Mexico - Seventh Agricultural Credit Project

Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No. P-2836-ME REPORT AND RECOMM4ENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AMD DEV.ETE1PMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA, S. A. WITH THE GUARANTEE OF UNITED MEXICAN STATES FOR A SEVENTH AGRICULTURAL CREDIT PROJECT June 9, 1980 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Since September 1, 1976 the Mexican peso has been floating; it has fluctuated around Mex$ 22.60 to the US dollar since mid-1977. On May 21, 1980, the peso traded at 22.80 per US dollar. FISCAL YEAR January 1 to December 31 ABBREVIATIONS ACF - Average cost per annum of borrowed funds to multi-purpose banks (excluding checking and savings accounts) which has averaged 17.4 percent for the 12 months ending April, 1980 BANRURAL - National Rural Credit Bank (BNCR) FEFA - Special Agricultural Credit Trust Fund FEGA - Technical Assistance and Loan Guarantee Trust Fund FINASA - National Sugar Finance Agency FIRA - Agricultural Trust Funds in the Bank of Mexico FONDO - Trust Fund for Crop, Livestock and Poultry Credit IDB - Inter-American Development Bank NAFINSA - Nacional Financiera S.A. PIDER - Integrated Program for Rural Development SARH - Ministry of Agriculture and Water Resources  FOR OFFICIAL USE ONLY MEXICO SEVENTH AGRICULTURAL CREDIT PROJECT LOAN AND PROJECT SUMMARY Borrower: Nacional Financiera, S.A. (NAFINSA) Guarantor: United Mexican States Beneficiary: Agricultural Trust Funds in the Bank of Mexico (FIRA) Amount: US$325 million equivalent Terms: Payable in 17 years, including 4 years of grace, at an interest rate of 8.25 percent per annum. Relending Terms: About US$319 million of the proposed loan would be relent through the Agricultural Trust Funds in the Bank of Mexico (FIRA) for on-farm investments, agroindustries, and fisheries development. Terms and conditions of the sub- loans would vary with income level of the beneficiaries and purpose of the subloans. Repayment periods would range from 3 to 15 years, including grace periods of 1 to 3 years, and interest rates would range from 14.0 to 21.5 percent per annum. The lowest rate would be applied to low-income borrowers whose annual family income is less than 1,000 times the regional daily minimum rural wage. Project The project, which would be committed over about two- and Description: one-half years, seeks to increase the production of agri- cultural commodities as well as income and employment in rural areas. It would provide medium- and long-term credit for investment in crop development, livestock production, fisheries and agroindustries. It would include a low-income producer's component, comprising approximately one-half of the total investment program. A program of applied research, training and monitoring would provide support to credit operations. The project would also strengthen FIRA's programming and planning operations. About 140,000 families would benefit from the project. The project has no special risks. This document has a restricted distribution and may be used by recipients only in the performance of their omcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Estimated Cost: The estimated total cost of the project is US$1,179.0 million of which US$325.0 million would be in foreign exchange: US$ millions Local Foreign Total I. Investment Program 616.0 269.0 885.0 Crop Investments 395.0 158.0 553.0 Livestock Investments 195.0 89.0 284.0 Agroindustrial Investments 22.0 18.0 40.0 Fisheries Investments 4.0 4.0 8.0 II. Training, Demonstration, Technical Assistance, Monitoring, and Planning and Programming 10.0 5.0 15.0 III. Project Cost 626.0 274.0 900.0 IV. Price Contingency 228.0 51.0 279.0 V. TOTAL PROJECT COST 854.0 325.0 1,179.0 Financing Plan: US$ millions FIRA 501.6 42 Beneficiaries 181.3 15 Participating Banks 171.1 15 Bank 325.0 28 TOTAL 1,179.0 100 Estimated Disbursements: Bank FY 1981 1982 1983 1984 ---- US$ millions ---- Annual 70 115 105 35 Cumulative 70 185 290 325 Staff Appraisal Report: Report No. 2944-ME dated May 28, 1980. Economic Rate of Return: Not applicable.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA, S.A. WITH THE GUARANTEE OF UNITED MEXICAN STATES FOR A SEVENTH AGRICULTURAL CREDIT PROJECT 1. I submit the following report and recommendation on a proposed loan to Nacional Financiera, S.A. with the Guarantee of United Mexican States for the equivalent of US$325 million to help finance a Seventh Agricultural Credit Project. The loan would be repaid over 17 years, including 4 years of grace, with interest at 8.25 percent per annum. About US$319 million of the proposed loan would be onlent through the Agricultural Trust Funds in the Bank of Mexico (FIRA) for on-farm investments, fisheries development, and agroindustries. Terms and conditions of sub-loans would vary with loan purpose and income level of the beneficiaries. Repayment periods would range from 3 to 15 years, including grace periods of 1 to 3 years, and interest rates would range from 14.0 to 21.5 percent per annum. The' Government would bear the foreign exchange risk. PART I: THE ECONOMY 1/ 2. The Mexican economic situation and major issues of economic policy were analyzed in "Special Study of the Mexican Economy: Major Policy Issues and Prospects" (2307-ME), distributed to the Executive Directors on May 30, 1979. The most recent economic mission visited Mexico in February 1980 and is now preparing its report. Country data sheets are attached as Annex I. Past Performance 3. For the three decades preceding the mid-seventies, Mexico was very successful in achieving rapid economic growth while also maintaining stability in prices and the balance of payments. From 1940 to 1970, GDP growth exceeded 6 percent per year in real terms, inflation averaged less than 5 percent per year from the mid-1960s to 1972, and the dollar value of the peso, fixed in 1954, was maintained until 1976. The Government's economic role in this achievement was to carry out direct investments in infrastructure and in key industries such as power, steel and petroleum, while creating a stable regula- tory and institutional framework, as well as good profit prospects, to induce private sector growth. 4. This strategy produced considerable progress and better living standards for many Mexicans. The incomes of poor farmers and marginal urban dwellers, whose productivity was low and has not been increasing, have been lagging behind. There was therefore little reduction in contrasts within the Mexican economy. While land redistribution has continued, most of the 1/ This section is substantially unchanged from the President's Report for the Second Small and Medium Scale Industry Development Project (Report P-2842-ME of June 4, 1980).  - 2 - peasants who received land could not significantly improve their economic status as they received only limited benefits from infrastructure, credit and technical assistance. Rapid population growth, which reached a peak of almost 3.5 percent per year by the mid-1970s, made social equity even more difficult to achieve. Even Mexico's sustained economic growth was not sufficient to absorb the rapidly growing labor force in productive employment and by the early 1970s some 50 percent of the labor force was either relatively unproductive and poorly paid, or openly unemployed. 5. During the 1970s Mexico experienced increasing public sector deficits, inflation, large balance of payments deficits, capital flight and a marked slowdown in the real rate of growth of GDP, which dropped to less than 2 percent in 1976--the lowest rate experienced since the mid-thirties. On September 1, 1976 the authorities abandoned the fixed exchange rate of 12.50 pesos per dollar that had remained unchanged since 1954 and let the peso float; since then it has remained rather stable at rates fluctuating around 22.60 pesos per dollar. Following the devaluation, Mexico obtained major support from the IMF. The new Government ratified a three-year extended facility agreement with the Fund shortly after taking office on December 1, 1976, and was generally successful in adhering to it. Recent and Current Situation 6. The present Government inherited a difficult situation. High inflation, large public sector deficits, increasing foreign indebtedness and lack of confidence in economic management indicated a need for economic stabilization. However, the situation also called for more expansionary policies; economic activity had slowed down, net private investment was virtually nil, and the gap between new job creation and growth of the labor force was increasing. Rich new petroleum discoveries and high world prices offered profitable investment opportunities in the petroleum sector; indeed, increased production for export of these products seemed by far the only way to meet a large part of Mexico's high debt service requirements in the coming years. 7. Faced with these conflicting needs and opportunities, the Mexican authorities adopted a mixed strategy aimed at reducing lower-priority public expenditures and increasing public revenues, while proceeding with petroleum and other high-priority investments. The objectives of the Government's program included control of inflation to be followed by a return to high rates of economic growth. Better management of public sector expenditures, tax reform, more rational pricing and cost control in public sector enter- prises, promotion of private savings, limiting wage increases to justifiable levels, and more effective cooperation with the private sector were important parts of the Government's economic strategy. 8. This approach succeeded in bringing inflation down to 18 and 20 percent in 1978 and 1979, respectively, as against an annual rate of almost 30 percent in 1977. The deficit in the current account of the balance of payments peaked at $4.2 billion (or 6 percent of GDP) in 1975 and declined to $1.9 billion (equivalent to 2.5 percent of GDP) in 1977. Favorable oil prospects and increasing capital inflows brought about a rapid increase in imports reflecting both the resolve to reduce protectionism and the growing demand for capital  - 3 - and intermediate goods upon which the expansion of the economy depends. The current account deficit increased to US$2.9 billion (or 3.1 percent of GDP) in 1978 and further to an estimated US$3.8 billion (under 3.5 percent of GDP) in 1979. The public sector deficit peaked at about 9 percent of GDP in 1975 and declined to about 6 percent in 1979. Mobilization of savings by the banking system has recovered at a strong pace. GDP growth is estimated at about 7 percent in 1978 and 8 percent in 1979 as compared to less than 1 percent in 1977. 9. The growth outlook for 1980 continues to be favorable and the economy should increase at about 8 percent, but inflation will remain a problem, essentially as a result of investments which are increasing at a rate of more than 15 percent a year in real terms. These investments call for continued increase in imports of capital and intermediate goods. The import program will put a severe strain on the existing infrastructure capacity, especially ports and rail transport in which bottlenecks already exist. Additional strain on the transport system is likely to come from the large imports of grains as a result of a bad crop this year. 10. Another threat to the efforts of the Government in reducing inflation below 20 percent may come from the wage area. The recently agreed increase in the minimum wage of about 21 percent, after three consecutive years of decline in real wages, while not automatically reflected in the total wage bill, is likely to establish a floor in union bargaining within the modern sector and contribute to a cost push which might be passed on to consumers. 11. The Government will not have an easy task in maintaining price increases within acceptable limits. The cumulative increase in the consumer price index in 1980, through March 31, of about 9.5 percent, resulting in part from seasonal factors and in part from the newly introduced value-added tax, may adversely affect expectations about inflation. At the same time, the need to expand public investment in the key infrastructure sectors and to maintain in real terms the current programs in the energy sectors, leaves relatively little scope for significant adjustments in the level of public expenditure. Economic Problems and Prospects 12. Mexico has the institutional and natural resources necessary to attain her ambitious goals of rapid growth and alleviation of poverty. The acute short-run disequilibria that affected the country during the mid-70s have been brought under control; the new petroleum riches will greatly relax the financial constraints on growth. The proven oil and gas reserves are estimated at about 50 billion barrels. Exploitation of these reserves should allow Mexico to substantially increase production of crude oil and natural gas from the equivalent of about 1.2 million bbl/day in 1976; the stated goal of the Government is to reach a production level of about 2.5 million bbl/day by end of 1980, and more or less maintain it at a level that will enable exports of 1.1 million bbl/day. This is a limit the Mexican Government is unwilling to exceed for fear of becoming increasingly a classical "oil producer country" with the economic and social tensions that would ensue. But even at this production level, the challenge is how Mexico can mobilize its resources-- its human skills, its institutions, and its experience--to help resolve its long term development problems. The most serious of these relate to poverty, unemployment, stagnation in agriculture, and urban-regional imbalances.  - 4 - 13. Poverty: Mexicans have unevenly participated in the remarkable economic growth of the last several decades. According to preliminary esti- mates for 1977, at least 2.4 million households (22 percent of the total) lived in absolute poverty, while at least 2.8 million (25 percent of the total) had incomes less than one-third the national average. The root causes of this persistent problem are three: rapid population growth, past neglect of agriculture (where some two-thirds of the poor are principally employed), and slow absorption of labor in high-productivity jobs (mostly in industry). 14. The Government is acting on all three fronts. A family planning program, started in 1972, has already helped reduce population growth from 3.5 percent per year to an estimated 2.9 percent at the present time. The program is being further strengthened by the present administration, with the ambitious goal of reducing population growth to 2.5 percent per year by 1982 and to 1 percent by the year 2000. New approaches are also taking hold in regard to rainfed agriculture (see para. 17). On the employment front, new tax incentives have reduced the anti-employment bias and efforts to stimulate employment will have to be continued. The expected rapid growth of output should also create jobs more rapidly. In spite of this progress, however, the still rapid growth of population and the staggering increase of the labor force (at 3.7 percent p.a.) made unavoidable by the high percentage of children in today's population, renders the eradication of absolute poverty a difficult goal to attain in the near future. The Government has under its consideration several types of subsidies for the poor. These could prove to be short-term palliatives and preempt resources which would otherwise be available for more investment in employment creating activities or for improving educational or health standards of the poor on a more permanent basis. 15. Open and hidden unemployment, which are now respectively at 8-9 percent and 40 percent of a labor force, will remain major problems in the years to come. With the expected GDP growth rate of 8 percent p.a., the economy should be able to absorb the additional labor force, assuming no significant change in the participation rate (now at about 29 percent) and taking into account an increase in labor productivity. In absolute terms, the present levels of underemployment and unemployment are therefore likely to remain. 16. An Employment Development Plan was published early this year. It calls for a number of measures to strengthen the so-called informal sector both in the urban and the rural areas. To increase the productivity of those employed outside the modern sector, and their employment opportunities, a major effort will be required in the area of vocational training. Technical assistance programs are also needed to stimulate more organized and structured forms of activities, especially in the services sector. While there is no doubt that the authorities are concerned about unemployment, and underemployment, and while the institutional structure to carry out some important programs already exist, a concentrated effort will be required to take effective action and make better use of human resources by substantially reducing the level of hidden and open unemployment. 17. In agriculture, crop and livestock production has shown little growth since the mid-1960s. Faced with diminishing returns to expensive new large-scale irrigation works, as well as the continuing low productivity (and income per capita) in the non-irrigated ("rainfed") sector, the present  administration has re-organized the parts of the Government that deal with agriculture in order to design and implement a new strategy. This strategy emphasizes production increases through a balanced development program. Greater emphasis is being placed on technical assistance, demonstration, and credit to develop the underutilized rainfed agricuiturcl potential. Programs to rehabilitate existing irrigation serving nearly one million ha are underway. Small-scale irrigation development is being promoted. Construction of new large-scale irrigation units continues, but with a smaller portion of budget resources than in the past. The banking system is being encouraged to provide greater support to agricultural production and processing programs. These initiatives should lead to an acceleration of production growth, more equal development opportunities for Mexico's farmers, and an improvement in the living conditions of the rural poor. 18. The main urban-regional problems are two-fold: (a) growing conges- tion, pollution, high-cost services (especially water) and other manage- ment problems that stem from continued rapid growth of Mexico City (already the third most populous metropolitan area in the world) and other areas in the dry, densely populated central plateau, and (b) retarded development, poverty and great difficulty in providing either better jobs or adequate public services for the one-third of all Mexicans who live in towns of less than 2,500 inhabitants. The present Government has taken many positive steps to confront these problems, including an administrative re-organization, elaboration of a comprehensive plan, and introduction of a strong package of incentives to promote growth in a few well-selected growth poles. 19. The expected high growth rate of the economy in the years to come is the country's strongest weapon to reduce poverty and unemployment. Industry will be a leading sector in expanding domestic production and exports. A National Industrial Development Plan was published last year and it reflects the serious effort of the present administration in identifying the long-term prospects of the industrial sector and its implications for the employment picture. Industry has the potential for considerable expansion in many areas, including efficient import substitution in chemicals, petrochemicals and capital goods as well as exports of many different manufactured products. The Mexican Petroleum Company (PEMEX) has already started an ambitious investment program to produce a variety of primary petrochemicals on a large scale for both domestic consumption and exports and an equally vigorous expansion is expected in investment for the production of secondary petrochemicals. Tourism export earnings are also expected to increase substantially. 20. A National Development Plan has just been published. This Plan marks the final step in the planning activities which the current administra- tion has undertaken in order to obtain a more structured picture of the economic and social problems facing the country. In the past two years, a National Urban Development Plan and the already mentioned Industrial Development and Employment Plans have appeared; the National Development Plan aims at formulating a national development program reconciling the sectoral targets and making them consistent with the general economic and social strategy of the Government and with the availability of domestic and foreign financial resources. 21. Mexico's public and publicly guaranteed debt service ratio has been increasing over the recent past and peaked above 60 percent in 1978-79. This high ratio reflects the low level of exports relative to GNP and the  high proportion of Mexican borrowing from commercial banks; the ratio of external public debt to GNP is average for middle-income countries. The public debt service ratio is expected to decline to around 40 percent in the early 1980s, not only as a result of rapid increases of petroleum exports but also as a function of repayment of a part of debt contracted at the least favorable terms. Debt service on Bank loans amounted to about 2.8 percent of public debt service in 1978; this ratio is projected to remain about the same during the early and mid-1980s. The Bank currently holds about 5.5 percent of Mexico's total medium and long-term public debt, and this ratio is not likely to change significantly over the next few years. Mexico is creditworthy for borrowing on conventional terms. PART II - BANK GROUP OPERATIONS IN MEXICO I/ Bank Operations 22. As of April 30, 1980, Mexico had received 62 loans from the Bank amounting to US$3,635.9 million net of cancellations and terminations; of these, 36 loans totalling US$1,710.4 million were fully disbursed. The Bank presently holds US$3,020.3 million of which US$1,209.6 million have not yet been disbursed. A loan of US$160 million for the Apatzingan Irrigation Project was approved by the Executive Directors on May 29. Some 38 percent of Bank lending has been for agriculture and rural development (20 loans for US$1,356.4 million), 20 percent for power (12 loans for US$704.8 million) 19 percent for transportation (13 loans for US$666.7 million), and 17 percent for industry (9 loans for US$647.5 million); the remaining 6 percent has been for water supply (US$130 million), tourism (US$114 million), and urban develop- ment (US$16.5 million) projects. Annex II contains a summary statement of Bank loans as of April 30, 1980 and notes on the execution of ongoing projects. IFC Operations 23. As of April 30, 1980, IFC had made investment commitments in 20 companies in Mexico, for a total of US$366.8 million, of which US$269.5 million had been sold, repaid or cancelled. A summary statement of IFC investments as of April 30, 1980, is presented in Annex II. Bank Strategy 24. The main objectives of Bank lending in Mexico have been to: (i) support policies and programs leading to a wider distribution of the benefits of economic growth; (ii) help finance projects that make directly or indirectly, significant contributions to output and employment; and (iii) help reduce Mexico's urban-regional imbalances. Therefore, the Bank is preferentially supporting projects of high social priority that help the rural or urban poor, projects that promote higher levels of employment and production and those that help to decentralize economic activity. 1/ This section is substantially unchanged from the President's Report for the Second Small and Medium Scale Industry Development Project (Report No. P-2842-ME of June 4, 1980).  25. Because of the difficult structural problems of Mexico's agricul- ture and the sector's crucial importance to the country's further development, the Bank has made agriculture the leading sector for its lending. The Bank's agricultural lending program for Mexico has four goals: first, to increase productivity of presently cultivated lands through selected programs of irri- gation rehabilitation and on-farm improvements; second, to improve the pro- ductivity of small farmers through programs for (a) rural development, (b) rainfed agricultural development, and (c) bringing new areas in the humid tropics under cultivation; third, to complement infrastructure investments with general support services including agricultural extension and marketing programs and provision of medium-term credit; and fourth, to promote employment opportunities in rural areas through programs of agro- and rural-industries. The Bank has made eleven loans in FY74-79 totalling US$1,012 million for irrigation, rural development and agriculture, agro-industries and livestock credit programs. Several projects for water control and irrigation, rainfed agriculture, rural development, and support services are in preparation; a rainfed agricultural development project and an integrated rural development project are expected to be ready for presentation to the Executive Directors in the coming months. 26. Past Bank lending for industry has been aimed at (a) assisting the Government's efforts to reduce the balance of payments deficit, (b) decentralizing industrial activities away from the major and increasingly congested urban areas and (c) promoting greater employment in the sector by supporting medium- and small-scale industry. A steel project which the Bank helped structure and finance is now operating in a previously under- developed area on the west coast of Mexico. The fertilizer sector has been strengthened by two Bank assisted projects which the state-owned fertilizer company (FERTIMEX) is carrying out. Loans for projects to promote the develop- ment of small- and medium-scale industrial enterprises and to support an industrial equipment fund (FONEI) were approved by the Executive Directors in FYs78-79; they offer support to the private sector at a time of rapid expansion. The Executive Directors recently approved a project for the mining sector which up to now has received insufficient resources from the financial system. A small and medium scale industries project has been submitted to the Executive Directors. A capital goods industry project is under discussion for possible Bank support. 27. As regards infrastructure, the Bank's operations have been focused on investments in key areas of the country as well as on institutional reforms and sector policies aiming, inter alia, at suitable pricing mechanisms to help generate additional resources for investment financing. The airports development project (FY74) was designed to support the Government's policy of regional integration; the third railway project (FY76) supported improve- ments of institutional aspects and financial management of the sector. The Mexico City (FY73) and medium cities (FY76) water supply projects have been instrumental in the establishment of specialized institutions for efficient provision of drinking water and in the pricing of water at levels more closely related to costs. A highway sector project was approved by the Executive Directors in FY79. A medium-size cities water supply project has been appraised and a railways project is currently under discussion for possible Bank support.  -8- 28. The Government and the Bank have long recognized the regional economic disparities prevailing in Mexico. In June 1976 the Government adopted the Law of Human Settlements to provide a new institutional frame- work to deal with the pressing problems of over-concentration of economic activities in the larger metropolitan areas. The Government has recently adopted a National Urban Development Plan that spells out its regional develop- ment priorities in operational terms, and several projects are now being prepared to meet the needs for basic urban services for poor families and to provide key regional infrastructure in selected priority cities. One such project, to assist in the development of the Lazaro Cardenas conurbation area on the West Coast, was approved by the Executive Directors in FY78, and another project for the southeast part of the country has been appraised. 29. The Inter-American Development Bank (IDB) is the second largest source of multilateral aid to Mexico. The IDB has made loans totaling US$2,148 million to December 31, 1979. Over sixty percent of this lending has gone for agricultural and rural development projects, and the balance for transportation, industry, and tourism infrastructure. In 1979, the IDB approved five loans totaling US$251 million for industrial credit, irrigation, human resources, highways and export promotion projects. The IDB and the Bank have worked in parallel on several projects; most recently the IDB and the Bank have each made loans for the National Program for Small-Scale Agricultural Infrastructure, the Integrated Program for Rural Development (PIDER), agricultural and livestock credit, small- and medium-scale indus- tries, and hotel development. The International Fund for Agricultural Development (IFAD) is processing a rural development project in the state of Oaxaca which was appraised by the Bank's staff. PART III - THE AGRICULTURAL SECTOR Background 30. Mexico's agricultural sector accounts for about 10 percent of gross domestic product and represents more than 15 percent of the country's exports. Over the last 15 years, growth in agricultural production has been sluggish and has not kept pace with domestic demand. The sector's rate of growth declined from an average of 6 percent per annum between 1945 and 1955 to 4.4 percent annually between 1955 and 1965 and less than 2 percent per annum since 1965. 31. Mexico has traditionally been a net exporter of agricultural products. However, agricultural imports have been increasing in recent years as demand from a rapidly industrializing and urbanizing economy has increased faster than domestic production of corn, wheat, sorghum, and oilseeds. In 1979, agricultural exports reached about US$1.8 billion, or 20 percent of total merchandise exports, and agricultural imports totaled US$0.8 billion, about 7 percent of merchandise imports.  - 9 - 32. Agriculture employs about 34 percent of the labor force in the country, despite increasing migration to urban areas. The sector generates economic opportunities for about 4 million families, of which 1.3 million are landless. The number of landless families is increasing rapidly because of the limited availability of farm land. The majority of the primary sector labor force is engaged in activities with very low productivity; about two- thirds of agricultural workers earn incomes below the minimum wage. 33. Between 1945 and the late 1950s, public investment in large-scale irrigation programs fostered rapid increases in agricultural production. Between then and the mid-1960s, growth came mostly from more intensive use of irrigated land as Mexico developed and utilized new seed varieties, promoted mechanization and fertilizer application, and improved the efficiency of irrigation water usage. In the mid-1960s, a decline in the rate of expansion of irrigated area accompanied by a decrease in the development of new tech- nologies affected the traditional sources of increased production. In addi- tion, productivity in some irrigation districts started declining due to problems of salinity, drainage, and the poor state of irrigation infrastruc- ture. At the same time, development of agriculture on non-irrigated land received little attention either in terms of investment or in application of new technologies. 34. Mexico has, however, a considerable potential for further agricul- tural development. The decline in productivity of irrigation districts is reversible, and the irrigated area could eventually be doubled to 10 million ha. Large areas of unused or underused land could be brought under intensive agri- culture; most of these areas are in the humid tropics and are sparsely settled. With proper technology and programs to promote land improvement and reclamation and soil and water conservation, perhaps another 10 million ha could be brought under rainfed cultivation. The potential of rainfed lands now under cultiva- tion has not been fully utilized; in most cases, farmers in rainfed zones do not have access to fertilizer, improved seed or credit. Considerable produc- tivity gains would be possible with extension of improved technology and applied research to the rainfed areas. Government's Policies and Programs 35. The present administration has perceived the dimensions of the problems of the sector and its strategy is based on obtaining higher produc- tivity in lands now under cultivation and expanding the cropped area, both irrigated and rainfed. 36. To increase agricultural production in the short term, the admin- istration is emphasizing programs to: (i) rehabilitate those irrigation districts where infrastructure is inadequate or where the land is in poor condition; (ii) develop small-scale irrigation works; and (iii) introduce better technology in rainfed zones through expanded technical assistance programs. In the medium-term, the administration is placing greater emphasis than in the past on rainfed agriculture. The recently created national rainfed districts program would expand and strengthen extension services and  - 10 - integrate extension with demonstration, applied research, marketing, and production credit programs. The Government is also contemplating large-scale water development projects in the Panuco and Papaloapan basins that would promote intensive cultivation of lands now suitable only for extensive live- stock grazing. 37. The Government has expressed a strong commitment to reduce rural poverty and improve the well-being of the indigenous population and of the people in marginal areas. The program of the Commission for Marginal Areas (COPLAMAR) is being expanded to provide infrastructure support and public services (such as health, water, schools, and food distribution) to these groups. Through the national Integrated Program for Rural Development (PIDER), the Government complements production-oriented agricultural and agro-industrial development programs with a basic needs-oriented package of services and with a program of rural infrastructure. The Bank has made two loans in support of PIDER and a third is under appraisal. The Bank has also appraised a project to support rainfed agriculture. Both projects will benefit some of the poorest land-holders in Mexico. 38. Off-farm employment opportunities are being provided through agro- industries and several programs that encourage industrial development in the less-congested zones. Agricultural Credit 39. The Administration, in implementing the programs referred to above, has increased public expenditures devoted to agriculture by more than 10 per- cent per annum in real terms since 1977. However, to be effective, public investment must be complemented by private investment in on-farm development, mechanization, and industrialization. The Government is: (i) increasing the supply of agricultural investment and production credit; (ii) taking measures to ensure that credit is provided as part of a technically and economically sound investment program; and (iii) providing credit to a wider range of farmers than in the past. Simultaneously, the Government has stimulated private agricultural investment by adjusting guarantee prices of grains and beans to ensure profitability of production, and has increased security of land tenure to reduce the risks associated with private investment in farm improvements. 40. The Government's policies have stimulated and increased demand for agricultural credit. Total institutional credit has increased drama- tically. At the end of 1970, Mexican banks had US$1.4 billion in agricul- tural loans outstanding; this had increased to US$3.7 billion at the end of 1978 and is projected to reach about US$6.3 billion by the end of 1980. The Government has promoted the establishment of an effective credit delivery system (paras 41-52). However, the funds available for lending are inadequate to meet the demand, and fewer than one-third of Mexico's farmers have access to institutional credit.  - 11 - 41. The Government has been promoting the development of the agri- cultural credit system in Mexico through three measures: (i) establishment of the Agricultural Trust Funds in the Bank of Mexico (collectively known as FIRA) that rediscount agricultural loans, provide technical assistance, and guarantee selected loans made by private banks; (ii) establishment of public banks to provide credit, mainly to smallholders and elidatarios; 1/ and (iii) promotion of private bank lending to agriculture. 42. FIRA Trust Funds. FIRA has been the most important agency to mobilize financial and technical resources of public and private banks in support of medium- and long-term lending for agriculture. FIRA is now in an important stage of expansion; the proposed loan would assist tha_institu- tion not only with part of the necessary finance (para 48) but more impor- tantly in institution-building activities that would strengthen FIRA and its client banks' capacity to finance agricultural development. 43. FIRA consists of three trust funds under the same management. The Trust Fund for Crop, Livestock and Poultry Credit (FONDO), established in 1955, rediscounts short-term production credits made by private banks. The Special Agricultural Credit Trust Fund (FEFA), established in 1965, channels foreign loans such as those from the Bank and the Inter-American Development Bank, with corresponding local counterpart funds, to provide financing for medium- and long-term investment. The Technical Assistance and Loan Guarantee Fund (FEGA), established in 1973, encourages private banks to lend to low- and mediuni-income farmers by guaranteeing a portion of the subloans and reimbursing the banks for their expenses in providing technical assistance associated with lending operations. 44. The three trust funds in FIRA share common management. Lending policies, financial plans, and the lending program are determined by a Technical Committee consisting of high level representatives of the Ministries of Finance and Agriculture as well as the Bank of Mexico, the National Rural Credit Bank (BANRURAL), the Agricultural Marketing Company (CONASUPO), the agricultural insurance company (ANAGSA), and representatives of small farmers, ranchers, and elidatarios. The General Director is responsible for FIRA's operations and for proposing policies to the Technical Committee. FIRA has over 800 technical staff located in the head office and 136 branches in all parts of the country (Map IBRD 11789R1). 45. FIRA has helped improve the technical and economic standards for bank lending to agriculture. Each sub-loan is appraised by an authorized technician who has received FIRA-sponsored training covering sub-project analysis and FIRA's operating regulations. Prior to FIRA, agricultural lending was generally based on availability of collateral rather than technical and financial viability of the investment program. 1/ Ejidatarios are member of an elido, a form of group land tenure based on usufruct.  - 12 - 46. FIRA has also promoted increased medium- and long-term lending for agriculture by improving the institutional capacity of the banking system and by providing additional finance. FIRA has strengthened participating banks' technical staff through a number of training programs; this has enabled commercial banks to greatly increase the size of their agricultural depart- ments. FEGA activities have made possible bank lending to farmers who in the past would have been too risky for loans from commercial banks. FIRA has also channeled steadily larger amounts of credit to agriculture, complementing the resources available from commercial and public banks. FIRA now finances about 30 percent of institutional credit for agriculture, up from 12 percent a decade ago. 47. FIRA initially benefitted commercial farmers and large cattlemen; however, in the early 1970's, FIRA started a program to make development loans available to low-income farmers. 1/ Low-income borrowers now account for about 30 percent of FIRA's program. FIRA helps banks to develop sound farm plans and programs of technical assistance for its low-income clientele. The technical soundness of the loans has reduced risk sufficiently to encourage many banks to lend to such beneficiaries. The guarantees and reimbursement of technical assistance costs associated with credit to low-income producers has also provided an incentive for bank lending. The Bank has supported this program, and the Fourth, Fifth, and Sixth Agricultural Credit Projects (Loans 910-ME, 1217-ME, and 1569-ME) allocated a total of US$162.5 million (37 percent of the total loan amount) to the low-income producer component. The Bank has also assisted FIRA's participation in other programs benefiting low-income farmers: US$57.5 million out of the two PIDER loans (para 37) was allocated through FIRA for agricultural credit for low-income farmers; US$11.3 million of the US$56 million loan for the Tropical Agricultural Development Project (Loan 1553-ME) has been allocated to credit through FIRA primarily for low-income producers, and the Rainfed Agricultural Development Project, which is now being processed, would include a credit component for low-income producers. In addition, six loans (equivalent to US$164 million) from the IDB have included credit through FIRA to low-income and small farmers. 48. FIRA's 1980-1982 operations program emphasizes expanded lending. Demand for farm investment credit is strong, and there is sufficient institu- tional capacity to channel additional credit resources into the sector, but at this time funds are insufficient to meet the credit needs. In 1980, FIRA will only have resources sufficient to discount 70 percent (or US$700 million) of the total medium- and long-term credit requests of the participating banks. For the period 1980-82, FIRA has estimated its medium- and long-term investment program at US$5,666 million. FIRA would contribute 60 percent of the above investment, and the participating banks and the beneficiaries would contribute 11 Low-income farmers are defined as farm families whose net annual income is less than 1,000 times the regional daily minimum rural wage rate. Daily minimum wages are established annually by the Government for 111 regions, and, for 1980, range from US$3.91 in the poorest states to US$7.39 in the northern border states.  - 13 - 25 percent and 15 percent, respectively. FIRA would generate funds from its own resources and receive funds from the Bank of Mexico; however, to meet fully the above financial commitment, FIRA would have to mobilize additional funds from other sources. The Bank's participation under the proposed project is equivalent to 5.7 percent of FIRA's total program. 49. Public Banks. Nearly 55 percent of all agricultural credit is channeled through the public banking system. The largest public agricultural bank, BANRURAL, was created in 1975 through a merger of three public sector banks and now accounts for 50 percent of the institutional lending to agri- culture. Total BANRURAL lending during 1979 was about US$1,700 million, including about US$390 million medium- and long-term credits for investments of which about US$130 million were rediscounted by FIRA. BANRURAL's 1980 lending program amounts to US$2,430 million. 50. The other public financial institution serving the farming community is the National Bank for the Sugar Industry (FINASA), which has the responsi- bility for short- and long-term credit needs of sugarcane producers, the sugar industry and marketing. FINASA's lending to canegrowers during 1979 was about US$140 million, of which US$37 million was rediscounted by FIRA. FIRA plans to increase its lending operations through FINASA in the coming years and is currently carrying out a special training program for FINASA technicians. 51. Private Banks. Until the establishment of the FIRA rediscounting facilities, commercial banks hesitated to undertake agricultural term lending because of the short-term nature of the bulk of their resources, problems of collateral, their lack of familiarity with the sector, and the high risk which is generally associated with farming. This situation has changed considerably during the last decade mainly because of the increasing support extended by FIRA in terms of funds, training of staff and provision of other support services. Many private banks have been establishing and rapidly expanding their agricultural credit departments and hiring significant numbers of agricultural technicians. FIRA has provided intensive training programs for the banks' technicians and is progressively transferring to them the authority to evaluate and approve subloans. 52. Private banks loan mainly to commercial producers and agroindustries. The Bank of Mexico, in order to encourage bank lending to ejidatarios and low-income producers, has stipulated that 0.7 percent of total deposits of multi-purpose banks and 2 percent of deposits in commercial banks be held in the form of agricultural loans to low-income producers. This provision is complemented by FEGA loan guarantees and reimbursement of technical assistance expenditures. About 76 commercial banks and banking groups participate in FIRA-financed lending operations; total medium- and long-term rediscounts are estimated to reach US$600 million in 1980.  - 14 - Performance Under Previous Credit Projects 53. The Bank has financed six credit projects, totaling US$600 million, to support lending for crop and livestock development and for agroindustries. In addition, three agricultural and rural development loans included US$68.8 million for credit through FIRA for low-income farmers (para. 47). 54. The Fourth Agricultural Credit Project (US$110 million) supported crop, livestock, and agroindustrial development activities, and was the first project to include a specific component directed to low-income producers, totaling 20 percent of project subloans. Disbursements under the project were completed one and one-half years ahead of schedule and about 10,900 subloans were made. Of the total amount lent under the project, 54 percent was for livestock enterprises, 24 percent for annual crop farms, 7 percent for perennial crops, 13 percent for agroindustries, and 2 percent was unclassified. 55. The Fifth Agricultural Credit Project (US$125 million) was fully disbursed by February 1979, four months ahead of appraisal estimates. In this loan, 40 percent of the total project investment was directed to low-income farmers. About 6,900 subloans were made to farmers in the low-income catego- ries and 10,740 subloans were made to medium-income farmers. Of the total amount lent under the project, 37 percent was for livestock enterprises, 46 percent for annual crops, 6 percent for perennial crops, 9 percent for agro- industries, and 2 percent was unclassified. 56. The Sixth Agricultural Credit Project continued Bank support of FIRA's long- and medium-term lending program. Implementation has proceeded ahead of appraisal expectations and by March 1980 funds were fully com- mitted. Bank disbursements amounted to US$130 million, or 65 percemt of the total loan. One-fourth of the project is targeted at low-income farmers. By December 1979, FIRA had rediscounted 11,500 subloans; about 60 percent of the investment went for crop production, 33 percent for livestock production, and 7 percent for agroindustrial development. 57. The Bank has completed an audit report on the fourth loan to FIRA, and a completion report on the fifth loan is now being prepared. FIRA's performance throughout the 1970s has been impressive. As an institution, it has grown rapidly, trained many high quality technicians of its own as well as from private and public banks, and established technical assistance systems and demonstration centers which have benefitted farmers throughout Mexico. Due to the slow start-up of its monitoring and evaluation division, FIRA does not yet have in-depth development impact studies of its lending program. Nevertheless, FIRA's rediscount program has undeniably increased private and public bank lending to the agricultural sector, thereby providing an important support for the Mexican Government's programs to increase agri- cultural production. With increased lending to the country's low-income producers, FIRA has made a contribution, though modest, to improve distribu- tion of the benefits of production increases within the agricultural sector.  - 15 - PART IV - THE PROJECT Background 58. A Staff Appraisal Report, entitled "Seventh Agricultural Credit Project," No. 2944-ME, dated May 28, 1980 is being circulated separately to the Executive Directors. The project was prepared by FIRA and was appraised by a Bank mission in January 1980. Negotiations took place in Washington, D.C. in May 1980. The Mexican negotiating team included Mr. Pedro Galicia of Nacional Financiera, S.A. and Mr. Horacio Garcia Aguilar of FIRA. Project Objectives and Description 59. The proposed project would be a continuation of Bank assistance to FIRA's lending program and would help to finance a wide range of investments in crops, livestock, fisheries and agroindustry development throughout the country as well as to strengthen the capacity of FIRA and the participating banks. The objectives of the project would be to: (i) support the Government's agricultural diversification program, including expansion and development of fisheries and agroindustries, with increased low- and medium-income farmer participation; (ii) strengthen FIRA's planning and programing capabilities and provide an institutional framework for efficient allocation of financial resources through private and public lending agencies; (iii) induce private commercial banks to increase participation in agriculture through FIRA's rediscounting facility and strengthen each agency's subloan evaluation and supervision capabilities and technical services; (iv) intensify training for the technical staff of FIRA as well as those of participating banks; (v) establish an operating regulations and procedures manual to standardize the participating banks' lending under FIRA; (vi) strengthen FIRA's monitoring and evaluation capabilities and data base system; and (vii) introduce a system of periodic interest rate adjustments for FIRA. 60. Subloans would be made to individual farmers, farmer groups, and cooperatives. About 63 percent of the total lending program would be for annual and perennial crops; 32 percent for livestock; and 5 percent for agroindustries and fisheries.  - 16 - 61. Crops. Lending for crop production would be for annual and perennial crops. Investments would include land clearing and preparation, land levelling, on-farm irrigation and drainage works, farm buildings and storage facilities, and machinery and equipment. For perennial crops, investments would also include the costs (planting materials, agricultural chemicals, fertilizer and hired labor) associated with the start-up period. 62. Livestock. Sublending for livestock would finance beef production, dual-purpose production (meat and milk), dairy production, and small animals (swine, poultry, goat and sheep). Investments would include purchase of animals, improvement and establishment of pasture, fences, buildings and water facilities, on-farm irrigation facilities, and machinery and equipment. Purchase of replacement breeding livestock would not be financed under the project (draft Project Agreement, Schedule 2). 63. Agroindustries. Subloans would be extended to small- and medium- scale enterprises for forestry industries; agricultural implement and service industries; slaughterhouses; fruit and vegetable packing and processing plants; milk pasteurizing plants; grain storage facilities; feed mills; and fishmeal plants. About 60 percent of the total lending would be for moderni- zation or expansion of existing enterprises and about 40 percent would be to establish new industries. Investment items would include engineering design, site preparation, buildings, storage facilities, utilities installations, and machinery and equipment. 64. Fisheries. A coordinated investment program (encompassing small boats or launches with outboard engines, fishing equipment, ice storage facilities, and refrigerated trucks) would be provided to benefit low-income, in-shore fishermen. Additionally, subloans would be made for shell-fish and fish farms to increase production for the domestic market. 65. Training, Demonstration and Technical Assistance. Under the project, FIRA's training program would be expanded to intensify training of its staff, technical staff of participating banks, and farmers. The project would also make provision for selected FIRA staff to be trained abroad in technical fields. To facilitate training for farmers, new demonstration centers would be estab- lished in strategic locations, and selected existing centers would be expanded. As under previous projects, FIRA would reimburse through FEGA participating banks for part of the cost of providing technical assistance to eligible farmers. 66. Data Base System and Monitoring. In order to improve FIRA's data base management system and improve its monitoring capabilities, the project would provide for facilities, equipment, additional qualified staff, and consultant services to assist FIRA in these areas. The data base system would be strengthened to improve (i) timely availability of quality data to various user groups in FIRA's management, and (ii) FIRA's internal control of its lending program.  - 17 - 67. Planning and Programing. Under the project, FIRA's planning and programming set-up would be strengthened by providing additional personnel and consultant services for preparation of annual investment programs and medium-term plans. Project Implementation 68. FIRA would be responsible for project execution. Funds would be channeled through some 90 private and public lending agencies. Formulation, evaluation, approval, and supervision of investment development plans would be carried out primarily by FIRA-approved participating bank technicians, with support from FIRA staff. Although FIRA has established a good reputation for its organization and technical competence, the project would have substantial institution building content. Steps would be undertaken to strengthen FIRA's planning and programing capabilities in order to ensure active and greater participation in national agriculture planning and coordination, and efficient allocation of its financial resources by preparing sound annual investment programs and medium-term plans. FIRA is preparing an Operating Regulations and Procedures Manual to provide direction and guidelines to FIRA field offices and participating banks for lending to farmers. Improvements would be made in the data base system to assist FIRA in managerial decisions and to facilitate internal control of its operation. Provisions would be made under the project to provide support to the Monitoring and Evaluation Unit to increase its capabilities to carry out detailed analysis of subloans and analysis of the development implications of FIRA's lending programs. 69. A total of 40 man-months of consultant services would be included in the project. FIRA's Planning and Programing Unit would be supported by specialists in planning and agricultural finance, contracted for an equivalent of 12 man-months. About 10 man-months would be utilized for hiring agricultural specialists for the training and demonstration programs, and 18 man-months would be used by the Monitoring and Evaluation Division and the Computer Services Division to improve the quality of the data base system. The total cost of consultant services, estimated at US$10,000 per man-month, would be US$400,000. Total Investment Program and Financing 70. The project would comprise a total investment program of US$1,179 mil- lion equivalent to about 20 percent of FIRA's 1980-1982 medium- and long-term operations. About US$325 million, or 28 percent, would be in foreign exchange. The proposed Bank loan would finance the foreign exchange cost. Sublending Policies and Procedures 71. Beneficiaries. Low-income beneficiaries 1/ would receive credit on concessional interest rates ranging from 14.0 to 1670 percent per annum. Loans to low-income farmers would be eligible for 80 percent guarantee by FEGA. Technical assistance costs incurred by participating banks with respect to loans to low-income beneficiaries would be eligible for reimbursement by FEGA. FEGA normally reimburses actual expenses up to 3 percent of sub-loan 1/ Low income farmers are those whose net annual family income is less than 1,000 times the regional minimum daily wage rate.  - 18 - balance outstanding; in special cases it can reimburse up to 6 percent of sub- loan balance. These measures have been tested and found useful in promoting technically sound lending to low-income beneficiaries. One-half of the proposed project and 58 percent of the loan is targeted at this group. 72. The Technical Committee of FIRA, in response to the priority given to rainfed agriculture (para 36), has decided to provide extra emphasis on lending to these farmers. A second beneficiary category would benefit farmers in rainfed districts whose incomes are between 1,000 and 1,500 times the regional wage; fifteen percent of project cost would benefit farmers in this category. Up to 60 percent of subloan amount would be eligible for guarantee by FEGA. Participating banks' technical assistance expenditures not exceeding 2 percent of subloan balance would be eligible for reimbursement. Sub-loans to these medium-income farmers would be at 17.0 or 17.5 percent per annum interest rates. 73. About 28 percent of the project would be allocated to finance subloans to other farmers. Subloans to this group would not be eligible for FEGA guarantee or technical assistance reimbursements, and would bear interest at 18.0 to 21.5 percent per annum. 74. Subloan Terms and Conditions. Terms and conditions of subloans would vary with the income level of the beneficiary: Beneficiary Maximum Rediscount Minimum Percentage Rate to Interest of Subloan Participating Rate to Rediscounted Bank Beneficiary 1. Low-income (a) Those who receive institutional credit for the first time 90 10.5 14.0 (b) Others 90 11.75 15.5 2. Medium-income in rainfed zones 80 13.5 17.0 3. Others (a) Income between 1,000 and 2,000 times regional minimum wage 70 14.25 18.0 (b) All others 70 19.0 21.0 Interest rates to beneficiaries and rediscount rates to participating banks on subloans for agroindustries or fisheries development would be one-half percent- age point higher than the rates shown in the table above. The spread for  - 19 - participating banks varies from 2.0 to 3.75 percentage points to reflect the administrative costs, perceived risks and return on their own exposure in loans for the respective categories. In cases where FIRA rediscounts to the participating bank less than the maximum portion of a subloan, it would allow the bank a slightly larger spread to compensate for the additional exposure (draft Project Agreement, Schedule 2). 75. FIRA is introducing a system for annual revision of interest rates applicable to new loans. The adjustment would reflect the difference between: (i) the average of the cost of borrowed funds to banks (ACF) 1/ in the 12 months preceding the adjustment; and (ii) the average of the ACF for 12 months preceeding the prior adjustment. The average ACF for the 12 months ending April 1980 (the latest month for which the index is available) is 17.4 percent. 76. The repayment period for subloans would be based on expected cash flows and would range from 3 to 15 years (including grace periods of up to three years). No subloan would be made to an individual sub-borrower for on-farm investment if the amount of the proposed subloan, together with the aggregate amount outstanding under previous FIRA-financed subloans to such a sub-borrower, exceeded US$222,000 (Mex$ 5,000,000) (draft Project Agreement, Schedule 2). Subloans made to groups of farmers could be proportionately larger provided the individual limit on outstanding balance is not exceeded for any member of the group. FIRA would obtain prior Bank approval for project subloans in excess of US$800,000 (Mex$ 18.4 million) (draft Loan Agreement, Schedule 1). 77. Subloan Appraisal and Supervision. Subloans would be made by participating public and private banks on the basis of sound development plans appraised by bank technicians. Based on past experience, the overall quality of subloan appraisal is good, and FIRA is taking steps through its training program to improve it further. For each subloan, the participating bank would prepare a financial plan, including a farm budget, an income and oper- ating expense statement and a financial cash flow, and would impute a financial rate of return based on FIRA's guidelines. Subloan approval would be based on the technical and financial viability of the proposed development plans. FIRA would ensure the economic soundness of subloans. Since calculation of the economic rate of return (ERR) of all subloans is impractical, FIRA would calculate ERR's only for selected investments regarded as typical subprojects in each category of the principal activities (draft Project Agreement, Schedule 2). The results of the economic analysis would be made available to the Bank upon request. 1/ The ACF is the cost per annum of borrowed funds to multi-purpose banks calculated monthly by the Bank of Mexico.  - 20 - Procurement 78. Bulk purchasing under ICB would not be feasible since the agricul- tural lending activities would be implemented over a two-and-one-half-year period, be widely distributed geographically, cover a variety of investment activities, and involve a large number of sub-borrowers. An adequate selection of machinery, tractors and other agricultural equipment and inputs is available to sub-borrowers through local and international suppliers and permits can be obtained to import machinery and tractors in horsepower ranges that are not available in Mexico. As in earlier projects, FIRA would require sub-borrowers to obtain quotations from several sources of supply whenever practicable for goods, civil works and imports of breeding livestock to be financed under subloans. Equipment for the demonstration and technical assistance programs would be procured through FIRA's ordinary procedures, which are acceptable to the Bank. 79. Machinery and equipment for agroindustries would be purchased by private producers or groups of producers. FIRA would make available to prospec- tive sub-borrowers a list of suppliers of agroindustrial machinery, including in it those from Bank member countries and Switzerland, as well as their agents or representatives in Mexico. FIRA would apply suitable procedures, either directly or through the financial intermediaries, to ensure that goods and services procured under the project are competitive in quality and price and are appropriate for the needs of the sub-borrower's enterprise. After the proposed loan is signed, FIRA would advertise locally and notify embassies in Mexico of Switzerland and Bank member countries that manufacture agroindustrial equipment of the details of the agroindustries' component of the project, giving broad particulars of the types of machinery likely to be required (Schedule 2 to draft Project Agreement). Disbursements 80. All project subloans would be committed during two-and-one-half years and proceeds of the Bank loan would be disbursed over approximately three and one-half years. The Bank would reimburse FIRA for: (i) 40 percent of its rediscounts of subloans; and (ii) 33 percent for its eligible expenditures for the productive support component (namely: training and demonstration centers, monitoring and evaluation, data base system, and planning and programing). Project Benefits and Impact 81. Based on FIRA's past experience, it is projected that about 140,000 families, or about 770,000 persons, would benefit directly from the project. Secondary benefits, although non-quantifiable, would also accrue from trans- portation, processing, marketing and agricultural services activities. At full development, it is estimated that incremental production of basic crops (maize, beans, wheat and soybeans) would increase by 1.2 million metric tons annually; cotton, sorghum and safflower by 180,000 metric tons; milk by 90 million liters; and beef and pork by 100,000 metric tons. The incremental production of these basic food products alone would amount to a foreign  - 21 - exchange savings of about US$177 million annually in 1979 prices. Increased production of export crops, mainly coffee, cotton and vegetables, would contribute significantly toward foreign exchange earnings, and, likewise, incremental production in fisheries and agroindustries would generate foreign exchange savings. The market prospects for the additional production that would be generated by the project are favorable. The ex post analysis, which would be carried out by FIRA's Planning and Programing Unit and the Monitoring Division, would indicate more precisely the overall impact of the various investments on production, employment and income. 82. Most investment plans or subprojects are expected to have financial rates of return in the range of 20 percent to 40 percent; economic rates of return would be somewhat higher in part due to shadow pricing of labor and exclusion of transfer payments, such as taxes, in the economic analysis. By allocating 65 percent of the total project costs, or US$766 million, to low- and medium-income producers, the Government strengthens its efforts to increase employment and improve income distribution among the rural population. 83. The project would have substantial impact on institution building. Strengthening FIRA's planning and programing capabilities would ensure its greater participation in national agricultural planning and coordination and would promote preparation of sound annual investment programs and medium-term plans, thus ensuring an efficient allocation of FIRA's financial resources. Compilation of an Operating Regulations and Procedures Manual by FIRA would provide better direction and guidelines to its field offices and participating banks for lending to farmers. Improvements in the data base system would assist FIRA in managerial decisions and would facilitate internal control of its operations. Support to the Monitoring and Evaluation Unit would increase its capabilities to carry out detailed socio-economic analysis of subprojects and analysis of the development implications of FIRA's lending program and procedures. Expansion of the training and demonstration programs would ensure transfer of appropriate technological packages to farmers and improvements in the quality of technical services provided to farmers. Moreover, training of FIRA's staff and the staffs of the participating banks would further improve subproject appraisal analysis. 84. Finally, adoption of a mechanism for periodic adjustment of interest rates for agricultural lending which is linked to the ACF index and therefore takes into account the rate of inflation, the cost of funds and the prevailing market rates, would: (i) standardize interest rates in agriculture and make them more compatible with those of other sectors; and (ii) help ensure efficient allocation of resources to the agricultural sector. Project Risks 85. Since FIRA is an efficient and mature institution, the project presents no special risk in terms of the technical and financial soundness of various investment programs that would be financed under the project.  - 22 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 86. The draft Loan Agreement between the Bank and Nacional Financiera, S.A., the draft Guarantee Agreement between United Mexican States and the Bank, the draft Project Agreement between the Bank and the Bank of Mexico, and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 87. Special conditions of the project have been described in Part IV of this report and are listed in Section III of Annex III. 88. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 89. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments June 9, 1980  ANNEX I - 23 - Page 1 of 5 TABLE 3A MEX,CO - SOCIAL INDICATORS DATA SHEST RtECC CRUSUtED AU7aRACES LADAIA C 40560 m 0.)mZc0 ERE8ENCE GROUPS CADJUOE yPJS LAN0 An (SROUA"D SQ. 7t.) T<XICO - MOST RECENT ESTIMATE) - LTOAL 1972.5 SAME SAME NEXT HIGHER ACR4C7JLTURAL 944.9 MOST RECEtN GEOGRA2HIC INCOME IINCOnE 1960 /b 1970 /b ESTIMATE lb REGION /c GROUr /d GROUP /I GNRP PtR CAPITA (US$) 380.0 710.0 1290.0 1124.4 1097.7 1942.6 ENERGY CONSUrPTION PER CAPITA (KILOGRMZS OF C0AL EQUIVALENT) 770.0 1047.0 1227.0 943.1 730.7 1646.7 POPULATION AND VITAL SIATSTCS POPULA7ION, MID-TEAR (KLLLlONS) 36.4 50.3 63.3 Imun POPULATION (PRECUT OF TOTAL) 50.3 59.3 63.2. 59.3 49.0 51.2 POPlATTON PROJECTIONS IOPSXTION IN Ar 2000 (MILLIONS) 116.0 STATIONARY POPUATION (aLLIONS) 204.0 YEAR STATIONAXY POPULATION IS REACRED 2075 POPVLATION DENSITY PER SQ. KM. 1.0 26.0 32.0 23.5 44.6 28.2 PEI SQ. KM. AGRICU.LTURAL LAND 36.0 52.0 67.0 80.5 140.7 10.5 POPULATION AGE STRUCTRE (PERLCENT) 0-14 YRS. 45.6 46.5 45.9 40.9 41.3 35.4 15-64 YES. 51.0 50.0 50.6 54.4 55.3 56.3 65 YRS. AND ABOVE 3.4 3.5 3.5 3.9 3.5 5.1 POPULATION GROUrH RATE (PERCENT) TOTSAL 3.1 3.3 3.3 2.4 2.4 1.7 URBAH 4.9 4.8 4.6 3.7 4.5 3.0 CRUDE BIRTH RATE (PER THOOSAND) 45.0 42.0 38.0 32.8 31.1 27.5 CRUDE DEATH RATE (PER THOUSAND) 12.0 9.0 8.0 8.5 9.2 9.1 GROSS REPRODUCTION RATE 3.2 3.. 3.0 2.4 2.2 1.8 FAMILY PLANNING ACCEPTORS, AONTUAL (THOUSANDS) .. 25.1 608.0 USERS (PERCENT OF MARRIED WOMEN) .. .. 21.0 17.7 34.7 P000 AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 87.5 100.0 96.1 99.4 104.4 102.0 FER CAPITA SUPPLY OP CALORIES (PERCENT OF REQUIREMENTS) 107.0 105.0 117.0 107.0 105.0 120.8 PROTEINS (CRAMS PEE DAY) 65.0 65.0 66.9 60.4 64.4 80.9 OP WNICH ANIMAL AND PULSE 29.0 28.0/f 27.5 28.3 23.5 31.3 CRILD (AGES 1-4) MORTALITY RATE 14.0 9.d 6.0 6.7 8.6 5.1 HEALTH LIFE EXPECTANCY AT StRTN (TEARS) 58.0 62.. 64.7 63.6 60.2 65.6 INFANT MORTALITY RATE (PER THOUSAND) 78.0 74.0 *- 76.1 46.7 45.5 ACCESS TO SAFE WATER (PERCENT OF POPSLATION) T07AL *- 54.0 62.0 63.4 60.8 69.4 URBAN * 71.0 70.0 79.5 75.7 83.1 RURAL .. 29.0 49.0 38.6 40.0 43.0 ACCESS ro EXCRETA DISPOSAL (PERCENT OF POPULATION) TO7AL .. .. .. 58.8 46.0 70.1 URBAN .. .. .. 77.8 46.0 88.3 RURAL .. 13.0 14.0 24.5 22.5 33.2 POPULATION PER PHYSICIAN 1700.0 1440.0 .. 1841.9 2262.4 1343.2 POPULATION ?ER XURSING PeRSON .. 1570.0 .. 933.7 1195.4 765.0 POPULATION PER ROSPITAL BED OSAL 1900.0 930.0 860.0 563.4 453.4 197.6 URBAN .. 780.0 770.0 279.4 Z53.1 260.2 0L'RAL *- 1310O.OL 1090.0 1140.9 7732.4 1055.3 AOMIOSIONS PER NOUPITAL RED .. .. .. 25.7 22.1 17.3 NOUS .NC AVERAGE SIZE OF HOUSEHOLO .OTAL 5.4 5. .. 5.0 5.3 4.7 UREA2N 5.7 5.7 .. 4.8 5.2 4.4 0RU.3L 5.2 5.8 .. 5.3 5.4 5.1 AVERAGE NUNB.ER OF PERSONS PER ROOM 70-.AL 2.9 2.5 .. 1.3 1.9 1.1 URBAN 2.6 2.2 .. 1.3 1.6 1.2 RusLAL 3.4 30. .. 1.5 2.; . .2 ACCIsS O CLECTRICITY (0ERCENT OF DWELLINCS) TCTA^L .. 59.0 .. 54.3 50.0 66.0 *'RBAN . 0 80.1 71.7 85.1 P.L'IAL .. 28.0 . 4.2 17.3  - - 24- ANNEX I Page 2 of 5 TABLE 3A MEXICO - SOCtAL tNDICATORS DATA SREET MXCO REFERNCE a OUPS (ADJUTD ARAGES SAME SAPs 9TN't 8CKER MOST RECENT GCOCRAPHIC INCOME INCOei 1960 /b 1970 /b E!S1ATR /b REGION /c GROUP /d GROUP /I EDICATION ADJUSTSD EoLL9NT UTIOs PR7ay ! TOTAL 80.0 104.0 116.0 107.3 102.5 101.7 MALE 82.0 107.0 116.0 109.1 108.6 110.0 UiALE 77.0 102.0 114.0 107.4 97.1 92.8 SRCOIDAEE: TOTAL 11.0 22.0 37.0 40.5 33.5 51.2 HALE 14.0 27.0 40.0 40.4 38.4 56.4 PPUILE a.0 17.0 34.0 39.0 30.7 43.7 VCATIOVAL U8OL. (S Of SECOIDAST) 24.0 24.0 .. 18.5 11.5 18.3 1O1tL-TRAIR RATIO PLNARY 44.0 46.0 46.0 37.1 35.8 27.1 SCONDARY 13.0 14.0 17.0 17.9 22.9 25.3 ADULT LITnACY RTE (PERCENT) 65.0 74.0 76.0 77.4 64.0 86.1 OONSIJHETION PA3SCNCU CAIS PUE TwOOSAuD POPULATION 14.0 24.0 41.6 29.1 13.5 53.4 RADIO RECEIVERS PER THOUSAND POPULATION 95.0 276.0 301.0 172.1 122.7 225.9 TV RECEtIVES PER TOUSn POPULATION 19.0 59.0 84.0 67.9 38.3 102.6 NESPAPER ("DAILY GENERAL tOrMisT) CIRCULATIOK PER THOUSAND POPULATION 79.0 .. .. 76.1 40.0 78.5 ciNMA AmNUAL ATTENDANCE PER CeITA 10.0 5.0 4.2 4.2 3.7 3.6 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 11300.0 13000.0 16600.0 FErALZ (PERCENT) 15.2 17.4 18.5 21.5 25.0 24.5 AGRICULTURE (PERCENT) 55.1 39.4 34.0 30.2 43.5 26.9 IDSTRY (PERCENT) 19.5 22.9 25.0 23.8 21.5 30.6 PARTICIPATION RATE (PERCENT) TOTAL 30.2 28.8 28.8 30.9 33.5 33.8 MALE 51.1 47.4 46.8 47.3 48.0 51.3 FEMALE 9.2 10.1 10.7 13.3 16.8 16.3 CONOMIC DEPENDNCY RATIO 1.6 1.9 1.8 1.5 1.4 1.3 INCOMSE ISTRIMEION PERCENT OF PRIVATE tCOME RECEIVED BY RICHEST 5 nRCENT O ROUSEdOLDS 28.7/h 27.9 23.9 23.7 20.8 RICREST 20 PERCENT oF HOUSEHOLDS s8.eTh 58.3 54.4 58.7 52.1 57.6 LOWEST 20 PERCENT OF HOUSEHOLDS 3.5/h 3.4 2.9 2.9 3.9 3.4 LOWEST 40 PERCENT OF NOUSEN3LDS 1o.371h 10.5 10.4 9.9 12.6 11.0 POVERTY TARII6f (icoUPS ESTIMATED ASOLUTE POVERTY INCOME LmL (US$ PER CAPITA) URBAN .. .. 270.0 265.6 170.0 VURAL .. .. 216.0 185.1 183.3 ESTIMATED RELATIVE POVERTY INMME LEVEL (U5S PER CAPITA) URAN .. .. 332.0 396.3 282.5 550.0 RURAL .. .. 332.0 308.1 248.9 403.4 ESTIMATED POPULATION 59LOW ABSOLUTE POVERT INCOMC LEVEL (PERCENT) URBAN 35.2 20.5 RURAL 46.6 35.3 Not available Not applicable. NOTES /a h adjusted group averages for each indicator are population-veighted geometric means, excluding the extreme ralues of thoe iaoicaor and the most '-,)ultced country in each group. Coverage ,C . c -,Cries among the indicators depends an availability of data and is not uniform. /b Unless otberwise noced, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for 'tost Recent Escinate, between 1974 and 177. 'c Lacin America I Caribbean; /d Intermediate Middle Incose (S551-1135 per captci, 1976); /a Upper Middle Income ($1136-2501) per capita. 1976); /f Av. 1964-66; _L Data refer to rural health centers only; /h 1963. Most Recent Escimate of CNP per capita is for 1978. AuSuste 1979  - 25 - ANNEX I MI)nO PW snrA. Mxcaa Page 3 of' 5 Mots:Aitesgh hedata are drpa fan sooroec gner%li a.dgd tha oNst satheritativo Sad relibl., it shold alSo ha ated that they Say net be loten-- iflM ' ler ef.tea... of the i..k of setadardlnd dstdaitiols sad locsptS so by dif fract coutries in oIllaetiag the data. The date are, Monnthsl.Se, oseful to desribe orders of opitussd, Stastrodgeo, sat aeh terataln osrta