Mexico - Chiapas Agricultural Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 5167b-ME STAFF APPRAISAL REPORT MEXICO CHIAPAS AGRICULTURAL DEVELOPMENT PROJECT March 25, 1985 Projects Department Latin America and the Caribbean Regional Office 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 (est. March 1985) US$1 = Mex$ 205 Mex$1 = US$0.0048 Mex$1 million = US$4,878 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) = 2.2 pounds 1 liter (1) = 0.26 gallons 1,000 kg = 1 metric ton (t) = 0.98 long ton ABBREVIATIONS ACF - Average Cost of Funds AU - Animal Unit BANRURAL - National Rural Credit Bank CAECECH - Agricultural Research Station in Central Chiapas CAEOCHI - Agricultural Research-Station on the Coast of Chiapas CAERI - Agricultural Research Station at Rosario Izapa CIAPAS - Communications Unit in Tuxtla CIES - Center for Ecological Investigations, San Cristobal CONADECA - National Cocoa Commission CONAFRUT - National Fruit Commission CONASUPO - National Marketing Organization for Basic Foods COPLADE - State Planning and Development Committee CRECIDATH - Tropical Center for Extension and Training DGCSA - General Directorate for Soil and Water Conservation DGDUT - General Directorate of Rainfed Districts and Units DGPEA - General Directorate for Production and Agricultural Extension FICART - Trust Fund for Credit in Rainfed Districts FIRA - Agricultural Trust Fund INI - National Indigenous Institute INIA - National Institute for Agricultural Research INIF - National Institute for Forestry Research INIP - National Institute for Livestock Research INMECAFE - National Mexican Coffee Institute NAFINSA - Nacional Financiera, S.A. PIDER - Integrated Rural Development Programs PLANAT - Rainfed Agriculture Programs PRODERITH - Program for Development of the Humid Tropics SRA - Secretariat of Agrarian Reform SARE - Secretariat of Agriculture and Water Resources SCT - Secretariat of Communication and Transport SEDUE - Secretariat of Urban Development and Ecology SRCP - Secretariat of Finance and Public Credit SPP - Secretariat of Programming and Budgeting USDA - United States Department of Agriculture GOVERNMENT OF MEXICO FISCAL YEAR January 1 - December 31  FOR OFMICIAL USE ONLY MEXICO CHIAPAS AGRICULTURAL DEVELOPMENT PROJECT TABLE OF CONTENTS Page No. LOAN AND PROJECT SUMNARY ... ....*.. i I. AGRICULTURE AND REGIONAL DEVELOPMENT . .................. 1 A. The Agricultural Sector..... .. .......... ....... ..... 1 Agriculture in the Economy ....... .o ...... ............ 1 Production Trends and Past Agricultural Policy...... 1 Present Agricultural Policy ........................ 2 Previous Bank Projects...... .... .............. 3 B. Regional Development........o .............. . ....... .... 4 aound ..... 4 Strategy for Development in Chiapas .................. 4 II. TE. PROJECT ARA..., ...... .............................. 5 A. Background ............................................ ..... 5 B. Agriculture and Land Use ..... o ....... ............ 6 III. THE ROJECT.......................................... ........ 7 B. Project Objectives and Description ............... o ...... 8 C. Detailed Features............... .......... so...... 9 I-nfrastructure ............. . .................. ..................... 9 Administration and Operation .... . ....... .......... 10 Ow-Farm Development and Soil Conservation...o........ 10 Production Supporting Services..................... 11 Studies .... .. .. ............. ... 12 D. Project Costs ...................................................... 13 E. Project Financing ............... .............. ..... ... 15 F. Procurement ...................................................... 15 Civil Works ................ .... ............................O..... 15 Equipment, Goods and Services .................... .... 16 G. Disbursements .. ..................................................... 16 This report is based on the findings of an appraisal mission that visited Mexico in February/March 1984. The mission comprised Messrs. C. Downing, J. Fernandez and M. Wilson (Bank) and F. Cancian and W. Ochs (consultants). IThis document has a resuicted distaution and may be used by recipients only in the prfomance of Lftir officia duties. Its coents my not Oerwise be diosed without World Bank authorization.  TABLE OF CONTENTS (continued) Page No. IV. PROJECT ORGANIZATION, MANAGEMENT AND EXECUTION ................. 18 A. Organization and Management ............................... 18 B. Project Design and Execution ..... ............. *........... 18 C. Design Criteria for Drainage and River Control infrastructure........................... 19 D. Selection of the Project Area and Beneficiaries ........99 19 E. Construction, Operation and Maintenaance ........so............ 20 Construction o o.o.o.&..oo.*.ooee*eo.e.................................. 20 Operation and Maintenance.. .......... ....... ........... 20 F. Extension Serice................. ........................... 21 G.oeerh..................................... 22 H. Credit ............................................................... 22 I. Special Studies .....*.*....... ............................................ 22 J. Technical Services ...................................... we .... 23 K. Accounting and Auditing .................. ........................ . 23 L. Monitoring, Evaluation and Reporting ...................... 24 Monitoring and Evaluation ....................... ....... 24 Reporting ......................................................... 25 V. AGRICULTURAL PRODUCTION AND MARKETING .......................... 25 A. Changes in the Production System .......................... 25 B. Yields and Production .................................... 26 C. Illustrative Farm Investment and Production ............... 26 D. Marketing ............................................................. 27 VI. BENEFITS AND JUSTIFICATION .. .................... .... ............. 28 AS. Benefits ................. O*.................... .................... 28 B. Economic Rate of Return .... .............................. . 28 C. Sensitivity Analysis e. ... ... ..... .... *w .. 29 D. Cost Recovery .................... .................. ....... 29 E. Project Risks ....... . ............ ...... . ............ . 29 F. Environmental Impact ............ ...... ............. .. .... 30 G. Sociological Impact ................... . ........... *...... . 30 VII. SUMMARY OF AGREEMENTS TO BE REACHED AND RECOMMENDATIONS ........ 31 TABLES IN TEXT 3.1 Project Cost Summary ...................................... 14 3.2 Financing Plan .............9....... ... ........ 15 3.3 Procurement Arrangements ........... . ...e.e .. 16 3.4 Disbursement Percentages ......................... .. . 17 5.1 Full Development Farm Family Income ........ ............... 27  TABLE OF CONTENTS (continued) Page No. ANNEXES ANNEX 1 Project Supporting Tables .................... .............. 32 Table 1 - Subproject Areas. .**....... **** .***.. 32. 2 - Implementation Schedule ................................. 33 3 - Field Offices and Workshops .................... .......... 34 4 - Equipment for Operation and Maintenance of Major Civil Works ....... ........................................* 35 5 - Extension Services and Training - Detailed Cost ......... 36 6 - Research - Detailed Cost .............................. 37 7 - Consultants and Studies - Detailed Cost ................. 38 8 - Project Components by Year - Phased Project ............. 39 9 - Main Infrastructure - Coast - Detailed Cost .............. 40 10 - Main Infrastructure - Central Depression and Altos - Detailed Cost ......................................................... 41 11 - Estimated Schedule of Disbursements ............... ...... 42 12 - Monitoring and Evaluation Detailed Cost................. 43 13 - Summary of Changes in Land Use and Crop Production ...... 44 14 - Incremental Economic AnalYsis ........................... 45 l5 - Sensitivity Ts .................................... 46 ANNEX 2 Infrastructure and On-Farm Development - Concepts and Design .................. *...P..*.................................... 47 ANNEX 3 Extension Services and Farmer Organizations ................ 50 ANNEX 4 Illustrative Farm Models ......................................... 52 Table 1 8 ha Coastal Farm Modell... . ........ 56 2 20 ha Coastal Farm Model.....................od 57 3 45 ha Coastal Livestock Model..o....... 58 4 130 ha Coastal Mixed Farm Model......................... 59 5 7 ha Central Depression Farm M oode ..................... 60 6 20 ha Central Depression Livestock Model...de....... -. 61 7 1 ha Altos Farm Model......... ............. ...... 62 8 Farm Models: Crop Input Costs Per Hectare . ...... .63 ANNEX 5 Special Studies ................................................ 64 ANNEX 6 List of Documents in Project File ........... .... 67 CHART l State Level Organization .............. o ........ ...... ...... 68 MAP - IBRD No. 18236 - Chiapas - Agricultural Development Project Area............................................  MEXICO CHIAPAS AGRICULTURAL DEVELOPMENT PROJECT Loan and Project Summary Borrower: Nacional Financiera, S.A. (NAFINSA) Guarantor: United Mexican States Beneficiary: Secretary of Agriculture and Hydraulic Resources (SARH) Amount: US$90 million equivalent. Terms: Fifteen years, including three years grace, at the standard variable interest rate. Project Objectives and Description: The proposed loan is one of two being presented simultaneously (agriculture and rural roads development) as part of the Bank's participation in an integrated development program for the State of Chiapas, in the Southeast of Mexico. The Chiapas Development Plan is designed to address the main constraints for the development of the State--namely, a depressed social environment, underutilized agricultural resource and lack of adequate communications-through an integrated approach placed in the context of a wider development scheme for the southeastern region of Mexico. At the core of this program are the investments required to achieve balanced socio- economic development of the areas of influence of the proposed parallel agriculture and rural roads' projects. The proposed project would support an initial phase of this program through execution of an agricultural development program in coordination with other social and economic developments. It aims to bring new land into rainfed crop production and intensify crop and livestock production on existing land, increase agricultural production and productivity, and generate rural employment and income. The project would cover an area of about 317,500 ha. To achieve these objectives the project would (a) construct flood control and road works; (b) strengthen administra- tion; (c) provide for on-farm works; (d) provision of soil conservation structures; (e) strengthen production support services; and (f) conduct studies.  - ii - Beneficiaries: The project would largely focus on 'ejidos" and small-hold- ers, directly benefiting about 32,000 rural families and providing full-time employment for about 15,000 people. In addition, it would benefit most of the urban families in area of influence of the flood control and service road works. Project Risks: The project faces three possible risks. The first flows from the fact that the institutional framework for coordination of Federal and State level planning and implementation activities is new and largely untested in practice. This institutional risk may also have implications for the provision of adequate and timely counterpart funding. To address this problem, the Government is taking steps to improve the institutional and budgetary capabilities of the executing agencies involved. The second and third risks could be (a) the beneficiaries' failure to adopt high-yield technologies; and (b) reluc- tance to switch to intensified crop production. Both would be minimized by strengthening the extension, research and promotion services, and providing drainage and river control infrastructure improvements. The project's major target group-small farmers-are expected to respond positively to incentives under the project. Therefore, adequate safeguards are provided against the three major risks of the proposed project. Estimated Costs: Local Foreign Total ______ i-TS$ million - I. Investment Cost Civil Works 35.5 21.8 57.3 On-Farm Development 8.8 5.4 14.2 Machinery, Vehicles, Equipment 2.1 5.3 7.4 Technical Services 11.8 2.2 14.0 Supporting Services 32.5 5.8 38.3 II. Project Base Cost 90.7 40.5 131.2 III. Physical Contingencies 7.7 5.0 12.7 VI. Price Contingencies 26.3 11.4 37.7 V. Total Project Cost 124.7 56.9 181.6  - iii - Financing Plan: Local Foreign Total --- USS million Government 88.8 - 88.8 Bank 33.1 56.9 90.0 Beneficiaries 1.8 - 1.8 Total 124.7 56.9 181.6 Estimated Bank FY Disbursements: 1986 1987 1988 1989 1990 1991 1992 1993 ----------US$ Million--- - Annual 7.5 10.5 14.0 14.0 15.0 16.0 8.5 4.5 Cumulative 7.5 18.0 32.0 46.0 61.0 77.0 85.5 90.0 Economic Rate of Return: 19%  I. AGRICULTURE AND REGIONAL DEVELOPMENT A. The Agricultural Sector Agriculture in the Economy 1.01 Mexico's agricultural sector contributes about 10% of the gross domestic product, employs about one-third of the country's active labor force and contributes about 6% of the country's exports. Between 1945 and 1955, agricultural production growth rates averaged about 6% annually, but declined to about 4.4% between 1955 and 1965, and to less than 3% between 1965 and 1980. During the latter period, production increases from newly irrigated land slowed down and agricultural terms of trade gradually worsened. How- ever, agricultural production increased at an annual average rate of about 8.5% in 1981 and 1982. The increase was the combined result of favorable weather conditions, higher farm-gate prices and large input subsidies under the Government-sponsored Mexican Food Program (SAM). During most of this period, the population grew at an annual rate of about 3.3%, but growth has declined recently to about 2.5% annually. 1.02 The reduced agricultural production growth before 1981, coupled with increasing internal demand, resulted in increased food imports and deterioration in the agricultural trade balance. In 1979 the country experi- enced its first agricultural trade deficit, and in 1981 the deficit was over US$1 billion. However, since 1982 the agricultural trade deficit has begun to decrease primarily due to reduced imports influenced by substantial devalu- ations. Since 1970, corn, wheat, soybeans, sorghum and powdered milk have been the principal food imports, representing almost 82 of total imports in 1980. During the same period, cotton, coffee, and vegetables constituted the main exports. Production, Trends and Past Agricultural Policy 1.03 Mexico's basic crops, which include maize, beans, wheat, rice, sorghum, soybeans and sugarcane, are produced on about 75% of the cultivated area. Production has varied strongly from year to year with a growth trend of 1.5% to 2.5% over the 1970s, i.e., well below the population growth rate. Government intervention in the price setting and marketing of these crops gradually grew stronger over the decade. With the pressure to protect the consumer against increased food prices during a period of gradually increasing inflation, the terms of trade worsened and negative protection rates pre- vailed. As a result, imports of these crops increased sharply: maize imports from 736,000 tons in 1970 to 3.8 million tons in 1980, and sorghum imports from 10,900 tons in 1970 to 2.8 million tons in 1981. From 1980 to 1982, the Government attempted to reverse this trend by substantially increasing farm- gate prices and introducing a range of input subsidies in the context of SAM. Farmers responded positively (para. 1.01), but as consumer prices for the basic products were allowed to rise at much lower rates, consumer subsidies also increased, and the Government program turned out to be too costly to maintain after 1982.  - 2 - 1.04 The production of export crops (mainly coffee, fruits and vegetables), which has remained relatively free from Government intervention in trade and prices, showed an annual average growth of about 12% up to 1979. In the ensuing three years, exports of these crops stagnated, mainly due to an increasing overvaluation of the Mexican currency. However, indications are that since 1982 growth has resumed. On livestock activities, beef production grew at an annual rate of 7Z between 1975 and 1982; pork, poultry and egg production increased at even higher rates, between 10% and 12% annually over the same period. These growth rates were sufficient to cover increased domes- tic demand, and Mexico's traditional beef exports were basically maintained. Milk, however, which is produced under controlled prices, grew only about 1.8% per annum during this period. Milk imports in the ten years before 1982 rose at an annual rate of about 20%, and presently equal about 16X of total produc- tion in fluid equivalent. 1.05 Growth in related sectors has been mixed: (a) the agroindustrial subsector grew 10% during the 1970s, and in 1979 accounted for about 18% of the industrial sector's output; (b) the forestry sector, which includes about 21 million ha of commercial wood, is underexploited, producing only about 9 million m3 of wood products in 1981; and (c) the fisheries subsector has shown significant growth in recent years rising from an annual catch of about 0.25 million tons in 1970 to about 2 million tons in 1982. Approximately 30% of the value went into exports (mainly shrimp), and about 50% of the total catch went into fish meal. Present Agricultural Policy 1.06 At the end of 1982, when the new Government took office, there was an urgent need to reassess and reorient agricultural development policies. After substantial devaluations, domestic farm-gate prices had deteriorated in real terms. Strong price increases, especially for the basic commodities, were required if farmers were to maintain and increase production levels. On the other hand, in order to lower high inflation levels, there was a need to contain increased food prices. Also, in view of high public sector deficits, the Government's agricultural subsidy policy needed to be overhauled. 1.07 The Government's policy, as outlined in the National Development Plan for 1983-1988, is designed to accelerate agricultural growth, alleviate poverty, and correct regional economic and social imbalances. The policy emphasizes the importance of agriculture in increasing Mexican exports and production of import substitutes. The stated policy over the medium term is to guarantee farm prices which are consistent with international prices. How- ever, in the short term, emphasis is being placed on adequate compensation for the increased cost of production and a reasonable profit margin to producers to determine price levels. Prices for basic crops and milk (i.e., mostly the controlled sector) increased between 120% and 160% in nominal terms during 1982, 1983 and 1984, and are presently 80-90% of international prices at cur- rent exchange rates. Input subsidies have been substantially reduced; subsi- dized prices for cash inputs (fertilizer and seeds) are now only available to small farmers holding less than 20 ha each. Interest rates on agricultural subloans, which until now were fixed and generally negative, have been made variable and are expected to approach positive levels in the medium term. The movement in rates has been referenced to the latest average cost of funds to  multipurpose banks (ACF)1/. Irrigation water rates were increased an average of about 200% during 1983 and subsequent adjustments are being made toward the stated goal of recovering operation and maintenance costs wherever possible, under a general strategy to improve the use and management of Mexico's water and soil resources. The Government has also taken steps to decentralize plan- ning, programming and implementation of rural development projects to state and local levels and to improve interagency coordination. Agricultural policy dialogue between the Go';ernment and the Bank has been intense in the recent past, and both have agreed to a continuous policy dialogue in the future. Previous Bank Projects 1.08 In the past ten years (FY74-84), Bank participation in the agricul- tural sector amounted to US$2,823 million distributed among 20 projects as follows: (a) Irrigation (Panuco 969-ME), Sinaloa I (970-ME), Fuerte/Sinaloa II (1706-ME), Bajo Rio Bravo/Bajo Rio San Juan I (1111-ME), Apatzingan (1858-ME), Ocoroni (1908-ME) and Bajo Rio Bravo/Bajo Rio San Juan II (2100-ME) - US$654 million; (b) Integrated Program for Rural Development PIDER I (1110-ME), II (1462-ME), and III (2043-ME) and Papaloapan Basin (1053-NE) - US$455 million; (c) Rainfed Agriculture PLANAT (1945-ME) and San Fernando (2191-ME)- US$418 million; (d) Agricultural Marketing FIDEC (2262-ME) - US$115 million; (e) Agricultural Credits V (1217-ME), VI (1569-ME), VII (1891-ME), VIII (2454-ME) - US$1,065 million; (f) Area Development (Tropical Agriculture) (1553-ME) - US$56 million; and (g) Small-Scale Agriculture Infrastructure Development (1643-ME) - US$60 million. 1.09 Since issuing the Staff Appraisal and Presidentts Reports for the Eighth Agricultural Credit Project (Loan 2454-ME) on June 4, 1984, the Bank has issued completion reports on three irrigation projects (Panuco, Loan 969-ME; Sinaloa, Loan 970-ME; and Papaloapan Rural Development, Loan 1053-ME). It is currently processing the completion reports for the Bajo Rio Bravo Irrigation Rehabilitation Project (Loan 1111-ME) and the Second Inte- grated Rural Development Project (PIDER II, Loan 1462-ME). The lessons learned and taken into consideration in designing the proposed project have been that: (a) in preparing irrigation projects, the alternative of developing rainfed agriculture should always be considered; (b) a strong extension service is necessary for the development of agriculture; (c) projected 1/ The weighted average of interest rates paid by financial institutions on bonds, notes and certificates of deposit, excluding checking and savings accounts. The ACF is established monthly by the Bank of Mexico.  -4- agricultural production targets should be based on tested models; (d) large civil works components require advanced preparation before appraisal; phasing should be considered for large projects with expected long implementa- tion periods; (f) complex multi-sectoral projects, such as PIDER, with many components and executing agencies, are difficult to manage and implement; and (g) projects in new areas especially where experience and knowledge are limited, should be modest in scope and design, reflecting a pilot approach. 1.10 Implementation of ongoing projects, with the exception of credit, is currently slow because counterpart funds are limited and financial control procedures are cumbersome. The Government, in cooperation with the Bank, is now reviewing the financial control procedures in order to accelerate disbursements. Also, under the Bank's Special Action Program, all ongoing projects have been reviewed, cost estimates have been revised, an increased share of the project cost is being financed by Bank funds for two years and partial loan cancellations have been made where implementation was lagging substantially, totalling US$220.4 million in 1984. B. Regional Development Background 1.11 The Government's policy, as outlined in the National Development Plan for 1983-1988 (para. 1.07), calls for special efforts to promote develop- ment in depressed regions throughout the country. Within the confines of its regional development program, the Government has placed high priority on the State of Chiapas in the Southeast of Mexico. Strategy for Development in Chiapas 1.12 The State of Chiapas is one of the least developed states in the country, with a per capita income of US$350, compared to the national average of USS2,250. The State's population is currently estimated at about 2.3 million, with over 65% of the people living in rural areas. Agriculture accounts for only about 35% of the State's GDP. 1.13 In May 1983 the Government of Mexico announced a long-term multi- sectoral development program for the State--the Chiapas Plan--as part of its regional development strategy. The basic strategy of the Chiapas Plan is to: (a) promote a more balanced distribution of social and economic benefits through economic growth and special development programs; (b) decentralize dectsion-making and management in favor of the State Government and local aut rities for resource allocation and implementation of development pro- grams; tc) institutionalize and reinforce the participation of the rural popu- lation in the formulation and design of investment programs; Cd) develop local resources and offer incentives to increase production of efficient import substitutes and exports; (e) utilize fully potential land resources by improving infrastructure, as well as the technical capacity of the producers to adopt new cropping systems and technology; and (f) promote conservation of the land resources and environment. The proposed development program is expected to be carried out in several phases over a 15-year period. At the outset, the Government plans to focus primarily on accelerating agricultural  -5- growth and improving the physical infrastructure, mainly roads, throughout the entire State. 1.14 Agriculture, the mainstay of the local economy, would focus on bringing new land into cultivation, intensifying crop and livestock produc- tion on existing land and promoting improved technology for export expansion and efficient import substitution. While agricultural production could be increased substantially statewide, the Coastal Plain offers the largest and easiest area to augment production significantly. II. THE PROJECT AREA A. Background 2.01 The State is divided into four distinct regions: the Tropical Coastal Plain, the Central Depression, the Central Highlands (the Altos) and thp Selva (tropical rainforest). The level of development varies considerably among these regions, with the Coastal Plain accounting for most of the econo- mic growth in recent years. In this initial phase of development, the project area (Annex 1, Table 1, and Map) would consist of about 317,500 ha: 255,000 ha (80%) on the Coast, 55,000 ha (18%) in the Central Depression, and 7,500 ha (2Z) in the Altos. The Selva, an environmentally demanding and sparsely populated area, would not be included in this first phase of development because adequate investment studies have not been undertaken. It is contemplated that, with further studies and experience in tne region, develop- ment would be undertaken in the Selva in subsequent phases of development in Chiapas. 2.02 The population of the project area is estimated to exceed 300,000, of which about 175,000 (60%) are rural and 60,000 (20%) are landless. Of the economically active population (166,000), about 55% are engaged in agricul- ture. Income levels are low and the present estimated average annual family income is less than US$1,900. The Coast is an area to which agricultural labor from other regions of the State migrate for regular and seasonal employment. Seasonal migrant labor includes underemployed producers from other areas (especially the Altos) and landless rural people. The harvest of coffee, banana and cottoa crops also attracts substantial seasonal labor from Guatemala. Employment in public and private construction has been a major source of off-farm employment in the past. However, the opportunities for construction employment have been substantially reduced by current economic conditions. 2.03 About 250,000 indigenous people with different cultures and languages live in the Altos, making it almost a state within the state. For the majority of the population, the opportunities to increase their income either from the land or off-farm employment in the area are limited. Strong cultural and family ties have so far inhibited permanent migration to other areas to seek better opportunities. Various development programs have been modestl.' successful but manage to benefit only a small part of the population.  2.04 The Coastal and Central Depression areas have a good potential for rainfed agriculture and adequate surface and ground water for future irriga- tion development. However, in all of these areas the dominance of rivers contributes to flooding and inadequate communications. Presently, much of the Coast is not cultivated because of the high risk of flooding and crop loss. In the Central Depression a higher percentage of the land is now cultivated; however, in some areas yields are often reduced as much as 60% in wet years due to flooding and poor water infiltration and drainage. 2.05 As a first order of priority, the proposed project, as a first phase of the Chiapas Plan, would focus on flood control and drainage in the Coast and the Central Depression and on increasing productivity and production under rainfed conditions in the Coast, the Central Depression and the Altos. All of the project areas have adequate rainfall (1,500 to 3,000 mm over a six-month period) and temperatures suitable for seasonal rainfed crop production. Rain- fall and temperature of the Central Depression are well suited to basic crop and horticultural crop production. The Coastal climate is suitable for a wide range of crops, including cereals, cotton, soybeans, rice, sugarcane and tropical fruits. The more temperate climate of the Altos is excellent for fruit production (apples, pears, peaches and oranges). B. Agriculture and Land Use 2.06 In the project area on the Coast, about 80,000 ha are used for crop production and 175,000 ha for livestock production. The Coast's principal crops are maize (29,000 ha), cotton (19,000 ha), soybeans (17,000 ha), sugarcane (12,500 ha) and cocoa (9,500 ha). In Comitan in the Central Depression about 12,500 ha are used for maize and bean production, 10,000 ha for pasture and about 1,000 ha for other crops; 8,500 ha are normally not cultivated because they are too wet. By and large, productivity remains low, particularly in the Central Depression; however, the scope for improvement is considerable (details on land tenure, soils and climatic conditions are avail- able in the Project File). 2.07 Of the total project area of 317,500 ha, about 55% is owned by ejidos (over 27,000 ejido families) and the remaining 45% by nearly 4,800 private land owners. Ejido holdings average about 8.8 ha and private hold- ings average 28.6 ha on the Coast, compared to an average of about 6.8 ha and 16.2 ha, respectively, in the Central Depression. Approximately 75 holdings used for livestock production in the Coastal area (about 10% of the total) are larger than 200 ha. in the Altos 85% of the cultivable land is held by ejidos, the remainder is communal and small private land holdings. Land holdings are highly fragmented, ranging from 0.5 to 3.0 ha, leaving more than 80% of the population at or below the subsistence level. 2.08 Areas proposed for development under the project are already part of designated rainfed districts. In accordance with the Agricultural Development Law of 1981, the Government can declare lands suitable for crop production as "Production Units," thereby applying a maximum limit of 200 ha per holding. Alternatively, under with the Federal Water Law of 1972, the Government can establish -Drainage Districts" as was done under the San Fernando Project (2191-ME). In Chiapas the Government plans to utilize the Production Unit concept which provides more flexibility within such designated areas regarding  -7- the use of land for crop and livestock production. Appropriate administrative action would provide for acquisition of lands in excess of 200 ha, acquisition of rights-of-way, and recuperation of investment and infrastructure operation and maintenance costs, in accordance with the producers' ability to pay, determined by socioeconomic studies. 2.09 With the proper mechanism, existing legislation provides for: (a) the Secretariat of Agrarian Reform (SRA) and the Secretariat of Agricul- ture and Water Resources (SARH) to coordinate regularization of land tenancy and expedite certification of land in favor of ejidos and small-holders; and (b) SARH, SRA and the Secretariat of Finance (SHCP) to determine appropriate recuperation of investments and cost of operation and maintenance. 2.10 Service roads in the project area, except for those in the Altos, are poor or nonexistent, which adversely affects marketing and development in the area. In the entire State, there are only 500 field level extension agents (one for each 6,400 ha) to cover more than 3.2 million ha used for crop and livestock production. The scattered nature of agriculture and livestock production areas and difficult communications require a higher than average ratio of extension staff. Specialized services are available from the Mexican National Coffee Institute (INMECAFE), the National Cocoa Commission (CONADECA), the National Fruit Commission (CONAFRUT) and the National Indigenous Institute (INI). In general, the state extension services suffer from lack of qualified and trained staff and inadequate subject matter specialist support. SARH estimates that about 33% of the crop area and 20% of the livestock area receive adequate technical support. 2.11 The National Institute for Agriculture Research (INIA) and the National Institute for Livestock Research (INIP) have research centers in Chiapas. However, the number of research stations and the number of scienti- fic staff are inadequate to cover needs of the State and to develop appro- priate technologies and farming methods to induce production in the region. 2.12 Many farmer organizations in Chiapas (including ejidos) have formed in response to a variety of Government programs that elicit group requests for various services. Most ejidos are relatively permanent general agricultural associations. Other specialized associations, such as those for conservation, and fruit, vegetable and flower production are common in the Altos. Both the generalized and specialized organizations would act as vehicles to support development in the region. III. THE PROJECT A. Introduction 3.01 In support of the Government's integrated regional development strategy and the Chiapas Plan, the Bank in this initial phase of development would focus on the agricultural sector and rural roads infrastructure, financing in parallel the Chiapas Agricultural Development Project and the Chiapas Rural Roads Project. The proposed Chiapas Agricultural Development Project was prepared by SARH's Commission for the National Hydraulic Plan (CPNH). CPNH was assisted by SARH's Directorate of Studies, its State  - 8 - Representative, the State Government and the State Committee for Planning and Development (COPLADE). A Bank identification mission visited Mexico in October 1982 (just prior to the change in administration), and the project was finally identified during the visit of a Bank mission in July 1983. Prepara- tion was completed in February 1984 and the project was appraised in March. Available working papers and supporting documents are listed in Annex 6. B. Project Objectives and Description 3.02 The project-which has a high priority in Mexico-has been designed in accordance with the Government's multi-sectoral regional strategy for development and the Chiapas Plan (para. 1.13). Bank participation would support the Government's strategy to increase agricultural production; accelerate economic growth; alleviate poverty; and correct regional, social and economic imbalances. The project draws substantially from the experience of the pilot PRODERITH project in Chiapas (Loan 1553-ME), as well as other operations, such as PLANAT, Papaloapan and PIDER (paras. 1.08-1.09). The objectives of the project would be to increase: (a) the area available for rainfed crop production and intensification of crop and livestock production; Cb) agricultural production and productivity with a view to improving self-sufficiency and increasing exports; and Cc) rural employment and family income. 3.03 To achieve these objectives the project would: (a) improve infrastructure by constructing river control dikes, farm service roads and drains; (b) strengthen administration of the rainfed districts operations by providing field offices, housing, workshops, equipment and vehicles for operation and maintenance; (c) provide financial assistance for on-farm works, including drains, land clearing, and land smoothing; (d) provide for construction of soil conservation structures; (e) strengthen production supporting services, extension, research, training, fellowships, and technical services (including national and international consultants); and (f) conduct studies (basic, feasibility, marketing, environmental and socioeconomic) to provide data for this project and future development in the State. 3.04 The project would be carried out over a seven-year period focusing on medium- and low-income producers, directly benefiting about 32,000 rural families and providing full-time employment for 15,000 people. It would benefit most of the urban families in the area of influence of the flood  - 9 - control and road works. Annex 1, Table 2 outlines the project implementation schedule. Annex 2 outlines design criteria and concepts for infrastructure and on-farm development. C. Detailed Features Infrastructure 3.05 Dikes with Roads. In order to protect farmland and rural communities, the Coastal project area of 255,000 ha would require construction of about 350 km of flood control dikes, along the rivers that flow from the mountains through the area to the Pacific Ocean. A road surface 6-8 m wide would be constructed on the dike corresponding to the top width and mass required for embankment stability. Dikes would average 1.5 m high. The area between dikes would be maintained in their natural state and used for pasture. 3.06 Service Roads. The project would construct and rehabilitate about 475 km of farm service roads in the Coastal and the Central Depression areas complementing the proposed parallel rural roads project. These roads would be constructed to proven SARE standards: 4-6 m width and 0.15-0.3 m all-weather gravel surface, depending on anticipated load conditions and soils available for embankment; for upland roads, a 4 m width would normally be adequate. Construction of new roads would involve stripping of surface soils under embankment areas to provide for a stable base. Borrow areas would be graded to minimize shallow standing water that could cause health control problems in areas where malaria is still prevalent. Suitable borrow materials are available within a reasonable distance of all subproject areas. 3.07 Drains. Drains would be required to remove excess surface water and control the water table. Depths would be limited to 1.5 m to avoid excessive lowering of the water table. About 600 km of drains would be constructed to the following dimensions: (a) primary drains-4 m bottom width, 1.5 m depth, 2:1 side slope; and (b) secondary drains--1.5 m width, 1.1 m depth and 2:1 side slope. Designs would vary to conform to soil type and hydraulic and hydrologic requirements. Design capacities are based on flows obtained from 48-hour duration storm based on a five-year frequency event except on very flat lands (under 1X land slope) where drainage curve procedures are used. Drainage curves are in accordance with accepted international standards and generally conform to USDA/Soil Conservation Service requirements for drained agricultural land. 3.08 Drains with Roads and Auxiliary Structures. About 300 km of farm service roads with drains would be constructed in accordance with SARE standards (paras. 3.06 and 3.07). Most of these roads would be in the Coastal areas where few roads exist. About 300 auxiliary structures, such as fords, bridges, culverts, sediment traps and crossings, would also be built as part of the civil works (dikes, roads and drains). Sediment traps are required near the outlet of many channels to minimize the movement of coarse-grained sediment into estuaries and lagoons. This practice would also help reduce the transport of non-soluble chemicals attached to water transported particles that could cause environmental degradation in receiving bodies of water. Filter strips to catch sediment would be maintained to help control agricul- tural chemicals used in areas where water from crop fields would flow directly  - 10 - into channels. In order to control and reduce erosion and agricultural chem- ical transport, vegetation would be planted on channel slopes and spoil banks. Vegetation on dikes and road side slopes, borrow areas and back slopes would also contribute to the control of erosion and environmental quality of these areas. Administration and Operation 3.09 Field Offices. For implementation and operational purposes the project would provide office space, storage and staff housing facilities in the projec': area. Six field offices would be constructed: two in the Coastal subproject ereas and one in each of the four Central Depression subproject areas. The construction engineering staff and production service staff would be based at these centers. A general description and breakdown of investment costs for offices and workshops are shown in Annex 1, Table 3. 3.10 Workshops. The project would provide six buildings for workshops, staff housing, and equipment and spare parts storage. These workshops would be developed and supplied with the necessary tools and equipment for service and repair of vehicles and maintenance of equipment, and would be located with field offices wherever practical. 3.11 Equipment for Infrastructure Maintenance. The operation and mainte- nance of the road network (475 km), drainage system (900 km), dike system (400 km), and auxiliary structures (300) would require heavy equipment, including motor graders, front-end loaders, backhoes, crawler tractors, water trucks, fuel and water transport trailers, draglines, and miscellaneous small tools and equipment (Annex 1, Table 4). Maintenance of the infrastructure, which is traditionally the responsibility of each rainfed district, is a vital element under the project and would require a substantial annual budget; 0&M during implementation has been included as part of the project cost. 3.12 Vehicles for Construction and Production Operations. The project would provide for the purchase, operation and maintenance of vehicles required for construction and production operations and services, and are included as part of the investment costs for research, extension and administration. On-Farm Development and Soil Conservation 3.13 In order to assist on-farm development, the Government would provide mediur- and long-term credit for construction of field drains, terracee, land clearing and smoothing, and soil conservation structures (Annex 2). About 100,000 ha (30% of the total project area) would require some investment for on-farm development for crop production costing about US$21 million, or an average of US$210/ha. About 10% of the project area for full development (Annex 1, Table 1) would require smoothing to remove depressions where water collects. Land clearing on about 15% of the area would be required to facilitate efficient field operations for crop and livestock production. It is estimated that about one-third of the works associated with on-farm investment would consist of soil conservation works (terraces, gulley erosion control, reservoirs and grass waterways) which would benefit the community and would be financed from the SARH budget as a public investment. The major part of the soil conservation investment would be in the Altos, one of the poorest  - 11 - areas of the State where socioeconomic analyses indicate that 85% of the popu- lation is at or below the subsistence level. The holdings are small and frag- mented (I to 3 ha) on steep fragile soils unsuitable for cultivation without the benefit of soil conservation structures. Production Supporting Services 3.14 Extension Services. At present there are 169 extension workers, supported by 26 administrative staff in the five rainfed districts (where the subprojects will be located) to service about 1.5 million ha used for crop and livestock production. However, to promote a higher level of production and efficiency under the project, an additional 345 technical staff (288 field level technicians and 57 subject-matter specialists and other support personnel) would be provided to strengthen services throughout the five districts, with particular emphasis in the subproject areas. The level of coverage in the subproject areas would be about one technician for each 1,000 ha (1:110 farm families) based on the successful intensive PRODERITf experience required to obtain a rapid transition from traditional extensive livestock to intensive crop and livestock production. This intensive extension system would only be maintained during the development phase. Extension workers would eventually move on to new development areas and staffing would be reduced to a level of about one technician to 3,300 ha (1:300 families) in the five districts of the area of influence of the project (1:340 in Chiapas). The cost for the seven-year period to cover incremental staffing, vehicles, equipment, and operating costs is shown in Annex 1, Table 5. Additional information on extension service operations is in the Project File (Annex 6). 3.15 Research. The overall objective of research under the proposed project would be to strengthen existing operations and help generate, test, and disseminate technical packages that would increase agricultural production (paras. 5.01-5.03). Project support to research would focus upon supporting INIA's programs at the Agricultural Research Stations at Rosario Izapa (CAERI), in Central Chiapas (CAECECH), and on the Coast of Chiapas (CAECOCHI), and INIP's programs at San Cristobal and Escuintla. Primary areas for study would be geared toward: (a) improving yields of existing and non-traditional crop or pasture species suitable for cultivation in Chiapas; (b) developing and testing new varieties; (c) improving management practices and developing farming systems; and (d) carrying out practical research appropriate for these areas in order to benefit from major project investments in drainage infra- structure. Investments provided to CAECECH in the Central Depression would ensure the establishment of a satellite research program involving at least two researchers to work exclusively on problems of the Comitan area, which is expected to undergo significant changes in production techniques as a result of drainage investments. Adequate technology is already available from the PRODERITH project and existing research institutions and programs to support initial agricultural production development under the project. Technical packages developed at the research centers would be disseminated through the Communications Unit in Tuxtla (CIAPAS), either directly to farmers or indirectly through formal links with the extension service. The cost to meet the incremental program for a seven-year period to cover construction of offices, storage, laboratory and library facilities, as well as the purchase of vehicles and laboratory and audio-visual equipment, staffing and operating  - 12 - expenditures is shown in Annex 1, Table 6. A summary of the extension and research operations and methodology are available in the Project File. 3.16 Training of Staff. To upgrade and improve the proficiency of administrative and technical support staff, funds would be allocated to provide training for selected personnel (Annex 1, Table 5). Training of extension staff would be carried out at the Tropical Center for Extension and Training (CRECIDATH) in Vera Cruz, a facility built specifically for this purpose under the PRODERITH Project, Bank Loan 1553-ME. All new extension staff would receive a three-month training course on aspects related to the extension needs of Chiapas, with particular emphasis on the approach that has been tested under the PRODERITH project (para. 4.14). Final selection of the extension staff would depend on satisfactory completion of the training and a final entrance examination. It is estimated that over the project period, approximately 1,200 extension staff would be trained; based on historical experience, approximately half would continue in a long-term role in the extension service. Infrastructure staff responsible for supervision of drainage works construction and operation would receive short-term training on specific technical aspects of their job at one of the existing training centers. In addition, administrative and technical support staff would receive training in sociological and environmental aspects related to management and execution of the project. 3.17 Training of Farmers. Courses in farmer organization, improved production techniques, and maintenance of drainage infrastructure would be provided throughout the project period to a total of about 3,000 farmers. Qualified trainers would be selected from among the technicians who have completed the technical training described in para. 3.16. The courses would generally be held in local SARH offices in Chiapas or on-farm demonstration plots. 3.18 Fellowships. A total of 12 man-years of fellowships for intensive local or overseas training would be financed under the project (Annex 1, Table 5) for middle-level managers to broaden their knowledge in their respective areas of technical responsibilities. 3.19 Technical Services. The project would provide funds for national and international technical services (consultants) to support SARH to strengthen its operations in the areas of soil conservation, environmental and socioeconomic impact analysis and research, extension communications, and the conduct of pre-investment studies. About 180 man-months of technical services would be provided under the project for this purpose (Annex 1, Table 7). Studies 3.20 Chiapas is relatively undeveloped and has inadequate knowledge and experience available to draw upon in the formulation and design of agricul- tural development proiects. This project would be the first phase of a much larger and longer-term multi-sectoral investment program for the State. Therefore, the project includes a major component for studies that would provide knowledge not only for this project but for future development. Detailed costs are indicated in Annex 1, Table 7, and a general description of each study is outlined in Annex 5. Specific areas of study financed under the project would include:  - 13 - (a) pre-investment (including feasibility) studies on about 330,000 ha and basic studies on about 300,000 ha in other areas of the State, including the Selva, and preparation of investment projects; (b) detailed soil surveys at the farm level to determine soil classifications and optimum land use when excess water is no longer a constraint; (c) bathymetric and hydrographical surveys of the lagoons and permanent wetlands of the Coast; (d) a study to determine marketing requirements in the project area at full development; and (e) periodic socioeconomic and environmental Impact reviews in the subproject areas. D. Project Costs 3.21 The total project cost would be about US$181.6 million, net of taxes, including a foreign exchange component of about US$57 million, or 31% of the total. The base cost, calculated at March 1985 prices, is estimated at about US$131 million, and physical contingencies are about US$13 million, based on an estimate of 15% for civil works and 10% for equipment, vehicles, goods and materials. Price contingencies are based on Bank guidelines and are calculated at 5% for 1985, 7.5% for 1986, 8% for 1987-1990, and 5% thereafter, and are estimated to be about US$38 million, or 29% of base costs. Total phased and detailed cost estimates are presented in Annex 1, Tables 8, 9 and 10. Project costs are summarized below:  - 14 - Table 3.1 Project Cost Summary 0$ Millon) (US$ Miion) X Total X Foreign Base Local Foreign Total Exchange local Foreign TotaL Costs A. DEPMSTRUCRE Roads With Dikes 2,367.1 1,450.7 3,817.7 38 11.5 7.1 18.6 14 Rceds With Drains 1,458.6 893.9 2,352.5 38 7.1 4.3 11.4 9 Roads 1,158.4 710.0 1,868.4 38 5.6 3.5 9.1 7 Drains 658.7 403.7 1,062.4 38 3.2 2.0 5.2 4 Structures a/ 749.7 459.4 1,209.1 38 3.6 2.2 5.9 4 Design and Engr. 520.0 318.7 838.7 38 2.5 1.5 4.1 3 Sub-Total 6,912.5 4,236.3 11,148.8 3B 33.6 20.6 54.2 41 B. ON-FARM DEVELCF9NT 1,806.7 1,107.3 2,914.0 3B 8.8 5.4 14.2 11 C. AG. SUPPORT SERVICES EAmtensioan and Training 3,649.5 665.5 4,315.0 15 17.8 3.2 21.0 16 Research 142.1 245.1 387.1 63 0.7 1.2 1.9 1 Sub-Total 3,791.6 910.6 4,702.1 19 18.4 4.4 22.9 17 D. OTER BEAT SERICES Coasultarts 272.3 210.0 482.3 44 1.3 1.0 2.3 2 Studies 1,423.2 158.1 1,581.3 10 6.9 0.8 7.7 6 Manitoring and Evaluation 322.9 80.7 403.6 20 1.6 0.4 2.0 1 Project Imp3ementation & Adm. 4,097.5 1,624.3 5,721.9 28 19.9 7.9 27.8 21 Sub-Total 6,115.9 2,073.1 8,189.1 25 29.7 10.1 39.8 30 Total Baseline Costs 18,626.7 8,327.3 26,954.0 31 90.6 40.5 131.1 100 Physical Contirgercies 1,580.4 1,034.5 2,614.9 40 7.7 5.0 12.7 10 Price Contingencies 5,441.4 2,336.4 7,777.8 30 26.5 11.4 37.8 29 Total Project Costs 25,648.4 11,698.2 37,346.7 31 124.7 56.9 181.6 139 a/ Includes, culverts, fords, brideps, sedimnxt aps etc. March 13, 1985  - 15 - E. Project Finaneing 3.22 The proposed Bank loan of US$90 million (50% of the total project cost) would be to Nacional Financiera, S.A. (NAFINSA), on standard Bank terms, and would cover about US$57 million of foreign exchange requirements and US$33 million (26%) of local costs. The proposed financing is summarized below: Table 3.2 Financing Plan (US$ million) Govt. Benefic. Bank Total Infrastructure 22.7 - 53.0 75.7 On-farm Development 15.8 1.8 3.8 21.4 Extension and Training 22.0 - 7.0 29.0 Research 0.5 - 2.0 2.5 Technical Services 0.7 - 2.1 2.8 Studies 2.4 - 7.1 9.5 Monitoring and Evaluation 1.7 1.0 2.7 Project Administration 24.0 14.0 38.0 Total 89.8 1.8 90.0 181.6 Percent 49 1 50 100 NOTE: Purchase of goods and equipment are normally exempt from taxes; taxes on civil works would not exceed 8% of cost. F. Procurement Civil Works 3.23 Major civil works (principal roads, dikes and drains) estimated to cost about US$35 million, would be packaged in contracts of not less than US$2 million, and procured by International Competitive Bidding (ICB) in accordance with Bank guidelines for procurement. Other small civil works (buildings, roads, soil conservation stiructures, drains, etc.) would normally be packaged in contracts of more than US$200,000 and be procured in accordance with Local Competitive Bidding (LCB) procedures acceptable to the Bank. These works are estimated to cost about US$45 million and would be scattered in time and place. Minor civil works not suitable for packaging in contracts larger than US$50,000, estimated to cost an aggregate of not more than US$6 million, would be purchased according to Government/SARH procedures for force account or direct contract acceptable to the Bank. For any civil works contracts expected to exceed US$1.5 million, the Bank's prior approval would be required before invitations to bid were issued and contracts awarded. 3.24 Civil works procurement procedures used in Mexico were recently reviewed in detail and found to be generally satisfactory. A working paper on LCB procedures is in the Project File (Annex 6). Procurement is carried out in accordance with the Public Works Law which became effective January 1,  - 16 - 1984. The Borrower would be encouraged to modify its procedures in order to conform more closely to Bank policies. In particular, the time for bidding would be increased, and contracts would be awarded to the lowest qualified bidder. Equipment, Goods and Services 3.25 Equipment for operation and maintenance, estimated to cost about US$6 million, would be procured under ICB procedures in accordance with Bank guidelines. Vehicles, equipment, spare parts and materials for administrative services, operation and production services and training, expected to cost about US$10 million, would as far as practical be packaged in contract amounts not less than US$150,000; each would be procured according to LCB procedures acceptable to the Bank. Equipment, goods and material contracts costing less than US$150,000 would be procured according to Government/SARH procedures acceptable to the Bank, and would not exceed in the aggregate US$4 million. Qualified domestic manufacturers for the supply of equipment, goods and materials, would receive a preference of 15% or the import duty, whichever is lower. Consultants for technical services would be selected in accordance with terms and conditions of the Bank guidelines. For all contracts for equipment, goods and materials expected to exceed US$250,000, the Bank's prior approval would be required before invitation to bid were issued and contracts awarded. During negotiations, the Government provided assurances that it would follow the procurement arrangements outlined in paras. 3.23-3.25. Table 3.3 Procurement Arrangements Project Component ICB LCB Other a/ Total ------US$ million------ Major Civil Works 35 0 - 35 Minor Civil Works b/ 0 45 5 50 On-farm Developmendt - 5 16 21 Vehicles, Equipment and Materials 6 5 4 15 Technical Services c/ - - 18 18 Total 41 55 43 139 a/ Quotations, direct contracting and force account. b/ Includes soil conservation. c/ Consultants, studies, designs and training. G. Disbursements 3.26 Disbursements would be made over seven and one-half years. The proposed disbursement schedule (Annex 1, Table 11) is based on-the profile for  - 17 - agricultural projects in Mexico. The proposed Bank loan of US$90 million would be disbursed against normal documentation. Purchase of small items and contracts for less than US$20,000 would be grouped together as far as practi- cal and disbursements made against statements of expenditures (SOEs). Disbursements for contracts for buildings and other works, normally costing less than US$150,000, would also be made against SOEs. All contracts and supporting documents for SOEs would be retained by the executing agency for review by the Bank as required and would be audited. In order to provide for timely payments of reimbursement applications, NAFINSA would establish a Special Account in US dollars to cover three months of estimated expendi- tures. The Bank would make an initial deposit of US$6 million. The Borrower would claim reimbursement of the Bank's share of expenditures from the Special Account upon presentation of withdrawal applications forwarded to the Bank, fully documented for replenishment of the Special Account. The Bank would require a monthly statement of the Special Account which would reflect transactions during the previous month. The project provides for retroactive financing for infrastructure, not to exceed US$9 million, for expenditures incurred after July 1, 1984. Assuming Board presentation in April 1985, the Completion Date would be March 31, 1993. During negotiations, the Borrower provided assurances that it would establish a Special Account and submit monthly statements to the Bank, as described above. 3.27 The table below indicates the categories and items to be financed from proceeds of the loan as follows: Table 3.4 Disbursement Percentages Allocation of % of Expenditure Category Loan Amount to be Financed (US$ million) 1. Civil Works for Dikes, Roads, Drains, Buildings, Soil Conservation and Engineering 58.0 70% 2. Equipment, Goods and 90% of the total Spare Parts 11.0 and 100% of FE 3. Consultant Services, Studies and Training 5.0 100% 4. Salaries for Incremental Extension Staff 7.0 100% until June 30, 1987 50% until June 30, 1989 25% until thereafter 5. Unallocated 9.0 Total 90.0  - 18 - IV. PROJECT ORGANIZATION, MANAGEMENT AND EXECUTION A. Organization and Management 4.01 The project would be organized, managed and executed along the lines that SARH has traditionally used in its projects in the rainfed districts (Chart 1). SARH's Bank-financed rainfed district projects have operated in a similar manner: the Tropical Agriculture Project (PRODERITH), Loan 1553-ME; the Rainfed Agriculture Project (PLANAT), Loan 1945-ME; and the San Fernando Rainfed Agriculture Project, Loan 2191-ME. All infrastructure design, tendering, construction and supervision would be carried out under SARH's Secretariat for Large-Scale Irrigation through the District Offices of the Resident Engineers. Operation, maintenance and technical services for agricultural production, under the responsibility of the Undersecretariat for Agriculture and Operations, would be carried out by the chief of each of the rainfed districts in which subprojects are located (Tapachula, Villaflores, Tuxtla Gutierrez, San Cristobal and Comitan). 4.02 The SARH State Representative in Tuxtla Gutierrez would be respon- sible for SAMI's coordination, supervision, monitoring and evaluation of the progress of execution of each rainfed district subproject. The basic advisory units in each district would be a Managemert Committee and a Technical Committee. Both would have representatives from among producers and the Federal, State and local Governments to assure coordination and integration of the annual operation program of each district. The SARH State Representative would keep COPLADE informed of the project progress and problems so that COPLADE could take these aspects into consideration in the coordination of planning and programming of future operations. 4.03 The principal SARH agencies involved in promoting agricultural pro- duction under the rainfed district system would be: the General Directorate for Production and Agricultural Extension (DGPEA), the National Institute for Agricultural Research (INIA), the General Directorate for Soil and Water Conservation (DGSA), the National Institute for Livestock Research (INIP), the National Fruit Commission (CONAFRUT) and the National Institute for Forestry Research (INIF). The National Marketing Organization for Basic Foods (CONASUPO) would support the project through the purchase and storage of basic foods, principally maize and beans. The Government's banking system, princi- pally the Agricultural Trust Fund (FIRA), the Trust Fund for Credit in Rainfed Districts (FICART), the National Rural Credit Bank (BANRURAL) and the commer- cial banks, would provide credit for on-farm investment and production. SARE would also provide additional technicians to prepare, evaluate and supervise subloans in support of the banking system. B. Project Design and Execution 4.04 SARH had a 1984 allocation of Mex$ 1,850 million (US$12.3 million) for infrastructure, rights-of-way, design, construction, supervision of construction and operation in the project area. Several small contracts have been let and construction is proceeding on two drainage canals on the Coast and part of the main collector drain at Comitan in the Central Depression. The initial designs and construction specifications would be based on the  - 19 - PRODERITH pilot project experience and design and construction in the project area already being implemented and financed from the 1984 and 1985 SARH budgets 2/. Under the project SARH would prepare annual project execution programS. The first year's program and final infrastructure designs were completed as a condition of Board presentation. SARH would then prepare and submit annual programs by December ) of each year during the project to cover the following calendar year; assurances to this effect were provided at negotiations. The first year's program would focus on: (a) acquiring rights- of-way; (b) designing and constructing dikes, drains and service roads; Cc) designing service centers and workshops; and (d) hiring technical staff for the initial planning, construction and operation phase. C. Design Criteria for Drainage and River Control Infrastructure 4.05 The design criteria (Annex 2) for drainage and river control infra- structure are based on actual topographic and hydrographic surveys, measure- ments of river flows, precipitation, run-off, infiltration, as well as existing and proposed Land use. The river control dike system design would be built to support a 24-hour peak flow, 10-year frequency storm, while the drainage system design capacities would be based on a 48-hour peak flow, 5-year frequency storm. The design criteria have also taken into considera- tion the experience of areas already developed in Chiapas, and in particular the 5,000 ha pilot project located at Acapetahua on the Coast financed under Loan 1553-ME. International consultants engaged under Loan 1553-ME have assisted SARR in the preliminary evaluation and design of the drainage and river control system for the Coast. Design criteria have taken into consi- deration the need to minimize construction costs, lowering of the water table for crop production, and maintaining an adequate water table for off-season pasture and crop production. The estlmated implementation schedule and basic costs (at time of appraisal and updated to October 1984) are indicated in Annex 1, Table 2; detailed infrastructure costs and phasing are indicated in Tables 9 and 10. D. Selection of the Project Area and Beneficiaries 4.06 The project area and beneficiaries are well-defined in the Central Depression. However, in the Coastal area, of the total 255,000 ha to be pro- tected from flooding by dike construction, 90,000 ha would be fully developed with drains and on-farm works for intensive crop and livestock production (Annex 1, Table 1). Select.on of these full development areas has not yet been completed; a proportion of them would be identified as part of each year's annual development program under the project (para. 4.04). The basic criteria for selection of areas for full development would be that: (a) the lands (less than 50 ha) be occupied primarily by ejidos and private small- holders; (b) the lands be technically and economically suitable for agricul- tural production; and (c) the support services (credit, extension, etc.) would be provided in an adequate and timely manner. During negotiations assurances were provided that the above criteria would be used in selecting such areas. 2/ Infrastructure cost estimates are based on actual 1983 and early 1984 experience in the project area.  - 20 - 4.07 The Coastal project area is divided into several watersheds by the 17 major rivers that cross the plain. In addition, mini-watersheds would be formed between the rivers by the design and construction of the drainage system, thus providing ample flexibility in selecting areas for full devel- opment that are essentially occupied by ejidos and small-holder farmers. In the Altos the 7,500 ha to be developed for fruit production would be selected by SARH in coordination with CONAFRUT. This is a continuation of an ongoing voluntary program strongly supported by the area farmers. In all areas SARM's extension workers and promoters would work closely with the beneficiaries in the selection of areas and preparation of the annual development program. 4.08 There are about 76 holdings, comprising IOZ of the area, that exceed the legal limit established by the Agricultural Development Law of 1981 for lands declared suitable for rainfed crop production. In accordance with the criteria for selection of beneficiaries (paras. 4.06 and 4.07), these holdings would as far as practical be avoided in selecting areas for full development. Existing legislation (paras. 2.08 and 2.09) would provide for SARH and SRA to coordinate action to acquire and redistribute land in excess of the 200 ha limit in those cases where it is not practical to avoid infrastructure development that would benefit large holdings. E. Construction, Operation and Maintenance Construction 4.09 Land acquisition for rights-of-way (about 2,750 ha) for the construction of dikes, drains, roads, and service centers has already been initiated and will continue to be handled by SAXM's Legal Department. Land would be acquired by out-right purchase or easements, and SARH would compensate farmers for crop losses. Compensation for land and crops is included in project costs. SARH's Department of Large-Scale Irrigation would design infrastructure according to usual SARM practices and standards, handle tendering, and supervise construction through its Offices of Resident Engineers. Private contractors would carry out the construction; adequate contracting experience and capacity are available in Chiapas and neighboring states. The estimated infrastructure implementation schedule is indicated in Annex 1, Table 2. 4.10 During the first year, the Government would begin implementation in each of the areas. Six regional operational and administrative centers (field offices) would be established and staffed to support project implementation. Production operations would be the principal goal of the project and the transition (production, promotion training and demonstration phase) would be initiated in the first year of the project. Each of the rainfed districts would be responsible for operations including extension and research activ- ities as well as maintenance and operation of the infrastructure system. 4.11 Since there would be a parallel Chiapas Rural Roads Project (pro- viding for construction of 1,000 km and improvement of 2,000 km of rural communications roads throughout the State, as well as increasing access to the project areas), it would be essential that SARH coordinate its project area  - 21 - service roads program (providing access within the project area) with the Secretariat of Communication and Transport (SCT) rural roads program (criteria for review of the roads program is indicated in the Project File). In the interest of economy and efficiency it is important that similar load factor and complementary roads constructed by SARE and SCT be designed, constructed and maintained to the same standards. In order to promote this objective in Chiapas, COPLADE, in its capacity as the State development planning and coordinating agency, would encourage and promote integrated planning and uniform design standards for construction or rehabilitation of rural roads and service roads whenever practical. During negotiations, the Government provided assurances that it would carry out a review of rural roads construction and maintenance practices in the State with a view to rationalizing design, construction and maintenance practices, of SARH and SCT, by December 31, 1987. Operation and Maintenance 4.12 In its annual project implementation plans SARH would provide for financing and execution of a regular periodic operations and maintenance (O&M) program for drains, dikes and roads in the project area. These operations would be the responsibility of each rainfed district carried out through their existing offices and field offices and workshops to be established under the project. Initial emphasis would be given to rehabilitation maintenance of existing infrastructure, and a plan would be formulated to take over O&M of new works as they are completed. A budget would be allocated for each district adequate to cover the O&M of tne equipment (para. 3.11) and infra- structure provided under the project. Beneficiaries would be encouraged to contribute labor for O&M in order to minimize the cost and the level of charges to be collected. As this project is part of an integrated development program for Chiapas it is important to analyze the relationship of the projeci- O&XM in the context of the SARH O&M program for the State. To determine the magnitude and status of its rural roads operations, SARH would conduct a statewide review and inventory with the objective of rationalizing its road system with SCT and improving the standards of maintenance to maximize the life of the infrastructure investment. During negotiations, the Borrower provided assurances that the Government would allocate an adequate annual budget for O&M of infrastructure and rationalize the SARK and SCT rural roads construction, operation and maintenance program, and allocate maintenance responsibility between the agencies (para. 4.11). F. Extension 4.13 Responsibility for coordinating the technical assistance effort in the rainfed districts would rest with their respective Operations Depart- ments. The five districts would be divided into about 12 units, which in turn would be subdivided into about 64 zones in the immediate area of admin- istrative structure (Chart 1). In every unit, aside from the regular exten- sion staff, there would be selected specialists in production, organization, pest control, soils, social work, etc.  - 22 - 4.14 Under the project, execution of the extension component would remain the responsibility of the rainfed districts, but would be modeled along the lines of the well-tested PRODERITH approach which is linked to agricultural research through the Division of Applied Research in INIA and the equivalent unit in INIP. A description of the extension system is summarized in Annex 3. G. Research 4.15 Assistance for research under the project would be designed to strengthen programs through the existing national institutions and INIA, INIP and INIF, which would continue to emphasize production-oriented commodity research. Satisfactory research programs have been formulated, and results are being achieved under the PRODERITE project. The institutions would strengthen multi-disciplinary research for each commodity program to tackle the broad spectrum of research needed. The programs would be subject to review by INIA's regional project committees and by its Division of Applied Research. This division would mairtain close contact with exteasion organi- zations to ensure that research is closely related to the production problems of the region. INIP has already adopted this production-oriented approach. It has established multi-disciplinary teams and a unit equivalent to the INIA Division of Applied Research, which is responsible for reviewing the programs and maintaining close contact with the extension services. The heads of the respective units would control the research programs financed under the project, while responsibility for overall direction and coordination would rest with the Subdirectors and the Directors General of INIA and INIP. 4.16 Both INIP and INIA have active pasture research programs. Conse- quently, a high degree of coordination between the INIA forage program and the INIP program for production systems based on pasture would be required to avoid duplication and to ensure a free interchange of information. To this end, the Directors General of INIA and INIP have already established a small working group to ensure effective coordination of efforts and meet an a regular basis. H. Credit 4.17 The Government would provide medium- and long-term investment credit to farmers from existing resources on a priority basis through Government banking institutions, such as FIRA, FICART, BANRURAL, and commercial banks (para. 4.03) under terms and conditions now being applied under Credit VIII (Loan 2454-ME). SARK, through its extension, promotion and farmer organi- zation services, would assist the lending institutions with the implementation of credit for on-farm development. Short-term credit would also be needed for seeds, fertilizers, chemicals and mechanization. During negotiations, the Government provided assurances that it would make adequate investment and production credit available from existing resources. I. Special Studies 4.18 As the project is a first phase of a longer-term agricultural development program for Chiapas, it is essential to carry out pre-investment,  - 23 - soil, socioeconomic, environmental, and marketing studies to provide data for this project and future development (para. 3.20). SARH's Secretary of Planning and Studies would be responsible for the studies, which would be carried out by the Directorate General for Studies and the Directorate General for Planning. Pre-investment (including basic and feasibility) and soil studies would be undertaken in the normal course of SARH operations in Chiapas. SARH is already preparing terms of reference and making satisfactory arrangements to conduct the survey of lagoons and the permanent wetlands of the Coast. Socioeconomic and environmental studies would be carried out on a continuing basis in collaboration with the Secretariat of Urban Development and Ecology (SEDUE) and COPLADE; action would be taken to correct problems identified during the course of these studies. Current marketing operations although adequate, appear inefficient and costly. Development under the project and the Chiapas Plan would result in a substantial increase in production that would amplify any marketing constraints. In particular, Chiapas produces a surplus of basic crops, as weli as coffee, bananas, cocoa and fruits that must be marketed in other parts of Mexico. This creates a complex marketing channel, which requires a careful review when contemplating a substantial increase in production. Studies would be undertaken with the assistance of consultants, as required. Detailed costs are indicated in Annex 1, Table 7. During negotiations, the Government provided assurances that it would, through SARH, undertake environmental and socioeconomic impact reviews on a periodic basis, and carry out a marketing study by July 31, 1988. J. Technical Services 4.19 In view of the limited development experience in Chiapas, the high potential for agricultural production, and the delicate environmental and sociological conditions in the State, there is an urgent need to accelerate the formulation of knowledge and data as the basis for future development. To achieve this objective the project would provide 180 man-months of local and international consultants (para. 3.19). The major focus of the technical services component would be to support programs that would address the fragile environmental and sociological conditions in Chiapas. About 108 man-months of technical services would provide continuing support of the soil conservation programs which are vital to sustain agricultural development and production in the humid tropics, as well as rural communities programs initiated under the Bank-financed PRODERITH project (Loan 1553-NE). About 72 man-months of tech- nical services would support pre-investment, environmental, and socioeconomic studies, and monitoring and evaluation required for this project, as well as provide scientific and technical information for future development throughout the State. K. Accounting and Auditing 4.20 Prior to submission to the Bank, all documentation, including Statements of Expenditures (SOEs) for which reimbursement would be claimed from the Bank loan, would be subject to the independent review and approval by SPP in accordance with its established control procedures. SARE would maintain separate accounts adequate to reflect the resources, expenditures and the financial situation of the project. An audit satisfactory to the Bank would be made of the accounts, and SOEs and submitted to the Bank for each  - 24 - year. The audit would be in accordance with sound auditing procedures consistently applied by qualified auditors. Certified copies of the state- ments audited, together with the report of the auditors, which would also cover SOEs, would be submitted to the Bank no later than six months after the close of each fiscal year. The Borrower shall furnish to the Bank such other pertinent information concerning such accounts as the Bank shall reasonably request from time to time. During negotiations the Government provided assurances that SARH would adhere to accounting and auditing procedures acceptable to the Bank. L. Monitoring, Evaluation and Reporting Monitoring and Evaluation 4.21 SARR, in coordination with COPLADE, would maintain a multi- disciplinary group to monitor and analyze project execution, beneficiary acceptance and response to the development investment, changes in the produc- tion system (cropping patterns, intensity and yields), and environmental and sociological changes. The monitoring and evaluation team would be responsible to the project executing agency. The first priority in the early stages of project execution would be to support management. Thus, the monitoring and evaluation group would monitor project execution progress and problems and keep SARH management and COPLADE adequately informed. Their findings would be taken into consideration in the preparation of each year's program and budget for the project. The group would also assist project management in identi- fying implementation problems and constraints so that these findings could be acted upon in a timely manner. 4.22 The monitoring and evaluation group would select small areas within each subproject as models to: (a) monitor and analyze beneficiary participa- tion; (b) determine beneficiary acceptance of the development program and objectives; and (c) measure progress in the transition from traditional live- stock and subsistence crop agriculture to intensive commercial livestock and crop production. The availability of adequate technology and the dissemi- nation and application of appropriate technology would also be analyzed. The procedures for promotion, farmer organization, technical assistance, and identification of systems that work and do not work would be analyzed and brought to the attention of the various agricultural production supporting services. Trends and achievements in cropping patterns, yields and benefits would also be measured and analyzed. 4.23 The environmental and socioeconomic analyses would be essential to monitoring and evaluation activities. Initial environmental analysis would consist of measurable elements, such as soil erosion, and sedimentation carried off and deposited in the water courses during the construction period. In the latter production phase, analysis would focus on the water quality, including possible chemical contamination of water courses, lagoons and wetlands, and proper use of agricultural chemicals (including ferti- lizers). Social monitoring and analysis would focus on changes in land tenancy, organization of beneficiaries, employment, and household income. 4.24 The group would maintain a regular exchange of information and findings with SARH and COPLADE and prepare and submit a detailed semi-annual  - 25 - report. The costs of monitoring and evaluation are shown in Annex 1, Table 12. During negotiations, the Government provided assurances that it would continue monitoring and evaluation of project operations and the agricultural, socioeconomic and environmental impact of the project. Reporting 4.25 SARH would submit an annual progres5 report to the Bank no later than 60 days after the end of each calendar year. These reports would present physical implementation achievements, as well as expenditures and disbursemeats by component. SARH would also explain any deviations from the implementation program. A project completion report would be submitted to the Bank within six months after the Closing Date. During negotiations, the Government provided assurances that it would satisfy reporting requirements. V. AGRICULTURAL PRODUCTION AND MARKETING A. Changes in the Production System 5.01 The project would have a major impact on incremental production by: (a) bringing new land into production and converting land now used for extensive livestock production to intensive crop and livestock production; (b) intensifying crop production on existing lands; (c) changing cropping patterns from essentially subsistence crops (maize and beans) to a wide range of commercial crops (para. 2.05); and (d) strengthening research, extension, farmer training, farmer organizations, and credit. Illustrative investment models, as shown in Annex 4, have been developed, demonstrating the trans- formation of agriculture at the farm level. changes in the cropping pattern and intensity through the application of improved technology, yield increase and income benefits. It is expected that producers would adopt new and improved technology and increase the area under crop production and yields. Adequate improved production technology is already known and available in the area from the experience of the PRODERTIH pilot project on the Coast, as well as from the more advanced commercial farms established on land not subject to flooding both in the Central Depression and on the Coast. An immediate impact would be achieved by the increased use of inputs (particularly fertilizer and improved seeds), once the risk of flooding is reduced. The smaller farmers (particularly ejidatarios with an average of less than 10 ha on the Coast and 7 ha in the Central Depression) would have a greater incentive to change from livestock to crop production in order to utilize family labor and increase family income. Larger farmers would tend to continue to focus on livestock and mixed farming. The project has been designed to provide intensive tech- nical assistance necessary to promote new technology and farming systems. Farmers would be organized to facilitate production and marketing, and dissem- ination of crop and livestock production technology (paras. 3.14 and 3.15). 5.02 Under the project, the area utilized for annual crop production would increase (Annex 1, Table 13) from about 118,000 ha to 170,000 ha (about 45Z), while cropping intensity would increase about 10% at full development. Simultaneously, the area used for livestock production would be reduced from  - 26 - about 175,000 ha to 133,000 ha (25%). However, with increased livestock intensity through the improvement of pasture, animals and management, it is expected that the number of animals and the level of milk and meat production would increase over time. 5.03 ln addition to the 90,000 ha on the Coast that would benefit from full development (construction of dikes, roads, drains, on-farm works, and improved production supporting services), 165,000 ha would benefit from the construction of flood control dikes and associated roads. It is estimated that the current value of production in the Coastal area (US$120 million) would increase by about 10% simply from the provision of flood control, roads and technical services. In the Central Depression, there would also be a significant increase in crop production (from 33,000 to 45,000 ha) while cropping intensity and yields would also increase. The most dramatic change in the cropping pattern and production value would occur on the 7,500 ha in the Altos (presently about 50% used for subsistence production of maize and beans) which would be converted to commercial fruit orchards. Nurseries in the project area have a capacity to supply more than 50Z of the planting materials and additional materials would be supplied from SARH and CONAFRUT nurseries in other states. B. Yields and Production 5.04 In addition to the large increase in the area cropped and changes in the cropping pattern and intensity (Annex 1, Table 13), there would be even more significant increases in yields as the result of flood control, drainage and improved production technology (particularly the use of higher levels of inputs). At present, there are wide variations each year in the area planted and harvested due to frequent heavy rains and flooding, and yields are low because farmers reduce their risks by using a minimum of fertilizer and improved seeds. It is expected that the infrastructure would control excess water and eliminate losses, except during extremely wet seasons that should not occur more than once in five years. It is estimated that yields of the principal crops (maize and beans) would double in the first six years of development. With average soil conditions on the Coast, yields of maize would increase from 1.5 to 3.0 t/ha and in the Central Depression from 2.0 to 4.0 t/ha, while bean yields in both regions would increase from about 0.6 to 1.2 t/ha. Livestock carrying capacity is estimated to increase from 1 AU (animal unit) to 1.4 AU/ha; thus maintaining or possibly increasing the total animal population. Under existing conditions of periodic flooding and poor communications in the project area, it can be assumed that the existing situation would continue without the Droject and that there would be little or no change in the net value of production without the investments under the project. C. Illustrative Farm Investment and Production 5.05 A series of illustrative farm development plans have been calculated which indicate that incomes of project beneficiaries would provide substantial incentive to farmers to participate in the on-farm development works and technical assistance program. Results are based on farm models (Annex 4), which are considered representative in terms of actual investment mixes, cropping patterns, regions of the State, subproject areas, and size of holdings.  - 27 - Table 5.1 Full Development Farm Family Income Financial Area Income Per Family Rate of Model System (ha) Present Future Return (X) --(Mex$ '000)--- Coastal Ejido Crop 8 235 426 44 Coastal Sjido Mixed 130 139 300 45 Coastal Private Crop 20 351 850 33 Coastal Private Livestock 45 445 850 24 C.Depression Ejido Crop 7 139 313 52 C.Depression Private Livestock 20 282 651 21 Altos Ejido Fruit 1 16 503 50 D. Marketing 5.06 The principal products of Chiapas are maize, cotton, coffee, bananas and other fruits, beans, soybeans and cocoa. Demand for these products is adequate, and Chiapas exportts a large part of these commodities to other parts of Mexico. CONASUPO is the principal organization for marketing of basic cereal crops (maize, beans, sorghum and soybeans) at prices predetermined by the Government. Other products are handled directly by private sector intermediaries including fruits from the Altos, which are distributed throughout the Southeast Region of Mexico. At the national level the demand for apples, pears and peaches far exceeds the supply. The wide range of agricultural commodities, dispersion of production, inadequate communications, complex intermediary systems, and lack of a local agroindustry for processing of meat, vegetables, fruits and dairy products, limit the development of a rational efficient marketing system. 5.07 Although inefficient, the present marketing system is adequate for current levels of production. However, studies would be undertaken to determine measures needed to strengthen and modernize storage the system in order to handle increased production (paras. 3.20 and 4.18). In areas of the project alone, maize production would increase more than 100Z from 120,000 to 250,000 tons, while rice production would increase from about 12,000 to 90,000 tons; substantial increases in other crops would also occur. Although the intensity of livestock production would increase, the area devoted to livestock would decrease, thus the number of animals and the quantity of meat and milk production are not expected to change significantly. Fruit and vegetable production would increase substantially; some credit is available for strengthening the marketing sector for perishable products (fruits, vegetables, meat and eggs) on a national basis under the Bank-financed Marketing Project for Perishables (Loan 2262-ME).  -28 - VI. BENEFITS AND JUSTIFICATION A. Benefits 6.01 The proposed project is a cornerstone of the Government's regional development strategy to improve social and economic conditions in depressed areas in the country. As a first phase program, the project would have a substantial impact by addressing poverty problems and expanding agricultural production. Further, the investment cost of about US$400/ha makes the project a suitable prototype for expanded development of the entire State. At full development, incremental production of the principal products-mainly maize, rice, soybeans, and fruits--would amount to a yearly foreign exchange savings of about US$45 million in 1983 prices. The project would directly benefit about 32,000 farm families, increasing employment opportunities in the proposed project area. Eventually, the project would provide full employment for about 15,000 additional persons (or about 405,000 yearly man-days), stemming migration from the project area to Mexico's already over-populated cities. The amount of employment generation would also contribute to improved income distribution in the project area. Average farm earnings of direct project beneficiaries would increase from about US$1,900 to US$4,800 per family at full development. 6.02 The flood control and drainage infrastructure and access roads would benefit most of the urban population by reducing property damage and improving communications in the area of influence of the project. The project would strengthen the institutional capacity in five rainfed districts and the delivery system for extension, research, credit, soil conservation and environmental protection. The project would also provide the knowledge and experience required to develop similar areas in Chiapas. B. Economic Rate of Return 6.03 The economic rate of return has been estimated at about 19% (Annex 1, Table 14) and is based on quantifiable benefits from crop and live- stock production over the next 20 years. Other secondary benefits, such as incremental production from flood control, part-time employment, and the urban population's benefit from flood control, were not included in the calculation. In calculating the economic rate of return, the transition from the traditional to the new intensive system was determined in accordance with land use projections represented by the farm models. The construction and phasing of basic infrastructure was projected according to the investment schedule for the project. Prices for traded commodities were calculated according to Bank projections for 1984 in constant prices and adjusted for handling, processing, and transportation costs to reach the average farm-gate prices; for other products, prevailing farm-gate unit prices were used. Labor costs have been calculated taking into account the high unemployment and under-employment in Chiapas; thus, family labor was considered to be 80% of the unskilled labor market wage. Similarly, unskilled labor was estimated at 70% of its market price. Subsidies were eliminated and other production costs were priced at local market conditions on the grounds that they best reflect opportunity costs.  - 29 - 6.04 The calculation of the economic rate of return includes costs of civil works, buildings and related infrastructure required for project imple- mentation. It also includes costs of extension; training; research; admin- istration; the necessary machinery and equipment for the development and main- tenance of dikes, roads and drainage systems; and physical contingencies. Cost of studies were deleted from the economic analysis because they relate principally to future development. C. Sensitivity Analysis 6.05 A sensitivity analysis to test the impact of changes in costs, benefits and prices of other factors was also made (Annex 1, Table 15). Switching value tests indicate that the rate of return is not particularly sensitive to changes in any particular component. Project benefits could be reduced by 36% and the economic rate of return would still remain at above 12% (the estimated opportunity cost of capital in Mexico). Prices would have to decrease by about 19% and yields by about 20% to lower the economic rate of return to about 12%. A switching value test on the assumption of delays in reaching full agricultural development was performed. It indicated that a delay in benefits of about three to four years would be required to cause the economic rate of return to drop to 12%. D. Cost Recovery 6.06 Most on-farm development costs would be recovered through the credit program. The 1972 Water Law provides the basis for O&M and investment cost recovery for irrigation and drainage works in irrigation and drainage districts. The 1981 Agricultural Development Law provides for reclassi- fication of land from livestock production to crop production use and the redistribution of holdings in excess of 200 ha. Under the existing legisla- tion with appropriate administrative arrangements, socioeconomic studies would be undertaken to determine the beneficiaries ability to pay. Similar arrangements would be required to achieve any form of cost recovery under the Chiapas project. During negotiations assurances were provided that the Government would take appropriate action to provide for recovery of operation and maintenance costs, and investment cost to the extent possible, upon completion of infrastructure in each of the subproject areas. E. Project Risks 6.07 The main project risks are the possible: (a) inadequate and untimely allocation of counterpart funds; (b) beneficiaries' failure to adopt yield increasing technology (agronomic practices, improved seeds, and increased levels of inputs); and (c) their reluctance to make the transition from livestock to crop production. 6.08 The project's design should help reduce each of the above risks to acceptable levels. Given the relatively small size of the proposed project with respect to the whole Chiapas Development Program, in case prolonged economic austerity were to put a ceiling on counterpart funds, the Government  - 30 - would have the flexibility to reassign limited budgetary resources and continue implementing the project's high priority investments proposed within a reasonable period. In order to minimize the other two risks that benefi- ciaries could fail to adopt yield increasing technologies or be reluctant to switch to intensive crop production, the project implementing agencies would draw on the lessons of experience obtained under a Bank-financed pilot tropical agriculture project and strengthen the extension, research and promotional services in the project area. In addition, the major target group under the project--consisting of ejidos and small farmers-is most likely to respond positively to incentives under the project, especially after drainage and river control infrastructure, land transport, marketing and storage facilities are improved. F. Environmental Impact 6.09 SARH and the Secretariat of Urban Development and Ecology have already initiated environmental impact studies in accordance with current legislation and are cooperating fully on all environmental aspects of the project. Civil works, in particular the drainage system, would be designed to protect the environment by: (a) utilizing sediment traps to minimize soil particles from being carried into the permanent wetlands and lagoons; (b) controlling the use and run-off of agricultural fertilizer and chemicals; and (c) maintaining a depth and flow of water in the drains to reduce the possibility of establishing breeding areas for mosquitos and the water-spawned insects. SARH, in collaboration with SEDUE and COPLADE, would design and establish environmental monitoring and control systems (including water analysis check points) for drainage networks under the project to measure possible detrimental effects of chemicals and fertilizers discharged through the drainage systems from intensified crop and livestock production. Research would be conducted to determine fertilizer and chemical application rates and methods compatible with obtaining optimum yields and protecting the environ- ment from chemical contamination. The extension services would advise farmers on the safe and proper application and use of fertilizers, chemicals and cultural practices required to protect the user and the environment. Cultural practices would include soil conservation measures, such as terracing, contour cultivation, and incorporation of crop residue into the soil. These practices would conserve soil and moisture, reduce run-off of water and soil particles that would otherwise carry fertilizers and chemicals to areas where they could cause detrimental effects. G. Sociological Impact 6.10 The project is designed to focus on ejidos and small-holders, those farmers who (in accordance with sociological analyses) are most likely to take advantage of drainage and flood control to intensify crop production and convert grazing land to crop production. Thus, the project would have a positive impact on the socioeconomic balance within its areas of influence. It would reduce the concentration of production from the hands of a few large livestock holdings and privately developed (more prosperous farmers) lands for crop production. In addition, the project would create temporary employment during the construction phase, generating about 15,000 full-time jobs in the areas of intensified crop and livestock production, as well as substantial part-time employment for weed control and harvesting. The increased  - 31 - employment opportunities in the project area would reduce the need for the unemployed and underemployed to migrate to other areas seeking opportunities for jobs. The social benefits of additional services and commerce generated by project production would also have a long-term impact. VII. SUMHARY OF AGREEMENTS REACHED AND RECOMMENDATIONS 7.01 During negotiations, assurances were obtained that the Government would: (a) follow procurement arrangements summarized in paras. 3.23-3.25; (b) establish a Special Account and submit monthly statements to the Bank (para. 3.26); (c) submit by December 1 each year the execution program for the infrastructure works to be carried out during the next calendar year (para. 4.04); (d) follow the criteria outlined in para. 4.06 in selecting areas for full development; (e) carry out a review by December 31, 1987, of rural roads construction and maintenance practices in the State wit; a view to rationalizing design, construction and maintenance practices of SARH and SCT (para. 4.11); (f) allocate an adequate annual budget for OE& of project infrastructure (para. 4.12); (g) make adequate investment and production credit available from existing resources (para. 4.17); (h) carry out a marketing study in the project area by July 31, 1988, and make periodic socioeconomic and environmental impact- reviews in areas of influence of the project (para. 4.18); (i) submit documents, periodic reports, financial statements, audit reports and a completion report as required (paras. 4.20 and 4.25); (j) carry out monitoring and evaluation of the project on a regular basis (para. 4.24); and (k) recover infrastructure operation and maintenance costs and investment costs to the extent possible (para. 6.06). 7.02 With the above assurances the proposed project would be suitable for a Bank loan of US$90 million on standard terms for Mexico.  -32 - Annex 1 Table 1 MEXICO CHIAPAS AGRICULTURAL DEVELOPMENT PROJECT Subproject Areas Z of Area for Full Subproject Areas Area for Development Total Area Development 2/ 1. Tapachula 98,500 ha (net) ) 2. Ruixtla 56,000 ha ) 90,000 3/ ) 3. Acapetahua 63,000 ha ) 4. Las Margaritas 37,500 ha Sub-total 255,000 ha 1/ 80% 90,000 5. Comitan 32,000 ha 32,000 6. Suchiapa 8,000 ha 8,000 7. San Miguel II 8,000 ha 8,000 8. Margenes de Grijalva 7,000 ha 7,000 Subtotal - Central Depression 55,000 ha 18% 55,000 9. Altos 7,500 ha 2% 7,500 Total Area Total Area Under the Project 317,500 ha Full Development 152,500 1/ Includes only river control dikes, roads and improved extension. 2/ Includes dikes, drains, roads, on-farm works and :itensive extension and research. 3/ 90,000 ha to be selected focusing on ejidos and su'tllholder farmers (not including Las Margaritas). October 10, 1984  -33- - ,a I 2 OMrS ArMMO viar - S h - C.1of _ by Z br l kd Ct Gu zm_ R1-. 2 3 w 4 5 .6 c 7 JIIt 563 ftU A. CmocoL 7ame L.) a d zb 3 IJ 25 30 D Z 0 a 351 6km ,30X 2.12.31631M Z.) Bomb2 8 3 2 5 - 3 a 601 2, 4 68 AS. . t) a 1 9 1 0 MD 3 D n | a 2 Y km .5 f1j5aO15 4.) ftdwc - D