Mexico - Agricultural Credit Project

R E ST R I C T>E D CIRCULATI'RNG COPY REpoRtI TO-E TO BE RETURNED TO REPORTS DESK po, No. TO-489a IN GENERAL FLES This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION AGRICULTURAL CREDIT PROJECT MEXICO August 27, 1965 Projects Department  CURRENCY EQUIVALENTS U.S. $1. 00 = 12.5 Pesos 1 Peso = 8 U.S. Cents 1 Million Pesos = U.S. $80, 000 AREA EQUIVALENTS 1 Hectare = 2.47 Acres RETURN TO REPOflTS DESK ROOM A-124 BY;, 'lMAR 191978  M E X I C O AGRICULTURAL CREDIT PROJECT TABLE OF CONTENTS Page No. SUivrf IARY . . . 0 . . . * * . . . . . . . . . . . * . . . . . . i I. INTRODUCTION. . . . . . . o . . . . . . . . . . . . . . 1 II. BACKGROUND OF AGRICULTURAL DEVEWOPMETJT AND FfTANCING. . 1 III. :[NSTITUTIONAL FRAMEWORK FOR CREDIT. I I I . . . I . I I 3 The Banking System I I I e . ...... .. . . . .I. . . 3 Official Banks I** @I I I I . . . . *..o I4 The Fondo. . . . . . . . . . . . a . a . II 14 Powers and Objectives I . . . . . . . . . .0 . . 4 Organization and Mlanagement I a a * * * O 4 * e 14 Rediscounting Policies and Procedures . I . . . . . Resources and Financial Situation . . . I . I I I I 6 IV, THE PROJECT I . . a *o a * * * * o o . o o . . . . 7 The Credit Program . . . e * * * o 0 * * * * * . . 8 Livestock Industry. . I . . I . .a. . . .* . . . . 8 General Crops Industry0 . 0I 0a * oI *a I 10 Tree Crops Industry Itry.......... 11 Food and Fiber Processing Plants. . . . . . . 11 Technical Services and Training . . . . . . . . . . 11 Organization and Management. o a I . . . . . . . . . . 12 Lending Policies and Procedures. . . . . . . . . . . . 13 Financingt. . 0 . . . . . . . . . . . . . . . . . . 14 Procurement. I I o o& 99 a o o- oa o a 16 Disbursement . . . . e . . . . . . . . . . . . . . . . 16 V. BENEFITS AND JUSTIFICATIO N .............. I I I o o a . 16 VI. CONCLUSIONS AND RECOIVThIENDATIONS . I. . . . . I . . I . 18  -2 A!T~EXES Annex 1 - The Banking System Table 1 - Resources and Liabilities of the Banking System Table 2 - Analysis of Agricultural and Livestock Loans Granted by Mexican Banks Annex 2 - The Fondo Organization Chart Table 1 - Summary of ALFRO Operations Table 2 - Analysis of Capital and Surplus Reserves Table 3 - Funds available for Fondo Rediscounts Annex 3 - Resources and Liabilities of the Fondo Annex 4 - Income and Expenses of the Fondo Annex 5 - The Lending Program Annex 6 - Projections Re: Operations Related to I.B.R.D. Loan Assumptions and Comments Table 1 - Project Cash Flow Table 2 - Statement of Projected Income and Expenses Table 3 - Statement of Projected Resources, Liabili- ties and Accumulated Net Income Annex 7 - Map 1 - Regions of Livestock Investments Map 2 - Regions of General Crop and Tree Crop Investments  MEXICO AGRICULTURAL CREDIT PROJECT S U M M A R Y i. The Government of Mexico has asked the Bank for a loan to finance a project of agricultural credit, ii, The project would be administered by the Fondo de Guarantia y Fomento para la Agricultura, Ganaderia y Avicultura (Fondo), a Trust Fund of the Banco de Mexico (Banco). It would operate through the private bank- ing system under a rediscounting procedure. It would assure medium- and long-term financing and technical services to medium and cormmercial farmers for specific on-farm investments in priority production regions to increase production of crops, tree crops and livestoclc, and to businessmen for re- lated food and fiber processing plants, It proposes total loans over a three-year period from the private banks of approximately pesos 625 million (US$50 million equivalent), of which up to 90 percent of the value of each loan would be rediscounted by the Fondo. These loans to farmers and pro- cessors would be financed fifty percent from Mexican resources and fifty percent from Bank loan funds. iii. The integrity and soundness of the lending program would be as- sured through the technical field staff of the Fondo, now numbering 135, who would appraise and approve each loan eligible for rediscounting under the project and would inspect and give technical supervision after each loan is made; this in addition to the private banks' own appraisal and supervision. The Fondo staff would be progressively augmented and its training program intensified. Lending operations would parallel the a- vailability of such technicians. iv. The project is sound and is suitable for a Bank loan of US$25 million, repayable over a 20-year term, including a 4-year grace period. The borrower would be the Nacional Financiera S. A., the official agency through which the Government contracts for foreign credits.  M E X I C O - AGRICTJLTURAL CREDIT PROJECT I. INTRODUCTION lo The Government of Mexico (Government) has requested a loan of US$40 million to coaplement an equal sum from its own funds for financ- ing mediuWi- and long-term on-farm investments to medium and commercial farmersl/ and to businessmen for related food and fiber processing plants. The loan would be administered by the Fondo de Garantia y Fomento para la Agricultura, Ganaderia y Avicultura (Fondo) of the Banco de Plexico (Banco). This appraisal report is based on findings of a field mission ihich visited Mexico in April-June, 1965. 20 The Government also reouested a loan for financing a Coffee Di- versification Project. That project was not considered appropriate for Bank financing as presented. Some specific on-farm investments contem- plated in it were considered sound, however, and have been incorporated in this Agricultural Credit Project as items eligible for Bank financing under the proposed loane II. BACKGROUND OF AGRICULTURAL DEVELOPMENT AND FINANCING 3. IMexicots agriculture is a picture of extremes i/ It ranges from the hot, humid tropics of the Gulf and lower Pacific Coasts; to the temper- ate tropics of the bordering mountain areas; to the pleasant, seasonally dry-wet central plateau; finally to the semiarid-arid west and north whose climate varies principally according to altitude. These extremes breed a wide variety of crops, tree crops and livestock, and contrasting produc- tion practices. Hence, no simple, country-wide, uniform pattern of on- farm investments which would maximize agricultural production in all re- gions is realistic. Plans must be designed to fit the pattern--region by region and investment by investment, 1/ Medium and commercial farmers are those normally farming 50 to 100 ha of irrigated land or its equivalent in dryland farming or ranching, with an annual net income of pesos 100,000 or more. 2/ For a more detailed description of I4exican Agriculture see Bank Report WIH-137a dated July 13, 1964, and Maps in Annex 7.  - 2 *- 4 Dlexico has a population of more than 38 million_/ to feed, about equally divided rural and urban, growing at a current annual rate of 3.7 percent, It supplies about 95 percent of necessary foods and agricultural raw materials and is yet a large net exporter of agricultural products. Agricultural exports exceed imports about three to one and constitute more than 50 percent of all exports. 5. Mexicots rapidly expanding economy had an estimated G.D.P. of pesos 227.4 billion (US$1802 billion equivalent) in 196h, to which agri- cultural production, including livestock, contributed about 16 percent, The rate of growth of agricultural production has lagged behind industrial growth, however, and requires acceleration to keep pace with the rapidly growing population and the need for continuing high exports. 6. Mexico topography is extremely rugged, thus limiting the avail- ability of productively cultivable land. An estimate of its land resources follows: Million % of Hectares Total Cultivable land 30,0 15.3 Pasture land 860o 43.7 Forest land 33.5 17.0 Agriculturally unproductive land 47.1 24.o Total 196.6 100l 0 7. Of the cultivable land slightly more than 50 percent is as yet under cultivation, and of this the output from an estimated 15 percent is annually lost to the ravages of drouth and pest and disease attacks. Thus Mexicols job of maximizing agricultural production lies both in improved land and production management, as well as in further exploitation of new land where water is available. 8. Mexican agriculture's most severe handicap is lack of water. Approximately 13 million ha are potentially irrigable, of which only about 4 million ha are currently irrigated. It has, however, an ambitious pro- gram for construction and rehabilitation of irrigation projects. In some of the tropical areas water management--i.e. flood control in the wet sea- son and supplemental water through irrigation in the dry season--is neces- sary. The problems are great and are receiving much official attention. 9, Crops, including fruits and vegetables, account for about three- fifths of the net value of farm output, and livestock products slightly more than one-third. Corn, beans, and wheat account for about 70 percent 1/ 38,1469000 as of June 30, 1963,  - 3 - of cropland, followed by cotton, coffee, and sugarcane. Beef cattle are the most important class of livestock, followed by dairy cattle, swine, and sheep. 10. Mexicots agriculture operates under a tenure system which is the result of its extraordinary preoccupation with social problems. Growing out of its great revolution was a land reform program and law which has been progressively implemented. This has included both a system of com- munal farms (the ejidos) as well as small property owners. Over half the farms of Mexico are less than 5 ha with basically subsistence farming. While there is much opportunity to increase production on these farms, of greater economic significance are the medium-sized and commercial farms (50-100 ha of irrigated land or the equivalent) to which this proposed loan is directed. 11. Agricultural development has suffered from a paucity of credit, particularly medium- and long-term. This has resulted both fromn competi- tion for available credit resources from other sectors of the economy, and from a basic conservatism of the private banks toward agricultural lending. Moreover, Government funds for agricultural credit have been diffused among several official institutions and in many areas, the result being a lack of concentration of financial and technical resources, both institutionally and by area. 12. In 1955 the Banco set, out through the Fondo to mobilize more credit for farmers through the private banks via a rediscounting operation, This program grew slowly but steadily through 1962. In 1962 the U.S. Agency for Intemrational Development (AID) made a US$20 million loan for the purpose of accelerating this program to small farmers. This became known as the Alliance for Progress (ALIRO) Program. The results have been positive and have exceeded expectations. The proposed Bank loan would have similar objectives with medium and commercial farmers. The Fondo is a suitable medium for a Bank loan to help achieve this objective. III. INSTITUTIONAL RALMEWORK FOR CREDIT The Banking System 13. The Mexican banking system (Annex 1) consists of two sectors: official banks, organized or created by the Government; and private credit institutions (private banks). As of December 31, 1964, total banking sys- tem resources were about pesos 88 billion, 39 percent belonging to official banks, (excluding the Banco, which is the central bank) and 61 percent to private banks. From these about pesos 8.9 billion were loaned to agricul- ture, approximately 69 percent by official banks and 31 percent by private banks.  - 4 - OFFICLIL BANES 14, Banco Ejidal and Banco Agricola. The Banco Nacional de Credito Ejidal (Banco Ejidal) and the Banco Nacional de Credito Agricola (Banco Agricola) have been the principal sources of credit to agriculture, but their loans have been only to ejidatariosY/ and small farmers. Their re- sources were adequate, however, to cover only abuut 25 percent of the demand for credit to these farmers. Their loans have been strongly so- cially oriented, and on the average 50 percent of their loan portfolio are past due and/or uncollectible. They would not be suitable for a Bank loan at this time, 15. Banco Agropecuario. A new bank, Banco Nacional Agropecuario (Banco Agropecuario) was created in March, 1965, with the objective of organizing and giving financial support to quasi-official regional banks and effecting adequate decentralization of agricultural credit, '16. These regional banks will be capitalized both by private sub- scription and the Banco Agropecuario, with the latter holding the majority stock, Banco Agropecuario will function as a bank of rediscount to the re- gional banks and would have access to the rediscounting facilities of the Banco de Mexico. In this respect it will operate in a manner similar to the Fondo (Paras. 18-30). 17, Banco Agropecuario is yet too new and unorganized to predict its future, While it now intends to rediscount loans from the regional banks primarily to groups of farmers, it can rediscount loans to individuals. Thus, it could become competitive with the rediscounting system of the Fondo through the private banks. The Bank has assurances from the Government that any such competition would not be on more favorable terms to medium and com- mercial farmers than the Fondo-private banks' credits. While the Banco Agropecuario is not yet organized and equipped to administer the use of Bank loan funds, its operations would be reviewed periodically, with the objective of possible future consideration during the course of the pro- posed 'loan. The Fondo 1. Powers and Objectives 18. The Decree establishing the Fondo in 1955 gave it principally the powier to rediscount loans to farmers by private banks and to issue guarantees for the repayment of such farm loans, Its principal objective is to mobilize through the private banking system maximum resources for short-, medium-, and 'long-term credits to efficient agricultural producers and processorse 2. Organization and Management '19. The Fondo (Annex 2) is a Trust Fund, which is an integral part of the Banco. The Fondots managing board is a Technical Committee of 9 members. Three are appointed by the Ministry of Finance and Public Credit 1/ Farmers who operate the comnmunal farm known as "ejidos."  (7inance 11inistry) to represent small farmers, and the remaining six are appointed by other designated Kinistries and public agencies, 20. The Fondo has its own offices and staff, both at headquarters in Mexico City and in the 21 field resident agencies. It works through 6 operating departments, one--Field Engineering--being administratively responsible for the field staff. All field staff are under the adminis- trative direction of the Chief Resident Officer in whose region they are stationed or assigned. Technical direction of the 135 specialists and general agricultural technicians is the responsibility of the Technical Assistance Department, but in coordination with Field Engineeringo A new organization plan under consideration by the Fondo contemplates com- bining these two departments under one chief. 21. The field technicians are the key personnel in the Fondo's re- discounting operations, particularly in the ALPRO program, under which their numbers have been increased considerably. They work directly with the farmers and private banks in identifying potentially sound projects, appraising them, and inspecting and supervising the resulting loans. 3. Rediscounting Policies and Prccedures 220 Loans to farmers under the Fondo prograns are govenied both by the policies and procedures of the Fondo and of the private bank3 making each loan. By far the most important activity of the Fondo is its redis- counting operation. In this it has had two programs: cne with the ALPRO Funds for rediscounting medium- and long-term loans to small and lower- medium income farmers earning under pesos 100,000 per annum; and one with its own resources for rediscounting short-term loans to all classes of farmers and for medium- and long-term loans to farmers with incomes of over pesos 100,000. 23. Under the first ALPRO loan of US$20 million (1962) the Fondo paid 3/ of 1 percent inuerest. Under the second recently authorized bY AID for an additional US$20 million it will pay 31 percent0 Under ALFRO the Fondo charges 3 percent to the private banks who in turn charge a rate of 6 percent to their borrowers. Under ALPRO, all loans are rediscounted up to 90 percent. Under the Fondo's own program for rediscounting mediium- and long-term loans there is a schedule as follows: Interest Received by: Portion of Paper Private Banks Fondo from Net to Rediscounted from Farmers Private Banks Private Banks Stock Farming 90% 10% 8% 2% 80% 10% 7% 3% 70% 10% 6% 4% Crops and Tree Crops Farming 90% or less 10% 6% 4%  241, This schedule was designed to encourage the private banks to vs& a greater percentage of their own resources, The results have been only partially successful. Under the proposed Bank loan assurances have been obtained that a new schedule applying to the Fonido-Bank proposed program would be adopted to encourage the desired results of greater participation by the private banks both in volume of leniding and percentage use of their own resources (Para. 60). 25. Under ALFRO, loan applications are appraised by the private banks and the Fondo technicians. Among other things the technician calculates the projected costs and retnrns to the farmer, but only at the end of the first year's operations.l/ The Fondo technician raust approve the loan, but not necessarily before the loan is made by the private banks, In the event, however, that the Fondo technician finds that the loan does not qualify under the ALPRO program, it may be transferred to the Fondo's own programD-/ ALPRO loans are inspected by Fondo technicians as well as by the represen- tative of the private banks to insure compliance of the borrower with his loan contract, The Fondo technician also renders technical assistance as his workload permits, but thus far his heavy work burden has restricted him largely to inspection. Under the Fondo's own program, only a financial appraisal of the prospective borrower by the private banks is required. Under both programs, the private banks carry the entire risk burden, 26. Results of operations under ALPRO are shown in Annex 2, Table 1. From a slow start the program accelerated in 1963 and 1964 to a point where operations exceeded original expectations, indicating a marked growth in the interest of the private banks. By December 31, 1964, 54 private banks had utilized 69 lines of rediscount credit totatling over pesos 175 million. The first AID loan of US$20 million was virtually committed by June 30, 1965, which led to AID authorization of the second US$20 million loan. 27. Under the Fondo program with its own resources, rediscounts for short-term loans have been greatly reduced since 1962 as interest of the private banks in handling these loans with their own funds has increased, On the other hand rediscounts for medium- and long-term loans great'ly in- creased (Annex 3)0 Through December 31, 1964, 91 lines of credit to 51 private banks had been extended. In 1964 they totaled pesos 267.8 million. 4. Resources and Financial Situation 28. The Fondo derives its funds from three sources: a. contributions of the Federal Government, includ- ing accumulated profits (Annex 2, Table 2); 1/ Under the proposed Fondo-Bank Program assurances have been obtained that costs and returns would be projected over the life of each indi- vidual loan. 2 Under the proposed Fondo-Bank Program assurances have been obtained that all 'loans must have been appraised and approved by qualified fie'ld technicians of or acceptable to the Fondo prior to having been granted by the private banks.  - 7 - b. rediscounts with the Banco; and c. loans from U.S, AID (used only for ALFRO program). 29. The Fondo is in good financial condition (Annexes 3 and 4). It has operated on a low margin of profit basis for policy reasons, but it carries no financial risk and its paper is well secured. Its special as- sociation with the Banco eliminates any question of liquidity, Its net- worth on December 31, 1964, representing Government capital contributions and accumulated profits was pesos 110.8 million. The main assets of the Fondo are medium- and long-term rediscounts (88,7 percent of total re- sources in 1964) and short-term rediscounts (6.5 percent of total resour- ces in 1964) to private banks. These debtors of the Fondo are sound and the loan portfolio is good. The Fondo has no delinquent debt problem. 30. The principal liabilities of the Fondo are money borrowed from the Banco on account of rediscounts and from U.S. AID. The liability to the Banco is secured by paper of the private banks rediscounted with the Fondo. The accounts of the Fondo are kept under the supervision of the Accounting Department of the Banco and are audited by the Banco's Audit Department* Both were examined by the mission and found to be adequate, IV. THE FROJECT 31. The Project is an agricultural credit operation of the Fondo, operating through the private banking eystem, under a rediscounting pro- cedure, under which the private bank would hear the principal risk. The Project would assure medium- and long-term financing and teclmical ser- vices to medium and commercial farmers in specified regions for increas- ing crops, tree crops, and livestock production, and to businessmen for planning and constructing related food and fiber processing plants. It proposes total loans by the private banks of approximately 625 million (us$50.o million equivalent) over a 3-year period, of which up to 90 per- cent would be rediscounted by the Fondo, from its own resources and from the Bank loan. It would enable specific investments in: pasture improve- ment; water facilities; livestock handling facilities; fencing; purchase of improved breeding stock; land development including on-farm roads; farm reclamation, irrigation and drainage works; farm machiniery and equipment; farm structures, including silos; tree stock; related food and fiber pro- cessing plants; and technical servics. 32. Successful execution of the project wou'ld be greatly dependent upon eva'luations and supervision of loans by the technical staff of the Fondo (Para. 21). Mexico is a large country and it is doubtful that suf- ficient additional technicians can be obtained and trained during the three-year disbursement period to cover all areas, To attain the maximum initial and sustained return to the economy, it is therefore proposed to concentrate investments in those regions considered to be actually or  - 8 - potentially most productive and to allocate the available technical staf7C primarily to those regions. Consequently, the country has beenl divided into the following priority production zones: Tropics, Central Plateau and North. 33. The size of the Project and the proposed Bank loan (US$25 mil- lion) have been reduced by approximately one-half the original proposal of the Fondo. This results from two causes: projected shortages of suf- ficient trained technical personnel to administer the larger programs; conservatism of the private banks toward medium- and long-term agricul- tural lending. Allowance has been made in this project for including those on-farm investments proposed in the Coffee Diversification Project which meet Fondo criteria (Para. 2). A, THE CREDIT PROGRLR 34. Annex 5 summarizes the proposed credit program by region, by in- dustry and sector, and by investment item. Paragraph 62 su;nmarizes the program by section. It is interesting to note that about 23 percent of the lending program and 57.5 percent of the proposed Bank loan represent the estimated foreign exchange component. Livestock Industry 35. Investments in the livestock industry would absorb about half of the funds, and would be for the following sectors, by region (Annex 7, Map 1): Sector Region Beef Cattle Tropics and Dryland North Dairy Cattle Central Plateau Swine Central Plateau Sheep Dryland North Beef Cattle Sector 36. Mexicots fast growing population (3.7 percent per annum) plus a modest annual increase in per capita consumption is producing a domestic demand for beef beyond the current annual growth rate of the beef cattle population of about 1.6 percent. Unless production increases signifi- cantly, this threatens to reduce beef exports, a significant item in Mexicots export trade. 37. The investment program in the beef cattle sector proposes to in- crease beef supplies primarily through inputs which would improve management and increase takeoff. These would include establishment or improvement of  -9 - pastures, water facilities, fencing, handling facilities, machinery and equipment, fertilizers and seeds for pastures, and farm structures, in- cluding silos. Some investment would also be made in the purchase of improved breeding stock and semen, primarily imported, but also from ap- proved breeding herds within Mexico. Some local procurement is warranted in Mexico because of the number and quality of local breeding herds from which improved breeding cattle could be purchased. This project would apply principally to farms carrying more than 200 head and would include approximately 500 farms0 Dairy Cattle Sector 38. Domestic consumption of milk is expected to increase almost 100 percent in the next 15 years. To satisfy this and the demand for other dairy products would require an agressive investment program to effect the necessary production increase. 39. Investments would be concentrated in the Central Plateau Region, especially the area known as the Bajio, which suppolies the bulk of dairy products to such major population centers as Mexico City, Guadalajara and Morelia. They would include alfalfa establishmient and pasture improve- ment, acquisition of farm machinery and dairy equipment including milk cooling and handling equipment, and such farm structures as milking sheds and silos. They would also provide for irater facilities and limited pur- chase of improved breeding cattle and semen0 An estimated 170 dairy farms with an average herd size of 150 cows are expected to be benefited. Swine Sector 4o0 Domestic demand for pork is projected to increase by 1h5 percent by 1975. The investment program is designed to meet that demando Invest- ments in the swine sector would be cofined to the western edge of the Bajio Region, the leading commercial swine producing region composed of the States of Guanajuato and portions of Jalisco and Idichoacan. 41e This is an efficient swine producing region. Even so, the in- vestment program is expected to increase outputs by 15 to 20 percent. This would be accomplished by weaning more pigs per litter, and by improving feed efficiency of fattening swine. 42. Investments would include four major categories: construction of new, and modernization of existing farro-ing and fattening barns; pur- chase of equipment for mechanization of feed mixing and storage; installa- tion of modern feeding and watering units and purchase of farm machinery and breeding animals. A minimum of 130 medium and cormmercial swine opera- tions would benefit from these investments0 Sheep Sector 43. Domestic demand for wool is projected to increase by more than 110 percent by 1975. Even now, wool is in deficit supply and is costing  - 10 - Mexico about US$10 million equivalent in imports. Demand for mutton (to- gether with goat meat) is expected to increase by '145 percent during the same period. 44. The sheep investment program would be confined to the State of Zacaticas and to portions of San Luis Potosi and Durango. Only a modest investment program is planned in this sector, 45. Principal investments would provide fencing, water facilities and a pasture management program collectively considered to be the three most important investment categories, Additional funds would be provided for construction of shearing and wool handling barns, stock handling fa- cilities and shearing equipment, Provision has also been made for the purchase of selected breeding animals, 46. The investment program, coupled with the technical assistance program, must bring about a change in production practices from primitive to intensive, The present annual wool production per ewe in Zacatecas is one kilogram. It is encouraging that the better ranchers are obtaining from two to three times this amount, Lambing percentage could be improved by at least 10-15 percent. Lamb mortality could be reduced by 5 percent and consequent weaning percentage increased. The mentioned increases would be accomplished primarily by a pasture improvement program to provide a year-round food supply, and by improved husbandry practices. Approximately 50 farms carrying a minimum of about 500 head would be benefited. General Crops Industr34/ 47. Domestic and export demand for general crops was projected by the mission to increase annually to 1975 about as follows: a. a substantial yearly increase in wheat (4.5%), rice (4.6%), sorgho (5.1%), vegetables (tomatoes 4.7%), sugar (4.8%), chick peas (4.5%), textile fibers (cotton 5.5%), fruits 5 to 5.5%), and forages (alfalfa 5.6%; sorgho 5,Vl). b. a lower year'ly increase in corn (3%), beans (2.6%), and vegetable oils (2,8%). 48. Opportunities for increased crop production are principally in the Tropics, the Central Plateau and the irrigated districts of the North, Approximately 610 'loans averaging about pesos 240, 000 would be for on-farm investments for soil rehabilitation, farm machinery and equipment, land development including on-farm roads; on-farm structures and small farm ir- rigation systems, The latter would require careful consideration by qua- lified technicians to assure that the appropriate soil, water, and engi- neering studies have been made, It is therefore contemplated that each such system would have the approval of Recursos Hydraulicos. 1/ See Annex 7, Map 2,  Tree Crops Industry / 49. Both domestic and export demand for tree crops, especially citrus, is expected to double during the period to 1975. Domestic demand for natural rubber is expected to increase several times over during the same period, 50. Tree crop production is concentrated principally in the North (citrus and deciduous fruits) and the Tropics (citrus, mangos, avacados; bananas, and rubber), and investments would be concentrated principally in these zones, In view of the general importance of the Central Plateau and the contemplated availability of technicians there, some investments there would also be important. Investments would include soil rehabilita- tion, land development including on-farm roads; farm machinery and equip- ment, on-farm structures, new plantings, fertilizer and lime, insecticides, farm structures and small farm irrigation systems. The approval of Re- cursos Hydraulicos would be required for the latter. Approximately 175 loans for tree crops are projected, Food and Fiber Processing Facilities 51. One of the limitations for increased agricultural production has been problems of marketing. Among these is a growing need for facilities to process and transport semi-finished and finished foods and fibers. These include milk processing plants, coldroom storage in slaughter plants, feed processing and storage facilities, refrigerated storage facilities, and fruit and vegetable processing facilities, Farmers of all three regions are much aware of the need and anxious for its solution, 52. Professional study and appraisal by region and by facility is required to establish potential, priority, and feasibility. The Fondo does not now have the necessary technical personnel, They would engage such services, probably by contract, to work with the private banks and businessmen0 All loans for food and fiber processing plants would require the approval of these technicians acting on behalf of Fondo, and those ex- ceeding pesos 21 million would require prior Bank approval. Technical Services and Training 53, The bulk of the costs of technical services to the private banks and farmers would be borne by the Fondo as an expense of administration. These technical services are so essential, however, that Bank loan funds should be used to help accelerate the training program, both in Mexico and abroad. This would include necessary training equipment. 54. The shortage of well-trained experienced senior technicians would necessitate acquiring up to three of these specialists from abroad. Use of Bank loan funds is proposed, / See Annex 7, Map 2.  12 - 55. Acquisition of professional services as a prerequisite to in- vestments in food and fiber processing facilities would be provided for (Paras. 51 and 52). These services would also be utilized to assess the effects of price controls) particularly in Mexico City, on meat and milk. B. ORGANIZATION AND MANTAGEMENT 56. Staff of the Fondo and the private banks would both be involved in administration of the project. Present orgarnization of the Fondo is described in Paras. 19 to 21 and in Annex 3. This organization has been basically effective. Some reorganization and adjustments, now planned by the Fondo, would need take place to enable the Fondo to adequately cope with problems inherent in the proposed expanded program. Assurances have been obtained in loan negotiations. 57. The major outstanding organizational problems are: a. Both the Director and Deputy Director have served in an acting capacity for more than two years. This restricted authority has been a handicap to them and to the Fondo. b. Field offices now report to more than one depart- ment head and a need exists for better headquarters' organizational arrangements to assure closer field contact and operation. c. A problem exists in assuring an adequate number of trained technicians. While the Fondo has carried forward training programs, a need still exists to intensify these programs, emphasizing on-thie-job training. In addition, field staff have frequently not had the basic financial training needed to balance their technical backgrounds. do There have not been uniformly adequate arrangements for the supervision of technical staffs in some re- gions. -A need exists for a well-trained, experi- enced technician of senior status to be placed in each region where the project would be operating. It would also be useful for the field offices to formulate advisory groups consisting of competent and respected farmers. e. The Fondo maintains much useful loan information, but it needs to be improved and systematized. It should be the task of a special economic unit at the Fondo headquarters to review field reports and main- tain records that will provide adequate yardsticks for future measurement of results.  - 13 - 58. Staffs of the private bani:s vary, but the financial soundness of the private banks bears testimony to their general caliber. C. LEIDING POLICIES AND PROCEDURES 59. Policies and procedures similar to those employed by the Fondo in successfully administering the ALPRO program would be used for the Fondo-Bank project (Paras. 22-25)o These woul1d be strengthened, however, by granting greater responsibility and authority to the Fondos field staffs, and requiring their approval of all loans. 60. One of the primary objectives to be achieved through the Fondo- Bank project is the stimulation of participation by the private banks in the proiect both in terms of total lcans to agriculture and the use of their owm resources. Experience already gained by the Fondo indicates this can best be achieved through the offering of soundly based incentives. An examination of the projected cash flow and the statement of projected income and expenses (Arnex 6) indicates that the Fondo could extend the following incentives without jeopardizing its financial position: a. lower the average interest charge to private banks on rediscounts; b. set the maximum interest rate of the private banks to the farmer and processor at no more than 10 percent; c. adjust the interest rate L'or loans to farmers receiv- ing loans under other programs so that a spread of not more than 3 percent would exist for recipients of loans under those programs and the proposed Bank loan. The present spread of h percent has tended to dis- courage borrowing under the Fondots own program; d. raise the maximum loan eligible for rediscounting under the project to pesos..2 million with provision for even larger loans after prior consultation with the Bank. The maximum loan under the ALPRQI/ program should also be lowJered to pesos 150,000 to avoid overlapping with the project; e. revise the rediscount schedule ncw used by the Fondo (Annex 2, Para. 15) to the following schedule: 1/ A.I.D. has exDressed agreement with this proposal.  - 14 J Percentage Participation literest Charged on by Eligible Banks on Loans by Eligible Banks Loans Financed under and on Financing by Project Special Trust Fund and Banco % Banco Fondo Privrate Banks TS -~ - 10 6 7 10 20 5 6 10 30 3 5 10 This schedule would provide money at a reasonable cost from the Banco to the Fondo, Tould iniprove the Fondo's financial position, would provide a greater incentive to the private banks and wo7uld enable a reasonable rate of interest to the ultimate borrowTers; f, expand the guarantee program which enables the Fondo to issue guarantees to private banks against losses up to 70 percent; g. pursue vigorously a progressive information program to better inform both the private banks as well as the farmers and processors of the benefits to be derived from the sound program of planned invest- ments contemplated in the proposed project. D. FINANCING 610 This project would combine private and public resources of M,1exico with funds of the Bank to achieve the desired investment program. Initially all loans would be made by the private banks from their own funds. These loans would then be eligible for discounting up to 90 per- cent if they comply with the Fondo requirements agreed to wTith the Bank, Thus the lending program would in effect be financed as follows: US$ Source of Finance Pesos Equivalent Percentage - Millions - FondoP-3iva-te va Bank '-~ ,3'12.5 2050 Bank 312.5 25,0 50 Tota'l 625..0 50.0 '100 1/ The relative contribution of the Fondo and private bank will vary ac- cording to the contribution of the latter ranging from 10 percent to 30 percent on each loan.  - 15 - 62. The lending program to be financed from these sources is sum- marized below (See Annex 5 for details): Total Lending Industry or Service Program Foreign Exchange Component -- Ilil '000 % Pesos % Pesos Dollars Livestock 54.9 343.1 30