Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-4583-ME MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE [NTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN WITH THE GUARANTEE OF THE UNITED MEXICAN STATES IN AN AMOUNT EQUIVALENT TO US$20.0 MILLION TO NACIONAL FINANCIERA, S.N.C. FOR AN AGRICULTURAL EXTENSION PROJECT June 1, 1987 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 Wotld Bank authorization. CURRENCY UNIT - PESO (Mex $) On May 12, 1987, the exchange rate in the controlled market was US$1 = Mex$ 1,218.30; the free market exchange rate stood at US$1 = Mex$ 1,214.00 FISCAL YEAR January 1 to December 31 UNITS AND MEASURES The metric system has been used throughout the report. GLOSSARY OF ACRONYMS IICA - International Institute for Agricultural Cooperation LCB - Local Competitive Bidding NAFIN - Nacional Financiera, S.N.C. PRONADRI - National Program for Integrated Rural Development, 1985-88 SARH - Secretariat of Agriculture and Hydraulic Resources FOR OMFICIAL USE ONLY MEXICO AGRICULTURAL EXTENSION PROJECT LOAN AND PROJECT SUMMARY Borrower: Nacional Financiera, S.N.C. (NAFIN) Guarantor: United Mexican States Beneficiary: Secretariat of Agriculture and Hydraulic Resources (SARH) Amount: US$20.0 million equivalent Terms: Repayment in 15 years, including three years of grace, at the standard variable 1nterest rate Financing Plan: World Bank US$20.0 million Government US$53.8 million TOTAL US$73.8 million Economic Rate of Return: Not applicable Staff Appraisal Report: Report No. 6620-ME This document has a restricted distribution and may be used by recipients only in the performan. of their official duties. Its contents may not otherwise be disclosed without World Bank authorizatioL. MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA, S.N.C. WITH THE GUARANTEE OF THE UNITED MEXICAN STATES FOR AN AGRICULTURAL EXTENSION PROJECT 1. The following report on a proposed loan to Nacional Financiera, S.N.C. (NAFIN) for US$20.0 million equivalent is submitted for approval. The proposed loan would be repaid over 15 years, including 3 years of grace, at the standard variable interest rate. Background 2. Mexico's agricultural sector contributes about 9% of GDP, employs about 25% of the labor force, and provides some 26% of non-oil exports. However, rural incomes are low with 78% of rural households earning incomes less than 30% of the national average. Because of its large share of employment, the poverty of many rural areas, its potential for growth and exports, and the historically important political role of the sector, the Government considers the revitalization of agriculture to be an important economic and social element in the structural recovery of Mexico. 3. In the 1950 to 1965 period, agricultural GDP growth averaged 4.3% per annum, however, beginning in the late 1960s, the costs of bringing marginal land into production rose, and expansion of irrigated areas diminished, slowing down growth. In the 1970s, exchange rat-e and pricing policies discriminated against agriculture and further contributed to the deceleration of growth. While before 1970, Mexico produced sufficient food to feed its population and export substantial surpluses, by the end of the 1970s, it had become a major importer of basic foodstuffs. These adverse circumstances resulted in a growth rate of agricultural GDP averaging 2.4% per annum between 1965 and 1980, compared to overall GDP growth of around 6% and industrial GDP growth of around 7%. 4. In March 1980, the Government took measures to reverse the decline of agriculture by making use of the growing revenues from oil. Higher support prices, more input subsidies, and expansion in subsidized credit, coinciding with favorable weather, led to substantial increase of agricultural production of 6% in 1980 and 1981. However, with declining oil prices, rising interest rates and debt service, and growing consumer subsidies, these Government actions proved to be financially unsustainable. In 1982, when farmgate prices were allowed to fall in real terms in the face of high inflation, agricultural production declined by 1%. Beginning in 1983 and through the 1985 crop year, agricultural production recovered moderately to an average growth of about 2.5%, primarily due to a supportive exchange rate and favorable weather. However, in 1986, agricultural production fell by about 4.2% due to poor weather and domestic demand contraction. Nevertheless, because of increasing exports and declining domestic consumption Mexico ran a substantial agricultural trade surplus in 1986 estimated at about US$1 billion, the first surplus since 1979. - 2 - 5. The Government continues to seek remedies to rural problems and has turned its attention to policies and an investment strategy aimed at increasing the efficiency of production, improving the effectiveness of remaining subsidies and public investments, and reducing its intervention in the market. A detailed strategy is included in the Secretariat of Agriculture and Hydraulic Resources' (SARH) 1985-88 National Program for Integrated Rural Development which seeks to: (a) increase farm productivity through more efficient extension services; (b) improve the agriculture trade balance; (c) raise incomes of the rural poor; (d) reduce and target subsidies; and (e) provide more direct assistance to the rural sector. The Bank endorses the above objectives and through proposed lending to the sector, including the loan recommended in this memorandum, is supporting the Government's strategy. Project Obectives 6. The Ministry of Agriculture, in collaboration with the Bank, carried out a subsector analysis in 1984 in an attempt to better identify the specific constraints to an efficient extension service. The analysis identified the following constraints: inadequate training and technical backstopping of field personnel, lack of response to farmers' needs, inefficient organization of public extension and research services, poor coordination among service agencies (extension, research, credit, insurance, inputs, and marketing), and underfunding of extension services. The proposed project would address these constraints. 7. The overall aim of the proposed project would be to raise the quality and cost effectiveness of extension services through the systematic introduction of an extension methodology which includes the fundamental features of the Training and Visit (T&V) system. The project would aim at improving efficiency in agriculture through streamlining and strengthening public extension services and making the system financially sustainable and replicable. The specific objectives would be to: (a) improve the quality of extension through improved selection, training and technical backstopping of field staff as well as by involving farmers more directly in the design and evaluation of extension services and research; (b) increase the number of farmers contacted per extensionist (from 40-50 to 150-460) as well as the crop area, and the percentage of farmers adopting new technology; (c) enhance recovery of a growing share of extension costs from benefitting farmers, and thus provide a fairer environment for private services to compete; (d) improve coordination between extension, farmers, research, input supplies and credit agencies; and (e) promote the role of women's groups in the development process of the rural sector. Project Description 8. The project would comprise twenty SARH rural development districts representative of key agroecological zones in Mexico. Specific project components to achieve the above objectives would include: (a) training of extension personnel (including subject matter specialists); (b) construction and rehabilitation of limited office facilities, and procurement of vehicles and equipment for extension and research personnel; (c) farmer training in technical, organizational and marketing activities; (d) building up regional farmer organizations to participate directly in the planning, evaluation and -3- cost sharing of extension services; (e) expanded adaptive research to improve the quality of technical packages; (f) an improved monitoring and evaluation system to reinforce feedback of information from farmers through extension agents to district chiefs and researchers; (g) technical assistance to streamline and improve SARH operations; and (h) assistance in the establishment of women's groups for small-scale agro-industrial, manufacturing and other community related activities. 9. The total project cost is estimated at US$73.8 million equivalent, with a foreign exchange component of US$16.9 million (23% of total project cost). A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key processing events and the status of Bank Group Operations in Mexico are given in Schedules C and D, respectively. The Staff Appraisal Report No. 6620-ME dated May 28, 1987, is beiag distributed separately. Rationale for Bank Involvement 10. Improvement of SARH's extension and research services is of strategic importance to Government's agricultural development strategy. Through this operation, the Bank would support the Government's efforts to maximize the efficient use of investment resources, provide more direct assistance to the rural sector, and improve productivity and rural incomes. Despite the relatively low incremental cost of the project's approach to improving SARH extension services, the pay-off in terms of incremental agricultural output is expected to be siguificant. The project would also support the Government's decentralization strategy by streamlining SARH's activities and delegating more responsibility to the district and state level. The Bank's presence would ensure that specific performance indicators, including parameters on cost sharing, coverage ratios, productivity, and farmers' incomes, would be closely monitored in an attempt to measure overall extension impact, to be later replicated on a nationwide scale. In addition, this operation complements the policy reforms being taken by the Mexican authorities i agriculture and the Government's investment programs in rural development, irrigation and credit. Agreed Actions 11. During negotiations, the Government of Mexico agreed on the following: (a) SARH would implement the agreed upon institutional strengthening program for extensirl services in all twenty project districts; (b) SARH would complete the feasibility studies for the balance of eighteen districts for Bank review and approval no later than November 30, 1988 (eight of which by December 31, 1987); (c) SARH would raise farmer cost sharing levels for extension services in the irrigated northwest to 50% by June 30, 1992; - 4 - (d) vehicles, machinery, equipment and furniture (US$5.2 million) would be procured under local competitive bidding procedures in accordance with Bank guidelines. Foreign firms would be allowed to participate. LCB is justified due to the small size of annual procurement needs in the twenty widely dispersed districts which does not permit meaningful ICB. Consultants for the institutional manpower development component would be selected in accordance with Bank guidelines. Benefits 12. The project would provide the overall benefit of cost-effective, replicable and responsive public extension services, while at the same time through the iptplemention of cost recovery measures, it would promote an enhanced role for private extension services. About 400,000 small-scale and ejido farmers on about 1.8 million ha are expected to benefit from the project. It is estimated that the percentage of farmers adopting improved technology would increase from about 5% to 15% at present up to about 40% to 60% at full development. Typical farm family incomes are expected to increase in real terms by over 22% by full development (year 13). The project would have an impact over a wide range of crops and livestock activities. Incremental production is estimated at about US$116 million per annum at full development. In addition, the project would be expected to generate about 11,200 new, full-time, on-farm jobs and would promote the status of women by assisting in the development of women's groups in agroindustrial production and community-related activities. Risks 13. The main risks include: (a) shortage of counterpart funds; (b) farmer unwillingness to adopt technical recommendations; and (c) insufficient incentives to motivate extension personnel. Remedies have been developed to address these risks. With regard to counterpart funds, Government has approved budget allocations for 1987 in line with appraisal estimates. Furthermore, a major effort would be made to involve farmers in the identification and evaluation of technical packages to be promoted under the project. Finally, improved training and financial incentive schemes to be promoted under the project are expected to provide sufficient incentives to create motivated, professional extension staff. Recommendations 14. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Banik and - commend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments Washington, D.C. June 1, 1987 -5- SCHEDULE A Estimated Costs Local Foreign Total …(---------- (US$ Million) ------- Extension 48.0 9.8 57.8 Training 4.3 4.2 8,5 Research 2.1 0.9 3.0 Monitoring and Evaluation 0.3 - 0.3 Base Cost 54.7 14.9 69.6 Physical Contingencies 0.4 0.4 0.8 Price Contingencies 1.8 1.6 3.4 Total Project Cost 56.9 16.9 73.8 _~~ I/ Rounded. Excluding taxes and duties. Financing Plan Local Foreign Total (US$ Million) -- - Government 53.8 - 53.8 Bank 3.1 16.9 20.0 TOTAL 56.9 16.9 73.8 = = -6- SCHEDULE B Page 1 of 2 PROCUREMENT a/ Project ElemLnt ICB LCB Other Tota, U---- (US Million) --------------- Civil Works - 3.2 - 3.2 (3.2) (3.2) Vehicles and Equipment - 5.2 - 5.2 (5.2) - (5.2) Services - 65.4 b/ 65.4 _ (11.6) (1:.6) Totalr - 8.4 65.4 73.8 - (8.4) (11.6) (20.0) a! Values in parenthesis reflect amount financed by the Bank. b/ Consult'ants, studies and recurrent expenditures. DISBURSEMENTS Amount % Category US$ Million Bank Financing I. Extension (a) Civil Works 2.6 100 (b) Vehicles and Equipment 4.1 1/ (c) Incremental Recurrent Costs 1.5 2/ II. Research (a) Civil Works 0.2 100 (b) Vehicles and Equipment 0.6 1/ (c) Incremental Recurrent Costs 1.6 2/ III. Training and Technical Assistance 7.4 100 I";. Unallocated 2.0 TOTAL 20.0 1/ 100% of foreign, 80% of local. 2,/ Incremental expenditures on a declining basis of 100% of expenditures during first year of implementation in individual pilot districts, 75% in year 2, 50% in year 3, and 25% in year 4. -7- SCHEDULE B Page 2 of 2 Estimated Disbursements Bank FY: 1988 1989 1990 1991 1992 --- - (US$ Million) --- Annual 0.8 3.8 7.6 6.8 1.0 Cumulative 0.8 4.6 12.2 19.0 20.0 SCREDULE C MEXICO AGRICULTURAL EXTENSION PROJECT Timetable of Key Project Processing Events: (a) Time taken to prepare: Four months (b) .repared by: SARH/IICA/Bank (c) First Bank Mission: June 16, 1986 (d) Appraisal Mission Departure: October 6, 1986 (e) Negotiations: April 1987 (f) Planned Date of Effectiveness: September 30, 1987 (g) List of Relevant PCRs and PPARs: Loan 1553-ME issued June 1985 Loan 1462-ME issued October 1985 -9- SCHEDULE D Page 1 of 2 STATUS OF BANK GROUP OPERATIONS IN NEXICO 1/ A. Statement of Sank Loans (As of aorch 81 1987) (Us9 miltion) ___________________________________________________________________----------__--- Floeel Amount Lose Und10- Loan No. Year Borrower Purpo0s Concetlations bureed 87 loons fully diabursed 4e86S.73 17a0-5 1978 NAFINSA IrrIgatI0n 92.00 81.19 1712-5 190 NAFIN8A Industry 175.00 11.12 1959-5 19S0 NAFINSA Terigation 160.00 191.89 1918 19S1 SANOURAS Vater SuppLy 116.00 44.42 1829 1991 BANOBRAS Reftways 150.00 0.12 19S0 1981 BANOBRAS Urban Devatop.ont Il 184.00 8B678 204a 1962 NAFINSA Intograted Rurot DOw. 175.00 84.47 1142 ¶sse NAFINSA Capitol geods Industry 151.80 9Q.88 2154 1982 NAFINSA Plttution Controt 95.00 18.50 Be1 6ss8 NAFINSA Sn Fernando Agric 46.40 15.7? 2194 le88 BANOSRAS Urban Engineering 9.10 5.49 2262 10Sa NAFINSA Agricutturat Narketing 115.00 5e.64 2281 19S8 BANOBRAS Third Water SuppLy 100.30 66.65 2825 1998 NAFIN8A Third SG/Ned Industry 175.00 to.92 2881 1998 BANCOMEXT Export Devetopment 850.00 89.29 2429 1984 BANOBRAS Highways 200.00 111.64 2450 1994 BANPESCA Ports 79.30 65.21 2525 1985 NAFtNSA Chiepes Rural Roads 21.00 1.5e 2526 1995 NAFINSA Chiapas Agric Dev. 90.00 82.8e 2546 1985 NAFINSA So/Ned Soots Nining It 106.00 94.56 2159 1986 NAFINSA Vocational Education 91.00 e8.80 2'75 1985 BANOBRAS RaiLneye V 300.00 240.45 k.10 1986 NAFINSA AgricuttureL Credit 180.00 44.20 2812 186 BANOBRAS Low-Income "ousing t 150.00 138.84 2859 1988 #AFIN Proderith lI 109.00 100.79 2865 198B BANOBRAS Earthquake Rehab. 400.00 106.00 2869 198E SANoBRAS Municipat Strengthening 40.00 87.98 2689 1986 8ANOBRAS Sotid Waste Pitot 25.00 g2.68 2745 19S? SANCONEXT Trade Poticy Loan I 5O0.O0 11.00 2748 1S97 NAFIN Industriat Recovery 150.00 196.71 2747 1987 KAFIN Technology Dovetoepent 46.00 48.66 2777 19S7 9NCE Export Devotopment I- 150.00 250.00 TOTAL S,106.95 Of which has boan repSid to the Sank 20119.10 Totat now outatending B,B8E.08 Amount coLd 82.84 Of which e8 beon repaid 82.84 0.00 Total now held by Bank 2/ 6,888.06 Totat undisbureed 2t824.89 1/ The status of the projects tlited in Pert A i In a separated report on aLL Bsnk/IDA financed projects in execution, which ts updated taice yearty and circutated to the Executive Directors on April 80 and October 81. 2/ Pricr to exchange adjustments. INKOPERS: (A1.J751 E OA rev atot LCINX ApriL 23, 1987 - 10 - SCHEDULE D Page 2 of 2 8. Statemnt of SFC Invasinnte As of Harch Ole 199? (USS million) FPead - riglnal Approvale Year ltlor Typo of Ibe1ines Equity Loan Total 1958/8 Industriel Perfect Circle, .A. aV Industrial Equlpunt 0.0 0.8 0.8 1G8 IrlstoL de Peaxc S.A. i A.C. Enpine Overhaul 0.0 0.5 0,5 ¶l81 AMarc Setar, S.A. @1 Twist Ortt11 0.0 0.8 o.8 19/8a/6/ Fundidore Monterrey, S.A. i Steaal °114 B.a 18.7 1888 Tubas de Aesro ds Netx1a 6teinleux Steel pipes 0.t 0.8 1,0 1Ogs gulisic dol Fay, S.A. S/ todius utphate 0.0 0.7 0.7 Iowa Industri del Hierro, B.A. Construction Equipent Q90 0.0 9,0 Iw70 Ninera del Norte st iron Ore Mining 0.0 1.e 1.8 1117 Celones NexUae 9.A. al Textiles 0.0 1Q.0 1,0 1979 Prceotora de Papal Periodicoa, B.A. de C.V. #/ Pulp and Paper b/ 0.0 il 19t8/ Cmntoe Veaaorux, B.A. Cmnt 0.0 15.9 15.9 1974161 Caoun Aristoc Htatl Tourim o0.a 1.0 t, 1978/78 Ha1noe S.A. Iteinleas Steal Ole 19s. 18ea t878a1/ Pepslen Penderossa S.A. Pulp nd Paper 0.0 10.7 Ul.7 1878 Terettoleeto lHxaianos, 9.A. Psarachoelosle 0.0 19.0 1O,0 187/1 Htetl Casino Rrel htepa, S.A. do C.V. Tourie 8.1 0.0 8.1 1978/89 Espreaem Tolteds 8.A. Cewmnt 7.09 16.0 17L.9 1e Conduotoreas fntorry, 8,A. ElectriosL Vir e Cxlo 0.0 19.0 1S.O 90 Induetries Rusieotl, 9.A. Particle Board 0.0 95.0 9S5O 1980 Vidri1 PIao do Muxeoc, S.A. Flat Glees 0.0 114.9 114.9 1980 Minere Roel de Anoalee, B.A. de C.V. Mining 0.0 110.0 110.0 1980 Celuleosioe Contouree 9.A. a/ Pulp and Paper 0.0 Ba.5 58.S 1991 Corporecion Agroindustriel 8.A. do C.V, Agri-8uinose 8.O 11.8 14.8 1898 Capital goode Factity al Capital God* FPinelong 0.0 1W0.0 100.0 1964 Hatelsa, S.A. Auto CMiaI 1.4 a.o 4.4 1984 Proteleon, B.A. de C.V. Agri-SOsinees 0.8 9.0 S.e 1990 Promotiones uInustrates axzioanaes S.A. de C.V. Patrchamicatn 0.0 18.4 15.4 1989 COluloase y Papal do Ourango. 8.A. de C.V. Pulp and 'aper 1.9 10.0 11.9 1366 Agesre Phase I (AEAJ Vaeg. & Fruit Proosesing O. 1.5 2.0 Totle Grosa Coesltents BO.S 717.P 787.9 Laos Canoellationa. Terminations, Rupaymnt. and Bote. 28.5 616.1 641.6 Total Comiteents fN HoLd by SFC 97. 90.1 1.9 Total Undi1buread (including pertioipantsl 6.1 8.4 8.S / InvSateents which have been fully coancelled terminated. writtan off, old, redened or repaid. b/ UuS9SaOO. of Exaludee U65.280 oepitel.lgd intareat. IFCTastA1.M751 EArevoetoLCIt Aprit 2a, 1887 -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ lio- UNITED STATES OF AMERI mnondo 1) - OAJA ji \ <+ ~lNoo Juarezs \CAIfORNIA < S SO ~~ ; R A i t < H U A . N ' A le*s, Guya ~ CA/EC BAJA S@,,to Ro0lio COAHU CAIlFORNIA W.4 SUiR Parrol aLo,eto t_Xv Trre6n4~ it otD U t A N \A. Paz Duran ZACA C MOZ~~~~~~~~~~~~ZC Sxo n Lur.Z M Topic . 20 6 160 260 360 IIUEES~~~~~~~~~~~~~~~~~~~~onoiI 0 0 0 0 - ~~~~~~~~~~~~~~~~~~~~110- IBRD 2037$ ICA 30'* rd A-o M E X I C O AGRICULTURAL EXTENSION PROJECT "Iedro^Neiro'sW (PROCATI) Pilot Rural Development Districts Nusooos,t o Irrigated, Arid Northwest Region ([ Nuevo Lared . Temperate Central Highlands Region ,Ont-r.t* / 7~ Mtonclovt J \ h t Notional capital A tK ,> . u' " P ) O 0 State capitols t t ;. !t 'Reyn 0 Principal cities or towns ; C o>/ 4 Motamoros - Divided highways 4- t l, \ / - ~~~~~~~~~~~~~~~~~~~~Selected malin toads Saltill<\t / -.-.- - (Railroads - ~~~~~~~~~~~~~~~~~~~~Rivers 4 Principal airports ( f j {1 -t ) - - State boundaries CAS J Ciuda/- International boundaries /Victri m JIat o\i .1 m - Mt liE _ -sd.MdeMdro Tamo<;s i usii , a pico -I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ % ,7AUZ Merida 5AN W~ !Qf ?f fY ' 5pe - 4~~~~~~~~~~~~~~~~~~~~~~~~~~~ Luts , Tam~~~~~~~~pica Vollet~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~12- 6VANA I f 4' -S BA il I zIIrn)O Jo UIN~~~~~~~~~~~~~~~ TL Cd dotol 0GuaA to'1 1 1~o (4opulcae YIJ CAzrCA TA < 4/-BbGurierreS A > TABASC ~ ~ 4OWTAV ~~~'4 NEJC°itoePOt \ \ s4 CAPECH P"rtoEtcri_ GUATEMALA HONDURAS 100F 91 FEBRUARY 1987