DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. P-1342a-ME REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA, S.A. WITH THE GUARANTEE OF UNITED MEXICAN STATES FOR RIO SINALOA IRRIGATION PROJECT February 4, 1974 Latin American and the Carribbean Regional Office This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. CURRENCY EQUIVALENTS Currency Unit - Peso (Mexg) US$1.00 - Mex$12050 Mex$1.00 - US$0.08 Mex$l million - US$80,000 GLOSSARY OF ABBREVIATIONS NAFIN - Nacional Financiera, S.A. SRH - Secretar{a de Recursos Hidraulicos INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVEWLOPENT REPORT AND REODMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIh3CTORS ON A PIDPOSED LOAN M1 NACIONAL FINA.NCIERA, S.A. WITH THE GUARANTEE OF THE UNITE} MEXICAN STATES FOR RIO SINAIDA IRRIGATION PRDJECT 1. I submit the following report and recommendation on a proposed loan in various currencies equivalent to US$47 million to Nacional Finan- ciera, S.A. (NAFIN) to assist in financing the Rio Sinaloa Irrigation Project. The loan would be guaranteed by the United Mexican States and would have a term of 25 years including 5 years of grace, with interest at 7-1/4 percent per annum. PART I - THE ECONOMW 2. ltThe Economy of Mexico: A Basic Report" (192-ME) was distributed to the Executive Directors on June 26, 1973. It was designed to provide a long-term perspective and a framework for the assessment of short-run trends in the Mexican economy. An updating report will be prepared this spring and is scheduled to be distributed to the Executive Directors in mid-1974. Country Data sheets are provided in Annex I. 3. For the three most recent of the six decades since the Revolution of 1910, the success of the Mexican system, measured in terms of GDP growth, has been outstanding. Since 1940, the annual average growth rate has ex- ceeded 6 percent. And from the mid-1950's to 1972 Mexico was among the few countries in the developing world to combine a sustained high rate of growth with monetary and balance of payments stability. The average annual rate of inflation was less than 5 percent and the dollar value of the peso was maintained at the level fixed in 1954. 4o Rapid and sustained growth was the product of successfutL policies affecting the mobilization and use of both private and public sector re- sources. The role of Government in promoting economic growth was concerned on one hand with the development of strategic infrastructure and major uti- lity industries and on the other with development policies which featured, in the agricultural sector, the development of price support, import control and agrarian reform measures, and in the industrial sector external pro- tection and the provision of fiscal incentives. 5. The sectoral allocation of public and private investment was reflected in a changing structure of output and employment. This featured the growth of manufacturing industry and the relative decline of agri- culture, although agriculture remained the chief source of employment, ac- counting in 1970 for 39 percent of the economically active population. -2- 6. Rapid economic grwoth has not generated sufficient opportun- ities to create employment for the labor force which has recently been growing at about 3.5 percent per year. In 1970 it was estimated that 40 percent of the labor force was either engaged in marginal occupations - relatively unproductive and hence poorly paid - or totally unemployed. Partly as a consequence of rapid population growth, but also as a result of the distribution of incomes and assets in the Mexican economy, the strategy which succeeded in promoting rapid growth was not comparably suc- cessful in spreading its benefits. The incidence of poverty had by 1970 been much reduced from the level of 1940. But the differentials between rich and poor, both between people and between places, had probably increased. 7. There was, until recently, little evidence (apart from the con- tinuation of the land reform program begun in earnest during the Cardenas regime in the 1930's) that Government policies were much concerned with these problems. By 1970, however, it was apparent that a revised economic strategy - one which would focus on the improvement of the living conditions of the poor - was required. It seemed to be understood that this goal should not be pursued at the expense of rapid growth or of the monetary and balance of payments stability which appeared to be a sine qua non of sustained economic expansion. The events and trends of the last three years have demonstrated the Government's determination to develop such a strategy. They have also revealed some of the constraints to doing so. There are several types of distributive measures which do not depend heavily on the growth of budgetary expenditures. Among those introduced since 1970 are a new Agrarian Reform Law (1971), a new Water Law (1971) and a revision of instructions concerning the allocation of bank credit (designed to increase the flow of resources to low income farmers and ejidatarios). 1/ These measures are all responsive to the needs of the laral sector and demonstrate the Government's concern to confront them. Another recent initiative is the introduction (1972) of a 5 percent payroll tax 2/ to finance a new housing program for workers in the lower-middle income groups. It is clear, however, in the light of the experience of the last three years, that neither the needs of the poor nor those of the public sector industries (on which the growth of the economy as a whole partly depends) can be met unless the Government takes new measures to mobilize additional public sector resources. 9. In 1971 the Government acted to restrain the growth of the economy iln order to preserve stability and, partly as a result, the growth rate fell from the 1960-1970 decade average of 7.1 percent to only 3.7 percent, while prices increased by 4.8 percent. In J972 renewed expansion was stimulated by public sector expenditures and the GDP growth rate rose to 7.5 percent, while prices increased (in terms of the GDP deflator) by slightly more than 5 percent. In 1973 there was a further substantial 1/ The ejido is a fonm of collective land tenure based on usufruct rather than ownership. 2/ This tax is not considered to be part of public sector resources for purposes of public finance analysis. - 3 - increase in public expenditures which was largely financed by recourse to increased internal and external borrowing. This expansion coincided with and iwas partially responsible for an acceleration in the rate of domestic price increases. These increases are also, however, a conse- quence of imported inflation (the impact of which was especially serious because of the poor harvest in 1972 and the resulting need to import basic foodstuffs in a year of high commodity prices). Prices increased by roughly 20 percent during 1973 - somewhat more in the case of whole- sale prices and somewhat less in the case of consumer prices. 10. In the light of these trends, the Government is introducing substantial new resource mobilization measures to generate the funds required to support the growth of public expenditures. Following some changes in the tax structure in 1972 and 1973, it is understood that there will be a more substantial increase in taxation in 1974. The action which was taken in October 1973 to adjust electricity rates (by an average of almost 30 percent) was followed by substantial increases in hydrocarbons prices in December 1973. The total of the revenue measures which have been taken or are under consideration is expected to yield the equivalent of approximately 2 percent of 1974 GDP. 11. These measures to increase public sector revenues are clearly needed and they will permit a reduction in the public sector deficit as well as a moderate increase in expenditure in 1974. The rate of increase in the latter, however, is likely to be slower than in 1973. There should be some deceleration in the rate of inflation in 1974 compared to 1973, but the rate will still be higher than in other recent years, both because of further expected increases in international prices and because the inflationary trends of 1973 have resulted in substantial wage adjust- ments which are likely to be reflected in higher costs and prices. 12. It is unlikely that the rate of economic growth in 1974 will be as high as the level of between 7 and 8 percent which is estimated for 1973. Growth will almost certainly be restrained by the capacity limit- ations derived from the low level of private investment in the last three years and because the Government recognizes the need to limit imports in order to contain the balance of payments deficit to an acceptable level. It is quite probable, therefore, that 1974 will be a year of fiscal and financial retrenchment and of moderate growth. 13. The events of recent months have illustrated the dangers inherent in large scale deficit financing, but also the willingness of the Government to take the kinds of corrective action which become necessary. The record of the Mexican authorities in economic management over the past two decades is such that there is reason to give credence to the Government's assurances that it will act to restore the relative price and balance of payments sta- bility which, in terms of the recent experience of the Mexican economy, ap- pear to be necessary conditions of sustained growth. The Bank, as well as the Fund, is in a continuing dialogue with the Government regarding these issues. - 4 - 1A. As of December 31, 1972, Mexico's outstanding disbursed ex- ternal public debt was US$4.0 billion as compared with a total of US$3.5 billion a year earlier. The IBRD share in the former total was US$723 million as compared with a level of US$659 million a year before. For 1973, net public medium and long-term external borrowing is estimated at about Us$1,300 million. This represents a sharp increase over the 1972 level ($451 million), and reflects the larger public sector defi- cit in 1973, a greater reliance upon external rather than domestic bor- rowing to finance the deficit and some borrowing undertaken to of-fset short-term capital movements. The substantial revenue measures re- cently taken will reduce the public sector's needs to borrow in 1974. 15. Annex I, Page 4 shows that 41.3 percent of public external ca- pital contracted in the period 1968-1972 was obtained from private banks - the largest single source and that international organizations ac- counted for the next largest share (22.2 percent). The World Bank ac- counted for 14.7 percent of total commitments. Annex I, Page 4 also shows the sectoral allocation of public external capital and reveals that power, transport and manufacturing were the dominant sectors. The terms of recent public external borrowing have continued to improve in the light of (a) the availability of capital in international markets and (b) Mexico's reputation as a creditworthy borrower. 16. During 1974, assuming normal private capital movements, it is expected that the level of net external borrowing by the public sector (or guaranteed by the public sector) will decline to around US$950 - US$1,000 million. Net borrowing of this magnitude is consistent with Mexico's debt service capacity. As a result, particularly of longer maturities on borrowings from financial institutions, Mexico's external public debt service ratio has declined over the last several years and was 18,2 percent in 1973. Assuming that the average terms in the future are about the same as those which have been recently obtained, the debt service ratio is expected to remain in the 18 to 20 percent range during the remainder of the 1970's. The Bank's share in public debt outstanding and disbursed is presently about 14 percent while its share in the corres- ponding debt service is about 10 percent. These ratios are not expected to change significantly during the remainder of the 1970's. 17e Mexico thus continues to be creditworthy for borroving on con- ventional terms, always provided that the additional public savings measures are taken without undue delay. The rate increases recently enacted by the publicly owned electric power sector and the recent in- crease in the prices of the publicly owned hydrocarbons industry, suggest that the Government will continue to handle its financing affairs prudently. PART II - BANK GROUP OPERATIONS IN MEXICO 18. The Bank has made 33 loans, for a total of US$1,599 million net of cancellations, of which at the end of December 31,1973 the Bank held US$1.3 billion including US$04Z billion not yet disbursed. Most of these loans have been made Tor power, roads and agriculture. Execution of Bank- financed projects has, on the whole, been satisfactory. However, disburse- ments on the US$125 million loan for the Fourth Power Sector Program were delayed because the Government found it impossible to effect necessary power tariff changes on schedule. The problem was resolved when tariffs were increased on October 16, 1973. 19. IFC has made eleven investment commitments in Mexico amounting to US$53.1 million, of which as of December 31, 1973, US$35.4 million had been sold, terminated or cancelled. The US$17.7 million held by the Cor- poration consists of US$15.9 million in loans and US$1.8 million in equity. Annex II contains a summary of Bank loans and IFC investments as of Decem- ber 31, 1973, and notes on the execution of ongoing projects. 20. Bank lending to Mexico in FY73 consisted of two loans, for agri- culture and water supply, totalling US$200 million. The FY74 program in- cludes, in addition to the Las Truchas Steel PrQject approved last September, the VII Highway Project and the Sinaloa -aiid Panuco Irrigation Projects under consideration today. In addition, wokc is under way on rural development, irrigation, forest industries and transport proj- ects for possible consideration by the Ececutive Directors during the next two years. 21. In lending to Mexico, the Bank tries to assist the Government in achieving four major objectives. These objectives are interdependent and complementary; hence, it is not possible to rank them in order of priority or importance. One objective is to spread the benefits of growth more widely than before and, more particularly, to begin to address the problem of rural poverty. A second objective is to help Mexico continue to achieve the remarkable growth of output of the past two decades, both by investing in projects that directly or indirectly make large contributions to prodac- tion and employment, and by supporting changes that will make existing institutions function more effectively or by creating new ones that will perform presently neglected functions. A third objective is to contribute with funds and expertise to the solution of critical adjustment problems that are themselves a result of Mexico's continued growth; noteworthy among these are the problems attendant on a rapid urban expansion, and the emerging need to exploit scarce water resources more efficiently. A fourth objective is to transfer sufficient external resources to complement Mexico's quite appreciable domestic savings and provide the necessary funds for sufficient economic and social investments in a framework of sound domestic finances and a viable balance of payments. 22. While the last objective primarily influences the magnitude of the Bankts program in Mexico, the other three jointly determine its struc- ture. Naturally, many operations serve more than one of the ends listed and may, moreover, support more specific Government objectives. Thus the Sinaloa and Panuco Irrigation Projects are designed not only to help expand pro(iuction but also to support the Governmentls policies on income redistri- bution as expressed in the Land Reform and Water Laws, both of 1971. Con- cern with the vital issue of better water management also induced the Gov- ernment, the Banlc and UNDP to organize, jointly, a national water study; the Bank serves as Ececuting Agency for the UNDP. The Study has the prin- cipal objectives of formulating alternative water development programs for the short, medium and long-term and of adopting key policy decisions con- cerning water development and management. It is expected to use the results of the Study - as they become available - for the identification and - 6 - analysis of future irrigation projects. Loans in the transport and power sectors are designed explicitly both to transfer resources to Mexico and to help improve institutional structures and policies in sectors that play a vital role in industrial and agricultural production and in the genera- tion and utilization of public sector resources. At the same time, the Government, together with the Bank, is attempting to prepare integrated rural investment projects in regions in which income levels are low but where some productive potential can be identified. PASU III - THE AG1CICULTURAL SECTOR 23. Agriculture has been a dynamic element of Mexico's economic de- velopment. The sector's growth of close to 6 percent p.a. in real terms over nearly three decades (1940-1965), is a record matched by only a few countries. It has managed to satisfy the demand of a rapidly growing po- pulation and to transform the country from a net importer to a net exporter of agricultural products. While the growth of agricultural output has been attributable primarily to expansion of the area under cultivation, it has of late become increasingly dependent on productivity increases and on changes in composition to higher valued crops. Public investment has played a key role in these processes. However, the share of agricultural investment - primarily irrigation - in the public budget declined after 1950 (from 19.3 percent to 13.6 percent in 1970). This shift is one of the causes accounting for the reduction in sectoral growth from an annual rate exceeding 7.5 percent in the forties to less than 4 percent in the sixties. 24. Although agriculture contributed only 10.1 percent to GDP in 1972, the sector is still the largest employer, with nearly 40 percent of Mexico's labor force. It is also the most important foreign exchange earner outside of tourism; agricultural exports amounted to US$673 mil- lion in 1972, nearly half of total commodity exports. Favourable external factors have benefited exports and have led to an increasing integration of Mexico's northern agriculture with the U.S. market. The most important export products are cotton and livestock, each accounting for about 21 per- cent of total export value, followed by tomatoes, sugar and coffee. Res- ponding to trends in domestic and foreign demand, livestock has developed more rapidly than crop production, increasing its share to nearly a third of total output in 1972. However, corn and beans continue to be the basic components of the Mexican diet and remain the subsistence crops for most of the peasants; together they account for nearly 70 percent of the rain- fed and 10 percent of the irrigation cropland. 25. Irrigation has traditionally accounted for about three-fourths of Government investment in agriculture; a reflection both of Mexico's climatic conditions and the technical competence of the staff of the Ministry of Hydraulic Resources (SRH). Irrigation is a sine qua non of agricultural production in most of MexicoIs cultivable areas, and public irrigation programs have in fact been a chief source of output growth since 1940; over 25 percent oL^ total output expansion originated in irri- gation districts which contributed 40 percent of total agricultural and 60 percent of total crop output in 1972. Public irrigation projects have laid the foundation for a modern, sophisticated, commercial sector which helped the country to earn the foreign exchange needed to industri- alize, but at the same time they tended to benefit, principally, the large-scale farmers and hence to accentuate the skewness of the rural income distribution. 26. Thus, although until recently agriculture policies were success- ful in raising production, they were not capable of solving the pressing problems of rural unemployment, high degrees of income concentration and accelerated rates of rural-urban migration. The Revolution of 1910 led to the far reaching Agrarian Reform Legislation of 1917, under which nearly half of Mexico's total land area was redistributed. The rural society has nevertheless undergone little change. It is still polarized into a small, highly efficient and rich class of rural entrepreneurs and a large class of poor peasants and ejidatarios which have, to a large extent, been bypassed by the rapid economic growth of the post-revolution period and even today barely participate in the market economy. 27. The rural poverty problem is a compound of an overall shortage of productive land, inequality in land ownership and inadequate public services. According to a recent study, only 7 percent of the almost 3 million farms in Mexico are modern while 53 percent are classified as subsistence units and another 40 percent as traditional, producing only small marketable surpluses. The rural population has grown faster than the land under cultivation, leading to excessive fragmentation of holdings in many parts of the country and a landless rural labor force of close to two million. At the same time, only 1 percent of the farmers still controlled more than 30 percent of to- tal cropland in 1960 and 5 percent of the farms in public irrigation dis- tricts owned more than 40 percent of the area in 1965. The skewed land distribution is reflected in the distribution of rural income9 It is es- timated that 10 percent of the farmers accounted for 40 percent of total rural income including proceeds from sources other than agriculture. 28. President Echeverrials Administration, which has been in office since the end of 1970, is attempting to reconcile the twin objectives of economic growth and income redistribution. It has given particular at- tention to agriculture and has substantially increased the budget alloca- tions to this sector in absolute terms and relative to other sectors. While the expansion of the irrigation, credit and extension programs is expected to raise the growth of output to the rates achieved in the past, the Government has initiated several measures to ensure that the earnings and living conditions of the rural poor are improved at the same time. These include the enactment of a new Agrarian Reform Law (1971), a new Water Law (1971), instruction to the banking system to channel part of - 8 - its resources to small farmers and ejidatarios, and large appropriations for an integrated rural development program. 29. The new Agrarian Reform Law is directed to strengthening the legal and institutional bases of the ejido, to transforming the ejido into an efficient production unit and to accelerating the granting of definite land titles. The agricultural credit program, supported by the Bank- financed Fourth Agricultural and Livestock Project, seeks to gear credit institutions more to the needs of the small farmers and to enable them to benefit from modern production technology. The rural development pro- gram, for which US$200 million have been appropriated in the 1973 budget, with a total investment of about Us$1.5 billion planned for 1973-1976, is the most ambitious Government effort to mitigate rural poverty by helping the landless and seasonally unemployed as well as improving the productive base of the smallholders and ejidatarios. 30. The new Water Law reduces the maximum permitted holdings in new irrigation districts from 100 has per owner to 20 has. The excess land is to be distributed to small farmers and landless families. While the new ceiling is still large enough to permit the application of modern methods of production, it will significantly change the distributional incidence of new irrigation projects. At the same time, SRH has diversified its policy; considerations of income distribution and employment are given more importance in project evaluation and more emphasis is placed on al- ternative investment options including conjunctive ground and surface water use, phasing of construction and non-structural alternatives like intensified grassland utilization with drainage improvement. Notable among the new or expanded activities of SRH are also a program specially designed to increase efficiency of water use and yields in existing ir- rigation districts (PLAKEPA), and a small-scale irrigation program which is addressed exclusively to the poor peasants; both programs are fi- nanced with assistance from the Interamerican Development Bank. PART IV - THE PhDJECT 31. The proposed project would be the ninth Bank operation for agri- culture in Mexico. Previous lending in the sector consisted of four loans for agricultural credit and four for irrigation. A sixth irrigation proj- ect, Panuco Irrigation, is being presented at the same time as the Rio Sinaloa Project. 32. The Rio Sinaloa project was appraised in two stages. The first appraisal mission visited the area in November/December 1972 and recommend- ed combining Phase I (diversion dam and irrigation distribution and drainage systems for 40,000 has) and Phase II (storage dam and irrigation and drain- age systems for another 60,000 has) in order to allow full use of the available surface water flows and to minimize the risk of temporary irriga- tion water shortages in the Phase I area. After completion of the request- - 9 - ed additional studies, appraisal of the combined project was completed in May 1973. Negotiations were held in Washington from January 14 to January 18, 1974. The main negotiators were Ing. Ignacio Aguilar Alvarez (Ministry of Hydraulic Resources), Lico Fernando Torres (NAITN), and Lic. Narciso Acevedo (Ministry of Finance) assisted by seven members of the Guarantor's and Borrower's staff. A report entitled "Appraisal of the Rio Sinaloa Irrigation Project" (No. 281a-ME, dated February 4, 1974) is being distributed separately to the Executive Directors. Annex III con- tains a loan and project summary. Project Description 33. The proposed project would consist of integrated irrigation and agricultural development of 100,000 has along both banks of the Sinaloa River in the State of Sinaloa. The project would include a storage and a diversion dam, complete irrigation distribution and drainage systems, wells to supplement surface water supply and, in addition, an intensive extension service over a four-year period. The project area comprises thle old irri- gation district of Guasave (22,000 has), the area on each bank with limited and irregular water supply (23,000 has) and the dryland area (55,000 has). Because of the inefficiency of the present irrigation system and lack of dependable surface water flows, presently only about 48,000 has are crop- ped in the project area on the average per year. The project, through full. utilization of the Rio Sinaloa flows and augmented by groundwater pumping together with modern irrigation and farming techniques, would make double cropping possible; it is estimated that on the average 26,000 has could be double cropped per year, resulting in a cropping intensity of 126 percent on the total project area of 100,000 has. Project Objectives 34. The proposed project has two principal objectives. First, it aims at increasing agricultural production to satisfy domestic demand and to help improve Mexico's balance of payments position. The value of incre- mental annual production originating from the project will be close to US$30 million, equivalent in gross terms to over 2 percent of Mexico's 1972 crop production. Nearly two-fifths of the production in value terms, pre- dominantly vegetables, fruits and cotton, will be exported. Most of the fruits and vegetables would be marketed to the U.S. through CAADES (Confe- deraci6n de Asociaciones Agrlcolas del Estado de Sinaloa), which is the largest supplier of imported fruits and vegetables to the U.S. The ex- pansion of cotton production under the project would help to overcome the decline which has been occuring in Mexico's total cotton production and exports. Most of the remaining output will substitute for imports of soy- beans, wheat, sorghum and safflower, which will have ready markets within Mexico. 35. The second major objective of the project is to mitigate prob- lems of rural poverty in the Sinaloa area. The project marks the first application of the new Water Law on a large scale. It is expected that - 10 - 23,400 has will be redistributed within the new irrigation district on which 2,350 ejidatario families will be settled. The redistribution in the area under new irrigation will affect both private farmers and existing ejidos; the holdings of the private farmers will be reduced to the maximum permissible size of 20 has and the ejidos reorganized so that no ejidatario has a holding larger than 10 has. While this limita- tion on owned land under the new Water Law is only applicable to new ir- rigation districts, the Government is also negotiating with the farmers in the old irrigation district of Guasave with the objective of rediuc- ing their holdings to between 50 and 80 percen-t of present size, subject to a minimum of 20 has and a maximum of 100 has. Thus the total amount of land to be redistributed is likely to be larger than the 23,400 has of the new irrigation district. 36. The project will not only benefit the 2,350 newly settled eji- datarios but also increase the income of the 10,900 existing ejidatarios and 1,100 private farmers, some 75,000 persons in total. The average farm income for both ejidatarios and private farmers will be raised sub- stantially, but individual income levels will vary with farm size and cropping pattern. The final income distribution will depend, in parti- cular, on each farmer's area under vegetables, which yield much higher retunLs than any other crop. 37. While the project area under vegetables is to be limited to 6,000 has, consistent with estimates of demand in the U.S. and the domestic market, as well as with production plans in other irrigation projects, the number of farmers who can successfully market vegetables is also restrict- ed. The lucrative export market has been dominated by CAADES, which has easy access to credit, has established a sophisticated and efficient mar- keting organization, stays in close touch with developments in the U.S. market and lays out production and marketing plans to avoid excessive price fluctuations. To help the ejidatarios participate more equitably in the high income yielding crops, the Government is taking measures of organizational and marketing assistance coupled with steps to ensure prompt and adequate availability of credit which will enable the ejidata- rios to take on a share of the domestic market and gradually move into the export of less perishable vegetables, e.g. onions and potatoes. The speed and extent of the results of such measures are, of course, diffi- cult to predict with precision. The possible range and the most likely result of the project's income incidence are nevertheless projected in the table below. 38. The stmost likely result" is based on the assumption that the ejidatarios as a group will account for about 20 percent of the total vegetable production from the project. The "maximum spread" between in- cremental ejidatario and private farmer income is indicative of what would occur if the ejidatarios would not produce any vegetables at all and the ltminimum spread" would obtain if the ejidatarios would cultivate 1,000 has more of vegetables for the domestic market, in addition to the 20 percent share. In the latter case, the economic rate of return on the total project would also be higher than that estimated, since total high value crop production would be greater. INCOME INCIDENCE OF PROJECT 1/ (US$ p.a.) Incremental Income Present Farm Maximum Most Likely Minimum Income Spread Result Spread Ejidatario (10 has) 200 2/ 1,500 1,965 2,400 Private farmer (20 has) 2,300 18,900 14,950 14,950 1/ After taxes and before water charges. Since appraisal, prices of grains have increased substantially, which would not only raise the income of the ejitdatario in absolute terms but also reduce his income disparity with private farmers. 2/ Most of the ejidatarios are also employed as rural laborers and may be earning $200-400 in addition to farm income, depending on number of days employed. Water Charges 39. The water charges will consist of two components; one for opera- tion and maintenance and one for investment recovery. While the operation and maintenance costs of the irrigation and drainage systems will be fully recovered from each beneficiary in proportion to his farm size, the com- pensation charges for the recovery of capital investment will be determined according to the payment capacity of the beneficiaries. SRH intends to link the compensation charges to water volume and to the cropping pattern, which is used as a proxy for income. A substantial progressivity will be built into the compensation charges as higher rates will be levied for higher value crops than for lower value crops. The actual compensation charges will only be determined after completion of a detailed socio- economic study - prescribed by law - on the payment capacity of the indi- vidual farmers. The Bank will be given an opportunity to comment on the conclusions and recommendations o; the study promptly after completion. Investment Recovery 40. While it is the Government's objective to recover the projectts investment costs at the earliest possible time, estimates on the time span of repayment can only be made with accuracy once the socio-economic studies have been completed. It will depend on (a) the farmers' net income after meeting all crop production costs, taxes and project operation and main- tenance charges less (b) the amount he needs to cover his family living costs and have a reasonable incentive to continue irrigated farming. Pre- liminary estimates indicate that, if raising farmers, net income to twice - 12 - the regional minimum salary, which is equivalent to the approximate cut- off point for the lowest 40 percent of incomes, is accepted as a reason- able target, about one-fourth of the "most likely" incremental income would be available for payment of water charges. This would make it pos- sible for the Government to fully recover investment costs, without in- terest, within about 32 years. It should be noted that, in addition to the direct water charges, general taxes on incremental crop production would serve to substantially increase total returns to the Government. Management and Organization 41. Responsibility for project planning, execution and operation rests with the Comision del Rio Fuerte, created in 1951 by Presidential decree as an agency within the Ministry of Hydraulic Resources. The Co- mision is empowered with exclusive authority to develop all water related projects in the Rio Fuerte Basin, including the Rio Sinaloa. It has a high caliber technical staff and has been operating successfully two other large irrigation projects. Agricultural development - annual cropping pattern, water allocation, technical assistance and credit - would be handled by a Management Committee, comprising representatives of the Co- mision, the Ministry of Agriculture, the Department of Agrarian Reform and Colonization, participating banks and the farmers. Costs and Financing 42. The capital requirements of the project - including interest during construction on the proposed loan (US$6.O million) - are US$145.6 million. The Bank loan would finance the estimated foreign exchange costs of the project except for US$3.4 million consisting of material and equip- ment which the Government furnishes directly to the contractors and of ne- gotiated contracts other than those for land clearing and leveling, plus 50 percent of the local costs of extension services during the development period ($0.7 million). The remaining costs would be met through Govern- ment budgetary allocations. Procurement 43. Contracts for civil works would be let under international com- petitive bidding and, whenever feasible, be grouped into large packages of at least $1.8 mi].lion. International competitive bidding would not be required for land clearing and leveling and instead SRH would contract for them with local groups of farmers. This procedure has the advantage of associating the ejidatarios and farmers ultimately benefiting from the project in the execution of these works and, even more importantly, pro- vides them with training for adoption of soil conservation practices under the proposed loan. International competitive bidding would also not be required for smaller contracts which, because of nature or timing, cannot rationally be included in the major contracts. The items exempt from international competitive bidding would account for less than 20 percent - 13 - of civil works contracts to be financed by the Bank, which has been the limit for awards on local bids and negotiated contracts under the pre- vious irrigation loans. Disbursement 44. The Bank loan would be disbursed against (i) 38 percent of payments to contractors of civil works let umnder international competi- tive bidding and negotiated contracts for land clearing and leveling and for small works not exceeding Mex$l million each up to an aggregate maximum of Mes$20 million, (ii) 100 percent of foreign expenditure of equipment purchased under international competitive bidding, (iii) 50 percent of the cost of intensive extension service during the initial period of the project and, (iv) cover 100 percent of interest during construction on the loan. The loan would be disbursed in seven years, 1974-1980. 45. Retroactive financing not exceeding $1.0 million is recommended for advance contracts placed under ICB of the Sinaloa de Leyva diversion dam and the first 17 kms. of main canal on the left bank. Economic Evaluation 46. With the contruction of the reservoir, the project area will lend itself to effective planning of water use. The economic rate of return is estimated at 17 percent which, using a combination of unlikely unfavourable events, could drop as low as 12 percent. Secondary benefits of the project have not been taken into account in the analysis nor have the benefits from the minimum provision for the hydro-electric power plant, water availability for domestic use, flood control and improved environ- mental conditions been quantified. Of the approximately 75,000 benefi- ciaries of the project (i.e. some 14,350 families), about 93 percent are in the lowest 40 percent of Mexico's incorme recipients. PART V - LEGAL INSTRUlENTS AND AUTHORILTY 47. The draft Loan Agreement between the Bank and Nacional Finan- ciera, S.A.; the draft Guarantee Agreement between the United Mexican States and the Bank; the Report of the Committee provided for in Article III (Section 4, iii) of the Articles of Agreement, and a draft Resolution approving the proposed loan, are being distributed to the Executive Directors separately. 48, I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. - 14 - PART VI - REOMMENDATION 49. In formulating this proposal, it has not been possible to take full account of the consequences of recent increases in petroleum prices. However, available information indicates that the proposed loan remains fully justified. 50. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President by J0Burke Knapp Attachments February 4, 1974 COItNTNY DATA ! P 1 4Ca AREA pOPlTLATIO.A DgNSTTY km7 54 million (mid-1972) 27 ter km2 P5'r km2of areble lrn;J SOCIAL ltIfCATIlORS Reference Countries 1960 1970 T970 -1970 3' Ota PER CAPITA US3 (ATLAS BA3IS)S111 A k2 22. 61D DK2',h.Alr!IC Cirudebirth rate (per thousand) 45 43 38 32 16 Crude death rate (per thousand) 11 8 9 9 8 Infant rmortality rate (per thousntid live births) 74 58 110 92 56 Life expectancy at birth (years) 59 62 63 61 65 Oross reproduction rate /2 3.2 3.1 2.5 2.2 1.3 Population growth rate ¢ 3.1 3.4 2.9 2.3 1.0 Populatiorn growth rate - urban 4.9 5.0 4.4 3.9 3.3 Age struectura. (p3rcent) 0-7.1 45.8 46.2 42.0 39.0 28.0 15,6L 50.9 50.1 55.0- 56.0 t4.0 65 and over -3.3 3.7 4.0 5.0 8.0 Denritideucy ratio Ab 0.96 1.0 0.8 1.2 0.8 Urban population as percent of total 51.0 59.0 56.0 74.0 5.0 Family plannings N4o. of acceptors cumulative (thous.) No. of users (% of married women) WR3WIXOE!1T Total labor force (thousands) 11,330 13,100 29,545 3,190 9,600 Plercentage employed in agriculture 51 39 44 26 52 Percentage unermployed ;. 3.7 2.4 5.2 7.1 INCOME DrSTRIBUTION Parcent of national incomea received by highest 5% 38 36 Percent of nationial income received by highest 20% 64 64 Fercent of r.ational incnne receivod byvlowest.20% 6 6 Perce:nt ot national income received by lowest 40% 26 24 DISTRIBSUT011 0 LAtND OWNERSHTP %i ow,ed oy top 30% of ownera .. 37..1 % owned by snl3lest 10% of owners .. 0.3 iF.ALTiH AND NUTRITION- Population per physician 1,800 1,852 1,953 1,730 1,000 Populati:n per r.ursing person 6,565 5,250 2,940 2,540 -790 P'opulation per bospital bed 570 S10 280 280 1i0 Per Capita calorie supply -as of requirements /5 98 120 96 102 125 Per capit3 protein supply, total (gram! per dayrT * 85 63 66 92 Of which, animal and pulse .. .. 41 32 29 Death rate 1-b years /7 13.8 8.9 .. 3.3 2.6 EDUCAT IO'1 Adju3t-3d /8 pritnary school enrollmont ratio 54 71 96 89 94 Adjusted 7 secondary school enrollment ratio 12 19 19 35 45 Years of schooling provided, first and second level 12 12 13 12 12 Vocational enrollment as % of sec. school enrollment 23 24 17 31 59 Adult literacy rato % 62 84 68 90 85 HOUSING AvoraU.3 No. °f p,arsons per room (urban) 2.6 2.5 1.0 .. 4.1 Percent of occupied units withoiut piped water .68 51 45 ;. 63 Accoss ta electricity (as % of total population) .. 60 .. .. 98 Percent of tural population conn-3cted to electricity .. ... COK;5110`1011l JioWrecaivera per 1000 population 95 276 60 143 164 Passeinger cars par lh&3 population 15- 25 22 .18 35 Electric pow-.r conwu:mption (kwht p.c.) 340 525 451 745 1.140 Newsprint conr.umption p.c. kg ;r:r year 2.8 3.1 2.9 5.1 4.3 foftes: 1g:rr;r refvr either to the i,tv:it periods or to acco-.nt of erUvironi.e:italtempcrat;re, i'-sly w: ;¾tb, a:.d the latest yeart.. Latest pariolos 1,I'e: In principle to dtnLribution by age anti ccx of nat onal p, . .-atonrs. the years 1956-60 or 19fd-7C; tl;e J. .':t years in prin- Protein sta,iJards (recmireme. ts) for all r...: ,raoo os cotiab- cipia tn 1.()-O bwj 19/0. Crdy rij:i ic1i differenrt li:ihcI hy .,_D. iAn,rr.A c :.:c .rci'_.Arvl-: ir v tc fr a ! periu!s or leara are f--tnt,dci suparutuly. all nwa:nco of iO f':o:ms or t.1-a pr- :.,tn p, r . y , :nr.i, . i :.^ Thei Per Ctipt'.a t,P eati,:er- fnr y era other than 190 &nima,l and pir-e r:ol.rn, )f wtijc. 1O :.:ihn,:i I b. in- is at markot pricee, i,c,l1,tat thy 3ame conversion protein. Tno:ir utzn.d.,itt are .......t 1.: th.r, t .':.'! (.1 torhniq A as the 19/2 ..r Al : At'. sa. or. n total pro.'. :,; 2: i 23 .-'r- a , .0 L-i prr : 12 Averagn nurno,e of Ja.ghMer3 per w'.aimn or-rfnr:udctJve h-'nr:ec for the wrrld, r.,poato'l bJ 1'^ ill t.,e 1hi.J Wt.rld iv-... ego. Ssirvey. 2 Popul&tion growth rates are for LI- decade' erKlian t l 7 5o-c nt-dles have o-,Sryte' th-at. crade death rat's of children l%60 trjd 19;0. - ag,s I tl roufih L rmay i,s u.:rd an a first approY.J.iatlIarl( - lnl! of Ratio of unier 15 anid e5. aai over Age brAck,ts ,o rmalnutrition. thozea In la ro,r firne br-a:rkt rf a."-, l; tI ,:;, (:i,. /P1' Pe:-cnta,o t:rrol lr.l r-o *rresroindlnrj poprlation of schnol at|u FA.j r.!r:X tlD;l Fr'''': !'.:i.'.:t rv'- 1 d. ,- . -.c; lry ..:i_l.1'r n.1 ,. t,".vI I.a.-dct '.it'l.- a..................... ,l:J ANNTEX I .i~oI:'~ic p*'m~'rr~~~DAT'A Pago 2 or7 ra-e Aet,u-~l Pro,'1ected 1~f0- .195 - 1970 - 1973 - 9 (tO 320 RATrCDAL ACCOtINTS ~~~~ ~~~1%O -T5 'i 3'73 T -1-, 5 1./8 19 65 1970 5 19 78 .~. d. 2! 3-Year Av,,~u'e at lOh. 6O..1cc.IYx:,h.w;. Rates Averal-e Ardezial Growthi Fftes -A3, 1'. rc(..nt of GDY Gross Do'mestic Product 15,65t 22.i94 3. 37,o7 .16,?u 4 s~DTT T . 6. 3 .5 l99 o100 7 GaIns from Terms of Trade ___ 17 -43 2 79 135 249 . .. . .1 0.0 0.5 Cross D,.>mwstic Income 15,668 22251 30,769 =,845 4rTS S 5U-TC-O 7 .2 6. 63 6.6 TUT)70 T0070 TUO70 Im.ports(incl. NYS) 1,822 2.125 3.076 3,934 4,616. 5,607 3.4 7.7 8.1, 7 .5 11.6 10.0 11.1 E-xpor-ts - (import canpzity) I_679 -197 2.624 3. 32 7 3.914 4,995 3.4 5.9 8.2 8.6 10.7 8.5 9.9 Bcrource Gap 143 147 4+52 -607 76t ~ 1 . 79 -r--s75 -'72 Consumption Rxpentiltures 12,897 17,791 24,978 29,9i6 33,7$5 40,699 6.5 7.1 6.7 6.4 82.3 81.0 80.4 Investment ' (minF. stocks). 2,,914 4,608 6,293 7,536. 8,778 10,533 10.2 6.6 6.5 7.1 18.6 20.5 20.8 Domestic Savings 2,771 4,461 5,841 6,929 8,095 9,971 10.2 5.7 6.4 7.6 17.7 19.0 19.6 National Savinges 2,701 4,278 5,527- 6,,521 7,55,4 9,162 9.8 5.4 6.5 7.2 17.2 17.9 19.0 NYRCIWTIANIIS TRADE Annual Data at Current Ilrices As Percent of 1~: i Imports564 Capital. Goods 710.4 1 ,13'.8 1,334.0 1,754.2 2.363.9 4.7 9.2 8.6 11.1 47.2 46.1 45.7 Fuels end intermediate goods 404.0 55nl.7 .797.9 900.0 1,135.0 1,731.9 6.2 7.3 7.0 12.6 214.1 33.4 3 3. 5 Conskvnitlion Goo>ds _?_2 . I 21L-5. __.52&.L ~ 7nflJ.O I.)_,9L~0L,.2 5.9 11.1 8.7 8.5 US.j -2.L5 ..ZLIL Total 17rClj. Imp..rts (elf) 1,186.5 1,559.6 2,460.8 2,937.0 3,712.1 5.177.1 6.0 9.0 8.1 11.0 100.0 100.0 100.0 Exports Pri:nery Products - 569.1 850.0 921.3 1,156.7 1,358.5 1,677.5 7.7 1.6 7.7 7.3 77.0 67.1 47.3 Manufactured GoodIs 165.,6 ZQii9 's1L7 __...863_.6 1, 195. 11,868.8 8.7 15.7 18.0 14.7 23.03 32.9 52.7 Total 2.'ercli. Exports (fob) 738.7 1,113.9 1,373.0O 2,020.3 2 .553 .6 3,546.3 8.1 4.7 12.0 11.0 100.0 100.0 100.0 Merchandise Trade Indices- Avrg 1, 7-69 - 100 LExpo;rt Price Index 83.1 928 15. 118.5 125.6 137.1 2.2 2.6 3.6 2.9 Import Price index 80.7 9 7. 7 105.2 11 3. 5 118.0 175.3 3.9 1.4 2.3 2.0 Terms of TPrcde Index 103.0 95.0 100.3 104.5 . 106.4 109.'t .1.6 1.1 1.2 0.9 Exports Volume Index 70.1 85.2 110.5 . 137.0 160.2 200.1 4.0 4.4 7. 7 7.8 VATM.J ADDFD BY SECTOR Annual. Data at 1967-69 Prices and Exchanre, Rates Averae.e Annual Growth Bates As Percent of T'otal Agriculture 2,506 3,201 3,509 3,636 3,820 4,114 5.0 1.9 1;7 2.5 15.9 11.3 8.2 lndlustry and Mining 4,602 6,914 10,466 13,148 15,753 19,167 8.5 8.6 7.8 7.8 29.2 33.7 38.1 Service _P_ 5 2 12,l16 17.081 1L9.941 22.660 26.988 7.0 7.1 5.8 6.2 54.9 55.0 53.7 TotaLl 15,760 22,232 31,057 36,725 4-1,7 33 50-,2 69 7.1 6.9 6.1 6.5 10. 100.o YO0 160-0. PJTBLTC FTlIANCE As Percent of GDP (Central 5overoment) Cuirrent Receipts .. 1,636 2,668 3,302 . . .. 9.6 11.1 7. .4 8.6 Current Expendi tures .. 907 -1.42 9 703 .9 6. 8 . 41 4.6 laidgetary Savings . 729 1,239 597 . . .. 10. 5 - 3. 3 4.0 Other Public Sector . 327 .296 -145 . .. -1.9 8.1 .. 15/ 1.0 Public Sector Invostmsent ... 1,267 1,903 2,224 . .. 8.0 12.3 . 5.7 - 6. 2 US milo CURRENT EF-KiVDIT'JRhE DETAILS Actual Preim.s Est. Proj. DETAIL o:N At end of 19601- sd FR Ts , Ttl Current F.xoend.)1 --T --- 97T 1971 1972 3973 PUBLIC SECTOR- ofcTi Education T3T16 T3T .. .. I1IYSTt*C-:!T PNffAM (90 - 1970)` Other Social Services 16.0 17.0 .. . .Social Sectors 2,600 23.9 Agriculture 5.0 8.0 .. . .Agriculture 1,200 10.9 Other !.conomic Services 36.0 31.0 . . . Industry, MUining and AdimAnistration and Defenae 31.0 32.0 .. . .Power 4,200 38.2 Othtr . . . .Transport and coznsumunicatiornc 2,700 24.7 Total Current Expe.nditures 100.0 . 100.0 Other 200 2.1 ______________________________________________________________________ ________ Totaltal Fxpenpenditures = 1,=0 SELECTED !NDICATO?S 1960- 1965- 1970- 1973- fII1aNCINS (Calculat.~d from 3-yea-r averaged data) 3965 1970 1975 1978 Average ICOR ITST S-6 574Y 374W5 Putli1c S-.ctor Savings 5,731 52.1 2..'pcrt. Elasitieity 0.39 1.18 1.40 1.15 lnternul 2,244 20.4 ?hreinal Dlmsentic Savings Ratea 0.26 0.16 0.20 0.22 External 3,025 27.5 Marginal Nstional Savinigs Rate 0.24 0.15 0.19 * 0.20 Total Financing =1,a1 T0~, LABOR FORiCE ANID ____ 'otal Trabtor Force _____Velue Addx:d 1'er Work,or }]9 60- Pri',ss 0, Fxe.1 OLPTRIT P'11 WjiRKtG Im Mil. .oT --a 6of - 70r -An U.S.1o1I J60 -- F7fAv-.rnS 19-60 1970 .l16Q 1_)70. rrcwth tt 3'60 ]VPO 59 60 1.19 70 Growth f;qte Agriculture 5.4 5.1 50.5 39.2 0.6 354.2 541.0 31.3 29.5 0.5 lndluctry 2.1 3.0 19.6 23.1 3.5 1,670.8 2,748.3 147.6 150.0 4,9 ie-rvice 3.2 4.9 29.0 3 7 .7 4.? 2,070.8 2,622.6 182.9 14-3.2 2.4. TOtal. 10.7 13.0 1000 100U.0 2.0 1T37i.2 I ITYW,6 1 0U0T~ r0970- ...ot a1['l1c~~~.b) C - nil !,~~107T 1/ 1965. )Qt available .. less t1imu afljf the smallest .,t,lt. shown L_ _ 5 r S g . o. J14 X S -IZ I _ ' > J 0wF oio-- ^ e- <  -1 ^ <"" .., ._, _, _ .r ^ i Z t ° s > ty ° , el, sl  |>| ^  s 4, e or S° - " sCt  O: - 2 ! _ ! 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