Updated Project Information Document (PID)Report No: AB296

Project Name MEXICO - Irrigation and Drainage Modernization ProjectRegion Latin America and Caribbean RegionSector Irrigation and drainage (100%)Theme Rural services and infrastructure (P); Water resource management (P)Project P035752

Borrower(s) NACIONAL FINANCIERA S.N.C. (NAFIN)Implementing Agency(ies) COMISION NACIONAL DEL AGUA (CNA)

Comision Nacional de Agua (CNA)Address: Av. Insurgentes Sur No. 1960, Col. Florida Mexico, 01050 D.F.Contact Person: Ing. Jorge Lorda/Ing. Raul Deschamps DiazTel: 52591592414 Fax: Email: jorge.Iorda@cna.gob.mx,rdeschamps@sgp.cna.gob.mx

Environment Category B (Partial Assessment)Date PID Prepared September 8, 2003Auth Appr/Negs Date September 5, 2003Bank Approval Date December 9, 2003

1. Country and Sector BackgroundAlthough the agricultural sector in general, and the irrigation sector in particular, has been subject todrastic structural reforms during the 1990s (e.g., trade liberalization, elimination of most priceinterventions, constitutional reforms of land tenure, transfer of large parts of the country's irrigationinfrastructure to water users), the sector's performance has been below its potential. In particular, thecompetitiveness of irrigated agriculture continues to be constrained by the low level of technlology ofirrigated agriculture and lack of modernization of its irrigation infrastructure, which have resulted in lowproductivity in the irrigation sector and poses a major policy challenge, given that the NAFTA agreementwill put the sector in open competition with producers from Canada and the United States as of 2008.

Additionally, as the economy develops, the competition for water resources will continue to increasecreating development constraints and leading to potential inter-sectoral conflicts. With agriculture as themain user of water resources, increased efficiency in water use in the sector will be an essential element toease future water constraints in the economy.

In recent years, the Government of Mexico has been adopting a number of initiatives to deal with thesector's issues. In 2001, it enacted a new Rural Development Law that provides the framework for futurepolicy and institutional interventions. Subsequently, it approved a Rural Sector Development Plan thatemphasizes, among others, competitiveness, on-farm and off-farm employment generation and regionaldevelopment. Regarding specifically the irrigation sector, the National Hydraulic Plan (2001-2006)promotes the integrated management of the natural resources, of which water is considered a strategicresource, as means to achieve sustainable development in Mexico. Furthermore, the watershed is viewed asthe basic water management unit and participation of water users in the decision making process is a keyelement of the new water resources management strategy. Within this framework, and consistent withgrowing budgetary constraints, the government is adopting measures to increase the efficiency in the use ofwater in agriculture; promote the sustainable management and development of water resources; improve theproductivity of irrigated agriculture; and complete the transfer of responsibility for operation, maintenanceand management of irrigation infrastructure to water users.

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2PID

In 1996, the Government launched a national agricultural and rural development program (Alianza para elCampo) to increase capitalization in the agricultural sector, with the aim of promoting improvedagricultural productivity and increased farmers' income. It fosters agricultural productivity by promotingproductive investment (under a matching-grant scheme) and providing more effective support services(research, extension, information, training) for a wide range of agricultural sub-programs. Under the newAdministration, the program has been reformed, its is now called Alianza Contigo and, under the presentOperational Rules (dated January 2003), the number of different sub-programs through which resourcesare channeled to farmers has been reduced to seven. From the perspective of PMI4R, the most relevantsub-program is the Promotion of Crops (PFA), which is the only one that supports activities related toirrigated agriculture. The PFA is roughly divided into 4 lines of activity, including investment and capitalbuilding, development of human resources, strengthening of agro-industrial productive chains, andtechnology generation and transfer. Within the first line of activity a special chapter supports integratedsoils and water management practices (MISA). Through MISA, the Government provides support forimproved management, rehabilitation and conservation of soil and water resources, and for development ofmodem irrigation systems. The cornerstone of the Alianza program, however, remains its decentralizedapproach, with a delegation of administration and decision-making to the States. The program continues tooffer the opportunity and the operational mechanism to implement a decentralized, demand-driven approachto channel technical and financial assistance directly to small farmers.

2. ObjectivesThe Project's main objective is to assist the Government of Mexico in its efforts to adopt a new model toimprove the competitiveness of irrigated agriculture and the efficiency of irrigation water use, in bothIrrigation Districts (Distritos de Riego, DR) and Irrigation Units (Unidades de Riego, UR), that wouldinclude the development of partnerships between the public and private sectors as well as effectiveinstitutional collaboration within the public sector, plus the strengthening of a demand-driven approach toinvestment decisions and financing. Specifically, the main objective would be achieved through: (i) themodernization of existing irrigation infrastructure to promote a more efficient use of irrigation water withinthe framework of Integrated Irrigation Investment Plans (IP); (ii) increased productivity of irrigatedagriculture and diversification into high-value crops; (iii) consolidation of the transfer of irrigationinfrastructure to water users; (iv) institutional strengthening of water users' organizations to enhance theirparticipation in the O&M of irrigation infrastructure as well as in investment decisions; and (v)establishment of a comprehensive monitoring and evaluation system.

3. Rationale for Bank's InvolvementThe World Bank has an extensive experience in irrigation development projects and has beenaccompanying irrigation development in Mexico for the last twenty years and is, therefore, well placed toassist the Government in its effort to adopt an integrated approach to improve the efficiency of irrigationinfrast-ucture and the competitiveness of irrigation agriculture. Bank participation in the project wouldcomplement central and State level government expertise, bringing lessons and insights from relatedprojects in other countries to ensure the design of an effective program of technical and financial assistanceto improve the efficiency and productivity of the irrigation sector, and secure the effective participation ofbeneficiaries in the design and execution of project-financed investment and activities. The Bank can fosteralso the development of a partnership between CNA and SAGARPA for the integrated development of theirrigation sector.

Furthermore, recent experiences with the implementation of World Bank-financed programs designed toprovide improved production equipment and technical assistance to farmers (ALCAMPO) and develop andimplement water resources management instruments and policies (PROMMA) would contribute also to abetter implementation of the proposed Irrigation Modernization Project.

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4. Description1. Modernization and Rehabilitation of Irrigation Infrastructure in DRs and URs, including rehabilitationof infrastructure works; purchase, conservation and repair of machinery and equipment.2. Diversification and Intensification of Irrigated Agricultural Production, including technical and financialassistance for the adoption of improved irrigation and farming technologies and equipment, and promotionof improved marketing systems and sustainable farm development.3. Institutional Development, including support to improve O&M of transferred irrigation infrastructure, topromote the establishment of new service providers, strengthening of water users' associations andexecuting agencies, both at the central and regional levels.4. Project Management, including the Project Coordinating Unit and support for the development andoperation of the Monitoring and Evaluation System.

5. FinancingSource (Total ( US$m))BORROWER ($140.00)IBRD ($300.00)Total Project Cost: $440.00

6. ImplementationThe project's Executing Agency will be CNA, which will establish a Project Coordinating Unit (PCU),within its General Irrigation Infrastructure Sub-Division (Subdirecci6n General de InfraestructuraHidroagricola, SGIH), that will coordinate project activities. CNA would have the main responsibility overthe execution of both the irrigation infrastructure rehabilitation and modernization component, and thediversification and intensification of irrigated agricultural production component. SAGARPA, on the otherhand, by establishing a Coordinated Operations Agreement with CNA, would support the project'sagricultural production diversification and intensification activities through its on-going Alianza programs,in particular through its MISA sub-program.

Project investments are expected to be demand driven, with decisions regarding investment projects to befinanced and investment priorities being made by water users' associations, with the assistance of CNA,within the framework of the IP that would be prepared, with active beneficiary participation, in each of theof the Irrigation Districts and Irrigation Units in which project activities would be implemented.

The proposed project execution would be decentralized, with a strong participation of producers and localauthorities in the decision making process. Coordination of project activities at the field level would beachieved through the participatory execution of IPs. Most project activities (Components 1 and 2) would becarried out by farmers directly, with financing shared by public and private resources. Allocation of publicfunding would be made by CNA, which would be responsible for reviewing investment proposals andauthorizing funds, through either its own budgetary resources or the relevant programs of the existingAlianza Contigo Program (PAC) . As in the ongoing projects, financial resources would be channeled tobeneficiaries through the State Trust Funds (Fideicomisos), to which State-level governments willcontribute financial resources according to their development priorities.

A Project Monitoring and Evaluation System, that would be managed by the PCU, will be designed beforeproject negotiations. This system would be based on the indicators for project monitoring mentioned inAnnex 2, would identify the baseline to be defined during the first year of project execution, and wouldindicate the frequency of monitoring as well as the contents and frequency of evaluation reports.

4PID

7. SustainabilityThe transfer of irrigation infrastructure to water users' associations, which includes also the transfer ofO&M responsibilities, together with measures to ensure the financial sustainability of these associations,would guarantee the sustainability of project investment. Furthermore, increased competitiveness ofirrigated agricultural sector, would contribute also to a sustainable development of the irrigation sector.

8. Lessons learned from past operations in the country/sectorSeveral important lessons have been either learned or reinforced by the experience of other projectsimplementation, in particular, that of Irrigation and Drainage Sector Project ("Time Slice") and On-Farmand Minor Irrigation Project ("PRODEP").

i. While both World Bank-financed projects made progress in the rehabilitation andmodernization of the country's irrigation infrastructure, their achievements were less thansatisfactory when it came to improvements in the productivity of irrigated agriculture anddiversification towards higher value crops, thus indicating the need to establish a close linkbetween actions oriented to infrastructure improvements and those aiming at productionimprovements.

ii. The country's experience with the transfer of irrigation infrastructure to water users hasbeen positive and should be consolidated. This positive experience has resulted not only in betterand less costly O&M of irrigation infrastructure, but also in a reduction in the governmentbudgetary contribution to the irrigation sector.

iii. There is great advantage in including potential beneficiaries in the decision-making processregarding infrastructure investment and other project activities. Their involvement provides notonly "ownership" of the proposed sub-projects, and contributes to the viability and sustainability ofinvestment, but results also in better targeted projects and activities that respond to the real needsof beneficiaries. In this context, institutional strengthening of water users' association becomes anessential part of any irrigation modemization project.

iv. Technical assistance in the selection of appropriate technology, with irrigation farmers'participation, become important elements in a program aiming at improved competitiveness ofirrigated crops.

v. In any future irrigation development agenda: (a) the sector would benefit from a moredecisive decentralization of CNA, both to the States and to water users' associations; b) thedevelopment of a mechanism to monitor performance and a benchmarking system could improveaccountability in a service that is a natural monopoly; and (c) the issues of the availability of waterresources, and environmental issues should be incorporated as primary elements of any program.

9. Environment Aspects (including any public consultation)Issues : The project seeks to improve agricultural productivity and encourage the adoption of

rational water use in existing irrigation schemes (districts), in which the development ofenvironmentally-sustainable production systems will be promoted. Since project components and activitieswill be oriented towards supporting integrated investment plans that would only include rehabilitation ofexisting infrastructure, and construction of new infrastructure is not foreseen, the combined effects of thesetwo features lead to the conclusion that no significant negative environmental impacts from projectactivities can be envisaged. Furthermore, improved management of irrigation water will reduce waterlogging and soil salinity, with the consequent positive environmental impact.

5PID

The project implementing agency will be CNA, which has more than 15 years of experience working withthe Bank in irrigation and water resources management development projects for Mexico. This longexperience has allowed the Bank to recognize CNA as an institution with adequate environmental standardsand regulations, which are critical to secure compliance with the Bank's environmental and socialsafeguard policies.

The environmental assessment work for this project was conducted in two stages. The first, the SectoralEnvironmental Assessment (SEA), has been completed as part of project preparation. Details of the SEAare described in section 5.2. The second stage is the Environmental Assessment (EA) of each subproject tobe financed by the project, which will be prepared during project implementation at the Irrigation District,Irrigation Unit, or sub-project module level, as part of the process for the subproject formulation andapproval. These subproject EAs will assess specific potential environmental impacts (related to waterquality and quantity, possible effects on wetlands, pest management, etc.) and will describe thecorresponding mitigation or enhancement measures (including budget, schedule, implementationresponsibilities, and monitoring of compliance and outcomes); these environmental measures will beincorporated in the respective Investment Irrigation Management Plans.

10. List of factual technical documents:

11. Contact Point:

Task ManagerMichael G. CarrollThe World Bank1818 H Street, NW

Washington D.C. 20433Telephone: 2024739528Fax: 2025220262

12. For information on other project related documents contact:The InfoShopThe World Bank1818 H Street, NWWashington, D.C. 20433Telephone: (202) 458-5454Fax: (202) 522-1500Web: http:// www.worldbank.orgAinfoshop

Note: This is information on an evolving project. Certain components may not be necessarily includedin the final project.