Guarantee Agreement CONFORMED COPY LOAN NUMBER 1111 ME UNITED MEXICAN STATES INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT DATED MAY 22, 1975

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1 Public Disclosure Authorized LOAN NUMBER 1111 ME CONFORMED COPY Public Disclosure Authorized Guarantee Agreement (Seventh Irrigation Project - Bajo Rio Bravo and Bajo Rio San Juan) Public Disclosure Authorized BETWEEN UNITED MEXICAN STATES AND INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized DATED MAY 22, 1975

2 CONFORMED COPY LOAN NUMBER 1I11 ME Guarantee Agreement (Seventh Irrigation Project - Bajo Rio Bravo and Bajo Rio San Juan) BETWEEN UNITED MEXICAN STATES AND INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT DATED MAY 22, 1975

3 GUARANTEE AGREEMENT AGREEMENT, dated May 22, 1975, between UNITED MEXICAN STATES (hereinafter called the Guarantor) and INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (hereinafter called the Bank). WHEREAS by the Loan Agreement of even date herewith between the Bank and Nacional Financiera, S.A. (hereinafter called the Borrower) the Bank has agreed to make to the Borrower a loan in various currencies equivalent to one hundred fifty million dollars ($150,000,000), on the terms and conditions set forth in the Loan Agreement, but only on condition that the Guarantor undertake the obligations set forth in this Guarantee Agreement; and WHEREAS the Guarantor, in consideration of the Bank's entering into the Loan Agreement with the Borrower, has agreed to enter into this Guarantee Agreement; NOW THEREFORE the parties hereto hereby agree as follows: ARTICLE I General Conditions; Definitions Section The parties to this Agreement accept all the provisions of the General Conditions Applicable to Loan and Guarantee Agreements of the Bank dated March 15, 1974, with the same force and effect as if they were fully set forth herein (said General Conditions Applicable to Loan and Guarantee Agreements being hereinafter called the General Conditions). Section Wherever used in this Agreement, unless the context otherwise requires, the several terms defined in the General Conditions have the respective meanings therein set forth, and the term "peso " means the currency unit of the Guarantor. ARTICLE II Guarantee Section Without limitation or restriction upon any of its other obligations under this Guarantee Agreement, the Guarantor hereby unconditionally guarantees, as primary obligor and not as surety merely, the due and punctual

4 4 payment of the principal of, and interest and other charges on, the Loan, and the premium, if any, on the prepayment of the Loan, all as set forth in the Loan Agreement. ARTICLE HI Execution of the Project Section The Guarantor shall carry out and operate the Project described in Schedule 1 to this Guarantee Agreement, under the responsibility, supervision and control of its Secretaria de Recursos Hidrdulicos, with due diligence and efficiency and in conformity with sound engineering, agricultural, economic and financial practices, and shall provide, promptly as needed, the funds, facilities, services and other resources required for the purpose. Section The Guarantor shall carry out, or cause to be carried out, infiltration tests and water balance analyses for each section of the canals with a capacity greater than 50 m 3 /sec and to be included in the Project, to determine whether the water loss justifies the proposed concrete lining, and, until the results of such tests and analyses are available and on the basis thereof the proposed lining is justified, the Guarantor shall not issue tender documents to contract such work out. Section Except as the Bank shall otherwise agree, the goods, works, and services for the Project to be financed out of the proceeds of the Loan shall be procured or performed, respectively, in accordance with the provisions of Schedule 2 to this Guarantee Agreement. Section (a) The Guarantor shall furnish or cause to be furnished to the Bank, promptly upon their preparation, the plans, specifications, contract documents and work schedules for the Project, and any material modifications thereof or additions thereto, in such detail as the Bank shall reasonably request. (b) The Guarantor: (i) shall maintain or cause to be maintained records adequate to record the progress and cost of the Project, to identify the goods and services financed out of the proceeds of the Loan, to disclose the use thereof in the Project, to show the results achieved by irrigation of the land included in the Project, and to show the extent to which the investment, operation and maintenance costs of the irrigation facilities included in the Project have been recovered pursuant to the provisions of this Agreement; (ii) shall enable the Bank's accredited representatives to visit the facilities and construction sites included in the Project and to examine the goods financed out of the proceeds of the Loan and any relevant records and documents; and (iii) shall furnish or cause to be

5 5 furnished to the Bank all such information as the Bank shall reasonably request concerning the Project, the expenditure of the proceeds of the Loan and the goods, works and services financed out of such proceeds. Section Except as the Bank shall otherwise agree, the Guarantor shall cause all goods, works and services financed out of the proceeds of the Loan to be used exclusively for the Project. Section (a) The Guarantor shall formulate and carry out, or cause to be carried out, a seven-year program of technical assistance for the Bajo Rio Bravo and Bajo Rio San Juan Irrigation Districts which shall include agricultural research and provision of extension services to farmers in order to ensure therein good farming practices and to encourage crop diversification and livestock production. (b) For the purpose of carrying out such program and except as the Bank shall otherwise agree, the Guarantor shall, within six months after the date of this Agreement, make arrangements satisfactory to the Bank with the Guarantor's national agricultural research and extension institutions. Section The Guarantor shall cause all works, facilities and equipment included in the Project to be adequately maintained, repaired and renewed in accordance with sound engineering and agricultural standards and practices, and shall cause all dams, canals, structures and other works, facilities and equipment not included in the Project but necessary for the proper and efficient operation thereof to be operated and adequately maintained, repaired and renewed in accordance with such standards and practices. Section The Guarantor recognizes that in order to be able to make full productive use of their land and the Project facilities, farmers in the Project area must have access to short-, medium- and long-term agricultural credit, fertilizer and improved seeds, on reasonable terms. To this end, the Guarantor shall take all measures necessary to ensure that such credit, fertilizer and improved seeds will be made available in the Project area in the quantities and at the time required to fully utilize the other resources available. Section Except as the Bank shall otherwise agree, the Guarantor shall not allow any new development in the Rio Bravo Basin, other than the Project, that would reduce the amount of water available for irrigation utilizing the facilities included in the Project. Section (a) The Guarantor shall: (i) promptly after the irrigation works included in the Project shall have been completed in each unit of the Bajo Rio Bravo and Bajo Rio San Juan Irrigation Districts, carry out a socio-economic study

6 6 in such unit to determine, inter alia, the ability of water users to pay for the cost of irrigation; provided that all such socio-economic studies shall be completed not later than June 30, 1982, or such other date as shall be agreed by the Guarantor and the Bank; and (ii) periodically review such study with a view to revising such charges, if appropriate. (b) The Guarantor shall, promptly as each of the studies referred to in paragraph (a) hereof is completed, give the Bank a reasonable opportunity to comment on their conclusions and recommendations. (c) The Guarantor shall collect such water charges as shall be necessary to recover all the operating and maintenance costs of the irrigation facilities included in the Project, and, starting within five months after the completion of the above-mentioned socio-economic studies, as much as practicable of their investment costs, giving due regard to the ability of water users to pay and the need to maintain an incentive for them to make best use of the land and water available to them. Section The Guarantor shall: (i) maintain separate accounts to reflect in accordance with consistently maintained sound accounting practices the financial situation of the Project; (ii) cause such accounts to be audited annually, applying sound auditing principles, in conformity with the laws of the Guarantor; (iii) promptly make available to the Bank copies of such accounts, as so audited; and (iv) furnish to the Bank such other pertinent information concerning such accounts as the Bank shall reasonably request from time to time. ARTICLE IV Other Covenants Section (a) It is the policy of the Bank, in making loans to, or with the guarantee of, its members not to seek, in normal circumstances, special security from the member concerned but to ensure that no other external debt shall have priority over its loans in the allocation, realization or distribution of foreign exchange held under the control or for the benefit of such member. To that end, if any lien shall be created on any governmental assets (as hereinafter defined), as security for any external debt, which will or might result in a priority for the benefit of the creditor of such external debt in the allocation, realization or distribution of foreign exchange, such lien shall, unless the Bank shall otherwise agree, ipso facto and at no cost to the Bank, equally and ratably secure the principal of, and interest and other charges on, the Loan, and the Guarantor, in creating or permitting the creation of such lien, shall make express provision to that effect; provided, however, that, if for any constitutional or other legal reason such

7 7 provision cannot be made with respect to any lien created on assets of any of its political or administrative subdivisions, the Guarantor shall promptly and at no cost to the Bank secure the principal of, and interest and other charges on, the Loan by an equivalent lien on other governmental assets satisfactory to the Bank. (b) The foregoing undertaking shall not apply to: (i) any lien created on property, at the time of purchase thereof, solely as security for payment of the purchase price of such property; and (ii) any lien arising in the ordinary course of banking transactions and securing a debt maturing not more than one year after its date. (c) As used in this Section, the term "governmental assets" means assets of the Guarantor, of any of its political subdivisions, or of any agency; and the term "agency" means any agency or instrumentality of the Guarantor or of any political subdivision of the Guarantor and shall include any institution or organization which is owned or controlled directly or indirectly by the Guarantor or by any political subdivision of the Guarantor or the operations of which are conducted primarily in the interest of or for account of the Guarantor or any political subdivision of the Guarantor. Section The Guarantor shall, within seven months after the date of this Agreement or such other period as the Guarantor and the Bank shall agree, issue regulations to enforce Article 70 of the Guarantor's Ley Federal de Aguas, as required to establish and collect water charges to recover the cost of public investment in irrigation. ARTICLE V Representative of the Guarantor Section Nacional Financiera, S.A. is designated as representative of the Guarantor for the purposes of Section of the General Conditions. Section The Guarantor hereby agrees that all notices and requests given or made by the Bank to the Borrower shall be deemed to have been given or made also to the Guarantor. IN WITNESS WHEREOF, the parties hereto, acting through their representatives thereunto duly authorized, have caused this Agreement to be signed

8 8 in their respective names in the District of Columbia, United States of America, as of the day and year first above written. UNITED MEXICAN STATES By: NACIONAL FINANCIERA, S.A. By /s/ Leandro Rovirosa Wade Authorized Representative INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT By /s/ Adalbert Krieger Regional Vice President Latin America and the Caribbean

9 9 SCHEDULE 1 Description of the Project 1. The Project consists of the rehabilitation and improvement of the irrigation and drainage works and related facilities serving an area of about 280,000 hectares in the Bajo Rio Bravo and the Bajo Rio San Juan Irrigation Districts. 2. The main works included in the Project are: (a) Lining with concrete of about 3,215 kilometers of canals, and construction of necessary canal structures and water gauging stations; (b) Construction of about 1,300 kilometers of new drains and improvement of about 360 kilometers of existing drains, and construction of necessary drain structures and water gauging stations; (c) (d) Reconstruction and improvement to all weather standards of about 2,600 kilometers of roads; Land leveling on about 200,000 hectares; (e) Construction and improvement of office buildings for Project administration, and of about 230 houses for ditch riders and operating personnel; and (f) Installation of a radio network with about 250 stations to link all operating units. 3. Acquisition and installation of equipment for operation and maintenance purposes. 4. A program of technical assistance to farmers in both Irrigation Districts. Parts 1, 2 and 3 of the Project are expected to be completed by June 30, 1982.

10 10 SCHEDULE 2 Procurement A. General Procedures 1. Except as provided in Part A.3 hereof, contracts shall be let under procedures consistent with those set forth in the "Guidelines for Procurement under World Bank Loans and IDA Credits" published by the Bank in April 1972, as revised in October 1972 (hereinafter called the Guidelines), on the basis of international competitive bidding. 2. Subject to the provisions of paragraph 3 hereof, to the extent possible civil works shall be grouped into contracts having a value of not less than 20 million pesos each. 3. (a) The Guarantor may contract work under its ordinary procedures, provided that the value of each contract so awarded does not exceed two million pesos, and that the aggregate of all contracts so awarded does not exceed one hundred million pesos. (b) The Guarantor may award contracts for land levelling to organizations formed by farmers in the area, under the Guarantor's ordinary procedures. B. Review of Procurement Decisions by Bank 1. Review of invitation to bid and of final contracts: (a) Before bids are invited, the Guarantor shall furnish to the Bank, for its comments, the text of the invitations to bid and the specifications and other bidding documents, together with a description of the advertising procedures to be followed for the bidding, and shall make such modifications in the said documents or procedures as the Bank shall reasonably request in consultation with the Guarantor. Any further modification to the bidding documents shall require the Bank's concurrence before it is issued to the prospective bidders. Invitations to bid will provide for a period of at least 30 days for the submission of bids, except that in case firms not established in Mexico manifest their interest to bid, such period will be at least 45 days. (b) The terms and conditions of the contract shall not, without the Bank's concurrence, materially differ from those on which bids were asked or prequalification invited.

11 11 (c) Two conformed copies of the contract shall be furnished to the Bank promptly after its execution and prior to the submission to the Bank of the first application for withdrawal of funds from the Loan Account in respect of such contract.