Document of The World Bank FOR OFFICIAL USE ONLY...Secretaría de Medio Ambiente y Recursos...

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 72398-MX

PROJECT PAPER

ON A

PROPOSED ADDITIONAL FINANCING

IN THE AMOUNT OF US$50 MILLION

TO THE

UNITED MEXICAN STATES

FOR A

SUSTAINABLE RURAL DEVELOPMENT PROJECT

October 23, 2012

Sustainable Development Department Mexico and Colombia Country Management Unit Latin America and the Caribbean Region

This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank’s policy on Access to Information.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective October 10, 2012)

Currency Unit = Mexican Peso (MX$) US$ 1.00 = MX$ 13.22

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS AF AIF CONAGUA COP EMF FIRCO

Additional Financing Annual Implementation Plans National Water Commission (Comisión Nacional de Agua) Convention of the Parties Environmental Management Framework Fideicomiso de Riesgo Compartido

FM GEF

Financial Management Global Environment Facility

GEO GHG GiZ

Global Environment Objective Greenhouse Gas German Agency for Development

GOM Government of Mexico IBRD International Bank for Reconstruction and Development IPPF ISDS MTR

Indigenous Peoples Planning Framework Integrated Safeguards Data Sheet Mid-Term Review

NAFIN Nacional Financiera NSCC National Strategy on Climate Change (Estrategia Nacional de Cambio Climático) NDP National Development Plan (2007-2012) OM O&M PAD PDO PECC PEF PIP PIU SAGARPA SEMARNAT SHCP SURI UNFCCC

Operational Manual Operation and Maintenance Project Appraisal Document Project Development Objective Presidential Special Program for Climate Change (Programa Especial de Cambio Climático) Federal Expenditure Budget Project Implementation Plan Project Implementation Unit Ministry of Agriculture, Livestock Production, Rural Development, Fisheries and Food (Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca, y Alimentación) Ministry of Environment and Natural Resources (Secretaría de Medio Ambiente y Recursos Naturales) Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público) Unique System for Registering Information (Sistema Unico de Registro de Información) United Nations Framework Convention on Climate Change

Vice President: Hasan A. Tuluy

Country Director: Gloria M. Grandolini Sector Director: Ede Jorge Ijjasz- Vasquez Sector Manager: Laurent Msellati

Task Team Leader: Svetlana Edmeades

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MEXICO

MEXICO: Sustainable Rural Development Project Additional Financing

TABLE OF CONTENTS

Project Paper

I. Introduction ...................................................................................................................................... 1

II. Background and Rationale for Additional Financing ...................................................................... 1

Project Objectives ........................................................................................................................... 1

Project Background ......................................................................................................................... 3

Original Project Performance to Date ............................................................................................. 4

Rationale for Additional Financing ................................................................................................ 5

Alternatives Considered and Reasons for Rejection ....................................................................... 5

III. Proposed Changes ........................................................................................................................... 5

IV. Appraisal Summary ........................................................................................................................ 8

Annex 1: Revised Results Framework and Monitoring Indicators .................................................... 12

Annex 2: Operational Risk Assessment Framework (ORAF) ............................................................ 19

Annex 3: Revised Implementation Arrangements and Support ......................................................... 23

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DATA SHEET

Basic Information - Additional Financing (AF) Country Director: Gloria M. Grandolini Sector Manager: Laurent Msellati Team Leader: Svetlana Edmeades Project ID: P130623 Expected Effectiveness Date: February 28, 2013 Lending Instrument: Specific Investment Loan Additional Financing Type: Scale-up

Sectors: General agriculture, fishing and forestry sector (100%) Themes: Other rural development (70%); Other environment and natural resources management (30%) Environmental category: B – Partial Assessment Expected Closing Date: December 31, 2016

Basic Information - Original Project Project ID: P106261 Environmental category: B – Partial

Assessment Project Name: Mexico Sustainable Rural Development

Expected Closing Date: December 31, 2013

Lending Instrument: Specific Investment Loan Joint Level: GEF

AF Project Financing Data [X ] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: Proposed terms: IBRD Flexible Loan denominated in US Dollars for USD$ 50,000,000, with a variable spread, bullet repayment on November 1, 2024, all conversion options (currency, interest rate, and Caps/Collars), and capitalized Front-end Fee (paid from Loan proceeds).

AF Financing Plan (US$m) Source Total Amount (US $m)

Total Project Cost (US$m): Co-financing (US$m): Borrower (US$m): Beneficiaries (US$m): Total Bank Financing: IBRD

131.25 10.50

0 70.75 50.00

Client Information

iii

Borrower: The United Mexican States Responsible Agency: Secretaría de Agricultura, Ganadería, Pesca y Alimentación (SAGARPA)/ Fideicomiso de Riesgo Compartido (FIRCO) Contact Person: Ing. Rodrigo Diez de Sollano Elcoro Tel: (52-55) 5062-1200 Email: [email protected]

AF Estimated Disbursements (Bank FY/US$m) FY 2014 2015 2016 Annual 18.0 22.0 10.0 Cumulative 18.0 40.0 50.0

Project Development Objective and Description Original project development objective: The project development objective is to promote the adoption of environmentally sustainable technologies in agri-businesses. Revised project development objective: N/A Project description: Component 1 - Environmentally Sustainable Technologies in Agri-Businesses; Component 2 – Investment and Production Support Services; Component 3 - Institutional Strengthening; and Component 4 - Project Management, Monitoring and Evaluation.

Safeguard and Exception to Policies Safeguard policies triggered: Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Forests (OP/BP 4.36) Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Indigenous Peoples (OP/BP 4.10) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP/BP 4.37) Projects on International Waterways (OP/BP 7.50) Projects in Disputed Areas (OP/BP 7.60)

[X]Yes [ ] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [X]Yes [ ] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No [ ]Yes [X] No

Is approval of any policy waiver sought from the Board (or MD if RETF operation is RVP approved)? Has this been endorsed by Bank Management? (Only applies to Board approved operations) Does the project require any exception to Bank policy? Has this been approved by Bank Management?

[ ]Yes [X] No

[ ]Yes [ ] No

[ ]Yes [X] No [ ]Yes [ ] No

Specific Conditions and Legal Covenants

mailto:[email protected]

iv

Loan Agreement Reference

Description of Condition/ Covenant

Date Due

Additional Conditions of Effectiveness Article V

Section 5.01 The Contrato de Mandato has been duly executed by the parties thereto.

Ninety (90) days after the date of this Agreement, but in no case later than the eighteen (18) months after the Bank’s approval of the Loan

Article V Section 5.02

The Additional Legal Matter consists that, the Borrower (in its legal opinion), NAFIN (in a separate legal opinion satisfactory to the Bank issued by NAFIN counsel acceptable to the Bank) and FIRCO (in separate legal opinion satisfactory to the Bank issued by FIRCO counsel acceptable to the Bank) represent that the Contrato de Mandato has been duly authorized or ratified by, and executed and delivered on behalf of, the Borrower, NAFIN and FIRCO and is legally binding upon the Borrower, NAFIN and FIRCO in accordance with the Contrato de Mandato’s terms.

Ninety (90) days after the date of this Agreement, but in no case later than the eighteen (18) months after the Bank’s approval of the Loan

Covenants

Section I.A.4 of Schedule 2

Prior to the disbursement of an Agri-business Grant, the Borrower shall cause FIRCO to enter into a sub-project agreement with a Beneficiary for the financing of an Agri-business Sub-project, under terms and conditions acceptable to the Bank as outlined in the Operational Manual (the “Sub-project Grant Agreement”)

Throughout the implementation of the Project

Section I.D. of Schedule 2

Without limitation upon the provisions of Section I.A.1 of this Schedule, the Borrower shall cause FIRCO to carry out the Project in accordance with the provisions of the Environmental Management Framework and/or the Indigenous Peoples Planning Framework.

Throughout the implementation of the Project

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I. INTRODUCTION 1. This Project Paper seeks the approval of the Executive Directors to provide an additional

loan in the amount of US$ 50 million to The United Mexican States for the Sustainable Rural Development Project (P106261).

2. The financing for the original project consists of a blend of US$ 50 million IBRD Loan from

the Bank and US$ 10.5 million Grant from the Global Environment Facility (GEF). The original project was approved on May 14, 2009, declared effective on January 29, 2010 and closes on December 31, 2013.

3. Additional Financing Loan: The proposed additional financing for the period from January

2014 to December 2016 would help finance the costs associated with scaling-up activities to enhance the coverage and impact of this well-performing project. The project has Satisfactory performance ratings for progress towards achieving development objectives and overall implementation. The additional loan would not require any changes to project objectives, components and/or overall design. All additional loan funds will be used for scaling-up sub-project investments and will be included under Component 1 (Environmentally Sustainable Technologies in Agri-Businesses).

4. Original Project (Level 2) Restructuring: Complementary modifications to the original

project would include: (i) a three-year extension of the closing date of the GEF portion of this blended project (December 31, 2013 - December 31, 2016), coinciding with the proposed three-year implementation period of the additional loan, (ii) revision of final targets of result indicators to adequately reflect the impacts of scaling-up, (iii) reallocation of funds from disbursement Category 1 to Category 2 of the original Loan Agreement, following a request by the Government of Mexico substantiated by the fact that funding for activities in Category 1 is now provided directly from the budget of the Ministry of Agriculture, Livestock Production, Rural Development, Fisheries, and Food (SAGARPA).

II. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING

PROJECT OBJECTIVES

5. The Project Development Objective (PDO) is to promote the adoption of environmentally sustainable technologies in agri-businesses. The Global Environmental Objective (GEO) is to contribute to the goals of the National Strategy on Climate Change (NSCC) by reducing Greenhouse Gas (GHG) emissions in the agricultural sector through the adoption of emission reduction technologies and support to the implementation of the President’s Special Program for Climate Change (PECC), with emphasis on the improved environmental sustainability of small and medium-sized agri-businesses.

6. The project is assisting the Government of Mexico (GOM) to develop policies and regulatory frameworks that strengthen the contribution of the agricultural sector in achieving Mexico’s mitigation goals under the Kyoto Protocol. Through blended financing from IBRD and GEF,

2

Government counterpart funds, beneficiaries’ contributions, and potentially carbon financing through voluntary carbon markets, the project objective will be achieved through: (i) promoting increased private investment in energy efficiency practices and renewable energy sources in existing small and medium-scale agri-business; (ii) increasing sustainable conversion of biomass into energy; and (iii) strengthening SAGARPA’s institutional capacity to effectively address the agricultural sector’s impact on climate change. The project is being implemented through four components:

7. Component 1: Environmentally Sustainable Technologies in Agri-Businesses. (Total

US$271.79 million of which US$46.58 million is IBRD financing (original loan), US$50.00 million is IBRD additional financing and US$4.79 million is provided by the GEF) Promotion of the adoption of environmentally sustainable technologies in agri-business operating at the various stages of the production chain of agricultural products, including, inter alia: (a) Modernization and rehabilitation of small and medium-sized agri-businesses to

improve their environmental sustainability, with particular emphasis on energy consumption efficiency and/or renewable energy; and

(b) Promotion of sustainable waste management and biomass conversion with potential use as energy.

8. Component 2: Investment and Production Support Services. (Total US$10.91 million of

which US$3.30 million is IBRD financing and US$1.73 million is provided by the GEF) Provision of technical assistance and training to Beneficiaries for: (a) The preparation of investment business plans that would subsequently be submitted

for Agri-business Sub-projects; and (b) The implementation of Agri-business Sub-projects, with special reference to

integration of energy efficient production and processing technologies in farms and agri-businesses.

9. Component 3: Institutional Strengthening. (Total US$3.59 million of which US$2.93 million

is provided by the GEF; no IBRD financing) Provision of technical assistance, training and equipment to: (a) Strengthen the institutional capacity of SAGARPA and its FIRCO to, inter alia:

address climate change and environmental issues in the agricultural sector, assist in Project promotion and implementation and share lessons learned from Project implementation; and

(b) Establish and operate pilot projects to demonstrate and validate energy efficient technologies.

10. Component 4: Project Management, Monitoring and Evaluation. (Total US$2.45 million of

which US$0.95 million would be funded by the GEF; no IBRD financing) Provision of technical assistance, training and equipment (as necessary) for, inter alia: (a) The development and operation of a Project monitoring and evaluation system; and (b) The strengthening of the Implementation Team in order to comply with its Project

management and implementation responsibilities.

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PROJECT BACKGROUND

11. The project’s Implementing Agency is FIRCO (Fideicomiso de Riesgo Compartido), a semi-autonomous entity (entidad paraestatal) within SAGARPA (Ministry of Agriculture, Livestock Production, Rural Development, Fisheries and Food). The project builds on a successful 15-year engagement of the Bank with SAGARPA and FIRCO in the promotion of renewable energy in rural areas and within the context of the broader Bank engagement with the Government of Mexico (GOM) in climate change and green and inclusive growth (Figure 1).

Figure 1. Stages of Climate Change and Green and Inclusive Growth Engagement in Mexico

12. Following a series of initial operational difficulties (related to changes in Mexican legal

dispositions regarding the role of NAFIN as a financial intermediary) that resulted in slow implementation progress until mid-2011, the project is now showing significant physical and financial progress. This has resulted in a consistent Satisfactory performance rating for the past 12 months (for progress towards achieving PDO and GEO), and the achievement of

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50.86% disbursement of IBRD loan funds and 13.04% disbursement of GEF grant to date. The project is now on track to achieve its objectives and targets and is producing examples of innovation in agri-business. Furthermore, current projections suggest that by the end of 2012, 74% of current loan funds will be disbursed, well on track to achieve 100% disbursement by the closing date of December 31, 2013 of the original loan.

ORIGINAL PROJECT PERFORMANCE TO DATE

13. The Bank recently conducted the Mid-Term Review (MTR) of the project (June 2012). The review was based on a comprehensive assessment of project performance by a team of independent consultants, as well as detailed technical and operational discussions between the Bank and FIRCO teams. The MTR concluded that (i) the project is well on target to meet its PDO and GEO; (ii) most mid-project targets have been met or surpassed; and (iii) considerable demand exists in the agri-business sector for the technical and financial support provided by FIRCO with project resources.

14. More specifically, the main elements that support the MTR assessment are the high number

of sub-projects under implementation involving renewable energy, biomass utilization, and energy efficiency investments (a total of 770 sub-projects, including over 400 biodigestors, representing almost 80% of the agreed original project target). Furthermore, the MTR highlighted the significant contribution that the project is making to promote the use of clean, agro-environmentally friendly practices among producers and agro-industries in Mexico, mainly benefiting livestock production and processing facilities. Evidence of these contributions to climate change mitigation is the reduction to date of almost 600,000 tons of CO2 emissions equivalent (70% of project target).

15. Further to the progress in the project’s primary performance indicator (number of sub-

projects), the positive results of the project are also supported by (i) the quality and impact of sub-projects financed through the project; (ii) the framework promoted by FIRCO that now allows producers in certain states to sell surplus electricity generated from biogas to the utilities; and (iii) the substantial co-benefits experienced by project beneficiaries as a result of the support provided, in terms of agri-business’ overall reduced environmental footprint (soil, water, and air pollution), financial gains, and other social benefits.

16. The MTR also identified a series of opportunities that would further enhance the results and

impact of the project. These include expanding the “menu” of types of biomass utilization and energy efficiency sub-projects to be supported, providing specialized technical assistance to beneficiaries (mainly on O&M of sub-projects), identifying strategic public and private sector partners to promote and disseminate project results, supporting the development of new technologies, enhancing the generation and collection of information based on the sub-projects (economic and financial, as well as assessment of co-benefits through case studies), and increasing project activities related to training and communication.

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RATIONALE FOR ADDITIONAL FINANCING

17. On August 1, 2012, the Bank received a formal request by the GOM’s Ministry of Finance and Public Credit (SHCP) for additional funding for the project, endorsing SAGARPA’s desire to provide continuity to project activities through Bank financing. This request is based on (i) SAGARPA’s priorities in promoting energy efficiency through investments in sources of renewable energy, (ii) clear evidence of increasing demand by producers and agri-businesses for the innovative technologies promoted by the project, and (iii) the results of the Bank’s MTR, which confirmed satisfactory implementation of the project.

18. Given the increasing demand for technical and financial support for renewable energy

technologies, combined with the fact that the original IBRD loan funds are fully committed and expected to be 100% disbursed by the closing date of the original project (December 31, 2013), an AF is the most appropriate instrument for scaling-up project activities. An AF would also ensure continuity and stability of project interventions, avoiding operational disruptions in the implementation of the program as a result of demand for scaling-up ongoing activities at the national level, which have proven to be successful and are desirable during a transition period of Government administrations.

19. The allocation of AF to the project would also provide continuity to the current blend of loan

funds with GEF resources, a key element of the original project design. GEF funds would extend the effective blending of investment and technical assistance activities during the implementation period of the AF, instrumental to further strengthening FIRCO’s capacity to promote energy efficiency public policies and programs, the development of appropriate technologies, and the sustainable adoption of such technologies at the farm level.

ALTERNATIVES CONSIDERED AND REASONS FOR REJECTION

20. The main alternative considered was the processing of a new follow-up operation (i.e. repeater project). Although this alternative would have provided a longer implementation period, the option of scaling-up project activities through AF was selected, given that (i) all new activities proposed to be added were fully consistent with the objectives and components of the original project; and (ii) the AF would allow FIRCO to respond more rapidly and effectively to the demand for additional assistance, due to the shortened preparation time and considering that all remaining funds from the original project are fully committed.

III. PROPOSED CHANGES 21. The AF would support activities that scale-up the project’s coverage enhancing impact and

development effectiveness. As such, the additional loan would increase the allocation of funds to Component 1 of the original project (Environmentally Sustainable Technologies in Agri-Businesses), and would be delivered by the same institutional and operational arrangements currently in place. As the original project covers the entire country, increased coverage will mainly translate in the scaling-up of the most successful technologies supported to date to a larger number of beneficiaries (existent and new agribusinesses), and the promotion of similar technologies to other subsectors and applications.

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22. Specific technologies to be supported include the installation of solar water heaters for post-

harvest and processing of agricultural products, the construction and operation of biodigestors to generate gas from animal waste in intensive dairy and pig operations, and the installation of specialized generators to convert gas from biodigestors into electricity. In addition, the AF would allow the project to expand the adoption of these energy-efficient technologies to: (i) other subsectors (poultry production, meat processing, utilization of by-products from fruit and vegetable processing, etc.), and (ii) other applications (chillers, refrigeration, cold storage, water pumping, etc.). During the implementation of the AF, the project would also validate and promote the utilization of alternative forms of solar and biomass utilization such as solar farms and the development of energy-related clusters of producers and processors. The project would also continue to support initiatives aimed at the improvement of the regulatory framework and technologies for co-generation; the establishment of alliances with food processors to disseminate energy efficiency practices; strengthening the identification, quantification and promotion of environmental and economic co-benefits from biomass utilization, and provide training and technical assistance to producers, processors, and suppliers on all aspects of renewable energy technologies, as well as opportunities for project beneficiaries to access voluntary carbon markets. Information on supported technologies is included in the Operational Manual.

23. Changes to the original project, not directly related to the Additional Financing, include:

(i) a three-year extension of the closing date (December 31, 2013 - December 31, 2016) of the GEF (P108766) portion of the original project (P106261), in order to allow for the continuation of the project’s blended format, which allows to complement the investments financed by the loan with the removal of adoption barriers through technical assistance, support services, and knowledge management activities financed by the GEF grant. No additional resources will be provided to the project for the GEF component;

(ii) adjustment of the targets for selected, existing categories of sub-projects, and the development of specific intermediary indicators to monitor the implementation of additional categories of sub-projects. The revised Results Framework is included in Annex 1; Table 1 summarizes the project outcome indicators.

Table 1. Project outcome indicators Indicator Original target Changes

with AF Revised target

Increased number of small and medium-sized agri-business adoption environmentally sustainable technologies

919

1,249 2,168

Tons of CO2 equivalent avoided 770,000 1, 217,500 1,987,500 SAGARPA is successfully formulating climate change mitigation and adaptation policies and programs in the agricultural sector and monitoring their implementation.

A Climate Change Unit is established and functioning within SAGARPA.

Same N/A

(iii) a request by the Government of Mexico for a reallocation of US$3.2 million of the

IBRD original Loan from Category 1 to Category 2. The funding for activities

7

described in Category 1 is now being provided directly through SAGARPA’s budget. This reallocation does not result in a change to the project activities or require a modification to the project description in the Loan Agreement. Proceeds from the original Loan will be reallocated as indicated in Table 2:

Table 2. Reallocation of Proceeds of IBRD original Loan

Category of Expenditure Loan Allocated (expressed in USD)

% of financing

Current Revised (1) Goods, Consultants services and Training other than those financed by the GEF Trust Fund Grant

3,200,000 0 100%

(2) Agri-business Grants, other than those financed by the GEF Trust Fund Grant

46,675,000 49,875,000 100% of the federal contribution for goods, works, non-consulting services, and consultants’ services required for an Agri-business Sub-project

(3) Front-end Fee 125,000 125,000 (4) Premia for Interest Rate Caps and Interest rate Collars (amounts due under section 2.07 (c) of this Agreement)

0

TOTAL AMOUNT 50,000,000 50,000,000

24. The revised financing plan (summarized in Table 3) reflects the funds from the additional

loan as well as estimated beneficiary contributions. Preparation for sub-projects activities will take place during 2013 in anticipation of the initial disbursement under the additional financing. The revised project costs are also summarized by Component (Table 4) and as they appear in the Loan Agreement for the Additional Financing, per Disbursement Category (Table 5).

Table 3. Revised Financing Plan (US$ million) Source Original Project Additional

Financing Total Revised

Project Borrower 27.74 0 27.74 IBRD 50.0 50.00 100.00 GEF Grant 10.50 -- 10.50 Beneficiaries 80.11 70.75 150.86 Total 168.35 120.75 289.10 Table 4. Revised Project Costs by Component (US$ million) Component Original cost

(US$m) Changes with AF

(US$m) Revised cost

(US$m) 1: Environmentally Sustainable Technologies in Agri-Businesses

151.04 120.75 271.79

2: Investment and Production Support Services

10.91 -- 10.91

3: Institutional Strengthening 3.59 -- 3.59 4: Project Management, M&E 2.81 -- 2.81 Total 168.35 120.75 289.10

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Table 5. Allocation of Additional Loan Proceeds Category Amount of the Loan

Allocated (expressed in USD)

Percentage of Expenditures to be financed (inclusive Taxes)

(1) Goods, Consultants services and Training other than those financed by the GEF Trust Fund Grant

0 100%

(2) Agri-business Grants, other than those financed by the GEF Trust Fund Grant

49,875,000 100% of the federal contribution for goods, works, non-consulting services, and consultants’ services required for an Agri-business Sub-project

(3) Front-end Fee 125,000 Amount payable pursuant to Section 2.03 of this Agreement in accordance with Section 2.07 (b) of the General Conditions

(4) Interest Rate Cap or Interest Rate Collar premium

Amount due pursuant to Section [2.07(c)] of this Agreement]

TOTAL AMOUNT 50,000,000

IV. APPRAISAL SUMMARY

25. Technical: The proposed additional financing would support the scaling-up of existing and proven innovative activities and technologies, for which adequate knowledge and capacity exists both in the country and in FIRCO’s highly decentralized structure. The experience in establishing the facilities and equipment for energy efficiency, renewable energy and biomass utilization during the implementation of the original project has contributed to develop the necessary expertise, both in the public and private sectors, to ensure the timely and effective expansion of these environmentally and financially sound investments. Furthermore, through the continuity of the project’s technical assistance and training activities, the additional financing is expected to promote the operational improvement and consolidation of these investments. During appraisal, the different types of technologies and estimates for both the number of sub-projects, as well as funding/investment amounts by the project and the beneficiary, were discussed in detail, with more information on each technology to be provided in the revised Project Operational Manual (OM).

26. Economic and financial analyses. The analysis for the original project is applicable to the proposed additional financing as activities with positive economic impacts (as a result of technical and financial support for improved energy efficiency in selected agri-businesses, as well as through construction of biodigestors to improve waste management, and in some cases, biomass conversion to electricity) will be scaled-up. Scaling-up of project activities would result in important economic, environmental and social benefits by expanding project coverage and increasing the number of supported sub-projects. The proposed AF would generate significant additional co-benefits, by consolidating project activities and improving the overall knowledge base required to further expand the sustainable adoption of energy efficiency technologies in the agricultural sector.

27. Institutionally, the AF will continue to be implemented by FIRCO, under the same overall operational arrangements currently applied for the original project, which include the compliance with procedures, satisfactory to the Bank, described in the OM. The revised OM

9

includes the necessary revisions to incorporate the technical and operational aspects of the scaling-up, as well as a description of the new proposed technologies, the institutional arrangements, and the agreed modifications to the current fiduciary procedures.

28. Risks: The overall Implementation Risk Rating is Moderate. No significant risks are

expected to affect the proposed AF. A potential risk would be a change in priorities by the incoming administration, which could affect financial allocations or institutional support to project activities, and the eventual lack of additional human resources within FIRCO to undertake the expanding workload from project activities. However, these risks are considered to be low given a number of contributing/mitigating factors: (i) the priority given by GOM to environmental and rural matters transcends administrations; (ii) the strong support that project activities have received at the state level (both from public and private sectors); and (iii) the valuable contribution made by the project to Mexico’s efforts to address the climate change agenda, extensively documented in the country’s communications to UNFCCC, and recognized by the international community in events such as the recent Convention of the Parties (COP) in Cancun.

29. Furthermore, the AF would contribute to provide continuity to SAGARPA’s ongoing energy

efficiency programs during the transition. Additional benefits would result from leveraging complementary technical and financial resources by FIRCO during the implementation of the AF, through possible collaborative engagements with IFC and bilateral partners such as GiZ.

30. Safeguards: The existing safeguard framework has been assessed as fully adequate for the

proposed additional activities, given that the investments (i.e., sub-projects) to be financed under the AF are similar in type and magnitude to those being currently financed, and the project area remains unchanged. This assessment is based on several factors: 1) satisfactory safeguards ratings of the original project, based on the social and environmental performance reviews carried out within the past 6 months (March and May, 2012 respectively), with recommendations for improvement being implemented as part of the AF; 2) in-depth social safeguards supervision carried out by the Bank in March 2012 and during appraisal, and 3) the findings of a technical mission carried out by the Bank in May 2012. Also, the client has been systematically recording the safeguards status of each sub-project, consistent with Bank’s policies. As a result, the AF would have the same environmental rating (B) and the same safeguards originally triggered, as described in the PAD and ISDS of the original project. Overall safeguards compliance of the original project has been rated Satisfactory for the last year of project implementation.

31. The Indigenous Peoples Planning Framework (IPPF) was updated by the client and disclosed on their website (http://www.firco.gob.mx/PueblosIndigenas/movie.swf) on October 5, 2012. It was also disclosed on the Bank’s external website on October 10, 2012. The Environmental Management Framework was updated by the client and disclosed on their website (http://www.firco.gob.mx/ManejoAmbiental/index.html) on October 12, 2012. It was also disclosed on the Bank’s external website on October 15, 2012. The revisions to safeguard implementation arrangements are described in detail in Annex 3.

http://www.firco.gob.mx/PueblosIndigenas/movie.swf

http://www.firco.gob.mx/ManejoAmbiental/index.html

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32. Fiduciary Aspects: Operational and institutional risks are considered to be minor, given that the project has implemented operational procedures acceptable to the Bank that would ensure continuity and the effective achievement of the proposed physical and financial goals. More specifically, the AF would be implemented using updated and strengthened procurement, FM, and operational procedures. The AF Loan Agreement reflects the updated Bank Procurement Guidelines, Consultant Guidelines and Anti-corruption Guidelines, as well as the current General Conditions. The appropriate fraud and corruption clauses will be included in the sub-project grant agreements with beneficiaries.

33. Financial Management: FM implementation arrangements are the same as those in place for

the original project; therefore, the FM risk for the additional financing is maintained as Moderate. In terms of implementation of the original project, as a result of supervision activities carried out, the FM assigned rating was Moderately Satisfactory, mainly explained by several delays in the presentation of financial reports to the Bank and slow project disbursements. As part of the MTR, the Bank and GOM agreed on a streamlined set of financial and operational procedures which resulted in a considerable increase of project's disbursements, along with a decrease of the administrative work load of the project (summarized in Annex 3). Institutional strengthening of FIRCO’s FM systems was also proposed, through enhancing of the SURI system, which is used by FIRCO for the control and follow up of sub-projects. The objectives are: (i) to integrate in the system a feature that allows for a suitable financial control of the investment made in subprojects, vis-a-vis the disbursements made by FIRCO and the Bank, (ii) avoid to the extent possible the use of manual procedures by FIRCO's State Delegations in the preparation of disbursement and financial reports, reducing accordingly the possibility of mistakes, (iii) to increase the overall transparency, accuracy, and reliability of financial information produced by FIRCO. Given that resources from the original project will be available for activities through the end of 2013, no retroactive financing will be required under the AF.

34. The audit reports for the original projects (IBRD and GEF) covering the period from effectiveness to December 31, 2011 were presented to the Bank on August 1, 2012. The audit was conducted by an independent audit firm acceptable to the Bank who issued an unqualified opinion for both reports, which have been reviewed and considered acceptable to the Bank.

35. Procurement: Procurement for the proposed project would be carried out in accordance with

the Bank’s “Guidelines: Procurement of Goods, Works and Non-consulting Services under IBRD Loans and IDA Credits and Grants by World Bank Borrowers” dated January 2011. Procurement arrangements will continue to be the same as in the original project. With regards to the sub-projects financed under Component 1, shopping procedures will be the procurement method by default. This procedure has already been defined in the Operation Manual of the original project. Supervision and reviews of the ongoing project have indicated the need to strengthen FIRCO’s capacity regarding procurement, administrative performance, and technical support to beneficiaries. The performance rating of the original project in procurement has been Moderately Satisfactory mostly due to changes in implementation arrangements (related to changes in Mexican legal dispositions regarding the role of NAFIN as a financial intermediary) that required a revision of project’s financial flows and

11

disbursement arrangements. This revision was agreed upon in written by all project parties and significant improvements have been made in the project performance.

36. Administration: Potential human resource limitations are expected to be minimized by the

recruitment of specialized consultants in 2013 to be financed by the GEF. Extending the duration of the GEF portion of the project will provide the required resources to strengthen project management, as well as the capacity and potential needs of the Project Implementation Unit (PIU) to support the increased number of sub-projects and the monitoring of adjusted performance indicators.

12

ANNEX 1: REVISED RESULTS FRAMEWORK AND MONITORING INDICATORS MEXICO: Sustainable Rural Development Project Additional Financing

Revisions to the Results Framework

Comments/

Rationale for Change PDO indicators

Current (PAD) Proposed change Number of small and medium-sized agri-businesses adopting environmentally sustainable technologies

Original target: 919 AF target: 1,249

Total: 2,168

Same with updated target

Tons of CO2 equivalent avoided Original target: 770,000 AF target: 1,217,500

Total: 1,987,500

Same with updated target. Total value represents sum of original target, AF target and additional accumulated emission reductions from sub-projects financed by the original loan

SAGARPA is successfully formulating climate change mitigation and adaptation policies and programs in the agricultural sector and monitoring their implementation.

Same Same

GEO: To contribute to the goals of the NSCC by reducing Greenhouse Gas (GHG) emissions in the agricultural sector through the adoption of emission reduction technologies and support to the implementation of the PECC.

Tons of CO2 equivalent avoided Same as before, but with updated target 770,000 +1,217,500 =1,987,500 Tons CO2


Intermediate Results indicators

Current (PAD) Proposed change Component 1 Environmentally Sustainable Technologies in Agri-Businesses Number of agri-businesses having adopted low carbon intensity technologies.

Solar thermal (329 + 109 = 438) Biomass systems (300+79=379) Biomass electricity conversion (40 + 131=171) Grid connected photovoltaic system (109+78=187) Support to grid connection (180) Energy efficiency (141+520=661) Small biomass conversion projects (149) New renewable energy pilot technologies (3) Total investments: 2,168

Same with updated target Same with updated target Same with updated target Same with updated target New sub-projects Same with updated target New sub-projects New sub-projects

Number of KWh of energy saved from adoption of energy efficient technologies and corresponding tons of avoided CO2 emissions.

Original target: 95,510 KWh AF target: 272,552 KWh

Total: 308,062 KWh

Original target: 770,000


Number of MWH energy is produced by Same with updated target

13

Revisions to the Results Framework

Comments/ Rationale for Change

biomass and corresponding tons of CO2 emissions avoided.

AF target: 1,217,500 Total: 1,987,500

Component 2 Investment and Production Support Services Number of energy efficient and/or renewable energy sub-projects prepared.

Dropped This indicator has been eliminated because, under SAGARPA’s current procedures, the recipients are required to prepare their projects proposals.

Number of agri-business employees/processors has participated in training events organized by the project.

Unchanged

Number of energy efficiency and /or renewable energy sub-projects received technical assistance on energy efficiency and/or renewable energy technologies during implementation.

Same indicator. Target value updated: 2,168

Target updated to take into consideration new sub-projects

Number of pilot projects carried out to demonstrate and validate other technological innovations that could be proposed under the project.

Same indicator. Target value is 4

FIRCO revised his own capacity to carry out innovative projects.

Component 3 Institutional Strengthening A unit within SAGARPA is established to support and/or to formulate, implement and monitor Climate Change mitigation and adaptation policies and programs in agriculture sector.

Same Same

Number of Inter-ministerial workshops promoting collaboration and knowledge sharing on climate change activities related to the project carried out.

Same Same

Number of SAGARPA/FIRCO staff that participated in training events organized by the project.

Same Same

Component 4 Project Management, Monitoring and Evaluation SAGARPA/FIRCO project staff, including regional staff, in place and functioning at all times during the project with sufficient capacity to carry out all project activities.

Same Same

Quarterly physical and financial status reports prepared and submitted to the Bank.

Same Same

Semi-annual documents on lessons learned and policy implications are prepared. To coincide with supervision missions.

Same Same

Planning process to be followed as defined in the Operations Manual describing when and how Annual Implementation Plans (AIP) and quarterly and monthly plans will be prepared based on Project Implementation Plan (PIP).

Same Same

14

REVISED PROJECT RESULTS FRAMEWORK

Note: With the exception of the sub-project-related indicators, targets remained unchanged from original project, as they are linked to funding from GEF.

Project Development Objective (PDO):

The project development objective is to promote the adoption of environmentally sustainable technologies in agri-businesses. The global environment objective is to contribute to the goals of the National Strategy on Climate Change by reducing GHG (CO2) emissions through the adoption of emission-reduction technologies and support to the implementation of the President’s Special Program for Climate Change (PECC), with emphasis on the improved environmental sustainability of small and medium-sized agri-businesses.

PDO Level Results Indicators

Cor

e

Unit of measurement

Baseline Original Project Start

(2010)

Progress To Date

(2012)

Cumulative Target Values

Frequency Data Source/ Methodology

Responsibility for Data Collection

Comments 2013 2014 2015 2016

1. Increased number of small and medium-sized agri-business adopting environmentally sustainable technologies

Number

Sub-projects

0 770 919 1,333 1,747 2,168

Semi-Annual and Annual reports; Beneficiary reports

Survey and beneficiary reports

FIRCO Original End Target: 919

2. Tons of CO2 equivalent avoided Tons

Baseline will be

collected prior to

sub-project

approval

600,000 770,000 1,119,769 1,525,060 1,987,500



FIRCO Original End Target: 770,000

3. SAGARPA is successfully formulating climate change mitigation and adaptation policies and programs in the agricultural sector and monitoring their implementation

Text

SAGARPA/

FIRCO staff

participate in

training events

Department of Bioeconomy

actively engages in

climate change related

activities



FIRCO

Original End Target: The Climate Change unit is functioning

15

Intermediate Results and Indicators

Intermediate Results Indicators

Cor

e

Unit of Measurement


(2010)

Progress To Date

(2012)

Target Values


Responsibility for Data

Collection

Comments 2013 2014 2015 2016

Intermediate Result 1: Investments in Environmentally Sustainable Technologies in Agri-Businesses

1. Number of agri-businesses having adopted low carbon intensity technologies.

# 0

16 energy efficiency, 283 biomass energy, 102 solar thermal, 27 PV system and 126 biomass electricity generator sub-projects (554 technologies)

919 1,333 1,747 2,168



FIRCO

At least 141 energy efficiency, 300 biomass energy, 329 solar thermal, 109 PV system and 40 biomass electricity generator sub-projects.

2. Number of KWh of energy saved from adoption of energy efficient technologies and corresponding tons of avoided CO2 emissions

KWh/ Tons

0 2.6 M KWh; 5,067 Tons

9.29M KWh; 11,268 Tons

33.54M KWh; 17,809 Tons

78.16M KWh; 41,502 Tons

143.45M KWh: 76,172 Tons



FIRCO

Original Target: 9.29 MkWh / 11,268 Tons. AF Target 134.00 M KWh, 64,904 Tons

3. Number of MWH energy is produced by biomass and corresponding tons of CO2 emissions avoided1

MWh/ Tons

0 18,960 MWh

and 10,068 Tons

83,703 MWh / 568,389

Ton CO2

126,946 MWh / 854,627

Tons

173,956 MWh / 1,176,041 Tons

224,908 MWh /

1,534,000



FIRCO

Original Target: 83,703 MWh / 568,389 Tons AF Target: 141,206,973 MWh and 965,611 Tons

Intermediate Result 2: Investment and Production Support Services 1.Number of energy efficient and/or renewable energy sub-projects prepared

Text -- TA provided for

the preparation of business plans on

919 1,333 1,747 2,168 Semi-Annual and Annual reports;


FIRCO Original End Target: TA provided for

1 CO2 tons include biogas burned which will be used for electricity generation.

16



Cor

e

Unit of Measurement


(2010)

Progress To Date

(2012)

Target Values



Collection

Comments 2013 2014 2015 2016

energy efficiency and/or renewable

energy technologies.

Beneficiary reports

the preparation of business plans on energy efficiency and/or renewable energy technologies.

2. Number of agri-business employees/processors has participated in training events organized by the project

# 0 0 165 215 250 300




3. Number of energy efficiency and/or renewable energy sub-projects received technical assistance on energy efficiency and/or renewable energy technologies during implementation

# 0 466 160 215 253 291




4. Number of pilot projects carried out to demonstrate and validate other technological innovations that could be proposed under the Project

# 0 0 2 2 X X Semi-Annual and Annual Reports

Reports


Intermediate Result 3: Institutional Strengthening 1. A unit within SAGARPA is established to support and/or to formulate, implement and monitor Climate Change mitigation and adaptation policies and programs in agriculture sector

Text No Unit Unit is

established

Semi-Annual and Annual Reports

Reports

FIRCO

Original End Target: Unit is established and functioning

17



Cor

e

Unit of Measurement


(2010)

Progress To Date

(2012)

Target Values



Collection

Comments 2013 2014 2015 2016

2. Number of Inter-ministerial workshops promoting collaboration and knowledge sharing on climate change activities related to the project carried out

# 0 4 1 2 1 2 Semi-Annual and Annual Reports

Reports


3. Number of SAGARPA/FIRCO staff that participated in training events organized by the project

# 0 147 128 128 128 128 Semi-Annual and Annual Reports

Reports


Intermediate Result 4: Project Management, Monitoring and Evaluation

1.SAGARPA/FIRCO project staff, including regional staff, in place and functioning at all times during the project with sufficient capacity to carry out all project activities.

Text

A technical coordinator

and consultants

hired to support FIRCO

implement the project

A technical coordinator and

consultants hired to

support FIRCO implement the

project

Semi-Annual and Annual Reports

Reports

FIRCO

Original End Target: A technical coordinator and consultants hired to support FIRCO implement the project.

2. Quarterly physical and financial status reports prepared and submitted to the Bank

Text/# Reports

Submitted to the Bank

4 4 4 4 4 Semi-Annual and Annual Reports

Reports

FIRCO

Original End Target: Reports Submitted to the Bank

3. Semi-annual documents on lessons learned and policy implications are prepared to coincide with supervision missions

Text/# Reports

Submitted to the Bank

4 2 2 2 2 Semi-Annual and Annual Reports

Reports

FIRCO

Original End Target: Reports Submitted to the Bank

4. Planning process followed as defined in the Operations Manual describing when and how Annual Implementation

Text

AIP prepared

and submitted

to the Bank

Yes

Quarterly, Semi-Annual and

Reports

FIRCO

Original End Target: AIP prepared and

submitted to the Bank

18



Cor

e

Unit of Measurement


(2010)

Progress To Date

(2012)

Target Values



Collection

Comments 2013 2014 2015 2016

Plans (AIP) and quarterly and monthly plans prepared based on Project Implementation Plan

Annual reports;

19

ANNEX 2: OPERATIONAL RISK ASSESSMENT FRAMEWORK (ORAF) MEXICO: Sustainable Rural Development Project Additional Financing

1. Project Stakeholder Risks Rating LOW Description: Lack of interest in participation by producers/producer groups; beneficiaries not fully aware of the new types of sub-projects that will be included in the AF. FIRCO’s regional offices are fully engaged in the project, at the regional and local levels certain roles and responsibilities but may not be clearly implemented in practice, particularly regarding the promotion of renewable energy practices and the full utilization of co-generation opportunities.

Risk Management: At appraisal the Bank assessed the proposed new types of sub-projects to be financed, and discussed FIRCO’s outreach and dissemination plans at the national and state level to ensure that potential beneficiaries are aware of the expanded scope of the project. FIRCO has been undertaking dissemination efforts under the current project and plans to scale those up given the AF, as well as expand through new methods. FIRCO has also conducted stakeholder assessments in order to determine levels of demand and identify possible new areas of engagement of the project, including the availability of eligible producer groups to participate in the project.

Resp: Client Stage: Implementation Due Date : Status: In Progress

Risk Management: As part of the project’s MTR, full agreement was reached on the importance of improving the dialogue with key public institutions in order to identify mechanisms to improve inter-institutional collaboration and to promote the effective adoption of renewable energy and biomass utilization by producers and agro-processors. The specific actions to be implemented (with GEF funding) were discussed at appraisal and will be followed up on at project launch.


2. Implementation Agency Risks (including Fiduciary) 2.1 Capacity Rating MODERATE Description: Financial Management: The institutional capacity of FIRCO might not be enough to ensure that all fiduciary arrangements are properly complied with during the project implementation in light of project complexity, weaknesses observed during implementation of the original project in the administrative capacity of the FIRCO regional offices, as well as delays experienced in delivering project’s financial reports to the Bank.

Risk Management: The FM arrangements for the AF will remain unchanged from the original project, including the same fiduciary team. As for the weaknesses observed in FIRCO regional offices, FIRCO has issued internal control guidance to ensure the homogenization and strengthening of administrative procedures among regional offices. During implementation, the FM team will ensure through supervision that the guidance is properly followed and complied with. Regarding the delays observed in the delivery of project’s financial information to the Bank, during implementation the FM team will provide capacity building training to FIRCO as necessary to improve awareness of Bank policies and identify causes for delays. The backlog of disbursements was tackled with the modifications formally agreed to the financial and operational procedures, which will apply to the additional financing. Also, the Bank and FIRCO have agreed to implement a disbursement module in the SURI system with the aim to increase the efficiency of the

20

Procurement (central): FIRCO is an implementation agency with previous experience in Bank operations. A review of the implementation agency concluded that procurement practices, controls, and staffing are adequate for the AF and provide sufficient security for a smooth execution. The agency also has previous experience with Bank procurement practices. Procurement (local): At the sub-project level, procurement activities will be undertaken by private sector beneficiaries with no previous experience. Therefore, procurement activities by beneficiaries will require close supervision.

procedures followed in State Delegations for preparing disbursement requests.

Resp: Bank Stage: Implementation Due Date : Status: In progress

Risk Management: Capacity building in Bank procurement guidelines and procedures will be provided as needed, including the use of the LCR system for the monitoring of the execution of procurement plans (SEPA). Procurement procedures, as well as anti-corruption guidelines, will be documented in the OM. As part of the institutional arrangements, all procurement will be conducted by an outsourcing firm to be hired shortly and in will be place during the AF.

Resp: Bank Stage: Implementation Due Date : Status: In progress

Risk Management: Close supervision and technical support by officials responsible for supervising these activities; training to producer groups and associations and development of a simple and practical set of procedures for the implementation of the low value procurement activities. These procedures will be documented in the OM to ensure consistency with Bank procedures. A guide to Bank’s procurement requirements will be incorporated as part of the agreement between FIRCO and project beneficiaries.

Resp: Both Stage: Implementation Due Date : Status: In progress

2.2 Governance Rating: MODERATE Description: Although FIRCO’s regional offices are fully engaged in the project, at the regional/local levels certain roles and responsibilities may not be clearly implemented in practice, particularly regarding the promotion of renewable energy practices and the full utilization of co-generation opportunities.

Risk Management: As part of appraisal, full agreement was reached on the importance of improving the dialogue with key public institutions in order to identify mechanisms to improve inter-institutional collaboration and promote the effective adoption of renewable energy and biomass utilization by producers and agro-processors. Specific actions to be implemented (with GEF funding) were discussed at appraisal and will be further elaborated with the project team at project launch.

Resp: Bank Stage: Implementation Due Date : Status: In Progress

3. Project Risks 3.1 Design Rating: LOW Description: Despite the successful implementation of the project to date, the incorporation of new technologies and practices may slow-down the current demand for project support.

Risk Management: The objective of the AF is to scale-up project activities. To a large extent, this scaling-up will involve supporting an expansion of technologies proven by the ongoing operation to a larger number of beneficiaries and expanding the geographic coverage to new areas in the country. In most cases, the proposed new technologies to be supported by the additional funds do not require any major R&D, as they represent the application of the existing technologies to other productive sectors (i.e. biodigestors for plant residues and byproducts), or the expansion of energy efficiency and renewable energy technologies.


21

With the exception of the PIU, project activities will be entirely implemented at the sub-national level. As such, the project could face an additional risk related to the flow of funds process. TA is a crucial element of project success. Given the special expertise required to assist beneficiaries, lack of training, excessive workload and inadequate oversight of suppliers could affect the quality and performance of project investments

Risk Management: Administering the ongoing loan has provided considerable experience with regards to the FM process, which has resulted in the development of a proven and effective system for management and administration of financial resources, consistent with the procedures implemented by SAGARPA and FIRCO in their various cash transfer programs. The strengthening of FIRCO’s FM capacity at the regional level to accommodate the requirements of the scaling-up and expansion of project activities envisaged through the AF were at assessed at appraisal and deemed adequate by the project team.


Risk Management: Given Mexican policies regarding allocation of Bank funds, most resources from the AF will be allocated to the implementation of sub-projects. However, FIRCO’s commitment to supporting investments with TA, combined with the availability of resources form the GEF grant (fully blended with the original loan) would ensure the recruitment and training of qualified decentralized TA providers, as well as implementation of feasibility studies, pilots and demonstration units, all essential complements to the investments.

3.2 Social and Environmental Rating: LOW Description: The proposed expansion in terms of geographical areas and technologies to be financed could result in changes to the environmental and social assessment of the ongoing project.

Risk Management: Assessments conducted by the Bank concluded that the proposed new activities are environmentally and socially similar to those currently under implementation. As a result, the original environmental rating (B) remains unchanged and no additional safeguards would be triggered. In addition, as agreed during appraisal (and recommended during the MTR) case studies will be carried out to measure and report on co-benefits generated by the sub-projects, most of which are of environmental and social nature.

Resp: Both Stage: Implementation Due Date : Status: In Progress

3.3 Program and Donor Rating: LOW Description: Other donors are supporting Mexico in the implementation of their Climate Change Strategy, including some initiatives linked to the agricultural sector. Lack of coordination among donors may lead to duplication of efforts and/or lost opportunities for synergies through collaborative partnerships.

Risk Management: Largely due to their long-term involvement in the promotion of renewable energy in rural areas, FIRCO has become a key stakeholder regarding technical knowledge and institutional commitment to all aspects of rural energy. As a result, concrete opportunities exist for collaboration between the project (both AF and GEF-funded activities) and other donors, specifically GIZ, IFC, and EPA. Although no formal co-financing arrangements were necessary immediately, opportunities for collaboration were discussed at appraisal and it is envisaged that possible roles and specific arrangements would be eventually formalized with interested donors through SAGARPA and FIRCO authorities.

Resp: Both Stage: Implementation Due Date : Status: In Progress

3.4 Delivery Monitoring & Sustainability Rating: MODERATE

22

Description: The project is broad in terms of scope and potential beneficiaries, and would be further broadened by the AF. Timely and effective monitoring of FIRCO’s performance, as well as sub-project implementation, operation and results may prove challenging. Due to the innovative nature of project interventions, beneficiary O&M demands are inherently high.

Risk Management: Assessments conducted by the Bank during project supervision have identified weaknesses and knowledge gaps regarding both O&M and optimal utilization of project investments by beneficiaries. This is particularly evident in the case of biodigestors in dairy and hog operations, and slaughterhouses. To address this issue, specific training and capacity building activities are planned to be implemented during the AF, not only aimed at beneficiaries, but also suppliers, FIRCO regional staff, and TA providers.


Overall Implementation Risk Rating MODERATE

23

ANNEX 3: REVISED IMPLEMENTATION ARRANGEMENTS AND SUPPORT MEXICO: Sustainable Rural Development Project Additional Financing

Key Safeguard Policy Issues and Revised Implementation Arrangements 1. The existing safeguard framework has been assessed as fully adequate for the proposed additional

activities, given that the investments (i.e. sub-projects) to be financed under the Additional Financing are similar in type and magnitude to those being currently financed, and the project area remains unchanged. As a result, the project’s Environmental Rating (B) and safeguards triggered will remain unchanged, as described in the original project PAD and ISDS.

2. The following updates and minor revisions regarding safeguard implementation arrangements and to ensure compliance with safeguard policies, given the additional activities, are as follows:

3. Indigenous Peoples (OP 4.10): This safeguard was triggered for the original project due to the

possibility that indigenous peoples groups (e.g. Ejidos or Community Enterprises) would apply for project funding. To this end, an Indigenous Peoples Planning Framework (IPPF) was prepared and disclosed locally and in InfoShop. To date, indigenous peoples groups have not applied or benefitted from project funding, despite outreach efforts in indigenous areas. This is partly due to the significant co-financing requirements for sub-projects. A procedure has been put in place by FIRCO where each application was examined to determine whether additional safeguards instruments were required. There is however evidence that indigenous communities have benefited indirectly from the project due to support provided to private agri-businesses located in communities populated by indigenous peoples (e.g. Campeche and Yucatan). As a result of project investments, indigenous peoples working and living adjacent to these agri-businesses have experienced improved living and working conditions. This was confirmed during an FY12 supervision mission, as well as the social impact assessment (mandated by the IPPF) which was carried out by the client in 2011-12 and demonstrated the positive co-benefits associated with sub-project investments for indigenous and non-indigenous communities alike, in terms of sustainable employment opportunities, cleaner water and air for neighboring residents, and healthier working conditions.

4. For the proposed Additional Financing, OP 4.10 remains triggered as there is still a possibility that indigenous peoples groups will apply and qualify for project support, and thus, outreach efforts will continue. The Indigenous Peoples Planning Framework (IPPF) was updated by the Client and disclosed on their website (http://www.firco.gob.mx/PueblosIndigenas/movie.swf) on October 5, 2012 in order to take into account the results of the recent social impact assessment and to provide some additional guidance on when and how indigenous peoples plans should be prepared. The IPPF was also disclosed on the Bank’s external webpage on October 10, 2012. There is a provision for the client to provide technical assistance to support indigenous peoples groups hoping to apply for the project in order to meet the requirements of the IPPF. Monitoring of indigenous peoples’ plan implementation would take the form of a follow-up field visit and questionnaire which would ascertain the benefits of the sub-project for the Ejido/community.

5. Involuntary Resettlement (OP 4.12): All sub-projects will be screened to ensure that no sub-projects

that trigger involuntary resettlement are financed under this project (original and additional financing). No involuntary resettlement has taken place under the original project and the relevant safeguard policy (OP 4.12) remains not triggered for the AF. Sub-project investments will be small in scale and implemented on private property, and will therefore not result in any resettlement impacts. The

http://www.firco.gob.mx/PueblosIndigenas/movie.swf

24

implementing agency (FIRCO) will continue to apply screening procedures to all sub-project applications to ensure sub-projects do not result in any unanticipated resettlement impacts.

6. Environmental Assessment (OP 4.01): The analysis of proposed activities/technologies concluded that

most of the sub-project investments under the AF will be a scaling-up of technologies that have already been implemented under the original project. There are, however, some new technologies included in the “menu” that are being proposed and supported by FIRCO under the AF (e.g. more efficient pumping systems, solar farms, chillers, etc.) to which special attention will need to be paid. In all cases for both existing and proposed new technologies, the environmental impacts were deemed positive (e.g. more efficient use of water, reduced emissions of greenhouse gases, reduced pollution to air and water, recycling and destruction of obsolete and inefficient equipment, improved product competitiveness in retail prices and market access). As such, the Environmental Rating for the project, including additional activities, continues to be a Category B - Partial Assessment, and as mentioned, will include a broader “menu” of technological options to best fit demand/needs of small and medium-sized agri-businesses.

7. In accordance with the Bank's policy, there is no need to prepare a new Environmental Assessment as the one prepared by the GOM in July 2008 continues to be valid in all aspects. The only areas requiring an update will be the inclusion/revision of any environmental and legal issues as a result of any proposed new technologies (e.g. water pumping systems, engine efficiency, chillers, small-scale solar energy generation). These issues were incorporated in a revised Environmental Management Framework (EMF). No negative environmental impacts are expected from the planned activities under the AF as the new technologies do not add new aspects that could directly affect the quality of air, water or soil. Potential environmental problems are minor or nonexistent and will be minimized or avoided by preventive or mitigating actions that will be applied as part of the screening of sub-projects. Some aspects to be screened for would include higher than expected pumping requirements, pollution by re-use of pumps and/or inefficient engines, pollution by discharge of refrigerants, and any potential negative effects on land and biodiversity from solar farms.

8. The Environmental Management Framework was updated by the Client and disclosed on their website (http://www.firco.gob.mx/ManejoAmbiental/index.html) on October 12, 2012 in order to take into account the results of the environmental assessment conducted in May 2012 to account for the scale-up of existing technologies and the use of new ones, and to provide additional guidance on when and how environmental plans should be prepared. The EMF was also disclosed on the Bank’s external website on October 15, 2012.

9. Natural habitats (OP 4.04): All sub-projects will be screened to ensure that no sub-projects that trigger

natural habitats are financed under this project (original and additional financing). Though no conversion of critical natural habitats are envisioned to be either promoted or permitted under the proposed additional activities, all sub-projects would be screened to ensure that proposed activities are consistent with OP/BP 4.04 and, if necessary, any issues would be specifically addressed in the sub-project design to avoid any possible activities that could result in natural habitat conversion. In matters relating to species and habitats, the framework already mentioned remains in place following Environmental Management Plan GOM standards:

a) Mexican Official Standard NOM-059-SEMARNAT-2010, Environmental Protection Mexico –

Native species of wildlife, risk categories and specifications are inclusion, exclusion or change-list of endangered species

http://www.firco.gob.mx/ManejoAmbiental/index.html

25

b) The latest revision of the published DOF 16-11-2011, the Wildlife Act, published in the Official Journal of the Federation on July 3, 2000

10. In addition to the current “restrictive list” included in the Operational Manual, the project would not

consider financing sub-projects that support construction of power transmission networks, and deepening of wells. Special attention will be paid to refrigerants used in cold chambers and chillers, and any equipment replaced should either be recycled or destroyed, (thus removing them from market). For this, a special protocol has been established. With regards to the efficiency of electromechanical equipment, internal metals such as copper, steel, iron, and others, would be appropriately recycled.

11. Consistent with the results of the original project to date, no significant negative environmental

impacts from project activities are envisaged, as additional activities would continue to be oriented towards positive environmental and economic impacts as a result of technical and financial support for investments to improve energy efficiency, including biodigestors to improve manure management and reduce methane emissions in the main dairy and pig production areas of the country. As such, the project is expected to have significant positive environmental impacts. Furthermore, improved capacity for environmental management by both the private and public sectors would also result in positive impacts on the environment.

12. SEMARNAT and CONAGUA are responsible for granting permits for any replacement of existing

pumps under NOM-006-ENER-1995. As this GOM policy remains in force, project activities will comply with current regulations. Consequently, any project activity involving approved replacement of pumps would a) monitor the volume of water extracted by pumps replaced, and b) monitor the destruction and recycling of replaced pumps.

Revised Project Operational Manual

13. The revised project Operational Manual includes the necessary revisions to incorporate the technical

and operational aspects of the scaling-up, including a description of the new proposed technologies, the institutional arrangements, as well as any required modifications to the current fiduciary procedures. Also, details regarding pilot project "clusters" to increase irrigation potential, solar farm installations, and/or other technologies will be described. All proposed technologies should be in accordance with GOM’s NOM-S/N-SEMARNAT-2011 which outlines technical specifications for environmental protection during site selection and preparation, construction, operation, and closure of any facilities located within low environmental impact areas.

14. Regarding environmental aspects, the OM has been updated and continues to include the necessary checklists for screening sub-projects to ensure compliance with local legislation and Bank safeguards. Where sub-project design would need to be revised for compliance, the OM includes detailed provisions of the steps sub-projects would need to go through in order to comply. As part of Bank supervisions, compliance with the EMF would continue to be periodically assessed by the Bank.

15. In the case of indigenous peoples groups applying for project assistance, the OM describes how FIRCO would apply a somewhat modified application process where the applicant would receive support for the preparation of an indigenous peoples plan in lieu of the normal business plan. This would include the provision of technical assistance to groups in facilitating and document community/ejido member consultation meetings, gather relevant social data on the community, and

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assess the potential co-benefits for the community. The plan would then be reviewed by FIRCO with the assistance of the Bank, and disclosed in accordance with the provisions of OP 4.10. Monitoring of plan implementation would take the form of a follow-up field visit and questionnaire which would ascertain the benefits of the sub-project for the relevant Ejido/community.

16. Financial Management. The overall FM arrangements for the additional financing will follow those

agreed for the original project. The project will make extensive use of country systems.

17. The FM team has proposed the institutional strengthening of FIRCO’s FM systems, through enhancing of the SURI system, which is used by FIRCO for the control and follow up of sub-projects.. The objectives are: (i) to integrate in the system a feature that allows for a suitable financial control of the investment made in subprojects, vis-a-vis the disbursements made by FIRCO and the Bank, (ii) to avoid, to the extent possible, the use of manual procedures by FIRCO’s State Delegations in the preparation of disbursement and financial reports, reducing accordingly the possibility of mistakes, (iii) to increase the overall transparency, accuracy, and reliability of financial information produced by FIRCO.

18. General flow of funds and information. Funds for this project will be allocated into the Federal

Expenditure Budget (PEF), which operation is subject to provisions of the annual PEF Law, the Federal Budget and Fiscal Responsibility Law, and the Government Accounting Law, which together provide a sound framework for budget formulation, execution and control arrangements. The description of the funds flow is presented in the following diagram, where the solid lines represent the flow of money and the dotted lines represent the flow of information:

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Flow of funds description:

1) The National Treasury (TESOFE, an Undersecretariat at SHCP) will transfer funds to SAGARPA in local currency (Mexican Pesos) via its standard budget.

2) SAGARPA will transfer funds to FIRCO. 3) FIRCO central office will either transfer resources to State Delegations for the implementation

of Components 1 & 2 of the project, or make payments to providers of goods and services (for Components 3 & 4).

4) FIRCO State Delegations will transfer resources to beneficiaries for the implementation of subprojects (Components 1 & 2 of the project).

5) Once the investment in a particular subproject has been completed (i.e. reached a 100% advance), and the investment in the main project2 has achieved an advance of at least 50%, State Delegations will prepare reimbursement requests through the SURI system.

6) FIRCO central office will consolidate reimbursement requests from all State Delegations, and will prepare the SOE report, which will be submitted to NAFIN.

7) NAFIN will request the reimbursement of funds to the World Bank. 8) The World Bank will reimburse the funds in USD into a commercial bank account opened by

NAFIN, who in turn will reimburse the resources to the TESOFE.

2 Main project is referred as the total investment made by a producer (project beneficiary) for which the subproject financed by the World Bank is a part of.

World Bank TESOFE (Ministry

of Finance)

SAGARA

6

1

FIRCO Central Office

7

2

8

NAFIN (acting as financial agent)

5

Program’s beneficiaries

4

Transfer to FIRCO State Delegations for the implementation of Components 1 & 2

Providers of goods and services under components 3 & 4

3

Reimbursement through NAFIN

Document of The World Bank FOR OFFICIAL USE ONLY...Secretaría de Medio Ambiente y Recursos...

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Transcript of Document of The World Bank FOR OFFICIAL USE ONLY...Secretaría de Medio Ambiente y Recursos...