Document of

The World Bank

Report 16476-ME

STAFF APPRAISAL REPORT

MEXICO

AQUACULTURE DEVELOPMENT PR()JECT

March28, 1997

Mexico Department and theSector Leadership GroupLatin America and the Caribbean Regional Office

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CIJRlRtNCY fQUIVAJ EN 'SCurrency UJnit = Mexican Nc 1'eso (N$)

IJS$I = N$7.965(March H,1997-

FISCAL YEARJanuary 1 - I)ecembeC 31

WEIGHTS AND MEASURESI meter (ni) - 3.28 feet (ft F

1 kilometer (km) t= ( 62 mile mn)I hectare (ha) = 10,00(() n2 -- 2 4 7 acres

I square kilometer (km2) = 0.38 square milr s (mi2) I CU liaI metric ton (ni ton) = 2,205 poinids

ABBREVIATIONS AND ACRONYMS

AOI' Annual Operating Plan NAI L'A Northl American Free I'rade AgrLemLnt1ANCOMFXT Foreign 't'rade 13ank of Mexico (Banco Nacional Ie "('l National Competitive 13idding

Comercio Exterior)COPl.ADE State l'lanning Commission \N P Net l'resent ValueC'NA National Water Commission (Coomisioii Nac ai'lt dc 1' 1' 1'rotect Implementation Plan

Agua)FA Fnvirolnmental Asscssment 1. Post-larvaeF .RR Economic RZate of Return P 1'( l IIPA Attoney e(icneral's 01itice lor I nvirominental

lProt (Procuradura del Medio Amnbienlte)IDiA (jeneral Directorate lbr Aquaculltuire (Direccion S \ Special AccoUIt

(Generale de Acuacultulra)['IRA [rUst Fund for Agriculture (Iondo de (iaratia v S V(IAR Ministry ol'Agriculture, Livestock and Rural

l'omento para la Agr icultLura( Ganaderia v D)evelopmenmtAvicultura)

FONAES National f'und tbr Solidarity Enterprises (Eondo SI'lPlSCA Founier Secretari t of I ishelries (Secretaria deNacional de Empresas de Solidaridad') Pesca)

(GiM G1overnment of' Mexico SilD)t'S()I. Ministry ot'Social D)evelopmcnt (Secretaria dcel)esarollo Social)

I JACC'I I lazard Analysis Critical Control lointis S \, INAI ' Ministry of Environnment, Natural Resourcesand l'ishleries (Secretaria de Mcdio Amhbieite,Reciursos Naturales N Plesca)

IC13 Lntemnational Competitive I3idding Si li('l Ministry of, Finance (Secretarial de I lacienda yCiedito P'ublico)

ICRM Integrated Coastal Resource Management SO)I: Statement of l;xpenditureI1{N Inlections I lypodennal and I lemotopoictic Necrosis Si1R Specitic Pathogen ResistanitINE National Ecology Institute (Instituto Nacional de Ip l 1 Iargeted Investmiienlt lund

Ecologia)l.(iEl`PA General Law on Ecological Fquilibrium and )R 'I'eleiis of' Reterenl(c

Ernvironmental PlrotectioniIJJCP Land tJse Capability I'lans

Vice President Shahid Javed ]3urkiDirector Olivier lafourcadeManager Michael 13axterStatY Member Louise Cord

Thle followring individuals contributed to the preparation of the Mexic, > Aquaculture I)evelopment ProjectMessrs [Mines. Louise Cord, Mark Cackler, Rudy van Puvmbroeck Charles di lIeva, Silvia Castro, D)ouglas Olson, Adollo13rizzi, 'I'eresa Roncal, Rodrigo Chaves, Nonni Riskaer, Auguista Molnar, Stefan Keoberle and Maria Conriia (World Bank).Philippe Vergne, D)onald Robaduie. Kevin Fitzsimmons, Mark llardin. Billie de Walt, Andrew Kaelin and l)onald l.ightner-Lidia R. Vidal, Carlos Wiinaun (Consultants). Peer reviewers were Messrs. /.iWeg, Vaii Santen, anld Ms Scura lProductionassistance was provided by Platricia lyenga and Margarete Ro(Lousaki,

MEXICOAQUACULTURE DEVELOPMENT PROJECT

CONTENTSPage No.

LOAN AND PROJECT SUMMARY .................................................... i

1. AQUACULTURE IN MEXICO .I. ...... IINTRODUCTION . ........................................ , I

AQUACULTURE PRODUCTION AND MARKETING ................................................. ,, 2INSTITUTIONAL AND REGULATORY FRAMEWORK ... 3SOCIAL FRAMEWORK ............................................ 6ENVIRONMENTAL CHIARACTERISTICS................. 8................,., . 8LESSONS LEARNED ................................ I 10

RATIONALE FOR WORLD BANK INVOLVEMENT ... .... 11

2. THE PROJECT .1............... , ,, 13PROJECT GOAL AND PURPOSE ......................... 13PROJECT DESCRIPTION 13.................. . , .... 3

Regulatory Framework and Public Goods .................................... 13Social Sector Development Component. ... 18

ENVIRONMENTAL ISSUES.... 2PROGRAM OF TARGETED INTERVENTIONS . ... 29PROJECT COSTS AND FINANcING PILAN . .,, .... 29

Project Costs .......... ,, 29Financing .,,, , 30Cost Recovery and Cost Sharing .................................. ,,.,,,.,,.. 31

PROJECT ORGANIZATION AND MANAGEMFNT ......................................... 32Project Implementation ...................... 32Procurement ...... ....... 34Disbursement . 37Accounts and Audits . ,, 39Implementation Monitoring and Evaluation .40World Bank Supervision and Mid-Term Review .41

PROJECT BENEFITS AND ECONOMIC EVALUATION ............................................ ,.41PROJECT RISKS ............ ,., ., , 44

3. AGREEMENTS AND RECOMMENDATIONS.46 .............................................. 46

LIST OF TEXT TABLES

Table I Estimated Project CostsTable 2 Procurement ArrangementsTable 3 Thresholds for Procurement Methods and Prior ReviewTable 4 Estimated Schedule of IBRD Disbursements

ANNEXES

A Environmental Risks and Management PlanB Project Economic Analysis and BenefitsC Project Costs SummaryD Flow of FundsE Lessons Learned from Past ExperienceF Project Logical FrameworkG List of Documents in the Project FileH Glossary of TermsI Aquaculture Production and Marketing in Mexico

MAP

IBRD No. 26690 Mexico-Aquaculture Development Project

MEXICO

AQUACULTURE DEVELOPMENT PROJECT

LOAN AND PROJECT SUMMARY

Borrower: Banco Nacional de Comercio Exterior (BANCOMEXT)

Guarantor: United Mexican States

Implementing Ministry of Environment, Natural Resources, and FisheriesAgency: (SEMARNAP)

Direct Beneficiaries Approximately 7,800 low-income and poor aquacultureof Physical Project producers and their familiesInvestments:

Poverty Category: Program of Targeted Interventions. Approximately 90% of theproject's beneficiaries will be marginal producers and their families.See para 2.57.

Loan Amount: US$40 million

Terms: Standard amortization term, grace period, and interest rate for fixedrate US$ single currency loans with an expected disbursementperiod of 3-6 years.

Commitment Fee: 0.75% on undisbursed loan balances, beginning 60 days aftersigning, less any waiver

Project Cost US$58.8 million (see paras 2.58-2.65)and Financing Plan:

Economic Rate 35% (for 83% of project costs: AcuaMexico subprojects,of Return: AcuaMexico Management Contract, Regional Diagnostic

Laboratory Network, Research Fund, Environment and CoastalResources Management Subcomponent, and Park Training andMonitoring Program. See para 2.99 and Annex B.

Map: IBRD No. 26690

Staff Appraisal Report No. 13898-MEReport:

MEXICO

AQUACULTURE DEVELOPMENT PROJECT

1. AQUACULTURE IN MEXICO

INTRODUCTION

1.1 The aquaculture sector in Mexico is small, contributing less than 15% of totalfisheries production and less than 1% of agricultural GDP and exports. However, it offerssignificant growth potential. Mexico's rich natural resource base includes abundant coastaland inland water resources with a wide range of water temperatures and salinities. Addedto this base, there are large tracts of coastal lands well suited to aquaculture and unsuitablefor agriculture. The aquaculture sector itself has an attractive regulatory and policyframework. Starting with the 1986 revision of the Fisheries Law and culminating with the1993 Foreign Investment Law, a series of legal and regulatory changes have been designedto facilitate private and foreign investment in aquaculture and increase Mexico's access tointernational seafood markets (Box 1). These efforts are a good start; however, theGovernment of Mexico is working to make furthur improvements in the following areas.

1.2 First, the Government of Mexico is modifying its regulatory framework and publicgoods role to promote private sector-led involvement. In particular, it is seeking to:strengthen the framework for aquatic health, and review the regulatory framework forpermits, licenses, and authorizations for aquaculture activities. Second, the Government isstriving to provide the key public goods and services (research, laboratory diagnosticfacilities, etc.) necessary for development of the sector. These should be accessible tosector's social sector producers (residents of ejidos, cooperatives and communal landgroups (mainly indigenous people) and other economically disadvantaged producers) aswell as its commercial producers. Third, the Government is seeking to carry out the aboveservices and investments using limited fiscal resources combined with cost recoverymechanisms to create a sector that contributes to the country's economic growth.

1.3 Moreover, as aquaculture expands it will face a series of social and environmentalchallenges. For example, the developing aquaculture industry could exclude the socialsector despite the fact that they comprise the majority of the sector's producers and ownmost of the coastal lands suitable for aquaculture. The recent changes in the regulatoryframework are likely to increase private sector access to the resources traditionally held bythe social sector. Although social sector producers currently possess an estimated 70-90%of the suitable coastal lands, many lack the capital and technology to fully exploit theseareas for aquaculture. Private sector producers may now purchase these lands from socialsector producers, which the previous legal framework did not allow, and may also enterinto joint investment arrangements with social sector producers more easily (Box 1). But

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despite the potential for profitable outcomes, a large influx of private sector investmentsinto coastal areas could create tensions for existing communities. Another possibleproblem may be the difficulty social sector producers have in complying with therequirements for legal licenses and permits for aquaculture. The complexity and costs ofthe application process might place social sector producers at a disadvantage in gaininglegal access to aquaculture resources.

1.4 Another set of problems that could emerge with a rapidly growing aquaculturesector concerns the environment. While the majority of aquaculture production is frominland water bodies, the sector's greatest potential lies with coastal aquaculture, especiallyfor shrimp. If coastal aquaculture is developed without regard for the environment, coastalecosystems, wildlife and communities that have traditionally resided in these areas couldbe negatively affected. Therefore it will be necessary to reinforce the environmentalinstitutions created by the law, target the environmental safeguards more specifically toaquaculture, and strengthen the capacity of state and local governments to useenvironmental tools for resource allocation decisions in coastal areas (para 1.24).

1.5 The sector is poised for growth, but it faces the above issues. Because of theirimportance, how the Government addresses these challenges could provide useful modelsand lessons to be applied to similar issues in other areas of natural resource managementand agriculture policy. The first chapter in this report describes the aquaculture sector inMexico in a fuller context, evaluating the principal changes in the relevant regulatoryframework and assessing the main environmental and social issues. The chapter concludeswith a section on lessons learned by the World Bank and other donors in aquaculture andcoastal areas development and a rationale for World Bank support of the MexicoAquaculture Development Project.

AQUACULTURE PRODUCTION AND MARKETING

1.6 Aquaculture is defined as the raising of aquatic species in a controlled environment(Annex H). Aquaculture production in Mexico is characterized by a large, traditionalsector that includes reservoir restocking (also known as inland capture fishing) and smallpond rural aquaculture, and a small, but rapidly growing, high-yield modern commercialsector (Annex I).

1.7 Aquaculture is a relatively recent activity in Mexico. It has been dominated by theproduction of freshwater species (tilapia, carp, catfish, charal and trout) in inland waterbodies located in Mexico's coastal states. Total aquaculture output represents about 14%of total fisheries production in the country and places Mexico 14th in the world foraquaculture production. The majority of the sector's output is tilapia (46%), followed byoysters (18%), carp (15%), and shrimp (9%). Mexico currently has 65,000-70,000 ha inaquaculture production, of which 16,000 ha are shrimp farms. In the case of shrimp, thisrepresents less than 10% of the estimated total area suitable for shrimp farming.Aquaculture production is concentrated in the 17 Pacific and Gulf coastal states, whichaccount for 80% of total output.

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1.8 There are factors that constrain the productivity of aquaculture production inMexico. First, aquaculture is limited by the inadequate technical knowledge of socialsector producers, which has led to poor site selection for ponds and difficulties in holdingand reproducing juvenile forms, and has encouraged the quasi-exclusion of social sectorproducers from commercial aquaculture. Second, aquaculture is constrained by diseaserisks, such as the IHHN virus that reduces growth rates, production and market value aswell as other diseases with the potential to cause high losses among the affectedpopulations. Third, the development of aquaculture has been restrained by limited supportservices, particularly research and diagnostic laboratories.

1.9 Almost all of Mexico's aquaculture production is either marketed nationally (55%-60%), or consumed directly by the producer (34%-39%); only 6% of the total output isexported. Rural aquaculture production is mainly for on-farm consumption with smallsurpluses sold in the local community. Restocking production is consumed directly by theproducers or sold in local and regional markets. Commercial aquaculture production isdirected toward specific urban markets (especially Mexico City, Guadalajara, Monterrey),and the better quality output is exported. Shrimp accounts for about 85% (in value) oftotal aquaculture exports, and the remainder consists of small amounts of tilapia, oysters,scallops, and abalone. The United States is the destination for most exports.

1.10 There are two sets of constraints to the marketing of aquaculture output. First,many of Mexico's processing plants, which until recently were almost exclusively in thepublic sector, lack up to date technology, infrastructure, and sanitary conditions.However, the expanded opportunities for private sector investment in production andprocessing activities under the new regulatory framework, coupled with the currentfavorable export opportunities, and the Government's promotion program to assistenterprises to meet HACCP (Hazard Analysis Critical Control Points) guidelines -- allprovide increased incentives for investments in marketing infrastructure.

1.11 Second, Mexico faces competitive world markets, particularly in the medium term.While export opportunities remain very attractive for shrimp and tilapia over the next twoto three years, medium- to long-term market conditions include increasing competition.The tilapia market will face increasing production from Costa Rica, Columbia and Taiwan.Similarly, the attractiveness of the shrimp market will depend on the extent to whichChina's and India's shrimp production recovers from the recent disease epidemics and thespeed at which other competitive producers (e.g., Vietnam and Thailand) are able expandtheir exports.

INSTITUTIONAL AND REGULATORY FRAMEWORK

1.12 In December 1994, the responsibility for policy on the environment, naturalresources and fisheries was assigned to the Ministry of Environment, Natural Resourcesand Fisheries (SEMARNAP). The new Ministry merges the former Ministry of Fisheries(SEPESCA) and several other institutional bodies previously under the control of theMinistries of Agriculture, Livestock and Rural Development (SAGAR) and Social Affairs(SEDESOL). The SEMARNAP has the challenging task of implementing the new

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regulatory and policy framework for environment, forestry, water, and fisheries. Thesefour sectors are highly intertwined and significantly affect the social fabric of Mexico'srural sector. With respect to aquaculture, this new institutional framework is expected tofacilitate access to water for aquaculture and create a more environmentally and sociallyintegrated approach to aquaculture development.

1.13 Since 1986, and especially since 1992, the overall body of laws affecting theaquaculture and fisheries sectors has undergone significant changes (Box 1). The revisedregulatory framework is designed to stimulate environmentally sustainable fisheryproduction. With respect to aquaculture, there are three principal elements in thelegislation. First, the new framework allows for a greater role for the private sector by: (a)eliminating the exclusive rights of the social sector in the cultivation of most high-valueaquaculture species; (b) eliminating restrictions that precluded private sectoraquaculturalists from collecting wild shrimp post-larvae (PL) and other juvenile forms(Annex H); and (c) opening up access to ejido lands, which include much of the country'scoastal lands suitable for aquaculture, either through direct purchase or joint investmentswith ejidatarios (Annex H).

1.14 Second, the new framework promotes investment in the sector by: (a) adoptingfavorable fiscal incentives (reimbursable value added tax (VAT), accelerated depreciationschedule, and reduced profit taxes) for aquaculture investments; (b) facilitating access tokey aquaculture inputs (especially imported inputs), and (c) lifting restrictions on levels offoreign investment in the sector.

1.15 Third, the Fisheries Law stresses sustainable fishing by linking permits and licensesto the biological capacity of fisheries resources, and by regulating the areas and thenumbers of juvenile forms (PL, fingerlings, offspring, etc.) that may be collected from thewild. The law requires that the Government issue: (a) authorizations to collect wildjuvenile forms; (b) licenses for commercial fishing (5-20 years) and aquaculture (5-50years); and (c) permits for commercial fishing, which provide the same rights as licensesbut have simpler processing requirements (technical studies are not required), and are for ashorter period of time (1-4 years). Authorizations to collect wild juvenile forms aregranted by number and area, while permits and licenses are granted by area, vessel, and insome cases, by fishing unit effort or aquaculture unit effort.

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Box 1. Regulatory Framework for Fisheries and Aquaculture

The principal changes in the regulatory framework affecting aquaculture began in 1986with the Federal Fisheries Law and cumulated in the 1993 Foreign Investment Law. Theprincipal changes are summarized below (see paras 1 .24-1.25.) for changes inenvironmental regulatory framework):

1986 Fisheries Law facilitated private sector investment in aquaculture by creating amechanism for private sector investors to enter into business agreements with cooperativesto develop shrimp farms.

1992 Fisheries Law sought to:

promote private investment in aquaculture, by lifting restrictions that permittedonly the social sector to cultivate and process many high-value species (e.g.,shrimp, oysters, clams, lobster, abalone), thereby facilitating flows of privatecapital into the sector. Similarly, the natural breeding grounds of shrimp post-larvae, which previously had been exclusively reserved for the social sector, wereopened to private producers, and

provide greater investment security, by extending the maximum aquacultureconcession from 20 years to 50 and facilitating the transfer and renewal ofconcessions. The law establishes biological and economic criteria as the basis togrant concessions and licenses.

Reform of Article 27 of the Constitution (1992) promotes private sector involvement byfacilitating joint ventures between private investors and ejidos, mainly in coastal areas, andby allowing ejidos to sell their land to non-ejidatarios.

1992 Water Law sought to: increase the sector's access to water by removing restrictionson the use of water for aquaculture and giving water for aquaculture the same priority asother productive uses of water. It also permits the use of irrigation canals for cageaquaculture and lifts the requirement for licenses for aquaculture farms (cage culture) inthe sea or working floating cages in inland bodies of water.

Fiscal Reforms (1989) sought to create a favorable environment for investing in the sector.In particular, individuals, cooperatives and firms involved exclusively in aquacultureactivities have a 50% exemption of their income tax; reimbursement of the value added taxVAT) when the producer pays duty on imported inputs; and accelerated depreciation orwrite-offs for up to 62% of the initial infrastructure investment and for up to 89% of theinvestment in machinery and equipment.

North American Free Trade Accord (NAFTA) and Trade Policy (1992) established azero duty on imports of basic inputs for aquaculture including fingerlings, seeds and postlarvae. In addition, tariffs on imports of feed for aquaculture species were reduced.Machinery and specialized equipment for export-oriented aquaculture farms qualify forpromotion mechanisms such as the Temporary Imports for Export Program. NAFTA alsoexpands Mexico's access to the United States and Canada.

1993 Foreign Investment Law permits foreign participation up to 100% for investments inaquaculture production, processing and marketing.

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1.16 The Fisheries Law defines five key areas of responsibility for the Government withrespect to aquaculture: (a) promotion of research and extension services, (b) granting ofpermits, authorizations, and licenses for aquaculture, inland capture fisheries and thecollection of wild juvenile forms; (c) promotion of aquaculture parks and hatcheries; (d)promotion of financial support programs; and (e) identification of areas suitable for thedevelopment of aquaculture.

1.17 To implement its new regulatory framework, the Government developed theNational Program for Fisheries and Aquaculture for 1995-2000. The main elements of theprogram are to: (a) develop aquaculture parks through the provision of sharedinfrastructure; (b) develop new technological models for aquaculture, together withresearch and educational institutions and the private sector, particularly for shrimpcultivation; (c) support aquaculture research mainly through collaborative arrangementswith public and private research institutions; (d) develop regional diagnostic laboratoriesfor aquatic diseases; (e) expand land use planning in areas with high aquaculture potential;(f) improve the management and restocking of endangered species, such as abalone; (g)promote aquaculture production in social sector communities; and (h) complete theregulatory framework for aquatic health.

1.18 Although the above regulatory and institutional changes and policy developmentsrationalize the framework for the sector and open it up to allow for a greater role formarket forces, the Government is working to address several remaining issues. First, theGovernment is continuing to shift from investing directly in the sector toward regulatoryand public goods activities. Second, it is working on developing a clearer strategy topromote aquaculture among social sector producers and to effectively deliver public goodsand services to this group. Third, the regulatory framework for fishing and aquaculturepermits and licenses needs to be further simplified and disseminated to promote increasedaquaculture investment, particularly among social sector producers. As discussed inChapter II, the proposed project has been designed to support Government efforts to dealwith these issues.

SOCIAL FRAMEWORK

1.19 The main populations around the large reservoirs and coastal areas most suited toaquaculture are predominantly small producers and fishermen, the majority of which arefrom the social sector. During the land reform program, many ejidos were grantedcommunal lands (mud flats and salt flats) in coastal areas that were unsuitable foragriculture (para. 1.3). Most of the producers in rural/restocking aquaculture have dividedtheir time between aquaculture/fishing and agriculture/livestock activities. They are almostexclusively involved in rural aquaculture (small pond) and restocking aquaculture (inlandfishing), with almost no direct involvement in high-yield aquaculture, given the significantcapital and technological requirements of this activity. The exception has been high-yieldcage culture operations in inland water bodies, which have attracted an increasing numberof small rural producers.

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1.20 Women have an important role in aquaculture. They mainly are involved in theprocessing and marketing of oysters and shrimp. Women generally do not fish or cultivateaquaculture products directly, with the exception of the collection of wild PLs.Commonly, the main job of women in aquaculture is to remove the oysters from their shellor to peel shrimp, activities that are generally carried out in the house. Women are alsooften involved in the commercialization of shellfish and finfish in local markets.

1.21 In addition, indigenous people have an important role in aquaculture. While themajority of these people are concentrated in the inland areas at higher elevations, asignificant indigenous population is found along the coastal areas or in ejidos andindigenous communities near lakes, rivers, or large, seasonal water bodies, which areimportant for restocking aquaculture. Furthermore, upland indigenous farmers areincreasingly becoming engaged in rural and restocking aquaculture as the populationincreases and land use intensifies. Currently, rural and restocking aquaculture are mainly asubsistence activity to supplement the traditional indigenous diet.

1.22 The social assessment carried out for the project identifies four sets of potentialsocial issues likely to affect Mexico's aquaculture sector during the next decade. They are:

(a) Coastal Aquaculture

(i) The recent changes in the regulatory framework affectingaquaculture seek to stimulate investment in the sector, particularly in high-yield modern aquaculture (paras 1.13 and 1.14). However, some socialsector producers may not be able to participate in commercial aquaculturedue to insufficient capital and technology.

(ii) Other coastal residents, not directly involved in aquaculture, couldbe adversely affected by the development of the sector. They may loseaccess to coastal resources to which they have traditional use rights. Forexample, the increased collection of wild PL and associated by-catch ofjuvenile finfish and crustaceans for aquaculture ponds may be perceived asa problem by many traditional coastal fishermen and aquaculturalists.

(iii) The development of coastal aquaculture in some countries has ledto the degradation of fragile coastal wetlands and lagoon systems due topoorly planned dredging, road construction, shrimp farm layouts, anddischarge systems. This has affected the quality of the local resource baseand the livelihoods of local residents leading to tensions between them andaquaculturalists.

(iv) Coastal and inland reservoir aquaculture investments have beennegatively affected by pesticide run-off or soil erosion caused byagriculturalists, thereby creating tensions between the aquaculturalists andnearby farming communities.

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(b) Permits and Licenses. The current system for allocating permits andlicenses for aquaculture (cage culture) and restocking aquaculture (inland capturefisheries) is complicated, expeiisive and not fully disseminated to all aquacultureproducers. These processes may make it difficult for some social sector producersto get permits, even though the Fisheries Law does mandate that producerscurrently exploiting the fisheries resource (many of whom are from the socialsector) have priority in receiving official permits and authorizations.

(c) Marketing/Processing. A portion of the small-scale informal marketingsystem for fish and seafood products may be negatively affected by themodernization of aquaculture and fishing. Large-scale marketing associated withhigh-yield aquaculture may reduce the market niches traditionally filled by theinformal sector.

(d) Institutional Framework. In the past, public sector agencies that dealtwith fishing and aquaculture were not fully effective in resolving social concernsassociated with aquaculture, despite the fact that the social sector's involvement inaquaculture was highly protected by the regulatory framework. Moreover, civilsociety groups, universities, technical institutes, advocacy groups, and otherorganizations working in the aquaculture sector were not effectively incorporatedinto the Government's aquacultural investment and monitoring activities.

ENVIRONMENTAL CHARACTERISTICS

1.23 The impact of most of Mexico's aquaculture activities on the environment has sofar been negligible (Annex A). Almost all of Mexico's aquaculture production is frominland water bodies and rural ponds, which have very little impact on the environment.Most of the negative impacts of aquaculture in Mexico relate to high-yield commercialshrimp farming, which remains a relatively recent and limited activity.

1.24 Notwithstanding the fact that aquaculture has so far had a limited impact on theenvironment, the Government has taken several important steps to mitigate potentialnegative impacts. First, in 1996 it revised the General Law on Ecological Equilibrium andEnvironmental Protection (LGEEPA), which reinforces the previous regulatoryframework and defines with greater clarity the attributes of the three levels of government.In particular this law and associated regulations obligate SEMARNAP to the sustainablemanagement of aquatic flora and fauna and make the National Ecology Institute (INE)responsible for the evaluation of the environmental impact of fishery and aquacultureactivities. Second, the Attorney General's Office for the Environmental Protection(PROFEPA) was created in 1988 to ensure compliance with requirements listed inenvironmental assessment (EA) reports for particular investments and with federalGovernment regulations. This agency has offices in all states, jurisdiction over mostaquaculture operations, and strong legal powers.

1.25 Third, a "Single Window" system was created in 1990 to assist potential investorsobtain the various required permits and approvals for an aquaculture project, which may

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involve up to 20 separate reviews, authorizations or permits from different agencies.'Under the Single Window system, the Subsecretariat of Fisheries is the only point ofcontact between the project promoter and the Government in the procurement of allpermits. Fourth, the Subsecretariat of Fisheries and INE have initiated Land UseCapability Plans (LUCP) for the nation's coastal zones. The LUCPs provide an a prioriindication of the preferred use of coastal lands, including aquaculture. An operationalLUCP should facilitate the environmental assessment process for aquaculture investments,help regional and local planners avoid the siting of non-aquaculture operations that mayharm or be harmed by aquaculture, and if properly designed with local input, avoid socialproblems related to the expansion of aquaculture. Under the direction of INE, theSubsecretariat has thus far undertaken LUCP baseline studies in six states, including fiveof the seven states that would be included in the project.

1.26 Despite these significant institutional and policy advances, there are problems thathinder their full and satisfactory implementation:

(a) Principal constraints to the effectiveness of the environmental assessmentmethodology developed under LGEEPA include a large backlog in the evaluationof EA reports by INE's office in Mexico City, insufficient personnel to review EAreports, insufficient field review of projects by INE reviewers, and unclearrequirements for data in the EA format.

(b) PROFEPA has been preoccupied with monitoring the most seriousenvironmental problems in the country and needs to give more attention toaquaculture development.

(c) The Single Window program remains quite lengthy and cumbersome.Evaluation of permit documents is often delayed due to the geographic dispersionof agencies and the need to physically relay the body of documents from one officeor region to another.

(d) Current LUCP methodology, although identifying mangroves as a forestcategory, neither distinguishes between the various classes of mangrove forest norclassifies inter-tidal mud flats. Despite the recognized value of mangrove forestsand mud flats and the fact that they offer great potential for shrimp aquaculturedevelopment, Mexico does not have a comprehensive inventory of either habitattype. This limits the effective monitoring of the impact of aquaculture and otheractivities on these areas. Moreover, participation needs to be incorporated into thedesign and upkeep of these plans if they are to be fully implemented.

Some of the permits that are required are: an aquaculture concession from SEMARNAP; a wateruse concession from the National Water Commission or an authorization of agricultural viabilityfrom the Agrarian Reform Ministry for all investments done by social sector producers;documentation confirming the status of private sector investors from the Ministry of ForeignRelations; and approval of the environmental assessment from INE.

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(e) Mexico does not have a coastal management policy or program. Littleattention has been given to an integrated approach that would network theresponsibilities of the many federal and state agencies charged with governingcoastal ecosystems. The many issues and interested actors affected by thetransformation of coastal lagoons due to changes in freshwater inflows,overfishing, dredging, and the manipulation of inlets and sedimentation require aparticipatory approach to resource management.

1.27 In short, despite significant improvements in the regulatory and institutionalframework for environmental issues relevant to aquaculture, both the institutions and theinstruments designed to monitor the impact of aquaculture on the environment could bestrengthened.

LESSONS LEARNED

1.28 The World Bank has limited experience in aquaculture and coastal areasdevelopment (Annex E). Since the first fishery project in 1964, there have been fewer thanfifteen projects with a significant aquaculture component. Similarly, there is littleexperience with coastal areas development as there are only two ongoing coastal areasdevelopment projects, both outside the Latin America region. Nonetheless, someimportant lessons can be drawn from the World Bank's experience in aquaculture andfisheries development. First, the sector requires an attractive regulatory and policyframework for successful development. Second, within an appropriate public sector/goodsframework, the private sector is capable and interested in aquaculture investments and itsrole should be fully considered in project design. Third, cost recovery from producers hasnot always been successful given the high-risk nature of aquaculture investments and theinappropriate use of funds on some projects. Producer access to technical assistance andclose monitoring are required to ensure cost recovery. Fourth, intensive staff training andtechnical assistance should be incorporated into project design. Fifth, the land tenure rightsof social groups residing in coastal areas should be reflected in project design. Sixth, toavoid risks of disease epidemics with highly vulnerable aquaculture species (such asshrimp), land use planning, early diagnostic services and specific disease free post-larvaeproduction technologies should be incorporated into project design. All of the abovelessons have been taken into consideration and are reflected in the design of this project.

1.29 The principal lessons from the World Bank's limited experience in coastal areadevelopment projects include the need for: significant institutional strengthening; high-level political support given the complexity of the issues involved; and involvement of onlya few institutions to facilitate planning and implementation and avoid interagency rivalry.Pilot interventions have been more successful than large-scale coastal zone managementprojects. Previous non-World Bank experience with the development of coastalaquaculture in a number of countries, including Mexico, has demonstrated the need to planinvestments in broader planning frameworks developed to reduce conflicts amongpotentially competing uses and users in coastal zones.

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RATIONALE FOR WORLD BANK INVOLVEMENT

1.30 The aquaculture sector is at a critical juncture in Mexico. It faces considerableinstitutional, environmental, social and technical challenges. Aquaculture, and especiallycoastal shrimp farms, will continue to expand in Mexico with or without the proposedproject. The project, however, provides the World Bank with an opportunity to assistGovernment put in place some key public goods and services to promote overall sectoralgrowth and poverty alleviation and to address the potential social and environmentalissues while still in their early stages.

1.31 The proposed loan is consistent with the Country Assistance Strategy that wasdiscussed by the Board on December 17, 1996. In particular, the project would supportthe Strategy's objectives of poverty reduction, enhanced rural productivity, andenvironmental management as described below.

1.32 Poverty Reduction and Enhancement of Rural Productivity. The WorldBank's most successful projects in rural poverty alleviation in Mexico have focused on theprovision of (i) basic infrastructure in poor regions (e.g., First and SecondDecentralization and Regional Development Projects, (Loans 3310-ME and 3790-MErespectively, and PRODERITH, Loan 2658-ME), and (ii) technical assistance to socialsector producers via government extension programs (e.g., PRODERITH, Rainfed AreasDevelopment Project, Loan 3778-ME, Chiapas Agricultural Development Project, Loan2526-ME). An important challenge faced by the World Bank in its efforts to alleviate ruralpoverty in Mexico has been to find appropriate instruments for supporting productive,income-generating investments by social sector producers.

1.33 The proposed project would test a variety of mechanisms for involving socialsector producers in productive aquaculture investments. For example, the proposed sevenaquaculture parks and hatcheries (para. 2.24) would benefit social sector producers, whilea targeted investment fund would use a variety of civil society and public sectorinstitutions to target small-scale investment and technical assistance support to socialsector aquaculture producers (para. 2.38). Overall, the project would raise theproductivity of the resources owned by social sector producers to assist them inaccumulating the necessary capital and technical skills to invest in commercial, as well asrural and restocking aquaculture. While the Government may have undertaken some ofthese production investments without the project, the involvement of the World Bank hashelped to ensure that the investments are targeted to the social sector, that they take intoaccount social and environmental risks that may emerge during aquaculture development,and that they incorporate well-defined principles of cost recovery and cost sharing.

1.34 Environmental Management. The project would support the World Bank'sobjective of environmentally sustainable development by improving the quality of andaccess to tools for the proper environmental management of aquaculture resources(coastal lands and waters, endangered species, etc.) at the federal, state and local levels(para. 2.8). The project would also support the development of a community-based,integrated coastal resource management pilot to assist the Government in addressing

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issues related to the use of fragile coastal resources in an integrated and participatorymanner. The investments supported by the project will provide useful models to theGovernment and civil society on how to incorporate social and environmental concernsinto productive rural sector investment projects.

1.35 The project will complement other proposed and ongoing World Bank activities inMexico, which have a focus on promoting environmentally sustainable growth in the ruralsector and rural poverty alleviation. For example, it will support the On-Farm and Small-Scale Irrigation Networks Improvement Project's (Loan 3704-ME) efforts to reorientsaline lands away from agriculture toward other productive uses such as aquaculture. Theenvironmental component would expand ongoing efforts of the Northern Border AreaEnvironmental Project (Loan 3750-ME) and the Mexico Environment Project (Loan3461-ME) to strengthen the capacity of state and municipal governments to bettermonitor environmental issues. Further, the various models to promote productiveinvestment among social sector producers will provide useful examples for the proposedSustainable Development Project currently under preparation. Finally, the project is in linewith the recommendations of the Mexico Rural Poverty Green Cover Study (Report No.1 5058-ME) which calls for the piloting of matching grant programs to support productiveinvestments by economically disadvantaged producers and for the provision of technicalassistance to community groups to improve their production, management and marketingpractices.

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2. THE PROJECT

PROJECT GOAL AND PURPOSE

2.1 The objective of the proposed project would be to promote sustainableaquaculture development by increasing the productivity of the aquaculture sector within aframework of social consensus and environmental soundness -- thereby contributing toeconomic growth and poverty alleviation in Mexico.

PROJECT DESCRIPTION

2.2 The proposed project has two components:

(a) The Regulatory Framework and Public Goods and ServicesComponent would assist the Government in completing and implementing itsregulatory framework and would provide key public goods to stimulate productivesector (private and social) investment in the sector. This component includes foursubcomponents: (i) regulatory framework, (ii) environmental and coastal resourcesmanagement, (iii) public goods and services, and (iv) institutional strengtheningand project coordination.

(b) The Social Sector Development Component (incorporates the SocialStrategy and Indigenous Peoples Development Plan) would support productiveinvestments and training for social sector producers and develop an appropriateinstitutional framework that creates a more level playing field for social sectorparticipation in aquaculture. This component includes two subcomponents: (i)social aquaculture production, and (ii) institutional development.

2.3 Project activities would focus on seven states Baja California Sur, Tamaulipas,Veracruz, Oaxaca, Chiapas, Sinaloa, and Nayarit, although many project activities,particularly those supported by the regulatory framework and public goods component,would benefit aquaculture producers, traders and processors throughout Mexico.

Regulatory Framework and Public Goods Component (US$13.0 million, 25% ofbase costs)

2.4 The regulatory framework and public goods component assists the Government inproviding a proper regulatory framework and key public goods and services.

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Regulatory Framework Subcomponent (US$0.8 million, 1% of base costs)

2.5 This subcomponent would provide support for two programs to assistSEMARNAP in: (a) simplifying and improving the procedures for granting aquacultureconcessions, and (b) completing the regulatory framework for aquatic health.

Aquaculture Permitting Study and Registry System (US$0.5 million, 1% ofbase costs)

2.6 The regulatory framework to authorize aquaculture concessions and permits needsto be further simplified and improved to facilitate investments in aquaculture. The projectwould provide technical assistance, workshops and computer equipment to develop: (a)new procedures for aquaculture permitting (that would be published in Mexico's DiarioOficial), (b) a dissemination and training program to explain the new procedures toSEMARNAP's state delegations and to social sector producers; and (c) an on-line expertsystem and permit registry for the state SEMARNAP delegations to maintain up-to-dateinformation on permit holders and the status of permit requests. A detailed description ofthe study and registry system as well as the terms of reference for the technical assistancecontract to carry-out the program are presented in Annexes A. 0 and A. I ofSEMARNAP's Project Implementation Plan (PIP).

Aquaculture Regulations Program (US$0.3 million, 0.5% of base costs)

2.7 To complete the regulatory framework, principally in the area of aquatic health,the project would finance the development and publication of six new aquatic healthregulations. The project would support: (a) technical assistance to develop the regulations,(b) their publication and translation into French and English, as required by NAFTA; and(c) seminars for aquatic health staff with their counterparts in the U.S. and Canada toensure the consistency of the regulations within NAFTA. Annex A. 2 of the PIP contains adetailed description of the proposed regulations.

Environment and Coastal Resources Management Subcomponent (US$5.1 million,10% of base costs)

2.8 The overall objective of the environment and coastal resources managementsubcomponent is to create a framework for the sustainable development of aquaculture byincreasing the capacity of the federal, state and local government, as well as civil societygroups to monitor and manage the natural resources affected by aquaculture production.In particular, the proposed project aims to: (a) develop instruments for planningaquaculture development and monitoring its impact on the environment; (b) increase theparticipation of community groups, the productive sector, and civil society in the designand use of tools for environmental decision-making; and (c) promote an integratedapproach to the management of coastal resources. To meet the objectives of thesubcomponent, the project would support: (a) an integrated and participatory coastalresource management pilot; (b) coastal wetlands inventories and regular water quality

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monitoring; and (c) improved environmental planning and review processes. Specificenvironmental issues related to physical project investments will be addressed in thefeasibility studies and environmental assessments scheduled for each investment subproject(para. 2.3 5).

Integrated Coastal Resource Management Pilot (US$2.7 million, 5% of basecosts)

2.9 The integrated coastal resource management (ICRM) pilot in Lagoon Tamiahua,Veracruz would assist the Government in developing a national ICRM policy bydemonstrating practical, participatory methods for managing and resolving conflicts overcoastal resources (para. 1.22). In particular, the project would:

(a) provide technical assistance, workshops and training to prepare andformally adopt an ICRM plan for the Lagoon Tamiahua;

(b) finance matching grants to communities and user groups to test ICRMpolicies and techniques during the development of the plan and to implementpriority elements of the ICRM plan once it is formally adopted;

(c) provide equipment and technical assistance to develop and disseminatetested tools (lagoon models and lagoon ecological histories) for managing lagoonsand their associated ecosystems;

(d) provide sustained public education and dissemination programs to createawareness and interest in coastal resource management issues and the newmanagement initiatives; and

(e) carry-out regular water quality monitoring of the lagoon.

The ICRM pilot will be carried-out with a single technical assistance contract that willinclude the provision of equipment, goods and the matching grant fund. The Terms ofReference for the technical assistance contract are included in Annex B. I of the PIP.

Monitoring of Coastal Wetlands and Water Quality (US$1.8 million, 4% ofbase costs)

2.10 To identify the impact of aquaculture on the management and quality of coastalresources, the project would support a baseline inventory and repeated monitoring todevelop the needed quantitative and descriptive databases of critical coastal wetlands andlagoon water quality.

2.11 The coastal wetlands program would inventory wetlands in Sinaloa, Nayarit,Tamaulipas, Veracruz and Chiapas, as these states have the largest mangrove forests. Theinventory would produce photographs, transparencies, atlases, digitized information, andmaps. The project would cover the costs of the necessary ground truthing and theproduction of the final information products (procurement and processing of images,

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publication, and technical assistance) for each state. The inventories would be carried outat the start of the project (Years One and Two) and would be repeated at the end of theproject (Years Four and Five).

2.12 The coastal water quality program would initiate quarterly assessments, onaverage, of coastal water quality and would demonstrate the value of monitoring topotential local consumers of such information. Water quality monitoring would be carriedout in Sinaloa and Nayarit, the states with the most significant water quality problems, andin Tamaulipas to provide baseline and on-going water quality data in conjunction with theimplementation of the San Andres Shrimp Park (para. 2.26). In each of these states, onecoastal lagoon would be selected for the program via a two-step participatory process thatwould take into account the general characteristics and overall productivity of the area.Following an initial review of relevant research to identify problem areas, a state-levelworkshop would be conducted, in which local environmental agency personnel,aquaculturalists, civil society organizations and other parties interested in environmentalquality would identify the targeted lagoon system. The output would include a regionalatlas that interprets water quality trends and geographic information system-type databasefiles. Funds would be provided for technical assistance, publications and disseminationcosts. Annex B.0 of the PIP describes the inventory and water quality monitoringprograms in more detail and Annex B.5 contains the terms of reference for the waterquality monitoring contract.

Environmental Planning and Assessment (US$0.6 million, 1% of base costs)

2.13 To strengthen the capacity of SEMARNAP to address potential environmentalissues related to aquaculture, the project would reinforce two existing planning andassessment programs for aquaculture: the Land Use Capability Program (LUCP) andenvironmental impact assessments (EAs).

2.14 Land Use Capability Program. The program would develop land use capabilityplans for Veracruz and Baja California Sur, the only two project states currently lackingLUCP plans. The studies would be carried out in accordance with the methodologyapproved by [NE and SEMARNAP, and would include public participation in their designand implementation. The input of local business leaders, government, universities, andcoastal resource user groups would be sought to define the issues and review the draftLUCP documents, including the policy recommendations. To develop these plans, theproject would support: technical assistance, materials, workshops, and LUCP publicationsfor Veracruz and Baja California Sur. The methodology to implement the land use plansand the specific objectives for the plans for Veracruz and Baja California Sur are describedin Annexes B.0 and B.2 of the PIP.

2.15 Environmental Impact Assessments. This activity would improve the quality ofINE's environmental assessments for aquaculture by developing criteria and guidelines forEA preparation specific to aquaculture with the provision of technical assistance,workshops and materials. Annexes B.0 and B.3 of the PIP explain in more detail theguidelines to be developed.

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Public Goods and Services Subcomponent (US$4.5 million 9% of base costs)

Research Fund (US$1.1 million 2% of base costs)

2.16 To encourage the generation of new technologies in aquaculture, the projectwould support a regional aquaculture competitive research program giving priority toChiapas and Oaxaca, states which traditionally have had less access to research support.An operating manual for the research fund is included as Annex C.0 to the PIP. Theproposed project would fund incremental recurrent research costs (reactive agents, inputs,materials, small equipment, etc.), but would not fund salaries, administrative costs orlarge-scale infrastructure costs. Recipient researchers would contribute these costs as costsharing, which they would itemize in their budget proposals (para. 2.63), which would beannexed to their signed contract with SEMARNAP. Contracting of short-term supportstaff for up to the duration of the research activity would also be financed. Public andprivate institutions would be permitted to submit proposals for research funding.

Regional Diagnostic Laboratory Network (US$3.4 million, 7% of base costs)

2.17 Mexico is developing a network of diagnostic laboratories to perform laboratorytests, treat diseases, conduct applied research, and carry out training activities. Such alaboratory network could play a significant role in disease prevention and control and thepromotion of high-yield aquaculture. The project would equip the regional diagnosticlaboratories to stimulate their involvement in aquaculture on the condition that they adopta cost pricing policy to recover all operation, maintenance and depreciation costs. Thenetwork would be comprised of a central reference laboratory and at least two regionallyspecialized private or public laboratories. The central reference laboratory would: (a)oversee the laboratory network; (b) serve as a reference for diagnostic and analytical tests;(c) develop and perform unusual, diagnostic or analytical tests and/or research; and (d)provide training and technical assistance to the regional laboratories. During the mid-termreview the involvement of public and private sector facilities in the network would beassessed as well as the policy requiring full cost recovery for services provided by theregional laboratories.

2.18 The project would finance: diagnostic equipment, a database on aquacultureresearch case studies, technical literature, publications, and the preparation of industrymanuals on disease. In addition to the above, the project would finance travel and trainingcosts for the staff from the regional laboratories to attend courses at the central aquaticlaboratory. In exchange for the equipment and training, the regional laboratories wouldcarry out research, prepare manuals, and would offer technical assistance and laboratorytesting to productive sector producers with full cost recovery (para. 2.64). Terms ofreference for the regional laboratory program are included in Annex D. I to the PIP.

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Project Coordination and Institutional Strengthening Subcomponent (US$2.6 million,5% of base costs)

2.19 The objective of this subcomponent is to strengthen the capacity of theSEMARNAP to implement the project and increase its overall effectiveness. Thissubcomponent would strengthen the General Directorate of Aquaculture (DGA) and thefederal delegations in the seven project states. The implementation arrangements for theproject are discussed in greater detail below (paras. 2.65 to 2.70) and in Annex E. 1 of thePEP.

2.20 While there will be no project coordination unit to assist the DGA implement andsupervise project activities, the project would finance an administrative director, fourtechnical promoters, one monitoring and evaluation expert, one environmentalcoordinator, two social scientists, and six months of technical assistance to assist withproject implementation as needed (project evaluation studies for mid-term review, projectmonitoring system). These staff could be consultants, contractors, retrained from withinthe DGA, or re-assigned from other parts of SEMARNAP. In addition, the project wouldfinance computer and communications equipment, furniture and staff travel costs. Tostrengthen the management and communication skills of the DGA, the project wouldsupport staff training courses in management, computer science, English, and socialscience. The project would also finance purchases of relevant databases, journalsubscriptions and textbooks for the Department's library, as well as technical assistance toassist the department in addressing critical areas of concern as they arise.

2.21 As a condition of project effectiveness, SEMARNAP shall have employed andready to assume their functions an administrator, two social scientists and anenvironmental specialist all acceptable to the World Bank.

Social Sector Development Component (US$38.4 million, 75% of base costs)(incorporates the Social Strategy and Indigenous Peoples Development Plan)

2.22 The social sector development component aims to find successful mechanisms topromote the involvement of social sector producers in aquaculture. It is a pilot strategy,whose implementation will be well monitored. In particular, this component would: (a)raise the productivity of the assets owned by social sector producers (mainly land andlabor) via joint investments in aquaculture parks and hatcheries, as well as other small-scale aquaculture activities, and via training and technical assistance; and (b) create afinancial and institutional framework to facilitate and monitor the involvement of socialsector producers in aquaculture using well-defined principles of cost recovery and costsharing. However, if and where the social sector is not competitive in aquaculture, theproject provides the mechanisms for increased private sector participation. Thiscomponent addresses the issues raised in the project's sectoral social assessment (para.

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1.22) and incorporates the management plan developed in the social strategy andIndigenous Peoples Development Plan (SS/IPDP) prepared by the Government. 2

2.23 Social Strategy and Indigenous Peoples Development Plan. The SS/IPDP aimsto: (a) avoid potential sector wide and project related conflicts (para. 1.22); and (b)promote the involvement of social sector producers in the aquaculture sector. To achievethe above objectives, the SS/IPDP included the: (a) provision of social institutionalstrengthening to the DGA to expand its capacity to address social concerns related toaquaculture development; (b) promotion of beneficiary monitoring systems and trainingprograms around subproject investment sites to assist communities participate in andmonitor project activities; (c) carrying-out of feasibility studies before implementingproject investments in commercial aquaculture to identify potential social issues associatedwith the investments and to design a management plan, if necessary; (d) establishment ofa targeted investment fund to test mechanisms to provide social sector producers withinvestment resources, technical assistance and training; and (e) creation of a wild postlarvae program to improve the collection and handling of wild post larvae and to reduceconflicts associated with their harvest. The social aquaculture component described belowincorporates the above activities, with the exception of the wild post larvae program,where SEMARNAP already had an existing similar program.

Social Sector Aquaculture Production Subcomponent (US$32.8 million, 64% of basecosts)

Aquaculture Parks and Hatcheries (27.2 million, 53% of base costs)

2.24 The project would support investments in aquaculture parks and hatcheries.Aquaculture parks provide potential investors and the Government with many advantages,some of the most important being: lower investment and operating costs due to sharedinfrastructure; group acquisition of permits, land and inputs; and controlled aquaculturedevelopment that lowers disease and environmental risks. The objective of the parkinvestments would be to build environmentally and financially sustainable, commercialaquaculture enterprises in which, after an initial transition period, investors from the socialsector would be able to purchase all or a significant portion of the company's assets or sellthem to the private sector. In addition, the parks would provide a model on how toproperly incorporate social and environmental concerns into modern commercialaquaculture.

2.25 The project would support the creation of four aquaculture park enterprises andthree hatcheries, together with interested investors from the social and private sectors (inthe case of the specific pathogen resistant shrimp hatchery). This would involve supportfor feasibility, engineering, and environmental impact studies in accordance with Mexicanlaw, the on-farm and shared infrastructure costs of the parks and hatcheries, as well as the

2 The original SS/IPDP was submitted to the World Bank by the Government on October 20, 1994.It was further developed during the appraisal and post-appraisal missions by a joint WorldBank/GOM team.

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environmental and social management plans, and initial operating costs. The project wouldalso fund training activities for park and hatchery investors to ensure that they have theproper technical and management skills to ultimately assume a significant managerialresponsibility (para. 2.44). The institutional, financial and management arrangements forthe parks and hatcheries are discussed below with the AcuaMexico Fund (para. 2.47) andin the cost sharing section (para. 2.63). The section below details what the project wouldfinance with respect to the four aquaculture parks and three hatcheries.

2.26 The construction of one shrimp park (San Andres, Tamaulipas), and in particular:(a) the construction of the shared park infrastructure (canals, access roads and bridges,pumping stations, power supply systems, equipment, basic infrastructure, and landpurchase costs); (b) the construction of individual park ponds/farms (land purchase costs,nursery and grow-out ponds, intake and outlet structures, basic infrastructure, andequipment); (c) park operating costs for the first two years (park management, technicalstaff, labor, electricity, fuel, materials, chemicals, crop insurance and maintenance) (80%in 2000 and 50% in 2001) ; (d) technical assistance for studies (feasibility, engineering,environmental assessments); and (e) the implementation of the environmental and socialmanagement plans, as necessary.

2.27 The construction of three tilapia parks (Vicente Guerrero, Tamaulipas; ElPortillo, Chiapas; and Cerro de Oro, Oaxaca). In particular, the project would support: (a)docks, boats and cage installations; (b) operating costs for two years (labor, materials andinputs) (80% in 2000 and 50% in 2001); (c) technical assistance for studies (engineering,social, environmental and feasibility); and (d) the implementation of the environmentaland social management plans, as necessary.

2.28 Specific Pathogen-Resistant Shrimp Hatchery. One of the critical factors facingshrimp farming in Mexico is the spread of infectious diseases (para. 1.8). Infected PLs areone of the main sources of transmission of shrimp disease. The use of specific pathogen-resistant (SPR) broodstock in the production of shrimp PLs helps to ensure that PLs areresistant to certain diseases. The main difference between a SPR and non-SPR hatchery isthe technology and protocol used to manage the laboratory. An SPR population isdeveloped through exposing animals to specific pathogens. The progeny of the survivinganimals are then used as broodstock. Great care is used to construct SPR hatcheries inisolated areas to reduce possibilities of contamination from other activities. There areseveral successful SPR hatcheries in the United States However, importing SPR PLs isnot a desirable option, as the international market for this commodity is very thin andunstable, and international trade in PLs, even SPR PLs, provides a way for disease tospread.

2.29 The project will support the construction of one SPR hatchery to produce SPRPLs, nauplii and broodstock to accelerate the introduction of this new technology inMexico. The Government's involvement in the hatchery will be limited in time andresources. The investment will be undertaken jointly with the productive sector andprivatized within one year after it is operational. During the first year, the disease resistantbroodstock will be developed and there will be a training program in the SPR protocol and

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a testing program to ensure the disease resistance of the SPR Pis. The testing program willbe done with a laboratory with an international reputation specialized in shrimp pathologyand the SPR technology. The objective of this investment is for the Government to serveas a catalyst to ensure the rapid introduction and adaptation of this technology to Mexico'sshrimp industry. The SPR hatchery would be constructed using a turnkey contract whichwould include the: (a) civil engineering to construct the SPR hatchery and broodstockfacilities (indoor maturation tanks, feed storage areas, seawater well, etc.), (b) technicalassistance for feasibility, engineering and environmental studies; (c) equipment; (d) atechnology fee; (e) contracts with shrimp pathology laboratories to provide technicalassistance, training and testing services); and (f) the implementation of the environmentalmanagement plan, if necessary. In addition, the project would cover a maximum of 51% ofthe 1999 operating costs.

2.30 The rehabilitation of one abalone hatchery (Punta Eugenia, Baja California Sur)and in particular: (a) investment costs to rehabilitate an abalone hatchery (pumps, blowers,tanks basic infrastructure, vehicles, etc.); (b) technical assistance for engineering andfeasibility studies; (c) partial operating costs for the first two years3; and (d) theimplementation of the environmental and social management plans, if necessary.

2.31 The construction of one pen shell scallop hatchery in Sinaloa. The hatcherywould restock designated areas for seeding of pen shell scallops that would be off-limitsfor exploitation. The restocking program would benefit the entire Pacific coast. There isno other pen shell scallop hatchery in Mexico and supply has decreased due to over-exploitation. The project would support technical assistance for engineering,environmental and feasibility studies, land purchase costs, civil works, equipment, boats,and the implementation of the environmental and social management plans, as necessary.

2.32 The four parks and three hatcheries were selected from among 29 potential parksites proposed by the seven state task forces and reviewed during appraisal by a jointWorld Bank/Government working group. The final investment subprojects parks wereselected according to technical, economic, environmental and social (level of organization,interest of local community, and general income level of local communities) criteria.Prefeasibility technical and environmental studies were carried out during preparation foreach site.

2.33 Feasibility Studies. Feasibility studies will be prepared for each park and hatchery.Terms of reference for the San Andres Shrimp Park and the SPR hatchery are included inAnnexes F. 1. and F.2. to the PIP. The feasibility studies for the other AcuaMexicoinvestments will be carried out using similarly designed terms of reference as for the SanAndres park. The feasibility studies will consider technical, basic engineering (general

3 The 1992 Fisheries Law requires that abalone producers who are almost exclusively social sectorproducers in isolated coastal communities, restock this specie. However, there is no functioningabalone hatchery in Mexico to assist producers comply with the law and imports are difficult toobtain as the international market for abalone spat is very thin

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construction plans, layout, etc.) economic, financial, institutional, social and environmentalaspects to define and detail a project plan that best meets the project's purpose (para. 2.1).The feasibility studies will specifically take into account relevant social and environmentalaspects in the evaluation of alternative plans and will include measures necessary toprevent and address any negative environmental or social impacts identified during theplanning process.

2.34 Creation of Limited Liability Corporations. Concurrent with the preparation of thefeasibility studies, the Management Company (para. 2.53) responsible for overseeing theimplementation of the parks and hatcheries will assist project beneficiaries in forminglimited liability corporations to operate the parks and hatcheries. This will involve thepreparation and registration of Articles of Incorporation for each park corporation, asappropriate.

2.35 The feasibility studies, including the environmental and social management plans(and the Best Practices Manual for the shrimp park) as well as the Articles ofIncorporation for each park, would be agreed with the World Bank before the WorldBank and SEMARNAP would agree upon the terms of reference for the detailedengineering studies and the Mexican environmental impact assessments. If a subprojectwas determined to be not feasible from an environmental or other standpoint, theresources for the concerned park could be reassigned toward another suitable parkinvestment.

2.36 Environmental Assessments. Mexican law requires that an environmental impactassessment be carried out after the engineering study is completed. Consequently, prior tothe construction of each park and hatchery, environmental impact assessments will beprepared in accordance with GOM regulations. These assessments will take into accountenvironmental aspects and include management and prevention measures where necessary.Terms of reference for the assessments for the San Andres Shrimp Park are included inAnnex B.4. of the PIP. As a result of the Mexican environmental impact assessment, thesocial and environmental management plans developed during the feasibility studies mayonly be strengthened and may not be weakened.

2.37 Preliminary environmental analysis of the specific subproject investments carried-out during preparation revealed the following potential environmental issues with theshrimp and tilapia parks (no major environmental issues were identified for the hatcheries):

(a) Shrimp Park. The shrimp park presents some environmental risks,although they are minimal as it is located on 800 ha of grassland (Annex A). Someof the general environmental problems that may affect the shrimp park are: (a)siting and construction impacts, (b) organic loading in pond discharge; and (c)predator control operations, which may impact aquatic birds. The shrimp park willhave a Category A environmental rating. There will be an environmentalassessment carried out as a part of the feasibility study (paras. 2.33-2.35), as wellas an environmental impact study that will be carried out upon competition of the

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engineering study (para. 2.36)4. The terms of reference for the feasibility study forthe San Andres shrimp park will include the preparation of a management plan anda "Best Practices" Manual in accordance with Mexican law to assist parkmanagement make environmentally appropriate decisions.

(b) Tilapia Parks. The principal environmental issue with the three tilapiaparks is the use of tilapia spp., a non-native but already introduced species, in thecage culture operations located in inland reservoirs (Annex A). However, theintroductions will take place in relatively new reservoirs that show littleresemblance to natural, freshwater aquatic communities and where tilapia arealready present. An additional potential environmental risk with the tilapia parks isincreased rates of eutrophication, as excess feed and waste contribute to theorganic load of the parent water body. However, this is not expected to be aproblem, as the cage culture area is limited in scope. The project will support theintroduction of 100 cages at each park. For the three tilapia aquaculture parks,environmental assessments (and management plans if necessary) would beprepared as a part of the feasibility studies prior to initiation of the engineeringstudies. In addition, Government will carry out a separate environmental impactassessment upon the completion of the engineering study, in accordance withMexican law.

Targeted Investment Fund (US 5.6 million, 11% of base costs)

2.38 The targeted investment fund (TIF) aims to test different mechanisms to promoteaquaculture development among social sector producers who lack sufficient land, capitaland technical skills to participate in an aquaculture park. The targeted investment fundwould concentrate its activities in the states of Nayarit, Chiapas, Oaxaca and Veracruzwhere there is a larger proportion of economically disadvantaged social sector aquacultureproducers compared to other project states.

2.39 In particular, the targeted investment fund would finance: (i) individual orcommunity aquaculture investments (rural ponds, cages, the renovation of coastal shrimpimpoundments, wild PL collection and storage centers, etc.); (ii) technical assistance forindividuals or communities in preparing management plans, studies and other requireddocumentation for obtaining concessions and permits or for follow-up assistance for anon-going investment project financed by the TIF; and (iii) workshops organized and run byproducer groups to transfer experiences and best practices.

2.40 The TIF would be implemented by civil society associations and public sectororganizations which have an internal governing body and are able to maintain separateaccounting records for the resources of the fund. Interested participants would submitwell-defined proposals to the Fisheries Subcommittee of the COPLADE (State PlanningCommission) in each state for a pre-selection on a semi-annual basis as indicated in the

4 The subproject environmental and social assessments were not carried out prior to project appraisalbecause the specific subproject investments were not selected until the appraisal mission.

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PIP. This pre-selection committee will include at least two representatives from civilsociety organizations. The final selection of the projects to be funded will be done by atechnical committee within SEMARNAP.

2.41 SEMARNAP would assume responsibility for the environmental analysis of theTIF's investments in accordance with Mexican law and the state INE representative wouldparticipate in the COPLADE selection committee. The environmental and social impact ofthe proposed subprojects as well as proposed management activities would be evaluatedbefore the support is authorized. Moreover, the funding proposal would include monthlyenvironmental and socio-economic monitoring indicators for the proposed TIF investment.During the regular supervision and mid-term review missions of the World Bank, theTIF's review processes for environmental and social issues would be reviewed. Theimplementation and environmental screening arrangements for the TIF are presented in theoperating manual in the PIP.

2.42 A total of US$5.6 million would be allocated to the TIF. The resources areexpected to be split between investment activities; technical assistance; and workshops inaccordance with the procedures in the PIP. The resources will be targeted towardeconomically disadvantaged social sector producers and will be provided on a grant basis,although beneficiary cost sharing will be required for the investment project in the form oflabor, land, local materials, and cash (approximately 25% of investment costs). Themaximum cost of each contract is US$50,000 and the average would be US$40,000. Anestimated 150 proposals would be supported by the project. The proposals will contain adetailed budget for expenditures which will be annexed to the signed contract withSEMARNAP.

Institutional Development Subcomponent (US$5.6 million, 11% of base costs)

2.43 A principal objective of the project is to remove key constraints that have made itdifficult for social sector producers to get involved in aquaculture. A critical constraint forthese producers has been a lack of financial resources, technological skills andmanagement know-how. The project would support training and technical assistanceprograms and would provide an innovative financial and institutional framework with theAcuaMexico Fund to assist social sector producers get access to and manage aquacultureinvestments over time.

Training and Monitoring (US$1.4 million, 3% of base costs)

2.44 Park Investor Training. To provide the park investors with the necessary technicaland management skills, the project would fund workshops, long-term formal trainingscholarships, park councils and foras. The objective is to develop the capacity amongcommunity investors to play a significant role in park management, especially once theGovernment privatizes its share in the parks. The project would support a fund forscholarships to provide formal management and technical training to park investors andtheir families. Candidates would have to be nominated by their respective communities.Following the completion of their training, the recipients would be required to work at the

25

park for a time equal to the time spent in training, or to pay back to the Fund the cost ofthe training. An operations manual for the scholarship fund is presented in Annex H. 1. tothe PIP. The project would also finance bi-annual workshops for each aquaculture parkto train the park investors in selected management and technical topics.

2.45 To assist the park investors in gaining experience in park management, the projectwould support the creation of a five-member park council in each project-supportedpark. The council members would: participate in management decisions (reviewprocurement and audit documents); serve as a liaison between the park investors andmanagement and between outside actors and the parks, and monitor social sectorownership in the parks. To establish and support the councils, the project would financetechnical assistance to set up the park councils and identify their work program, and smallstipends for council members (US$250/year). The park council members, together withthe AcuaMexico Management Company, would organize bi-annual foras for all parkparticipants to discuss the overall direction of the park. Interested outside participantsmay be invited to the fora to discuss their concerns about the park. Annex H.O. to the PIP,describes the operation of the park councils, park fora, and park workshops.

2.46 Park Management Training. The project would also train the management staff ofeach park. To ensure that the parks are well managed during the critical start-up years, theproject would provide an intensive course of training and internships for the parkmanagers (one per park), farm managers (three to five per park), and technicians (ten perpark). The project would finance course fees, per diem, travel costs as well as a trainingcoordinator, printing of manuals, classrooms, dormitories, and teaching ponds. The parkmanagement training arrangements are also summarized in Annex H.0 of the PIP.

AcuaMexico Fund (US$4.2 million, 8% of base costs)

2.47 The AcuaMexico Fund, would be created to carry out the investments in theaquaculture parks and hatcheries. The AcuaMexico Fund would also finance the trainingand monitoring activities for park managers and investors. The AcuaMexico Fund wouldsupport direct investments in aquaculture by:

(a) promoting a high level of social sector participation in economically viable,commercial aquaculture enterprises (e.g., the aquaculture parks);

(b) promoting the introduction of new technology into the commercialaquaculture sector (e.g., the SPR hatchery); and

(c) creating an institutional and financial framework that will secure theprivatization of government investments in high-yield productive aquaculture.

2.48 The AcuaMexico Fund will be created by SHCP as a mandate fund.BANCOMEXT would be the mandate holder and would have the responsibility ofmanaging the Fund's finances and ensuring that its resources are spent in accordance withthe objectives of the Mandate. SHCP would transfer the resources to BANCOMEXT,

26

however, because the Fund would be sectoralized under SEMARNAP (SHCP cannotdirectly support federal investments in aquaculture), the resource flows to theAcuaMexico Fund would be included in SEMARNAP's regular investment budget.

2.49 The AcuaMexico Fund, together with resources from the productive sector (socialsector and private investors), would finance investment and operating costs for the sevenaquaculture park and hatchery corporations. These seven investments will be referred to asthe AcuaMexico subprojects. Under the terms of the SHCP mandate, a MandateCommittee would be responsible for the overall management of the resources of theAcuaMexico Fund and would provide appropriate instructions to BANCOMEXT.Accordingly, the Mandate Committee would be responsible for the initial operation andeventual privatization of the aquaculture parks (as long as the BANCOMEXT holds themajority of the park corporation's share as the AcuaMexico Fund mandate holder) (para.2.53). A technical secretariat will support the Mandate Committee in the day to daymanagement and follow-up of project activities. In order to obtain the necessary technicalexpertise and manpower, the Mandate Committee will obtain, through BANCOMEXT,the services of a management consulting firm experienced in aquaculture management anddevelopment, particularly among social sector producers (referred to as the managementcompany).

2.50 The specific responsibilities of the Mandate Committee and the ManagementCompany are briefly described below (paras. 2.51-2.53) and in the Mandate Contract, theAcuaMexico Fund Operating Rules and the terms of reference for the ManagementCompany found in Annexes 1. 1, 1.2, 1.3 of the PIP. AcuaMexico will operate according tothe principles, objectives and procedures outlined in the deed, and the content of the deed,operating manual and management contract will not be changed during the life of theproject unless agreed with the World Bank. Prior to disbursements for technicalassistance for the SEMARNAP subprojects, the deed, operating rules, and ManagementContract must be signed by all relevant parties and agreed with the World Bank.

2.51 The Mandate Committee will approve, inter alia: the Annual Operating Plan(including the budgets for the park corporations); the projects to be financed with theFund's resources; changes to the AcuaMexico Deed and Operating Rules; the selection ofthe Management Company; and the privatization plans for the AcuaMexico investments.The Mandate Committee would consist of the SEMARNAP Subsecretaries of Fisheries,Planning and Natural Resources, International Affairs and Budget/Accounting Controls;the SHCP Subsecretary for Expenditures; the Federal Environmental ProtectionProcurator; the Presidents of the National Fisheries Institute (INP) and INE; the DirectorGeneral of CNA; and the Directors General of FIRA and FONAES. In addition, thecommittee would have three invited members: one representative of private commercialaquaculture, one from the social sector and one from the park corporations formedthrough the Mandate. From time to time, representatives from the seven project stateSEMARNAP delegations, civil society organizations, the National Agrarian DevelopmentInstitute, the National Indigenous Institute (INI), the National Council of Science andTechnology (CONACYT) and BANCOMEXT may be invited to attend meetings of theMandate Committee.

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2.52 The Management Company would be selected according to competitive biddingand would need to satisfy, inter alia, the following criteria: (a) technical capacity in saltwater and inland aquaculture; (b) experience working with indigenous groups andcooperatives; (c) management experience in Mexico; (d) privatization experience inMexico; (e) experience in the assessment of the environmental and social implications ofaquaculture; (f) experience finance and rural credit; and (g) knowledge of world wideaquaculture markets and marketing practices. It is not likely that a single firm will meet allof these criteria, instead a consortium of different firms will most likely be mostappropriate. The specific responsibilities of AcuaMexico Management Company wouldinclude, inter alia,

(a) contracting out the feasibility, engineering and environmental impactstudies, according to the conditions stated above (paras. 2.33-2.36);

(b) ensuring that the management plans outlined in the feasibility studies areproperly carried out prior to and during the construction and implementation of theAcuaMexico investments;

(c) finalizing the participants in the park and hatchery investments, based onthe results of the above studies; in the case of the shrimp SPR hatchery, it wouldissue a request for proposals for investors interested in participating;

(d) assisting the ejidatarios in obtaining final legal title to their land for theshrimp park;

(e) legally establishing the limited liability park and hatchery corporations withthe productive sector investors and the preparation and registration of the Articlesof Incorporation;

(f) assisting the park corporations contract out and supervise the constructionof the parks and all procurement;

(g) hiring the park management; periodically reviewing the financial statementsof the parks as well as monitoring their overall financial performance; andproviding technical, administrative and financial backstopping to the parkmanagement (as long as the AcuaMexico Fund is the majority shareholder);ensuring that all park management participate in the training program as stipulatedin its operating manual;

(h) ensuring that all park management participate in the training program asstipulated in its operating manual;

(i) ensuring that park councils are established at each park and that a non-voting member is elected from among all the councils to sit on the MandateCommittee; the Management Company staff for the AcuaMexico Fund would alsoattend the meetings of the park councils and ensure that social concerns raised bythe parks are frlly addressed by the park management;

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(j) overseeing the implementation of the investor training program (e.g.,establishing the park councils, the on-the-job training program, bi-annualworkshops/corporation, scholarship fund, bi-annual park foras), together with parkmanagement and the park councils, to ensure that the social sector investors getthe necessary management and technical skills to assume significant managementresponsibilities for the parks (para. 2.44), and

(k) maintaining an information database for each park on basic indicators.

2.53 Privatization arrangements. In the case of the aquaculture parks and abalone andpen shell scallop hatcheries, BANCOMiEXT, as mandate holder would sell theAcuaMexico shares when the parks are financially viable (estimated to be three years afterthey are operational), while in the case of the SPR hatchery, it would sell its shares afterthe first year it is operational. The privatization arrangements for each of the AcuaMexicosubprojects would be reviewed annually. BANCOMEXT is expected to privatizeAcuaMexico's shares in the parks and hatcheries via a public offering and sell its SPRhatchery shares via a strategic privatization (to the investor that contributed 49% of thecapital costs). Should after a reasonable period of time, an AcuaMexico investment not beprofitable, BANCOMEXT (acting on advice from the Mandate Committee) may privatizethe particular investment at a loss, in which case the producers might lose some or all oftheir capital and labor returns - this risk would be fully explained to the social sectorproducers at the time their park corporation is created.

2.54 Prior to their privatization, park investors could buy AcuaMexico shares fromBANCOMEXT at book value. Also prior to the privatization, the park investors couldbuy and sell shares among themselves and BANCOMEXT. If at the time of privatization,the social sector investors do not have a minimum 51% of the park corporation shares,BANCOMEXT would place the difference (51% minus the percentage of shares ownedby the ejido park investors) into an escrow account. The social sector investors could buythe shares in the escrow account at their market or book value - whichever is lessexpensive. A portion of the social sector's dividends from its shareholdings could be usedto buy shares in this escrow account. While in the escrow account, the MandateCommittee would maintain voting rights over these shares. BANCOMEXT, also acting oninstructions from the Mandate Committee, would use its recuperated resources to reinvestin the social and/or high technology sector. BANCOMEXT may not invest AcuaMexicoresources in any existing government enterprise or parastatal in which the Government hasa financial interest. These privatization arrangements are described in Annexes 1. 1. and 1.2of the PIP.

ENVIRONMENTAL ISSUES

2.55 A primary focus of the project is to promote environmentally sustainabledevelopment by strengthening the regulatory and institutional framework and through thepromotion of specific assessment and amelioration efforts as needed. The project has aCategory A environmental rating, as some investments occur in or near environmentallysensitive areas. A sectoral environmental assessment (SEA) report was prepared and

29

submitted by the Government to the World Bank (Annexes A and G). On a sectoral level,the environmental and coastal resources management subcomponent strengthens thecapacity of the federal, state and local government and resource user groups to manageand evaluate the environmental impact of aquaculture (para. 2.8). At the subproject level,the project supports environmental assessments that will be carried out as part of thefeasibility studies as well as a Mexican environmental impact study for all newconstructions (aquaculture parks, SPR and pen shell scallop hatcheries), and theimplementation of the environmental management plans, where necessary (para. 2.37).

PROGRAM OF TARGETED INTERVENTIONS

2.56 The investments supported under the targeted investment fund (10% of total costs)would be specifically targeted toward approximately 7,500 social sector aquacultureproducers (para 2.38). In addition, the estimated initial 600-800 investors in theaquaculture parks and hatcheries (44% of total costs) would be mainly ejidatarios from thesocial sector. Ejidatarios comprise 83% of Mexico's subsistence rainfed farmers and onaverage earn less than half of the farm income of non-ejido producers. It is expected thatat least 90% of the project's beneficiaries would be social sector producers.

PROJECT COSTS AND FINANCING PLAN

Project Costs

2.57 Total project costs are estimated at US$58.8 million, including contingencies(14%), incremental recurrent costs, duties and taxes (Table 1). Baseline costs areestimated at US$51.4 million and contingencies at US$7.4 million. Annual price increaseswere applied to foreign costs in all categories in US dollar terms at a rate of 2.6%. Annualprice contingencies for local costs were calculated using the projected NP inflation rate.5

Physical contingencies were calculated at I0% for civil engineering and 5% for equipment,vehicles, and on-farm investments. Throughout the project, the exchange rate is estimatedto adjust for domestic inflation without any additional peso depreciation. The mainexpenditure categories include civil works, equipment, technical assistance, training,operating costs, a turnkey contract, and grants for the research fund and the TIF. Thecosts are summarized in the table below.

Inflation rates for local costs are 1996 - 28.9%; 1997 - 12.4%; 1998 - 8.1%; 1999 - 5.5%; and 2000-4.7%

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Table 1Estimated Project Costs

(US$ million)

(US$ Million)% % Total

Foreign BaseLocal Foreign Total Exchange Costs

A. Regulatory Framework and Public Goods1. Regulatory Framework

Aquaculture Permitting 0.3 0.3 0.5 53 1Aquaculture Regulations Program 0.1 0.2 0.3 72 1

Subtotal Regulatory Framework 0.3 0.5 0.8 59 22. Environment and Coastal Resources Management

Integrated Coastal Resources Management Pilot 0.4 2.3 2.7 85 5Monitoring of Coastal Wetlands and Water Quality 1.8 - 1.8 - 3Environmental Planning and Assessment 0.6 - 0.6 - I

Subtotal Environment and Coastal Resources Management 2.8 2.3 5.1 45 103. Public Goods

Research Fund 1.1 - 1.1 - 2Regional Diagnostic Laboratory Network 0.9 2.5 3.4 73 7

Subtotal Public Goods 2.0 2.5 4.5 55 94. Project Coordination and Institutional Strengthening 2.5 0.1 2.6 6 5

Subtotal Regulatory Framework and Public Goods 7.6 5.4 13.0 41 25B. Social Sector Development

1. Aquaculture ProductionParks and Laboratories 24.5 2.6 27.2 10 53Targeted Investment Fund 5.6 - 5.6 - 11

2 Institutional DevelopmentAcuaMexico Fund 0.6 3.6 4.2 85 8Training and Monitoring 1.3 0.1 1.4 4 3

Subtotal Institutional Strengthening 1.9 2.7 5.6 65 11Subtotal Social Sector Development 32.0 6.3 38.4 16 75

Total BASELINE COSTS 39.7 11.7 51.4 23 100Physical Contingencies 1.8 0.2 2.1 12 4Price Contingencies 4.4 0.9 5.3 17 10

Total PROJECT COSTS 46.0 12.8 58.8 22 114Numbers do not add up due to rounding

Financing

2.58 The World Bank loan of US$40.0 million would have the standard amortizationterm, grace period, and interest rate for fixed rate US$ single currency loans with anexpected disbursement period of 3-6 years. The World Bank and the Government ofMexico would finance approximately 66% and 16% of project costs, respectively.Beneficiaries would finance approximately 18%.

2.59 The loan would not finance vehicles (boats and cars) or land purchases. The loanwould finance 100% of all foreign exchange costs and 70% of the domestic currency costs(Annex C). The relatively high share of financing for domestic costs is explained by theirhigh proportion in the overall budget (78% of total costs) and by the project's strong focuson economically disadvantaged social sector producers. The loan would be made to

31

BANCOMEXT as the borrower, which would transfer the loan proceeds to SHCP, whichwould in turn, transfer them back to BANCOMIEXT (as mandate holder for theAcuaMexico Fund) and SEMARNAP (Annex D). The loan will be guaranteed by theUnited Mexican States.

2.60 In the past, inadequate counterpart funding has been a principal cause for the slowand partial implementation of World Bank projects in Mexico. During project preparationthis issue was discussed fully with Government and the project size was modified to reflectthe likely availability of Government counterpart resources, especially in light of the 1995economic crisis in Mexico.

2.61 Operating Costs. The project includes US$8.6 million of recurrent costs,representing 15% of total project costs. The loan would finance US$4.9 million or 42% ofthese costs. Operating costs for the parks and the abalone and pen shell scallop hatcherieswould be financed 80% by the project in year 2000 and 50% by the project in year 2001.The productive sector investors would finance the remaining operating costs. The projectalso would finance 51% of the operating costs during the first year of operation of theSPR hatchery (1999). The remainder of the SPR hatchery operating costs in 1999 wouldbe financed by the investors. The project would not finance any operating costs after 1999for the SPR hatchery, as it is to be privatized after the first year of operation. The park andhatchery operating costs include: park management, technical staff, labor, electricity, fuel,materials, chemicals, crop insurance and maintenance.

2.62 The project also includes US$1.5 million of recurrent costs for the regionaldiagnostic laboratories which will be entirely financed by the participating laboratories viafees charged on services provided to users. The remaining project operating costs are formaintenance, travel, supplies, and utilities for the DGA for overall project management.These costs would be financed by the loan on a decreasing basis and the balance by theGovernment. In 1997 and 1998, the loan would finance 90% of the operating costs, 50%in 1999 and 2000, and 10% in 2001 and 2002. Recurrent government salaries are notfinanced by the project.

Cost Recovery and Cost Sharing

2.63 The project involves a high element of cost recovery and cost sharing to ensure thedevelopment of a sustainable and efficient aquaculture sector. The provisions for costsharing include:

(a) Beneficiaries of the Research Fund would contribute cost sharing whichwould include the salaries of researchers and the administrative and infrastructurecosts of the research institutions. These costs are estimated to be at least 50% ofthe total cost of the research grants (para. 2.16).

(b) Beneficiaries of the Targeted Investment Fund would provide labor andlocal materials for the investment subprojects, which are estimated to cover about25% of the investment costs of the projects financed by the fund (para. 2.38).

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(c) Beneficiaries of the ICRAMtpilot practical exercises will provide at least30% in matching contributions (para. 2.9).

(d) The AcuaMexico subproject investments would involve both cost sharingand cost recovery. The investors in the aquaculture parks and pen shell scallop andabalone hatchery would have to contribute about 10% of total investments costs,either in the form of land (shrimp park); investment capital (tilapia parks and penshell scallop hatchery); or the existing hatchery infrastructure (abalone hatchery).The investors in the SPR hatchery would contribute 49% of the investment costs.In addition, the beneficiaries of the parks and hatcheries would contributeoperating costs. In the case of the parks and the pen shell scallop and abalonehatcheries, the investors would contribute 20% of the operating costs in year oneand 50% in year two. Year one operating costs for the SPR hatchery will be splitbetween the productive sector investors (49%) and the AcuaMexico Fund (51%)(para. 2.61).

2.64 Cost Recovery. SEMARNAP, through BANCOMEXT, would recover itsinvestments in the park corporations and the abalone and pen shell scallop hatcheriesthrough the sale of its assets (para. 2.53). Initially, they would be sold at book value to theoriginal park investors, however, after the park is commercially viable, the shares wouldbe sold to the public at market value. The SPR hatchery would be sold to the productivesector investor at market value after the first year of operation. There would also be costrecovery provisions for the regional diagnostic laboratories, as the latter would recovertheir operating and investment costs through the fees they will charge users (para. 2.17).The cost sharing and cost recovery arrangements are described in the PIP.

PROJECT ORGANIZATION AND MANAGEMENT

Project Implementation

2.65 Overall responsibility for the project lies with SEMARNAP. The implementationresponsibilities are outlined below and are summarized in the PIP. The supreme decisionmaking authority will be the Project Committee. Among the committee's responsibilitieswill be the approval of the annual work program, budgets and investment plan, as well asthe approval of any modifications to the PIP. The Project Committee would consist of theSEMARNAP Subsecretaries of Fisheries, Planning and Natural Resources, InternationalAffairs and Budget/Accounting Control; the Federal Environmental Protection Procurator,the Presidents of the National Fisheries Institute (INP) and INE; the Director General ofCNA; and representatives from the seven state delegations plus other invited guests aswarranted. Prior to effectiveness, the SEMARNAP project committee will be functional.

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2.66 The Project Committee will be assisted by the DGA, which will serve as itstechnical committee. In particular, the DGA will be responsible for the implementationand supervision of the project, which will include:

(a) project planning, including the preparation of the AOP(Annual OperatingPlan) and budget;

(b) project monitoring and supervision through: (i) the maintenance of acomputerized project monitoring system that would monitor: the log frameindicators (Annex F); the detailed impact, implementation and financial monitoringindicators that are included in the PIP; and the specific projects funded by theresearch fund and the TIF; (ii) the preparation of twice-yearly progress reports forthe World Bank; (iii) the preparation and implementation of the mid-term reviewand the project launch seminar; (iv) assisting the World Bank organize and carry-out twice-yearly supervision missions; (v) assuring the involvement of specializedenvironmental, social and administrative staff and technical assistance as needed toimplement and supervise the project; (vi) overseeing procurement, including thereview of all terms of reference for contracts and technical specifications ofequipment; and

(c) implementation of all project activities, with the exception of theAcuaMexico investment projects and the training and monitoring activities.

2.67 In addition, there would be eight SEMARNAP working groups composed ofrelevant staff from SEMARNAP and its sectoralized agencies (e.g. CNA, INE, etc.) thatwould assist the DGA in the implementation of their respective project activities. Theworking groups would be for: aquaculture permitting, aquaculture regulations,environment, research and technological development, diagnostic laboratory network,AcuaMexico, Targeted Investment Fund, and training and monitoring.

2.68 The AcuaMexico Fund would finance, under the Mandate Committee's guidanceand with operational support from the management company: (i) the aquaculture parksand abalone and pen shell scallop hatcheries together with social sector investors; (ii) theSPR shrimp hatchery together with productive sector investors; and (iii) the park investorand management training and monitoring program with assistance from the individual parkmanagement.

2.69 Civil society organizations, educational institutions, productive sector actorsand public and private research institutions would participate in: (i) the TargetedInvestment Fund; (ii) the regional diagnostic laboratory network (together with the centralaquaculture laboratory); (iii) the aquaculture parks and hatcheries; and (iv) the ResearchFund.

2.70 PIP. During negotiations assurances were obtained that the project will beimplemented in accordance with the PIP, which will be modified to reflect the changesagreed to during negotiations and submitted to the World Bank prior to the submission of

34

the project to Board. The AOPs for the coming year will be prepared by the DGA, forfurther review and approval by the World Bank by September 30 of each year. The AOPswill outline each component's objectives for the coming year, the implementation schedule,and the specific human resources and financial allocations required. Adherence to theAOPs would be reviewed annually. An acceptable 1997 AOP will be part of the final PIP.

Procurement

2.71 All project components financed under the proposed World Bank loan would beprocured in accordance with the Guidelines for Procurement under World Bank loans(January 1995, revised January and August 1996) and as further described below. Table 2below summarizes procurement arrangements. The project would finance civil works,technical assistance, turnkey contracts, grants, equipment (laboratory, computer, office,construction), studies, training, and recurrent costs. Vehicles, including boats and motors,would be procured by the Government and would not be reimbursable against the loan.Standard Bidding Documents agreed by the World Bank and the Government would beused for procurement of goods and works under NCB.

2.72 Civil works would consist of the construction of aquaculture parks, hatcheries andteaching facilities. No international competitive bidding (ICB) is expected due to the sizeof contracts. NCB procedures satisfactory to the World Bank would be used, althoughinterested foreign bidders would be allowed to participate. Small works valued at less thanUS$350,000 would be procured on the basis of lump-sum fixed priced contracts awardedon the basis of quotations from at least three qualified domestic contractors, provided theydo not exceed an aggregate amount of US$1.5 million.

2.73 Goods. Wherever possible, goods would be packaged into contracts valued atUS$350,000 or more to be procured under ICB procedures. Goods to be procured underICB include the information technology equipment, laboratory equipment, geographicinformation system equipment and specialized materials. Contracts of goods expected tocost more than US$50,000, but less than US$350,000, would be procured under NCB inan aggregate amount not exceeding US$700,000. Office equipment, furniture and othersimilar goods expected to cost less than US$50,000 per contract would be awarded on thebasis of price quotations from at least three suppliers, provided they do not exceed anaggregate of US$400,000.

2.74 SPR shrimp hatchery. Because of the complexity and importance of integratingdesign, implementation and startup, the SPR shrimp hatchery would be procured as aturnkey operation according to the ICB procedures.

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Table 2Procurement Arrangements

(US$ million)

Procurement MethodInternational National

Category Competitive CompetitiveBidding Bidding Other N.B.F. Total

A. Civil Works - 17.3 1.5 - 18.8(I 1.4) (1.1) ~~(12.5)

B. SPR Hatchery /a 2.7 - - - 2.7(1.5) (1.5)

C. Goods /b 2.8 0 7 0.4 - 3.9(2.4) (0.6) (0.3) (3.3)

D. Vehicles and boats - - 0.I 0.1

E. Technical Assistance - - 14.3 14.3(12.2) (12.2)

F. Training 0.9 0.9(0.7) (0.7)

G. GrantsResearch Fund 1.2 - 1.2

(0.6) (0.6)TIF 6.1 6.1

(4.6) (4.6)H. Land - - - 2.2 2.2

I. Recurrent Costs - - 6.9 1.5 8.5(3.5) (0.1) (3.6)

Total 5.5 18.0 31.4 3.8 58.8(3.8) (12.0) (23.0) (0.1) (40.0)

Note: Figures in parenthesis are the respective amounts financed by IBRD\a Turnkey contract\b Equipment, furmiture and publications.

2.75 Consultants, Training, and Studies. The World Bank's "Guidelines on the Useof Consultants by World Bank Borrowers and by the World Bank as Executing Agency"(August 1981) would govern all consultancies financed under the project. Employment ofconsultants would be carried out using a standard letter of invitation agreed with theGovernment and a World Bank-issued standard form of contract.

2.76 Research Fund. Grants for the development of new technologies in aquaculturewould be awarded to national research institutions on a competitive basis and would besubject to the signature of a research contract. No contract would exceed the amount ofUS$50,000. Expenditures would be made against a standard contract betweenSEMARNAP and the research institution, which specifies the detailed budget breakdownand the work program. Eligibility criteria for the institutions participating in the ResearchFund and the standardized contract are in the Research Fund Manual attached to the PIP.

2.77 The Targeted Investment Fund (TIF) would consist of matching grants tocommunities to test different mechanisms to promote aquaculture development among

36

economically disadvantaged social sector aquaculture producers. The TIEF would finance:(i) individual or community aquaculture investments (rural ponds, cages, the renovation ofcoastal shrimp impoundments, wild PL collection and storage centers, etc.); (ii) technicalassistance for individuals or communities, including assistance to prepare managementplans, studies and other required documentation for obtaining concessions and permits;and (iii) workshops organized and run by producer groups to transfer experiences and bestpractices. Expenditures would be made against a standard contract between theSEMARNAP delegation and the promoter, specifying the detailed budget breakdown andthe work program. No contract would exceed the amount of US$50,000. The TIF wouldbe implemented by civil society organizations and qualified public sector groups. Stricteligibility criteria for the private and public promoters, and for the eligible projects, as wellas the standardized contract are included in the TIF Manual that is part of the PIP.

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2.78 Prior Review by the World Bank. Table 3 summarizes the thresholds to beapplied:

Table 3

Thresholds for Procurement Methods and Prior Review(US$)

Category Contract Value Procurement Method Contracts Subject to(Thresholds) Prior Review by

World Bank

Works < 10,000,000 NCB First 3

< 350,000 Lump-sum contracts None

Goods > 350,000 ICB All

50,000 - 350,000 NCB First 3

< 50,000 National shopping None

SPR Hatchery > 350,000 Turnkey contract All

Consulting ServicesFirms > 100,000 Selection according to All

Consultants Guidelines

< 100,000 TORs only

Individuals > 50,000 All

< 50,000 __ TORs only

Grants under the Up to $50,000 National shopping Selection criteriaResearch Fund Lump-sum contracts only of Research

InstitutionsGrants under the TIF Up to $50,000 National shopping Selection criteria of

under contracts with civil society and publiccivil society and public organizations only

organizations I _I

* Exemption from prior review does not apply to consultants contracts below the thresholds in cases of: singlesource selection of firms, assignments of critical nature, and amendments to contracts raising contract value above thethresholds.

Disbursement

2.79 All disbursements will be handled by BANCOMEXT. Prior to effectiveness,signed contractual arrangements between BANCOMEXT and the Government,acceptable to the World Bank, will be in place. Disbursements would take place over thesix project years (Table 4). The project completion date would be July 1, 2002. The loanclosing date would be December 31, 2002.

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2.80 The loan would be disbursed against eligible project expenditures at the rates of(i) 70% for civil works; (ii) 85% for goods; (iii) 51% for the SPR Hatchery; (iv) 100%for technical assistance, training and studies; (v) 100% for grants for the Research Fund;(vi) 100% for grants under the TIF; (vi) operating costs for parks at 80% in 2000 and50% in 2001; (vii) operating costs for SPR Hatchery at 51% in 1999; and (viii)incremental recurrent costs on a declining basis, 90% in 1997 and 1998, 50% in 1999 and2000 and 10% thereafter (Annex C).

2.81 Documentation of Expenditures. Disbursements would be made on the basis offull documentation for all expenditures made under contracts requiring prior review by theWorld Bank and amendments to contracts raising the value of such contracts above theprior review limits (Table 3). For all other expenditures disbursements would be madeagainst Statements of Expenditures (SOE) for which supporting documents would bemaintained by SEMARNAP and would be available to the World Bank for staff review.

2.82 Special Account. The borrower, BANCOMEXT, would establish a SpecialAccount (SA) in the Banco de Mexico with an authorized allocation of US $2.5 million,with an initial deposit of US$ 2.0 million to correspond to estimated project expendituresduring the first four to six months of project implementation. The borrower may not usefunds from the Special Account for expenditures under disbursement categories withdisbursement conditions, until the World Bank has confirmed that the conditions havebeen met. As a condition of effectiveness, the Borrower and the Guarantor would sign anagreement acceptable to the World Bank for the transfer of the loan proceeds. The SAwould be replenished monthly on the Borrower's request (but no less frequently thanevery three months), or whenever one third of the authorized amount has been withdrawn,whichever occurs first.

2.83 Documentation. The DGA would be responsible for submitting regularreplenishment requests with appropriate supporting documents for expenditures under theproject. The documents would include: (i) a standard withdrawal application (Form 1903)for the total amount of eligible project expenditures to be replenished into the SpecialAccount with a copy of the monthly bank statement for that account; (ii) the SOE formwhich will provide the summary of category expenditures including grants to communities;(iii) standard summary sheets (designed for each sub-project and included in thedisbursement letter) and supporting documentation for all expenditures above theprocurement prior review thresholds; and (iv) a reconciliation statement for the SA. Theuse of grants by the beneficiaries would be checked through auditing procedures, themonitoring systems and project supervision arrangements.

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Table 4Estimated Schedule of IBRD Disbursements

(US$ million)

World Bank FY FY98 FY99 FY00 FY01 FY02 FY03Annual 3.1 4.8 5.3 112 12.6 3.0Cumulative 3.1 7.9 13.2 24.4 37.0 40.0

2.84 Retroactive Financing. There will be retroactive financing for expenditures forgoods, training, incremental operating costs and technical assistance related to: theregulatory framework subcomponent; the environment and coastal resources managementsubcomponent; institutional strengthening and project coordination; and the establishmentof the AcuaMexico Fund. To qualify for retroactive financing, the expenditures must be:carried out in accordance with World Bank guidelines; incurred after December 31, 1996;and less than US$4 million.

Accounts and Audits

2.85 Project Financial Statement and Financial Reporting. Project financialstatements to be prepared by SEMARNAP would include a statement of sources and usesof funds, and a register of project assets or balance sheet where appropriate. The fundsflow statement would indicate sources (the World Bank, as well as counterpart financing)and expenditures in accordance with the main project components and disbursementcategories. Project financial statements would show actual and pending payments againstthose budgeted.

2.86 SEMARNAP and BANCOMEXT, operating both in its capacity as borrower andas mandate holder for the AcuaMexico Fund, would maintain separate central accountswith respect to all project expenditures (Annex C). The state delegations of SEMARNAPwould also maintain separate accounts for project expenditures incurred by them. Allaccounts would be subject to SEMARNAP's and BANCOMEXT's internal and externalaudits: they would adequately reflect expenditures made for the project, in accordancewith sound accounting practices agreed with the World Bank. Financial documents insupport of disbursement requests would be reviewed by SEMARNAP andBANCOMEXT before submission to the World Bank.

2.87 A certified copy of the project audit (for both SEMARNAP and BANCOMEXT),to be done by independent external auditors acceptable to the World Bank and inaccordance with the March 1982 World Bank "Guidelines for Financial Reporting andAuditing of Projects Financed by the World Bank," and in line with the November 1991audit agreement with SECODAM would be submitted to the World Bank not more thansix months after the completion of each Government financial year. The audit reportwould include a separate opinion by the auditor on disbursements against certified SOEsand the Special Account.

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Implementation Monitoring and Evaluation

2.88 Implementation Monitoring. The SEMARNAP Project Committee together withthe DGA would be responsible for monitoring project implementation. The principal toolsthey would use are: (a) implementation, impact and financial indicators as presented in thePIP; (b) regular meetings of the Project Committee, the Technical Secretariat and theworking committees, (c) regular field visits by DGA staff, (d) the annual operating planprepared by the DGA, (e) the DGA database on all proposals funded by the ResearchFund and the Targeted Investment Fund and (f) regular reports from the managementcompany for the AcuaMexico Fund.

2.89 The DGA would maintain the computerized project monitoring system updatedand issue semestrial monitoring reports presenting the various monitoring indicators thatwould be accessible to the borrower and the World Bank. In addition, the DGA wouldupdate the monitoring system every two months to support the internal discussions of thetechnical secretariat and the working groups. The DGA also would maintain an updatedcomputerized database on each proposal funded under the Targeted Investment Fund andthe Research Fund. Similarly, the management company for the AcuaMexico Fund wouldmaintain detailed indicators on financial, technical and social indicators for each of theseven AcuaMexico subprojects. The project would install a computerized system ofproject monitoring to be maintained by the DGA, which would be operational as acondition of project effectiveness. These monitoring arrangements are described in thePIP.

2.90 The Government would provide the World Bank with a semestrial report within 30days of the end of each semester. The report to the World Bank would include: (a) thesemestrial status report of the financial, physical, and impact indicators; (b) an updatedproject logframe (Annex F), (c) a summary of key events and activities that occurredwithin the past six months; and (d) a discussion of any problems or concerns with theproject.

2.91 Project Evaluation. External evaluations would be conducted of each projectcomponent by a team of external experts prior to the end of the second full year of projectimplementation, which would be a key input into the mid-term review. In addition, therewould be external evaluations of each component in Year Five of the project. The purposeof the evaluations would be to provide input to SEMARNAP regarding problems to beaddressed and modifications to be made in operating guidelines and projectimplementation practices, and to identify progress made and positive experiences thatmight be generalized beyond the project. Government would also prepare and review withthe World Bank, not more than six months after the close of the project, a plan for thefuture operation of project activities.

2.92 There would also be outside evaluations of activities financed by the AcuaMexicoFund in Years Two and Three in order to analyze the Fund's ability to address theparticular needs of the park communities and to incorporate the ejidatarios inmanagement decisions for the particular parks. This evaluation would be carried out by a

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local group with social sector representation, together with an international firm/universitywith social science expertise. The seven above-mentioned evaluation studies are discussedin the PIP.

World Bank Supervision and Mid-Term Review

2.93 During negotiations, assurances were received that World Bank supervisionwould take advantage of three important sets of project reports: (a) the annual workplan, prepared by component, which would be prepared by SEMARNAP and discussedand agreed upon with the World Bank September 30 of each year; (b) the semestrialmonitoring reports; and (c) prior to the submission of SOEs, SEMARNAP would providethe World Bank information about the subprojects and expenditures contained on theSOE, including sufficient information to allow the determination of project eligibility.There would be World Bank reviews twice a year, which would focus on: (a) the full setof impact and implementation indicators; (b) the technical quality, and economic, socialand environmental sustainability of physical investments (parks, SPR hatchery, ICRM pilotpractical exercises and Targeted Investment Fund); (c) procurement, disbursements, andaudit procedures; (d) management of the AcuaMexico Fund, the Targeted InvestmentFund, the practical ICRM exercises, the Research Fund, and the regional diagnosticlaboratories; (e) the extent of social sector participation in the park management andownership; and (f) any other issues that may arise.

2.94 During negotiations, assurances were received that there would be a project mid-term review to analyze the first two years of implementation experience and to confirmthe investment program for the remainder of the project. Input to the mid-term reviewwould include: (a) the semestrial monitoring reports; (b) the second year evaluation ofeach project component; (c) the first independent evaluations of AcuaMexico in projectYear Two; (d) and annual workplans for the first two Project Years. The mid-term reviewwould assist SEMARNAP and the participating states and agencies, as well as the WorldBank, identify project successes and problems to be addressed and needed modificationsto project procedures and investments for the second half of the project. The mid-termproject review would be held no later than December 31, 1999, according to terms ofreference agreed with the World Bank. Thereafter, SEMARNAP will take all such actionsas agreed with the World Bank for the efficient execution of the project and theachievement of its objectives.

PROJECT BENEFITS AND ECONOMIC EVALUATION

2.95 Benefits and Beneficiaries. Aquaculture producers, and in particular, socialsector producers would be the primary direct beneficiaries of the project. About 300 socialsector producers would benefit from the aquaculture parks and hatcheries, whileapproximately 7,500 economically disadvantaged social sector producers would benefitfrom the targeted investment fund. In the case of the aquaculture parks, the project wouldprovide social sector producers with an opportunity to participate, as investors andwithout direct subsidies, in commercial aquaculture. This would be accomplished with the

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financing structure of the aquaculture parks, and the technical assistance and training to beprovided by the AcuaMexico Management Company and the park management. Theaquaculture parks and hatcheries would also provide employment for social sectorproducers and their families (Annex B).

2.96 In the case of the Targeted Investment Fund, economically disadvantaged socialsector producers would expand their involvement in small-scale aquaculture withinvestment and technical assistance. This would provide them with additional income,food and employment opportunities. The institutional strengthening of SEMARNAP andthe park councils would also expand the capacity of the Government and its programs toattend to the needs of economically disadvantaged producers. Finally, the aquaculturepermitting study would evaluate and facilitate access to aquaculture permits in the currentregulatory framework for aquaculture producers, including economically disadvantagedand indigenous producers.

2.97 The project would also benefit directly all aquaculture producers via: (a)investments in key public goods and regulatory framework (Research Fund, diagnosticlaboratories, aquatic health regulations, and aquaculture permitting), which would increasethe productivity of aquaculture, expand the sector's access to attractive urban and exportmarkets, and reduce the risk of disease epidemics; and, (b) the environmental and coastalresources subcomponent, which would increase the capacity of the federal and localgovernments as well as local interested actors/beneficiaries to address environmentalissues associated with aquaculture.

2.98 Economic Analysis. The economic rate of return (ERR) and the net present value(NPV) are calculated for each AcuaMexico subproject investment and in addition acomprehensive ERR/NPV is prepared for all the investments and the SPR shrimp hatchery(Annex B). The comprehensive ERR/NPV reflects 83% of project costs. In addition to thepark and hatchery investments, it includes the costs of the AcuaMexico ManagementContract; the training and monitoring program, the regional diagnostic laboratorynetwork, the Research Fund, and the environment and coastal resources management sub-component. The data was collected using 1994 prices. Prices and costs were adjusted toreflect 1995 levels, according to whether or not they are a tradeable or non-tradeable orsome combination thereof The analysis assumes constant 1995 prices and expenditures.The market value of all inputs and outputs is assumed to reflect the economic value. Thebase model uses an average exchange rate of 6.5 NP/IJS$. Sensitivity analysis was carriedout to determine the impact of changes in the exchange rate, output prices, and productionon the economic viability of the investments. In addition, the impact of possibleimplementation delays, which would affect production levels in Year One and Year Twoof the project were estimated.

2.99 The cumulative base case ERR is 35% (AcuaMexico subprojects and publicgoods) and the base case ERR is 45% (AcuaMexico projects only). Exchange ratefluctuations have a minimal impact on economic viability, as the benefit of higher outputprices is offset by the higher input prices. Given possible medium-term declines in shrimpand tilapia prices, the model estimated the impact of a 10% decline in output prices. The

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latter would reduce the base case ERR (AcuaMexico projects only) to 35%, while a 33%decline in output prices would drop the base ERR to 12% and cause the NPV to becomenegative. Also in light of the volatility of aquaculture production, particularly shrimp, themodel assessed the impact of changes in production levels on the economic viability of theoperations. A 10% decline in production levels for all species brings the base ERR to37%, while a 39% decline in production brings the base ERR to 12% and causes the NPVto become negative. The model also tests for the impact of production delays during thestart-up phase of the investments. A 20% reduction in production in Year One coupledwith a 10% reduction in Year Two causes the base ERR to fall to 41%. Finally, acombined scenario was tested involving a 15% devaluation, a 10% fall in output pricesand start up delays causing output reductions of 20% and 10% in Years One and Tworespectively. This causes the base ERR to drop to 33%.

2.100 Project Sustainability. In the past 15 years, Mexico has undergone two deepmacro-economic upheavals. The 1982 debt crisis catalyzed the adoption of significantmacro economic reforms in the areas of fiscal policy, financial sector reform, exchangerate policy and trade liberalization. Similarly, the 1995 exchange rate crisis appears that itwill deepen many. of the financial reforms. However, sectoral and micro-economicreforms have often lagged behind the macro policy changes, partially explaining the limitedresponse of the economy to the reforms. This project provides a needed impetus for theGovernment to push forward some critical sector reforms in the aquaculture and fisheriessector, thereby putting in place the framework for a fiscally, environmentally and sociallysustainable aquaculture and fisheries sector.

2.101 The regulatory framework and public goods supported by the project provide theGovernment and the productive sector with the tools to manage the environmental, publichealth and disease risks that have so undermined the aquaculture sectors in other countriesin Latin American and Asia. Moreover, the emphasis placed on finding effectivemechanisms to raise the productivity of the assets owned by low-income and poorproducers and to expand the capacity of the Government to deal with social sector issuescontributes toward rural poverty alleviation, without which sustained and equitable growthwill not be possible in Mexico. Similarly, the importance placed on cost recovery and costsharing in the delivery of public goods in the project strengthens the fiscal sustainability ofthe Government's aquaculture policy and promotes an efficient allocation of public andprivate resources in the sector. In addition, the project's strong support for appliedresearch (Research Fund and regional diagnostic laboratory network) promotes thegeneration of new technology appropriate for the varied aquaculture conditions in Mexico,providing a significant impetus for long-term growth. Finally, the project puts into placean institutional framework with well-defined roles for the public and private sector andwith a strengthened government capacity to address the technological, social andenvironmental issues that are likely to arise as the sector expands.

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PROJECT RISKS

2.102 The project is an innovative operation that aims to tackle important social,technical and environmental issues in a difficult sector. As such, there are risks related toproject design, the overall macro situation in Mexico and the project's institutionaldemands. However, project design has been modified to take these into account and toprovide the World Bank and the Government with the opportunity to respond quickly andflexibly to any issues should they arise.

2.103 The proposed project poses several risks:

(a) Project Design Risks: (i) social sector investors may lack the capital,technical and managerial resources to acquire and manage a controlling share ofthe park and hatchery corporations; (ii) a disease epidemic could wipe out anaquaculture park, particularly the shrimp farms; (iii) social and environmentalproblems could undermine the effectiveness of and support for the AcuaMexicosubprojects, and (iv) the ability of the AcuaMexico Fund not to become a drain onthe government budget is uncertain as it calls for the creation of a newGovernment Fund and its financial health depends upon the successful privatizationof its investments.

(b) Macro Economic Risks: (i) the economic crisis coupled with past WorldBank experience in Mexico suggest that the project may encounter problems inreceiving sufficient counterpart funds; and (ii) high real interest rates for theoperating costs may make the parks financially not viable.

(c) Institutional Risk: the limited management capacity of SEMARNAPcould undermine its ability to adequately implenment/supervise the project.

2.104 It is not possible to completely eliminate these risks, but their impact on the projecthas been minimized by the following provisions:

(a) Project Design Risks: (i) SEMARNAP will not sell park shares to theprivate sector until the parks are financially viable -- this will give the social sectorinvestors time to amass the necessary financial resources and will facilitate theiraccess to credit; moreover, if at the time of privatization, the social sectorinvestors do not own at least 5 1% of the park corporation shares, the differencewill be placed in an escrow account to allow the investors additional time topurchase these shares; and finally, SEMARNAP will provide on-the-job and formaltraining to the social sector park investors in aquaculture and business managementpractices to assist them develop the necessary skills to manage the parkcorporations. (ii) The investments in aquatic health, LUCPs, the SPR shrimphatchery and the diagnostic laboratories provide new and innovative strategies toreduce disease risks that, as yet, have not been applied in other countries; inaddition, shrimp park management staff will received specialized training in shrimpdisease; also, the shrimp park will have production insurance, which covers disease

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epidemics; and finally, the density of shrimp farms in Mexico is much lower than inother major shrimp producing countries that have experienced diseas epidemics.(iii) The feasibility studies for each park (including social and environmentalmanagement plans, if necessary), the park councils, the AcuaMexico ManagementCompany, the park management staff and the social scientist staff of the DGA willhelp to identify and address social problems that may emerge. Similarly, thepotential negative environmental impacts will be identified and controlled by: thefeasibility studies and the environmental impact assessments for each park; theagreement with the Government to drop or modify park design, if a managementplan is too costly or not effective; and, the overall strengthening of the capacity offederal, state and local government and user groups to address environmentalissues related to aquaculture. (iv) The specific legal charter under whichAcuaMexico will be created does not allow this particular type of fund to havegovernment staff, consequently, the work of the fund will be carried out by aManagement Company which will have a fixed term contract; moreover, the fund'soperating rules indicate that investments which are consistently not profitable maybe privatized at a loss, which could limit the opportunity for specific investments todrain the fund's resources.

(b) Country Specific Risks: (i) The Government and the World Bank canmodify project size as necessary. Moreover, the scope of the project has beendrastically reduced from the first proposed US$670 million (July 1994), whichincluded 29 aquaculture parks, to US$58.8 million for seven subprojects in orderto reflect reasonable projections on the availability of fiscal resources. (ii) The parkcorporations will not borrow operating capital until 1998 at the earliest, and bythat time real interest rates are expected to come down. Moreover, the project willcontribute to the AcuaMexico subproject operating costs in years one and two.

(c) Institutional Risk: First, SEMARNAP will not be the sole implementor ofthe project. A Management Company will be contracted to implement theAcuaMexico investments and the monitoring and training activities. Second, theDGA will receive assistance from other areas and agencies of SEMARNAPthrough the Project Committee and the working groups. Third, the DGA willreceive institutional strengthening in project management, as well as inenvironmental and social issues.

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3. AGREEMENTS AND RECOMMENDATIONS

3.1 During Negotiations, the following assurances were obtained:

(a) the project will be implemented in accordance with the PIP as indicated inpara. 2.70; and

(b) reporting and review arrangements for the project will be carried out bySEMARNAP as indicated in paras. 2.93 and 2.94.

3.2 The following are special conditions of effectiveness:

(a) the DGA is staffed as indicated in para. 2.21, the DGA monitoring systemis operational, and the SEMARNAP Project Committee has been constituted(para. 2.70);

(b) signed contractual arrangements between BANCOMEXT and Governmentacceptable to the World Bank (para 2.79).

3.3 Prior to disbursements for technical assistance for the AcuaMexico subprojects,the following documents must be signed by the respective parties and agreed with theWorld Bank: (i) the AcuaMexico deed, (ii) the AcuaMexico Operating Rules and (iii) theAcuaMexico Management Contract (para. 2.50)

3.4 Recommendation. With these agreements and conditions, the project would beeligible for a single currency fixed rate US Dollar IBRD loan of US$40.0 million.

ANNEXES

Annex A Environmental Risks and Management Plan

Annex B Project Economic Analysis and Benefits

Annex C Project Costs Summary

Annex D Flow of Funds

Annex E Lessons Learned from Past Experience

Annex F Project Logical Framework

Annex G List of Documents in the Project File

Annex H Glossary of Terms

Annex I Aquaculture Production and Marketing in Mexico

Annex APage lofli

Environmental Risks and Management Plan

Background

1. The Mexico Aquaculture Development Project has a Category Aenvironmental rating for the Bank, as some investments occur in or nearenvironmentally sensitive areas and, in some cases, may involve the permanentconversion of these areas. A sectoral environmental assessment (SEA) report wasprepared and submitted by the Government to the World Bank. It assesses theenvironmental risks associated with the expansion of aquaculture in Mexico,evaluates the legal and institutional framework to address these risks, and proposesseveral project investments to ensure the sustainable development of the sector.1Preliminary environmental analysis of the specific subproject investments carried-out during preparation revealed no major environmental risks, with the exceptionof the coastal shrimp park. This subproject has a Category A environmental ratingand an environmental assessment study will be carried out as part of the overallfeasibility study, according to terms of reference agreed with the Bank. No majorenvironmental risks were identified among the three tilapia parks, the rehabilitationof the abalone and the construction of the pen shell scallop hatcheries, as well asthe construction of a specific pathogen resistant shrimp hatchery. However, anenvironmental assessment will also be carried out for these investments as part ofthe overall feasibility studies. In addition, the shrimp park, the tilapia parks, thepen shell scallop hatchery, and the SPR hatchery will have a Mexicanenvironmental impact study (the rehabilitation of the abalone hatchery will notrequire an environmental assessment under Mexican law).

2. This Annex first summarizes the environmental risks related to theaquaculture sector and the capacity of the regulatory and institutional frameworkto address these issues. Second, it reviews the specific environmental risksassociated with the subproject investments. Third, it presents the environmentaland coastal resource management subcomponent, which is the management planthat addresses the issues identified in the SEA and in the prefeasibilityenvironmental analysis of the specific subproject investments.

I Mark Hardin, "Sectoral Environmental Assessment for the Mexico AquacultureDevelopment Project", KBN Engineering and Applied Sciences, Inc., May 1994. The SEAis based on findings from two missions to Mexico, covering the periods November 29 toDecember 11, 1993, and January 23 to February 13, 1994. Extensive interviews withrepresentatives from key federal agencies, as well as federal and state government offices inall seven project states were conducted as preparation for the sectoral environmentalassessment. In addition, workshop sessions were held with groups of fishermen andaquaculturists to discuss environmental quality issues affecting the success andsustainability of aquaculture in Mexico.

Annex APage 2 of 11

Aquaculture and the Environment

3. Sectoral Environmental Risks of Aquaculture. The impact of most ofMexico's aquaculture activities on the environment has, so far, been relatively little.Almost all of Mexico's aquaculture production is from rural grow-out ponds andinland water bodies, which have very little impact on the environment. Almost allof the limited negative impacts of aquaculture in Mexico relate to semi-intensiveshrimp farming, which remains a relatively recent and limited activity. Thepotential negative effects of aquaculture on the environment are outlined below, aswell as an assessment of the relative importance of each issue in Mexico:

(a) Displacement of coastal mangrove estuaries by shrimp ponds, withconsequent loss of ecosystem production, was a serious problem inmany countries during the 1960-1970s. This has not been asignificant problem in Mexico, in light of Mexico's land useregulations and as the discovery of mangrove soils' poor suitabilityfor aquaculture in the 1980s. Moreover, most shrimp farms arelocated in areas where there are few mangrove forests: 83% ofMexico's 15,600 ha of shrimp farms are in the states of Sinaloa andSonora, which have only 17% of the country's mangrove forests.

(b) Alteration of local hydrology due to construction of pond dikes,access roads and the dredging of water supply channels hasoccurred in some cases due to the construction of agriculture farms.The extent to which such problems are associated with aquacultureis relatively limited, given the recent introduction of industrialaquaculture in Mexico.

(c) Eutrophication from pond water effluent discharged duringdrainage or routine exchange can enrich receiving waters, resultingin local degradation in water quality and loss of ecosystem functionand diversity. This occurs primarily when there is a high density ofshrimp farms in areas with restricted hydrology. There have beenno studies associating shrimp farm effluent with local water qualitydegradation, and no mention was made of the problem in numerousinterviews. This could change as the density of farms on coastallagoon systems increases, as the latter are characteristically plaguedwith restricted hydrology. Mitigating this threat is Mexico'srecognition of the problem that Ecuador and Honduras haveexperienced, and the observed tendency towards master-planningregional shrimp farm development.

(d) Eutrophication from waste feeds may arise near large cage-cultureand net-pen culture operations that are sited in areas ofhydrologically restricted water exchange. Again, this issue has not

Annex APage 3 of 11

emerged yet in Mexico on any significant scale, given the relativelyrecent introduction of cage aquaculture.

(e) Aquaculture may endanger vulnerable wildlife. For example,capture fishing in inland reservoirs (restocking aquaculture) withgill nets has entangled and drowned american crocodiles(Crocodylus acutus) in one known reservoir in Mexico.2 Otherexamples are the overfishing of pen shell scallop and abalone alongthe Pacific coast in Mexico.

(f) The introduction of exotic species such as tilapia may displacenative organisms by direct competition or the introduction of newpathogens. Tilapia were widely introduced to Mexico in the 1 960sand 1970s, and now occupy every watershed in the country.Artificial reservoirs account for 97% of the freshwater in Mexico,and 100% of these reservoirs have established populations oftilapia. Though endemic aquatic species have been negativelyaffected by the introduction of tilapia, the major trauma occurreddecades ago, and the surviving endemic species have longestablished an equilibrium state with the new species.

4. Environmental Risks for Aquaculture Development. Aquaculture isalso influenced by the quality of the surrounding environment:

(a) Water contamination from agricultural chemicals is a particularconcern in Chiapas and Sinaloa. Fertilizers seem to be the mostproblematic in Mexico. Mexico is in the process of phasing out themost persistent organochlorine pesticides to organophosphoruspesticides that have less environmental impact.

(b) Deforestation and erosion of watersheds results in thesedimentation of river and estuarine channels and connections toopen water. Chiapas and Oaxaca are experiencing high rates of

2 According to the International Union for the Conservation of Nature's (IUCN) 1994"Red List of Threatened Animals," C. acutus are considered "vulnerable" throughout arange that includes the Pacific coast from Mexico to Ecuador, as well as the Atlanticdrainage from Guatemala to Florida. According to IUCN terminology, "vulnerable"indicates that a species could become endangered unless present trends are reversed. Dataon worldwide numbers of C. acutus are virtually nonexistent due to their occurrence inisolated populations over a wide geographic range. Mexican law classifies C. acutus as a"special management" species within the INE's four-tiered rating system, a status thatallows captive propagation for conservation purposes. Finally, the InternationalCommission on the Trade in Endangered Species (CITES) includes the species in theirAppendix 1, indicating a categorical prohibition on commercial trade in products derivedfrom wild animals (i.e., products from cultivated animals may be allowed).

Annex APage 4 of 11

erosion from deforestation or conversion of permanent tree cropsto other types of agriculture in upper watersheds.

(c) Reduction in freshwater inflow to estuaries, as a result of damming,degrades coastal water quality and coastal morphology. This hasoccurred in most coastal states of Mexico.

(d) Contamination of residual waters with domestic sewage is animportant problem in the coast of the Gulf of Mexico. The Pacificcoast is also beginning to experience sewage pollution problems incertain areas, but the situation is less critical at the moment. Bivalveshellfish quality has been severely degraded, particularly inVeracruz and Tamaulipas.

(e) Toxic effects on fisheries of fugitive oil contamination frompetroleum extraction and transportation in coastal areas,particularly in Veracruz, has led to reduced populations anddegraded quality of shellfish and shrimp.

(f) Entrainment at thermal power plant cooling intakes has led to thedestruction of large numbers of juvenile aquatic forms.

5'. Regulatory and Institutional Framework. To address the above issues,the GOM has taken several key steps to mitigate the impact of aquaculture on theenvironment. First, it revised the General Law on Ecological Equilibrium andEnvironmental Protection (LGEEPA) in 1996. This law and associatedregulations obligate SEMARNAP (previously SEPESCA) to the sustainablemanagement of aquatic flora and fauna, and makes fNE responsible for theevaluation of the environmental impact of fishery and aquaculture activities.Second, the Attorney General's Office for Environmental Protection (PROFEPA)was created within the past three years to assure compliance with EA conditionsand federal government regulations. This agency has jurisdiction over mostaquaculture operations, and is backed by fairly powerful legal authority.

6. Third, the "Single Window" system was created in 1990 to address theadministrative complexity of the permitting process for fisheries and aquaculture,which may involve up to 20 separate reviews, authorizations or permits fromdifferent agencies. The new system made the Subsecretariat of Fisheries the onlypoint of contact between the project promoter and government in the procurementof all permits. Fourth, the Subsecretariat of Fisheries and INE have initiated a landuse capability planning (LUCP) program for the nation's coastal zones. TheLUCPs provide an apriori indication on the natural vocation and preferred use ofcoastal lands, including aquaculture. An operational LUCP should facilitate theenvironmental assessment process for aquaculture investments, helps regional andlocal planners avoid the siting of non-aquaculture operations that may harm or be

Annex APage 5 of 11

harmed by aquaculture, and if properly designed with local input, an LUCP canavoid social conflicts associated related to the introduction of aquaculture. Underthe direction of INE, SEMARNAP has thus far undertaken LUCP baseline studiesin six states, including five of those proposed in the Aquaculture DevelopmentProject.

7. Despite these significant institutional and policy advances, several problemshinder their full and satisfactory implementation:

(a) Principal constraints to the effectiveness of the environmentalassessment methodology developed under LGEEPA include aserious backlog in the evaluation of EA reports by INE's office inMexico City, a lack of personnel to review the EA reports, a lack offield review of projects by INE reviewers, and unclear requirementsfor data in the EA format.

(b) PROFEPA has been preoccupied with monitoring the most seriousenvironmental problems in the country and has been able to giveaquaculture development relatively little attention.

(c) The single window program remains quite lengthy andcumbersome, reportedly requiring up to 30 months from initiationto completion in some cases. Evaluation of permit documents isoften delayed due to the geographic dispersion of agencies and thesimple need to physically relay the body of documents from oneoffice or region to another.

(d) Present LUCP methodology, although identifying mangroves as aforest category, neither distinguishes between the various classes offorest (i.e., dwarf/sparse vs. high/dense), nor classifies intertidalmudflats. Despite the recognized value of these areas, Mexico doesnot have a comprehensive inventory of either habitat type for thoseregions where the potential for shrimp farm development isgreatest. The lack of such information can limit effectivemonitoring and planning of these valuable ecosystems (mangrovesand mudflats) in the face of intensified coastal aquaculture.Moreover, community participation needs to be incorporated intothe design and upkeep of these plans to ensure their sustained andfull implementation. Finally, funding is not available to implementthe LUCP program in all states with aquaculture potential.

(e) Mexico does not have a coastal management policy or program.Little attention has been given to an integrated approach that wouldnetwork the responsibilities of the many federal and state agencies,charged with governing coastal ecosystems. The many issues andgroups affected by the transformation of coastal lagoons due to

Annex APage 6 of 11

changes in fresh water inflows, overfishing, dredging, and themanipulation of inlets and sedimentation, require a participatoryapproach to coastal resource management.

Direct Environmental Impacts of Project Activities

8. The majority of the environmental risks related to project investments arelinked to the shrimp aquaculture park, San Andres. This park is located on pasturelands and playons (elevated mud flats). The principal environmental issues will bethe planned use of exotic species in culture operations (P. vannamei) and asignificant need for dredging to improve lagoon water quality.

9. Three areas on the Laguna San Andres lagoon shoreline are considered assites for the San Andres Park. Two sites are on the south and north sides of themouth of the Rio Tigre, and the third is near the municipality of La Presita. TheSan Andres lagoon is subject to a tidal amplitude of less than 60 cm, and theshoreline is in fact more prone to flooding from wind rather than tidal action. Theintertidal zone throughout the lagoon is accordingly narrow, ranging fromapproximately 200 to 500 m, and has the sparse cover of dwarf Avicennia,Sesuvium, Salicornia, and Sporabola ssp. and other holophytic vegetation thatcharacterizes poorly inundated areas. Just inland of the intertidal zone, the flatcoastal plain has either been converted to pasture land or left with the nativethorny scrub composed chiefly of huisache, mesquite or ebony (Acacia, Prosopis,and xx spp. respectively). Given the abundance of flat uplands with clay soils,shrimp farm construction can avoid the intertidal wetland fringe (with theexception of the effluent and intake canals).

10. The principal environmental issue with the three tilapia parks is the use oftilapia spp, a non-endemic specie, in the cage culture operations located on inlandreservoirs. The introductions will take place in relatively new reservoirs that showlittle resemblance to natural, freshwater aquatic community structure or speciescomposition and where tilapia are already present. An additional environmentalproblem that could arise in the tilapia reservoirs is the risk of eutrophication, asexcess feed and waste contribute to the organic load of the parent water body. Inaddition, the project will support the rehabilitation of an abalone hatchery and theconstruction of a pen shell scallop hatchery, and a shrimp specific pathogenresistant hatchery. These subprojects present no major environmental problems,although an environmental assessment will be prepared for each investment projectas part of the feasibility study, and there will be an Mexican environmental impactstudy after the detailed engineering design, except in the case of the abalonehatchery, which is a rehabilitation project.

Annex APage 7 of 11

Environmental and Coastal Resources Management Subcomponent

11. The overall objective of the environment and coastal resourcesmanagement subcomponent is to strengthen environmental policy for aquacultureand to avoid any potential negative effects due to the sector's expansion and thespecific subproject investments. To strengthen environmental policy foraquaculture the proposed project aims to: (a) decentralize environmental decision-making to the state and community levels; (b) increase participation of communitygroups, the private sector and civil society organizations in the design and use oftools for environmental decision making; (c) expand the availability of high qualitydata for environmental monitoring of aquaculture and other activities that occur infragile coastal lands; and (d) promote an integrated approach to the managementof coastal resources. To meet these objectives, the project will support one coastalresource management pilot, improved evaluation and planning procedures foraquaculture, and monitoring of coastal wetlands and water quality.

Integrated Coastal Resource Management Pilots

12. The objective of the integrated coastal resource management (ICRM) pilotin the Lagoon Tamiahua in Veracruz is to develop innovative approaches forintegrated and participatory ICRM at the local and state levels. This area faces:over harvesting and gear conflicts in coastal and lagoon fisheries; and watercirculation and quality problems, aggravated by past dredging and breachwayconstruction, coastal flooding, loss of mangrove ecosystems, urban developmentand water pollution. Oyster culture and lagoon fisheries dominate the lagoon area.

13. The ICRM pilot aims to resolve resource use conflicts, identify appropriateutilization of coastal systems, and to demonstrate practical, participatory methodsfor applying the existing framework of environmental decision making (land andshore use planning, environmental impact assessments, one-stop permitting, andlaw enforcement). To achieve these objectives, the pilot will:

(a) Prepare and formally adopt a site-specific ICRM plan. The plan willguide case-by-case decision making, as well as stimulate restorationand conservation initiatives. To develop the plan the project willprovide technical assistance, workshops and training.

(b) Test new policies, procedures and management practices bysponsoring "practical exercises" in community based coastalresources management and by providing matching grants tocommunities and user groups to implement priority elements of theICRM plans.

(c) Develop and disseminate tested tools for managing lagoons andtheir associated ecosystems, which will be a key input into theICRM plan. A lagoon model will be developed to assess lagoon

Annex APage 8 of 11

conditions and predict changes to the ecology over time, and anecological lagoon history will be prepared using scientific andtechnical reports, census data, the LUCP study and interviews withlong-time resource users and elders, newspaper files and historicalrecords. The report will document how people have used thecoastal ecosystem over time, track trends in the productivity andconditions of the system, and provide the social and environmentalcontext for current issues and potential solutions. Portions of theplan will serve as addenda to the existing regional developmentplans and state and local ordinances.

(d) Provide sustained public education programs to create awarenessand interest in the resource management issues and the newmanagement initiatives (annual outreach strategy, press releases,organization of public meetings to discuss ICRM outputs,coordination with other public and private environmental groups).

(e) Carry out regular water quality monitoring in the lagoon.

Environmental Planning and Assessment

14. To strengthen the capacity of SEMARNAP to address potentialenvironmental issues related to aquaculture, the project would reinforce twoexisting planning and assessment programs for aquaculture: Land Use CapabilityProgram (LUCP) and environmental impact assessments (EAs).

15. Land Use Capability Program. The program would develop land usecapability plans for Veracruz and Baja California Sur, the only two project statescurrently lacking LUCP plans. The studies would be carried out in accordancewith the methodology approved by INE and SEMARNAP, and would includepublic participation in their design and implementation. The input of local businessleaders, government, universities, and coastal resource user groups would besought to define the issues and review the draft LUCP documents, including thepolicy recommendations. To develop these plans, the project would support:technical assistance, materials, workshops, and LUCP publications for Veracruzand Baja California Sur.

16. Environmental Impact Assessments. This activity would improve thequality of INE's environmental assessments for aquaculture by developing criteriaand guidelines for EA preparation specific to aquaculture with the provision oftechnical assistance, workshops and materials.

Annex APage 9 of 11

Monitoring of Coastal Wetlands and Water

17. To identify the impact of aquaculture on the management and quality ofcoastal resources, the project would support a baseline inventory and repeatedmonitoring to develop the needed quantitative and descriptive databases of criticalcoastal wetlands and lagoon water quality.

18. The coastal wetlands program would inventory wetlands in Veracruz,Sinaloa, Nayarit, Tamaulipas and Chiapas, as these states have the largestmangrove forests. The inventory would produce photographs, transparencies,atlases, digitized information, and maps. The project would cover the costs of thetechnical assistance and the production and dissemination of the final informationproducts (procurement and processing of images) for each state. The inventorieswould be carried out at the start of the project (Years One and Two) and would berepeated at the end of the project (Years Five and Six).

19. The coastal water quality program would initiate, on average quarterlyassessments of coastal water quality and would demonstrate the value ofmonitoring to potential local consumers of such information. Water qualitymonitoring would be carried out in Sinaloa and Nayarit, the states with the mostsignificant water quality problems, and in Tamaulipas to provide baseline and on-going water quality data in conjunction with the implementation of the San AndresShrimp Park. In each of these states, one coastal lagoon would be selected for theprogram via a two-step participatory process. Following an initial review ofrelevant research to identify problem areas, a state-level workshop would beconducted, in which local fisheries and environmental agency personnel,aquaculturalists, civil society organizations and other interested actors inenvironmental quality would identify the targeted lagoon system. The outputwould include a regional atlas that interprets water quality trends and geographicinformation system-type database files. Funds would be provided for technicalassistance, publication and dissemination.

Annex APage 10 of 11

SECTORAL ENVIRONMENTAL ISSUES AND MANAGEMENT PLAN

Etwim nme~a RikLqlC~s int/ Projot~Fraiwmwork Li~~mitation

Hydrological Modification -Forestry Law -Insufficient Baseline Data -Wetlands Inventory(indirect wetlands degradation) -General Environmental Law -EA methods -EA strengthening

* Environmental Assessment (*) not specific on issue guideline Development-Specific Environmental Law -EA application decentralization* Mangrove Protection (*) lack of EA field review OD 4:01

Wetlands Conversion -Forestry Law -Insufficient Baseline Data -Wetlands Inventory(Direct) -General Environmental Law -EA Methodology -EA strengthening

EA (*) -Lack of EA field review guideline DevelopmentLUCP -Insufficient LUCP coverage decentralization

-Specific Environmental Law (*) -LUCP methodology OD 4:01mangrove protection -LUCP extension (to BCS & Vc)protected areas -LUCP methodology (participation)

-International Treaties (*)Migratory birdsRAMSARNAWCC

-INE institutional policies* priority wetlands list

Eutrophication -Water Law (CNA enforcement) -Insufficient baseline Data -Support of Park concept-Environmental Law -EA methodology -Water quality monitoring

I EA (*) -EA methodology-Fisheries Law (-) guidelines development

Predator control -Environmental law (t*) -lack focus on the issue -Best Practices-Wildlife/Hunting laws (SAGAR) -lack of knowledge

Seed Capture -Fisheries Law (*) -Awareness -Training* INP supervision -Best Practices

Introduction of Exotics -Fisheries Law (*) -EA application -EA strengthening-Environmental Law (*) -Training and monitoring-EA

(*) denotes enforcement by PROFEPA

Annex APage 11 of 11

Subproject Environmental Issues and Management Plan

Potential Envirormental Issues Management

General Iasuea a. Project to supports EAs for each park that will include Bank review,a. siting and construction impacts (hydrology and wetlands) and extensive analysis of hydrological parameters and wetlands issues.

b. Organic loading from pond discharge water a. San Andres Park to be sited on non-wetland area.

c. Increased capture of wild seedstock and incidental by-catch b. Park concept allows master planning of discharge canals such that maximumdestruction dilution and minimal impact occurs.

d. Predator control operations may impact aquatic birds b. Nutrient loading will be modeled during EA.

e. Cultivation of tilapia in cages in inland reservoirs could threaten c. SPR hatchery is supported to minimize wild seed capture.

endemic speciesd. Training and Best Practice Manual will focus predator control away from most

specie, and emphasize non-lethal methods.

e. Since tilapia is well established throughout Mexico, little increase is anticipated

in long-term standing fish stocks, and the stocking will occur in artificial

environments; the incremental environmental risk posed by these projects is

considered to be very small

San Andre- (Tamaulipas) a. EA preparation team will ensure development of exotic species management plan.

a. use of exotic species in culture operations a. Pacific white shrimp have already been accidentally introcuced along Gulf coast(P. vannamei) from Texas-based culture facilities.

b.Significant need for dredging to improve lagoon water quality. b. LA preparation team will ensure dredging impacts are adequately addressed.

Tilapia Parka (reservoir) a. Large size of most impoundments ensures minimal organic loading and risk ofa. Contribution of organic load to parent waterbody from excess feed eutrophication.

and wastes.

b. Use of exotic culture species. b. Tilapia is already established in all Mexican reservoirs and watersheds.

c. Viua/astetcderaatonfomflatngcgeadenc. Low use for 'scenic" tourism or residential communities minimizes significancec. Visual/aesthetic degradation from floating cages and pens.I of aesthetic impacts of cage culture in reservoirs.

Annex BPage 1 of 5

Project Economic Analysis and Benefits

1. This Annex presents the economic rate of return (ERR) and net present value (NPV) forthe AcuaMexico subprojects. It also identifies incremental production, employment, and majorproject beneficiaries.

Economic Analysis

2. ERRs and NPVs are calculated for each of the seven AcuaMexico subprojects. Inaddition, a comprehensive ERR and NPV is calculated for the seven subprojects, which alsoincludes the cost of the permitting study, the environment and coastal resources managementsubcomponent, the research fund, the regional diagnostic laboratory network, the training andmonitoring program and the management contract for the AcuaMexico Fund. Thiscomprehensive ERR/NPV reflects 83% of project costs. Most of the data was collected using1994 prices. Prices and costs were adjusted to reflect 1995 levels, according to whether or notthey are a tradeable or non-tradeable or some combination thereof The analysis assumes constant1995 prices and expenditures. The market value of all inputs and outputs is assumed to reflect theeconomic value.

3. The base model uses an average exchange rate of 6.5 NP/US$. The domestic inflation rateis assumed to be 40% for 1995. Sensitivity analysis was carried out to determine the impact ofchanges in the exchange rate, output prices, and production on the economic viability of theinvestments. In addition, the impact of possible implementation delays, which would affectproduction levels in Year One and Year Two of the Project were estimated. Shrimp and PLs areassumed to be fully tradeable, while only 30% of the tilapia is assumed to be tradeable (theremainder is not of an sufficient export quality). The abalone and pen shell scallop spat are non-tradeables as well as the depurified oysters. Appendix Table I presents the net present value(NPV) (in millions of NP$) and the economic rate of return (ERR) for each scenario. Theproduction and cost assumptions are shown in Appendix Table 2. The detailed farm models are inthe project file (Annex G).

The base case ERRs are 45% (AcuaMexico subprojects only) and 35 % (including otherpublic goods). Exchange rate fluctuations have a minimal impact on economic viability, as thebenefit of higher output prices is offset by the higher input prices. Given possible medium-termdeclines in shrimp and tilapia prices, and the uncertain price of abalone and pen shell scallop spat,the model estimated the impact of a 10% decline in output prices. The latter would reduce thebase ERR to 35% (for the AcuaMexico subprojects), while a 33% decline in output prices woulddrop the ERR to 12% and cause the NPV to approach zero. Also in light of the volatility ofaquaculture production, particularly shrimp, the model assessed the impact of changes inproduction levels on the economic viability of the operations. A 10% decline in production levelsfor all species brings the ERR (for AcuaMexico subprojects) to 37%, while a 39% decline inproduction brings the ERR to 12% and causes the NPV to become negative. The model also testsfor the impact of production delays during the start-up phase of the investments. A 20% reductionin production in Year One coupled with a 10% reduction in Year Two causes the ERR to fall to41%. Finally, a combined scenario was tested involving a 15% devaluation, a 10% fall in output

Annex BPage 2 of 5

to fall to 41%. Finally, a combined scenario was tested involving a 15% devaluation, a 10% fall inoutput prices and start up delays causing output reductions of 20% and 10% in Years One andTwo respectively. This causes the cumulative ERR to drop to 33%.

Incremental Production

4. Table C. I compares the national estimated production of shrimp and tilapia in 2005 withand without the project (calculated using the average 91-94 growth rate). Overall, the incrementalcontribution of the project to production is small, less than 1% for tilapia and shrimp. However, itis not clear that the 1991-94 growth rate for shrimp is sustainable, although the sector hassignificant potential. Similarly, the incremental impact of the project on tilapia is small due to theimportance of this species in Mexican aquaculture (46% of total production). The contribution ofthe SPR shrimp hatchery is also estimated to be relatively small (7%). However, this facility isincluded in the project to provide as a model for the SPR technology and to catalyze otherprivate/social sector hatcheries to adopt this technology. The hatcheries to produce abalone andpen shell scallop spat will be the first of their kind in Mexico.

Table C. l: Incremental Project Production (metric tons)

National National IncrementalNational Production w/o Project Production Increase due

Production Projecta Production with Project to ProjectProduct 1994 2005 2005 2005

Shrimp (tons head 15,509 923,914 2,185 926,099 0.2%on)

Tilapia (in tons) 81,490 105,780 895 106,675 0.9%

Shrimp(in millions of PL) 875 2,496 173 2,669 7%b

a. Based on average 1991-94 growth rates for shrimp and tilapia. The 1991-94 average growth rate was 45% forshrimp and 2.4% for tilapia.b. Assumes that PL production increases at 100/o/year.

Annex BPage 3 of 5

Beneficiaries

5. The project would benefit 7,810 low income and poor aquaculture producers viainvestments in the aquaculture parks and the TIF and via the training programs. The projectwould create a total of 139 permanent employment positions with the majority from theaquaculture parks. Table C.4 provides a summary of these beneficiaries.

Table C.2: Beneficiaries

1 3 1 l Pen Shell 1Indicator Shrimp Tilapia Abalone Scallop SPR TIF b/ Total

Park Parks Hatchery Hatchery Hatchery

EmploymentGenerated (# of 80 20 7 12 20 n/a 139jobs created) a/

Direct 250 60 n.a. n.a owners SPFBeneficiaries (# company 7500of people) c/ plus shrimp 7 7,810

producerswho

purchase theSPR PLs

n.a. Data not available.

a. Defined as number of jobs created in the management and operation of each park or hatchery.b. Assumes 150 TIF proposals for an average of US$40,000 will be funded with an average of 50 directbeneficiaries per contract.c. Expected number of social sector investors.

Annex BPage 4 of 5

Appendix Table C.1:

Base Option (1) Production Exchange Rate Output Prices Implementation Scenario (3)Plus 10% Minus 10% 15% Depreciation 15 % Appreciation Plus 10 % Minus 10% Delays (2)

San Andres Shrimp ParkNET PRESENT VALUE AT 12 % 116,735,192 142,353,740 91,116,644 138,699,852 94,770,532 148,476,593 84,993,791 111,305,058 96,792,976ECONOMIC IRR (%) 49 56 41 50 46 58 39 45 38

Cerro De Oro Tilapia ParkNET PRESENT VALUE AT 12 % 2,507,465 3,915,055 1,099,875 2,098,286 2,916,644 3,915,055 1,099,875 2,074,250 201,264ECONOMIC IRR (%) 39 55 24 33 47 55 24 31 14

Vincente Guerrero Tibpia ParkNET PRESENT VALUE AT 12 % 2,507,465 3,915,055 1,099,875 2,098,286 2,916,644 3,915,055 1,099,875 2,074,250 201,264ECONOMIC IRR (%) 39 55 24 33 47 55 24 31 14

El PortMio Tigapia ParkNET PRESENT VALUE AT 12 % 2,507,465 3,915,055 1,099,875 2,098,286 2,916,644 3,915,055 1,099,875 2,074,250 201,264ECONOMIC IRR (%) 39 55 24 33 47 55 24 31 14

Panta Eugenia Abalone HatcheryNET PRESENT VALUE AT 12 % 5,581,248 7,721,197 3,441,299 3,970,324 7,192,172 7,721,197 3,441,299 4,761,873 1,092,937ECONOMIC IRR (%) 35 45 26 27 46 45 26 30 16

Pen Shell Scallop HatcheryNET PRESENT VALUE AT 12 % 7,514,353 9,646,503 5,382,203 7,769,256 7,259,449 9,646,503 5,382,203 7,072,978 5,031,194ECONOMIC IRR (%) 31 35 26 29 32 35 26 29 23

SPR Hatchery Facility (shrispPL)NET PRESENT VALUE AT 12 % 13,066,929 16,643,917 9,489,941 15,236,173 10,897,686 16,643,917 9,489,941 12,081,622 10,102,843ECONOMIC IRR(%) 45 54 35 45 43 54 35 40 32

ADl AcuaMexico SubprojectsNET PRESENT VALUE AT 12 % 146,734,422 184,492,636 108,976,208 167,810,553 125,658,292 190,615,489 102,853,355 137,622,972 109,245,492ECONOMIC IRR (%) 45 53 37 45 44 54 35 41 33

AcuaMexico Subprojects and publicgoods (4)

NET PRESENT VALUE AT 12 % 107,257,926 139,954,729 74,561,124 123,793,977 90,721,875 145,176,791 69,339,061 98,282,092 72,134,706ECONOMIC IRR (%) 35 42 28 36 34 43 27 32 25

(1) Base option assumes 1995 constant prices; 6.5 NP/US$ exchange rate and 40 percent inflation rate (the latter is assumed to be 40 percent of the depreciation/appreciation of the NP).(2) Implementation delays refers to a 20 percent production loss in year I and a 10 percent production loss in year 2.(3) Scenario assumes a 15 % depreciation, a 20 % and 10 % implementation delay in year I and 2, respectively, and a 10 % decline in output prices.

Annex BPage 5 of 5

Appendix Table C.2: Production and Cost Assumptions for Economic Analysis

All tilapia in Pen Shell Punta SPR ShrimpIndicator San Andres cages (b) Scallop Eugenia Hatchery

Species Shrimp Tilapia Pen Shell Abalone Spat SPR PLScallop Spat

Production Area (ha)a 800 100 cages (6.5 N/A N/A N/AM3 each) I

Investment Costs 1995 85.9 1.4 7.1 8.5 11.2million NP$

Operating Costs 1995 38.5 2.2 2.0 1.9 2.0million NP$ (a)

Output Price 36.4 NP/kg 8.4 NP/kg 293 NP/ha 5.2 NP/000 41 NP/000restocked

Crops/Year(&) 2 2 20,000 Ha 1 12restocked

Stocking Densities (a) 17 1 80/m3 N/A n/a n/a

Survival Rates (a) 60-75% variable 85% after 50g N/A n/a 40%(after nursury pond)

Yield 2.73 mt/ha/yr 459/kg/m3 N/A 600,000 173 million PLs/kg/yr/spat

Feed Conversion Ratio 1.8:1 1.8:1 N/A N/A N/A

a. At full production.b. Includes Cerro de Oro, El Portillo, Vincente Guererro.

Annex CPage 1 of 9

Components Project Cost Summary

(NS '000) (USS '000)

% % TotalForeign Base

Local Foreign Total Local Foreign Total Exchange Costs

A. Regulatory Framework and Public Goods1. Regulatory Framework

Aquaculture Pemiittmg 2,003 1 2,219 5 4,222 6 253 6 280 9 534.5 53 1AquacultureRegulationsPrograrn 624.9 1,6163 2,241 2 791 204.6 283.7 72 1

SubtotalRegulatoryFramework 2,6280 3,8358 6,4638 3327 485.5 818.2 59 22. Environment and Coastal Resources Management

Integrated Coastal Resources Management Pilot 3,160 4 17,908.9 21,0693 4001 2,2670 2,667.0 85 5MonitoringofCoastal Wetlands and WaterQuality 13,935 6 - 13,935 6 1,764.0 - 1,764.0 - 3Environmental Planning and Assessment 4,935 1 - 4,935 1 624.7 - 624.7 I

Subtotal Environment and Coastal Resources Management 22,031 1 17,908 9 39,940 0 2,788 8 2,267.0 5,055.7 45 103. Public Goods

Research Fund 8,769.0 - 8,7690 1,1100 - 1,1100 . 2Regional Diagnostic Laboratory Network 7,231.3 19,608.2 26,8395 915.4 2,482.0 3,397.4 73 7

Subtotal Public Goods 16,0003 19,608.2 35,608 5 2,0254 2,482.0 4,507.4 55 94. Project Coordination and

Institutional Strengthening 19,407.2 1,152.5 20,559 8 2,456.6 145 9 2,602.5 6 5Subtotal Regulatory Framework and Public Goods 60,066 6 42,505 4 102,572 0 7,603 4 5,380.4 12,983.8 41 25B. Social Sector Development

1. Aquaculture ProductionParks and Laboratories 194,103.1 20,812.4 214,9156 24,570.0 2,634.5 27,2045 10 53Targeted Investment Fund 43,888 5 - 43,888 5 5,555,5 - 5,555.5 - 11

Subtotal Aquaculture Production 237,9916 20,812.4 258,8040 30,125 5 2,634.5 32,760.0 8 643. Institutional Development

AcuaMexico Fund 5,003 4 28,352.7 33,356 2 633.3 3,589 0 4,222 3 85 8TrainingandMonitornng 10,653.9 470.1 11,1240 1,348.6 59.5 1,408.1 4 3

Subtotal Institutional Development 15,657.4 28,8228 44,4802 1,981 9 3,648.5 5,630.4 65 11Subtotal Social Sector Development 253,6489 49,6352 303,284.2 32,107.5 6,282.9 38,3904 16 75Total BASELINE COSTS 313,715 6 92,140.6 405,856 2 39,710 8 11,663.4 51,374 2 23 100

Physical Contingencies 14,583.3 1,956.9 16,5403 1,846.0 2477 2,0937 12 4Price Contingencies 189,697.0 44,439.9 234,1369 4,394.3 8969 5,2912 17 10

Total PROJECT COSTS 517,9959 138,537.4 656,5333 45,951 1 12,8080 58,759.1 22 114

Table C.1

Annex CPage 2 of 9

Expenditure Accounts Project Cost Summary

(NS '000) (USS '000)

% % TotalForeign Base

Local Foreign Total Local Foreign Total Exchange Costs

1. Investment CosbA. Civil Works 120,571.0 - 120,571.0 15,262.2 - 15,262.2 - 30B. Turnkey Contract 9,020.2 9,020.2 18,0404 1,141.S 1,141.S 2,283.6 50 4C. Goods

LabEquipment 3,271.4 18,538.1 21,809,5 414.1 2,346.6 2,760.7 85 5Office Equipment andPublications 418.4 104.6 523.0 53.0 13.2 66.2 20 -Furniture 177.8 - 177.8 22.5 - 22.5 - -Computers 2,445.8 2,445.8 4,891.7 309.6 309.6 619.2 50 1

Subtotal Goods 6,313.4 21,088.5 27,401.9 799.2 2,669.4 3,468.6 77 7D. Vehicles 711.0 - 711.0 90.0 - 90.0 -E. Consultants and Technical Assistance

International Consultants 10,863.0 61,557.1 72,420.1 1,375.1 7,792.0 9,167.1 85 18Local Consultants 28,967.3 4.7 28,972.1 3,666.8 0.6 3,667.4 - 7

Subtotal Consultants and Technical Assistance 39,830.3 61,561.8 101,392.2 5,041.8 7,792.6 12,834.5 61 25F. ResearchFund 11,925.1 - 11,925.1 1,509.5 - 1,509.5 - 3G. PTIF 43,888.5 - 43,888.5 5,555.5 - 5,555.5 - 11I. Training and Workshops

Intemational training 83.0 470.1 553.0 10.5 59.5 70.0 85 -Local training 6,173.1 6,173.1 781.4 - 781.4 - 2

Subtotal Training and Workshops 6,256.0 470.1 6,726.1 791.9 59.5 851.4 7 2I. Land 15,800.0 - 15,800.0 2,000.0 - 2,000.0 - 4

Total Investmnent Costs 254,315.5 92,140.6 346,456.1 32,191.8 11,663.4 43,855.2 27 85L Recurrent Costs

B.OperatingCostsforParks 49,797.7 - 49,7977 6,303.5 - 6,303.5 - 12C. Operating Costs for Laboratories 1,794.9 - 1,794.9 227.2 - 227.2 -D. Incremental Recurrent Costs 7,807.6 7,807.6 988.3 - 988.3 - 2

Total RecurrentCosts 59,400.1 - 59,400.1 7,519.0 - 7,519.0 - 15Total BASELINE COSTS 313,715.6 92,140.6 405,856.2 39,710.8 11,663.4 51,374.2 23 100

Physical Contingencies 14,583.3 1,956.9 16,540.3 1,846.0 247.7 2,093.7 12 4Price Contingencies 189,697.0 44,439.9 234,136.9 4,394.3 896.9 5,291.2 17 10

TotalPROJECTCOSTS 517,995.9 138,537.4 656,533.3 45,951.1 12,808.0 58,759.1 22 114

Table C.2

Annex CPage 3 of 9

Project Components by Year -- Totals Including Contingencies(US$ '000)

Totals Including Contingencies1997 1998 1999 2000 2001 2002 Total

A. Regulatory Framework and Public Goods1. Regulatory Fromework

AquaculturePermitting 564 3068 959 1161 - - 575.1Aquaculture Regulations Program 62.5 66.1 68.0 70.0 37.9 - 304 5

Subtotal Regulatory Framework 119.0 372 9 163.9 186.0 37.9 8 879.72. Environment and Coastal Resources Management

Integrated Coastal Resources Management Pilot 541 1 556.8 573.0 589.6 606 7 2,867.2Monitoring of Coastal Wetlands and WaterQuality 2141 3361 304.0 753.8 3025 - 1910 6Environmental Planning and Assessment 227.8 245 9 66.8 56.6 58.2 - 655 3

Subtotal Environment and Coastal Resources Management 9829 1,1389 9438 1,400.0 967.5 5,43323. Public Goods

Research Fund 225.2 231.8 2385 2454 252.5 - 1,193.3Regional Diagiostic Laboratory Network 693.7 677.2 723.4 778.5 954.0 3,826.8

SubtotalPublicGoods 918.9 9089 961.9 1,023.9 1,206.5 - 5,020.14. Project Coordination and

Institutional Strenthening 616.9 546 5 554.5 538.1 551.6 - 2,807.6Subtotal Regulatory Framework and Public Goods 2,6377 2,967 2 2,624.1 3,148.1 2,763.5 - 14,1406B. Social Sector Development

1. Aquaculture ProductionParks and Laboratories 2,648 7 1,587 6 1,593.2 9,493.6 12,407.1 4,639.8 32,369 9TargetedInvestmentFund 1860 522.0 1,014.5 1,965.1 2,445.4 6,132.9

Subtotal Aquaculture Production 2,834.7 2,109 5 2,607.7 11,458.7 14,852.5 4,639.8 38,502.83. Institutional Development

AcuaMexico Fund 507.3 1,043.9 1,133.9 1,007.1 859.4 - 4,551.6Traimngand Monitorng 89.4 216.0 857.8 193.8 207.1 - 1,564.1

Subtotal Institutional Development 596.6 1,2599 1,991.8 1,200.8 1,066.5 6,1157Subtotal Social Sector Development 3,431.3 3,369.4 4,599.4 12,659.5 15,919.1 4,639.8 44,618 5

Total PROJECT COSTS 6,069.0 6,336 6 7,223.5 15,807.7 18,682 6 4,639.8 58,759.1

Table C.3

Annex CPage 4 of 9

Expenditure Accounts by Years -- Totals Including Contingencies(US$ '000)

Totals Including Contingencies1997 1998 1999 2000 2001 2002 Total

I. Investment CostsA. Civil Works - - 5067 8,9344 9,365.0 - 18,806.2B. Tumnkey Contract 1053 1,206.5 1,3453 - - - 2,657.1C. Goods

Lab Equipment 420.2 548 1 626.7 682.9 862.5 - 3,140.4OfficeEquipmentandPublications 29.1 194 11.3 6.5 6.7 - 72.9Fumiture 16.0 - - 8.7 - - 24.7Computers 315.7 110.8 111.4 130.6 12.4 - 681.0

Subtotal Goods 781.0 678.3 749 4 828.7 881.6 - 3,919.0D. Vehicles 63.9 32 9 - - - 96.8E. Consultants and Technical Assistance

Intemational Consultants 1,436.9 2,271.7 1,9314 2,222.2 2,008.9 - 9,871.1Local Consultants 735.7 864.9 652.4 1,071.1 612.5 - 3,936.6

Subtotal Consultants and Technical Assistance 2,172.6 3,136.6 2,583.8 3,293.3 2,621.4 - 13,807.7F. Research Fund 244.9 278.8 347.2 368.4 391.8 - 1,631.2G. PTIF 186.0 522.0 1,014.5 1,965.1 2,445.4 - 6,132.9H. Training and Workshops

Intemational training - - 75.2 - - - 75.2Local training 118.8 243.9 183.8 126.6 165.0 - 838.1

Subtotal Training and Workshops 118.8 243.9 259.0 126.6 165.0 - 913.2I. Land 2,191.3 - - - - - 2,191.3

Total Investment Costs 5,863.9 6,098.9 6,805.8 15,516.4 15,870.4 - 50,155.411. Recurrent Costs

B. Operating Costs for Parks - - 152.3 - 2,499.3 4,639.8 7,291.4C. Operating Costs for Laboratories 49.0 51.7 52.9 48.3 41.5 - 243.3D Incremental RecurrentCosts 156.1 186.0 212.5 243.0 271.4 - 1,069.0

Total Recurrent Costs 205.1 237.7 417.6 291.3 2,812.2 4,639.8 8,603.7Total PROJECT COSTS 6,069.0 6,336.6 7,223.5 15,8077 18,682.6 4,639.8 58,759.1

Table C.4

Annex CPage 5 of 9

Expenditure Accounts by Financiers(US$ '000)

Local

IBRD GOM Productive Sector Total For. (Excl. Duties &Amount % Amount % Amount % Amount % Exch. Taxes) Taxes

A. Civil Works 12,495.1 664 5,976.4 31 8 3346 1 8 18,806.2 32.0 - 15,985.3 2,820.9B. SPRHatchery 1,355.1 51.0 0.0 - 1,3020 490 2,657.1 4.5 1,328.6 930.0 3986C. Goods

Equiprnent 3,329.2 84.9 589.8 15.1 - - 3,919.0 6.7 3,024.4 306 7 587.8SubtotalGoods 3,329.2 84.9 589.8 151 - 3,9190 67 3,0244 3067 5878D. Vehicles

I Vehiclesandboats - - 96.8 1000 - - 96.8 0.2 - 823 145Subtotal Vehides - - 96.8 100.0 - - 96.8 0.2 - 82 3 14 5E. Technical Assistance 10,542.3 85.0 1,860.4 15.0 - - 12,402.8 21.1 6,774.3 3,768.0 1,860.4F. Technical Assistance forParks 1,6168 85.0 285.3 15.0 - - 1,9021 32 1,616 8 - 2853G Training 725.8 85.0 128.1 150 - 8539 1 5 639 661 9 128 1HL Grants

1. Research Fund 596.7 500 - - 596.7 50.0 1,193.3 2.0 - 1,014.3 17902. PTIF 4,599.7 75.0 0.0 - 1,533.2 25.0 6,132.9 10.4 - 5,213.0 919.9

Subtotal Grants 5,196.3 70.9 0.0 - 2,129.9 29.1 7,326.2 12.5 - 6,227.3 1,098.9L Operating Cost

Operatingcosts for PARQUES 2,999.3 50.0 0.0 - 2,9993 50.0 5,998.6 102 - 5,0988 8998OperatingCostsforLabs - - 00 - 1,383.9 100.0 1,3839 24 - 1,1763 2076OperatingCostsforSPRHatchery 777 51.0 - - 746 490 1523 03 - 1295 228Incremental recurrent costs 545.7 51.0 523.3 49.0 - - 1,069.0 1 8 908.6 160 3

Subtotal Operating Costs 3,622.7 42.1 523.3 6.1 4,457.8 51 8 8,603.7 14.6 - 7,313.2 1,290.6J. Land - - - - 2,191.3 100.0 2,191 3 3 7 - 1,862.6 328 7

Total 40,033 4 662 9,460.1 16.1 10,415.6 177 58,7591 1000 12,808.0 37,137.2 8,8139

Table C.5

Annex CPage 6 of 9

Components by Financiers(US$ '000)

Local

IBRD GOM Productive Sector Total For. (Excl. Duties &Amount % Amount % Amount % Amount % Exch. Taxes) Taxes

A. Regulatory Framework and Public Goods1. Regulatory Framework

Aquaculture Permitting 488.9 85.0 86.3 150 - - 575.1 1.0 302.7 186.2 86.3AquacultureRegulationsProgram 258.8 85.0 45.7 15.0 - - 304.5 0.5 216.8 42.0 45.7

SubtotalRegulatoryFramework 747.7 85.0 132.0 15.0 - - 8797 1.5 519.5 228.2 132.02. Environment and Coastal Resources Management

Intepated Coastal Resources Management Pilot 2,437.1 85.0 430.1 150 - - 2,867.2 4.9 2,437.1 - 430.1MonitoringofCoastalWetlandsandWaterQuality 1,624.0 85.0 286.6 15.0 - - 1,910.6 3.3 - 1,624.0 286.6EnvironrnentalPlanningandAssessment 557.0 85.0 98.3 15.0 - - 655.3 1.1 - 557.0 98.3

SubtotailEnvironmentandCoastalResourcesManagement 4,618.2 85.0 815.0 15.0 - - 5,433.2 9.2 2,437.1 2,181.0 815.03. Public Goods

Research Fund 596.1 50.0 - - 596.7 50.0 1,193.3 2.0 - 1,014.3 179.0RegionalDiagnosticLaboratoryNetwork 3,045.9 79.6 537.5 14.0 243.3 6.4 3,826.8 6.5 2,816.0 436.8 574.0

SubtotalPublicGoods 3,642.6 72.6 5375 10.7 840.0 167 5,020.1 8.5 2,816.0 1,451.1 753.04. Project Coordination andInstitutional Strengthening 1,939.3 69.1 868.3 30.9 - - 2,807.6 4.8 157.2 2,229.3 421.1

Subtota RegulatoryFrameworkandPublicGoods 10,947.8 77.4 2,352.8 16.6 840.0 5.9 14,140.6 24.1 5,929.9 6,089.6 2,121.1B. Socel Sector Development

1. Aquaculture ProductionParksandLaboratonries 18,213.6 56.3 6,114.0 18.9 8,042.3 24.8 32,369.9 55.1 2,945.4 24,569.1 4,855.5Targeted InvestmnentFund 4,599.7 75.0 0.0 - 1,533.2 25.0 6,132.9 10.4 - 5,213.0 919.9

SubtotalAquacultureProduction 22,813.2 593 6,1140 15.9 9,575.6 24.9 38,502.8 65.5 2,945.4 29,782.0 5,775.43. Institutionl Development

AcuaMexicoFund 3,868.9 85.0 682.7 150 - - 4,551.6 7.7 3,868.9 - 682.7TrainingandMonitoring 1,253.5 80.1 310.6 19.9 - - 1,564.1 2.7 63.9 1,265.6 234.6

Subtotal Institutional Development 5,122.3 83.8 993.4 16.2 6,115.7 10.4 3,9328 1,265.6 917.4Subtotal Social SectorDevelopment 27,935.6 62.6 7,107.4 15.9 9,575.6 21.5 44,618.5 75.9 6,878.1 31,047.6 6,692.8

Total Disbursement 40,033.4 662 9,460.1 161 10,415.6 17.7 58,759.1 100.0 12,808.0 37,137.2 8,813.9

Table C.6

Annex CPage 7 of 9

Local/Foreign/Taxes by Financiers(US$ '000)

IBRD GOM Productive Sector TotalAmount % Amount % Amount % Amount %

I Foreign 12,808.0 100.0 - - - - 12,808.0 21.8II. Local (Excl. Taxes) 27,225 4 70.2 3,602.7 9 7 7,459.2 20.1 37,137.2 63.2III Taxes - - 5,8574 66.5 2,956.4 33.5 8,813.9 15.0

Total Project 40,033 4 66.2 9,460.1 16.1 10,415.6 17.7 58,759.1 100.0

Table C.7

Annex CPage 8 of 9

Procurement Arrangements(US$ Million)

Procurement Method

International Local

CompetiUve Competitive Ial Direct ConsultingBidding Bidding Shopping Contracting Services N.B.F. Total

A. Civil Works - 17.3 1.5 - - - 18.8(11.4) (I1) (12.5)

B. SPR Hatchery /a 2.7 - 2.7(1.4) (1.4)

C Goods /b 2.8 0.7 0.4 - - - 3.9(2.4) (0.6) (0.3) (3.3)

D Vehicles and boats - - - - - 0.1 0.1

E Technical Assistance - - - 0.4 13.9 - 14.3(0.4) (11.8) (12.2)

F. Training -0.9 - 0.9(0.7) (0.7)

G. GrantsResearch Fund - - - - 1.2 - 1.2

(0.6) (0.6)PTIF - - - - 6.1 - 6.1

(4.6) (4.6)H. Land - - - - - 2.2 2.2

1. Reciurent Costs - - - 7.1 - 1.5 8.6(3.5) (0. 1) (3.6)

Total 5.5 18.0 1.9 8.4 21.2 3.8 58.8(3.8) (12.0) (1.4) (4.6) (17.0) (0.1) (40.0)

Note: Figures in parenthesis are the respective amounts financed by IBRD\a Turnkey contract\b Equipment, furniture and publications.

Table C.8

Annex CPage 9 of 9

Allocation of Loan ProceedsIBRD

(US$ '000)

DisbursementLoan Amount %

A. Civil Works 11,200.0 70.0

B. Goods /a 3,000.0 85.0

C. SPR Hatchery 1,200.0 51.0

D.Technical Assistance 9,500.0 100.0

E. Technical Assistance for Parks 1,500.0 100.0

F. Training 700.0 100.0

G.Grants

1. Research Fund 500.0 100.0

2. Targetted Investments Fund 4,100.0 100.0

H. Recurrent Costs

1. Operating Costs Parks 2,700.0 80% in 2000 and 50% 2001

2. Operating Costs for SPR Hatchery 100.0 51% in 199990% in 1997 and 1998, 50% in 1999

3. Incremental Recurrent Costs 500.0 and 2000, 10% in 2001 and 2002

Unallocated 5,000.0

Total 40,000.0

Loan arnounts financed by IBRD

\a Equipment, furniture and publications

Table C.9

Annex DPage 1 of I

Project Flow of Funds

EXTERNAL FUNDS FEDERAL FUNDS OTHER FUNDS

I I ~~~~~~~~~~~~~~~~~~Producers, CommercialI I ~~~~~~~~~~~~~~~~~~ak,Research

World Bank SHCP - SEMARNAP InstRutions, etc.

AcuaMexico Programs

[ ACUAMEXICO 16[SEMARNAP

Investment and Operating Capital

(Parks, Hatchenes, General Directorate of Aquaculture

Training and Monitonng) - Aquaculture PermittingAqu_Oro-. - Aquatic Health

San Andres Producers local communities and- Pilot ICRM Project (with Veracruz) 9 --- government

Punta Eugenb - Coastal Inventory and MonitonngCerro de Oro - Environmental Planning and Assessment

El Porto Regional Diagnostic Labs University and Other Labs

Vincente Guerrero - Research Fund .4 Research institutions

-Project Coordination and InstitutionalSPR Hatchery Strengthening

Penn Shel Scao,o Hatchen - Targeted Investment Fund (with states) 4 - Producers/civil society/public institutions

Producers (Land and Capital)

Commercial Banks (Operating Costs)

Annex EPage lof 11

Lessons Learned from Past Experience

Aquaculture Development

1. Background. Since the first fishery project in 1964, the Bank has supported97 projects involving fisheries, totaling US$616.5 million in Bank loans. Of theseprojects only 35 focused on fisheries; in the other projects, fisheries development wasjust a component. By 1984, when the first review of Bank experience in fisheries wasdone, aquaculture components amounted to 10% of overall Bank lending for fisheries;there were eight closed and ongoing projects with an aquaculture component and onlytwo had aquaculture development as the main target. Aquaculture has grownsignificantly in recent years as has Bank involvement in the activity. At present, thereare more than ten ongoing projects financed by the Bank promoting aquaculturedevelopment. All Bank aquaculture projects are in Asia, reflecting the fact that 80% ofthe reported world cultivated fish output in 1987 came from Asia, 12% from Europeand 8% from Latin America and Africa.

2. In general, all projects have similar components: (a) off-farm publicinfrastructure for the construction or rehabilitation of embankments, canals, reservoirs,water control structures, and other facilities to supply farms with fresh water; (b)credit lines to farmers to finance on-farm infrastructure (e.g. minor canals, ponds,pumps, etc.); (c) credit lines to private firms or to public firms for support facilities,especially hatcheries, feed mills, and marketing services (ice plants and cold storage);and (d) institutional support, technical assistance and training for project andgovernment agencies' staff and beneficiaries (Annex Tables F. 1 and F.2).

3. Lessons Learned. The Operations Evaluation Department (OED) work"Review of Bank Experience with Fisheries Development" (1984) found that theoverall performance of the Bank's fisheries portfolio had been poor; 46% of thecompleted fisheries projects were judged by OED audits to have failed to achieve theirmajor objectives. Although there is no specific reference to aquaculture, the reportoffers good lessons for fisheries projects, which may also be applied to aquacultureinvestments. Almost all problems encountered could be attributed to administrativeand managerial weaknesses in the implementing agencies; weak project concept anddesign; low technical, extension, and other staff recruitment; and the lack of a coherentBank approach to the sector due to a shortage of in-house fisheries technical staff.

4. As mentioned, Bank experience with aquaculture projects is limited, mostaquaculture projects are at appraisal or at implementation, and only two projects arecompleted: the Inland Fisheries Project implemented in India from 1980 to 1989 andthe Fisheries Credit Project implemented in Indonesia from 1974 to 1981. Their PCRshighlight important lessons learned during implementation.

Annex EPage 2 of 11

5. The Inland Fisheries Project was highly successful in reaching its objectivesaccording to the PCR. Incremental carp production surpassed 220,000 mt (appraisaltarget was 200,000 mt). The ERR was 65% and exceeded the appraisal estimate(42%), mainly due to higher than expected producer prices. The project also resultedin important employment generation for over 200,000 people and benefits for lowerincome groups, and contributed to the foundation of a new fish seed industry.Nevertheless, project implementation was delayed due to poor public hatcheriesdesign, shortage of technical staff in the implementing agencies as well as in the Bank,and failure to recognize the private sector role.

6. The Indian project had an unsuitable design of hatcheries that producedproblems in finding adequate sites for them and delayed construction. Once the poordesign was evident, the Bank was rigid in accepting modifications to the originaldesign. Finally, when the hatcheries were ready, they were large and difficult tomanage, especially as there was not enough trained and experienced staff Privatesector investors with technical help from the government compensated for the badperformance of the public hatcheries and ensured the overall success of the project.

7. Private entrepreneurs' involvement in the project was not considered atappraisal, but when public hatcheries' failure delayed aquaculture development, thegovernment was glad to technically support investors interested in this profitableactivity with adequate size and good management. The private sector also performedextremely well in other areas not included in the project that were not governmentsupported, such as feed production, ice production, cold storage, and other supportactivities and marketing services.

8. At appraisal, the Government of India considered a subsidy to cover 25% ofinvestment and first year inputs cost for the poorest farmers. Later, duringimplementation, the government tried to ensure the fastest possible development ofaquaculture. It decided to extend the subsidy to every farmer, not only the poorest,and to cover any cost or investment, not just the 25% considered at appraisal. Thecost incurred for this subsidy had a negative effect on the government's budget andfarmers could take up fish farming without any equity. It is doubtful whether it wasnecessary to promote aquaculture to such extent given the industry's relatively highprofitability.

9. The Fisheries Credit Project implemented in Indonesia from 1974 to 1981 alsoprovides some good lessons. Contrary to the previous example, production was lessthan estimated due to insufficient credit. Individual loan amounts were insufficient tocover the cost of the necessary improvements. Consequently, farmers could not reachthe expected technical requirements to ensure a high production.

10. Cost recovery of the Indonesian project was poor due to low fishpondproductivity (para. 9); farmer's lack of understanding of long-term loans; and most of

Annex EPage 3 of 11

the farmers spent their money in other needs and used poor climatic conditions andother excuses for non payment. To ensure a good cost recovery an automaticmechanism of deduction from farmers' fish sales was introduced in a later aquacultureproject in Indonesia (Annex Table F. 1)

11. Summarizing, nearly all the most serious problems faced by aquacultureprojects, as well as fisheries projects (para. 3), reflect inadequate technical preparationand weaknesses in the implementing agencies, mainly because there was notexperience promoting aquaculture and a shortage of specialized and experimented staffin the area. The Bank also suffered from similar weaknesses, and lacked a coherentapproach to the sector and sufficient fisheries technical staff. Lessons learned fromprevious projects suggest an extensive preparation and a realistic evaluation oftechnical and administrative capacity of national fisheries agencies. For projectsintroducing a new technology in a country a pilot phase or small-scale initial phaseshould be considered. Finally, participation and involvement of the private sectorshould be encouraged. Private investors have been extremely successful and helpfulinvolving in support activities and marketing services.

12. Lessons from Previous Experience with Fisheries in Latin America LatinAmerica and the Caribbean amounted to only 10% of the Bank fisheries lending. Whenthe OED reviewed Bank experience in fisheries development, the region had noproject under active consideration. The Bank has not financed any aquaculture projectin the region. The report cites the following important lessons from fisheries projectsimplemented in the Latin American region: (a) with proper legislation and the rightincentives, a strong private sector can emerge; (b) the private sector should beinvolved in project design and implementation; and (c) special attention should befocused on effectiveness of legislation and soundness of pertinent policies andinstitutions concerning the sector.

13. In 1992, a Bank paper, "Strategy for Fisheries Development," cautions LatinAmerican governments and producers from over-specializing in one or two high valueexport species, such as shrimp and oyster. The risk is that producers will become tooexposed to international price trends. In contrast, aquaculture farmers in Asia producea variety of fish for the domestic market and are less vulnerable to international pricefluctuations.

14. Three agricultural projects implemented in Mexico have had a small fisheriescomponents. The projects covered many different activities, such as livestock,agriculture, fruits, forestry, agro-industries, etc. Fisheries was, in each of the projects,a small component (about 1% of the total project cost). The fisheries componentsfinanced: off-shore facilities, such as docks and repair shops; marketing services, coldstorage, ice plants and refrigerated trucks; and training courses and extensionactivities. In general the projects were judged over ambitious and too dispersed.Coordination among the numerous agencies involved was more difficult thanexpected. The performance of the fisheries components were unsatisfactory. Major

Annex EPage 4 of 11

problems were a weak appraisal design and a lack of technical assistance. Most of theequipment financed was repossessed by the National Fisheries Bank (BANPESCA), orbecame inoperative due to poor maintenance. There also were many complex socialproblems regarding fisheries rights, as under the old Fisheries Law only cooperativesand ejidos were allowed to exploit the highest value species.

15. A report for USAID on the socioeconomic development of the shrimp industryin Honduras highlights that steps must be taken to address the social problems causedby converting common resources into concessions for private gain. Local people weredenied to access to those areas used as common resources for hunting, fishing andfirewood collection that were given in concession for shrimp culture to private fans.

Coastal Areas Management

16. There has been no Bank lending specifically for coastal area management inLatin America and experience in other regions is limited (Annex Table F.3). There aretwo projects now at appraisal in Africa. First, these projects concentrate on thecreation or strengthening of existing governmental environment agencies through staffdevelopment, training, provision of facilities, and funds for studies. Second, theprojects support the development of environmental information systems, whichincludes the collection, interpretation and presentation of data, in such areas as, landownership, topographic conditions, meteorological information, etc. Third, they seekto promote public awareness and environmental education through electronic media,print campaigns, etc. Finally, they include pilot programs to improve environmentalresources management with the participation of local governments and communities.

17. The Latin America and the Caribbean Technical Department has proposed thefollowing recommendations after studying some cases in the Caribbean: (a) set-up aneffective coastal zone management agency in each country; (b) include environmentalconcerns and studies in the early stages of project development; (c) various studies areoften necessary to understand the natural system and thus design the most appropriateand cost effective solution. The study also gives recommendations on the mostimportant functions of a coastal area management agency. They are: environmentalplanning and permit regulation; monitoring of coastal systems; environmentalawareness and education; and legislation, surveillance, and enforcement of legislation.

18. Finally, some Asian agencies' have done case studies on Coastal AreaManagement Programs (CAMPS) in Southeastern Asia. This work highlights severalconstraints to the successful implementation of CAMPS.

The Ministry of Science, Technology and Environment, Kuala Lumpur; Johor State EconomicUnit Planning, Johore Bahru, Malaysia; and International Center for Living aquatic ResourcesManagement, Manila, Philippines.

Annex EPage 5 of 11

a. Interagency rivalry. Agencies feel threatened by losing authority or budget,if many are involved.

b. Ineffective law enforcement. Bureaucracy, insufficient trained manpowerand budget are main reasons for this constraint.

c. Lack of political will. The inability to obtain support of political leadershipmakes it difficult to implement CAMPs. Political leadersshould view CAMPs as programs that provide long- termsolutions to multiple-use resource conflicts.

d. Lack of alterative livelihoods. Many inhabitants of coastal areas who areheavily dependent on coastal resources lack any other wayto earn a living.

e. Insufficient budget and institutional capabilities. A smaller geographicalarea for CAMP implementation has a greater chance ofsuccess, especially when funding is a major constraint.

Annex EPage 6 of 11

Table F.1: Background Information on Projects with Significant Aquaculture Components

Project Shrimp and Fish Culture Coastal Land Development Fisheries Support Services Inland Fisheries Project

Country India China Indonesia India

SAR Date 1991 1988 1986 1979

Total Project Cost US$ 95 million US$ 217 million US$ 41 million US$ 67 million

Bank Loan US$ 85 million US$ 100 million US$ 24.5 million US$ 19 million

Components and - Construction of off-farm and - Aquaculture development, - Off-farm infrastructure - Construction of governmentShare of Total on-farm facilities (61%) construction of ponds hatcheries, rehabilitation (40%) owned and managed hatcheriesProject Cost - Line of credit to entrepreneurs ice plants, feed mills, cold storage, - On-farm facilities improvement (16%)

for hatcheries, feed mills, ice etc. (77%) (47%) - Line of credit for farmers toplants, and other support -Animal husbandry development, - Training and technical assistance improve on-farm facilities (32%)facilities (18%) breeding stocks, on-farm facilities, on hatcheries (2%) - Subsidy for on-farm facilities- Line of credit to farmers for feed mills, market facilities, etc - Line of credit to a private firm to improvement and first year inputsfirst year inputs (9%) (12%) improve cold storage and ice (48%)- Project management, training, - Agricultural development, production (2%) - Training centers and technicalextension, and technical support establishment of fruit and nuts - Restructuring of a public fisheries assistance (4%)tbr project staff and beneficiaries production and support facilities firm, technical development and(12%) (6%) support, and coastal zone pilot

- Aquaculture animal husbandry, project (a suitable institutionand agriculture technology provides inputs and poor fishermendevelopment and extension (5%) labor) (7%)

Economic Rate of 30% Aquaculture 30 to 45%, animal 26% 42% in SAR, 65% at evaluationReturn in SAR husbandry 28 to 43%, agriculture

16 to 25%

Cost Recovery Credits on comnmercial Farmers, entrepreneurs and state Farmers would repay through Hatcheries through commercialbasis;other components full cost enterprises would pay loans automatic deduction from fish sales, operation; subsidies were notrecovery through leasing according to schedules determined private firms on conmmercial basis, recovered

by local governments; extension no cost recovery on the otherand training through service fees components

Annex EPage 7 of 11

Table F.1: Background Information on Projects with Significant Aquaculture Components (Cont.)

Project Shrimp Culture Freshwater Fisheries Third Rural Credit Fishenies Credit

Country Bangladesh China China Indonesia

SARDate 1985 1986 1987 1983

Total Project Cost US$ 36.7 million US$ 198 million US$ 340 million US$ 16.8 million

Bank Loan US$ 22 million US$ 60 million US$ 170 million US$ 6.5 million

Components and - Embankmnents and water control - Construction and improvement of - Aquaculture development, - Provision of boats and otherShare of Total structures and hatcheries for existing off-farm facilities, ponds, construction of ponds hatcheries, ice goods for a public enterprise andCost demonstration and commercial canals, water controls, etc. (70%) plants, feed mills, cold storage, etc. fishermen's cooperatives (28%)

purposes (39%) - Construction of hatcheries, feed (10%) - Construction of support- Line of credit for farmers for on- mills and other support facilities - Livestock development, breeding facilities such as ice plants, andfarm facilities (24%) and marketing services like cold stocks, on-farm facilities, feed mills, cold storage (40%)- Line of credit to private storage (29%) market facilities, etc (16%) -Line of credit to farmers forentrepreneurs for hatcheries, feed - Training and technical assistance - Agricultural development, improvement of ponds and othermills, ice plants, etc. (8%) for farmers (I%) establishment of fruit, rubber, tea, facilities for shrimp culture- Institutional strengthening and and support facilities (33%) (32%)technical assistance (29%) - Agro-processing development,

fruit, rubber, tea, meat, and oilseedsprocessing plants (40%)- Training and technical assistancefor farmers (1%)

Economic Rate of 27% 28% 24% 24% for the aquacultureReturn in SAR component in SAR, 29% at

evaluation

Cost Recovery Full cost recovery through Farmers, entrepreneurs and state Farmers, entrepreneurs and state Farmers and cooperatives wouldlicensing fees and export tax enterprises would pay loans enterprises would pay loans repay according to schedules

according to schedules determined according to schedules determined coordinated with harvest, public|by local governments; extension by local govermnents; extension and enterprise through commercialand training through service fees training through service fees operation

Annex EPage 8 of 11

Table F.2: Economic and Social Benefits and Environmental Impact on Projects with Significant Aguaculture Components

Project Shrimp and Fish Culture Coastal Land Development Fisheries Support Services Inland Fisheries

Country India China Indonesia India

Economic Benefits Increase in shrimp production Increase in production of Increase in shrimp and skipjack Increase in carp productionshrimps, levier, minks, goat, productionducks, fruit, and nuts

Poverty Alleviation Higher incomes for 14,200 families Increase in living standards of Creation of 4.3 million man- Creation of 4,000 full-time jobsfrom the poorest sections of the 115,000 families day/year employment and 10,000 part-time jobspopulation

Environmental - Revegetation with mangroves to - The project would not affect - Support coastal fisheries Reduction of unutilized waterEffects compensate necessary removal wildlife intensification rather than the bodies which are breeding grounds

- Monitoring wild shrimp seed - Agro-processing plants' design creation of new ponds to preserve for mosquitoes that carry malariacollection and training on shrimp would include waste control the habitat of many wild speciesand fish conservation - The pilot component will be- Construction of sluices gates for carried out with soundeffective water management environmental procedures- Test of shrimp flesh for potentialcontamination from heavy metalsand other contaminants from near-byindustries

Implications for - Join ownership of ponds by The input and marketing service The input and marketing service Not indicated in SARWomen husband and wife would be required industries would provide industries would provide

- The input and marketing service extensive labor opportunities for extensive labor opportunities forindustries would provide extensive women womenlabor opportunities for women

Implications for NA NA NA NAIndigenous Groups I

Annex EPage 9 of It

Table F.2: Economic and Social Benefits and Environmental Impact on Projects with Significant Aquaculture Components (Cont.)

Project Shrimp Culture Freshwater Fishenes Third Rural Credit Fisheries Credit

Country Bangladesh China China Indonesia

Economic Benefits Increase in shrimp production Increase in fish production Increase in production of tea, Increase in fish and shrimprubber, fruit, meat, fish, and other productionproducts

Poverty Alleviation Increase in living standards of 3,700 Creation of 16,800 temporary Creation of 326,000 full-time Creation of 750 full-timefamilies and employment generation jobs and 6,600 full-time permanent jobs permanent jobs

permanent jobs

Environment Effects Elimination of salt water from No adverse effects on Improvements to reduce erosion Not indicated in SARagricultural land environment

Implications for Not indicated in SAR Not indicated in SAR Not indicated in SAR Not indicated in SARWomen

Implications for NA NA NA NAIndigenous Groups

Annex EPage 10 of 11

Table F.3: Background Information on Coastal Zone Management Projects

Project Egyptian Red Sea Coastal and Marine Resource Management Environmental Resource Management

Country Egypt Ghana

SAR Date 1992 1992

Total Project US$ 5.73 million US$ 35.9 millionCost

Bank Loan Grant US$ 18.1 million

Components - Preparation of the Coastal Zone Management Plan - Strengthening of existing institution: human resources development,and Share of - Development of government agencies to evaluate, regulate, and environmental education, collection and monitoring system development (62%)Total Project monitor the impact of coastal area development, staff training, and - Introduction on a pilot basis of improved land and water management to reduceCost facilities land degradation with participation of local governments and communities

- Development of facilities to monitor and enforce marine pollution (18%)control - Demarcation of five coastal areas for seabird habitat conservation,- Promote training and public awareness development of a Wetland Management Unit, inventory and monitoring oh the

ecology, study of forms of development preserving environment, construction ofa marine out-fall sewage (20%)

Econoznic Rate NA NAof Return I

Economic and -Allocate resources and promote policies for sustainable economic - Improve management of environmental resources, improve availability ofSocial Benefits development and income generation from tourism, oil, fishing, and information required to make decisions, better understanding of environmental

nature conservation implications, and early warning of pollution and degradation- Protection of egyptian reefs and other coastal habitats and actions to - Promote the management of their own environmental resources bymitigate pollution communities

- Preservation of ecosystems in coastal wetlands, identification of developmentoptions that are compatible with ecological integrity

Annex EPage 11 of 11

Bibliography

Chua, Thia-eng, and Daniel Pauly. Association of Southeast Asian Nations. Coastal areaManagement in Southeast Asia: Policies, management strategies, and casestudies. Kuala Lumpur Ministry of Science, Technology, and theEnvironment, 1989.

DeWalt, Billie R. Environmental Study of the Gulf of Fonseca Region, Honduras. ConsultingReport for USAID/Honduras. Report still in process.

Loayza, Eduardo A. A Strategy for Fisheries Development. World Bank Discussion Paper.Washington D.C., 1992.

The World Bank. Environmental Resource Management Project - Republic of Ghana - SAR.Document of The World Bank, Report No. 10691, 1992.

. Egyptian Red Sea Coastal and Marine Resource Management Project - Egypt - SAR.Document of The World Bank, Report No. 11131, 1992.

-. Shrimp and Fish Culture Project - India - SAR. Document of The World Bank, ReportNo. 10046, 1991.

Inland Fisheries Project - India - PCR. Document of The World Bank, Report No. 9415,1991.

-. Inland Fisheries Project - India - SAR. Document of The World Bank, Report No. 2496,1979.

F. isheries Credit Project - Indonesia - PCR. Document of The World Bank, Report No.4468, 1983.

Fisheries Support Services Project - Indonesia - SAR. Document of The World Bank,Report No. 6290, 1986.

Shrimp Culture Project - Bangladesh - SAR. Document of The World Bank, Report No.5561, 1985.

Fresh Water Fisheries Project- China - SAR. Document of The World Bank, Report No.5976, 1986.

Coastal Land Development Project - China - SAR. Document of The World Bank,Report No. 6986, 1988.

. Third Rural Credit Project - China - SAR. Document of The World Bank, Report No.6903, 1987.

. Pider II Integrated Rural Development Project - Mexico - PCR. Document of The WorldBank, Report No. 6333, 1986.

Pider III Integrated Rural Development Project - Mexico - PCR. Document of TheWorld Bank, Report No. 9175, 1990.

Seventh Agricultural credit Project - Mexico - PCR. Document of The World Bank,Report No. 7931, 1989.

. Coastal Zone Management: Case studies from the Caribbean. Latin America and theCaribbean Technical Department, Regional Studies program, Report No.26, 1992

. Harvesting the Waters - A Review of Bank Experience with Fisheries Development.Operations Evaluation Department, Report No. 4984, 1984.

. The World Bank and the Environment. A progress Report, Washington D.C., 1991.

Annex FPage 1 of 4

Project Logical Framework

Narrative V Verifiable Indikators Nia of Inuportant AssumptionsSummar O

Economically, 1I A minimum 10 % real increase in the 1.1 AcuaMexico andenvironmentally and income of social sector investors in the individual park corporationsocially sustainable project's parks and hatcheries by EOP annual reportsaquaculture (end of project).development

1.2 The commercial aquaculture parks 1.2 INE documents acceptingcomply with Mexican environmental law enviromnental assessmentsat all times, and periodic environmental

audits dunng project asrequired by INE.

1.3 70% and 60% of the completed 1.3 Mid-term and finalprojects of the Targeted Investnent Fund project reviewsare operational without external support(except technical assistance) at the mid-term review and at EOP review,respectively.

Pu= ae ==__ ___._..___._._...

Increase productivity of 1. I By EOP, 1500 mt of shrimp, 900 mt 1. I Annual AcuaMexico, (Purpose to Goal)the aquaculture sector of tilapia and 600,000 abalone spat aquaculture enterprise reports 1. I Demand for aquaculture productswithin a framework of produced: and monitoring indicators. remains stable (or increases) and realsocial consensus and (a) with AcuaMexico and social prices do not decline by more thanenvironmental and private investors; and, 10%V.soundness. (b) according to the 1. I There is no major disease

environmental procedures defined by INE, epidemic (especially for shrimpthe parks' best practices manuals, the production) affecting project areas.environmental assessments and in light of 1 I Input prices for commercialthe water quality and planning data aquaculture production do notproduced by the project. increase by more than 100/o in real1.2 120 rural aquaculture investment 1.2 Semestrial project terms.projects operational with social sector monitoring reports.investors. X

o utp ts _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

. Regulatory I. la Time between submission of permit 1. Ia Md-term and fmnal (Output to Purpose)framework improved request and receipt final of pernut reduced project reports and 1. I ncreased demand for aquacultureand operational to 140 days by December 1998. monitoring indicators. permits from producers (including

l. I b New permitting procedures adopted 1. I b SEMARNAP directives social sector producers)by SEMARNAP by July 1998. 1. I Adequate enforcement and1. Ic New permitting procedures 1. Ic Dissemination monitoring systems exist to enforcedisseminated to aquaculture producers by publications and monitoring permiitting requirements.December 1998 (including social sector indicators. 1.2 Adequate government capacityproducers). exists to enforce new regulations.1.2 Two new regulations on genetics and 1.2 Diario Oficial 1.2 U.S. and Canada agree tochemical substances adopted by Mexican regulations

I SEMARNAP July 1998. 1 1

tAssumes that 20 percent of the total 150 investment projects supported by the fund are not operational by the end of

the project.

Annex FPage 2 of 4

Narrative j erifiable Indicators | Means of Important Ass"gtlonsSummary Verification .

2. Management of 2. la Integrated coastal zone management 2. Ia Publication in Veracruz 2.1 Communities and state andenvironment and coastal plan for Laguna Tamihahua adopted by Diario Oficial. municipal governments haveresources improved. Veracruz State Congress by January 2000 adequate resources and interest to

2. lb Integrated coastal zone management 2. lb Annual report of implement ICZM plan.plan is being implemented by local technical assistance firmcommunities with state and municipal (implementing the pilot)government assistance starting in January indicating amount of money2000. spent by local governments2.2a Quarterly water quality monitoring and communities toprogram operational in Sinaloa, Nayarit implement plan.and Tamaulipas in 1998 with publicdissemination program of results withinthree months of each sampling.2.2b Coastal wetlands inventories 2.2 Semestrial project 2.2 Producers and communities useundertaken twice (1998 and 2000/01) in monitoring reports and water the wetlands inventory and waterSinaloa, Chiapas, Nayarit, and Tamaulipas quality and coastal inventory monitoring data in their naturaland results disseminated to local publications and resource management and investmentcommunities and interested civil society dissemination materials. decisions.organizations within six months of eachinventory.2.3a Land use plans developed in 2.3a Published land use plans 2.3 Producers, communities andVeracruz and Baja California Sur by for Veracruz and Baja government officials (municipal, stateDecember 1999. California Sur. and federal) use the land use plans to2.3b New guidelines adopted by INE to 2.3b SEMARNAP directive guide their resource allocationassess envirownental impact of publishing new guidelines. decisions.aquaculture investmnents by July 1998.

3. New and improved 3.1 30 research proposals implemented 3.1 Semestrial projectpublic goods and by 2001 with support from the Research monitoring reports andservices operational Fund and results disseminated in review of research

publications/final reports. Not more than institutions publications8 proposals are for commercial during mid-term.aquaculture. 23.2 At least two laboratories are 3.2 Semestnal projectincorporated into the regional diagnostic monitoring reports.laboratory network by Decemnber 1999

4. Expanded capacity 4.1 Three tilapia parks, one shrimp park, 4.1 Annual reports of park 4.1 and 4.2 Social sector producersfor commercial and rural one penn shell hatchery, one SPR hatchery enterprises and semestrial have sufficient interest, capital andaquaculture involving and one abalone hatchery operational with project monitoring reports. resources (e.g. land) to participate insocial sector social sector and AcuaMexico Fund the aquaculture enterprises.participation in place investment (excluding the SPR hatchery

which may not involve social sectorinvestment) by December 31, 2000.4.2 150 rural aquaculture investmentprojects with economically deprived social 4.2 Semestrial projectsector producers supported by Targeted monitoring reports, and mid-Rural Investment Fund by EOP 3 term and final project reports. I

2Assumes the average proposal will be for US$37,000 and that the total fund budget is US$ 1.1 10 million.

3Assumes the average project size for the targeted investment fund is US$35,000 and that US$300,000 of the allottedUS$5.5 million is for technical assistance.

Annex FPage 3 of 4

Narrative Verifiable Indicators Means of Important AssumptionsSummary Verification

5. Institutional 5.1 70 % of social sector producers in the 5 1 Mid-term review andframework in place to parks maintain that they have received final project reviCWsupport social sector and adequate technical assistance and traininginnovative commercial to understand operation of the enterpriseaquaculture investments during the mid-term and final project

reviews.

5 2 Aquaculture parks are efficiently 5 2 Mid-tenn and finalmanaged and disease, enviromental and project reviews. AcuaMexicosocial risks are minimized throughout the arunual reports, and enterpriselife of the project. aninual reports

5.3 New aquaculture investment5.3 2 new aquaculture enterprises 5 3 AcuaMexico lund annual projects and investors are identifiedsupported by AcuaMexico Fund by reports that are in accordance with theDecember 2001 AcuaMexico mandate contract

4Activities: Inputs (US$)I. I a SEMARNAI1 to (1.1) 50(),0()0 (Activity to Output)develop and disseminatenew guidelines for , - rm.l I to 5.2 I'he Directorate General ofaquaculture permiting PIroject annual budget Aquaculture has sufficient materiallI.b SEMARNAP to submitted to SHCP for and human resources to implementestablish on-line permit prograrmed expenditures iI the project.registry D)ecember anid SeMeStrial1.2 SEMARNAP to (1.2) 300,000 fdinancial moiitoringdevelop and adopt six indicators lo: actualnew aquatic health cxpendituresregulations

2.1 Develop, formally (2.1) 2,700.000adopt and initiateimplementation ofcoastal zone pilotmangement plan inVeracruz with localcommunity andmunicipal govemnnentinvolvement

2.2 Establish regular (2.2) 1,800,000water quality monitoringprogram and wetlandinventory and publishand disseminate results

4Without physical and price contingencies

Annex FPage 4 of 4

.arrative Verifible Iiiiators Means of . Imp orant A mptoniSummEnary . : . . Verificataon.

Activities: Inputs (US$):

2.3 SEMARNAP to (2.3) 600,000contract, adopt anddisseminate newguidelines for EApreparation foraquacultureinvestments.

3.1 Establish and (3.1) 1,100,000operate research fund3.2 Equip and train staff (3.2) 3,400,000in at least two regionalpublic or privatediagnostic laboratoriesand in the centralaquaculture laboratory.

4.1 Project coordination (4.1) 2,600,000and institutionstrengthening

5.1 Construct 7 new (5.1) 27,200,000 5.1 Social sector producers havecommercial aquaculture sufficient interest and resources toproduction facilities and participate, there are no land tenureoperationalize with problems or important difficultiessocial sector with interested actors.participation (except the

SPR facility).

5.2 Establish and (5.2) 5,600,000 5.2 Interest and quality proposals areoperate Targeted put forth.

Investment Fund.

6. la Design and (6.1) 1,400,000implement park investortraining and monitoringprogram (scholarshipfund, bi-annualworkshops, parkcouncils and bi-annualfora).6. lb Design andimplement parkmanagement trainingprogram (includesconstruction of trainingfacilities).6.2 Establish (6.2) 4,200,000 6.2 Receive sufficiently qualifiedAcuaMexico Mandate proposals with appropriateFund and hire

experience and skills mix.management company

Annex GPage I of I

List of Documents in Project File

GOM Documents

Mexico Fisheries Law, 1992.

Programa de Acuacultura Rural (Marzo de 1993)

Programa de Desarrollo Integral de la Acuacultura (1990-1994)

Parques Acuicolas-Modelo Administrativo y Operativo

Acuerdo Nacional para la Modernizacion en la Acuacultura

Plan Para el Desarrollo Social y de Comunidades Indigenas (October 27, 1994)

Sectoral Environmental Assessment for the Mexico Aquaculture DevelopmentProject, May 1994.

Programa de Pesca y Acuacultura 1995-2000

Project Working Papers

Working Paper No. 1: Review of Aquaculture Financing in Mexico, August1993.

Working Paper No. 2: Aquatic Health in Mexico, November 1994.Working Paper No. 3: Environmental and Integrated Coastal Resources

Management Components.Working Paper No. 4: Economic Analysis Tables, February 1997.Working Paper No. 5: Project Cost Tables, February 1997Working Paper No. 6: Aquaculture Development in Mexico Technology

Integration and Resource Management,December 1994

Working Paper No. 7: Social Assessment of Mexico Aquaculture Project,April 1994.

Working Paper No. 8: Social Strategy and Indigenous PeoplesDevelopment Component (Annex A ofYellow Cover, Staff Appraisal Report),March 6, 1995.

Working Paper No. 9: Informe de Trabajo sobre Mexico Aquaculture(Fundacion Chile), (June 1995)

Working Paper No. 10: Mexico Aquaculture Development Project,Marketing Component, Pre-appraisal report,September 1994

Annex HPage 1 of 3

Glossary of Terms

Aquaculture Farming of aquatic plants or animals.

Aquaculture Research

Basic Aquaculture Research analyzes nutritional, growth, reproductive and environmentalrequirements of aquaculture production. Disease issues may also be addressed.

Rural Aquaculture Research analyzes issues associated with reservoir and small pond,river, and canal aquaculture (carrying capacity, effluent management, stocking levels,identification of locally available resources, etc.).

Environmental Aquaculture Research assesses: (a) the impact of aquaculture on thesurrounding environment (water quality, wetlands ecosystems, etc.); (b) the impact of theenvironment on aquaculture (mainly water quality issues associated with deforestation,agro-chemicals and sewage); (c) issues related to endangered and overexploitedaquaculture species.

Commercial Aquaculture Research evaluates issues related to operating a successfulcommercial aquaculture enterprise (farm design, costs and impact on financial viability,disease management and prevention, etc.).

Battered Fish product that has been coated with a flour-based product.

Broodstock Male and female adult forms of shrimp or fish used in hatcheries to spawn larvae.

Butterflied A shrimp tail that has been split in half and flattened.

Cage aquaculture Farming of aquatic animals, typically fish, in cages made of wood or otherwater-resistant materials, immersed in areas of large water bodies such as reservoirs, lakes, orbays that are protected from strong wind and wave action.

Catch per unit effort A measure used in capture fisheries to assess the average volume of catch(measured in tons or kilograms) per unit of fishing time for a known gear type and vessel class.

Communal land communities A community created under Spanish rule that consists of aspecial charter of land allocated mainly to indigenous groups. The special rights and charters ofcommunal lands were recognized by the agrarian reform legislation of 1915 and 1992.

Depuration Holding filter-feeding bivalve mollusks, such as oysters, in clean water for a periodof approximately 1-2 days to remove any pathogens that may have accumulated in the gut.

Annex HPage 2 of 3

Ejidatario A member of an ejido.

Ejido Land and water resources the title of which has been given to a village as a whole (sincethe Agrarian Reform of 1915) and which are exploited collectively or individually by the membersof the village. The revised Article 27 of the Constitution grants ejidos ownership rights over theirlandholdings and allows them to sell their land to non-ejido members.

Fingerlings Small, juvenile form of fish, just after egg-fry stage when the egg sack has beenabsorbed.

Fisheries The hunting and gathering of wild aquatic species.

Growout ponds Earthen ponds used to grow shrimp to market size. These ponds can be stockeddirectly with PLs or with larger animals transferred from nursery ponds.

Commercial Aquaculture Relatively large-scale, high-yield farming of aquatic plants or animals,typically done as semi-intensive or intensive mono-cropping.

Infectious Hypodermal and Hematopoietic Necrosis (IHHN) Virus A virus causing infectionand disease, of varying severity, that occurs among all commonly cultured species of shrimpworld wide. IHIHN virus was most probably introduced to Mexico in the mid-1980s withimported stocks of P. vannamei, the shrimp species most commonly cultured in the WesternHemisphere. Runt deformity syndrome in P. vannamei has been linked to IHHN virus infections.

Hazard Analysis Critical Control Points (HACCP) A management system designed tocontrol, at each critical point in the production and processing chain of seafood, the biological,chemical or physical hazards that present unacceptable risks to the consumer.

Nauplii The larval from of shrimp just prior to metamorphosis to the PL form. Nauplii aresometimes sold by larger hatcheries to smaller hatcheries for the production of post-larvae.

Nursery ponds Small, earthen ponds used to grow shrimp from PL to juvenile form, typically toa size of 1 gram or less. These ponds are used to facilitate more accurate stocking of grow-outponds.

Peeled butterflied A shrimp tail with the carapace removed.

Post-larvae (PL) An early juvenile benthic (bottom-dwelling) form of shrimp just aftermetamorphosis from the larval, planktonic form. PLs, either collected from the wild or producedby hatcheries, are the typical form of shrimp used to stock nursery or grow-out ponds.

Restocking aquaculture Release of hatchery produced fingerling fish into open water bodies,such as reservoirs, for later capture by fisherman using boats and nets. Also known as inlandfishing in Mexico. Outside Mexico, commonly known as capture fisheries enhancement stocking.

Annex HPage 3 of 3

Rural aquaculture Relatively small-scale, low-yield farming of aquatic plants or animals, oftenintegrated with terrestrial crop and livestock production or other nonagriculture income-generating activities. Also known as integrated agriculture-aquaculture.

Small pelagic fisheries Offshore, open water fishing activities targeting small fish, such assardines and anchovies, that live at medium depths.

Social sector producer A producer who is a member of an ejido, cooperative, communal landscommunity, as well as any economically disadvantaged producer.

Spat Juvenile, benthic form of mollusks, including bivalves such as oysters, just aftermetamorphosis from larval, planktonic form. Spat settle out of the water column onto the bottomor other suitable substrate where they then grow to adult size.

Specific Pathogen Resistant (SPR) shrimp hatchery A shrimp hatchery specially designedand stocked with SPR broodstock, and operated under strict quarantine protocols to produce PLsthat are resistant to specific pathogens.

I

Annex IPage 1 of 3

Aquaculture Production and Marketing in Mexico

Production

Aquaculture is defined as the raising of aquatic species in a controlled environment (AnnexH). Aquaculture production in Mexico is characterized by a large, traditional sector that includesreservoir restocking (also known as inland capture fishing) and small pond aquaculture, and asmall, but rapidly growing, high-yield modern commercial sector. The three main forms ofaquaculture practiced in Mexico are:

(a) Restocking aquaculture or inland capture fishing takes place in large, natural orconstructed (reservoirs, irrigation canals) water bodies. There are 13,535 dams andreservoirs in Mexico, covering approximately 1.2 million ha, although 72% of therestocking output is from a few (23) large dams with surfaces exceeding 10,000ha. Restocking aquaculture accounts for the majority of the sector's output (64%),and Mexico is the largest reservoir fish producer in Latin America. Government-supported fingerling stations (hatcheries) annually stock hundreds of reservoirs anddams with finfish fingerlings (mainly tilapia and carp). Government aquaculturepolicy in the 1970s and 1980s focused on restocking aquaculture and built most ofthe existing hatcheries. The actual harvest is by small artisanal and commercialfishermen and is a form of capture fisheries. Many social sector families exploitrestocked reservoirs, as this business requires a minimal investment and only basictechnical skills.

(b) Rural aquaculture is often combined with agricultural efforts by small farmers.Rural aquaculture is based on the introduction of juvenile forms into small,permanent or temporary bodies of water, which may also be used for livestock andsmall-scale irrigation. Only a relatively small fish population can be supported in agiven water body with rural aquaculture, as it relies upon no inputs other thanthose provided by nature. Rural aquaculture is most common among subsistence-oriented producers.

(c) High-yield commercial aquaculture was introduced in Mexico in the 1980s andoccurs in specific areas designed for semi-intensive and intensive aquacultureproduction. It requires skilled labor, as well as significant capital investments, andinvolves relatively high operating costs (mainly feed, electricity and diesel fuel).Coastal shrimp farms and inland reservoir cage culture are the most importantforms of high-yield commercial aquaculture. Commercial aquaculture offers thegreatest potential for growth. Thus far, private investors dominate this type ofaquaculture.

Annex IPage 2 of 3

2. Aquaculture is a relatively recent activity in Mexico. It has been dominated by theproduction of freshwater species (tilapia, carp, catfish, charal and trout) in inland water bodieslocated in Mexico's coastal states. Total aquaculture production in 1994 was 176,200 tons. Thisrepresented about 14% of total fisheries production in the country and placed Mexico 14th in theworld for aquaculture production. The majority of the sector's output is tilapia (46%), followedby oysters (18%), carp (15%), and shrimp (9%). Mexico currently has 65,000-70,000 ha inaquaculture production, of which 16,000 ha are shrimp farms. In the case of shrimp, thisrepresents less than IO% of the total area suitable for shrimp farming.

3. Aquaculture production is concentrated in the 17 Pacific and Gulf coastal states, whichaccount for 80% of total output. The 11 Pacific coastal states account for the majority of tilapiaproduction and almost all of shrimp output. Oysters are the principal contribution of the six Gulfcoastal states. The share of the inland states in total output is 20% and has risen slightly since thelate 1980s, reflecting the increased production of freshwater species (especially trout and carp).

4. Aquaculture production increased steadily during the 1980s, but with the exception ofshrimp and trout, has either stagnated or declined in the 1990s. Since 1990, captures offreshwater fish in inland water bodies have stagnated, reflecting declining production offingerlings by government hatcheries, as well as overexploitation of inland water bodies. Incontrast, trout production has increased due to greater private sector involvement and bettermanagement of government trout hatcheries, which have traditionally charged for troutfingerlings. Oyster harvests have also declined, dropping by 55% between 1989 and 1993,reflecting the reduced demand for oysters during the cholera epidemic in 1991-92 on the Gulfcoast, which produces 91 % of all oysters. Data for 1995 suggest that oyster output has started torecover as the epidemic has been brought under control. In contrast, shrimp production increasedby more than five time between 1989 and 1993, although it remains a small share of totalaquaculture production (9 % in 1994). The rapid expansion of shrimp production reflects itsattractive economic prospects and the lifting of restrictions on private sector involvement inshrimp.

5. Several factors constrain the productivity of aquaculture production in Mexico. First,aquaculture is limited by the inadequate technical knowledge of social sector producers, which hasled to poor site selection for ponds and difficulties in holding and reproducing juvenile forms, andhas encouraged their quasi-exclusion from commercial aquaculture. Second, aquaculture isconstrained by disease risks, such as diseases similar to the Taura syndrome that causescumulative losses of 50% to 90% of the affected populations and the IHHN virus that reducesgrowth rates, production and market value. Third, the development of aquaculture has beenlimited by inadequate support services, particularly research and diagnostic laboratories.

Marketing

6. Almost all of Mexico's aquaculture production is either marketed nationally (55%-60%),

Annex IPage 3 of 3

or consumed directly by the producer (34-39%); only 6% of the total output is exported Ruralaquaculture production is mainly for on-farm consumption with small surpluses sold in the localcommunity. Restocking production is consumed directly by the producers or sold in local andregional markets.

7. Commercial aquaculture production is directed toward specific urban markets (especiallyMexico City, Guadalajara, Monterrey), and the better quality output is exported. Shrimp accountsfor about 85% (in value) of total aquaculture exports, and the remainder consists of smallamounts of tilapia, oysters, scallops, and abalone. The United States accounts for most exportsHowever, small amounts of oysters and abalone are exported to Asia (mainly Japan and HongKong), and small amounts of shrimp are also exported to Canada and Europe Processingactivities remain fairly basic and most of the shrimp are exported frozen/headless/shell-on, asopposed to peeled/frozen/ headless, peeled/butterflied, or battered/butterflied, all of which offergreater value added.

8. Prior to 1992, most exports were through processing and marketing companies owned bythe Government (e.g., Ocean Gardens), and to a lesser extent, the social sector. Since theadoption of the 1992 Fisheries Law (Box 1), private producers may have their own processingfacilities and may engage in direct sales. As a result, in the last two years many private investorshave purchased facilities owned by Ocean Gardens or the social sector to form integratedproduction, processing and marketing companies, particularly for shrimp

9. There are three sets of constraints to the marketing of aquaculture output. First, many ofMexico's processing plants that until recently were almost exclusively in the public sector, haveout-of-date technology, infrastructure, and sanitary conditions. Many of these plants will not beable to satisfy the HACCP (Hazard Analysis Critical Control Points) program guidelines,developed for the European Union (EU) and US markets, which are expected to be adopted inMexico in 1997. After 1998, Mexican firms that do not meet HACCP criteria will not be able toexport to the US or the EU However, the expanded opportunities for private sector investment inproduction and processing activities under the new regulatory framework, coupled with thecurrent favorable export opportunities, provide increased incentives for investments ininfrastructure.

10. Third, Mexico faces competitive world markets, particularly in the medium term. Whileexport opportunities remain very attractive for shrimp and tilapia over the next two to three years,medium- to long-term market conditions include increasing competition. The tilapia market willface increasing production from Costa Rica, Columbia and Taiwan. Similarly, the attractiveness ofthe shrimp market will depend on the extent to which China's and India's shrimp productionrecovers from the recent disease epidemics and the speed at which other competitive producers(e.g.. Viet Nam and Thailand) are able expand their exports

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