World Bank Document€¦ · Report No: ICR00001437 IMPLEMENTATION COMPLETION AND RESULTS REPORT...

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Document of The World Bank

Report No: ICR00001437

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-76010 IBRD-76390)

FOR A

MEXICO ENVIRONMENTAL SUSTAINABILITY DEVELOPMENT POLICY LOAN

IN THE AMOUNT OF US$701.75 MILLION

TO THE

UNITED MEXICAN STATES

June 20, 2010

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

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CURRENCY EQUIVALENTS

(Exchange Rate Effective as of April 19, 2010)

Currency Unit = Mexican Peso (MXN) MXN 1.00 = US$ 0.08

US$ 1.00 = MXN 12.32

UNITED MEXICAN STATES - FISCAL YEAR January 01- December 31

ABBREVIATIONS AND ACRONYMS

AAA Analytical and Advisory Activities

BANSEFI National Bank for Savings and Financial Services or Banco de Ahorro Nacional y Servicios Financieros, S.N.C.

CBMM Mesoamerican Mexican Biological Corridor or Corredor Biológico Mesoamericano-México

CDM Clean Development Mechanism

CFE Federal Electricity Commission, or Comisión Federal de Electricidad

CICC Intersecretarial Commission on Climate Change or Comisión Intersecretarial de Cambio Climático

CO2 Carbon dioxide

CONAFOR National Forestry Commission, or Comisión Nacional Forestal

CONAGUA National Water Commission, or Comisión Nacional de Agua

CONAVI National Housing Commission or Comisión Nacional de Vivienda

CPS Country Partnership Strategy

DPL Development Policy Loan

EIA Environmental Impact Assessment

EMBI+ Emerging Markets Bond Index Plus

EMS Environmental Management Systems

ENRP Environment and Natural Resources Program

ENSO El Niño Southern Oscillation

ENVDPL Environment Development Policy Loan

ENVSAL Environment Structural Adjustment Loan

FAO United Nations Food and Agriculture Organization

FIRCO Fideicomiso de Riesgo Compartido

FY Fiscal Year

GDP Gross Domestic Product

GEF Global Environment Facility

GHG Greenhouse Gas

GIS Global Information System

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GOM Government of Mexico

IBRD International Bank for Reconstruction and Development

ICC International Code Council

IDA International Development Association

IMF International Monetary Fund

IMTA Mexican Institute for Water Technology

INE National Ecology Institute, or Instituto Nacional de Ecología

ISO International Organization for Standardization

ITWG Inter-sectoral Technical Working Group

LyFC Central Electricity Company or Luz y Fuerza del Centro

MICs Middle Income Countries

MOU Memorandum of Understanding

MPN Most Probable Number

MT Metric Tons

MW Minimum wages

NAFTA North American Free Trade Agreement

NHP National Housing Program

NDP National Development Plan 2007 - 2007

NPT National Program for Tourism, or Programa Nacional de Turismo

NSCC National Strategy on Climate Change, or Estrategia Nacional de Cambio Climático

NWP National Water Plan

PDIA Environmental Institutional Development Program, or Programa de Desarrollo Institucional Ambiental

PEMEX Mexico Petroleum Company, or Petróleos Mexicanos

PFM Public Financial Management

PHRD Policy and Human Resources Development

PIN Public Information Notice

ppm Parts Per Million

PROCYMAF Forest Resources Conservation and Sustainable Management Project, or Proyecto de Conservación y Manejo Sustentable de Recursos Forestales en México

PRODDER Rights Restitution Program, or Programa de Devolución de Derechos

PRODEPLAN Program for the Development of Commercial Forest Plantations, or Programa para el Desarrollo de Plantaciones Forestales Comerciales

PROFEPA Federal Attorney General for Environmental Regulation, or Procuraduría Federal de Protección al Ambiente

PROSENER Energy Sector Program, or Programa Sectorial de Energía

PSA Payment for Environmental Services, or Pago por Servicios Ambientales

PSBR Public Sector Borrowing Requirements

PSIA Poverty and Social Impact Analysis

RBCs River Basin Councils, or Consejos de Cuenca

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SAGARPA Ministry of Agriculture Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentación

SAL Structural Adjustment Loan

SEA Strategic Environmental Assessment

SECTUR Ministry of Tourism, or Secretaria de Turismo

SEDESOL Ministry of Social Development or Secretaría de Desarrollo Social

SEMARNAT Ministry of Environment and Natural Resources, or Secretaría de Medio Ambiente y Recursos Naturales

SENER Ministry of Energy, or Secretaría de Energía

SFA Water Financing System, or Sistema Financiero de Agua

SHCP Ministry of Finance, or Secretaría de Hacienda y Crédito Público

SOx Sulfur oxides

TAL Technical Assistance Loan

TESOFE National Treasury or Tesorería de la Federación

TFP Total Factor Productivity

UNFCCC United Nations Framework Convention on Climate Change

WSS Water Supply and Sanitation

Vice President:Pamela Cox

Country Director: Gloria M. Grandolini

Sector DirectorLaura Tuck

Sector Manager:Karin Kemper

Task Team Leader:Adriana Moreira

ICR Team Leader:Adriana Moreira

ICR Team: Maria Elena Castro, Cristina Roriz, Caitlin Sanford,

MEXICO Mexico Environmental Sustainability Development Policy Loan

CONTENTS

Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Program Performance in ISRs H. Restructuring

B. Key Dates ...................................................................................................................ii C. Ratings Summary .......................................................................................................ii D. Sector and Theme Codes...........................................................................................iii E. Bank Staff ..................................................................................................................iii F. Results Framework Analysis ..................................................................................... iv G. Ratings of Program Performance in ISRs ...............................................................viii H. Restructuring (if any) ..............................................................................................viii

1. Program Context, Development Objectives and Design............................................. 1 Source: Bank staff calculation based on SHCP, Banco de México and INEGI .............. 2 2. Key Factors Affecting Implementation and Outcomes............................................. 13 3. Assessment of Outcomes .......................................................................................... 18 4. Assessment of Risk to Development Outcome......................................................... 27 5. Assessment of Bank and Borrower Performance...................................................... 27 6. Lessons Learned........................................................................................................ 30 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners........... 32 Annex 1. Bank Lending and Implementation Support/Supervision Processes............. 33 Annex 2. Beneficiary Survey Results ........................................................................... 34 Annex 3. Stakeholder Workshop Report and Results................................................... 34 Annex 4. Summary of Borrower’s ICR and/or Comments on Draft ICR ..................... 35 Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders ....................... 39 Annex 6. List of Supporting Documents....................................................................... 39 MAP

A. Basic Information

Country: Mexico Program Name: Mexico Environmental Sustainability Development Policy Loan

Program ID: P095510 L/C/TF Number(s): IBRD-76010,IBRD-76390

ICR Date: 04/19/2010 ICR Type: Core ICR

Lending Instrument:DPL Borrower: SHCP

Original Total Commitment:

USD 300.8M Disbursed Amount: USD 701.8M

Revised Amount: USD 701.8M

Implementing Agencies: Secretaria de Medio Ambiente y Rescursos Naturates SEMARNAT Secretaria de Hacienda y Credito Publico SHCP

Cofinanciers and Other External Partners:

B. Key Dates

Process Date Process Original Date Revised / Actual Date(s)

Concept Review: 11/26/2007 Effectiveness: 12/16/2008 12/16/2008

Appraisal: 09/02/2008 Restructuring(s):

Approval: 10/02/2008 Mid-term Review:

Closing: 12/31/2009 12/31/2009

C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Satisfactory

Risk to Development Outcome: Low or Negligible

Bank Performance: Satisfactory

Borrower Performance: Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Satisfactory Government: Satisfactory

Quality of Supervision: Satisfactory Implementing Agency/Agencies: Satisfactory

Overall Bank Performance:

Satisfactory Overall Borrower Performance:

Satisfactory

C.3 Quality at Entry and Implementation Performance Indicators Implementation

Performance Indicators QAG Assessments (if any) Rating:

Potential Problem Program at any time (Yes/No):

No Quality at Entry (QEA):

None

Problem Program at any time (Yes/No):

No Quality of Supervision (QSA):

None

DO rating before Closing/Inactive status:

Satisfactory

D. Sector and Theme Codes Original Actual

Sector Code

Forestry 14 14

General agriculture, fishing and forestry sector 29 29

General energy sector 14 14

General water, sanitation and flood protection sector 29 29

Other industry 14 14

Theme Code

Climate change 25 25

Environmental policies and institutions 50 50

Water resource management 25 25

E. Bank Staff Positions At ICR At Approval

Vice President: Pamela Cox Pamela Cox

Country Director: Gloria M. Grandolini Axel van Trotsenburg

Sector Manager: Karin Erika Kemper Laura E. Tlaiye

Program Team Leader: Adriana Moreira Adriana Moreira

ICR Team Leader: Adriana Moreira/ Maria E. Castro-Munoz

ICR Primary Authors: Maria E. Castro-Munoz

Cristina Oliveira Roriz

Adriana Moreira

F. Results Framework Analysis Program Development Objectives (from Project Appraisal Document) The objective of the DPL operation is to balance socio-economic development with environmental protection and improvement by integrating environmental concerns in the sectoral policies and programs of key development sectors (tourism, energy, forestry, water, agriculture and housing). Revised Program Development Objectives (if any, as approved by original approving authority) Not applicable. (a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : Sectoral policies and programs of key development sectors (tourism, energy, forestry, water, agriculture and housing) include environmental sustainability concerns.

Value (quantitative or Qualitative)

Sectoral policies and programs of key development sectors do not incorporate environmental sustainability.

Environmental sustainability concerns incorporated into sectoral policies and programs of key development sectors.

n/a

Current policies for all six sectors have environmental sustainability as an integral part of its programs and actions.

Date achieved 12/31/2006 12/31/2009 12/31/2009 Comments (incl. percent achievement)

100 % achieved. Environmental sustainability is currently one of the five pillars of the GOM’s 2007-2012 National Development Plan (PND).

(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised

Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : SECTUR monitoring sustainability indicators of Agenda 21 action plans in an additional 35 tourism destinations by 2008.


55 tourism destinations90 tourism destinations n/a 110 tourism

destinations

Date achieved 12/31/2006 12/31/2009 12/31/2009 Comments 122 % achievement. GOM’s Agenda 21 for Tourism aims to promote tourism

(incl. percent achievement)

development with a strong focus on ensuring that local actors at the municipal level are actively engaged in sustainable tourism development.

Indicator 2 : Mayors, civic officials, and tourism operators are implementing Agenda 21 action plans in an additional 35 destinations, to improve environmental conditions in tourist destinations.


55 tourism destinations90 tourism destinations n/a 90 tourism

destinations

Date achieved 12/31/2006 12/31/2009 12/31/2009

Comments (incl. percent achievement)

100 % achieved. The implementation of action plans varies among the municipalities. In 20 areas, including main destinations (e.g Cozumel, Riviera Maya, Los Cabos,) the implementation is advanced in promoting environmental best practices in tourism.

Indicator 3 : An additional 50 % of tourism enterprises are operating in line with environmental quality criteria established by SECTUR, PROFEPA, and Asociación Mexicana de Hoteles y Moteles.


200 tourism enterprises300 tourism enterprises n/a 500 tourism

enterprises

Date achieved 12/31/2006 12/31/2009 12/31/2009


167 % achievement. From the 500 tourism enterprises applying the environmental quality criteria 255 are hotels and the remaining ones include tour operators, aquariums, and marinas, among others. There are 72 hotels with #green globe# certification.

Indicator 4 : Increased annual electricity savings by at least 10 % in 2008 as compared to 2007.


21,441 million Kilowatt-hours

23,585 million Kilowatt-hours n/a Not possible to

calculate

Date achieved 12/31/2007 12/31/2009 12/31/2009


The new Energy Sector Reform, approved by Congress in December 2008, established a new methodology for calculating electricity savings, excluding transport efficiency. The data according to the new methodology shows 20,040 GigaWatt-hours (GWh) for 2009.

Indicator 5 : Share of renewable energy capacity (non-hydro) in the power sector increased.Value (quantitative or Qualitative)

2.0 % 2.7 % n/a 3.71 %

Date achieved 12/31/2007 12/31/2009 12/31/2009


244 % achieved. The share of renewable energy capacity increased by 1.71 % in comparison to the 2007 baseline, and the Government has projected a 7.6 % increase by 2012 in this sector, indicating a strong focus on alternative energy sources.

Indicator 6 : Mandatory standards for recovering sulfur at petroleum refineries have been published and implemented, with the purpose of reducing sulfur emissions.


No regulations in placeMandatory standards in place n/a

Mandatory standards published and implemented


100 % achieved. Sulfur oxide emissions from gas-processing plants decreased from 40 thousand metric tons/year in 2007 to 32 thousand metric tons/year in 2008.

Indicator 7 : States are implementing community forestry programs, Value (quantitative or Qualitative)

6 12 n/a 22

Date achieved 12/31/2006 12/31/2009 12/31/2009


166 % achieved. In 2008 GOM established the ProÁrbol Program which included in its operational rules the principles of community forestry, hence the expansion to 22 states, encompassing over 700 communities (80 % of indigenous peoples).

Indicator 8 : An additional 1.0 million hectares are being sustainably managed in accordance with approved management plans.


8.5 million hectares 9.5 million hectares n/a 15 million hectares

Date achieved 12/31/2006 12/31/2009 12/31/2009


158 % achieved. During this period the Forest Fund was updated, with technical assistance provided by the Bank. This work has helped developing new financing schemes and designing loan guarantees for sustainable forest management operations.

Indicator 9 : CONAFOR has begun payment to titleholders of an additional 1.1 million hectares of forest land for the protection of critical watersheds under the Payment for Environmental Services Program.


0.7 million hectares 1.8 million hectares n/a 2.27 million

hectares


126 % achieved. The PES mechanism is compensating 4,699 beneficiary titleholders in 32 Mexican states.

Indicator 10 : Municipality and industry treatment of wastewater collected has increased by at least four percentage points.


36.1 % of the flow collected in sewerage networks was treated


n/a



101 % achieved. An increase of 4.6 percentage points in municipal and industry treatment of wastewater collection.

Indicator 11 : Average global efficiency of 80 water operators, serving localities with 20,000 or more inhabitants, has increased by at least two percentage points


36.2 % 38.2 % n/a 42.3 %


205 % achieved. The average global efficiency of water operators increased by 6.1 percentage points.

Indicator 12 : Irrigation Districts have invested in modernized infrastructure in an additional 350,000 hectares to improve efficiency in water use.


2.08 million hectares 2.43 million hectares n/a 2.67 million

hectares


170 percent achieved. Modernized infrastructure was established in additional 598,000 hectares of irrigation districts with improved water use efficiency.

Indicator 13 : Identification of priority areas for improved land management practices, including reforestation, protection, and natural regeneration measures, in pastoral lands covering about 125,000 hectares.


Unknown; initiative introduced in 2008 125,000 hectares n/a 161,625 hectares

Date achieved 09/05/2008 12/31/2009 12/31/2009


129 % achieved. The data includes areas adopting at least one type of improved land management practices (managed natural regeneration, recuperation of degraded areas, reforestation with economically viable species, etc).

Indicator 14 : Introduction of conservation tillage in 50,000 hectares of agricultural land. Value (quantitative or Qualitative)

Unknown; systematic monitoring introduced in 2008

50,000 hectares of agricultural land n/a 73,350 hectares


146 % achieved. The data includes areas adopting #zero tillage farming systems, which includes soil and water conservation practices.

Indicator 15 : Implementation of 32 productive conservation projects and adoption of 24 communication strategies within the framework of the Mexican Mesoamerican Biological Corridor.


zero (Mexican Mesoamerican Biological Corridor agreement signed on April 7, 2008)

32 productive conservation projects and 24 communication strategies

n/a

50 productive conservation projects and 24 communication strategies implemented


156 % achieved. The conservation projects are being implemented in four states and the communication strategies are aimed at dissemination of practices to rural and indigenous communities.

Indicator 16 : Increased number of newly constructed homes incorporating energy efficiency and water conservation measures in line with CONAVIs criteria.

Value zero Increased number n/a 105,104 homes

(quantitative or Qualitative)

of homes being constructed with CONAVIs criteria.

Date achieved 12/31/2006 12/31/2009 12/31/2009


100 % achieved. In 2008 CONAVI issued the #Criteria and Indicators for Sustainable Housing Developments#. Even though the adoption of these criteria is voluntary, by February 2010, an additional 20,580 houses are being constructed under this program.

G. Ratings of Program Performance in ISRs

No. Date ISR Archived DO IP

Actual Disbursements (USD millions)

1 11/06/2008 Satisfactory Satisfactory 0.00

H. Restructuring (if any) Not Applicable

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1. Program Context, Development Objectives and Design

1.1 Context at Appraisal 1.1. A. Sector Background at Appraisal 1. This Environmental Sustainability DPL, the third in a series of policy lending operations to support environmental management in Mexico, built on environmental mainstreaming efforts and reforms initiated under the two previous operations (Environment Structural Adjustment Loan – EnvSAL I and Second Programmatic Environment Development Policy Loan II – EnvDPL II).1 The DPL continued integration of environment and sustainability concerns into energy, tourism, water, and forestry – sectors with established environmental agendas – and also reinforced environmental components in two new sectors: housing and agriculture. Although the Environmental Sustainability DPL continued activities initiated under EnvDPL II, the 24-month rule mandated that a new operation been launched in order to continue the operation in accordance with World Bank policies. 2

2. At the time of appraisal of the Environment DPL series, Mexico faced significant pressures on its natural environment, resulting from decades of rapid industrialization and expansion of transportation, agriculture, and livestock production. The GOM was aware of the environmental challenges facing the country, as well as the economic consequences of failing to take action to ensure environmental sustainability. In response to these challenges, the Government formulated an environmental sustainability agenda outlined in the 2007-2012 National Development Plan (NDP).3 This agenda seeks to mainstream environment into the development planning process in order to promote sustainable production and consumption, prevent environmental degradation, and to ensure long-term development opportunities. The NDP recognizes that all elements that compose the natural environment must be managed in an integrated manner. Consequently, the NDP includes strategies for environmental components including water, forest, climate change, biodiversity, solid waste, and cross-cutting environmental sustainability policy instruments. 3. In addition to the environmental sustainability component, the NDP outlined an extensive reform program focusing on the additional strategic pillars of security and the rule of law, competitiveness, equality of opportunity, and effective democracy. 4 The Plan’s environmental sustainability pillar stressed the important contribution of environment to competitiveness and social development, as well as affirming the

1 The Environment Structural Adjustment Loan (EnvSAL I – P074539) and the Second Programmatic Environment Development Policy Loan (EnvDPL II – P079748) were approved in August 2002 and September 2005, and closed in December 2003 and January 2006, respectively. 2 World Bank operational guidelines specify that once 24 months have lapsed between Board approval of operations, a new project must be initiated. This was the case with the environmental DPLs in Mexico. 3 Presidencia de la República, Plan Nacional de Desarollo 2007-2012. Mexico, DF: Gobierno de los Estados Unidos Mexicanos, 2007. (http://pnd.presidencia.gob.mx)4 Mexico: 2007-2012 Plan Nacional de Desarollo (http://pnd.presidencia.gob.mx/)

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importance of mainstreaming sustainability principles into sectoral policies. Mexico saw the need to mainstream environment into key productive sectors in order to:

(i) Use Mexico’s richly endowed natural environment as a source of competitive advantage to meet the demands of more selective and lucrative markets; and

(ii) Conduct interventions to mitigate the negative impacts of environmental degradation, including climate change and threats to human health, productivity, and competitiveness.

4. Because environmental degradation impacts human health, economic activities, and social welfare, considering the environment in key economic sectors is critical to ensuring long-term, sustainable economic growth. As Mexico recognized, ensuring that productive use of natural resources will be possible into the future serves as a complement to sound macroeconomic policies in ensuring long-run economic growth. 1.1.B. Macroeconomic Context at Appraisal 5. From 2004-2007, the Mexican economy grew at a rate of 3.8 percent of GDP. The global economic expansion that occurred during this period contributed to countrywide growth as exports increased at double-digit annual average growth rates. Enhanced price stability contributed to a healthy expansion of domestic demand as a result of improved purchasing power of wages and salaries and an expansion of domestic credit and consumer lending (see Table 1). Table 1: Mexico – Selected Economic Indicators

2004 2005 2006 2007 Real GDP ( percent growth) 4.2 2.8 4.8 3.2 Private Consumption ( percent growth) 4.1 5.1 5.0 4.0 Private Investment ( percent growth) 8.8 9.7 11.5 5.2 Exports of goods ( percent growth nominal dollar value)

14.1 14.0 16.7 8.9

External Current Account Balance ( percent GDP) -0.9 -0.6 -0.2 -0.6 Consumer Price Inflation ( percent year-end) 5.2 3.3 4.1 3.8 Exchange rate (peso/dollar, annual average) 11.29 10.90 10.91 10.95 Budget Deficit ( percent GDP) -0.2 -0.1 0.1 0.0 PSBR ( percent GDP) -1.9 -1.5 -0.9 -1.3 Net public sector debt ( percent GDP) 36.8 35.3 32.5 31.5 o.w. percent in foreign currency 37.3 32.4 28.1 25.7

Source: Bank staff calculation based on SHCP, Banco de México and INEGI

6. At the time of loan approval, the Bank team determined that Mexico fully met the policy requirement of OP 8.60 for a sound macroeconomic framework. Mexico had maintained solid macroeconomic policies that had succeeded in moderating output volatility and creating robust economic growth. The country had a consistent set of macroeconomic policies, including monetary policy within an inflation targeting framework, a flexible exchange rate, a balanced budget fiscal policy and public debt management.

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7. However, the Mexican public sector remained heavily dependent on oil revenue, which in 2007 represented 35 percent of total public sector revenue, whereas non-oil tax revenue remained at a modest 10 percent of GDP. Oil production had dropped from a high of about 3.4 million barrels per day in 2004 to about 3.1 million barrels per day in 2007, and to nearly 2.8 million barrels per day preceding the loan. Known reserves of oil were estimated to produce in the order of 10 years of production and Mexico was the only major oil producer to have suffered a dramatic decline (halving) of known reserves in recent decades.5

1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved) 8. This loan supported the GOM’s medium-term, outcome-based strategy to promote sustainable development. The overarching objective of the program was to balance socioeconomic development with environmental protection across sectors. 9. As mentioned, this operation was originally envisioned as the third phase of the Environment Policy Lending Program, which included the Environmental SAL I and Environment DPL II. However, the preparation of the new loan was delayed due to the change of the Mexican Administration that took place in 2006. Only in mid-2007 did the Government request the Bank to prepare a new operation that would continue to support the GOM’s sustainable development program. Given that more than two years had passed between Board approval of Environment DPL II and the expected approval of this operation, this loan was processed as a self-standing DPL, according to Bank policy. 10. Regardless of the processing requirements, this DPL was designed to continue supporting government policy reforms aimed at strengthening environmental sustainability measures in the four sectors (energy, water, tourism, and forestry) of the previous two operations. In addition, two new policy areas – agriculture and housing – were included in this operation at the GOM’s request, since these sectors had recently begun to integrate environmental concerns into relevant policies. The inclusion of these two new areas marked an important step in broadening the multi-sector dialog led by the Ministry of Environment and Natural Resources (SEMARNAT). In addition to building on preceding DPL operations (EnvSAL I, and EnvDPL II), this DPL complemented the Climate Change DPL, which was prepared in parallel to the Environmental Sustainability DPL. Achievement of the loan’s objectives can be assessed using the following key outcome indicators:

Key Issues and Objectives Outcome Indicators TOURISM Integrate environmental sustainability considerations into the tourism sector agenda.

• Mayors, civic officials, and tourism operators are implementing Agenda 21 Action Plans in an additional 17 destinations by 2008, to improve environmental conditions in tourist destinations, as identified through the System of Sustainability Indicators (Sistema de Indicadores de Sustentabilidad para el Turismo). (Baseline for 2006: 55 tourism destinations)

• SECTUR monitoring sustainability indicators of Agenda 21 Action Plans in an additional 35 tourist locations by 2008. (Baseline for 2006: 55 tourism

5 Part of this drop was due to a change in the methodology for assessing oil reserves.

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destinations) • An additional 50 percent of tourism facilities are operating in line with

environmental quality criteria established by SECTUR, PROFEPA, and Asociación Mexicana de Hoteles y Moteles. (Baseline for 2006: 200 tourism enterprises)

ENERGY Integrate environmental sustainability considerations into the energy sector agenda.

• Increased annual electricity savings by at least 10 percent in 2008 as compared to 2007. (Baseline for 2007; 21,441 million Kilowatts/hour).

• Share of renewable energy capacity (non-hydro) in the power sector increased from 2.0 percent in 2007 to 2.7 percent in 2008

• Mandatory standards (Norma Oficial Mexicana) for recovering sulfur at petroleum refineries have been published and implemented, with the purpose of reducing sulfur emissions. (Baseline for 2006: No regulations in place).

FORESTRY Increase support for sustainable forestry management.

• Twelve states are implementing community forestry programs, up from six in 2006.

• An additional 1.0 million hectares are being sustainably managed in accordance with approved management plans. (Baseline for 2006: 8.5 million hectares)

• CONAFOR has begun payment to titleholders of an additional 1.1 million hectares of forest land for the protection of critical watersheds under the Payment for Environmental Services Program. (Baseline for 2006: 0.7 million hectares)

WATER Increase water use efficiency and reduce water pollution.

• Municipality and industry treatment of wastewater collected has increased by at least four percentage points (Baseline for 2006: 36.1 percent of the flow collected in sewerage network was treated)

• Average global efficiency (a measure combining physical losses due to leakages and poor maintenance and commercial losses due to poor financial management and illegal use) of 80 water operators, serving localities with 20,000 or more inhabitants, has increased by at least two percentage points (Baseline for 2006: 36.2 percent)

• Irrigation districts have invested in modernized infrastructure in an additional 350,000 ha to improve efficiency in water use (Baseline for 2006: 2.08 million hectares)

AGRICULTURE Integrate environmental sustainability considerations into the agriculture sector agenda.

• Identification of priority areas for improved land management practices, including reforestation, protection, and natural regeneration measures, in pastoral lands covering about 125,000 hectares. (Baseline: unknown; initiative introduced in 2008)

• Introduction of conservation tillage in 50,000 hectares of agricultural land. (Baseline: unknown; systematic monitoring introduced in 2008).

• Implementation of 32 productive conservation projects and adoption of 24 communication strategies within the framework of the Mexican Mesoamerican Biological Corridor. (Baseline: unknown; Mexican Mesoamerican Biological Corridor Agreement signed on April 7, 2008).

HOUSING Integrate environmental sustainability considerations into the housing sector agenda

• Increased number of newly constructed homes incorporating energy efficiency and water conservation measures in line with CONAVI’s criteria. (Baseline: zero; cross-sector guidelines issued in March 2008)

11. These issues, priority actions, and outcome indicators were selected based on consultations and analytical work conducted in the context of the Bank’s long-term engagement with the Government of Mexico on environmental and climate change issues, as well as priority areas for continuation that emerged under the Environmental DPL Program.

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1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification The program objectives remained unchanged. 1.4 Original Policy Areas Supported by the Program (as approved) 12. This DPL supported economic and social goals in priority sectors by recognizing concrete activities to mainstream environment sustainability in six priority areas as explained below: Enhancing competiveness and sustainability in the tourism sector 13. Tourism has been one of the main drivers of economic growth in Mexico; tourism generates approximately 8 percent of the country’s GDP and over 5 percent of paid jobs nationwide.6 Moreover, the tourism industry also provides relatively high-paying jobs, with high average annual earnings relative to the national average and contributes to regional development. Recognizing the importance of tourism for development, the GOM adopted Agenda 217 for Mexican Tourism as a framework for action to promote sustainable tourism. 14. The integration of Agenda 21 in tourism was spearheaded by SECTUR and SEMARNAT and aimed to facilitate collaboration between federal, state and municipal level governments, tourism business owners, academia, NGOs and local communities, to improve tourism activities and living conditions in and around tourist destinations. In order to support the implementation of Agenda 21 at the local level, the GOM developed a system of tourism sustainability indicators, serving as a diagnostic tool to measure and monitor the conditions – environmental, socioeconomic, seasonal factors, and supply and demand for tourism– of each tourist destination, and to aid in decision making relating to sustainable tourism development. Based on information obtained from the indicators of sustainable tourism development, GOM also identified priority areas for action according to the type of destination. Institutional capacity building for tourism organizations was part of this operation, as was identifying and building Mexico’s comparative advantage and brand in sustainable and ecotourism. Improving performance in the energy sector 15. Although energy production only accounts for 2.6 percent of GDP and 7.9 percent of all exports, it is a critical component of Mexico’s economy. In 2007 oil revenues made

6 Instituto Nacional de Estadística, Geografía e Informática. Sistema de Cuentas Nacionales de México: Cuenta Satélite del Turismo de México, 1999-2004. (www.inegi.gob.mx) 7 Agenda 21 is a comprehensive blueprint of action to be taken globally, nationally and locally by organizations of the UN, governments, and major groups in every area in which humans impact the environment. GOM’s Agenda 21 for Mexican Tourism aims to promote tourism development while ensuring environmental protection, with a strong focus on ensuring that local actors ate the municipal level are actively engaged in sustainable tourism development.

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up almost 40 percent of the national budget.8 However, the long-term sustainability of PEMEX’s revenue stream, which since 2004 had benefited greatly from high oil prices, is being threatened by the gradual depletion of its proven hydrocarbon reserves and by the lack of investment and technological advances, most notably in off-shore exploration. Mexico’s oil company, PEMEX –as well as the national electricity companies–face serious challenges including high costs of production, the need to replace old and inefficient generation and production equipment, and the need to improve the overall performance and quality of service and products. High and/or regressive subsidies (in electricity and fuels) do not provide economic incentives for adopting sustainability measures. 16. Despite recent progress in improving environmental performance in the energy sector, Mexico still faces a number of challenges. The energy sector is a leading source of air, water, and soil pollution, with poor fuel quality playing a major role in the continuously high emissions from transport in Mexico. A diagnostic analysis of PEMEX released by SENER in April 2008 stated that, despite recent efforts to reduce green house gas emissions, sulfur oxide (SOx) and carbon dioxide (CO2) emissions increased by 10 percent in 2007 as result of gas flaring. Furthermore, although PEMEX lowered its water consumption by 20 percent from 2001 to 2006, only 11 percent of water consumed was recycled, putting pressure on hydrological resources and critical water basins located in Mexico’s northern and central regions.9

17. In addition, at the time of appraisal there were still about 1,000 hectares and 147 dam sites that needed to be remediated due to hydrocarbon spills and other waste contamination resulting from well perforation. Low quality fuels produced by PEMEX, as well as subsidies applied to diesel and gasoline, continue to contribute significantly to carbon emissions generated by the transport sector. Although the GOM’s interventions succeeded in reducing air pollution in various urban areas, in 2005 air quality remained unsatisfactory more than 80 percent of the time in the Mexico City Metropolitan Area, 33 percent of the time in the Guadalajara Metropolitan Area, and 27 percent of the time in the Monterrey Metropolitan Area.10 A study supported by the PHRD preparation grant, assessing the costs of environmental degradation, found that ambient air pollution accounted for approximately 2,800 premature deaths per year.11 Furthermore, 3,800 premature deaths were estimated to occur annually due to indoor air pollution stemming from the use of solid fuels for cooking; fatalities from indoor air pollution primarily affect children in poor rural communities. Strengthening PEMEX’s Environmental Protection Strategy

8 Secretaría de Hacienda y Crédito Público; Noviembre 2007.Estadísticas Oportunas de Finanzas Públicas y Deuda Pública. 9 PEMEX consumed a total of 228 million cubic meters per year of water (81 percent supplied from fresh water resources) and recycled only 11 percent of this amount (equivalent to the consumption of a city with a population of 340,000 inhabitants). 10 Secretaria de Medio Ambiente y Recursos Naturales. Compendio de Estadísticas Ambientales 2005. Mexico City: SEMARNAT. 2005 11 INE-Alejandro Guevara (2005) PHRD MX ENVDPL II. Mexico DF.

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18. PEMEX developed and Environmental Protection Strategy during the loan period. PEMEX estimated that an investment of about US$7 billion would be needed to finance the actions associated with the strategy’s environmental objectives, including improvements in fuel quality (such as those supported under the Program for Clean Fuel Production) and operational activities across all segments of the industry.12 PEMEX’s Environmental Protection Strategy was the first to establish a conceptual framework for incorporating environmental sustainability into the business planning and investments decisions. Streamlining the Energy Sector Program 19. During the same period as this operation, the GOM approved and began implementing its 2007-2012 Energy Sector Program, which addressed the environmental impacts of the energy sector by incorporating sustainability considerations into the sector’s highest decision- making levels and policies, aligned with the National Development Plan’s environmental sustainability pillar. Furthermore, the program targeted increases in the share of renewable energy capacity in power generation (specifically, from geothermal, wind, and solar power). The target of increasing the renewable energy from 2 percent of the portfolio in 2006 to 4 percent by the end of 2009 was achieved. The Energy Sector Program is expected to increase energy savings (measured in GWh) by at least 50 percent from the 2006 baseline, although evaluation has been complicated by a change in measurement procedures. 20. The DPL also recognized the continued implementation of the GOM’s ambitious energy efficiency program, which seeks to double energy savings in electricity consumption by 2012 (from 2006 levels). To achieve these targets, the 2007-2012 Energy Sector Program proposes the following:

(i) To design and implement policies and financial mechanisms to accelerate adoption of energy efficient technologies in both the public and private sectors;

(ii) To optimize energy supply and consumption in public facilities;

(iii) To improve coordination among the public and private sectors, and civil society in order to promote energy efficiency;

(iv) To support the reduction of energy consumption in residential buildings;

(v) To promote efficient energy generation through auto-generation and cogeneration schemes;

(vi) To strengthen the regulatory framework for cogeneration schemes, among others.

12 http://desarrollosustentable.pemex.com; and PEMEX Estrategia de Protección Ambiental 2007-2012.

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Enhancing sustainability and pro-poor growth through forestry 21. Mexico’s forests cover close to 30 percent of the country’s land area (30.5 million hectares of temperate forest and 26.5 million hectares of tropical forest).13 An additional 40 percent of the territory including xerophytic vegetation (58.5 million hectares) is managed by the National Forestry Commission (CONAFOR). Production in the forestry sector contributes accounts for about 1.4 percent of GDP,14 and generates over 100,000 permanent jobs that pay salaries about three to four times higher than most jobs in the agricultural sector.15

22. Although an estimated 38 percent of Mexico’s total forested area has commercial potential (21.6 million hectares)16, only around 15 percent (8.5 million hectares) of the area was managed under approved sustainable management plans at the time of loan approval. In addition to the lack of sustainably managed forests, deforestation and degradation pose a threat to Mexico’s forested areas. The lack of incentives for landowners to sustainably manage forests, combined with weak institutions, lead to the continued loss of forest cover. 23. 24. Over 80 percent of Mexico’s forests are owned by indigenous communities and ejidos17, and it is estimated that of the 12 to13 million people that live in forest areas about 5 million are indigenous people. Ensuring the sustainability of Mexico’s forests is crucial to improving the livelihoods of poor rural populations, remedying environmental degradation through soil and water conservation, mitigating climate change, expanding sustainable tourism, and developing competitive timber and non-timber products for domestic and international markets. CONAFOR and ProÁrbol 25. Effectively managing the nation’s forests has become a priority for the GOM. In 2001, CONAFOR was created by presidential decree to promote the sector’s productive,

13 García Trujillo, Zazilha (2006) Perfil de inversión México. PPT presentation for the Foro internacional de inversión en bosques tropicales. 14 Merino et al (2008) ). The biggest participation of the forestry sector in the national GDP in the decade considered occurred in 2000 (1.6 percent), after this year the participation has been constantly reduced until reaching 1.39 percent in 2005. 15 Torres Rojo, Juan Manuel (2004) Estudio de Tendencias y Perspectivas del Sector Forestal en América Latina al año 2020, Informe Nacional México, SEMARNAT/FAO 16 Merino et al (2008) 17 The Agrarian Reform Ministry, via Mexican Presidential declarations created the communities communal farms, today known as "Ejidos", as a means of providing land to the poor farmers of Mexico (peons/campesinos). The creation of Ejidos was reflected in the 1917 Mexican Constitution. The Mexican Agrarian Law in February 26, 1992 foresees, in its transitory article 8th (at the end of the law), the ability of the "ejido" to decide not to continue to be an "ejido" by choosing a dis-incorporation process.

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conservation, and restoration activities. Since 2001, the Mexican government has substantially increased forest subsidy programs that assist communities in developing forest management plans, reforestation activities (commercial plantation and forest restoration), use of non-timber forest products, and, payments for environmental services, among other activities. With updated management plans, communities continue to be legal timber producers, and can access benefits such as payments for environmental services, certified wood prices, etc. Mexico’s Payment for environmental Services Program designated 1.3 million hectares of forested lands for protection as watersheds, carbon sequestration, biodiversity, agro-forestry systems, and other environmental services. 26. The ProÁrbol Program is aimed at consolidating different federal support mechanisms to improve participatory forest management, especially in 101 of the poorest municipalities. ProÁrbol is managed by CONAFOR, which issues grants on a competitive basis to organizations or individuals for improving forest planning, forest protection, reforestation, soil conservation and development of commercial wood processing. The program currently encompasses 22 states and over 700 communities (80 percent of which are composed of indigenous peoples).

27. Despite the advances in sustainable forestry management mentioned above, capacity-building programs such as the Forest Resources Conservation and Sustainable Management Project (PROCYMAF) did not have significant capacity and received the smallest amounts of CONAFOR’s total funding. PROCYMAF, for example, allocated only about 1 percent of total CONAFOR funding in the six poorest forested states, while funding for the Payment for Environmental Services Program accounted for 8 percent of total government forestry funding between 2000 and 2007.

28. Considering these capacity challenges, this DPL recognized CONAFOR’s efforts in increasing community access to information and financial services, promoting improved forestry management, classifying new areas for legal timber production, and promoting the protection of critical watersheds. Securing sustainable access to water 29. Mexico’s water resources are currently under significant stress, and water may become a constraint on expansion and productivity in many sectors. Although water extraction represents 16 percent of natural resources used at the national level, this figure is above 57 percent in the country’s northern regions and around 154 percent in the Mexico City Valley.18 Over-extraction of groundwater has increased in recent decades. By 2006 the 104 aquifers that provided almost 60 percent of total groundwater extraction were being exploited beyond capacity. Water quality has also deteriorated, partly from the lack of wastewater treatment, with only 24 percent of wastewater being treated in 2006. Water quality is also affected by water discharges from municipalities, industries

18 According to the United Nations, severe water stress occurs when extraction is equal to more than 40 percent of availability. CONAGUA, Estadísticas del Agua en México 2007.

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and the tourism sector, as well as diffuse pollution from agriculture and livestock production. Capacity building for CONAGUA 30. As part of the GOM’s efforts to manage these challenges, CONAGUA developed the 2007-2012 National Water Program in line with the 2030 vision of sustainable human development. Concurrently, a 2004 change in the legal framework restructured key functions of CONAGUA at the water basin level. The mandate to decentralize the functions of CONAGUA to the River Basin Agencies (Organismos de Cuenca) is one of the major reforms in the amended law. In addition to the River Basin Agencies, an amendment to the National Water Law granted the River Basin Councils (Consejos de Cuenca) authority in the administration of the Water Financial System (SFA- Sistema Financiero de Agua), which the law mandated but did not fully develop.19 At the time of the loan approval, 25 Basin Councils were responsible for formulating and agreeing on activities to improve water resources management and on the need for water infrastructure in their respective basins.20 According to the amended Law, the Basin Councils were expected to supervise, together with CONAGUA, the work of the aforementioned Basin Agencies.

Sustainable agricultural productivity for economic growth and poverty reduction 31. Mexico’s public spending in agriculture and rural development is high compared to the Latin America and Caribbean average and to that of other middle income countries (MICs). In 2006, total federal spending on rural development programs was approximately US$14.3 billion, or 7.8 percent of total federal spending. Despite large budget allocations, agricultural growth and productivity have been lagging since the 1980s, relative to the Mexican economy as a whole, and to other MICs and major regional competitors.

32. While national agriculture performance has been relatively weak, regional performance has been heterogeneous. In the northern States, irrigated lands produced yields similar to US productivity levels. Conversely, the productivity of the small-scale, rain-fed agriculture of the South (where 86 percent of the farmers reside), has been stagnant. Long-standing structural problems such as land conflicts, poor infrastructure and services, and continued limited access to education and health services have limited rural economic growth. In addition, the rural poor have not been incorporated into other productive sectors in Mexico, with migration, mainly to the US, serving as the only alternative for this population. Migration has contributed to a reduction in the labor force and further declines in productivity.

33. As Mexican agriculture struggles to be competitive, it also struggles to integrate principles of environmental sustainability into primary production as well as into

19 The exact role of the basin level institutions in the SFA remained to be defined through the regulations of the amended National Water Law. 20 The territory covered by some basin agencies (such as the Lerma Basin) covers up to five states, while on the other hand some states (such as Sonora) include territory covered by up to five basin agencies.

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agribusiness. Rapid intensification and expansion of irrigated agriculture in the north has resulted in overexploitation of water resources, especially groundwater, creating a further decline in water availability. Over-extraction is a problem in 16 percent of the 653 aquifers in Mexico.

34. Agriculture is also a primary source of carbon emissions, due to use of internal combustion engines for machinery and electricity generation for heating and cooling. On the other hand, small scale farmers are key players in sustainable resource management since small scale farmers cultivate an estimated 83 percent of areas with natural resources (SRA, 2008). Of all forests in Mexico, and around 90 percent of lands in protected areas are community owned.

35. The agriculture sector was added to the environmental policy program in this operation, demonstrating SEMARNAT’s increased capacity to conduct a strong policy dialogue with a sector in which the impacts on the environment and water resources are significant. SEMARNAT and SAGARPA have agreed on a mainstreaming agenda, which supports the integration of environmental considerations in the agriculture sector, focusing on improving sustainability in agriculture.

Expanding access to sustainable housing 36. The housing sector in Mexico has experienced a major expansion. Between 2001 and 2007 the number of loans for housing and housing improvements almost tripled, from 293,000 in 2001 to 883,433 in 2007. Although housing loans were still dominated by the public sector, private funding increased its share gradually from 1 percent to 13 percent during the same period. The mortgage portfolio as a percentage of GDP grew from 5.5 in 2001 to 11 percent in 2007. 37. The lack of orderly expansion of cities, partially driven by residential expansion, has contributed to unmanaged use of natural resources, especially water and forestry, in some cases leading to unsustainable sprawl. In many cities, rapid housing development surpassed the ability to adequately provide basic infrastructure and services, such as water, sanitation, public transport, energy, and solid waste management.

38. In 2006, Mexican cities generated 36.1 million tons of solid waste, but the country achieved important results in the creation of new sanitary landfills. In 2006, 55 percent of the total solid waste generated was disposed in sanitary landfills and the remaining 45 percent was either disposed in other “controlled zones” (11 percent) or open dumps (34 percent). Mexican cities generated 242 million cubic meters of water waste in 2006, of which 85 percent was collected by sewerage systems, although only 30.8 percent was treated.

Green guidelines and comprehensive legislation

39. CONAVI (formerly CONAFOVI) prepared and published three sets of “Green Guidelines” for the (i) design and incorporation of green spaces into housing

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developments, (ii) efficient use of energy, and (iii) efficient use of water resources in housing developments. In 2006, Congress approved a new Housing Law which provided amore comprehensive institutional setting for the sector and mandated for the first time the environmental sustainability of the housing sector.21 In particular, the law mandated that the housing policy incorporate environmental considerations and an efficient use of resources, fostering programs that foster planned urban development while incorporating other relevant sectors such as environment, transport, and finance in the policy discussions. The Environmental Sustainability DPL supported the development and approval of cross-sector guidelines for incorporating environmentally sustainable practices into new housing developments financed under the federal subsidy program.

1.5 Revised Policy Areas (if applicable)

The government’s policy program remained unchanged.

1.6 Other significant changes 40. On October 2, 2008, the Board of Directors approved the originally agreed-upon Environmental Sustainability Development Policy Loan (DPL) of US$300.75 million to the United Mexican States. Shortly thereafter, global financial conditions deteriorated substantially, leading to severe limitations on financing for developing countries and a sharp rise in emerging market spreads. In light of these major economic and financial challenges, the Mexican government requested supplemental financing for the above-mentioned DPL for the amount of US$401 million. 41. The global economic environment dramatically changed the scenario of economic growth, public finances, and the external financing requirements of the public sector relative to those that the government presented in its 2009 budget proposal in early September at the time the DPL operation was negotiated.

42. A cyclical downturn had already been observed as of the beginning of 2008, with economic growth in the first half of the year slowing to 2.7 percent. In early October, the Mexican government adjusted its GDP growth estimate to 2.0 percent for 2008 and 0.5-1.5 percent for 2009, down from 2.4 and 3.0 percent, respectively. By the end of 2009 economic decline of GDP reached more than 6 percent.

43. This situation was aggravated by the global financial turmoil that led to a sharp tightening of financing conditions. The EMBI Global spread for Mexico peaked at 627 basis points in October before returning to about 400 basis points in early November. Sharply increased spreads on corporate bonds and reduced access to external finance are having an adverse impact on investment and business expansion plans.

44. Tightening of access to external financing was accompanied by high volatility on the foreign exchange market and a sharp depreciation of the peso with respect to the US dollar. Corporate exposure to foreign exchange derivatives heightened the volatility on

21 www.diputados.gob.mx/LeyesBiblio/doc/LViv.doc

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the foreign exchange market as firms had to meet margin calls and closed out losses from their foreign exchange derivative exposure. The initial lack of disclosure of corporate foreign exchange positions contributed to a temporary freeze on the domestic corporate bond market disabling firms to roll-over commercial paper.

45. In light of these changes, the government of Mexico requested multilateral agencies to expand their role in supporting its programs and policies, including those supported by the DPL operation. This included a higher level of disbursements under Bank-financed operations throughout the last quarter of 2008 and an enhanced assistance program for the FY09-FYI0 period focusing on the need to maintain a robust social safety net. The proposed Supplemental Financing for the Environmental Sustainability DPL met Bank requirements for Supplemental Financing under OP 8.60, as follows:

(a) The government was seeking supplemental financing because foreign financing had become exceedingly costly, and global bond markets effectively closed, even for investment grade emerging market countries like Mexico. It was also not able to secure alternative financing from other sources in the short-term at a reasonable cost, as the cost of borrowing even in local markets had increased substantially.

(b) Mexico’s sovereign credit risk, as measured by the JP Morgan-Chase Emerging Markets Bond Index Global (EMBIG), fluctuated in the range of 390 to 450 basis points throughout the first half of November, double the level observed on average in August.

(c) The time available was too short to process a further freestanding Bank operation.

The use of the Supplemental Financing option enabled the Bank to deliver timely program support to respond to the financial needs of the government of Mexico given the tightening of credit markets.

46. In spite of the crisis, the borrower continued to be committed to the program and the implementing agencies had demonstrated competence in carrying out the planned activities. The Mexican government had been at the forefront of developing countries in promoting a strong environmental policy agenda, and was implementing the DPL in a satisfactory manner, with both the commitment and the capacity to continue doing so. The government’s policy program, as described in the Program Document for the Environmental Sustainability DPL that the Board approved on October 2, 2008, remained unchanged. That said, the unanticipated gap in financing - in terms of particularly costly and difficult financing conditions currently facing world economies – constrained the government’s activities in a variety of areas, including the environmental reform program. As a response to the Mexican Government’s request, a Supplemental Financial was approved by the Board on December 18, 2009 in a total amount of US$ 401 million. This was simply additional resources and the policies related issues remained exactly the same, with no new safeguards being triggered.

2. Key Factors Affecting Implementation and Outcomes

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2.1 Program Performance (supported by a table derived from a policy matrix) Program disbursement was completed as expected and all outcomes achieved.

Outcome Indicators Status TOURISM: Integrate environmental sustainability considerations into the tourism sector agenda. Mayors, civic officials, and tourism operators are implementing Agenda 21 Action Plans in an additional 35 destinations by 2008, to improve environmental conditions in tourist destinations, as identified through the System of Sustainability Indicators (Sistema de Indicadores de Sustentabilidad para el Turismo). (2006 baseline: 55 tourism destinations)

Completed

SECTUR monitoring sustainability indicators of Agenda 21 Action Plans in an additional 35 tourist locations by 2008. (2006 baseline: 55 tourism destinations)

Completed

An additional 50 percent of tourism enterprises are operating in line with environmental quality criteria established by SECTUR, PROFEPA, and Asociación Mexicana de Hoteles y Moteles. (2006 baseline: 200 tourism enterprises)

Completed

ENERGY : Integrate environmental sustainability considerations into the energy sector agenda. Increased energy savings (GWh) by at least 10 percent in 2008 as compared to 2007. (2007 baseline: 21,441 GWh)

Changes in methodology for calculating energy savings make quantitative

comparison difficult (see text) Mandatory standards (Norma Oficial Mexicana) for recovering sulfur at petroleum refineries have been published and implemented, with the purpose of reducing sulfur emissions. (2006 baseline: No regulations in place).

Completed

Share of renewable energy capacity (non-hydro) in the power sector increased from 2 percent (2007) to 2.7 percent (2008).

Completed

FORESTRY: Increase support for sustainable forestry management. Twelve states are implementing community forestry programs, up from 6 in 2006.

Completed

An additional 1.0 million hectares are being sustainably managed in accordance with approved management plans. (2006 baseline: 8.5 million hectares)

Completed

CONAFOR has begun payment to titleholders of an additional 1.1 million hectares of forest land for the protection of critical watersheds under the Payment for Environmental Services Program.. (2006 baseline: 0.7 million hectares)

Completed

WATER: Increase water use efficiency and reduce water pollution. Municipality and industry treatment of wastewater collected has increased by at least four percentage points (Baseline for 2006: 36.1 percent of the flow collected in sewerage network is treated)

Completed

Average global efficiency (a measure combining physical losses due to leakages and poor maintenance and commercial losses due to poor financial management and illegal use) of 80 water operators serving localities with 20,000 or more inhabitants has increased by at least two percentage points (2006 baseline: 36.2 percent)

Completed

Irrigation districts have invested in modernized infrastructure in an additional 350,000 ha to improve efficiency in water use (2006 baseline: 2.08 million hectares)

Completed

AGRICULTURE: Integrate environmental sustainability considerations into the agriculture sector agenda.

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Identification of priority areas for improved land management practices, including reforestation, protection, and natural regeneration measures, in pastoral lands covering about 125,000 hectares. (Baseline: unknown; initiative introduced in 2008)

Completed

Introduction of conservation tillage in 50,000 hectares of agricultural land. (Baseline: unknown; systematic monitoring introduced in 2008).

Completed

Implementation of 32 productive conservation projects and adoption of 24 communication strategies within the framework of the Mexican Mesoamerican Biological Corridor. (Baseline: unknown; Mexican Mesoamerican Biological Corridor Agreement signed on April 7, 2008).

Completed

HOUSING: Integrate environmental sustainability considerations into the housing sector agenda

Increased number of newly constructed homes incorporating energy efficiency and water conservation measures in line with CONAVI’s criteria. (Baseline: zero; cross-sector guidelines issued in March 2008)

Completed

47. The Financial Agent for this loan was the National Bank for Savings and Financial Services (BANSEFI). BANSEFI helped coordinate operations, participating in negotiation meetings with all participating entities, and reviewing and verifying information including legal aspects. BANSEFI also coordinated disbursements and financial management of the operation. Disbursements were as follows:

Amount (US$)

Release dates Release

Environmental Sustainability DPL (single tranche)

300.75 million

22-12-2008 Regular

Supplemental loan to the Environmental Sustainability DPL

401.00 million

24-12-2008 21-01-2009

Regular Regular

2.2 Major Factors Affecting Implementation: 2.2.A Strong Government Commitment 48. This DPL was successfully implemented due to strong ownership by the GOM and the institutional support of both the Finance Ministry (SHCP) and the Ministry of Environment and Natural Resources (SEMARNAT). Both agencies provided coordination and oversight from the outset and encouraged active participation of the sector ministries and agencies involved in the Program. 2.2.B Building on the experiences and lessons learnt of the First and Second Environmental Structural Adjustment Loan.

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49. The Administration that took office in 2006 requested the Bank’s assistance in preparing a follow up operation to the Environmental DPL II in mid 2007 to build on the reforms initiated and implemented in the first two stages. Based on the positive experiences of EnvSAL I and EnvDPL II, the self-standing Environmental Sustainability Development Policy Loan incorporated areas supported in those operations: (i) integrating environmental and sustainability considerations in the energy agenda; (ii) increasing appropriate financing for sustainable forestry; (iii) increasing water use efficiency and reducing water pollution; and (iv) integrating environmental sustainability considerations into the tourism sector agenda. The Environmental DPL II therefore helped ensure continuity and follow-though in the Bank’s partnership with the GOM on environmental sustainability and resource management issues. 2.2.C. Difficulties encountered in DPL design and processing 50. As mentioned, because of the transition in administrations in Mexico (2006-2007), 24 months passed before approving extensions, and the second DPL was designed as a stand-alone operation. Originally, the operation was intended to have a focus on climate change, which had become a main priority of the Mexican Government. However, considering the urgency of climate change, the new administration decided to carry out a separate operation focusing only on climate change, which is a separate currently active operation. Hence this DPL continued work of previous mainstreaming efforts, with two new sectors, agriculture and housing, added at the Government’s request. Although these sectors are of paramount importance to poverty reduction, social equality, and growth, as well as environmental sustainability, the addition of these sectors increased the complexity of the operation. 51. Finally the global financial crisis of 2008-09 affected Mexico significantly, leading the Mexican Government to request additional funding. Although the team was eventually able to incorporate all government requests, sector coordination became more difficult. Finally, because of the need for quick disbursement, the DPL was based only on previously agreed-upon actions that, despite their relevance, limited flexibility and the overall long-term impacts expected from this type of operation. This highlights an example of where a programmatic approach might be useful. It is important to mention that this DPL did not benefit from a Memorandum of Understanding (MOU) which allows the Bank to provide technical assistance towards critical activities. The MOU is a useful tool that should be standard procedure in DPL operations.

2.2.D. The challenge of adopting sustainability policy as a cross-cutting element in sector development.

52. Environmental sustainability is one of the five pillars incorporated into the National Development Plan, but also needs to be integrated into all areas and not treated as a stand-alone issue. To support this aim under the DPL, it was necessary to overcome traditional development paradigms and adopt sustainability as a cross-cutting priority.

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This approach required the adoption of key sustainability principles in each sector involved and the selection of specific actions contributing to this end. 2.2.E. Difficulties of inter-sectoral coordination 53. The cross-cutting sustainability approach demands close coordination among different sectors to achieve common goals. While all parties agreed to this goal in principle, the institutional structure of the public sector in Mexico made coordination difficult. To overcome this, resources from the PHRD were used to carry out basic studies under the guidance of SEMARNAT. Inter-sectoral working groups were established and positive results were achieved, such as the creation of an environmental mainstreaming office in the SEMARNAT. Importantly, the PHRD gave the sectors an opportunity to analyze environmental issues from a broader perspective and to set up the basis for sector coordination. The PHRD helped to strengthen SEMARNAT’s leadership and to improve coordination among sectors. Technical assistance provided by the Bank team during preparation and execution of studies financed with PHRD funding also helped to bring sectors together. However, this process deteriorated slightly as implementation progressed, indicating the need for greater coordination and resources to achieve results in a complex institutional environment. 2.2. E. Impact of the economic crisis 54. In the first quarter of 2008 economic growth slowed down to 2.7 percent. In early October, the Mexican government adjusted its GDP growth estimate to 2.0 percent for 2008 and 0.5-1.5 percent for 2009, down from 2.4 and 3.0 percent, respectively. By the end of 2009 economic decline of GDP reached more than 6 percent. 55. This situation was aggravated by the global financial turmoil that led to a sharp tightening of financing availability. Sharply increased spreads on corporate bonds and reduced access to external finance adversely impacted investment and business expansion plans. 56. With respect to the DPL, the economic downturn posed a threat to completion of all objectives, as government financing was diverted elsewhere. This situation was addressed by the supplemental financing requested by the government of Mexico for this DPL operation. Thus, it was possible to allow a higher level of disbursements under Bank-financed operations throughout the last quarter of 2008 and an enhanced assistance program for the FY09-FY10 period focusing on the need to maintain a robust social safety net through the Supplemental Financing for the Environmental Sustainability DPL.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization:

(a) M&E Design: A set of outcome indicators for measuring progress were defined during the preparation of this loan. These indicators were selected in agreement with Government counterparts and there was an effort to reflect results in a quantitative manner. The selected indicators are also a sub-set of the Government’s official indicators for the 2007-2012 National Development Plan. SEMARNAT was in charge of overall M&E for the loan and for collecting the appropriate data to follow the indicators, with

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each of the sectoral ministries and agencies involved in the operation (SECTUR, SENER, CONAFOR, CONAGUA, SAGARPA, and CONAVi) responsible for reporting progress on each of the loan’s components. The Bank and the Government recognized the importance of establishing a baseline to better access impact and target values were established for the selected indicators for this operation. (b) M&E Implementation: Data availability for all indicators was adequate and timely provided by the Government counterparts. A workshop was held in April 2010, after the operation’s closing date, in which key governmental stakeholders and the Bank Task Team assessed the status of the operation’s outcome indicators. This workshop also provided an opportunity to share experiences and reflect on lessons learned from the DPL Program.

2.4 Expected Next Phase/Follow-up Operation (if any) 57. Although this is not a programmatic operation, Bank support to Mexico in these key sectors remains strong, with other operations such as the new Water and Climate DPLs continuing to build on the strong dialog and reforms initiated during the environmental sustainability DPL.

3. Assessment of Outcomes 58. The operation defined a set of 16 outcome indicators with clear quantitative targets for the six sectors (tourism, energy, forestry, water, agriculture and housing). All targets where achieved at a 100 percent level or even surpassed, with the exception of the indicator related to energy efficiency, in which the methodology for calculation was revised and the comparison to the previously established baseline was not feasible (see indicators table on pages iii-vii). Section 3.2 below provides a more detailed description of the results achieved and the development objectives.

3.1 Relevance of Objectives, Design and Implementation 59. The policies supported by this loan have been important in strengthening the environmental sustainability pillar of the NDP by ensuring that environment was considered as both a cross-cutting and a stand-alone issue. In addition to supporting the country's current development priorities, this DPL’s objectives and design were fully consistent with the Bank country partnership strategy (CPS) for 2008-2013, which is structured around the same five pillars as the National Development Plan. The CPS refers to the DPL operation as supporting the environmental pillar’s objectives; therefore there is a close alignment between the goals or expected outcomes of both the CPS and DPL. Three of the results expected during the CPS’s implementation period are consistent with the DPL’s expected outcomes (increased energy generation from renewable sources, increased number of hectares under sustainable forest management, and increased coverage of municipal wastewater treatment). 60. Analytical work carried out under the EnvSAL and EnvDPL II was important in selecting the sectors to focus on in the Environmental Sustainability DPL. Analytical

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work was carried out by a multidisciplinary team made up of 12 specialists in environment, environmental engineering, environmental economics, environmental policy, water resources management, energy, forestry, and operations provided useful technical guidance and drew on extensive background analyses. 61. With regard to higher-level objectives, the project had significant positive impacts on environment and natural resources management in line with Millennium Development Goal #7 and Mexico’s overall approach to development.

3.2 Achievement of Program Development Objectives 62. This operation’s main achievements to date include, inter alia:

• Continued support to strengthen inter-institutional coordination mechanisms among participating agencies especially through the Oficina de Transversalidad (see below);

• The inclusion of two new sectors (agriculture and housing) with significant actions in mainstreaming environmental sustainability in their policies and programs;

• The approval of a Law for Sustainable Forestry and corresponding regulation, and the approval of two laws and regulations that well improve efficiency for the Energy Sector.

63. The relevant policy actions and specific achievements with respect to mainstreaming environmental concerns for each of the six sectors are as follows: 64. Tourism: Based on the positive contributions of local Agenda 21 action plans for the tourism sector, this operation recognized SECTUR’s efforts in promoting the development of Agenda 21 Action Plans in 17 new tourism destinations, thereby increasing the number of tourist destinations that adopted such plans, from 55 in 2006 to 72 in 2008. In addition, during the period of this operation, the monitoring of tourism sustainability indicators of Agenda 21 actions plans was applied in 110 tourism destinations, representing an increase of 45 destinations when compared to the 2006 baseline (35 destinations). The priority areas for investments were: i) adequate waste management (sanitary landfills and recycling), ii) promotion of environmental management in business, and iii) land use planning. In addition to new destinations, existing indicator systems were updated in key tourist destinations.

65. Other actions included: (i) A 20 percent increase in the number of tourist facilities such as hotels, restaurants, botanical gardens, zoos, dolphin aquariums, sports clubs, and golf courses with Certificación de la Calidad Ambiental Turística developed by SECTUR and PROFEPA in municipal jurisdictions; and (ii) adoption of a unified sustainable tourism strategy to strengthen the competitiveness of the sector both in the short and long term. After participation in the program, 72 hotels went on to secure at

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least one category of the “green globe” certification, an internationally accepted standard for environmental sustainability of the travel, tourism and hospitality industry.22

66. Additionally, as part of GOM’s efforts to promote sustainable nature tourism and diversify its tourism offerings, a Strategic Plan for Nature Tourism was presented by SECTUR in collaboration with SEMARNAT, Ministry of Economy, SAGARPA, SEDESOL, Commission for Development of Indigenous People, National Commission for natural protected areas (CONANP), FONATUR, Mexican Council for Tourism Promotion (Consejo de Promoción Turística de Mexico) and CONAFOR in November 2006. This plan provided the basis for preparation of a National Strategy for Sustainable Tourism Development and Recreation in Natural Protected Areas in Mexico, presented in September 2007 by SECTUR, in collaboration with SEMARNAT and CONANP.

67. Within the framework of the National Tourism Strategy, SECTUR has been collaborating with SEMARNAT for the development of ecological land use plans in key tourism destinations, including the Gulf of California, the Gulf of Mexico and the Baja California Peninsula.

68. Energy: A major achievement under this operation was the congressional approval of an energy reform package in October 2008. The package included two key pieces of legislation: a law to promote the efficient use of energy23 and a law to promote the use of renewable energy sources.24 These laws lay out an important framework for a significant shift in energy policy in Mexico towards a focus on greater efficiency in the use of energy and sustainability on energy production, providing a strong regulatory basis for including renewable energy sources in the electricity generation mix, including from independent power producers.

69. This energy sector reform established a new methodology for calculating electricity savings, excluding the transport efficiency data, which was included in the previous calculation and it is not related to electricity efficiency. The current data according to the new methodology is of savings of 20,040 GigaWatt-hours for CY 2009. During loan preparation the target was set at 23,585 GigaWatt-hours using the previous methodology. Since the new method of calculation excludes the transport sector, and data on how many GigaWatt-hours are created by transport is not available, it is difficult to ascertain the quantitative energy savings attributable to this project.

70. On the positive side, the new system should allow for better monitoring in the future. The new energy efficiency law also established a national information system on energy efficiency (Subsistema Nacional de Información), which allows for more consistent data collection and analyses. The system is set to register, organize, update and disseminate information about energy consumption, its end-uses, sectors that use this energy, distinct

22 See Green Globe website (http://greenglobecertification.com) for detailed description of sustainability criteria, certification categories and auditing procedures. 23 Ley para el Aprovechamiento Sustentable de la Energía, published on November 28, 2008. 24 Ley para el Aprovechamiento de las Energías Renovables y el Financiamiento de la Transicíon Energética, published on November 28, 2008.

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geographical regions using energy, reasons for use, and specific indicators for energy efficiency. Furthermore, SENER maintains the goal of increasing savings by 50% compared with 2006 levels, suggesting that further reductions are likely to continue in the future.

71. In the 2007-2012 Energy Sector Program, the GOM has set a target to increase the aggregated capacity share of geothermal, wind, and solar based generation from 2 percent in 2006 to 6 percent by 2012. By end of CY 2009, the share of renewable energy capacity was 3.71 percent, mainly from geothermal and wind sources. The government is now projecting a 7.6 percent increase in renewable energy capacity by 2012.

72. During the loan period, PEMEX adopted a Environmental Protection Strategy, which proposed to implement specific projects between 2007 and 2012 that aim to (i) reduce emissions of sulfur oxide (SOx) by 30 percent and carbon dioxide (CO2) by 18 percent, (ii) decrease fresh water consumption by 13 percent; and (iii) eliminate historic environmental degradation (sites contaminated by hydrocarbon spills or hazardous waste disposal) by 59 percent. By the end of 2009, the consumption of freshwater by the oil industry was reduced by 3.1 percent and the sulfur oxide emissions were reduced by 16 percent.25 This strategy established for the first time a conceptual framework for incorporating environmental sustainability considerations into the business planning process and investments decisions of PEMEX.

73. Forestry: During the loan period, the Bank provided technical assistance to revise and update the Forest Fund. The fund finances sustainable forest management operations and payments for local owners to maintain forest ecosystems as a way of protecting local watersheds and ensuring the services provided by them. By the end of 2009, 15 million hectares of forests under sustainable forest management operations were financed by the Mexican Forest Fund. During the same period, the Payment for Environmental Services Program expanded to 2.27 million hectares of forest land, encompassing payments to 4,699 titleholders in the 32 Mexican States. The protection of critical watersheds has important cross-sector implications for water supply and agricultural activities.

74. These activities were made possible by (i) an increase in CONAFOR’s budget for forestry programs, and (ii) an increased availability of loans for sustainable forestry management with guarantees provided by CONAFOR. One key element in reducing deforestation and forest degradation is CONAFOR’s national forest sector development program, ProÁrbol, which promotes sustainable forest management and conservation activities, and was made possible by additional funding to CONAFOR.

75. Additionally, a poverty and social impact analysis (PSIA) of current and potential financial instruments for the forestry sector was conducted as part of the operation. This analysis presented policy options to increase the poor’s access to community forest services under the ProÁrbol program. The DPL operation recognized CONAFOR’s pro-poor programs and actions to improve social and economic equality through improved access to forest resources. Technical assistance was offered to 400 communities and

25 Annuario Estadisdico PEMEX 2009.

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ejidos in order to update or prepare Sustainable Management Plans for SEMARNAT’s approval. Additionally, the government has promoted the creation of Community Forest Enterprises (CFEs) that are the Mexican model of community forest management to address organizational weaknesses, social capital growth, and improved ecosystem management in the ejidos.

76. Legal activities, such as the implementation of the General Law for Sustainable Forestry Development, enacted in 2003, and associated regulations that created consultation mechanisms and improved ProÁrbol’s operational rules were also included. As a result of these policies, the capacities of vulnerable groups, such as indigenous peoples and ejidatarios, to understand and exercise their rights under the new legal framework was strengthened.

77. Water: By end of 2009, 40.7 percent of the flow collected in sewerage networks at the municipal level was treated, representing a 4.6 percentage points increase in municipal and industry treatment of wastewater in comparison to the 2006 baseline (36.1 percent). The efficiency of water operators serving localities with 20,000 or more inhabitants also increased by 6.1 percentage points over the same period. Modernized infrastructure was established in 598,000 hectares of irrigation districts to improve water efficiency. Although Mexico’s water quality problems remain serious, these actions have contributed to further Mexico’s water agenda by promoting quantitative and qualitative gains in water pollution reduction and water use efficiency.

78. Additionally, as part of the Environmental Sustainability DPL wastewater discharge fees for municipalities and industries were included in the 2008 Federal Rights Law. This law provided that discharge fees would be used to finance approved Municipalities and industries’ wastewater action plans. The action plans included wastewater treatment, changes in production processes, and discharge control. Operating rules for eight of CONAGUA’s ongoing programs in irrigation and drainage, and water supply and sanitation were also formalized. These modifications provided specific requirements for accessing financial resources, including mandates for improved water use, reduction in water loss, and improvements in water measurement.

79. Under the DPL, guidelines for the planning and implementation of small local flagship projects were developed in a decentralized participatory manner with implementation planned over a five-year timeframe. These flagship projects were designed to demonstrate how decentralized water resource management can work, and to show solutions to problems of allocation, contamination, and overexploitation, as well as to improving the economic, social, and health outcomes.

80. Agriculture: The main impacts in agriculture include 161,625 hectares of pastoral lands converted to improved land management practices (reforestation, managed natural regeneration, restoration of degraded areas, etc), and 73,350 hectares under “zero tillage farming systems”, with important impacts on soil and water conservation.

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81. SEMARNAT and SAGARPA also signed an agreement to implement joint actions aiming to reduce the negative environmental impacts of agricultural practices in the municipalities within the Mexican Mesoamerican Biological Corridor, which encompasses three states in the Yucatan Peninsula (Campeche, Quintana Roo and Yucatan) and Chiapas, focusing on limiting agriculture expansion into new areas and promoting sustainable management of natural resources. Although these initiatives are limited in scope and population coverage, they are first steps in reversing a sector policy that has not been very effective in promoting sustainable development and reducing poverty.

82. Housing: The Environmental Sustainability operation recognized the development and approval of cross-sector guidelines for incorporating environmentally sustainable practices into new housing developments financed under the federal subsidy program. 26 To promote sustainable growth in the sector, the subsidy program’s guidelines determine that those housing units that incorporate certain sustainability criteria will be eligible for a 20 percent higher subsidy from the federal government. To define and measure this “sustainability criteria” CONAVI issued in February 2008 the Criteria and Indicators for Sustainable Housing Developments prepared jointly by CONAVI, SEMARNAT, SENER, CONAGUA, SEDESOL, and twelve other institutions. These criteria set the basic standards for housing construction for:

(i) Land use, and site locations and characteristics (ii) Energy consumption (iii) Water resources, and

(iv) Solid waste management.

83. These sustainability criteria27 were prepared by an inter-sectoral working group, including the environmental (SEMARNAT), water (CONAGUA), energy (SENER) and housing (CONAVI) agencies. Despite the fact that the adoption of these criteria is voluntary, by end of CY 2009, 105,104 new homes received the 20 percent subsidy and were being constructed following established sustainability criteria, including energy efficiency and water conservation measures. 84. Since construction standards are a municipal responsibility, CONAVI’s programs aim to build consensus and promote best-practice among both local governments and developers; however these standards are voluntary and are not enforced. Linking the criteria to an additional subsidy, however, is expected to create the necessary incentives for developers.

26 See http://www.shf.gob.mx/programas_de_shf/PROGRAMASUBSIDIO.html for program rules. 27 See http://www.conafovi.gob.mx/publicaciones/cuad_criterios_web.pdf for downloading the Program Manual with criteria and indicators (65 pages).

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85. Overall assessment: The contributions to mainstreaming environmental concerns into development programs have been clearly positive. However, the DPL structure and limitations to prior actions and constraints on supervision were challenging at times. It also is not easy to demonstrate in the short-term the combined contribution of sector reforms towards environmental improvements. In this regard it is also important to recognize that Bank operations represent a small share of Mexico’s overall development financing and therefore it is difficult to demonstrate a causal linkage between policy actions and outcomes that may be the result from other actions.

3.4 Justification of Overall Outcome Rating Rating: Satisfactory 86. The DPL achieved all of its goals as demonstrated by outcome indicators, making it feasible to achieve the operation’s development objectives following the best-practice principles: 87. Ownership: The DPL was in response to a GOM request to support specific programs and areas that reflected national priorities. SHCP and SEMARNAT provided constant leadership and oversight from the outset and ensured the active participation of the sectoral line agencies involved in the DPL.

88. A coordinated accountability framework was established: The loan was based on a coherent framework of previous actions and expected outcomes that were based on the GOM’s program. An operational policy matrix was prepared with this aim including indicative triggers for the preparation of the loan, prior actions for Board approval and expected program outcomes based on the government’s program. Moreover, some mechanisms establish under the DPL II to promote cross-sectoral coordination continue to operate, such as the Inter-sectoral Committee for Projects for Emissions Reductions and Capture of Green House Gases and the energy sector Technical 21 Advisory Team that comprises Mexican experts in environment and energy policy issues.

89. Selection of relevant sectors: The DPL included sectors selected in the programmatic Environment SAL I and Environment DPL II with the support of a multidisciplinary team. The outcomes achieved have proven that these sectors are critical to improve environmental policies in key areas of development. This DPL builds on these outcomes and contributes to further mainstreaming of environmental policies in selected priority sectors. The new sectors added are relevant for the Mexican development agenda and to promote environmental sustainability.

90. Participatory approach: A PSIA for the water sector, perhaps the most challenging of all, was prepared to inform this DPL including consultation with main stakeholders. Tourism, Agriculture and Forestry programs also incorporate some type of consultation with main beneficiaries.

91. Accountability framework customized to country circumstances: The DPL is fully aligned with the sustainable development goals included in the 2007-2012 National

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Development Plan which aims to strengthen environmental mainstreaming into key economic sectors.

92. Transparent progress reviews: The proposed one-tranche operation is timed to the country’s budget cycle, with timing agreed in discussions with SHCP based on the current review of the operation’s prior actions.

3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development 93. The provisions of OP8.60 apply to the Environmental Sustainability DPL and the operation is expected to have a significantly positive poverty and social impact. In general, improvements in environmental sustainability are expected to benefit the poor and other groups under the scope of the project. 94. To inform the DPL dialogue during preparation, Poverty and Social Impact Assessments (PSIAs) were prepared for the water sector, given its likely distributional impacts (see Annex 4). The rationale for focusing PSIAs on this sector includes their importance to the GOM’s development agenda, and the impacts that this agenda will have on poor stakeholders. 95. The measures under the DPL include activities that are expected to have positive poverty impacts:

96. Tourism sector: The implementation of Agenda 21 in 35 tourism sites offers several important social benefits, including: (i) promoting the participation of local communities in tourism-related activities, which will enable residents to have a more significant voice in tourism activities in their communities; (ii) the Local Agenda 21 committees made up of local residents provide a means for sustained citizen engagement and create a mechanism through which authorities and developers can be held accountable if citizens’ interests are ignored.

97. Energy sector: Policy reforms supported by the loan will help to ensure access to safe and clean energy and related services, especially for the poor. Reducing pollution from energy will reduce costs to human health, especially respiratory diseases and the economic losses associated with such health programs.28

98. Forestry sector: Resource allocations and rights in the forestry sector have tended to skewed in favor of larger, private landowners. Under this operation, increased budgeting for CONAFOR’s pro-poor programs provided greater access to financing and technical

28 According to a survey conducted by the INE, the average annual total cost of the treatment of frequent respiratory diseases in Mexico City ranges between MXN 13,565 (asthma) and MXN 8,641 (bronchitis).

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assistance, specifically targeting ejidos and indigenous communities, to promote more socially equitable management of forest resources.

99. Water sector: Reforms under the DPL aimed at increasing water use efficiency and reducing water pollution contribute to better access to clean water and improved health outcomes among the poorest segments of the population. Complementary activities under the flagship projects (proyectos emblemáticos) recognized by this operation helped to improve planning practices and integrated sub-basin/basin management plans with the participation of all relevant stakeholders.

100. Agriculture sector: Activities recognized by the DPL sought to protect the livelihoods of small farmers and indigenous communities in the forested areas of the Mexican Mesoamerican Biological Corridor. This operation assisted the GOM in developing a large scale joint initiative in agriculture for ecosystem preservation. Representatives from SEMARNAT and SAGARPA, as well as other agriculture and environmental stakeholders, developed and signed an agricultural sustainability agenda to promote the sustainable management of natural resources within low-productivity areas of the Mexico Mesoamerican Biological Corridor (CBMM). This joint agenda increased the number of farmers following the environmental procedures set out in the Operating Rules. SEMARNAT and SAGARPA’s commitment to more effectively coordinate their environment-related policies was an important first step in addressing the sector’s environmental challenges, as environmental concerns had not been systematically incorporated in sectoral reforms in the past. Furthermore, since the joint agenda addressed poverty and productivity, the operation also helped ensure that poor farmers benefit from these programs. Legal measures to establish limits on agricultural land expansion by agro-businesses and regulations to prevent land use conversion help to ensure the security of poor, small-scale farmers. 101. Housing sector: The actions recognized by the DPL in the housing sector supported increased access to housing for the poor. The loan also helped to incorporate financial incentives for voluntary compliance with environmental guidelines for new home construction financed under the federal subsidy program. These incentives have been offered to low-income perspective homeowners and affordable housing developers. In 2007, the government program begun to provide loans and credit-linked subsidies for housing acquisition and improvement to citizens earning between 1 and 5 MW (around US$1,800 and US$9,000 per year). For housing developers of developments geared to low-income clients (under 4 MW), the program supported a 20 percent larger government subsidy for new developments that met sustainability criteria. The government sponsored subsidy and voluntary compliance programs reduced the risk that the increased costs of compliance would make it difficult for the poor to access the final product.

(b) Institutional Change/Strengthening

102. This DPL contributed to the institutional strengthening efforts by creating an unprecedented level of dialogue and information exchange between different sectors on environmental issues, especially through the creation of a new office for environmental mainstreaming in the environment ministry.

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103. SEMARNAT created an environmental mainstreaming office, the Oficina de Transversalidad, responsible for establishing and following indicators used to monitor the Ministry’s joint agendas with other line ministries. This office played a key role in overseeing M&E implementation and the experience gained by SEMARNAT during the project execution was crucial to enhance its role in the promotion of environment sustainability as a cross-sector activity. In terms of environmental mainstreaming, the creation of the office for mainstreaming was a major accomplishment in that is served to elevate the environment ministry to a level of importance on par with other line ministries related to important economic activities in Mexico.

104. Another important institutional change was the long-awaited incorporation of the agriculture sector in environmental sustainability efforts. This DPL marks an important first step in what will be a fruitful partnership between agricultural and environmental sectors in Mexico. Such collaboration will ensure that Mexican agriculture grows in a way that is both economically and environmentally sound. (c) Other Unintended Outcomes and Impacts (positive or negative, if any)

3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops Not applicable

4. Assessment of Risk to Development Outcome Rating: Low

105. The risk to development outcome is low because of the following reasons:

a. The DPL has achieved all its objectives and has been able to mainstream environmental sustainability as a key factor in all the sectors involved.

b. The DPL benefited from strong government ownership of the reforms and the

GOM is fully committed to its medium-term sustainable development goals.

c. The recent reforms adopted in the energy, water, and housing sectors and the expansion of programs targeting poor producers in the forestry and agriculture sectors will also support sustainable development.

d. Multi-sector coordination has ensured a broader discussion of the issues and

promoted buy-in with respect to strategy proposals and instruments from the sectors.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry

Rating: Satisfactory

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106. The DPL benefited from studies, experiences, and lessons learned from the EnvSAL I and EnvDPL II. Discussions and consultations conducted for preparation of the National Development Plan also contributed to define priorities and key action areas. A core team with ample experience working in Mexico and experienced in the design of environmental DPLs, helped to design the operation. For the preparation of the DPL, three preparation missions were conducted, comprising specialists in environment, economics, water, energy, urban planning, financial management, and operations. Bank specialists in other sectors under the DPL provided additional support. The team provided strong technical guidance during preparation of the operation, included an adequate level of expertise, and drew on extensive background analyses to provide advice to the Government. 107. This DPL also took into account recommendations from the Second Environmental Performance Review for Mexico carried out by the OECD. This study provided an independent assessment of the country’s environmental challenges, particularly the need to integrate environmental concerns into economic and social policy. This recommendation and the defined sector environmental priorities were fully consistent with the objectives of the DPL.

108. The PHRD grant also supported two workshops with various government institutions to review lessons learned from the EnvDPL Program and how best to build on the lessons in the design of the proposed operation. The team provided technical support in preparation of terms of reference and the review of various studies conducted under the PHRD grant.

109. Positive aspects of Bank performance at appraisal include:

• Well-designed coordination mechanisms to address the difficulties associated with the complex institutional structure of agencies involved. Concrete actions feasible to produce results were selected for the key sectors incorporated in the DPL.

• A focus on monitoring and evaluation including a monitoring framework including baselines as well as concrete, measurable indicators closely linked with the actions supported by the operation. As a result, the policy matrix was designed with a limited number of outcome indicators closely linked to the supported policy actions.

(b) Quality of Supervision (including M&E arrangements)


110. The Bank team maintained a continuous dialogue with the client to evaluate progress in carrying out Program reforms and to continue to provide technical support, although no official supervision missions were conducted after loan disbursement. Bank procedures for supervision of a DPL were not completely followed as prescribed. In spite of this, the team maintained a close partnership with SEMARNAT and supported its efforts to coordinate all sectors involved to ensure achievement of all the DPL’s goals.

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After closing the operation, the Bank and SEMARNAT organized a workshop to review results and discuss lessons learned during the program. (c) Justification of Rating for Overall Bank Performance Rating: Satisfactory

111. As Quality at Entry was rated satisfactory and Quality of Supervision rated satisfactory, the overall Bank performance is rated satisfactory. As explained above, official supervision could have been better, and prior actions limitations constrained the team in some areas. However, the policy dialogue was strong and promoted commitment to policy reforms under the Environmental Sustainability DPL, warranting the satisfactory rating.

5.2 Borrower Performance (a) Government Performance


112. The Government demonstrated ownership and commitment to policies promoted under the DPL, ensuring that levels of human and budgetary resources were adequate to ensure institutional capacity. The operation was included in its National Development Plan (NDP) 2007-2012 and annual reports of implementation of the NDP, published each September, included information to measure progress on the loan’s work in assuring environmental sustainability. (b) Implementing Agency or Agencies Performance

Rating: Satisfactory 113. SHCP and SEMARNAT provided constant leadership and oversight from the outset and ensured the active participation of the sectoral line agencies involved in the DPL. SEMARNAT was responsible for coordinating actions among other concerned agencies. SEMARNAT played a critical role providing guidance and support to ensure compliance with agreed policy reforms. 114. Sectoral ministries and agencies involved in this operation, including SHCP, SAGARPA, SEMARNAT, SENER, SECTUR, CONAFOR, CONAVI, and CONAGUA, were responsible for implementation of the proposed components of the operation and for reporting progress. All of these agencies complied with outcome indicators established for measuring the operations’ achievement of development objectives agreed during preparation.

115. SEMARNAT was also in charge of overall monitoring and evaluation for the loan and for collecting the appropriate data to follow the indicators with each of the line ministries and agencies involved in the operation and played a key role in overseeing M&E implementation. (c) Justification of Rating for Overall Borrower Performance

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Rating: Satisfactory 116. The GOM, particularly SHCP and SEMARNAT, participated actively in the preparation of the EnvDPL, facilitated and coordinated actions with responsible agencies, closely followed the policy matrix, reported to the Bank on progress and helped to organize a closing workshop to collect the views of participants. 117. Several publications prepared by SEMARNAT will help to demonstrate the positive impact of policies promoted under the DPL and further mainstream environmental sustainability across sectors.

6. Lessons Learned

118. Comprehensive mainstreaming of environmental sustainability. The adoption of environmental sustainability as a cross-cutting priority faces many challenges. Maintaining the importance of environment as an entity itself, while also mainstreaming environmental concerns into all sectors, required delicate intervention and coordination between many stakeholders. This approach required the adoption of key sustainability principles in each sector involved and the selection of specific actions contributing to this end. 119. Long-term approach is required. The DPL achieved all its goals and achieved positive contributions to policy reforms and programs in all sector included. However, it is important to recognize that despite progress achieved, continuous capacity building and support will be needed to ensure that environment remains a priority into the future. Therefore in the case of environment a programmatic approach is recommended. It is a good sign, however, that the Bank has been able to establish a positive dialog with the Mexican government that will help to ensure sustainability. Moreover, several Bank operations in the sectors included will also contribute to continued environmental mainstreaming.

120. Inter-institutional coordination is key. The complex institutional framework of the operation required substantial efforts on the part of participating entities underwent learning and adapted significant behavioral changes. The commitment of all sectors and the leadership of SEMARNAT and SHCP helped to establish a successful coordination process which provided opportunity for knowledge sharing among the different sectors.

121. Budgetary support to inter-institutional coordination is necessary. As mentioned, the Japan Policy and Human Resources Development Fund (PHRD) provided important resources (over US$350, 000) that allowed for the development of key analytical work and stakeholder participation in the EnvDPL and provided a positive incentive for mainstreaming environmental concerns in key economic sectors. This demonstrates that additional resources, such as those provided by the PHRD, can provide technical assistance to strengthen coordination among key stakeholders. This is an important option for overcoming coordination constrains. However, this DPL did not benefit from

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aMemorandum of Understanding (MOU), in which the Bank commits to support a series of advisory and analytical activities linked to the DPLs’ main objectives. Because an MOU creates clarity and allows for more flexibility, this tool should be considered as an integral component of future DPLs.

122. Need for incentives for participation. Under Mexico's fiscal policy, loans do not increase aggregate fiscal resources available to the environment and other sectoral agencies since the fiscal envelope is defined by the binding primary fiscal surplus targets. This represents a limitation to participation since some sectors perceive this type of operation as a burden rather than an incentive. A positive aspect is that to comply with the loan agreement, the GOM ensures that levels of human and budgetary resources are adequate to ensure institutional capacity. Some sectors perceive this as an opportunity to promote policies and programs that otherwise would have a limited budget allocation and ensure the sustainability of priority activities. Again, an MOU could be useful in this regard to outline additional activities that could be used to leverage participation.

123. Bank’s value added in technical assistance and past experience. The GOM has enough resources to finance reforms for the environment sector and the Bank’s financial contribution represents a minimum share of available resources. The request for Bank support has underscored the added value of the operation both in terms of technical assistance provided and the institutionalization of spaces for inter-sectoral cooperation and dialogue. Bank expertise from operations in other countries can also help ensure that best practices are used and south-south cooperation is implemented where possible. Technical Assistance Loans (TAL) linked to the DPL operations represent an option to overcome some of the constraints of inter-sectoral coordination mentioned above, and can facilitate providing support in a timely manner.

124. Importance of strong and committed local champions. To ensure that inter-institutional coordination efforts are sustained it is essential that an entity take a leading role in overseeing these efforts, particularly as participating entities undergo an initial learning process and define their functions within inter-sector working groups. SHCP and SEMARNAT assumed this coordinating role, helping to ensure success.

125. Importance of measurable and specific indicators. Clearly-defined baseline and target values to monitor progress and evaluate outcomes, as well as a relevant set of measurable and meaningful outcome indicators, are essential for a results driven process. In the case of the Environment DPL Program the indicators system were detailed and ambitious. In the case of this operation six prior actions were established and a meaningful set of indicators was defined for the key selected sectors in the project, thus facilitating monitoring.

126. Supervision. Because the period between approval and disbursement of this single tranche operation was only two months only one formal supervision mission was conducted and an ISR was not produced. Nonetheless, the team ensured that all previous actions were met, supporting SEMARNAT in its role as inter-sectoral coordinator and providing analytical support to the sectors in the operation. The difficulties in

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supervision and encouraging participation created by the DPL structure should be kept in mind in project evaluation: in the case of DPLs, the Bank does not have a direct involvement in actions implemented and the project financing usually represents a small share of Government Program overall financing.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/Implementing agencies

127. The Ministry of Environmental and Natural Resources (SEMARNAT) reviewed the draft ICR and provided comments on 17 June 2010 (See Annex 5). The agency agreed with the report’s findings. In addition, the Secretariat noted that the DPL strengthened national actions and capacities related to environmental management, which allowed Mexico to continue its effective leadership role in the United Nations climate negotiation processes. 128. The Ministry commended new Bank policies, which in contrast to the previous structural adjustment process allow for a more programmatic approach that allows the country to participate in designing and tailoring appropriate development policies. SEMARNAT noted that this structure was particularly helpful in allowing the partnership with the Bank on environmental mainstreaming to continue through the change in the administration in Mexico. The results achieved in the Environmental Sustainability DPL were especially commendable considering that the new administration with many new officials implemented policy changes or continued efforts begun in the previous administration in a timely manner. The Secretariat also wished to especially emphasize the financial support from PHDR that made possible 11 highly useful studies related to the six focus areas for mainstreaming under the loan. (b) Cofinanciers Not applicable (c) Other partners and stakeholders Not applicable

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Annex 1. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members

Names Title Unit Responsibility/ Specialty

Lending Juan Carlos Alvarez Sr Counsel LEGESAngela G. Armstrong Sr Operations Officer ECSS3 Keiko Ashida Tao Operations Analyst LCSENYewande Aramide Awe Sr Environmental Engr. ENV Juan C. Belausteguigoitia Lead Environmental Economist LCSENBenoit Bosquet Lead Carbon Finance Specialist ENVCFMaria E. Castro-Munoz Sr Social Scientist LCSSOFernando Cubillos Sr Technical Spec. ENVCFRicardo Hernandez Murillo Sr Environmental Spec. LCSENTodd M. Johnson Lead Energy Specialist LCSEGKarina M. Kashiwamoto Language Program Assistant LCC1CAdriana Moreira Sr Environmental Spec. LCSENDouglas C. Olson Lead Water Resource Specialist LCSEN

William Reuben Consultant LCSHS-DPT

Supervision Juan Carlos Alvarez Sr Counsel LEGESAngela G. Armstrong Sr Operations Officer ECSS3 Hugo Rosa da Conceicao Junior Professional Associate LCSENKarina M. Kashiwamoto Language Program Assistant LCC1CVictor Manuel Ordonez Conde Financial Management Specialist CTRLP

(b) Staff Time and Cost Staff Time and Cost (Bank Budget Only)

Stage No. of staff weeks USD Thousands (including

travel and consultant costs)Lending

FY06 57.33 FY07 86.77 FY08 249.93

Total: 394.03 Supervision/ICR

Total: 394.03

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Annex 2. Beneficiary Survey Results Not Applicable

Annex 3. Summary of Stakeholder Workshop An in-depth follow-up of this Environmental Policy Lending Program took place through workshops held after the closing of each operation, in which key government stakeholders and the Bank Task Team assessed the status of the operation’s outcomes indicators as well as the target values for the next operation (as in the case of the two first operations, Environmental SAL I and Environment DPL II). These workshops provided an opportunity to reflect on the impacts in each sector and helped indentify lessons that could be applied to improve design and implementation arrangements for future operations. The key results and lessons learned from the Environmental SAL I and Environment DPL II operations were discussed in a workshop held in Mexico City on February 12, 2008. The results of this workshop were summarized in the ICR prepared for the two operations (Report No: ICR0000737). In the case of the current operation, the Environmental Sustainability DPL, a workshop was held on April 12-15, 2010 in Mexico City. All six sectors involved in the operation participated discussed the a first draft of this ICR report, providing inputs on the indicators table, main results of the operation, and lessons learned, which are reflected throughout this report. This participatory approach was commended by the client.

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Annex 4. Summary of Borrower’s ICR and/or Comments on Draft ICR (Will be provided by Borrower)

The following comments on the draft ICR were provided by SEMARNAT on 17 June 2010:

• Para fortalecer la construcción de la política ambiental del Gobierno federal, una de cuyas características centrales es la de ser necesariamente de carácter transversal, en el año 2002 se aprovechó el apoyo del Banco Mundial a las políticas de desarrollo para estructurar nuevas operaciones relacionadas con el apoyo a políticas de desarrollo sustentable.

• Así, se diseñó el Programa (Environment Structural Adjustment Loan (EnvSAL, por

sus siglas en inglés), comprendido en tres operaciones, EnvSAL I, EnvDPL II y EnvDPL III, cuyo objetivo fue apoyar los esfuerzos del gobierno para balancear el desarrollo socioeconómico con la protección y el mejoramiento del ambiente en varios sectores de la administración pública federal.

• En el marco de ese Programa, se firmó el crédito del Banco Mundial de octubre de

2008, por un financiamiento de 300.75 millones de dólares al Gobierno Mexicano, para desarrollar el programa “Desarrollo de Políticas para la Sustentabilidad Ambiental” (DPL III).

• La crisis económica iniciada a finales de 2007 afectó a la economía mexicana,

particularmente por la caída de las exportaciones hacia los Estados Unidos, y a las finanzas públicas, por lo cual fue necesario ampliar el monto de la operación original. Así, el financiamiento suplementario para el DPL se incrementó en 401 millones de dólares.

• El objetivo general del programa fue el diseño, instrumentación y evaluación de

políticas públicas y acciones de transversalidad e integración con los sectores de turismo, energía, forestal, agua, agricultura y vivienda.

• En dicho préstamo se adoptaron los siguientes indicadores los cuales fueron

evaluados directamente por cada una de las dependencias involucradas (SECTUR, SENER, CONAFOR, CONAGUA, SAGARPA y CONAVI)

Turismo: Integrar las consideraciones ambientales en la continuidad de la agenda del sector del turismo Energía: Integrar las consideraciones ambientales en la continuidad de la agenda del sector de energía Forestal: Aumento de la ayuda para la sustentabilidad forestal

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Agua: Aumentar la eficiencia del uso del agua y reducir la contaminación de agua

Agricultura: Integración de las consideraciones ambientales en la agenda del sector agricultura

Vivienda: Integración de las guías transversales que incorporen prácticas ambientales en la agenda del sector vivienda

• La operación de DPL apoyó el desarrollo y la aprobación de las pautas

intersectoriales para incorporar ambientalmente las prácticas de desarrollo sustentable. Una de las prioridades principales de la SEMARNAT ha sido apoyar la política de transversalidad con los sectores de Gobierno involucrados directamente con el medio ambiente y los recursos naturales. El resultado ha sido la integración intergubernamental, que para esta tercera etapa (ENVDPL III) y con los resultados anteriores pensamos que el mecanismo legal y regulador establecido bajo ENVDPL II a través de la promulgación de leyes y regulaciones proporcionan una base para asegurar la continuidad de las políticas y el plan del programa que fija la formulación de las estrategias medioambientales del sector, fortaleciendo la base para la continuidad de las políticas.

• La operación de referencia se realizó en el contexto de un nuevo gobierno federal, por

ello, además de los objetivos de fortalecimiento de las políticas transversales para el manejo y aprovechamiento sustentable de los recursos naturales y del medio ambiente, se otorgó nueva prioridad al tema de cambio climático.

• Es importante resaltar que el Gobierno federal valora los cambios en el enfoque de los

préstamos del Banco Mundial. La transformación de los créditos fundados en el enfoque de ajuste estructural fueron sustituidos por los de desarrollo de políticas, los cuales son más adecuados para apoyar a los gobiernos para el diseño, realización y fortalecimiento de sus políticas de desarrollo soberanas, lo cual permite una definición de prioridades en función de los compromisos de gobierno y de las características y circunstancias de cada país.

• Por ejemplo, en el caso del crédito de referencia fue posible adecuar la cooperación

del banco a las prioridades de un nuevo gobierno bajo los mismos criterios generales del programa diseñado con el Banco.

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Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders (Not applicable)

Annex 6. List of Supporting Documents

1. Environmental Sustainability Development Policy Loan (P095510) - Program Document

2. Project Loan Agreement (L7601-MX) 3. Loan Agreement – Supplemental Financing (L7639 – MX) 4. Environmental Sustainability Development Policy Loan: Supplemental Financing

(P115101) – Project Paper 5. Project ISR – 11/06/2008. 6. SEMANART. El cambion Climático en México y el potencial de reducción de

emisiones por sectores. México 2009. 7. SEMANART. Estimaciones del impacto del cambio climático, desde el Sistema

de Cuentas Económicas y Ecológicas de México 2010-2100. México 2009. 8. SEMANART. Impacto del cambio climático en las tierras y sus características.

México 2009. 9. SEMANART. Distribución de los costos del cambio climático entre los sectores

de la economía mexicana – Un enfoque de insumo-producto. México 2009. 10. SEMANART. Consecuencias sociales del cambio climático en México – Análisis

y propuestas. México 2009.

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11.

MAP (IBRD33447R)

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