Document of The World Bank FOR OFFICIAL USE ONLY Report No: PAD2594 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$56 MILLION AND ON A PROPOSED GRANT FROM THE BIOCFPLUS-ISFL TRUST FUND IN THE AMOUNT OF US$10 MILLION TO THE UNITED MEXICAN STATES FOR A STRENGTHENING ENTREPRENEURSHIP IN PRODUCTIVE FOREST LANDSCAPES PROJECT January 5, 2018 Environment & Natural Resources Global Practice Latin America And Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Exchange Rate Effective December 20, 2017 Currency Unit = Mexican Peso (MXN) 18.9 MXN = US$1 US$0.05 = 1 MXN FISCAL YEAR January 1 - December 31 Regional Vice President: Jorge Familiar Acting Country Director: Jutta Ursula Kern Senior Global Practice Director: Karin Erika Kemper Practice Manager: Valerie Hickey Task Team Leader(s): Angela G. Armstrong and Katharina Siegmann ABBREVIATIONS AND ACRONYMS AFOLU Agriculture, Forestry, and Other Land Use BIO CF BioCarbon Fund CBA Cost-benefit Analysis CDI National Development Commission for Indigenous Peoples (Comisión Nacional para el Desarrollo de los Pueblos Indigenas) CFE Community Forest Enterprise CONABIO National Biodiversity Commision (Comisión Nacional de Biodiversidad) CONAFOR National Forestry Commision (Comisión Nacional Forestal) CPS Country Partnership Strategy EMF Environmental Management Framework ENAIPROS 2013-2018 National Sustainable Forest Management Strategy to Increase Production and Productivity (Estrategia Nacional de Manejo Forestal Sustentable para el Incremento de la Producción y Productividad 2013-2018) ENAREDD+ National REDD+ Strategy (Estrategia Nacional para REDD+) ER Emission Reduction ESMF Environmental and Social Management Framework FAP Forest Action Plan FCPF Forest Carbon Partnership Facility FGM Feedback and Grievance Mechanism GDP Gross Domestic Product GHG Greenhouse Gas GOM Government of Mexico GRS Grievance Redress Service IBRD International Bank for Reconstruction and Development INECC National Institute of Ecology and Climate Change INEGI National Statistics and Geography Institute INFyS National Forestry and Soils Inventory (Inventario Nacional Forestal y de Suelos) INMUJERES National Institute for Women IPLC Indigenous Peoples and Local Communities IPPF Indigenous Peoples Planning Framework ISFL Initiative for Sustainable Forest Landscapes LULUCF Land Use, Land Use Change, and Forestry MAC Mechanism for Citizen Attention (Mecanismo de Atención Ciudadana) MDG Millennium Development Goal MOU Memorandum of Understanding MRV Measurement, Reporting and Verification NAFIN National Financial Agency (Nacional Financiera) NDC Nationally Determined Contributions NGO Non-governmental organization NPV Net Present Value OSSF Forestry Sector Social Organizations (Organizaciones Sociales del Sector Forestal) PDO Project Development Objective PES Payment for Environmental Services PF Process Framework POM Project Operational Manual PROMARNAT Sectoral Program of Environment and Natural Resources (Programa Sectorial de Medio Ambiente y Recursos Naturales) PRONAFOR National Forestry Program (Programa Nacional Forestal) REDD+ Reducing emissions from deforestation and forest degradation, and the role of conservation, sustainable management of forests, and enhancement of forest carbon stocks in developing countries SAGARPA Ministry of Agriculture, Livestock, Rural Development, Fisheries and Food (Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentación) SDG Sustainable Development Goal SEMARNAT Ministry of Environment and Natural Resources (Secretaría de Medio Ambiente y Recursos Naturales) SESA Strategic Environmental and Social Assessment SFM Sustainable Forest Management WB World Bank The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) BASIC INFORMATION Is this a regionally tagged project? Country(ies) Financing Instrument No Investment Project Financing [ ] Situations of Urgent Need of Assistance or Capacity Constraints [ ] Financial Intermediaries [ ] Series of Projects OPS_BASICINFO_TABLE_3 Approval Date Closing Date Environmental Assessment Category 29-Jan-2018 31-Mar-2023 B - Partial Assessment Bank/IFC Collaboration No Proposed Development Objective(s) The Project Development Objective (PDO) is to strengthen sustainable forest management and increase economic opportunities for forest-dependent people and enterprises in selected forest landscapes in Mexico. Components Component Name Cost (US$, millions) Strengthening Forest Management, Conservation, and Business Development 175.00 Institutional Development and Facilitation Support 10.00 Organizations Borrower : United Mexican States Implementing Agency : CONAFOR PROJECT FINANCING DATA (US$, Millions) Page 1 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) FIN_SUMM_NEW SUMMARY Total Project Cost 185.00 Total Financing 185.00 Financing Gap 0.00 DETAILS PUB_FIN_DETAIL Counterpart Funding 119.00 Borrowing Agency 119.00 International Bank for Reconstruction and Development (IBRD) 56.00 Trust Funds 10.00 BioCarbon Technical Assistance Trust Fund 10.00 Expected Disbursements (in US$, millions) Fiscal Year 2018 2019 2020 2021 2022 2023 Annual 0.84 3.79 5.32 9.94 15.38 20.72 Cumulative 0.84 4.63 9.95 19.90 35.28 56.00 INSTITUTIONAL DATA Practice Area (Lead) Environment & Natural Resources Contributing Practice Areas Climate Change and Disaster Screening This operation has been screened for short and long-term climate change and disaster risks Page 2 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Gender Tag Does the project plan to undertake any of the following? a. Analysis to identify Project-relevant gaps between males and females, especially in light of country gaps identified through SCD and CPF Yes b. Specific action(s) to address the gender gaps identified in (a) and/or to improve women or men's empowerment Yes c. Include Indicators in results framework to monitor outcomes from actions identified in (b) Yes SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating 1. Political and Governance  Substantial 2. Macroeconomic  Moderate 3. Sector Strategies and Policies  Moderate 4. Technical Design of Project or Program  Moderate 5. Institutional Capacity for Implementation and Sustainability  Moderate 6. Fiduciary  Moderate 7. Environment and Social  Moderate 8. Stakeholders  Moderate 9. Other 10. Overall  Moderate COMPLIANCE Policy Does the project depart from the CPF in content or in other significant respects? [ ] Yes [✔ ] No Page 3 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Does the project require any waivers of Bank policies? [ ] Yes [✔ ] No Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 ✔ Natural Habitats OP/BP 4.04 ✔ Forests OP/BP 4.36 ✔ Pest Management OP 4.09 ✔ Physical Cultural Resources OP/BP 4.11 ✔ Indigenous Peoples OP/BP 4.10 ✔ Involuntary Resettlement OP/BP 4.12 ✔ Safety of Dams OP/BP 4.37 ✔ Projects on International Waterways OP/BP 7.50 ✔ Projects in Disputed Areas OP/BP 7.60 ✔ Legal Covenants Sections and Description Loan Agreement: Activities Agreement | Description: For purposes of implementing the activities under Part 1 of the Project, and upon the selection and approval of any said activity pursuant to the eligibility criteria and procedures established in the CONAFOR Rules, the Borrower, through CONAFOR, shall, as instructing party (mandante) of the Forest Fund, provide a Direct Support to the Eligible Beneficiary pursuant to an agreement (the Activities Agreement) to be entered into between CONAFOR and the Eligible Beneficiary, under terms and conditions substantially similar to those of the model form agreement(s) contained in the POM. | Section I.C.1 of Schedule 2 | Due Date: Continuous Sections and Description Loan Agreement: Safeguards Aspects | Description: The Borrower, through CONAFOR, shall carry out the Project in accordance with the EMF, the IPPF and the PF. Except as otherwise agreed by the Bank, the Borrower, through CONAFOR, shall not amend, abrogate, waive, or fail to enforce the EMF, the PF and/or the IPPF or any of their provisions. | Section I.D.1 of Schedule 2 | Due Date: Continuous Sections and Description Grant Agreement: Safeguards Aspects | Description: (1) The Borrower, through CONAFOR, shall carry out the Project in accordance with the EMF, the IPPF and the PF. Except as otherwise agreed by the Bank, the Borrower, Page 4 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) through CONAFOR, shall not amend, abrogate, waive, or fail to enforce the EMF, the PF and/or the IPPF or any of their provisions; (2) The Borrower, through CONAFOR, shall ensure that the terms of reference for any technical assistance provided under Part 2 of the Project, as applicable, shall be satisfactory to the Bank, and to that end, such terms of reference shall require that the advice conveyed through such technical assistance be consistent with the requirements of the World Bank’s Safeguards Policies and Procedures. | Section I.C of Schedule 2 | Due Date: Continuous Conditions Type Description Effectiveness Loan Agreement: Contrato de Mandato | Description: The Contrato de Mandato has been duly executed by the parties. | Section 5.01 | Due Date: Effectiveness Type Description Effectiveness Loan Agreement: Legal opinions on Contrato de Mandato | Description: (a) the Borrower, through SHCP and CONAFOR, shall issue two separate legal opinions – one for SHCP and one for CONAFOR- satisfactory to the Bank, by counsel acceptable to the Bank, indicating that the Contrato de Mandato has been duly authorized or ratified by, and executed and delivered on behalf of, the Borrower, and is legally binding upon the Borrower in accordance with the Contrato de Mandato’s terms; and (b) NAFIN has issued a legal opinion satisfactory to the Bank, by NAFIN’s counsel satisfactory to the Bank, indicating that the Contrato de Mandato has been duly authorized or ratified by, and executed and delivered on behalf of, NAFIN, and is legally binding upon NAFIN in accordance with the Contrato de Mandato’s terms. | Section 5.02 | Due Date: Effectiveness Type Description Effectiveness Grant Agreement: BioCFplus-ISFL Contrato de Mandato | Description: The BioCFplus-ISFL Contrato de Mandato has been duly executed by the parties. | Section 5.01 (a) | Due Date: Effectiveness Type Description Effectiveness Grant Agreement: IBRD Loan Agreement | Description: The IBRD Loan Agreement has been signed and delivered by all the parties to such agreement, and all conditions precedent to its effectiveness have been fulfilled. | Section 5.01(b) | Due Date: Effectiveness Type Description Effectiveness Grant Agreement: CONAFOR and NAFIN Legal opinions on the BioCFplus-ISFL Contrato de Mandato | Description: The Recipient, through CONAFOR, shall and shall cause NAFIN to, issue a legal opinion satisfactory to the World Bank, by counsel acceptable to the World Bank, indicating that the BioCFplus-ISFL Contrato Page 5 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) de Mandato has been duly authorized or ratified by, and executed and delivered on behalf of, the Recipient and NAFIN, and is legally binding upon the Recipient and NAFIN in accordance with the BioCFplus-ISFL Contrato de Mandato’s terms. | Section 5.02 (a) and (b) | Due Date: Effectiveness Type Description Disbursement Loan Agreement: Retroactive Financing | Description: No withdrawal shall be made for payments made prior to the Signature Date, except that withdrawals up to an aggregate amount not to exceed $11,200,000 may be made for payments made prior to this date but on or after the date twelve (12) months prior to the Signature Date, for Eligible Expenditures, under Category (1). | Section III.B.1 of Schedule 2 | Due Date: Disbursement PROJECT TEAM Bank Staff Name Role Specialization Unit Team Leader(ADM Angela G. Armstrong GEN04 Responsible) Katharina Siegmann Team Leader GEN04 Procurement Specialist(ADM Francisco Rodriguez GGOPL Responsible) Joao Guilherme Morais de Procurement Specialist GGOPL Queiroz Financial Management Daniel Chalupowicz GGOLF Specialist Anders Jensen Team Member Monitoring & Evaluation GENOS Arelia Jacive Lopez Social Safeguards Specialist GSU04 Castaneda Environmental Safeguards Dora Patricia Andrade GEN04 Specialist Dorothee Georg Social Safeguards Specialist GSU04 Elena Segura Labadia Counsel LEGAM Fabiola Maria Lucia Team Member Climate Change GEN04 Mercado Jaldin Franka Braun Team Member Carbon Finance GEN04 Gabriela Grinsteins Counsel LEGLE Page 6 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Graciela Reyes Retana De Team Member Environmental Economics GSU04 La Torre Jose C. Janeiro Team Member Finance WFALA Jose Carlos Fernandez Team Member Environmental Economics GEN01 Ugalde Julian Gonzalo Jimenez Team Member Monitoring GCCFM Environmental Safeguards Robert H. Montgomery GEN04 Specialist Stefano P. Pagiola Team Member Environmental Economics GENGE Viviana Vallejo Team Member Private Sector Engagement CM1A7 Yatziri Zepeda Medina Team Member Environmental Economics GEN04 Yu Huan Team Member Climate Change GCCSO Extended Team Name Title Organization Location Page 7 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) MEXICO STRENGTHENING ENTREPRENEURSHIP IN PRODUCTIVE FOREST LANDSCAPES TABLE OF CONTENTS I. STRATEGIC CONTEXT .................................................................................................... 10 A. Country Context ................................................................................................................ 10 B. Sectoral and Institutional Context .................................................................................... 11 C. Higher Level Objectives to which the Project Contributes ............................................... 14 II. PROJECT DEVELOPMENT OBJECTIVES ............................................................................ 15 A. PDO.................................................................................................................................... 15 B. Project Beneficiaries.......................................................................................................... 16 C. PDO-Level Results Indicators............................................................................................. 18 III. PROJECT DESCRIPTION.................................................................................................. 18 A. Project Components.......................................................................................................... 18 B. Project Cost and Financing ................................................................................................ 20 C. Lessons Learned and Reflected in the Project Design ...................................................... 21 IV. IMPLEMENTATION........................................................................................................ 21 A. Institutional and Implementation Arrangements ............................................................. 21 B. Results Monitoring and Evaluation ................................................................................... 21 C. Sustainability ..................................................................................................................... 22 D. Role of Partners................................................................................................................. 22 V. KEY RISKS ..................................................................................................................... 23 A. Overall Risk Rating and Explanation of Key Risks.............................................................. 23 VI. APPRAISAL SUMMARY .................................................................................................. 24 A. Economic and Financial Analysis ....................................................................................... 24 B. Technical............................................................................................................................ 24 C. Financial Management ...................................................................................................... 25 D. Procurement ..................................................................................................................... 26 E. Social (including Safeguards) ............................................................................................. 26 F. Environment (including Safeguards) ................................................................................. 28 G. Other Safeguard Policies ................................................................................................... 30 Page 8 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) H. World Bank Grievance Redress ......................................................................................... 30 VII. RESULTS FRAMEWORK AND MONITORING .................................................................... 31 ANNEX 1: DETAILED PROJECT DESCRIPTION ......................................................................... 40 ANNEX 2: IMPLEMENTATION ARRANGEMENTS .................................................................... 50 ANNEX 3: IMPLEMENTATION SUPPORT PLAN ...................................................................... 66 ANNEX 4: ECONOMIC ANALYSIS........................................................................................... 69 ANNEX 5: WORLD BANK ENGAGEMENT IN THE FORESTY SECTOR IN MEXICO ....................... 87 Page 9 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) I. STRATEGIC CONTEXT A. Country Context 1. Mexico’s economy continues to expand at a steady though moderate rate of growth. The increase in Mexico’s GDP over the past three years, 2014-2016, at an annual average of 3.0% was stronger than annual average growth recorded during the previous two decades, 1994-2013, of 2.4%.1 Growth is expected to moderate to about 1.9% in 2017 and strengthen in the medium-term to about 2.5% by 20192 as uncertainty regarding The North American Free Trade Agreement (NAFTA) and the presidential elections (July 2018) dissipates and gross fixed investment growth resumes. However, these growth rates are only about half the average growth observed in emerging market economies (5.3%) between 1994 and 2016. 2. Economic performance has been resilient in view of external shocks experienced over the past few years. During this time, Mexico’s economy has experienced several external shocks, including a sharp drop in oil prices with average oil prices down by 50-60%, an additional reduction in the volume of oil and gas production by 6% annually, international financial market volatility related to a normalization of monetary policy in advanced economies, and, more recently, uncertainty over the future of U.S.-Mexico trade relations. Sensible monetary and fiscal policy responses to these shocks, within an overall sound macroeconomic policy framework including a flexible exchange rate, an inflation-targeting monetary policy framework and fiscal oversight ensuring moderate public sector deficits, has maintained macroeconomic stability in recent years. 3. Moderate economic growth over recent years has limited significant poverty reduction and improvements in shared prosperity. The most recent official poverty estimate, based on a combination of monetary and non-monetary dimensions of welfare, shows a decline in poverty from 46.2% to 43.6% and in extreme poor from 9.5% to 7.6% between 2014 and 2016.3 Access to health services and access to social security and food security were the non- monetary components that most improved. Monetary poverty also declined as poverty rates at the well-being poverty line dropped from 53.2% to 50.6%.4 The decline in monetary poverty has been driven by higher income growth at the lowest income distribution levels. 4. Mexico is also a megadiverse country and its biological diversity provides substantial opportunities for socio- economic development. Mexico has over 88 million hectares of forests, covering almost 45% of its national territory. Mexico is home to around 10% of all known species.5 A significant share of this biological diversity is found in forest ecosystems, hence the strategic importance of their preservation and sustainable management for biodiversity conservation. 5. Mexico is exposed to climate-induced extreme weather events that have the potential to exacerbate natural disasters. In addition, climate change impacts are anticipated to intensify the country’s development challenges. Storms and floods are frequent natural disasters, and their frequency is expected to rise with greater climate 1 World Bank estimates based on The National Institute of Statistics and Geography (INEGI) data. 2 Global Economic Prospects, January 2018. 3 National Council for the Evaluation of Social Development Policy (CONEVAL). 4 Ibid. 5 Comisión Nacional para el Conocimiento y Uso de la Biodiversidad (CONABIO) (2014). Quinto Informe Nacional de México ante el Convenio sobre la Diversidad Biológica (CDB). CONABIO. México. Page 10 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) variability. Mexico’s coastlines are highly prone to tropical cyclones and hurricanes. Climate phenomena, such as La Niña and El Niño, are expected to increase the frequency and intensity of these climate-related storms while disrupting normal climate patterns. The increase in average temperature can result in heat stress, droughts, and water scarcity. Sustainable management of natural resources in forest landscapes have a central role in climate change mitigation and adaptation. Sustainable management of forests secures the survival of a variety of ecosystems and enhances their environmental, social, and economic functions, while helping forests and forest-dependent people adapt to new weather and physical conditions caused by climate change. Climate change mitigation can be achieved through forest carbon stocks conservation and carbon sequestration. Climate change adaptation can strengthen the adaptive capacity of forests while reducing climate vulnerability and increasing forest ecosystems’ resilience.6 It is estimated that the Project could provide significant mitigation and adaptation co-benefits, amounting to as much as 75% of the total Project amount.7 B. Sectoral and Institutional Context Sectoral Context 6. It is estimated that forests in Mexico are home to more than 12 million people,8 most of whom live in poverty9 and directly depend on local natural resources. Forests are a vital source of goods and services for millions of poor people living in rural areas, and thus offer important opportunities for socioeconomic development. In 2008, 57% of the poorest quintile of rural households derived one fourth of their income from the extraction of natural resources, most of which was forest-related.10 Poverty rates are higher among indigenous people, who account for almost 50% of forest dependent people. 7. Mexico’s unique land tenure structure provides a solid basis for the collective management of forest resources. There is a clear, well-established and legally recognized system of land tenure governing forest lands in Mexico. Approximately 30% of forest lands are the property of private small landowners,11 around 9% belong to the State in the form of forest reserves, while 61% of forests are the communal property12 of comunidades and ejidos.13 Both comunidades and ejidos are forms of collective land ownership recognized by the Mexican Constitution and Agrarian Law,14 which establishes governance structures and governing councils for collective decision making. 8. Although forestry production in Mexico accounts for a modest 0.6% of national GDP, the country has the capacity to increase its current production by more than double, leading to an increase in tax revenue and 6 FAO (2010), Managing forests for climate change http://www.fao.org/docrep/013/i1960e/i1960e00.pdf. 7 Team estimate based on preliminary screening. 8 Torres Rojo, J.M. (Ed.). 2015. Desarrollo Forestal Comunitario: La Política Pública. México, D.F.: Centro de Investigación y Docencia económicas. 9 Reyes, J. A. y D’Acosta (Eds.) (2012). Memorias del Seminario Propiedad Social y Servicios Ambientales 8 de noviembre de 2011, Ciudad de México; http://www.ccmss.org.mx/descargas/Memorias_del_seminario_propiedad_social_y_servicios_ambientales.pdf . 10 Lopez Feldman, A (2012). Environmental Dependence of Mexican Rural Households: Exploring the Role of Income, Shocks, Rules, and Roads. CIDE. Ciudad de México: http://www.libreriacide.com/librospdf/DTE-528.pdf. 11 CONAFOR (2016), IRE. 12 Torres-Rojo, J.M., Moreno-Sánchez, R. & Mendoza-Briseño, M.A. Curr Forestry Rep (16) 2: 93. https://doi.org/10.1007/s40725-016-0033-0. 13 The comunidad is a population grouping with a legal personality and is the holder of agrarian rights recognized by executive or restorative order, or by resolution confirming their ownership of forest lands. The ejido is an association of peasant farmers that are owners of common property assigned to them by the State. More detail is provided in Table 1. 14 CONAFOR (2016), IRE. Page 11 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) employment.15 In recent years, the trade deficit of Mexico’s forestry sector has increasingly widened and the level of national consumption of timber products is almost three times more than national production. In 2015, the trade balance grew to US$6,466 million, with exports of forestry products increasing to US$2,392 million while imports amounted to US$8,858 million. Mexico has the potential to sustainably produce 60 million m3 of roundwood at the national level, which could generate employment and be a source of tax revenue. If average annual production increases by 1 to 3%, by 2025 tax revenue could also increase by 47 to 223%. With these growth levels, there could be a four-fold increase in the number of people employed in the forestry sector by 2025. 16 For example, there were 373,873 people employed in the forest sector in 2015, and with these growth levels, the number of people employed could increase by up to 23,143 per year. 9. Despite the strategic, social, and environmental contribution of forests to Mexico’s economy and local livelihoods, forests continue to be under pressure. Deforestation and forest degradation levels have fallen in recent years, however the country’s deforestation and degradation rates are still among the highest in the world and the principal drivers behind the loss of natural capital in Mexico.17 The annual rate of change has fallen steadily since the 1990s, from 2.7% net over the period 1990-2000 to 0.7% net over the period 2010-2015. The drivers of deforestation and forest degradation vary widely across the country and include direct and underlying factors. The underlying causes of deforestation and degradation include economic, social and institutional factors, such as the profitability of alternative land uses, land use change, particularly related to agriculture and livestock production, and comunidades and ejidos low management capacity to conduct forest operations. As a result, environmental degradation and depletion of natural resources in Mexico have an economic cost equivalent to roughly 6.3% of Mexico’s GDP, which is even higher in deforestation hotspots.18 10. Community forest enterprises and landowners face challenges in accessing finance and improving forest management practices. Although 65% of community forests have commercial potential, less than a quarter have developed forest management plans and less than 9% have evolved into community forest enterprises. Some of the forest management challenges in communities include: (i) the perception that community forest enterprises are long- term sources of employment rather than a quick source of income; (ii) ejidatarios’ and comuneros’ limited understanding of the technical, regulatory and management issues related to developing and overseeing forest enterprises; and (iii) leadership structure of the ejido and community assemblies by the most senior members, leading to the marginalization of young people and women.19 Further, few agrarian forest communities invest in their forests or engage in sustainable and profitable forest management over the long term. In order to build the technical, organizational, and entrepreneurial capacities of those responsible for forest management, public policies and programs supporting forest management must be maintained and strengthened, and efforts must be made to promote access to finance. 11. Women face significant challenges in accessing forest resources and means of production. Given a variety of cultural, socioeconomic, and institutional factors, women have limited participation in the management of forest 15 IMCO and World Bank (forthcoming). 16 IMCO and World Bank (forthcoming). 17 CONAFOR (2016), IRE. 18 CONAFOR (2016), IRE. 19 CONAFOR, Estrategia Nacional de Manejo Forestal Sustentable para el Incremento de la Producción y Productividad (Enaipros) 2013-2018; de Jong et al., Opportunities and Challenges for Community Forestry. In Mery, G. et al., Forests and Society: Responding to Global Drivers of change, available at http://www.iufro.org/science/special/wfse/forests-society-global-drivers/. Page 12 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) landscapes. One of the major barriers facing women is legal in nature. Only 19.8%20 of ejidatarios and comuneros (holders of land property rights) are women. Consequently, available public programs are less accessible to women than to men.21 Historically, this has hindered a female’s ability to benefit from public programs, since access to equipment, infrastructure, government loans, and subsidies has been restricted to land title holders. Although the Government of Mexico has increased its efforts to mainstream gender in policies, women continue to be excluded from activities in the forest sector, and on average, less than 25% of direct beneficiaries of the Comisión Nacional Forestal (National Forestry Commission, or CONAFOR) programs are women.22 Institutional Context 12. The Government of Mexico (GOM), through its forest policies and programs, provides incentives for the sustainable management and conservation of forests. Since its creation in 2001, CONAFOR has supported comunidades, ejidos, and small landowners in the care, improvement, and sustainable management of forestry resources. This has been done through a series of voluntary/demand driven incentive programs, including programs aimed at increasing sustainable forest productivity and forest conservation and restoration. 13. Mexico is committed to preventing deforestation and degradation at the landscape level through policy and institutional reforms. CONAFOR was established in 2001 with the objective of promoting conservation and developing sustainable forest policies, plans and programs, and was also made the Reducing Emissions from Deforestation and Forest Degradation (REDD+) mechanism focal point. In addition, Mexico has a number of civil society and indigenous organization networks and institutions, including the National Development Commission for Indigenous Peoples (CDI). Moreover, to address landscape-level causes of deforestation and forest degradation, CONAFOR signed an agreement in 2016 with the Ministry of Agriculture, Livestock, Rural Development, Fisheries and Food (SAGARPA) to improve inter-institutional collaboration in forest landscapes. The agreement outlines commitments for joint actions to be undertaken by CONAFOR and SAGARPA in relation to REDD+, restoration with the aim of productive land use, integrated watershed and fire management, and improved monitoring systems, among others. This agreement is also part of a higher-level Environment-Agriculture agreement signed between the Environment and Agriculture Ministries. 14. The United Nations' Sustainable Development Goals (SDGs) include 17 global goals aimed at eradicating poverty, protecting the planet, and ensuring global prosperity by 2030. Goal Number 17 is “Strengthen the means of implementation and revitalize the global partnership for sustainable development”, and hosts target 17.14 “Enhance policy coherence for sustainable development”. The Mexican Presidency, leading implementation of the SDGs to ensure more strategic coordination, is undertaking important efforts to create policy coherence for sustainable development and achieve target 17.14, by (i) strengthening intersectoral coordination, (ii) creating synergies between the Ministries, and (iii) revising the federal budget for better alignment of development efforts. Although national indicators for 17.14 have yet to be published, it is expected that the budgetary revision will also lead to a reform of the environmentally harmful subsidies in Mexico, with expectations raised by an agreement between SAGARPA and SEMARNAT (the Ministry of Environment and Natural Resources). 23 20 INMUJERES, 2013, op.cit. 21 CONABIO (2016). Estrategia Nacional sobre Biodiversidad de México (ENBioMex) y Plan de Accioón 2016-2030. CONABIO, México. http://www.biodiversidad.gob.mx/pais/pdf/ENBIOMEX_baja.pdf 22 CONAFOR – World Bank evaluation based on women beneficiaries under the Forest and Climate Change Project (P123760). 23 Sources: https://www.gob.mx/cms/uploads/attachment/file/257196/Estrategia_Nacional_Agenda_2030_MCH__1_.pdf; Page 13 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) 15. Mexico is also at the forefront internationally in preparing and implementing a national REDD+ mechanism under its National REDD+ Strategy (ENAREDD+). Mexico’s ambitious Nationally Determined Contributions (NDC)24 recognize the essential role of forests in mitigation actions and establishes the goal of 0% net deforestation by 2030. In addition, Mexico’s climate change commitments emphasize the contribution of forest to adaptation by reducing local communities’ vulnerability to natural disasters and economic downturns. 16. The proposed Project builds directly on World Bank collaboration with the GOM on forest conservation and management, which spans over two decades. In particular, the Project builds on successes from this engagement and ensures continuity in the areas of community forest management and payment for environmental services. It also supports innovative new approaches, including: (i) increasing the economic and environmental benefits of Project interventions, by promoting the integration of productive forest management activities along with forest conservation and restoration activities in the same territory; (ii) supporting a wide variety of potential beneficiaries, such as communities and ejidos, small land owners, and forest enterprises in order to have a greater impact at the landscape level; (iii) enhancing beneficiaries’ social capital, by providing culturally-appropriate training in areas related to entrepreneurship and business development; and (iv) focusing on productivity, which will enable forest- dependent people and enterprises to more fully reap the benefits of forest landscapes. The Project will integrate productivity and forest landscape management activities as a means of increasing economic opportunities, while promoting sustainable forest management and conservation. 17. These innovative approaches are made possible by Initiative for Sustainable Forest Landscapes (ISFL) Program support, which will play a key role in pioneering new directions in forest landscape investments in Mexico. The program will integrate productivity and forest landscape management activities as a means of increasing economic opportunities, while promoting sustainable forest management and conservation. To ensure landscape restoration, prevent degradation, and better alignment in landscape investments, the ISFL program will help strengthen inter- sectoral collaboration in forest landscapes (in particular, between CONAFOR and SAGARPA). ISFL funding will also play a key role in developing green financial instruments to increase private sector investments in sustainable land- use activities while reducing pressure on natural capital. The ISFL Program will be part of a programmatic approach, consisting of a comprehensive national program and other, complementary World Bank-financed initiatives. C. Higher Level Objectives to which the Project Contributes 18. The proposed Project is aligned with the World Bank Group’s (WBG) Country Partnership Strategy for Mexico (CPS) FY 2014-201925. The CPS outlines four strategic pillars, one of which relates to the promotion of green and inclusive growth, including reducing the footprint of growth and using natural resources in an optimal way. The CPS acknowledges not only the costs of land and forest degradation, but also the importance of forests as an essential source of employment, income, and livelihood and forests’ role in mitigating and adapting to climate change. The Project also is consistent with the CPS thematic area of increasing social prosperity, as the proposed activities will support sustainable forest management activities to be implemented by Indigenous Peoples and Local Communities (IPLC). The proposed Project is also aligned with the WBG’s Forest Action Plan for FY16 – 20 (FAP), as Project activities https://www.gob.mx/sre/prensa/expertos-nacionales-e-internacionales-debaten-la-aplicacion-de-la-agenda-2030-para-el-desarrollo- sostenible-en-mexico; 24 Nationally Determined Contributions under the UNFCCC, mitigation and adaptation commitments defined prior to the 2015 COP in Paris. 25 FY2014-2019 World Bank Group’s Country Partnership Strategy for the United Mexican States (Report 80800-MX), discussed by the Executive Directors on December 12, 2013; and updated in the Performance and Learning Review of February 23, 2017 (Report No. 104752). Page 14 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) will support several interventions under the FAP Focus Areas (Sustainable Forestry and Forest Smart Interventions) and Cross-Cutting Themes (Climate Change and Resilience, Rights and Participation, Institutions and Governance). In addition, the Project is aligned with the WBG Climate Change Action Plan’s top-level priorities on Supporting Transformational Policies and Institutions, by helping to implement Mexico's NDC in climate policies and investment plans. Through its focus on improving livelihoods and economic opportunities of IPLC, the Project is aligned with the WBG’s twin goals of ending extreme poverty and boosting shared prosperity. 19. BioCarbon Fund (BioCF) Initiative for Sustainable Forest Landscapes (ISFL). The ISFL, currently collaborating with five developing countries, seeks to reduce emissions from the land sector through smarter land use planning, policies, and practices. These catalytic efforts can reduce millions of tons of emissions but, just as importantly, the investments and capacity built can improve livelihoods, reduce poverty, and contribute to the sustainability of national economies. The ISFL seeks to promote reduced greenhouse gas (GHG) emissions from the land sector, from REDD+, and from sustainable agriculture, as well as to promote smarter land use planning, policies, and practices. Operating at the scale of the jurisdictional or regional landscape is considered one of the key design features of the ISFL. National or local governments need to consider the trade-offs and synergies between different land uses that may compete in a jurisdiction—such as agriculture, energy, and forest protection—and successfully identify integrated solutions that serve multiple objectives. Adopting a landscape approach means implementing a development strategy that is climate- smart, equitable, productive, and profitable at scale and strives for environmental, social, and economic impact. Mexico has been selected for the ISFL program, and as part of this, will develop an emission reduction (ER) program to access results-based finance for reducing GHG emissions from land use. II. PROJECT DEVELOPMENT OBJECTIVES A. PDO 20. The Project Development Objective (PDO) is to strengthen sustainable forest management and increase economic opportunities for forest-dependent people and enterprises in selected forest landscapes in Mexico. 21. This objective will be attained through the maintenance of, and an increase in, forest landscape area under sustainable management. Strengthening reflects Project-financed activities to maintain, improve, and increase forest management. Forest management, according to the Mexican General Forest Law, includes actions and procedures aimed at managing, harvesting, protecting, conserving, restoring, and using environmental resources and services of a forest ecosystem, with consideration of ecological principles, respecting the interdependence of resources, and maintaining the productive capacity of ecosystems and resources. Under Component 1, the supported sustainable forest management activities include, inter alia, sustainable forest management, forest landscape restoration, national and international certification, and Payments for Environmental Services (PES). Forest-dependent people and enterprises includes all the potential beneficiaries detailed in Table 1. Increased economic opportunities include improved access to key markets and business opportunities that will also help generate increased income and employment. Page 15 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) 22. Selected forest landscapes26 in Mexico refers to a series of regions considered as priority for productive forest management and for their potential to provide ecosystem-services, as well as areas that connect these areas or complement them. These areas have also been identified for their potential to develop low carbon activities, address drivers of deforestation (including linkages to the agriculture sector), and increase forest productivity. The Project will focus support within these key priority areas indicated in Map 1, which are located within 19 states, namely Map 1. Project’s selected landscapes Campeche, Chiapas, 1 Chihuahua, Coahuila, Durango, Estado de México, Guerrero, Hidalgo, Jalisco, Michoacán, Nayarit, Nuevo León, Oaxaca, Puebla, Quintana Roo, San Luis Potosi, Tamaulipas, Tlaxcala, and Veracruz. However, the ISFL emission reduction program jurisdiction (the investment areas where emission reductions will be generated) is currently being defined and will be confirmed at the Project’s outset. The GOM has proposed that the ISFL program’s investment areas also be located within these same 19 states, excluding the Forest Carbon Partnership Facility (FCPF) ER program states of Campeche, Chiapas, Quintana Roo, and Jalisco. These states provide vital environmental goods and services and are recognized for their high levels of biodiversity, including keystone species and valuable endemism. For example, Durango and Chihuahua are responsible for 46.5% of the country’s timber production and provide vital water resources that are currently impacted by deforestation and forest degradation. B. Project Beneficiaries 23. The Project’s primary beneficiaries include land owners and those in possession of forest lands, including: (i) communities and ejidos, with collective ownership rights; (ii) small landholders; and (iii) clusters of communities or smallholders who have formed associations, including community forest enterprises and private or mixed forest enterprises (see Table 1). Project beneficiaries also include people who depend on forests for their livelihood and who do not necessarily own land, such as tenants, settlements, and common interest groups. The Project aims to support a total of 370,015 beneficiaries. 26 In the World Bank Group’s Forest Action Plan, a landscape approach is defined as an approach that ¨provides the organizing principle for investing in and managing land, based on rational spatial planning and socioeconomic considerations.” Page 16 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Table 1. Project Beneficiary Groups Ejidos and In Mexico, “Comunidades” (or ―agrarian communities) are long-standing rural population centers that have comunidades been given formal ownership of their traditional or customary lands. “Ejido” refers to a portion of land that has been titled to a rural population nucleus that was formed more recently or relocated from another area. Community members with full ownership rights are legally recognized as ejidatarios or comuneros.. Both types of community groups are governed by a similar structure, with an “Asamblea” of all ejidatarios or comuneros, a “Comisariado Ejidal” or “Comisariado de Bienes Comunales” and a “Consejo de Vigilancia.” It is estimated that 9,000 communities and ejidos have a forest area of 300 hectares or more, of which about 3,000 are engaged in forestry as their main activity. Small People who own an area of forest land of any kind not exceeding 800 hectares outside a community/ejido area. landholders Avecindados People who live in a community or ejido territory, who are not ejidatarios or comuneros. Producer Two or more ejidatarios/comuneros or ejidos/comunidades or small land-holders that are dedicated to the Associations same productive activity, and choose to combine efforts under a cooperative contribution scheme in benefit and of their ejido(s)/comunidad(es). Organizations Community Legally established and recognized of an ejido or comunidad organization that is dedicated to a productive Enterprises activity and follows a formally established business structure and purpose. Forest Legally established organization that is dedicated to a productive activity and follows a formally established enterprises business structure and purpose. 24. Women’s participation in community forest management programs in Mexico is very low. On average, less than 25% of direct beneficiaries are women due in part to the legally established collective land tenure system, as well as governance structures, that tend to benefit men. As a result, some of the main barriers to women’s active participation in community forest management are legal and institutional in nature. Eligibility criteria for these community forestry programs are conditioned on land tenure and women rarely participate in the communities’ governance body. Other barriers to women’s participation include gender norms and access to information and resources. These constraints have been examined under various gender studies, including a World Bank lead behavioral-based analysis.27 Based on these assessments, addressing gender gaps would require removing barriers to women’s ownership and control of assets. Forestry activities that are not necessarily linked to land tenure must be promoted to enhance women’s participation in local governance structures. As such, a key feature of the Project’s design is to target marginalized populations as direct beneficiaries of community forestry programs. The aim is to help remove barriers to managing natural resources and provide these vulnerable groups direct access to finance for these activities. In addition, the Project aims to enhance women’s voice. The Project is aligned with the World Bank’s FY16-FY23 Gender Strategy28 and will contribute to reducing gender gaps in accordance with Pillar 3 of the Strategy - removing barriers to women’s ownership and control of assets. 27 World Bank (2018). Ensuring Gender Mainstreaming in the Design and Implementation of REDD+ Programs. A behavioral approach on the FCPF ER-P benefit sharing model (forthcoming). 28 World Bank. 2015. World Bank Group gender strategy (FY16-23): gender equality, poverty reduction and inclusive growth . Report 102114. Page 17 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) C. PDO-Level Results Indicators 25. The following key results are expected:  Area of forest landscape managed according to defined criteria. Area includes annual new or improved areas under schemes supported under Component 1 that have been verified to comply with defined criteria. Defined criteria are detailed in the Operations Manual and follow CONAFOR´s current Operating Rules and regulations. These criteria include the following activities: (i) PES, (ii) restoration and productive re-conversion, (iii) agroforestry, (iv) certification at all three levels (international, national, and technical audit), (v) timber and non-timber forest management, and (vi) commercial forest plantations. (Target: 393,006 ha)  Share of target beneficiaries that increase their index of forest entrepreneurship by at least one range. Target beneficiaries includes all individuals and institutions included in Table 1. The index will be divided into five levels. The index of forest entrepreneurship is preliminarily comprised of the following levels: (i) establishment and organization: existence of an operational and established forest enterprise (structure, governance, accounting system); (ii) added value: increase in the number of value chains that the target beneficiary is engaged in by at least one; (iii ) diversification: increase in the number of products sold on the market, i.e., at least one additional product sold in the market, and (iv) production: increase in the production volume by at least a certain percentage. This indicator takes into account improvement at different levels based on each beneficiary’s baseline. (Target: 70%)  Share of target beneficiaries with rating “Satisfied” or above on Project interventions. Share of target beneficiaries considered "satisfied", according to criteria detailed in the Operations Manual and measured by a perception survey. The findings and results from the survey will be discussed with the target beneficiaries along with corrective measures (feedback loop). Target beneficiaries includes the individuals supported under Component 1 and included in Table 1. Project interventions includes all the activities under Component 1 (see Annex 1, Table 1.1). (Target: 80%) III. PROJECT DESCRIPTION A. Project Components 26. Component 1. Strengthening forest management, conservation, and business development. (IBRD US$56 million, Government US$119 million). This component will finance forest sector demand-driven incentive programs that aim to support local communities, other landholders, and forest dependent people in sustainably managing forests, as well as increasing economic opportunities from forest resources. Under existing forest management incentive programs, forest dependent people and enterprises receive government incentives directly in the form of grants, and matching grants for activities ranging from enhancing forest community social capital (including activities to strengthen capacities) and organization to conservation and restoration to increasing market access. The Project will help align these incentive programs to support beneficiaries in sustainably exploiting forest resources and improving their livelihoods. In particular, this support will be focused on three sub-components: (1.1) Forest entrepreneurship and social capital, which will support forest owners, forest social organizations, regional forest promotors, community-to-community knowledge exchange networks, and local community forest promotors in implementing projects to improve their governance, landscape planning and to generate knowledge to improve production processes; (1.2) Sustainable management of forest landscapes, which includes activities to plan for and implement silviculture, conservation, and restoration practices. This includes support for production of timber and non- timber products, forest certification (both national and international certification, and including technical audits of Page 18 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) forest management plans), and commercial forest plantations, as well as conservation schemes such as Payment for Environmental Services (PES), restoration, and agro-forestry activities. This sub-component will ensure connectivity between landscape activities, for example: (i) promoting PES in certified forest management areas, (ii) convergence of restoration and PES in degraded areas with a high potential of ecosystem services provision, (iii) convergence of restoration and commercial plantations in areas with commercial production potential, and (iv) connecting PES corridors between production areas with high potential of ecosystem services provision. In addition the component will provide support for management certification under national and international certification schemes; and (1.3) Transformation and access to markets, which supports forest communities and landowners to more fully reap the benefits from forest landscapes, through support for all phases of the production chain, formation and strengthening of community forest enterprises, including diversifying activities and products, value addition, process and technological modernization and transfer, market access, and chain of custody certification. These programs aim to increase competitiveness and diversify the production potential of forest resources. 27. In addition, Component 1 incentive programs will be targeted to address drivers of deforestation and degradation and specifically include the frontier of forest to agriculture and other land uses, as well as increasing the economic value of forest and forest activities. The forest management incentive programs, supported under Component 1, will provide assistance to forest dependent people and enterprises in increasing their business opportunities and sustainably managing forests, by, inter alia: (i) assessing and implementing technological improvements in production processes, such as addressing outdated machinery and technological lags in the wood industry; (ii) market analysis, to identify the best ways to introduce products into the market; (iii) support forest- dependent peoples and enterprises in developing sustainable forest management tools (manuals, guides, approved methodologies or criteria for monitoring, management inventories, wood classification, among others) to make operating procedures more efficient. This component will also seek to address gender and social inclusion issues, and ensure the participation of women and youth. 28. Component 2. Institutional Development and Facilitation Support. (BioCFplus-ISFL grant US$10 million) BioCFplus-ISFL funded activities under Component 2 seeks to support the preparation of a BioCF ER program. Specifically, the grant funded activities aim to prevent degradation and ensure landscape restoration, as well as foster greater private sector engagement in forest landscapes, by improving the quality of extension services and technical assistance provided to investment beneficiaries under Component 1. This includes providing capacity building and other support to CONAFOR and beneficiaries to better align CONAFOR’s incentive programs with other sectors (for example, with the agriculture sector) and increase beneficiaries access to private and public sector finance and value chains. This support will help pilot cross-sectoral investment plans and private sector approaches that can then be implemented and scaled-up under Component 1. In addition, BioCFplus-ISFL funding would help the government meet ISFL requirements through Measurement, Reporting and Verification (MRV) investments in the Agriculture, Forestry, and Other Land Use (AFLOU) sector. 29. Sub-component 2.1 Strengthening CONAFOR and Cross-sector Coordination. This component will finance goods, technical assistance, and operating costs to (i) help strengthen CONAFOR’s coordination with other agencies that play a role in landscape management, including the Ministry of Agriculture (SAGARPA), Ministry of Environment (SEMARNAT), National Institute of Ecology and Climate Change (INECC), National Institute of Geography and Statistics (INEGI), National Biodiversity Commission (CONABIO), National Women’s Institute (INMUJERES), Federal Environmental Protection Agency (PROFEPA), State Governments, Municipalities, Academia, Civil Society (e.g., by establishing joint investment plans with SAGARPA in areas that are eligible for agriculture and forest subsidies to better align landscape investments, by formalizing arrangements with INECC for Agriculture, Forestry, and Other Land Page 19 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Use (AFOLU) monitoring); (ii) support improvements in the enabling environment for sustainable forest landscape management (e.g., review and update the administrative framework to promote sustainable forest management, modernizing schemes for regulating forest-related productive processes, among others); (iii) support CONAFOR in developing financing mechanisms suited to the needs and conditions of private forest enterprises (e.g., a green credit/guarantee line); (iv) support CONAFOR in developing new PES modalities focusing on support to environmentally-friendly forest production and restoration of degraded landscapes through support to agroforestry and silvopastoral practices (in collaboration with SAGARPA), in improving the effectiveness of the national PES program, and in developing new local PES mechanisms; (v) provide needed investments in monitoring, reporting, and verifying GHG emissions and support the longer-term sustainability of CONAFOR’s Forest Monitoring Technical Unit, in particular, by developing a GHG inventory of all AFOLU categories to meet ISFL emissions reduction program requirements; and (vi) provide specialized technical support to CONAFOR’s departments through a Technical Support Group (Grupo Técnico de Apoyo, GTA), including the Sustainable Forestry Production Development, Forest Environmental Services, Forest Restoration, Forest Information and Education, Training and Forest Culture departments. 30. Sub-component 2.2. Strengthen Beneficiary Advisory Services. In addition, grant funding would finance technical assistance and operating costs to improve the quality of extension services and technical assistance provided to beneficiaries. This facilitation support will be focused on areas currently not supported under CONAFOR’s incentive programs, and includes developing: (i) tools and materials to strengthen forest landscape management; (ii) seminars and workshops to strengthen beneficiary capacities; (iii) studies on technological improvements in production and commercialization processes; (iv) specialized consultancies, including on biomass use; and (v) a team of regional specialists, located in priority hotspots, to provide specialized regional guidance and technical support to beneficiaries under Component 1 and other relevant stakeholders. B. Project Cost and Financing 31. The proposed operation provides Investment Project Financing in the amount of approximately US$185 million, with financing from an IBRD loan of US$56 million, a BioCFplus-ISFL grant of US$10 million,29 and a Government contribution of US$119 million. Nacional Financiera (NAFIN) will act as the Borrower’s financial agent, managing loan disbursement processes and providing overall implementation support and oversight. Table 2. Financing Plan (US$M) IBRD Trust Counterpart Project Components Project cost Financing Funds Funding Component 1. Strengthening Forest Management, Conservation, and 175.00 56.0 119.0 Business Development Component 2. Institutional Development and Facilitation Support 10.0 10.0 Total Costs 185.0 56.0 10.0 119.0 29 Comprised of two single donor trust funds: Portion A of the Grant financed under TF0A6448 (US$3.35 million) and Portion B of the Grant financed by TF0A6533 (US$6.65 million). Page 20 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) C. Lessons Learned and Reflected in the Project Design 32. The World Bank and the Government of Mexico have collaborated on forest conservation and management for over two decades. This partnership has evolved from an emphasis on institutional strengthening and community forest management to a focus on integrated forest landscape management and inter-sectoral coordination. The design of the proposed Project incorporates lessons learned from previous Bank-supported forestry projects, including the Community Forestry Project (PROCYMAF I and II, 1997-2003 and 2004-2008), the Environmental Services Project (PSA, 2006-2011), the Forest and Climate Change Project (2012-2018), and the Coastal Watersheds Conservation in the Context of Climate Change Project (2013-2019). Key lessons learned that have been incorporated in the Project design include: (i) the importance of strengthening social capital, (ii) the recognition of the value of collective governance and traditional institutions, (iii) the opportunities to implement a variety of interventions at the forest-landscape level in order to better address drivers of deforestation and degradation, (iv) the potential and limits of technical assistance provided by extension activities, knowledge networks and private service providers, and (v) the importance of strong inter-institutional arrangements. In addition, the proposed Project embraces the importance of mainstreaming productivity within forest landscape management activities as a means of generating income while promoting sustainable forest management and conservation. IV. IMPLEMENTATION A. Institutional and Implementation Arrangements 33. The detailed implementation arrangements are presented in Annex 2. CONAFOR has a robust implementation capacity and long-standing experience with Bank-financed operations. The Project will be implemented through existing CONAFOR structures, and will strengthen existing channels of cross-sectoral coordination. A Steering Committee and an Operational Committee will be created within CONAFOR. CONAFOR, with Project support, will also contract specialists with expertise in areas where CONAFOR plans to develop and implement a strategic intervention, such as productive restoration and forest enterprise development. Higher-level government coordination will take place in the context of the existing Inter-Secretarial Commission on Climate Change. At the local level, day-to-day implementation and monitoring of Component 1 will be undertaken by CONAFOR field offices in collaboration with state governments in line with their regular mandate. Inter-institutional collaboration arrangements with SAGARPA, SEMARNAT, and other federal and sub-national agencies are also described in Annex 2. B. Results Monitoring and Evaluation 34. During implementation, CONAFOR will be responsible for overall Project monitoring. Progress will be measured against the Results Framework PDO and intermediate indicators (see Annex 1). The Monitoring and Evaluation plan will include at least two formal evaluations during Project implementation (at midterm and final review) and the parameters will be outlined in the Operations Manual. The final review will assess the achievement of indicators, sustainability of results, and identify lessons learned. PDO Indicator 1 covers the strengthening of sustainable forest landscape management, while PDO Indicator 2 captures the increase in economic opportunities. PDO indicator 3 measures the satisfaction of Project beneficiaries. In addition, a set of intermediate indicators for each component has been selected. PDO and intermediate indicators were selected to balance the number of results areas that are considered critical to measure progress and to maintain a streamlined design of the Project, that is, practicality and manageability. The RF includes the indicators, their unit of measurement, baselines, annual targets, Page 21 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) data sources, and methodology for calculation of annual progress against the indicators as well as frequency of data collection. CONAFOR is responsible for data collection and reporting. 35. RF indicators have been designed to also report on ISFL-supported achievements, in line with the ISFL methodological framework30: (i) Output indicator 1.1 Total land area brought under sustainable management plans as a result of ISFL support; (ii) Outcome indicator 1.5 Land users who have adopted sustainable land management practices (% women) as a result of ISFL support; (iii) Outcome indicator 1.4 Land area reforested or afforested in ISFL program areas (practice iii, Plantations and re-/afforestation); and (iv) Output indicator 1.2 Total land area under sustainable landscapes. 36. In addition to the RF, five indicators will be reported to ISFL (i) Output 1.3 Land users who have received training for improving land management (% women); (ii) Output 1.5 Reforms in forest and land use policy, legislation or other regulations as a result of ISFL support; (iii) Output 1.6 Government officials who have received technical training on ISFL interventions (% women); (iv) Output 1.7 Number of government institutions provided with capacity building to improve land use management; and (v) Outcome 2.2 Number of people involved in income generation activities due to ISFL support (% women). CONAFOR will be responsible for their monitoring. 37. CONAFOR has developed strong monitoring and evaluation systems and capacity, including a Management and Information Analysis System to track the applications and incentives given by CONAFOR (known as SIGA). Through FIP, IBRD, and Norwegian support, CONAFOR has also established a MRV system (an essential piece in the REDD+ scheme) to support monitoring and reporting under an upcoming FCPF Emission Reductions Program. The Project will help build on this MRV support, which is currently monitoring Land Use, Land Use Change, and Forestry (LULUCF) sectors by CONAFOR, and provide needed investment in conducting a GHG emission inventory and strengthening GOM MRV systems for the AFOLU sector through inter-institutional coordination. C. Sustainability 38. The Project is central to CONAFOR’s mission and the forests agenda is considered a priority by the current administration. Although a change in administration will occur in the early stage of implementation, the proposed operation is likely to remain a priority for the Borrower over the long term as it is central to Mexico’s rural, social and environmental agenda and to its international visibility and commitments for climate change, conservation and poverty reduction. D. Role of Partners 39. Program investments seek to strengthen inter-sectoral collaboration in forest landscapes. CONAFOR has fostered coordination with key public entities involved in sustainable rural development, which have been formalized in Collaboration Agreements (CA). The proposed Project will reinforce coordination with these government agencies, linked with the forestry sector. For example, CONAFOR and SAGARPA signed a CA in December 2016, and with Program on Forest (PROFOR) grant funding31, they are currently working to define operational instruments, including joint investment criteria, to implement this inter-sectoral agreement. A working group consisting of SAGARPA, CONAFOR, SEMARNAT, and CONABIO (National Biodiversity Commission) representatives was established in May 2017 to oversee the CA’s implementation and review the allocation of agriculture and livestock subsidies in territories 30 ISFL methodological framework might be consulted here: https://www.biocarbonfund-isfl.org/methodology. 31 This is implemented with support by the International Union for Conservation of Nature (IUCN). Page 22 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) that are eligible for both forestry and agriculture programs, in particular, to ensure agriculture and livestock investments do not lead to deforestation. The Project will play a critical role in helping ensure and enable the implementation of these CA joint operational instruments, in accordance with sustainability criteria that will include spatial exclusion criteria to ensure landscape restoration, as well as support interventions in areas that are eligible for agriculture and forest subsidies to better align landscape investments. 40. With respect to greenhouse gas accounting, CONAFOR is the lead agency to account for land use, land-use change and forestry (LULUCF) through its National MRV system. CONAFOR will formalize coordination arrangements with INEGI and INECC to further support this LULUCF monitoring, and with INECC and the Agri-food and Fisheries Information Service (SIAP) to monitor emissions from the agriculture sector. 41. At the regional level, CONAFOR, with the support of Forest Sector Social Organizations (OSSF), provides needed support to ejidos and communities. OSSF have been successful in providing such technical assistance and support to these groups and given this success, would be a key actor in the Project’s implementation. In addition, as part of CONAFOR’s strategy to align long term capacity building with forest sector development activities, targeted capacity building will be provided through technical agents as an integral part of each of the Project’s activities. 42. State governments would play a key role in the implementation of Project activities and particularly the coordination of the public subsidies from various government programs at the state level. Agreements would be signed between CONAFOR and the state governments for the implementation of the Emission Reduction Program (ER P). Currently states are developing working groups to oversee Project activities, and these groups will play a key role in overseeing these activities. 43. Lastly, private sector enterprises will be a strategic partner for the Project. Under the Government’s forest program, strategic alliances have been established to: (i) pilot a zero net deforestation value chain agreement in deforestation hot spots, which include some of the largest private sector players in the country (Bimbo and Coca Cola), and (ii) further engage private companies to invest in PES schemes. These efforts would be consolidated and expanded as part of the ISFL/IBRD Project. V. KEY RISKS A. Overall Risk Rating and Explanation of Key Risks 44. The overall risk of the Project is considered moderate. While the proposed Project builds on over two decades of engagement between the GOM and the Bank, and incorporates lessons learned from this engagement into project design, there are risks related to future uncertainties, mainly the political climate (Political and Governance). The Project is fully aligned with CONAFOR’s strategies and programs and Government commitment to the Project is high. However, upcoming federal elections in 2018 and changes in agency personnel could result in implementation delays. To mitigate this risk and minimize delays resulting from any turnover in staff, the Project team will work with the new government transition team to foster continued high-level political support. In addition, capacity building will be provided as needed and tools and documentation to ensure the transfer of in-house knowledge will be developed. In this respect, the Project is expected to help bridge the current political and technical engagement on forest management with the transitional government and the incoming administration. Certain challenges may arise from the security situation in remote rural areas of the country. Appropriate analysis of the situation and mitigation measures, particularly those related to Project supervision, will be taken. Page 23 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) VI. APPRAISAL SUMMARY A. Economic and Financial Analysis 45. The Project supports a broad range of activities in a large and diverse area. Models were developed for each of four main land use transitions the Project is expected to induce: (1) unmanaged forests with productive potential converting to sustainable forest management (SFM); (2) managed or unmanaged forest with conservation potential converting to conserved forest with PES; (3) minimally managed productive forest to well-managed productive forest by Community Forest Enterprises (CFE) with stronger business and entrepreneurial capacities; and (4) land with no forest cover with productive potential or low opportunity cost agricultural land to commercial plantations (CPs). Each of the transitions was estimated to be potentially profitable for participants under a broad range of conditions, with net benefits ranging from about US$1100/ha for SFM to about US$200/ha for participating in PES.32 As participants will be free to choose which activities to undertake, it can be assumed that they will generally pick those that they believe are most likely to bring them net benefits given their conditions and constraints .33 46. As the precise mix of activities that will be implemented cannot be known in advance, a land use change scenario prepared by CONAFOR was used to estimate the potential overall results of the Project. This scenario is intended to be realistic, but conservative. It projects total land use change covering 719,000 ha, including 317,000 ha of SFM, 390,000 ha under PES, 3,500 of commercial plantations, and 40,000 ha of forests whose CFEs are improved. 47. Under these assumptions:  Benefits to landholders. Collectively, participating ejidos and communities would be better off by about US$270 million. The bulk of these benefits (over 60 percent) would be generated from SFM, followed by participation in PES (about 30 percent) and improvements to CFEs (7 percent).  National benefits. The country would gain about US$160 million if carbon is not valued, or US$210 million if carbon is valued at market prices, but these are certainly underestimates as they do not include any other environmental services generated by forests, such as hydrological protection. The bulk of these national benefits would again be generated by SFM. PES appears to impose net costs if carbon isn’t valued and to make only a small contribution if carbon is valued at market prices, but, again, this omits the value of the other environmental benefits that forests protected by PES provides.  Global benefits. When the large amounts of carbon emissions that would be avoided and of carbon that would be sequestered thanks to new tree planting are valued at the social value of carbon (SVC), global benefits are expected to be very substantial, ranging from about US$650 million (at low SVC) to almost US$1400 million (at high SVC). Note that these are also underestimates, as they omit any benefits from improved biodiversity conservation. 48. Project costs. In PV terms, total Project costs are estimated to be US$141 million, or US$133 million from the country’s perspective (omitting costs financed by the grant). The estimated benefits exceed costs, usually by a substantial margin. Nationally, the NPV is about US$34 million if carbon benefits are omitted (BCR of 1.26), and about US$80 million if they are valued at market price (BCR of 1.6). Globally, the estimated NPV ranges from about US$460 at low SVC to about US$1,100 million at high SVC. 49. Sensitivity analysis. At zero carbon prices, national benefits would remain positive as long as per hectare benefits and participating area do not decline by more than 15 percent; at market carbon prices, national benefits would remain positive as long as they do not decline by more than 35 percent. Thus, the estimated results are quite 32All results in this section are stated as the present value of expected net benefits over 30 years, discounted at 10 percent. 33Not all activities can be implemented everywhere. For example, SFM is targeted at areas with economically viable productive potential, while PES is targeted at forests with little or no productive potential in areas that are important for environmental services. Page 24 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) robust to even large swings in assumptions. It is also worth emphasizing that this understates the robustness of results, as significant benefits could not be estimated. B. Technical 50. The Project helps ensure alignment of CONAFOR’s demand-driven programs in forest areas, as well as alignment between CONAFOR and SAGARPA programs in jointly-managed forestry and agriculture territory. Hence, this integrated land management approach in forest landscapes explicitly includes forest management – timber and non- timber - as well as sustainable agriculture in forest lands. The objective of enhancing entrepreneurship can translate to actual on-the-ground community and land owner led investments or be directed toward establishing and strengthening the political and governance enabling framework for such investments. Thus, community participation, local governance structures for production and productivity, and benefit-sharing models are specifically included. 51. Component 1 supports existing demand driven programs in a way that allows for i) program alignment within priority areas, and ii) better geographic targeting of priority programs. This would allow for enhanced benefits for forest dependent people and enhance the value of forests. Over the past two decades, CONAFOR, with Bank support, has gradually improved existing programs. The Project would continue this collaboration and improvement to ensure technical enhancements and efficient budget allocation. Component 2 focuses on improving CONAFOR‘s capacity to collaborate with other agencies, on promoting cross-sector coordination, and on improving the quality of technical assistance services available to beneficiaries. Thus, the proposed IBRD/ISFL operation is designed in a manner that allows to strategically allocate both IBRD resources and ISFL grant support. The proposed operation is also fully complementary to the existing forest, REDD+ and landscapes portfolio as described in Annex 5. Overall, the proposed Project continues and scales up efforts and results of past and existing projects and focalizes World Bank engagement towards supporting productive forest landscapes under sustainability criteria. Ultimately, the operation seeks to provide the necessary inputs for the development of an ISFL Emission Reductions Program, which recognizes emission reductions achieved via landscape level investments. C. Financial Management 52. The World Bank conducted a Financial Management (FM) Assessment in accordance with OP/BP 10.00 and the Guidelines for Assessment of Financial Management Arrangements in World Bank-Financed Projects. The Project entails complex implementation arrangements and flow of funds and information involving numerous actors (beneficiaries), including CONAFOR as the implementing agency in charge of Project components and Nacional Financiera (NAFIN) as the financial agent, which together will have to coordinate to conduct some of the FM tasks such as preparing financial reports, disbursement requests, and verification of expenditures financed via advance payment. The moderate FM risk that arises from this complex process is mitigated through various mechanisms which include (a) the country’s strong overall country public FM arrangements; (b) the fact that the Project is governed by a set of well-defined operating rules which include strict eligibility criteria for selecting beneficiaries and clear rules for transferring the money, documenting the Program’s expenditures, and for the Program’s oversight; and (c) CONAFOR’s long-standing experience in working with the World Bank and the fact that its FM Unit is well staffed with adequate segregation of functions. The World Bank will conduct periodic FM supervision missions and training aimed at building capacity. The Project will be annually audited by an acceptable audit firm, in accordance with terms of reference acceptable to the World Bank. Detailed FM arrangements are described in Annex 2. Page 25 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) D. Procurement 53. Procurement for the Project will be carried out by: (i) CONAFOR under Component 2 (Institutional Development and Facilitation Support), and (ii) by activity beneficiaries under Component 1 following community procurement processes. The Project will be implemented in accordance with the WB’s Procurement Regulations for IPF Borrowers - July 2016, revised November 2017 (“Procurement Regulations”). CONAFOR will be responsible for all procurement and contracting related queries and processing of the Project, including management and compliance with fiduciary requirements on activities implemented by beneficiaries. The procurement activities will be managed and executed by the same staff as that of the implementation of the REDD+ Readiness (P120417) and Mexico Forests and Climate Change (P123760) Projects, and will receive close support from Nacional Financiera (NAFIN), the government fiduciary agent. 54. A Project Procurement Strategy for Development (PPSD) was prepared and identified the appropriate selection methods, market approach and type of review by the WB. The Borrower has also prepared an acceptable Procurement Plan to be included in the new Systematic Tracking of Exchanges in Procurement system (STEP) covering at least the first 18 months of Project implementation. Most Project activities will be carried out via the Request for Bids (RFB) and Request for Quotation (RFQ) methods for the purchase of goods and non-consulting services, respectively. The contracting of Consulting Services for firms will be carried out via the methods described in Annex 2. 55. The World Bank's Standard Procurement Documents will govern the procurement of World Bank financed Open International Competitive Procurement. For procurement involving National Competitive Procurement, the harmonized procedures and documents agreed with the Secretaria de Fundión Pública (SFP) and The Interamerican Development Bank (IDB) will be used. Other simplified documents may be agreed with the Bank. 56. Procurement under Component 1 (activities agreements). As mentioned above, for Component 1 there will be different Procurement arrangements, with beneficiaries implementing procurement, following the arrangements included in Annex 3 and the Project Operational Manual. These procurement arrangements follow procedures already approved by the Bank for previous Projects implemented by CONAFOR. 57. Overall Risk Assessment. Procurement activities to be carried out for this Project are not complex and are of small amounts. In view of the number of procurement processes to be carried out by communities and the different actors supported under Component 1, located in rural areas with difficult access, procurement risk is rated moderate. Mitigation actions are described in Annex 2. E. Social (including Safeguards) 58. The project is classified as Category B given that the proposed investments are not likely to have significant negative impacts on human populations or cause resettlement. The Project, rather, is likely to have positive impacts on social development, given its inclusive approach toward women, the most vulnerable population, and indigenous peoples. Further, the Project will incorporate relevant social safeguard principles. 59. CONAFOR has extensive experience working with and ensuring the inclusion of the Project’s target groups. Significant efforts have been made to incorporate these different target groups, and enhance CONAFOR’s programs and operations in terms of providing support to indigenous populations and other local communities in a socially and culturally appropriate manner. To best address these groups’ needs, different governance mechanisms, as well as different processes of participation, the Project will (i) make use of differentiated efforts and culturally appropriate Page 26 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) communication tools to include more vulnerable groups, women, and indigenous peoples in demand-driven programs, and (ii) implement specific activities to assist in the process of developing land use plans and community strategies that will serve as a guide in assessing the feasibility of investments and ensure an equal distribution of the Project´s benefits. 60. Indigenous Peoples (OP/BP 4.10). This policy is triggered as the Project will be implemented in priority forest areas, which include areas with indigenous peoples, one of the Project's beneficiary groups. CONAFOR carried out a full-scale Social Assessment for the forestry sector34 under the Forest and Climate Change Project (P123760), as well as a Strategic Environmental and Social Assessment (SESA)35 for the National REDD+ Strategy, which were disseminated through an extensive participatory process and are still considered valid given the nature of the activities to be financed under the Project. Given the relevance of these assessments, they will provide an important basis for the Project. 61. Further, to meet the requirements of OP 4.10 and ensure that any potential negative impacts of interventions are avoided, an Indigenous Peoples Planning Framework (IPPF) was prepared, which has been consulted and disclosed on the Bank’s and client’s website on November 22, 2017, with a revised version published on both websites on December 19, 2017. The IPPF identifies any potential impacts on indigenous peoples by the Project and provides recommendations on how to screen for and avoid impacts. It contains specific guidelines on culturally adequate consultations, as well as measures to ensure joint planning, capacity building and culturally-inclusive implementation of activities. Furthermore, it highlights that (i) training of Project managers, (ii) inclusion of indigenous peoples in decision-making and as technical promoters, as well as (iii) awareness raising regarding the specific needs of indigenous communities in the intervention areas will be continuously promoted by the Project. In addition, the IPPF: (i) establishes guidelines and criteria for the preparation of Indigenous Peoples Plan(s), to be developed when deemed applicable, in line with Annex B of OP 4.10 and through culturally-appropriate consultations with relevant indigenous peoples and gender working groups and representative bodies; (ii) includes the principles and objectives of OP 4.10, which are also included in technical assistance activities planned; (iii) establishes actions for the culturally-appropriate inclusion of women and indigenous peoples in the Project and for ensuring the mitigation of potential negative impacts and the increase of benefits of the Project; and (iv) contains social criteria to be incorporated in the Monitoring and Evaluation Framework of the Project. 62. Involuntary Resettlement (OP/BP 4.12). No involuntary resettlement is expected to result from any activities financed by the Project. The Project also does not anticipate any land acquisition and all investments financed under this operation will be carried out on private land, owned by the Project’s beneficiaries (e.g., ejidos, communities, small land holders, among others). 63. The Project, however, will invest in natural resource management activities (agroforestry, soil restoration, tree planting, etc.), some of them to be implemented in protected areas (PA) in accordance with PA management plans and under close supervision. As such, there might be cases where use and access to resources may be restricted due to changes in forest management and resource management plans. OP 4.12 is therefore triggered and a Process Framework (PF) has been developed as a means of mitigating any potential adverse impacts that may emerge from restrictions of access to natural resources. The PF also includes a screening mechanism to exclude any interventions that could potentially lead to land conflicts and provides clear guidance on handling of conflicts, in accordance with 34 http://documents.worldbank.org/curated/en/389701468057259099/pdf/IPP5310V20REVI00Box385192B00PUBLIC0.pdf . 35 https://www.gob.mx/cms/uploads/attachment/file/173696/Reporte_SESA__FINAL_.pdf. Page 27 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) CONAFOR’s operational rules (reglas de operación). The PF was consulted, and disclosed on the Bank’s and client’s website on November 22, 2017. 64. The preparation of the IPPF and PF took into consideration lessons learned from prior IBRD projects, including the Mexico Forest and Climate Change Project (P123760), Environmental Services Project (P087038), Community Forestry II (PROCYMAF II) (P035751), Mexico Community Forestry I (P007700), and REDD+ Readiness and REDD+ Emission Reductions Program (P120417 and P162749). These projects have contributed to building safeguard capacity in CONAFOR and have produced a series of frameworks, safeguards instruments, and manuals to promote best practices in social and environmental safeguards, including forest and soil management as well as biodiversity conservation practices at the national and local levels, and with beneficiaries. F. Environment (including Safeguards) 65. The Project is classified as Category B given that the proposed investments and the Project, more broadly, are likely to have a positive impact on forest conservation. In addition, all capacity building activities (e.g., related to technological improvements) will incorporate relevant safeguard principles and Environment, Health and Safety (EHS) best practices (particularly those related to forest and non-forest wood activities). 66. OP/BP 4.01 Environmental assessment. CONAFOR carried out a full-scale Environmental Assessment for the forest sector36 under the Forest and Climate Change Project (P123760), as well as the SESA, that remain valid and have been used as a baseline for this Project. Given the successful safeguard management carried out during the implementation of the Forest and Climate Change Project, the related Environmental Management Framework (EMF) has been updated to reflect the new activities and beneficiaries of the proposed Project. The EMF includes an exclusionary list, and a screening plan for activities to identify, avoid and mitigate any potential negative environmental, health, safety, and social impacts associated with Project activities. The EMF also incorporates recommendations to include health and safety principles within CONAFOR´s operational rules, as well as to assure site specific safeguards compliance. 67. The updated EMF takes into account the potential impact from Project activities. The proposed Project interventions are not expected to cause significant negative impacts, but rather are expected to have positive impacts on forest management and conservation. The main potential negative impacts identified by the EMF might arise from interventions supporting plantations. These interventions could lead to soil contamination through excessive use of pesticides and fertilizers, erosion due to inappropriate or excessive use of machinery and equipment, damage to biodiversity with the integration of exotic species or promotion of monocultures, technical advisors’ and beneficiaries’ lack of adequate land management experience, and increased worker accidents due to a lack of personal protection equipment and inadequate working conditions in areas of felling and sawing, or while combating forest fires. The EMF provides the necessary recommendations to mitigate these potential impacts and measures, in accordance with CONAFOR’s operational rules, to ensure sound safeguards compliance during implementation. The updated EMF was consulted and disclosed on CONAFOR’s website and the Bank external website on November 22, 2017 and revised on November 24, 2017. 68. Natural Habitats OP/BP 4.04. This policy is triggered given that some Project activities will be implemented in natural habitats, including Protected Areas. These activities could include forest management and conservation interventions, and could impact environmental and ecosystem services that natural habitats provide. The EMF 36 http://documents.worldbank.org/curated/en/601141468045049280/pdf/E28800V10REVIS00Box385192B00PUBLIC0.pdf . Page 28 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) therefore addresses issues related to the exploitation of non-timber products, natural habitats and ecosystem services, and potential Project impacts. Specifically, the EMF introduces appropriate screening criteria to ensure that impacts on natural habitats are properly evaluated and highlights that Project activities or financing must not involve significant conversion of natural habitats. 69. Forests OP/BP 4.36. This policy is triggered as the Project will be implemented in forest landscapes. However, as the Project promotes sound forest management practices, overall impacts are expected to be positive. A screening mechanism was incorporated in the EMF to ensure that any potential small scale, negative impacts on forests and forest dwellers will be mitigated. Further, all activities supported, including technical assistance activities, will follow the principles of the OP, Bank policy, EHS Guidelines, CONAFOR´s operational rules, and national policies. 70. Pest Management OP 4.09. The Pest Management policy is triggered as the Project will finance timber forest products, tree nurseries and other forestry activities which might include the use of pesticides and fertilizers. Reforestation activities could also trigger this policy depending on the methods selected to manage pests. However, the Project will promote integrated pest management and eventually the careful use, storage and disposal of certain non-restricted pesticides to minimize risks to human health and the environment. The EMF contains a specific Pest Management Plan and screening mechanisms to evaluate the use of pesticides, ensuring their responsible management and avoiding and mitigating associated environmental or health impacts. The Plan is in line with sound environmental and human health protection objectives and promotes the use of mechanical and biological alternatives to replace pesticides. A stand-alone pest management plan is not needed. 71. Physical Cultural Resources OP/BP 4.11. This policy is triggered. Although it is not anticipated that the Project will have a negative impact on any sites with the presence of physical or cultural resources, including sites and areas of cultural and religious value to local communities, this policy would be triggered if Project interventions or investments do find physical or cultural resources unexpectedly. The EMF includes provisions regarding how to protect known physical cultural resources and how to address chance finds through CONAFOR’s operational rules. 72. The activities financed under this operation will contribute to climate change mitigation and adaptation across Mexico. As climate models predict that natural disasters will be exacerbated due to an increase in extreme weather events, sustainably managed forests and improved use of land will help reduce vulnerability to climate change and advance both mitigation and adaptation objectives in Mexico. In particular, this operation will contribute to climate change mitigation as follows: (i) Sub-component 1.1 will strengthen forest governance, skills and knowledge in communities and ejidos, which in turn will enable the implementation of best practices for sustainable forest management resulting in the conservation and increase of forest carbon stocks; (ii) Sub-component 1.2 will increase forest area and quality through reforestation, forest management and restoration, PES and agroforestry activities, leading directly to the reduction and sequestration of GHG emissions; and (iii) Sub-component 1.3 will reduce GHG emissions by promoting the use of improved technologies through all the phases of forest production chains. 73. This operation will contribute directly to climate change adaptation through Sub-component 1.2 which will increase the land area and beneficiaries under sustainable and integrated landscape management practices, thereby securing the continuity of forests and their functions, buffering against weather-related forest ecosystem losses and enhancing resilience of the ecosystem against climate impacts. Sub-components 1.1 and 1.3. will contribute to climate change adaptation by i) creating the enabling environment for successful implementation of Sub-component 1.2, and ii) by enhancing the readiness and capacity (resilience) of forest communities to respond to climate induced impacts and economic downturns by strengthening their institutions and enterprises. Page 29 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) G. Other Safeguard Policies 74. CONAFOR has also developed a mechanism (Mechanism for Citizen Attention, MAC) to address complaints, concerns, suggestions, and requests for information from the public.37 This mechanism has been developed in accordance with the Federal Law on Transparency and Access to Public Information and based on principles such as, accessibility, cultural relevance, effectiveness, fairness, transparency and feedback. Citizens can present their concerns or requests via a number of channels (web, email, telephone, and in person). CONAFOR received over 5,208 citizen requests in CY2016. CONAFOR also conducted a survey in 2016 to gauge community satisfaction with the response received / resolution of their concern; 64% rated the service they received excellent; 23% rated their service to be very good; and 13% good. 75. Citizen engagement. The Project explicitly seeks to support engagement of stakeholders and beneficiaries through the use of transparent information, consultative processes, and feedback mechanisms to strengthen Project design, build ownership, and thus, contribute to sustainability and better Project outcomes. Feedback mechanisms have been developed in the Project design to ensure transparency and a continuous dialogue with stakeholders and beneficiaries. Particular attention will be given during implementation to the capacity of CONAFOR to close the feedback loop and report on action taken in this regard. The specific elements of the framework for citizen engagement include (a) access to information and exchange platforms; (b) information campaigns on the Project and call for proposals targeting IPLC, civil society organizations (CSOs), academia, local governments, and media; (c) community participation as a core feature of the Project investments; (d) establishment of a feedback mechanism (MAC) to process complaints, concerns, and questions from stakeholders; and (e) specific third-party monitoring of program activities will be supported annually to ensure transparency and feedback on these activities. The protocol and mechanisms for these citizen engagement framework elements are detailed in the Project’s Operational Manual (POM). H. World Bank Grievance Redress 76. Communities and individuals who believe that they are adversely affected by a World Bank (WB) supported project may submit complaints to existing project-level grievance redress mechanisms or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address project- related concerns. Project affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/en/projects-operations/products-and-services/grievance-redress-service. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org. . 37 http://www.conafor.gob.mx:8080/documentos/docs/35/5113Mecanismos%20de%20Atenci%C3%B3n%20Ciudadana.pdf. Page 30 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) VII. RESULTS FRAMEWORK AND MONITORING Results Framework COUNTRY : Mexico Strengthening Entrepreneurship in Productive Forest Landscapes Project Development Objectives The Project Development Objective (PDO) is to strengthen sustainable forest management and increase economic opportunities for forest-dependent people and enterprises in selected forest landscapes in Mexico. Project Development Objective Indicators Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection Name: Area of forest Hectare(Ha) 0.00 393006.00 Bi-annual reports Review of custom reports CONAFOR landscape managed from CONAFOR according to defined criteria beneficiaries’ databases and CONAFOR´s beneficiary follow-up system (SIGA). Description: The area includes the annual new or improved areas under the schemes supported under Component 1 that have been verified to comply with predetermined defined criteria. The defined criteria is detailed in the Operations Manual and in accordance with CONAFOR´s Operating Rules and regulations in force and include the activities that are grouped in:(i) PES, (ii) Restoration and Productive re-conversion, (iii) Agroforestry, (iv) certification at all three levels, (v) Timber and non- timber forest management, and (vi) Commercial forest plantations. Name: Share of target Percentage 0.00 70.00 Bi-annual reports A panel survey using the CONAFOR Page 31 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection beneficiaries that increase regional specialists reports. their Index of forest entrepreneurship by at least one range Description: Share of target beneficiaries that increase their range in the Index of forest entrepreneurship by having an increment in at least one dimension. Target beneficiaries includes all the individuals and institutions included in Table 1. The index will be divided into 5 ranges. The index of forest entrepreneurship is preliminarily composed by the following elements: (i) Establishment and organization: existence of an operational and established forest enterprises (structure, governance, accounting system), (ii) Added value: increase in the number of value chains that the target beneficiary is engaged in by at least one additional, (iii ) Diversification: increase in the number of products sold on the market, i.e. at least one additional product sold in the market, (iv) Production: increase the production volume by at least a certain percentage measured in measurable unit. This indicator takes account of improvement at different levels based on each beneficiary’s baseline. Name: Share of target Percentage 0.00 80.00 Baseline, mid-term, end Perception survey to a CONAFOR beneficiaries with rating of project selected sample “Satisfied" or above on project interventions Description: Corporate results indicator. Share of target beneficiaries considered "satisfied", according to the criteria detailed in the Operations Manual and measured by a perception survey. The findings and results from the survey will be discussed with the target beneficiaries along with corrective measures (feedback loop). Target beneficiaries includes the individuals supported under Component 1 and included in Table 1. Project interventions includes all the activities under Component 1 (see Table 1.1). Intermediate Results Indicators Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection Page 32 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection Name: Land area under ✔ Hectare(Ha) 0.00 191000.00 Bi-annual reports CONAFOR databases and CONAFOR sustainable landscape SIGA. management practices Land area includes the area (in hectares) of cumulative new or improved practices under the project and according to the definition of the corporate World Bank. It includes the cumulative practices applied, not necessary if they are maintained. Used to report to: (i) ISFL Outcome indicator 1.4 Land area reforested or afforested in ISFL program areas (using practice iii, Plantations and re- /afforestation), and (ii) Output indicator 1.2 Total land area under sustainable landscape. Description: The indicator measures, in hectares, the land area for which new and/or improved sustainable landscape management practices have been introduced. Land is the terrestrial biologically productive system comprising soil, vegetation, and the associated ecological and hydrological processes; Adoption refers to change of practice or change in the use of a technology promoted or introduced by the project; Sustainable landscape management (SLM) practices refers to a combination of at Page 33 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection least two technologies and approaches to increase land quality and restore degraded lands for example, agronomic, vegetative, structural, and management measures that, applied as a combination, increase the connectivity between protected areas, forest land, rangeland, and agriculture land. Name: Forest area brought ✔ Hectare(Ha) 0.00 330750.00 Bi-annual reports CONAFOR databases and CONAFOR under management plans SIGA. Incorporation or re- incorporation of forest areas in hectares under a management plan for timber and non-timber with support from CONAFOR (programa de manejo forestal maderable y no maderable). Used to report to ISFL Output indicator 1.1 Total land area brought under sustainable management plans as a result of ISFL support. Description: Name: Number of Number 0.00 370015.00 Bi-annual reports SIGA reports CONAFOR beneficiaries implementing Page 34 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection sustainable forest management schemes Description: Cumulative number of all individuals supported by the project and implementing any activities under Component 1. Sustainable forest management schemes includes all activities under subcomponents (1.1) Forest entrepreneurship and social capital, (1.2) Sustainable management of forest (1.3) Transformation and access to markets (see Table 1.1 for all eligible activities). Disaggregated by percentage of female and indigenous peoples. Used to report to ISFL Outcome indicator 1.5 Land users who have adopted sustainable land management practices (% women) as a result of ISFL support. Name: Share of target Percentage 0.00 30.00 Bi-annual reports CONAFOR databases and CONAFOR territory that meets the SIGA criteria of innovative landscape level management schemes Description: This indicator reflects the landscape level approach. Target territory refers to the number of properties supported with one or more activities under Component 1 (see Table 1.1). The innovative integrated landscape level management schemes are those schemes under the project that harmonize two or more activities at landscape level. The criteria of harmonized management practices are detailed in the Operations Manual could include, inter alia: (i) PES and certified forest management, (ii) convergence of restoration and PES, (iii) convergence of restoration and commercial plantations, and (iv) connecting corridors of PES between production areas, (v) plan predial (integral property plan) under implementation. The indicator is calculated by dividing (yearly number of properties that meets the criteria of innovative integrated landscape level) by (total number of yearly supported properties under the project). Name: Knowledge products Number 0.00 25.00 Bi-annual reports CONAFOR databases CONAFOR prepared on entrepreneurship and forest management Description: Knowledge products includes all the products, and events supported under Component 2 that meet the criteria outlined in the Operations Manual, including Page 35 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection guides, manuals, documents and studies that enrich the technical assistance. Name: Emissions Reduction Yes/No N Y Year 2 CONAFOR databases, CONAFOR Program prepared and Project records and submitted to the BioCarbon activities Fund Description: This refers to the document detailing the ER-Program, and its operational and financial plans. It will, inter alia, provide details on specific actions that would lead to reducing emissions, the priority geographical areas, the reference level and specific implementation agreements. It is expected to be prepared by 2020. Having an ER program document prepared is an indication that there have been other activities completed such as the strengthening of the National MRV system, the benefit- sharing mechanism designed and the emissions reference level established. Name: Inter-institutional Number 0.00 5.00 Bi-annual reports SNMRV and CONAFOR CONAFOR coordination mechanisms in reports with the evidence of place to improve landscape agreements level governance Description: Interagency agreements in place to have a landscape level governance. The coordination mechanism are the agreements in place between CONAFOR and the institutions relevant at landscape level, namely the Ministry of Agriculture, Livestock, Rural Development, Fisheries and Food (SAGARPA), the ministry of Environment and Natural Resources (SEMARNAT), the National Institute of Ecology (INECC), the National Indigenous Commission (CDI) and the National Women Institute (INMUJERES). Name: Net greenhouse gas Number 0.00 - Baseline, mid-term, end Ex-Ante carbon balance tool CONAFOR emissions 3688424.0 of project EX-ACT; SNMRV 0 Description: Net Balance tons of CO2 equivalent at project end (- reduction). Corporate results indicator. This indicator is at Project level, including all the areas (in hectares) supported under Component 1 (PDO1). Monitoring this indicator includes: (i) determining a baseline (or reference level), (ii) assessing the indicator during Page 36 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Unit of Responsibility for Indicator Name Core Baseline End Target Frequency Data Source/Methodology Measure Data Collection project implementation to determine emission reductions, and (iii) conducting an ex-ante climate impact assessment of the project. To perform these steps and assess project impact, CONAFOR will use two complementary approaches: (1) the National Monitoring, Reporting and Verification System, which allows for comprehensive estimates with adequate levels of accuracy and precision; (2) the tool EX-Act (http://www.fao.org/tc/exact/ex-act-home/en/) to generate ex-ante estimates of greenhouse gases. The first measurement approach (use of SNMRV), will seek to maintain consistency with the accounting approach that is subsequently in the framework of the BioCarbon Fund Program. Page 37 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Target Values Project Development Objective Indicators FY Indicator Name End Target Area of forest landscape managed according to defined criteria 393006.00 Share of target beneficiaries that increase their Index of forest entrepreneurship by at least one range 70.00 Share of target beneficiaries with rating “Satisfied" or above on project interventions 80.00 Intermediate Results Indicators FY Indicator Name Baseline End Target Land area under sustainable landscape management practices 0.00 191000.00 Forest area brought under management plans 0.00 330750.00 Number of beneficiaries implementing sustainable forest management schemes 0.00 370015.00 Share of target territory that meets the criteria of innovative landscape level management 0.00 30.00 schemes Knowledge products prepared on entrepreneurship and forest management 0.00 25.00 Emissions Reduction Program prepared and submitted to the BioCarbon Fund N Y Inter-institutional coordination mechanisms in place to improve landscape level governance 0.00 5.00 Page 38 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Indicator Name Baseline End Target Net greenhouse gas emissions 0.00 -3688424.00 Page 39 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) ANNEX 1: DETAILED PROJECT DESCRIPTION COUNTRY : Mexico Strengthening Entrepreneurship in Productive Forest Landscapes 1. Component 1. Strengthening forest management, conservation, and business development. (IBRD US$56 million, Government US$119 million). This component will finance existing forest sector demand-driven incentive programs (see Box 1.1) that aim to support local communities and other landholders in sustainably managing forests, as well as increasing economic opportunities from forest resources. The supported activities under Component 1 are described in Table 1.1, including the maximum financing and technical assistance support that CONAFOR will provide per activity. These activity amounts will be detailed, as well as updated yearly in the Operations Manual. All forest incentive programs are authorized by CONAFOR, according to CONAFOR Rules of Operation (see Figure 1.1), which are voluntary and provided based on demand. Beneficiaries of these incentive programs are those groups and individuals authorized by CONAFOR to receive subsidies, and include owners and those in possession of forest lands, associations formed between these groups or individuals, forest enterprises, and common interest groups. For several activities, eligibility to participate is restricted spatially (e.g., to areas of high hydrological and/or biodiversity importance in the case of the PES program). When applications exceed available resources, they are ranked according to prioritization criteria (criterios de prelación). The incentive programs are designed to address beneficiary needs associated with all stages of forest enterprise development, from developing social capital, planning, implementation, certification of productive activities, as well as the establishment of an enterprise, provision of market access, and developing innovative payment for environmental services. Activities to strengthen capacities are a considerable part of subsidy support assigned to beneficiaries to ensure adequate technical and administrative implementation of the support. This technical support is provided by certified advisors, who were certified under the ongoing Forest and Climate Change Project. Box. 1.1. Mexico’s forest incentive programs. CONAFOR’s public incentive programs are designed to meet different forest policy objectives and serve as a source of support to Mexico’s forest owners: communities, ejidos, and small landowners. These programs cover a comprehensive range of activities on forest lands and pertain to: social organization, capacity building, land-use planning, sustainable forest management and protection, as well as the extraction, processing, and marketing of forest goods and generation of forest ecosystem services. These programs are demand-driven and are voluntary in nature. Support may be in cash or in-kind and is granted in accordance with Reglas de Operación (operating rules). These rules and guidelines are evaluated and updated on a yearly basis to take into account national and regional priorities, as well as the requirements of forest communities. Under the operating rules and guidelines, beneficiaries must make contributions in cash or in-kind, in an amount that may vary between 5 percent and 50 percent, depending on the program or type of support requested. Forest owners may request participation in one or several programs at the same time. In 2014, 3,871 communities and ejidos, as well as 5,645 small landowners benefited from incentives for voluntary participation in CONAFOR’s programs. Mexico has an excellent record of innovation in public forestry incentives. For example, through Mexico’s Community Forestry Project (PROCYMAF, or Proyecto de Conservación y Manejo Sustentable de Recursos Forestales), the Mexican Government instituted a series of community incentive and advisory support programs in the 1990s to assist communities in the management of forest resources. Another example is the Page 40 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Payment for Environmental Services (PES) program, which, since 2003, has spearheaded the application of economic instruments for forest conservation and the promotion of sustainable forest management practices. Both programs were implemented with support from the World Bank. Figure 1.1. Application, Approval and Implementation Process of activities under Component 1 2. Sub-component 1.1 Forest entrepreneurship and social capital. (IBRD US$3.4 million, Government US$12.4 million) This sub-component aims to strengthen the capacity of beneficiaries and to improve their governance structures to strengthen social and human capital. The beneficiaries under this sub-component are primarily communities, ejidos, and forest sector social organizations. Under this sub-component, local technical advisors will help beneficiaries develop strategic planning actions focused on developing and strengthening productive projects, optimizing processes, conducting seminars to share experiences with other communities, community territorial planning, training community forest advisors, conducting regional studies, and strengthening forest sector social organizations. 3. Sub-component 1.2 Sustainable management of forest landscapes. (IBRD US$42.4 million, Government US$69.6 million) This sub-component aims to strengthen forest cultivation and promote forest management certification of natural forests as well as commercial forest plantations. Activities supported by this sub-component include natural forest management planning, including environmental impact assessments, technical studies to take advantage of timber and non-timber forest products, forest management to maintain natural forests productive potential, technical audits and forest certification, as well as commercial forest plantations, including their establishment and maintenance. 4. In addition, to strengthen management and use of forest resources at landscape level, this sub- component will support conservation, protection, and restoration schemes. This will allow Page 41 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) beneficiaries to conserve and increase natural capital, and diversity their income. Activities to be supported include Payment for Environmental Services (PES), restoration, and agro-forestry activities among others. 5. This sub-component will primarily support integrality of activities, for example: (i) promoting PES in certified forest management areas, (ii) convergence of restoration and PES in degraded areas with high potential of provision of ecosystem services, (iii) convergence of restoration and commercial plantations in areas with commercial production potential, and (iv) connecting corridors of PES between production areas with high potential of provision of ecosystem services. 6. Sub-component 1.3. Transformation and access to markets. (IBRD US$10.2 million, Government US$37 million) This sub-component aims to modernize supply systems, promote transformation and added value of forest raw materials, and improve the access of timber and non-timer products to markets, in an effort to improve forest enterprises’ profitability. Beneficiaries will have adequate organizational development to ensure viability of this support. Activities to be supported include investments in all phases of the productive chain, formation and strengthening of community forest enterprises, including in their administration, production, and commercialization, and chain of custody certification. A specific funding window will be developed to support women-managed productive projects. 7. The forest landscape and enterprise development investments under this component, which have been identified given their potential to address drivers of deforestation and degradation, including the frontier of forest to agriculture and other land uses, are expected to be part of a future ISFL Emission Reduction Program. Specifically, these investments which will generate emission reductions aim to address causes related to the conversion of land uses that are often more lucrative (such as agriculture) by providing incentives for communities to maintain forest landscapes, increased technical and advisory support, and increased economic opportunities. opportunities. The Program will be prepared in the coming year for approval by CY2019, under Component 2 financed activities. 8. Component 2. Institutional Development and Facilitation Support. (BioCFplus-ISFL grant US$10 million) BioCFplus-ISFL funded activities seek to improve the quality of extension services and technical assistance provided by CONAFOR to investment beneficiaries under its demand-driven incentive programs financed under Component 1 of the Project. This includes fostering CONAFOR’s coordination with other agencies that play a role in landscape management, supporting CONAFOR in developing financing mechanisms suited to the needs of private forest enterprises and landholders, providing specialized technical assistance to CONAFOR, and providing specialized assistance to develop the capacities of investment beneficiaries. This also includes activities to enhance capacities and investment support to CONAFOR and beneficiaries to better align CONAFOR’s incentive programs with other sectors (for example, with the agriculture sector) and increase beneficiaries access to private sector finance and value chains. This support will help pilot cross-sectoral investment plans and private sector approaches that can then be implemented and scaled-up under Component 1. In addition, BioCFplus-ISFL funding would help the government meet ISFL requirements through MRV investments in the AFOLU sector. 9. Overall, there is a risk of lack of harmonization among forest and non-forest policies, as well as Page 42 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) cross-sectoral collaboration. While CONAFOR is the implementing agency, a number of other agencies also play a key role in landscape management (SAGARPA, SEMARNAT, PROFEPA, INECC, INMUJERES, state and municipal governments). Lack of adequate coordination among agencies puts forest landscape management at risk and increases the likelihood of deforestation and forest degradation. Agency involvement in the Project design process and support from the BioCF plus grant to finance Component 2 are expected to help mitigate this risk by improving coordination among these agencies. 10. Sub-component 2.1 Strengthening CONAFOR and Cross-sector Coordination. (BioCFplus-ISFL grant US$3.5 million) This component will finance goods, technical assistance, and operating costs to (i) help strengthen CONAFOR’s coordination with other agencies that play a role in landscape management, including SAGARPA, SEMARNAT, CONANP, INECC, CONABIO, INEGI, INMUJERES, PROFEPA, State Governments, Municipalities, Academia, Civil Society (e.g., by establishing joint investment plans with SAGARPA in areas that are eligible for agriculture and forest subsidies to better align landscape investments and ensure agriculture and livestock investments do not lead to deforestation, by maintaining joint databases with SEMARNAT, by formalizing agreements with INECC for AFOLU monitoring); (ii) support improvements in the enabling environment for sustainable forest landscape management (e.g., updating legislation to promote sustainable forest management, modernizing schemes for regulating forest-related productive processes, among others); (iii) support CONAFOR in developing financing mechanisms suited to the needs and conditions of private forest enterprises (e.g., developing green financial instruments to increase private sector investments in sustainable land-use activities while reducing pressure on natural capital); (iv) provide needed investments in monitoring, reporting, and verifying GHG emissions and support the longer-term sustainability of CONAFOR’s Forest Monitoring Technical Unit, in particular by developing a GHG inventory of all AFOLU categories and subcategories; and (v) provide specialized technical support to CONAFOR’s departments, through a Technical Support Group (Grupo Técnico de Apoyo, GTA), including the Sustainable Forestry Production Development , Forest Environmental Services, Forest Restoration, Forest Information and Education, Training and Forest Culture departments. 11. Regarding collaboration between the agriculture and forestry sectors, instruments for the operationalization of a recent SAGARPA-CONAFOR agreement (an inter-agency collaboration agreement fostering integrated landscape management and public policy alignment) are currently being developed with PROFOR trust fund support. This PROFOR support is defining joint operation instruments, such as finance eligibility criteria for agricultural expansion activities that align finance eligibility criteria to the environmental and social eligibility defined for public investments, as well as joint investment plans. The finance eligibility criteria is hoped to have a strong impact on specific agricultural sub-sectors with potential high environmental impacts, such as avocado plantations, livestock production, etc. The joint investment plans will include spatial exclusion criteria to ensure landscape restoration, as well as support interventions in areas that are eligible for agriculture and forest subsidies to better align landscape investments. The ISFL funding will play a critical role in helping ensure and enable the implementation of these joint operational instruments. 12. CONAFOR has established a number of private sector alliances that will be scaled up under Component 2. These private sector initiatives include: (i) piloting a zero-deforestation value chain agreement in deforestation hot spots, which have included some of the largest private sector players in the country (Bimbo and Coca Cola), (ii) engaging private companies to invest in PES schemes, and Page 43 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) (iii) improving forest conservation through reforestation campaigns. Given Mexico’s unique land tenure situation and hence the overall implementation by communities primarily, as well as the engagement of private companies, the Mexico ISFL proposal represents a unique approach to design a program that is almost entirely implemented by private sector players. 13. CONAFOR also requires further support in developing financing mechanisms suited to the needs and conditions of private forest and agricultural enterprises (e.g., a green credit line). To support this effort, an exchange will be carried out with other countries leading in this area (e.g., Brazil) on low- carbon credit lines and the component will also support the piloting of such mechanisms. 14. With regards to MRV, while CONAFOR has made significant advances in MRV of the LULUCF sector, CONAFOR does require support to contribute to the long-term sustainability of its National Monitoring Management Unit on MRV and develop a GHG inventory of all AFOLU categories and subcategories in the program area to meet ISFL ER Program Requirements. Specifically, the ISFL plus grant would support (i) the National Institute for Ecology and Climate Change (INECC) and CONAFOR in developing a GHG inventory for the livestock category and for the agriculture sector, (ii) compiling and systemizing information for the AFOLU inventory, and (iii) the GSNMF in integrating AFOLU inventory tables according to the IPCC (2006), as well as (iv) quality control for the program area. In addition, support would be provided to advance toward Tier 2 AFOLU state inventories and identify mitigation measures in the AFOLU sector, with emphasis on forest landscapes with extensive livestock and silvopastoral systems. To advance to Tier 2 state inventories, studies will be conducted to characterize livestock production and manure management systems, and specialists will be contracted to build capacity in livestock sector accounting. To identify mitigation measures in the AFOLU sector, studies will be conducted on nutrient management (carbon and nitrogen in soils) and specialists will be contracted to build capacity and help develop mitigation scenarios for the AFOLU sector. 15. This support is important, given that accounting for emission reductions from AFOLU for results- based payments on a jurisdictional scale has not yet been tested in Mexico, and the country will need capacity building in terms of data requirements (resolution, temporal extent, future availability) to account for carbon following the approach adopted by the BioCF’s ISFL. Specifically, the Project will support the preparation of the necessary tools, assessments and systems (such as those related to MRV of AFOLU GHG emissions and removals) to allow the Government of Mexico to enter into an ER Purchase Agreement with the BioCarbon Fund. 16. In particular, MRV funding will help achieve the following objectives: (i) implementing the GHG accounting approach for the Project, (ii) strengthening the institutional arrangements of the Project’s SNMRV in the AFOLU sector, (iii) contributing to the sustainability of the MRV Specialized Technical Unit (Unidad Tecnica Especializada MRV – UTE MRV) for Project and program accounting, and (iv) compiling and preparing the information by subcategories of the GHG inventory in the Program Area by 2019, for the entire AFOLU sector. These funds guarantee the ER P’s operationalization in 2020 (first ERPA Phase); by completing the AFOLU inventory in the Program Area, selecting the subcategories of the LULUCF sector for accounting with the quality requirements by the BioCarbon Fund ISFL ER Program Methodological Framework, preparing the baselines for those subcategories and monitoring the ER in the Program Area. Page 44 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) 17. Sub-component 2.2. Strengthen Beneficiary Advisory Services. ( BioCFplus-ISFL grant US$6.5 million) In addition, the grant funding will provide capacity building and finance operating costs to help create and develop the capacities of investment beneficiaries. Specifically this sub-component provides facilitation support not included in CONAFOR’s incentive programs, such as: (i) the development of tools and materials to strengthen forest landscape management; (ii) seminars and workshops to strengthen beneficiary capacities; (iii) studies on technological improvements in production and commercialization processes; (iv) support CONAFOR in developing new PES contract modalities focusing on support to environmentally-friendly forest production and restoration of degraded landscapes through support to agroforestry and silvopastoral practices (in collaboration with SAGARPA), improving the effectiveness of the national PES program, and developing new local PES mechanisms; (v) specialized consultancies, including on biomass use; and (vi) developing a team of 35 regional specialists, located in priority hotspots to provide specialized regional guidance and technical support to Technical Advisors, Community Advisors, and OSSF, providing technical assistance to beneficiaries under CONAFOR’s demand-driven, incentive programs. Given their specific regional knowledge, these specialists will help ensure that beneficiary investments and activities are well aligned with regional strategies, including the activities of other sectors. They will also ensure that beneficiaries receive sufficient technical support from OSSF and technical and community advisors. Page 45 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Table 1.1 Activities supported under Component 1, including maximum amount of financing and share of support provided per area of support (in Mexican pesos) Component Type of support Description Activities Maximum amount Share of support provided per area of provided for technical support per year (Mexican assistance (%) pesos) and maximum matching (%) Sub-component Strengthening Support activities to a) Participatory Rural a) $50,000 a)100% 1.1 social strengthen the governance Assessments b) 85,000 b)0% Forest organization and social organization of b) Seminars community to c) $300,000 c)100% entrepreneurship and governance communities and ejidos by community d) $100,000 d)0% and social capital in communities following culturally- c) Community Land Planning e) $700,000- 1´500,000 e)15-35% and ejidos appropriated and d) Community Promotor f) $300,000-500,000 f)100% participatory methods. This e) Projects to strengthen approach has been built social organizations in the upon the PROCYMAF and forestry sector FCC experiences. f) Regional projects of forest social organizations Increase skills Support activities to a) Activities to enhance a) $80,000.00 a)7.5-14% and knowledge generate or increase skills capacities b) $300,000 b)30% related to forest and technical and b) Technology transfer from management operational knowledge in research centers management, procurement, and processing, as well as the technology transfer including the transfer for introduction of new best management practices. Sub-component Forest Support the planning and a) Timber forest a) $683,000-4´283,000 a) 100% 1.2 management documentation of management plan b) $250,000 b) 100% Sustainable plans for timber sustainable forest b) Technical studies for non- c) $270,000 c) 100% management of and non-timber management plans for timber forest resources d) $888,000-5´568,000 d) 100% Page 46 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) forest landscapes products timber and non-timber c) Environmental impact products. assessment d) Unified Technical Document for timber harvesting Forest Support forest management a) Timber production a) $900,000 a) 15% management activities for the practices b) $300,000 b) 15% improvement and b) Non-timber production c) $200,000 c) 15% maintenance of the practices productive potential of c) Wildlife practices natural forests, including best management practices. Commercial Support activities to support a) Establishment of a) $11’800,000 a) 6.8% forest new or established commercial plantations b) $11’800,000 b) 6.8% plantations commercial plantations. b) Support to established commercial plantations Payment for Support the provision of a) Payment for maintenance a) $700-1,100 per ha per a) average 7% Environmental hydrological and biodiversity of forest area with an year Services Environmental Services, with active conservation a primary focus on polygons approach that promotes a within the priority areas of partial re-investment of forest production, and in the the resources to corridors between these implement activities to areas. Multiyear (5 years). improve or maintain coverage Local Support the provision of a) Matching payment for a) $600 per ha per year a) average 7% Mechanisms for hydrological and biodiversity maintenance or and a maximum match Payment for Environmental Services, with improvement of forest of 50% of the total Environmental a primary focus on polygons area amount Services within the priority areas of forest production, and in the corridors between these areas. In conjunction with other private or public institutions to maintain or Page 47 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) increase forest area Multiyear (1-5 years). Restoration Support restoration a) Activities for conservation a) $7, 836 - 13,236 per ha a)6-10% activities, mainly those with and restoration of soils, a productive approach. The reforestation and fencing payment can cover short- term expenses of restoration, and in medium term the area may receive support for forest management or plantations (if it has forest potential) or for PES (if it has a high environmental value). Multiyear (1-3 years). Agroforestry Support provided for the a) Activities for conservation a) $4,772 per ha a) 6% establishment of an and restoration of soils, agroforestry system, which agricultural practices and includes conservation reforestation and practices and soil strengthening the restoration. capacities to restore degraded areas Certification Support the access to expert a) Forest certification with a) $70,000-240,000 a) 20-100% individuals or companies national norm, national or b) $140,000-240,000 b) 20-100% with technical and legal international certification, capacity to carry out the including technical process of international or assistance and national certification. implementation of corrective actions preventive b) Technical Audit of Forest Management Plan Sub-component Business Support for the a) Business training for a) $300,000 a) 100% 1.3 creation, implementation of projects integration of forest b) $150,000 b) 10% Page 48 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Transformation development, for the development, supply, production chain c) $105,000 c) 100% and access to management manufacturing and b) Promotion and marketing markets and value added marketing of forest products, for forestry enterprises in order to promote full use c) Chain of custody of forest materials, give Certification them added value and improve the competitiveness of community forest enterprises, forest enterprises and forestry production chains. Technology and Support new technology, a) Trade and investment for a) a) $1’000,000- 6’ a) 2-15% infrastructure equipment and the forestry industry, 500,000 for one b) 100% infrastructure. The use of including equipment and beneficiary or region or technology to reduce machinery (sawmills and up to 20’000,000 if emissions of greenhouse others) and technical national strategic project gases will be promoted, assistance on how to use and a maximum match including technologies to it of 30-75% of the total generate energy using forest b) Training for management amount biomass. support, production and b) $200,000 marketing Productive Support the implementation a) Match support for new or a) $ 2,000,000 and up to a) 15% projects for of projects operated by existent productive 50-90% of the total women groups of women related to projects, including amount the development, production technical assistance or and commercialization of equipment timber and non-timber forest products. Page 49 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) ANNEX 2: IMPLEMENTATION ARRANGEMENTS COUNTRY : Mexico Strengthening Entrepreneurship in Productive Forest Landscapes Project Institutional and Implementation Arrangements CONAFOR will be the entity responsible for Project execution. The Project will be managed by a Steering Committee comprised of CONAFOR’s General Director, and the General Coordinators of Production and Productivity, Conservation and Restoration, Planning and Information, Administration, Communications, International Affairs and Financing, State Management, Education and Technological Development, and Legal. The Steering Committee will monitor Project implementation, supervise overall Project strategy, and make strategic decisions for implementation. The Steering Committee will also validate the general rules for Project implementation, considering sectoral policy, national regulations, and those of the World Bank. Project implementation will be managed by an Operations Committee. Its objective will be to facilitate the Project’s day-to-day implementation. This Committee will be comprised of two units: (i) Operations Unit: comprised of a representative from each of the following areas: Sustainable Forestry Production Development, Forest Environmental Services, Commercial Plantations Development, Forest Restoration, Education, Training and Forest Culture, Development and Technology Transfer, National Forest Monitoring System, and Financing. (ii) Supporting Unit: comprised of a representative from each of the following areas: Forest Information, Computer, Communications, Material Resources and Works, Financial Resources, Coordination and Social Participation, Planning and Evaluation, Regulations and Consultation, and Operations Control. At the national level, a new Unit will be created, with specialists with expertise in areas where CONAFOR plans to develop and implement strategic interventions, such as productive restoration, forest entrepreneurship, and renewable energy. This new unit will provide specialized advice to CONAFOR´s Managers and State Offices. At the regional level, Regional Management Units, with the support of State Offices, will play a key role in overseeing the implementation of the subsidy programs, as well as overseeing and coordinating the work of community and private technical advisors providing support to beneficiaries. At the regional level, CONAFOR, with the support of Forest Sector Social Organizations (OSSF), will provide needed support to ejidos and communities. OSSF have been successful in providing such technical assistance and support to these groups and given this success, would be key actors in the implementation of the Program. At the local level, the Technical Advisors will offer coordinated assistance in the region. They will be certified through the processes established by CONAFOR, in coordination with academic certification institutions. At the local level, Community Forestry Promoters, who are members of beneficiary communities or potential Page 50 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) beneficiaries under Component 1 who voluntarily wish to provide technical assistance in forestry issues to their community, will play a key role in the implementation of the Program. Project implementation will require effective collaboration with several public and private entities at various levels of government. CONAFOR has developed diverse coordination mechanisms with federal level agencies such as SAGARPA, SEMARNAT, PROFEPA, and INECC. It is worth noting recent collaboration in the agriculture and forest sectors through a signed CONAFOR-SAGARPA Agreement, which aims to promote and facilitate the integration and alignment of agricultural and forestry public policies, as well as promote the development of climate change programs and strategies that improve the economic opportunities and quality of life of rural populations. A working group comprised of SAGARPA, CONAFOR, SEMARNAT, and CONABIO (National Biodiversity Commission) representatives was established in May 2017 to oversee the Agreement’s implementation and namely to ensure that ensure agriculture and livestock investments do not lead to deforestation. This working group is expected to play an important role in helping define investment plans for a future ISFL Emission Reduction Program. CONAFOR is the focal point of REDD+, and has led the preparation of the National REDD+ Strategy in Mexico through a highly participatory process (considered best practice). It is experienced in fostering contributions from various stakeholders, including government agencies (such as SEMARNAT, SAGARPA, SEDESOL, CDI, CONABIO,), State Governments, multiple CSOs and local communities. CONAFOR is seen as a leader on REDD+ agenda by the international community. Also in the area of REDD+, CONAFOR fosters collaboration with inter-municipal associations, producers’ associations, and other public agencies. With regards to GHG accounting, CONAFOR is the leading agency to account for land use, land-use change and forestry (LULUCF) through its Monitoring, Reporting and Verification system. CONAFOR will formalize agreements with INECC and INEGI to support GHG monitoring, particularly for the AFOLU sector. Financial Management Summary. The Project will be implemented at federal level, making use of most of the country FM systems, including accounting, budgeting, treasury, internal control and auditing. The Project will mainly finance Goods and Works, Non-consulting Services, Consulting Services, Capacity Building, Project Incremental Costs, including direct support to eligible beneficiaries under national and regional programs and support for Environmental Services (PES) / others. Based on previous satisfactory experience with CONAFOR’s implementation of Bank - financed projects, as well as the proposed Project’s characteristics, including centralized procurement and payments to consultants, providers, and beneficiaries, the overall proposed FM risk is assessed as Moderate. The Project FM control measures described in this assessment include: (i) robust country public FM arrangements and their large use by the Project; (ii) program integration into the national budget; (iii) selection of beneficiaries and subsidies (National Programs/PES/others) monitoring are based on Operational Guidelines; (iv) reimbursement of eligible expenditures recorded under earmarked budgetary lines and pre-financed by the Government and upon receiving of all supporting documentation; (v) use of Integral Management System (SAI) for records and control purposes of some Project transactions; (vi) use of the Payment System (SIDPA) for beneficiary direct support payments; (vii) internal auditing procedures according to Public Audit Standards and Guidelines, issued by the Public Administration Ministry (SFP); (viii) follow-up of CONAFOR’s Internal Control Unit (OIC) on Project external auditor’s findings, if any; (ix) submission to the Bank of semiannual non-audited Interim Page 51 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Financial Reports (IFRs); (x) annual audit of Project Financial Statements and Statements of Expenditures (SOEs) by auditors acceptable to the Bank; (xi) ample experience of the CONAFOR’s staff in dealing with Bank-financed operations; (xi) NAFIN’s support to CONAFOR on main fiduciary related issues; and, (xiii) at least two on-site FM supervision missions per year. Description and Assessment of Project FM arrangements Country issues relevant to the Project. In general, public financial management in the Mexican Federal Administration relies on robust budgeting, treasury, accounting and control systems. All FM-related activities using these country systems will be coordinated by CONAFOR and used in this operation. The Project will be implemented through the national budget as described below. Implementing entity. The Project implementation will be carried out by CONAFOR, which has strong institutional structures and capacities for implementation of Bank-financed projects. From the FM perspective, the Project implementation responsibility, including preparation of SOEs, IFRs and annual financial statement, budget monitoring and execution, and accounting records, among others, mostly belongs to the Dirección de Financiamiento (DF) mapped to the Unidad de Asuntos Internacionales y Fomento Financiero and Gerencia de Recursos Financieros (GRF) mapped to the Coordinación General de Administración (which administers and controls the entity overall budget). The CONAFOR Dirección de Financiamiento has ample experience dealing with Bank-financed operations and a strong system of FM internal and external controls is in place. Moreover, most FM activities, including funds flow, budgeting, accounting and financial reporting, will be carried out based on the existing FM arrangements, which were agreed for the MX Forests and Climate Change Project (P123760) and the ongoing MX Readiness Preparation Proposal (P120417), and are considered satisfactory by the Bank. Financial administration. NAFIN will act as the financial agent of the Borrower. In that capacity, NAFIN will manage loan and grant disbursement processes, request advance funds from the World Bank grant account, submit proof of eligible expenditures submitted by CONAFOR, and provide overall implementation support and oversight, drawing on its many years of experience with Bank-financed projects. Budgeting arrangements. Project funds will be part of the Federal Expenditure Budget (PEF). Thus, Project funds will be subject to provisions of the annual PEF Law, the Federal Budget and Fiscal Responsibility Law, the General Government Accounting Law, the Guidelines on Budget Procedures, among others. This set of legal and regulatory arrangements, together with CONAFOR’s implementation systems, provides sound budget formulation, execution and control arrangements. As per usual practice in Mexico for the operations implemented at the national level, the government will pre-finance the Project’s expenditures under budgetary lines earmarked for the Project for the IPF Loan component. There will be a Designated Account (segregated and in US$) opened by NAFIN for the US$10 million grant consisting of Portion A of the Grant financed under TF0A6448 and Portion B of the Grant financed by TF 0A6533. In addition, for the advance of funds under the grant, the Bank will disburse in US$and NAFIN will transfer funds in MXN$ into an existing account in CONAFOR. Accounting system. CONAFOR, through the DF, will maintain records and accounts adequate to reflect this Bank- financed operation, and will be responsible for keeping files of all supporting documentation for Project expenditures. Project records will be kept in accordance with accounting practices acceptable to the Bank and in compliance with General Government Accounting Law and other administrative requirements issues by the Federal Ministry of Finance and National Council of Governmental Accounting Harmonization (CONAC). Records Page 52 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) will be separated for each source of financing. The entity has implemented an Integral Management System (SAI), which includes modules for budgeting, accounting and treasury, among others. This system has been previously considered acceptable to the Bank. Some specific Project data, produced by the SAI, will be extracted from the institutional system and used for preparation of Project-related documents, such as Statements of Expenditures (SOEs) and Interim Financial Reports (IFRs), through Excel-based spreadsheets. Internal control and internal auditing. In addition to the budget regulations and procedures mentioned above, CONAFOR is subject to the Federal Public Administration Internal Control Standards issued by the Public Administration Ministry (SFP), which provide sound internal control arrangements. The internal auditing function is carried out by the Internal Control Unit (OIC), which reports to SFP and follows the Public Audit Standards and Guidelines also issued by SFP. Good systems are in place for timely follow-up to internal and external audit observations and implementation of recommendations, including those findings from the Project external audit, if any. Flow of funds. The Project will mainly finance through an IPF Loan of $56 million and a BioCFplus-ISFL Grant of $10 million (with portion A and portion B under one grant agreement and one DL) Goods and Works, Non- consulting Services, Consulting Services, Capacity Building, Project Incremental Costs, including direct support to eligible beneficiaries under national and regional programs and support for Environmental Services (PES) / others. From the financial perspective and similarly to the financial arrangements used for the MX Forests and Climate Change Project, CONAFOR will transfer part of its annual budget dedicated to subsidies for beneficiaries, allocated to Fondo Forestal Mexicano (FFM), which, in turn, is administered by BANORTE. BANORTE is a private bank considered as a solid nation-wide financial institution, which has been also providing a set of financial services to the Bank country office in Mexico for more than 10 years. The general arrangements for the flow of funds are described in the following chart and explained below: TESOFE (PEF) (#1) MXP$ Pre-financing The World Bank Account CONAFOR FFM Bank (#7) US$ (#8) US$ (#2) MXP$ Transfers NAFIN Reimbursement Reimbursement (#6) Reports + Information (#3a) MXP$ Payments (#3b) MXP$ Payments (#4) Reports + Information Subsidies to NAFIN (#5) Reports + Information GO, CW, NCS, CS & OP, Beneficiaries Financial Agent TR and WS under Applicable Rules of Operation 1. CONAFOR pre-finances Project expenditures from the national budget (PEF). There might be a Designated Account (DA) for Program initial disbursements, opened at NAFIN for the Grant only, to Page 53 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) advance funds to CONAFOR. Likewise, CONAFOR through NAFIN may request the Bank to advance direct funds from the grant. 2. Part of the budget funds, which are allocated for subsidies to beneficiaries under national and regional programs (including PES others), is transferred to FFM. 3. (a) CONAFOR executes the Project budget funds and processes payments for goods and works, non- consulting services, consultants’ services, Capacity Building, Project Incremental Costs (payments to consultants and providers); (b) CONAFOR selects beneficiaries, signs subsidy agreements with each eligible beneficiary, and gives instruction to BANORTE to process payments to such beneficiaries. 4. Beneficiaries submit reports and information to CONAFOR. 5. Based on the reports provided by beneficiaries as well as payments processed to consultants and providers, this information is aggregated and summarized in Statements of Expenditures (SOE), and formally submitted to NAFIN. 6. NAFIN reviews the SOEs and submit them, through Client Connection, together with the loan withdrawal application to the Bank. 7. The Bank reimburses the eligible funds into a bank account administered by NAFIN, which, in turn, transfers them to CONAFOR for the Grant or TESOFE for the IBRD Loan. 8. In case of the use of advance funds to CONAFOR, directly from the World Bank grant account or through the Designated Account, CONAFOR will submit to NAFIN proof of eligible expenditures. 9. Finally, CONAFOR officially requests SHCP to regularize the additional funds as part of the PEF in accordance with the applicable legal framework, according with the Mandate Agreement signed between SHCP, CONAFOR and NAFIN. Financial reporting and external audit. The general framework for the financial reporting and audit of all Bank-financed projects implemented in Mexico at federal level is the technical MOU and general ToRs on auditing, which were agreed between the GOM and the Bank. The Project will be subject to this framework. CONAFOR will prepare and submit to the Bank not later than 45 days after the end of each calendar semester unaudited Interim Financial Reports (IFRs) for the Project covering each semester in form and substance satisfactory to the Bank. These reports will be based on the formats of the annual financial statements. The Project’s financial statements will be annually audited by an acceptable audit firm, designated by the SFP, and in accordance with the ToR mentioned above. The Project implementation and external auditor’s findings will be also subject to follow-up provided by the CONAFOR’s Internal Control Unit. After loan effectiveness, the financial, audit and technical reports will be presented by CONAFOR to NAFIN for review and further submission to the Bank, as follows: Report Due date (World Bank receipt) Semi-annual unaudited project IFRs, with separate Within 45 days after the end of each calendar columns for each source of financing semester. Annual audit report on project financial statements Within six months after the end of each calendar and eligibility of expenditures, with separate columns year (or any other period agreed with the Bank). for each source of financing Written procedures. Project FM procedures will be documented in the Project Operational Manual (POM) that will define the roles and responsibilities of CONAFOR and other involved agencies, such as NAFIN. The OM may include, among other financial procedures: (i) budgeting, treasury, accounting, internal control policies and procedures; (ii) formats of the SOEs; (iii) financial reporting and audit, among other Page 54 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) monitoring & evaluation arrangements. Bank FM supervision. The scope of Project supervision will review the implementation of FM arrangements and FM performance, identify corrective actions if necessary, and monitor fiduciary risks. It will take place on a semi-annual basis and include: (a) desk review of Project IFRs and audit reports, following-up on any issues raised by auditors, as appropriate; (b) participation in Project supervisions at least twice a year, which will consider the operation of the control systems and arrangements described in this assessment; and (c) updating the FM rating in the FM Implementation Support and Status Report (FMISSR), as needed. Risk assessment. Based on the Bank’s Project FM assessment, the overall Project FM risk is considered Moderate, as explained in the following table: FM Risk Table Residual Risk Comments / Risk mitigating measures Risk type38 Risk Rating incorporated into Project design Rating Inherent risk M M Country level M Use of Country Systems – PFM M Entity M The Project implementation will be carried out by CONAFOR, which has M strong institutional structures and capacities. Moreover, most FM activities will be carried out based on the existing FM arrangements, which were agreed for the ongoing operations. Project M The Project will be implemented at federal level, making use of the most M of the country FM systems, including accounting, budgeting, treasury, internal control and auditing. There will be centralized procurement and payments to project’s consultants, providers, and beneficiaries. Control risk M M Budgeting M Project funds will be part of the Federal Expenditure Budget (PEF) and will M be pre-financed by CONAFOR under budgetary lines earmarked for the Project. There will be a Designated Account as well managed by NAFIN. Accounting M All Project expenditures, under part 2 of the Project, will be recorded in M the Integral Management System (SAI), which includes modules for budgeting, accounting, and treasury, among others. The payment disbursement process, under part 1 of the Project, will be recorded in the Payment System (SIDPA) and SIGA. Internal M The internal auditing function is carried out by the CONAFOR’s Internal M Control Control Unit, which reports to SFP, and it is responsible for follow-up on a regular basis on all internal control and Project external audit findings. Funds Flow M The main disbursement mechanism will be a reimbursement of eligible M expenditures pre-financed from the CONAFOR’s annual budget. There will a DA opened at NAFIN and used to advance funds under the Grant to CONAFOR. Likewise, CONAFOR through NAFIN may request the Bank to 38The FM inherent risk is that which arises from the environment in which the project is situated. The FM control risk is the risk that the project’s FM system is inadequate to ensure project funds are used economically and efficiently and for the purpose intended. The overall FM risk is the combination of the inherent and control risks as mitigated by the client control frameworks. The residual FM risk is the overall FM risk as mitigated by additional controls and by the Bank supervision effort. Page 55 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) advance direct funds from the grant. Financial M CONAFOR will prepare and submit to the Bank semi-annual IFRs for the M Reporting Project not later than 45 days after the end of each calendar semester. Auditing M The Project financial statements will be annually audited by an acceptable M audit firm, designated by the SFP, and in accordance with the ToR acceptable to the Bank. The Project implementation and external auditor’s findings will be also subject to follow-up provided by the CONAFOR’s Internal Control Unit. Overall risk M M Disbursements Disbursement arrangements. The loan disbursement arrangements39 are hereby summarized: Disbursement method Reimbursement of eligible expenditures (pre-financed by the government) into a bank account in US$ administered by NAFIN, and a Designated Account (Segregated and in US$) opened by NAFIN with a Ceiling of US$2 million. CONAFOR will use an existing account in MXN$ to receive the advances for the two portions of the grant sent by NAFIN. Supporting documentation  Statements of Expenditures40.  Customized Statements of Expenditures for the PES /others, of the Project. CONAFOR will use the same formats of SOEs that it uses under the MX Forests and Climate Change Project (P123760) and may propose some simplification of formats if considered necessary. SOE for the IPF Loan and the grant will be submitted to the Bank through NAFIN in MXN$.  Thresholds will be specified in the respective Disbursement and Financing Information Letter (DFIL), for the loan and the grant, and reviewed as part of the Project financial audit. Retroactive expenditures Reimbursement of the eligible expenditures that comply with the following:  Incurred within 12 months before the signing of the loan agreement;  Incurred within 12 months before the signing of the grant agreement;  Do not exceed 20 percent of the loan amount.  Do not exceed 20 percent of each grant amount. Expenditures would be subject to the same systems, controls, and eligibility filters described above. Expenditures would also be subject to the Project’s external audits. Disbursement Table Amount of the Loan Percentage of Expenditures Category Allocated to be financed (inclusive of (expressed in US$) Taxes) 39For details, please see the Disbursement Guidelines for World Bank Clients. 40All SOE supporting documentation will be maintained by CONAFOR & NAFIN. Such documentation will be available for review by the external auditors and the Bank staff at all time during Project implementation, and at least until one year after the audit report covering the last disbursement has been received from the Bank. Page 56 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) (1) National and regional programs / PES / others under Parts 1 financed through the 56 million 100% Loan. (2) Goods and Works, Non-consultants’ Services, Consultants’ Services, Training and 6.65 million 100% Workshops, and Operating Costs under Part 2 financed through the Grant A. (3) Goods and Works, Non-consultants’ Services, Consultants’ Services, Training and 3.35 million 100% Workshops, and Operating Costs under Part 2 financed through the Grant B. (4) FEF Procurement Project Institutional and Implementation Arrangements Procurement activities for the proposed project will be carried out in accordance with the World Bank’s Procurement Regulations for IPF Borrowers - July 2016, revised November 2017 (“Procurement Regulations”), and the provisions stipulated in the Loan Agreement and ISFL funding Agreement. The various items under different expenditure categories are described in general below. Each contract to be financed is agreed between the Borrower and the Bank in the Procurement Plan, including: activity description; different procurement methods; estimated costs; procurement review requirements (prior or post) and time frame for every phase of the planned activity. The Procurement Plan will be updated in the Systematic Tracking of Exchanges in Procurement system (STEP) whenever required to reflect the actual project implementation needs. Procurement Summary: Under Component 1, the Beneficiaries will be responsible to implement their own procurement activities. For Component 2, CONAFOR will carry out the procurement activities. Under Component 1, the project will finance forest sector demand-driven incentive programs that aim to support local communities and other landholders in sustainably managing forests, as well as increasing economic opportunities from forest resources. The key beneficiaries of this project would be Ejidos, Comunidades, Avecindados, Producers Associations and Organizations; Small Landholders; Community Enterprises and Forest Enterprises that would benefit from payments under Rules of Operation and carry out activities under Component 1 (activities). The activities and their procurement processes will be directly implemented by the beneficiaries, financing a large number of small, simple activities (technical assistance, goods, small works) that are geographically dispersed. Therefore, procedures for these community procurement processes will be suitably adapted to reflect the nature of these activities, the environment in which they will be implemented, and the conditions and capacity of the beneficiary, provided that these procedures are efficient and acceptable to the Bank. Procedures for the community procurement processes are described below and further explained in the Project Operational Manual. Page 57 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Under Component 2, the project will support CONAFOR’s institutional strengthening and inter institutional coordination, as well as strengthen beneficiary advisory services. Procurement Methods CONAFOR (Component 2) Procurement of Works. No civil works carried out by CONAFOR will be financed under this project. Procurement of Goods and Non-Consulting Services. Goods to be procured under this project include the acquisition of software, hardware, including those to support CONAFOR’s institutional systems development. In addition, the project will finance non-consulting services, such as training, communication and outreach. Since all these contracts are for purchases of goods and non-consulting services for individual contracts costing less than US$100,000, they will be procured by CONAFOR through shopping procedures. Any purchase over this amount should be procured by RFB (Open-National/International). Direct contracting could be used on an exceptional basis, under the circumstances explained in paragraphs 6.8 to 6.10 of the Regulations. Selection of Consultants. The project will require the services of consultants to carry out a variety of consultant services, including those related to impact evaluation of the activities developed by the Project, as well as to CONAFOR institutional strengthening and policy innovation and the strengthening of beneficiary advisory services. Firms. Most contracts for firms carried out by CONAFOR are expected to be selected using the Quality- and Cost- Based Selection Method (QCBS). Consultant assignments of specific types, as agreed previously with the Bank in the Procurement Plan, may be selected using the following selection methods: (i) Quality-Based Selection (QBS); (ii) Selection under a Fixed Budget (SFB); (iii) Least- Cost Selection (LCS); (iv) Selection Based on Consultants’ Qualifications (CQS); and exceptionally (v) Single-Source Selection (SSS), under the circumstances explained in paragraph 7.13 to 7.15 of the Regulations. Individuals. Individual consultants will be hired to provide technical advisory and project support services and will be selected in accordance with the comparison of at least 3 CVs. Procurement Plan - The Procurement Plan should be prepared by CONAFOR and uploaded in the Systematic Tracking of Exchanges in Procurement (STEP), providing the basis for the procurement methods. The procurement plan will be updated as necessary and required to reflect actual project implementation needs and improvements in institutional capacity. Beneficiaries – (Component 1) The beneficiaries will be selected by CONAFOR through open and transparent processes, in accordance with technical criteria established by CONAFOR (Reglas de Operación) and agreed with the World Bank. Interested individuals and communities would sign an agreement (Convenio de Concertación) with CONAFOR for each support they receive under these Operational Rules and only upon meeting all selection and administrative criteria. Payments might be subject to additional verification criteria. Page 58 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) The principal beneficiaries of the project will be organized groups that may be scattered—sometimes in remote rural locations—in project areas. The majority of these groups shall have legal status or be recognized under the Operational Rules, to be eligible to apply for matching grants under the project to finance their activities. The transactions that these communities may engage in will be small, with aggregate values in their activities. Communities would be responsible for deciding on the goods and services that they need. This component will finance a wide range of activities, under CONAFOR Operational Rules and as specified in the POM and agreed with the Bank. Eligible Costs under the Activities Beneficiaries should be empowered to carry out their procurement per the agreement with CONAFOR (Convenio de Concertación), and such procedures must be consistent with those described in the POM. They will prepare technical assistance activities, productive investments, and receive payments for environmental services. The selection of service providers, goods and related services, and consulting services would be the responsibility of the beneficiaries. They will implement these activities, supported by a broad range of implementation tools and instruments, tailored to project-specific situations, while remaining acceptable to the Bank and in line with Bank procurement policies. They will use simplified procurement methods for contracting acceptable to the Bank, described and explained in the POM. Technical assistance – Beneficiaries would identify their needs for technical assistance and would proceed the process for contracting individual or firm consultants. Technical advisors are listed in CONAFOR lists, or other relevant list, certifying their technical capacities to carry out the technical advisory services. Such lists are updated regularly and are accessible to all potential beneficiaries for open and transparent selection. Technical advisors will be selected following the procedures explained and specified in the POM. Beneficiaries will prepare private agreements with said individual/firm and rates under project financed activities are assigned considering the activity to be carried out by the beneficiary and in line with the total amount defined in the Operational Rules. The POM will detail all the selection procedures. The level of effort of these Technical advisors and the quality of their service will be monitored by CONAFOR. Goods, non-consulting services for community and investments under activities agreements. Non-consulting services and goods such as machinery, purchase of materials, tools, and minor field equipment could be contracted by the beneficiaries under CONAFOR supervision, using CONAFOR Operational Rules’ shopping procedures, through the comparison of at least three quotes. Comparison of two quotes is justified only when there is satisfactory evidence that there are only two reliable sources of supply. And in exceptional circumstances, it can be purchased directly, for example, when the required good is obtainable only from one source. These purchases should be described in the POM. Civil Works (community participation). Some of the program activities could be procured under the modality of community participation (paragraph 6.52 of the Regulations) and should be detailed in the POM. This method is appropriate for some of CONAFOR’s community programs considering the: (a) call for the participation of local communities and ejidos in civil works, (b) the need to promote the utilization of local know-how, and/or (c) labor intensive works. Procurement Plan - Due to the demand-driven nature of these projects and the financed activities, simplified Page 59 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) procurement plans should be provided prior to initiating the implementation. The POM contains a section that defines the project procurement arrangements, including the organization, procedures and review threshold for all these procurement methods. A report of the selected communities, activities and amounts will be provided annually to the Bank. Assessment of the Implementing Entities’ Capacity to Implement Procurement CONAFOR has demonstrated sound capacity in implementing World Bank procurement policies and procedures. Procurement for the Second Community Project as well for the FCPF were executed at the central level by the same staff as that of the current Forest and Climate Change Project (P123760). This Procurement team has sound knowledge of Bank Procurement Policies and Guidelines. In addition, CONAFOR has a suitable Management team, with different departments charged with the responsibility of implementing specific components. The Beneficiary Supports (Component 1) will encompass a large range of activities, with diverse actors, sometimes in remote locations with poor communications, among a large number of small, simple activities that are geographically dispersed and implemented by rural communities. These communities have no experience in implementing World Bank procedures. However, CONAFOR has instruments in place to ensure that beneficiaries comply with requirements set forth in the operational rules and the individual contracts. Procurement Action Plan Risks Mitigation Actions Agency When Responsible Large number of parties and Supervision and internal/external CONAFOR During Project transactions involved, small audits are defined as part of the Implementation value and multiplicity of CONAFOR’s operational procedures. contracts, and scattered Other forms of accountability should locations of community be built at the community level. For program activities example, successful internal control requires that the beneficiaries and other stakeholders be kept well informed at all times and at all levels about their entitlements, rights, obligations, and the project’s costs and benefits. Beneficiaries may Procurement procedures should be CONAFOR During Project lack the necessary simple enough to be implemented by Implementation experience local beneficiaries. In addition, they should be sufficiently transparent to permit real competition among suppliers and to facilitate control in the selection of contracts and use of funds. These procedures are clearly Page 60 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) defined in the POM. These processes will be further disseminated, and appropriate capacity will be provided. Project Operational Manual (POM). The POM covers the relevant procurement procedures, including detailed institutional processes, accountability, composition of technical and administrative evaluation committees, time frames for approvals, etc. The POM also covers topics related to conflicts of interest, fraud and corruption. Notification of Business Opportunities. A General Procurement Notice will be published in the United Nations Development Business (UNDB). Specific Notices and Request for Expressions of Interest will be published following the Regulations and the Harmonized procedures agreed with the SFP and the IDB. Bank supervision. Bank procurement staff will undertake at least two missions in the first two years after the Project has been declared effective to monitor and review compliance with procurement policies. The Bank’s supervision of CONAFOR and Beneficiaries’ implemented activities will consist of procurement post reviews (analysis of procurement documents and field visits). These reviews are done according to procedures acceptable to the Bank and should be done in addition to technical and financial reviews and audits. Environmental and Social (including safeguards) Institutional Arrangements CONAFOR is implementing an institutional strengthening program to build the capacity of technical personnel at local and federal levels. All capacity building activities incorporate relevant safeguard principles and Environmental Health Safety (EHS) best practices. Under this Project, additional principles related to timber and non-timber forest activities will be considered to improve this capacity building program. CONAFOR has extensive experience working with and ensuring the inclusion of the Project’s target groups. Significant efforts have been made to incorporate these different target groups, and enhance CONAFOR’s programs and operations in terms of providing support to indigenous populations and other local communities in a socially and culturally appropriate manner. To best address these groups’ needs, different governance mechanisms, as well as different processes of participation, the project will make use of: (i) differentiated efforts and culturally appropriate communication to include more vulnerable groups, ejidos, women and indigenous peoples in demand-driven programs, and (ii) implementing activities such as community-to-community workshops and other events to assist in the process of developing land use plans and community strategies that will serve as a guide in assessing the feasibility of investments. CONAFOR, through the Forest and Climate Change Project, has begun to integrate more women in beneficiary schemes. There is still room for improvement with respect to including women in beneficiary programs and forestry management activities; a challenge that this Project aims to address. The Project takes into consideration that women generally devote their time to non-timber activities and men to timber harvesting. Moreover, the Project acknowledges that women face important disadvantages: 88% of rural women live in highly marginalized areas, 62% live in poverty and in vulnerable conditions with limited access to resources such as education, health, and employment, 15% of Mexican women (primarily older) are illiterate, which limits their ability to apply for services and subsidy programs. Rural women are also more likely to spend 71% of their week working on Page 61 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) remunerated and non-remunerated activities, compared to 66% of men, leaving them less time to potentially devote to the project´s activities. CONAFOR’s Safeguards Area within the Forest Information Management Department is responsible for managing both environmental and social safeguard issues. This area started operating during the first WB financed forestry project in Mexico, which developed capacity to coordinate, develop, monitor and control safeguards instruments for Forest and Climate Change and emerging projects. Currently three staff are in charge of overseeing activities, implementation, documentation, and following up on activities related to consultation, participation, dissemination and coordination related to the areas of forests and climate change, as well as activities related to compliance and reporting on environmental and social safeguards. This safeguards support is vital, and is expected to be maintained during the proposed project. Grievance Redress CONAFOR has successfully developed and managed mechanisms to deal with complaints, suggestions and requests for information based on the country´s legal regulations: Constitution of the Mexican United States, Transparency and Access to Public Information Federal Law, Administrative Responsibilities of Public Servants Federal Law, among others. The MAC from CONAFOR is based on principles like: accessibility, culturally relevance, effectiveness, fairness, transparency and feedback, and considers three forms of attention depending on the nature of the problem/complaint (the mandatory procedure for the resolution of problems is published on the CONAFOR website.41 Safeguard Instruments and Oversight The Project is classified as Category B given that the proposed investments (e.g., silviculture, forestry enterprise programs and other forest landscape management measures) are not likely to cause significant negative impacts on human populations and/or environmental areas. The Project is likely to have a positive impact on forest conservation. CONAFOR carried out a full-scale Environmental and Social Assessment for the forest sector, as well as a Strategic Environmental and Social Assessment (SESA) for the National REDD+ Strategy for related projects, that remain valid and have been used as a baseline for this project. Hence, the project’s safeguards instruments are updates of existing Forestry and Climate Change Project Frameworks, which have been shared with a variety of stakeholders at the national and state levels and discussed in forums such as the National CTC-REDD, the regional CTC-REDD, a SESA Follow-Up Group, forestry councils at the national and regional levels, among others. Furthermore, these safeguard frameworks have been endorsed via widespread consultations with civil society, governmental stakeholders, international organizations, and indigenous peoples, gender, and community forestry specialists. During implementation, CONAFOR will maintain continuous dialogue with key stakeholder groups such as Indigenous Peoples and women in line with its operational rules. 41 http://www.conafor.gob.mx:8080/documentos/docs/35/5113Mecanismos%20de%20Atenci%C3%B3n%20Ciudadana.pdf) Page 62 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Given the successful safeguard management carried out during the implementation of the Forest and Climate Change Project (P123760), the related Environmental Management Framework (EMF) has been updated to reflect the new activities and beneficiaries of the proposed project. The EMF includes an exclusionary list, and a screening plan for activities to identify, avoid and mitigate any potential negative environmental, health, safety, and social impacts associated with project activities. The EMF also incorporates recommendations to include health and safety principles within CONAFOR´s operational rules, as well as to assure site specific safeguards compliance. The updated EMF takes into account the potential impact from project activities, such as community forestry, sustainable management of forest-landscapes, guidelines for sustainable exploitation of timber and non-timber products, productive reconversion, national and international certification, value chain development, access to markets, commercial forest plantations, certification processes, as well as the preservation of critical natural habitats sustained by these forests. The proposed project interventions are not expected to cause significant negative impacts, but rather are expected to have positive impacts for sustainable forest management. The main potential negative impacts identified by the EMF might arise from interventions supporting plantations. These interventions could lead to soil contamination through excessive use of pesticides and fertilizers, erosion due to inappropriate or excessive use of machinery and equipment, damage to biodiversity with the integration of exotic species or promotion of monocultures, technical advisors’ and beneficiaries’ lack of adequate land management experience, and increased worker accidents due to a lack of personal protection equipment and inadequate working conditions in areas of felling and sawing, or while combating forest fires. The EMF provides the necessary recommendations to mitigate these potential impacts and measures, in accordance with CONAFOR’s operational rules, to ensure sound safeguards compliance during implementation. The updated EMF was consulted and disclosed on CONAFOR’s website and the Bank external website. To meet the requirements of OP 4.10 (Indigenous Peoples) and ensure that any potential negative impacts of interventions are avoided, an Indigenous Peoples Planning Framework (IPPF) was prepared, which has been consulted and disclosed on the Bank’s and client’s website on November 22, 2017, with a revised version published on both websites on December 19, 2017. The IPPF identifies any potential impacts on indigenous peoples by the project and provides recommendations on how to screen for and avoid impacts. It contains specific guidelines on culturally adequate consultations, as well as measures to ensure joint planning, capacity building and culturally-inclusive implementation of activities. Furthermore, it highlights that (i) training of project managers, (ii) inclusion of indigenous peoples in decision-making and as technical promoters, as well as (iii) awareness raising regarding the specific needs of indigenous communities in the intervention areas will be continuously promoted by the project. No involuntary resettlement is expected to result from any activities financed by the Project. The Project also does not anticipate any land acquisition and all investments financed under this operation will be carried out on private land, owned by the Project’s beneficiaries (e.g., ejidos, communities, small land holders, among others). The Project, however, will invest in natural resource management activities (agroforestry, soil restoration, tree planting, etc.), some of them to be implemented in protected areas (PA) in accordance with PA management plans and under close supervision. As such, there might be cases where use and access to resources may be restricted due to changes in forest management and resource management plans. OP 4.12 on Involuntary Resettlement is therefore triggered and a Process Framework (PF) has been developed as a means of mitigating any potential adverse impacts that may emerge from restrictions of access to natural resources. The PF also includes a screening mechanism to exclude any interventions that could potentially lead to land conflicts and Page 63 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) provides clear guidance on handling of conflicts, in accordance with CONAFOR’s Rules of Operations (reglas de operación, RO). CONAFOR’s monitoring system (SIGA) oversees compliance of CONAFOR’s Rules of Operation (RO), which include provisions to ensure compliance of the project’s safeguards instruments (EMF, IPPF, and PF). Compliance with environmental safeguards is integrated within the federal legal and programmatic instruments, as well as by the set of institutions that directly affect the execution of these safeguards. Within CONAFOR’s Rules of Operation, criteria are included that allow for identification of possible environmental impacts regarding proposed activities. Compliance with environmental safeguards is guaranteed through RO application, both during application stage as well as during implementation stage. This is because RO directly consider the Project’s safeguard instruments (the EMF, IPPF, and PF). RO monitoring thus includes a direct monitoring of the project’s environmental safeguards compliance. The RO are updated each year (by July) and approved for implementation by December, so it is expected that all new considerations in the EMF will be complete and updated starting from RO 2019. During implementation in 2018, CONAFOR will also ensure that safeguards are complied with; that is, will ensure that the provisions of the Project’s safeguard instruments (EMF, IPPF, and PF) not yet embedded in the current RO are fully complied with. Related to social safeguards, the RO, in accordance with the Project’s IPPF, recognize communal and individual land ownership, and guarantee that the supports granted through these RO will not alter the property regime of said lands. Indigenous peoples and communities, who cannot prove legal ownership or legitimate possession of the land to which the support will be allocated, with the corresponding legal title, may deliver documents of approval from the community or land owner and requirements will be based on the corresponding uses and customs of each indigenous people or community. The RO, in accordance with the Project’s PF, also determine when the Project investments will or will not promote involuntary restrictions on access of natural resources in ANPs and establish platforms and participation mechanisms, as well as continuous consultation processes for beneficiaries via regional forums, workshops, courses, among others. In that sense, there are two moments in which the safeguards are implemented and verified: (1) Prior to the granting of support: both in the RO and in the specific calls for the different community investment supports, the legal, regulatory and regulatory requirements necessary to obtain them are included, to receive support for marketing, installation of offices or others. (2) Verification activities: occurs during the execution of the investment supports, first the state management of CONAFOR verifies that the activities of the technical proposal entered by the applicant, meet the criteria determined in the terms of reference. The activity reports are presented by the beneficiary together with the technical advisor, and CONAFOR’s State Management verifies that they have been prepared according to the guides and manuals that CONAFOR has developed. If the reports are prepared in accordance with these guides and manual, CONAFOR proceeds to provide support to the beneficiary. If the reports are not satisfactory, the subsequent payments or the final payment are not made. Monitoring and Evaluation During implementation, CONAFOR will be responsible for overall project monitoring. Progress will be measured against the Results Framework PDO and intermediate indicators (see Annex 1). The Monitoring and Evaluation plan will include at least two formal evaluations during project implementation (at midterm and final review) and the parameters will be outlined in the Operations Manual. The final review will assess the achievement of Page 64 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) indicators, sustainability of results, and identify lessons learned. Systems for monitoring of inputs: CONAFOR uses two main tools to monitor the inputs: (i) the Management and Information Analysis System (SIGA II) to track the management of application incentives allocated under the CONAFOR programs; and (ii) the Payment System (Sistema de Gestión de Pagos, SIDPA) to track and control the payments to the beneficiaries of CONAFOR‘s programs. Both systems can be disaggregated to the minimum unit (community/ejido/private landowner) or aggregated by state and municipality. The systems make it possible to observe information about gender, indigenous groups, and number of beneficiaries within a forest community. Matrix of Results Indicators: It aligns the contribution of the programs to the objectives. The results framework (RF) is permanently and systematically updated by CONAFOR. Page 65 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) ANNEX 3: IMPLEMENTATION SUPPORT PLAN COUNTRY : Mexico Strengthening Entrepreneurship in Productive Forest Landscapes Strategy and Approach for Implementation Support In order to facilitate the achievement of the PDO, the partnership between the Government and World Bank, and other stakeholders (e.g., civil society organizations, development partners) requires systematic and sustained implementation support, covering fiduciary, technical, and analytical aspects as well as coordination needs. Additionally, implementation support will have a strong focus on mitigation measures to address key risks identified. Given the diversity of activities that the Project supports, the Bank’s team will require a corresponding range of skills covering private sector development, market development, financial instruments, forestry management, sustainable land management, environment management, MRV, general agriculture, and social development. The expertise should have sufficient versatility to cover operational and technical aspects of project activities, as well as policy issues. The team will also require periodic expertise in communications to support project dissemination activities. The team will additionally need to support CONAFOR in monitoring and evaluation of results, both in design and implementation, and making adjustments, as needed. Further, the multitude of activities by other partners on landscape management and climate change will necessitate frequent dialogue to maximize complementarities, and capture lessons learned, incorporate knowledge and information from analytical work. The Bank will conduct missions on at least a bi-annual basis to review implementation progress, provide recommendations and guidance, and agree on the action plan/next steps. More frequent interaction will take place in-between through videoconferences. During implementation, the Bank will supervise the project’s financial management arrangements in the following ways: (a) review the Project’s semiannual Interim Financial Reports and annual audited financial statements and any remedial action recommended in the auditor’s Management Letter; and (b) during the Bank’s on-site supervision missions, review the following key areas: (i) project accounting and internal control systems; (ii) budgeting and financial planning arrangements; (iii) disbursement management and financial flows, including counterpart funds, as applicable; and (iv) any incidences of corrupt practices involving project resources. With respect to procurement, the Bank will undertake supervision through a combination of prior and post reviews. A dedicated procurement specialist will work with clients (NAFIN and CONAFOR) on a regular basis to ensure understanding of procurement guidelines and procedures. Implementation support missions will be geared towards: (i) reviewing procurement documents; (ii) providing detailed guidance on Bank procurement guidelines; and (iii) monitoring of procurement processes against the detailed procurement plan and discussing changes to the procurement plan as needs arise. On safeguards compliance, the Bank will provide support to ensure proper implementation and monitoring of the Project’s EMF, IPPF, and PF. Support will also be provided to ensure proper implementation of social aspects such as gender and citizen engagement. Regular monitoring will be done by the Bank. Page 66 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Implementation Support Plan and Resource Requirements The Implementation Support Plan will be reviewed at least once a year to ensure that it continues to meet the implementation support needs of the project (for instance, need for technical skills). Time Focus Skills Needed Resource Estimate First twelve - Project Launch - Financial US$250,000 months Workshop Management - Fiduciary and systems Procurement functioning - Forestry - M&E systems management, functioning market (includeing development, Baseline private sector surveys) development, MRV, gender specialist, environmental and social development, communications, and monitoring and evaluation 12 to 48 months - Project - Financial US$350,000 Implementation Management - Procurement and - Financial Procurement Management - Forestry - Safeguards management, compliance market - M&E development, - Mid-Term private sector Review development, MRV, gender specialist, environmental and social development, communications, and monitoring and evaluation 48 months to - Project - Financial US$425,000 completion Implementation Management Page 67 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) - Procurement and - Financial Procurement Management - Forestry - Safeguards management, compliance market - M&E development, - Implementation private sector Completion development, Report MRV, gender specialist, environmental and social development, communications, and monitoring and evaluation Page 68 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) ANNEX 4: ECONOMIC ANALYSIS I. Introduction 1. This annex presents the economic analysis of the Strengthening Entrepreneurship in Productive Forest Landscapes Project to assess its potential economic, social, and environmental impacts compared to its costs. 2. Mexico lost an estimated 9.4 million hectares (ha) of forest between 1993 and 2011—more than 10 percent of the forest area at the beginning of the period (CONAFOR, 2015). Although gross deforestation rates have declined in recent years, they are still high, with an estimated 348,000 ha of forest lost annually between 2007 and 2011 (CONAFOR, 2015). Forest loss rates are significantly higher in tropical dry forests and tropical rainforests. Afforestation has offset about half of forest loss, resulting in an average annual net loss of about 176,000 hectares 2007 and 201142; however, afforested areas differ significantly from natural forests in terms of carbon, biodiversity, and other attributes. 3. The drivers of deforestation and forest degradation also vary significantly across the country; they include economic, social, and institutional factors, such as: the higher relative profitability of alternative land uses, particularly agriculture and livestock production; weak management; weak governance and leadership capacity by ejidos and communities to conduct forest operations; poverty and pressure created by other rural and landless populations on ejidos and communities forest resources.43 Even in areas with potential for forest production, other activities may be preferred since the competitiveness of sustainable forest operations is currently low. 4. While forests contribute a modest 1 percent of GDP, they represent an essential source of employment, income, and livelihood for people living in and around forests. Forests are central to the livelihoods of millions of people in Mexico, providing valuable goods such as food and medicinal resources, raw materials for construction and fuelwood. Forest-dependent people tend to be poor and with limited entrepreneurial capacities and economic activities and dividends. Over a quarter of the forest populations lives in extreme poverty (CONAFOR, 2011).44 In 2008, 57 percent of the poorest quintile of rural households obtained almost one-quarter of their income from natural resource extraction, most of which was forest-related. 5. In addition, forests generate other fundamental services of local, regional and global value, such as regulating services, habitat or supporting services, and cultural services. Forests regulate the local and global climate: they influence rainfall locally and regionally, and remove pollutants from the atmosphere, while storing and sequestering greenhouse gases; forests improve the capacity of human communities and other species to adapt to climate change; they moderate the impacts of extreme events such as floods, storms, and landslides; maintain soil fertility and prevent soil erosion. Forests 42 Own calculations based on a change matrix of land cover changes between 2007 and 2011 using the most recent data form the National Statistical Institute (INEGI) – Series IV and V. 43 Emission reduction initiative submitted by Mexico to Forest Carbon Partnership Facility (FCPF), October 2016. 44 Estimates of community-owned forests range from 60 up to 80 percent, whereas 15 percent are privately owned and just 5 percent are public lands. It is also estimated that indigenous peoples hold up to 45 percent of forest lands (INEGI, 2007). Page 69 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) are determinant in the quality and quantity of water available for human consumption; support pollination and regulate pests and diseases. They represent habitats for species and maintain genetic diversity. Finally, forests are spaces for recreation and for the promotion of mental and physical health; they support tourism, are source of inspiration, and for many groups represent a fundamental component of spiritualism and of the sense of belonging.45 6. Forest conservation can be fostered by increasing and internalizing their economic value, which often is greater than the economic value of the alternative land uses to which forest land is converted after deforestation. Evidence shows that communally managed forests in Mexico have experienced less deforestation than protected nature reserves and forests under logging bans (Bray and Merino, 2005; Porter-Bolland and others, 2012). By allowing forest-dependent people to improve their livelihoods while preserving other environmental services, conservation of forests through economically viable sustainable community forest management is a no-regret investment. 7. Unfortunately, the limited organization, capacity, and resources of the forest-dependent people prevent them to from fully taking advantage of the productive activities open to them in forest landscapes. Strengthening the organizational, technical, financial, and entrepreneurial capacities of forest-dependent people and enterprises would enable them to transition to production systems more compatible with the sustainable management of their landscapes, while enhancing their livelihoods. 8. The Strengthening Entrepreneurship in Productive Forest Landscapes Project is designed to provide forest dependent people within selected intervention areas appropriate entrepreneurial capacity building, including organizational, commercial, administrative, and technical skills to promote competitive sustainable forest operations. Through an innovative approach that includes a wider range of beneficiaries beyond ejidos and communities, the integration of complementary resources and different activities implemented in the same territory, and the development of culturally appropriate models of capacity building, the Project is expected to support income diversification, to increase the natural capital, and to realize the benefits of landscape-level interventions. II. Economic rationale of the Project 9. Taking into consideration the lessons learned from previous engagements between CONAFOR and the World Bank, including the Community Forestry Project (PROCYMAF) and the Forests and Climate Change Project (PBCC), the Project will incorporate four innovative approaches:  Including a wider range of beneficiaries, in addition to ejidos and communities.  Focusing on strengthening forestry enterprises and sustainable production.  Combining natural forests management with complementary activities, such as commercial forestry plantations, agroforestry, conservation, and forest restoration, which recognizes the often complex mosaic of land cover and land use in forest landscapes, where a single property may contain areas suitable for production, conservation, or restoration. Combining multiple types of support also make use of the same institutional platform and organizational capacity.  Developing an integrated, culturally appropriate model of capacity building at the local level, aimed at enhancing the effectiveness of the support. 45 The Economics of Ecosystems and Biodiversity http://www.teebweb.org/resources/ecosystem-services/ Page 70 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Such interventions are expected to increase the natural capital and income diversification, and to ensure an intervention at the landscape level. 10. The Project objectives will be met through two components: (1) Strengthening forest management, conservation, and business development, and (2) Institutional Development and Facilitation Support. 11. Component 1, to which the greatest share of the budget is allocated, will finance existing forest sector demand-driven incentive programs to strengthen forest management, conservation, and business development. The implementation model is based on three sub-components: 1.1 Forest entrepreneurship and social capital, 1.2 Sustainable management of forest landscapes, and 1.3 Transformation and access to markets. These sub-components complement each other by creating enabling social, technical and legal conditions for forest management (1.1), promoting the effective implementation of sustainable management of forests for products and services as well as the restoration and agroforestry (1.2); and supporting the consolidation and sustained operation of forest enterprises by enhancing the value added across the supply chains, supporting business creation and development, as well as infrastructure and technology (1.3). All proposed activities and incentives in the Project are voluntary, demand-based, and provided by CONAFOR. Most of the financial support promotes capacity building activities to ensure the adequate technical and administrative implementation of the Projects. 12. Evidence suggests that Mexican Community Forestry Enterprises (CFE) represent attractive investment opportunities, with positive NPV averages in each stage of their development. A study on the competitiveness of forest enterprises that analyzed a sample of 30 CFEs reported returns on investment of 442 percent for forest management, 70 percent for timber harvesting, and 65 percent for processing.46 Unfortunately, social, technical, and economic barriers have prevented many communities from fully realizing these benefits. Although numerous support programs are available to help communities overcome these barriers and engage in sustainable forest management, many communities have failed to improve their forest management, and some have even regressed. Torres and Callejas have shown that most ejidos and communities have remained at the same level of vertical integration and value added from 2004 to 2011.47 Part of the revised approach proposed in this project is aimed at increasing the efficacy of the support programs that support forest management and increasing the economic rents from forests by providing complementary support. 13. The combination of natural forest use with other complementary activities such as commercial forestry plantations, agroforestry, or Payment for Ecosystem Services (PES), make investment in forestry production systems more profitable and enhances the overall social value by enabling synergies and efficiencies across the different support programs. For example, ejidos and 46 Cubbage, F.W., R.R. Davis, D. Rodríguez Paredes, R. Mollenhauer, Y.K. Elsin, G.E. Frey, I.A. González Hernández, H. Albarrán Hurtado, A.M. Salazar Cruz, and D.N. Chemor Salas. 2015. “Community forestry enterprises in Mexico: Sustainability and competitiveness.” Journal of Sustainable Forestry, 34(6-7):623-650. 47 For example, 84 percent of ejidos and communities without authorized management plans (Tier I) in 2004 remained at that level in 2011; only 16 percent of them had moved to manage their forest and timber processing. Similarly, only 18 percent of ejidos and communities with forest management plans but third-party harvesting (Tier II) in 2004 had moved to do the harvesting by themselves or process their timber in 2011. Only 13 percent of those ejidos and communities with management plan and undertaking harvesting directly (Tier III) had actually managed to add value to their timber by transforming it (Tier IV). During the same time period, 10 percent of ejidos and communities that were initially at level IV (undertaking processing and commercialization directly) regressed to lower levels, as did 15 percent of those at level III and 9 percent of those at level II. Page 71 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) communities already with an authorized management plans in the project’s eligibility areas have 7 million ha of forests classified as productive forests, but also 1.4 million tagged for conservation and half a million for forest restoration. In addition, small producers with insufficient cash cannot afford to make up-front expenditures of, for example, certifications of agroforestry practices. Through complementary incentives like PES, agroforestry and other sustainable land-use projects are expected to be more attractive.48 14. Another significant factor that affects NPV is the time lag between investments in certain activities and the positive results that would generate profit or other social benefits. In this regard, those activities that result in short-term realization of benefits would increase the value of the Project, compared to those in which private and social benefits would be realized in the long term, as in the case of SFM. The combination of resources within the same territory/polygon (e.g. the access of PES in areas with forest certification) is expected to increase the economic feasibility of productive sustainable forest operations where benefits are realized in the long term. 15. The effectiveness of the program is also being promoted in the project through programs that recognize the socioeconomic and biophysical heterogeneity in landscapes. This landscape approach proposed in this Project is reflected in the promotion of integrated management strategies, the multi- stakeholder inclusion, and most importantly, by its focus in accompanying the processes, rather than the predetermined outcomes.49 By considering a wide range of actors and their interests, the menu of incentives and activities proposed in the Project can support forest owners and users to better address the synergies and trade-offs involved with attaining socio-economic and environmental objectives.50 Moreover, a landscape approach promotes the generation of production and scope scales that allows the development of participation platforms, decision-making, and activities also at larger scales. 16. Given its focus in the process, a core element of the Project is the provision of technical assistance to ensure the adequate implementation of the activities. Technical capacity building, and technological transfer are transversal elements that will benefit all types of land uses. Unless the forest owners and users can address the uncertainty generated from new sustainable land-use technologies, these will not be implemented. Technical capacity building would increase the certainty to the producers regarding the potential outcomes from adopting innovative land-use alternatives (Casey, 2004), thus leading to higher probabilities of adoption, investment, and/or commitment. III. Assessment of the causal framework 17. Activities within Sub-component 1.1 will enable the sustainable management of unmanaged forests with productive potential, increase forest conservation, and improve the provision of environmental services. Sub-component 1.1 can also strengthen the organizational capacities of the forestry organizations and promote sustainable forest management at the regional and watershed-levels in forests already under management. 48 Gobbi, J.A. 2000. “Is biodiversity-friendly coffee financially viable? An analysis of five different coffee production systems in western El Salvador.” Ecological Economics, 33:267-281. 49 Nielsen. T.D. 2016. “From REDD+ forests to green landscapes? Analyzing the emerging integrated landscape approach discourse in the UNFCCC.” Forest Policy and Economics, 73:177-184. 50 GLF (Global Landscape Forum). 2015. “Outcome statement.” Bogor: Global Landscape Forum. Page 72 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) 18. Sub-component 1.2 will ensure forest management as well as the synergies across landscape activities. It will improve and maintain the productive potential of natural forests and forest plantations. If properly implemented, access to certification can result in premium prices that some segments are willing to pay, and the stabilization of forest economies due to an increased security of the supply base. Through the establishment and maintenance of commercial forest plantations, Sub- component 1.2 can benefit owners of deforested areas with high restoration value and commercial potential, as well as owners of deforested areas with low restoration value and where agricultural and livestock activities have low values as well, by increasing their income. Beyond local environmental services such as the provision of timber and no-timber products, fresh water, the regulation of local climate and air quality, and erosion prevention, global environmental services such as carbon sequestration and storage, and the maintenance of genetic diversity will also be generated. This Sub- component can also incentivize forest conservation and improve environmental services both in managed and unmanaged forests with productive potential as well as forests with no productive potential through PES. Deforested areas with high restoration value but without commercial potential can increase the provision of global ecosystem services through Sub-component 1.2 by integral restoration, priority watershed restoration, and agroforestry systems. 19. Finally, Sub-component 1.3 will support communities and landowners to more fully reap the benefits from forest landscapes by supporting all phases of the production chain. This sub-component is expected to strengthen community forestry enterprises by diversifying activities and products, adding value, process and technological modernization, and market access. These activities will increase the competitiveness of managed forests with productive potential, resulting in an increased income for beneficiaries. Managerial capacity building, technical capacity building, and technological transfer are transversal activities that will benefit all types of land uses. 20. Component 2 aims to strengthen and support CONAFOR´s capacity building and other relevant institutions in order to improve the quality of extension services and technical assistance provided to investment beneficiaries for the successful implementation of activities under Component 1. 21. It is assumed that in the absence of the Project, the beneficiaries would lack the support and the incentives that allow them to undertake conservation and productive activities that are economically feasible; to enter the continuous process of building the competitiveness level of already established enterprises and to improve their technical capacities to sustainably manage their forests, resulting in an increased pressure on the forest frontier. 22. The assumption of additionality is a realistic assumption in this Project, considering that: (i) potential beneficiaries could not self-finance eligible sustainable productive activities in the short/mid-term and there is no evidence of a significant reconversion of conventional activities into sustainable productive land uses, in spite of having a higher profitability in the long term51; (ii) potential beneficiaries do not have the knowledge or skills to implement the Project activities on their own; (iii) potential beneficiaries could not access similar support from a commercial provider; (iv) the proposed Project does not duplicate other donor-funded support. Economic analysis approach 51 Heinrich, M. 2014. “demonstrating additionality in private sector development initiatives. A practical exploration of good practice for challenge funds and other cost-sharing mechanisms.” Cambridge: Donor Committee for Enterprise Development. Page 73 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) IV. Economic analysis approach 23. The Project supports a broad range of activities to ejidos and communities in a large and diverse area. Potential participants in the project areas will be free to choose the specific mix of activities that they wish to undertake. As with many projects that offer a broad range of options to participants, the specific mix of activities that will be implemented cannot be known in advance. This creates an obvious problem for the economic analysis of the Project as a whole. The problem is further complicated because both the potential participants and the project areas are themselves very diverse, which could result in a wide range of outcomes even to similar activities. 24. As participants will be free to choose which activities to undertake, it can be assumed that they will generally pick those that they believe are most likely to bring them net benefits.52 25. In order to overcome the lack of a known portfolio of the Project while assessing the potential costs and benefits of the proposed investments, a set of model activities was used to compare the situation with and without Project. The analysis focuses on four of the main transitions that the Project will support, including model activities that reflect complementary activities carried out in other land uses, as shown in Table A4.1. In each case, the net benefits per hectare are estimated. Table A4.1: Main land-use transitions expected to be supported by the Project Land use adopted Initial land use under project Project activities providing support 1. Forest management Unmanaged forests with Sustainable forest 1.1 Forest entrepreneurship and social capital productive potential management  Strengthening social organization and governance in communities and ejidos  Increase skills and knowledge related to forest management  Forest management plans 1.2 Sustainable management of forest landscapes Forest management  Payment for Environmental Services (including local PES)  Restoration  Agroforestry  Certification 2. Conservation Managed or unmanaged Conserved forest 1.2 Sustainable management of forest landscapes forests with conservation  Payment for Ecosystem Services potential 3. Forest enterprises Forest under basic Well-managed 1.3 Transformation and access to markets management and low productive forest  Business creation, development, management and value value added added 52 This assumption is likely to be quite reliable in the case of activities such as participation in PES, as both the costs of conservation and the benefits to participants (that is, the payments) are easily predictable. It may be less appropriate in cases requiring substantial investments in new productive activities, as there is less certainty about actual costs and benefits. Page 74 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) with greater value  Technology and infrastructure added  Productive projects for women 4. Restoration Land with no forest cover Commercial 1.2 Sustainable management of forest landscapes with productive potential plantations  Initial establishment and maintenance of forest plantations or low opportunity cost  Established commercial plantations agricultural land 26. Private (financial) analysis. These estimates show the net returns for participating communities of undertaking each main land use transition. These estimates include the value of support provided by CONAFOR to communities undertaking these transitions, but do not include the social benefits of externalities generated by forests. These estimates indicate whether undertaking these transitions is likely to be profitable for participating communities. If they are not, communities are unlikely to undertake these transitions, or will only do so while receiving support from CONAFOR, and then abandon them. 27. Social (economic) analysis. These estimates show the net returns for society of undertaking each main land use transition. These estimates omit the value of support provided by CONAFOR to communities undertaking these transitions (as these are transfers), but do include the social benefits of externalities generated by forests to the extent possible. 28. Value of carbon. In addition to direct benefits to landholders, the Project’s activities are likely to generate a wide range of environmental benefits: improved hydrological flows, increased biodiversity conservation, and reduced emissions of greenhouse gases (GHGs). Of these, only the reductions in emissions can be quantified with available data. Following World Bank guidance, the value of these reduced emissions is estimated in two ways:  From the country’s perspective, emissions reductions are valued at the prices to be paid under the prospective pay-for-performance program. As this price is not yet known, an estimate of US$5/tCO2 is used, in line with recent prices in forest carbon markets. The national returns are also valued in the absence of carbon payments.  From the global perspective, the social value of carbon (SVC) is used. Following World Bank guidance53, a low estimate of US$38/tCO2e in 2018 rising to US$78/tCO2e in 2050 and a high estimate of US$77/tCO2e in 2018 rising to US$156/tCO2e in 2050 are used. 29. Discount rate. A 10 percent baseline discount rate was used in all models, but results were also estimated using a higher discount rate (20 percent) in the case of private and national benefits, and using a lower discount rate (4 percent) in the case of global benefits. 30. Monte Carlo analysis. The values used in the models represent typical values for each transition. However, actual values are likely to vary across the landscape depending on local agro-ecological and socio-economic conditions; in addition, there is some uncertainty in the values of different parameters. To allow for this, ‘optimistic’ and ‘pessimistic’ scenarios are examined in addition to the central scenario. A Monte Carlo simulation is run to estimate returns under a range of possible combinations of conditions. The 95 percent confidence interval for these estimates is reported in addition to the central estimate. 53 World Bank. 2017. “Guidance note on shadow price of carbon in economic analysis.” Washington: World Bank. Page 75 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) 31. Area in each transition. The analysis then estimates the area in which each kind of transition is likely to be implemented under the Project. By combining these estimates with the hectare benefits of each land use change, the total net benefits can be estimated. These total net benefits are then compared to estimated project costs to determine whether the Project as a whole is economically justified. V. Analysis of main land-use transitions induced by the project 32. Costs and benefits of the four main land-use transitions to be induced by the Project are examined, as shown in Table A4.1. Model 1: Forest management 33. This model is of unmanaged forests with productive potential converting to sustainable forest management (SFM). As the costs and benefits of SFM to participants and the environmental benefits are likely to vary depending on the type of forests, separate analyses for temperate and tropical forest are presented. 34. Unsustainable forest use. If left unmanaged, forests are exposed to the risk of being subject to overexploitation, illegal harvesting, degradation, and ultimately deforestation. The expected annual deforestation in such forests is likely to be around 0.8 ha per 100 ha per year, on average.54 This figure will of course vary across the landscapes as different forest types face different opportunity costs. However, for the purpose of this analysis, a single value is used for all forests. The values lost with deforestation are multiple, from habitat to wildlife, impacts on soils, on water infiltration, availability of forest products and, carbon emissions. 35. Tropical forests. The analysis of tropical SFM systems is based on data from Lara and others.55 Data on costs and benefits of alternative land uses were obtained and verified from the field experience of expert governmental agencies and civil society organizations. As a representative model, a 1,000 ha Mahogany natural forest units in Yucatan with 60-year rotations and with annual extraction was used. Timber is sold by the ejidos as standing trees. Private costs include the development and implementation of the management plan, training, felling, restoration of areas and equipment, and opportunity costs. Benefits in the analysis include the value of wood. 36. Temperate forests. The analysis of SFM in temperate forest is based on INECC,56 which used data from Cubbage and others.57 The study identified costs and benefits of 30 CFEs, and gathers other additional information from focus groups in Oaxaca and Quintana Roo.58 As a representative model, a pinewood production unit with 50-year rotations and annual harvests was used. Private costs include site 54 Lara, J.A., A. Guevara, and R. Alba. 2014. “Costos y beneficios de diferentes tipos de uso de suelo en México.” México, D.F.: USAID and Alianza México-REDD+. 55 Ibid. 56 INECC (Instituto Nacional de Ecología y Cambio Climático). 2016. “Beneficios y costos de la participación en los programas de desarrollo forestal relacionados con las medidas de las Contribuciones Nacionalmente Determinadas (CND). Informe final.” México, D.F.: Instituto Nacional de Ecología y Cambio Climático. 57 Cubbage 2015. 58 The study considers pine as the representative species used in CFEs in Mexico, claiming that it accounts for 90 percent of the plantations in temperate ecosystems, and that these ecosystems represent 90 percent of the total area where CFEs are located. Page 76 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) preparation, maintenance and forest conservation, technical support, and timber harvesting. Benefits considered no-timber products, and income from timber sold as round wood in sawmills. 37. The main assumptions used are summarized in Table A4.2. To estimate the opportunity cost of the transition a BAU deforestation of 0.008 ha/year was assumed.59 Considering that most of the forest cleared in Mexico is used for grazing, the opportunity cost of the transition from unmanaged to managed forest using average returns from livestock production was estimated at US$100/ha. The social NPV includes carbon benefits from the transition to SFM, as evidence suggests that forest under management in Mexico increase their capacity for carbon storage. An estimate of 3.8tCO2e/ha/year +/- 20 percent was used for tropical forests and 5tCO2e/ha/year +/- 20 percent for temperate forests.60 Table A4.2: Summary table of assumptions: transition to SFM Tropical Forest Temperate Forest Planted species Mahogany Pine Project duration 60-year rotation 50-year rotation Project size 1000 ha 1000 ha Carbon storage capacity under SFM (min, max) (1) 3.04, 4.5tC/ha/yr 4, 6tC/ha/yr Total yield 1.8 m3/ha/yr 22 m3/ha @ yrs 5, 20, 35, 50 CONAFOR support for management plan 2 US$/ha 2 US$/ha CONAFOR support to strengthening social organization and 9.52 US$/ha 9.52 US$/ha governance @yrs 0, 10, 20, 30 and 40 Harvesting costs mid 125 US$/ha/yr 464 US$/ha @ yrs 5, 20, 35, 50 pessimistic 150 US$/ha/yr optimistic 100 US$/ha/yr Annual management costs mid 55 US$/ha/yr 21 US$/ha/yr pessimistic 63 US$/ha/yr optimistic 30 US$/ha/yr Price of roundwood mid 175 US$/m3 52 US$/m3 pessimistic 109 US$/m3 45 US$/m3 optimistic 217 US$/m3 66 US$/m3 Opportunity cost (alternative income of extensive livestock) (2) 100 US$/ha/yr US$ 100 ha/yr Transaction costs (administrative costs to CONAFOR) 2.1 US$/ha/yr 2.1 US$/ha/yr Carbon emissions under BAU from extensive livestock (3) 1.2tC/ha/yr 1.2tC/ha/yr Sources: (1) CONAFOR based on data from the National Forest Inventory; (2) Jaramillo (2002); (3) Lara and others (2014). Project characteristics of a SFM project in tropical forests, including optimistic and pessimistic scenarios, were adapted from Lara and other (2014). For temperate forests, data was adapted from INECC (2016); optimistic and pessimistic roundwood prices for temperate forests were obtained from CONAFOR (2017). 38. Private benefits. The transition from unmanaged forests with productive potential to SFM is expected to be profitable for participating communities, with NPVs of over US$1,100/ha in tropical forests and over US$1,000/ha in temperate forests (Table A4.3). Profitability remains robust even at higher discount rates. SFM can be unprofitable under some combinations of conditions, but it is expected that communities would be able to avoid adopting SFM under those conditions, and TA will help them to do so. 59 Lara and others, 2014. 60 Estimate from CONAFOR based on data from the National Forest Inventory. Page 77 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) 39. Social benefits. This transition is expected to result in positive social returns in both tropical and temperate forest (Table A4.3). From the national perspective, this transition generates positive social returns even in the absence of carbon payments, with an estimated NPV of US$1,100/ha in tropical forests and US$1,000/ha in temperate forests. Carbon payments would increase these estimated benefits to about US$1,300 in tropical forests and US$1,200/ha in temperate forests. Although there is a small chance that returns will be negative in tropical forests, the potential losses are small. Returns are expected to be positive in temperate forests under plausible values of the main parameters. The estimates remain positive even under higher discount rates (20 percent). The estimated benefits are even higher when carbon is valued at the SVC, even with low values, with NPVs of over US$3,200/ha in tropical forests and about US$3,600 in temperate forests. Table A4.3: Estimated benefits of transition of unmanaged forests with productive potential to SFM Social NPV - National perspective Discount Private NPV (US$/ha) Social NPV - Global perspective (US$/ha) rate (%) (US$/ha) Without C Market price of C Low SVC High SVC Tropical forests 7,753 16,707 4 (4,726 – 10,488) (13,580 – 19,342) 1,148 1,132 1,320 3,177 6,593 10 (-217 – 2,297) (-232 – 2,281) (-44 – 2,470) (1,812 – 4,326) (5,229 – 7,743) 548 536 631 20 (-83 – 1,079) (-94 – 1,067) (0 – 1,162) Temperate forests 8,267 19,649 4 (8,009 – 8,783) (19,391 – 20,164) 1,059 1,043 1,231 3,551 7,942 10 (941 – 1,296) (924 – 1,280) (1,113 – 1,469) (3,433 – 3,788) (7,824 – 8,179) 641 629 724 20 (583 – 755) (572 – 744) (667 – 839) Notes: Other externalities not quantified: Local climate and air quality, moderation of extreme events, erosion prevention and maintenance of soil fertility, biological control, habitat for species, maintenance of genetic diversity, water quantity and quality Source: Own elaboration with data from Lara and others, 2014; INECC, 2016; The World Bank, 2017; CONAFOR, 2013 Model 2. Conservation with PES 40. This model is of managed or unmanaged forest with conservation potential converting to conserved forest with PES. Without PES, many such forests would be gradually degraded or deforested and converted to other uses. The opportunity costs of these alternative uses represent the bulk of economic costs for forest conservation. These costs vary greatly depending on the type of forests, the type of farmers and their assets, the plot size, among others. It is important to note that not all such forests would be deforested without the project. Some would remain, either because there are no viable alternative uses (for example, because they are on steep slopes, poor soils, or are very distant from roads), or because they provide some benefits to local landholders. There would be no opportunity cost from conserving such forests; indeed, in the case of forests that provide local benefits, opportunity costs could be negative. Page 78 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) 41. A nationwide study conducted during design of the PES program estimated average opportunity costs ranging from about US$60/ha for maize producers to about US$100/ha for livestock producers.61 However, a substantial number of producers have lower opportunity costs. 42. Because participation in PES is voluntary, it can be assumed that landholders will only choose to participate if the opportunity cost of conserving the specific forest areas that they submit to the program is less than the payment they receive, minus the cost of participation. In particular, those who choose to participate in PES are likely to have low opportunity costs—lower than the net value to participants of the payments the receive. If this were not the case, they would simply not participate. In some areas, opportunity costs could be close to zero, or even negative. 43. Annual PES payments currently range from about US$16/ha to US$70/ha (MXN304-1,300/ha), depending on ecosystem type and deforestation risk (including payments for technical assistance). However, participants must devote up to 50 percent of the payment amount to implement a plan of best practices. To the extent that they would not have undertaken these activities if the rules did not oblige them to, the net value of the payment is reduced62 while the conservation benefits increase. To account for this, the net value of payments to participants by 25 percent were reduced in the private NPV calculations. The upper bound on annual opportunity costs thus ranges from US$12/ha to US$53/ha, depending on the area. 44. The primary reason for instituting the PES program is to correct a market failure and protect socially valuable environmental services that forests provide but that are not internalized in the land use decisions. PES is targeted to areas that are important for hydrological services and/or for biodiversity. By conserving forests, PES also reduces carbon emissions. Of these benefits, only the emissions reductions can be quantified. Accordingly, only emission reduction benefits are included in the analysis below. It is important to note that this results in extremely conservative estimates of the total benefits generated by the PES program. 45. Participation in PES only generates environmental benefits if the area conserved would have otherwise been deforested. If forests enrolled in the program would have been conserved even without it, no additional environmental benefits are generated. To examine the degree of additionality in the program, an evaluation of the PES program impact covering the period 2011 to 2014 was conducted.63 Problems with the available data on forest cover made it impossible to obtain statistically significant results. Within this constraint, the study found that deforestation among participants appeared to have been reduced by about half64, with a particularly strong impact in high deforestation areas in the Yucatán Peninsula (which accounts for almost half of forest loss in the 2001- 2013 period). At the same time, to the extent that conservation is not additional, it also does not generate opportunity costs. In such cases, the economic costs of the program are limited to the transaction costs of operating the program (contracting and monitoring participants, making payments, etc). Nevertheless, it is clear that there is considerable scope to improve additionality. This 61 Jaramillo, L., 2002. “Estimación del costo de oportunidad del uso de suelo forestal en ejidos a nivel nacional.” DGIPEA Working Paper No.0205. México, D.F.: Instituto Nacional de Ecología, adjusted to 2017 prices. 62 We assume that the rest of the expenditure on forestry activities generates benefits at least equal to their cost, and so can be omitted from the analysis. 63 Alix-Garcia, J.M., K.R.E. Sims, and V. Orozco. 2017. “Evaluation of Mexico’s payments for environmental services program: 2011-2014.” Washington: i2i Program. 64 An analysis of the program’s impact in earlier years had found a similar impact on deforestation by participants (Alix -Garcia and others, 2012, 2015). Page 79 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) is further confirmed by the study’s finding that most participants would have been willing to accept significantly lower payments than they received. Under Component 2 of the Project, efforts will be made to further improve the program. 46. The main assumptions used in the calculations are shown in Table A4.4. Table A4.4: Summary table of assumptions: transition to PES Forest type Tropical Temperate Time frame 50 years 50 years Annual deforestation rate (1) 0.008 ha 0.008 ha Additionality (2) 50 50 Carbon coefficients 128tCO2/ha 100tCO2/ha Opportunity cost of avoided deforestation US$16/ha/yr US$16/ha/yr Average PES payment US$20/ha/yr US$20/ha/yr Transaction costs of PES US$2/ha/yr US$2/ha/yr Sources: (1) Lara and others, 2014; (2) Alix-Garcia and others, 2017. 47. Private benefits. Participation in the PES program is expected to be profitable for communities, as they will only offer to the program forest areas that would have generated less returns than the payments they would receive. Should this condition change (for example, if the value of alternative land uses increases), communities can simply drop out of the program by not re-applying to it when their contracts end. Table A4.5: Estimated benefits of transition of forest with conservation potential to conserved forest with PES Discount Private NPV Social NPV - National perspective (US$/ha) Social NPV - Global perspective (US$/ha) rate (%) (US$/ha) Without C Market price of C Low SVC High SVC Tropical forests 4 628 1,258 10 205 -28 11 233 477 20 102 -12 4 Temperate forests 4 486 978 10 205 -28 6 179 486 20 102 -12 1 Notes: Other externalities not quantified: Local climate and air quality, moderation of extreme events, erosion prevention and maintenance of soil fertility, biological control, habitat for species, maintenance of genetic diversity, water quantity and quality Source: Own elaboration with data from Lara and others, 2014; INECC, 2016; The World Bank, 2017; CONAFOR, 2013 48. Social benefits. The PES program has slightly negative returns for the country when carbon benefits alone are considered (about US$28/ha). However, these estimates omit the other national benefits that forest conservation generates, such as protecting hydrological services; if these could be estimated, it is likely that they would compensate for these small estimated losses. If carbon is valued at the SVC, on the other hand, the PES program generates positive net benefits (about US$230/ha in tropical forests and US$180/ha in temperate forests, at low SVC) even without considering other environmental benefits. Any improvements in additionality would also improve these results. 49. Fondos Concurrentes. It is worth noting that in areas conserved by the PES program’s Fondos Concurrentes program (in which local service user co-finance payments), the proportion of the Page 80 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) contracted area that is at high risk of deforestation is much higher than under the regular program, reflecting the greater incentives that local service users have to ensure that they only pay for areas where benefits are very likely. At present, over 100 such agreements are in place, covering almost 400,000 ha. Although the above-mentioned study did not look at these areas separately, it is likely that additionality is higher in these areas. Under Component 2 of the project, the Fondos Concurrentes program will be further expanded. 50. New PES modalities. Currently, the PES program only supports forest conservation. Under Component 2, new PES modalities will be developed, that will provide PES (a) to sustainably managed forests; (b) for restoration of degraded areas by reforestation and/or adoption of sustainable land uses such as agroforestry and silvopastoral practices. Both new modalities would be focused in critical areas for hydrological and/or biodiversity benefits.  SFM PES contracts would increase the area in which SFM is viable for local communities, by providing an additional income stream. Such contracts would thus increase the area under Model 1 discussed above, and have similar net benefits per hectare.  Reforestation PES contracts would make reforestation more attractive and ensure it is maintained over time by combining support to reforestation itself with a longer-term payment for the resulting forest. The primary benefit of this contract would be to reverse the environmental damage that had been caused by deforestation, restoring the carbon stock, reducing the damage to hydrological services, and (at least partially) restoring biodiversity. Its costs would include the cost of reforestation itself, and the opportunity cost of abandoning the current use (which would likely be low, as these areas are degraded).  Agroforestry and Silvopastoral PES contracts would allow degraded areas to be converted to areas that are more productive for landholders while also generating increased environmental services. Although the environmental services generated would be lower than those the original forest had provided, the cost of the restoration would be substantially lower, as the opportunity costs would be negative. Payments would only be needed for a short period, as the practices are established. PES was found to be very effective at inducing adoption of silvopastoral practices in Colombia and Nicaragua65; moreover, landholders were found to have retained these practices even after the payments ended.66 Model 3. Strengthening Community Forest Enterprises (CFE) 51. This model examines the transition from poorly or minimally managed productive forest to well- managed productive forest by Community Forest Enterprises (CFE) with stronger business and entrepreneurial capacities. The analysis of this transition is based on data from the GEF-financed Biodiversity in Production Forests in Certified Markets Project, implemented by CONAFOR in 2011- 2016, and on a study of the competitiveness of CFEs in Mexico67. In order to understand the impact of capacity building of CFE, first, a review of the GEF-financed Biodiversidad en Bosques de Producción 65 Pagiola, S., and A.R. Rios. 2013. “Evaluation of the Impact of Payments for Environmental Services on Land Use Change in Quindío, Colombia.” PES Learning Paper 2013-2 Washington: World Bank. 66 Pagiola, S., J. Honey-Rosés, and J. Freire-González. 2016. “Evaluation of the permanence of land use change induced by payments for environmental services in Quindío, Colombia.” PLoS ONE, 11(3):e0147829–18; Pagiola, S., J. Honey-Rosés, and J. Freire-González. 2017. “Assessing the permanence of land use change induced by payments for environmental services: Evidence from Nicaragua.” PES Learning Paper No.2017-1. Washington: World Bank. 67 Cubbage and others, 2015. Page 81 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) y Mercados Certificados project was conducted, which supported the improvement of the production and productivity capacity of 32 CFEs. The average annual forest income of the 32 CFEs in 2016 was US$1.3 million, a 20 percent increase compared to 2015, representing benefits of approximately US$7 million in that year. In the same period, the production costs remained almost the same, mostly due to higher wood prices.68 Regarding the social benefits, from 2012 to 2016 the forest cover increased in 0.5 percent in the 185 permanently monitored sites, and the number of registered species increased in 4.6 percent. Finally, women participation in CFE increased from 1 percent to 7 percent. 52. Income increases resulted from the modernization of the sawmill industry, improvements in costs control processes, improved administrative and sawing practices, increase in the authorized volumes for harvesting, technical assistance for the development and promotion of forestry products, costs restructuration, access to new markets, including international markets, and to better prices. 53. NPV estimates before and after the project implementation could not be obtained given the lack of data on area and productivity per CFE. However, stable production costs and average levels of income similar to those in 2016 are sufficient to justify the project. Productivity challenges faced by the forestry sector are significant and can only be addressed with additional support: It is estimated that Mexican sawmills lose between 35 and 40 percent of their production due to lack of technical capacities.69 54. Net returns of CFEs were estimated for a sample of 30 CFE in Mexico using data from Cubage and others.70 Overall, CFE with certification reported incremental benefits, compared to CFEs without certification. Communities that managed forests but sold standing timber had a net return of US$50/ha without certification and of US$ 62/ha with certification, while communities that managed forests and harvested timber had returns of US$ 60/ha without certification and of US$ 88/ha with certification. The greatest effect of certification was on communities that transformed timber to sawnwood, who had a net return of only US$19/ha without certification but of US$67/ha with certification. Considering that only those forests managed with certain technological and organizational levels can be certified, the data demonstrates the value of facilitating the access to technology and strengthening the capacities of CFEs. The vertical integration of CFEs also generates incremental benefits. Table A4.6: Estimated benefits of strengthening business and entrepreneurial capacities of CFE Discount Uncertified to Uncertified to Uncertified type III Certified type III rate (%) certified type III certified Type IV to type IV to type IV Social NPV (US$/ha) 4 492 1,337 334 1,178 Private NPV (US$/ha) 10 265 720 180 635 20 140 379 95 334 Notes: Externalities not quantified: Carbon benefits, local climate and air quality, moderation of extreme events, erosion prevention and maintenance of soil fertility, biological control, habitat for species, maintenance of genetic diversity, water quantity and quality Source: Own elaboration with data from Cubbage and others, 2013 68 UNEP (United Nations Environment Programme). 2017. “Informe Final - Proyecto Biodiversidad en Bosques de Producción y Mercados Certificados.” New York: UNEP. 69 INECC, 2016. 70 An outlier with annual harvest of 0.03m3/ha and total costs of US$ 180/m3 was excluded from the estimates. Page 82 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) 55. The transition from poorly or minimally managed productive forest to well-managed productive forest by strengthened CFE would result in a positive social and private returns, with the extent of benefits depending on the magnitude of the improvement71 (Table A4.6). Note that no carbon benefits are assumed to result from this transition. Model 4. Commercial plantations 56. This model examines the transition from land with no forest cover with productive potential or low opportunity cost agricultural land to commercial plantations (CPs). 57. The estimated costs and benefits of CPs are context-specific and depend on a number of factors such as the size of the infrastructure required, the capacities of the personnel, land tenure, type of product (timber vs. no-timber), the market value of the species, and the opportunity cost. CP are productive systems that contribute to carbon sequestration. Depending on the specie, it has been estimated that CP can capture between 7tCO2/ha (Cedrela odoratta) and 130tCO2/ha (Gmelina arborea), with most species capturing about 40tCO2/ha.72 58. The main assumptions used in the calculations are shown in Table A4.7. They are based primarily on data by García-Cuevas and others (2011) and adapted by Lara and others (2014). The project model consists of a mahogany plantation of 10 hectares in Quintana Roo. Thinning takes place in years 10, 15, 20, and 25, with a final harvest in year 30. Investment costs include: project documents, paths, materials, vehicles, and labor. Variable costs include tools, inputs, and labor. Benefits include the value of wood from forest thinning, and the final harvest. Table A4.7: Summary table of assumptions: transition to commercial plantations Planted species Mahogany Project duration 30 years Project size 10 ha Carbon emissions of commercial plantations 980 tC by year 30 Total yield 3,353 m3 (Thinning in years 10, 15, 20, and 25, and final harvest at year 30 PV of establishment costs US$3,125 PV of maintenance costs US$6,089 PV of equipment costs US$4,649 PV of private return US$41,285 Opportunity cost (alternative income of extensive US$150.86/ha/yr livestock) CONAFOR support for establishment and initial US$ 730/ha management Carbon emissions of BAU (extensive livestock) 1.2tC/ha/yr Source: Land others (2014). Given that annual values of costs vary throughout the years of the project, we present their PV, using a 10 percent discount rate. 71 Type II CFE are subject to timber exploitation where the extraction activity is carried out by third parties through commercial contracts, without the owner or possessor participating in any phase of the process; Type III CFE are subject to authorized logging that is carried out directly by the owner or possessor in some phase of the production chain; Type IV CFE are producers of raw materials that have infrastructure for its primary transformation and directly carry out the commercialization of their products. 72 CONAFOR. 2003. “Programa para el desarrollo de plantaciones forestales comerciales (PRODEPLAN): Ejercicio fiscal 2003.” Guadalajara: CONAFOR. Page 83 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) 59. Private benefits. Undertaking commercial plantations is expected to be privately profitable at low discount rates, but may not be at higher discount rates, due to the long wait before the timber can be harvested (Table A4.8). Table A4.8: Estimated benefits of transition of degraded areas with low restoration value and high commercial potential to commercial plantations Social NPV - National perspective Discount Private NPV (US$/ha) Social NPV - Global perspective (US$/ha) rate (%) (US$/ha) Without C Market price of C Low SVC High SVC 17,794 21,756 4 (10,034 – 22,410) (13,995 – 26,371) 1,907 1,292 1,478 3,134 4,979 10 (160 – 3,139) (-454 – 2,524) (-268 – 2,710) (1,387 – 4,366) (3,233 – 6,211) -777 -1,284 -1,214 20 (-1,120 – -434) (-1,356 – -941) (-1,558 – -871) Notes: Other externalities not quantified: Local climate and air quality, moderation of extreme events, erosion prevention and maintenance of soil fertility, biological control, habitat for species, maintenance of genetic diversity, water quantity and quality Source: Own elaboration with data from Lara and others, 2014; INECC, 2016; The World Bank, 2017; CONAFOR, 2013 60. Social benefits. This transition is also expected to result in a positive social return from the national perspective (Table A4.8), but only at relatively low discount rates. At a 20 percent discount rate, plantations are unprofitable even with carbon payments, at current carbon prices. From a global perspective, on the other hand, plantations bring net benefits even at low SVC levels. Restoration is another transition that could be supported by the Project. Birch and others (2010) analyzed the economic potential of a change in land use from livestock grazing to restored native forest. The projects are 20-year forest restoration projects in the dryland of Veracruz and Chiapas. Benefits accounted for included carbon sequestration, timber and no-timber production, and tourism. Costs considered were opportunity costs of livestock, and direct costs, including fencing and fire management, and tree establishment in active restoration. Results show that passive restoration is cost-effective for both study areas on the basis of the services analyzed. Results were very sensitive to the value assigned to carbon. In Chiapas, active restoration is cost-effective with carbon values of US$ 43/ton and above. In Veracruz, passive restoration with protection is cost-effective at all discount rates with this carbon value but costs outweighed the benefits with lower carbon values. VI. Total project benefits 61. The preceding analysis shows that the proposed land use transitions are expected to be profitable for communities that adopt them, and to generate positive social benefits on a per hectare basis. As the extent of benefits varies, the total benefits generated by the project will depend on the specific mix of these activities that are adopted. As communities will select which transitions to undertake in light of their own preferences, conditions, capabilities, and constraints, this mix cannot be known in advance. 62. To estimate the potential overall results of the Project, a land use change scenario prepared by CONAFOR was used. This scenario is intended to be realistic, but conservative. It projects total land use change covering 719,000 ha, including 317,000 ha of SFM, 390,000 ha under PES, 3,500 of commercial plantations. As this scenario was intended to estimate emissions reductions, it does not include improvements in CFEs, which are not expected to generate substantial emissions reductions. Page 84 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Thus 40,000 ha of forests whose CFEs are improved (10,000 under each level of improvement shown in Table A4.6) were added. 300 Benefits 1,200 Costs 250 Benefits 1,000 Costs 200 Million USD Million USD 800 150 600 100 400 50 200 - - Private NPV National NPV National NPV Global NPV Global NPV (zero C) (market C) (low SVC) (high SVC) A. National perspective B. Global perspective Note: PVs over 30 years, at 10 percent discount rates. Figure A4-1: Total project costs and benefits 63. Figure A4.1A shows the estimated NPV of project activities under these assumptions about areas covered.73  Benefits to landholders. Collectively, participating ejidos and communities would be better off by about US$270 million. The bulk of these benefits (over 60 percent) would be generated from SFM, followed by participation in PES (about 30 percent) and improvements to CFEs (7 percent).  National benefits. The country would gain about US$160 million, or US$210 million if carbon is valued at market prices, but these are certainly underestimates as they do not include any environmental services generated by forests, such as hydrological protection. The bulk of these national benefits would again be generated by SFM. PES appears to impose net costs if carbon isn’t valued and to make only a small contribution if carbon is valued at market prices, but, again, this omits the value of the other environmental benefits that forests protected by PES provides.74  Global benefits. When the large amounts of carbon emissions that would be avoided and of carbon that would be sequestered thanks to new tree planting are valued at the SVC, global benefits are expected to be very substantial, ranging from about US$650 million (at low SVC) to almost US$1400 million (at high SVC). Note that these are underestimates, as they omit any benefits from improved biodiversity conservation. 64. Project costs. Total project costs are estimated to be US$185 million, including US$56 million financed by the loan plus US$119 million financed from CONAFOR’s budget in Component 1, and US$10 million 73Unless otherwise stated, all NPVs in this section are over 30 years, at a 10 percent discount rate. 74Of course, all forests generate some amount of environmental services—not only those protected by PES. However, PES is targeted to areas that are particularly valuable for environmental services such as hydrological protection (while programs such as SFM are targeted to areas with the greatest production potential, which may or may not correlate with importance for environmental services), and at forests that have few other productive benefits, and so are particularly likely to be lost without PES. Page 85 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) covered by the FCPF grant in Component 2. Component 1 expenditures are expected to be disbursed equally in each year of the project, while Component 2 expenditures will be concentrated in the first 3 years. The PV of total project costs, therefore, is US$141 million, or US$133 million from the country’s perspective (omitting costs financed by the grant). These costs are also shown by the solid black lines in Figure A4.1. In all cases, estimated benefits exceed costs, usually by a substantial margin. Nationally, the NPV is about US$34 million if carbon benefits are omitted (BCR of 1.26), and about US$80 million if they are valued at market price (BCR of 1.6). Globally, the estimated NPV ranges from about US$460 at low SVC to about US$1,100 million at high SVC. 65. Sensitivity analysis. The robustness of the analysis depends on the (i) reliability of the estimated per hectare benefits of each main land use transitions; (ii) estimated areas on which each transition is undertaken; and (iii) estimated costs. As already noted in section V, most of the transitions are expected to bring positive net benefits on a per hectare basis even under pessimistic assumptions, and as landholders are free to adopt any transition they wish to (or none), they are likely to avoid those that are unlikely to generate net benefits. At zero carbon prices, national benefits would remain positive as long as per hectare benefits and participating area do not decline by more than 15 percent; at market carbon prices, national benefits would remain positive as long as they do not decline by more than 35 percent. Thus, the estimated results are quite robust to even large swings in assumptions. It is also worth emphasizing that this understates the robustness of results, as significant benefits could not be estimated. Page 86 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) ANNEX 5: WORLD BANK ENGAGEMENT IN THE FORESTY SECTOR IN MEXICO COUNTRY : Mexico Strengthening Entrepreneurship in Productive Forest Landscapes 1. The Government of Mexico and the World Bank have been collaborating for more than two decades on forest management. This support has evolved in terms of scope and instruments to respond to specific country needs. In the late 1990s, the Bank provided institutional support that led to the creation of the National Forest Commission (CONAFOR). This support shifted in the 2000s to supporting CONAFOR in piloting innovative programs, such as Community Forestry and Payment for Environmental Services Programs that have since become emblematic programs not only in Mexico but also globally. The Payment for Environmental Services program has demonstrated the conservation potential of attributing an economic value to natural resources and their conservation. Bank financed projects have further supported CONAFOR in institutionalizing these forest management and conservation programs, and have provided important stepping stones toward current and future World Bank support. For example, under the current, Bank-supported Forest and Climate Change Program, which represents the largest and most ambitious World Bank engagement on forests today, the Bank and GOM have focused on developing integrated operations that draw in a variety of sectors and levels of government in forest landscape management, which is financed with IBRD proceeds along a variety of grants. Figure 1 provides an overview of the various World Bank projects and instruments that have supported Mexico’s forest sector and their contributions to the Bank’s Forest Action Plan. Page 87 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Figure 5.1 World Bank engagement history in the forestry sector in Mexico that contributed to the areas of the Forest Action Plan Source: Mexico`s Forest Note (2017) 2. The current Forest and Climate Change Program brings together a combination of financial and analytical instruments to support the forest sector in a comprehensive and programmatic manner. Since 2012, the Bank has utilized various instruments to support the GoM under the Forest and Climate Change Program, totaling approximately US$460 million, to help rural communities sustainably manage their forests, strengthen social organization, and implement innovative initiatives to reduce pressure on forests and generate additional income. The program includes: (i) the Forest and Climate Change Project, funded with IBRD loan proceeds and a grant from the Forest Investment Program (FIP), with a dedicated grant mechanism (DGM) for indigenous peoples and local communities; (ii) REDD+ Readiness technical assistance , funded with a grant from the Forest Carbon Partnership Facility (FCPF); and (iii) a grant from the Program on Forests (PROFOR) to help align forest and agriculture sector investments in forest landscapes.. This investment and technical assistance support, implemented at the landscape level, aims to boost productivity of the forestry sector and agriculture activities in forest landscapes, while conserving biodiversity and ecosystem services. Figure 2 provides an illustration of this approach and the components that comprise the integrated support provided to Mexico under the Forest and Climate Change Program. The figure also shows how the program has developed over the past two decades, evolving from a community-driven forestry approach to a focus on integrated landscape management. Page 88 of 90 The World Bank Strengthening Entrepreneurship in Productive Forest Landscapes (P164661) Figure 5.2 Current programmatic engagement between the Bank and the GoM in Forest and Climate Change Source: Mexico`s Forest Note (2017) 3. Building on World Bank collaboration with the GoM on forest conservation and management, a new, follow-on forestry project is being prepared. The proposed Project, to be funded with IBRD loan proceeds and ISFL grant resources, ensures continuity in the areas of community forest management and payment for environmental services. It also supports innovative new approaches, including: (i) increasing the economic and environmental benefits of project investments, by promoting the integration of sustainable productive forest management activities complemented with conservation and restoration activities in the same territory; (ii) supporting a wide variety of potential beneficiaries, such as communities and ejidos, small land owners, and forest enterprises in order to have a greater impact at landscape level; (iii) enhancing beneficiaries’ social capital, by providing culturally-appropriated training in areas related to entrepreneurship and business strengthening, and (iv) focusing on productivity, which will enable forest-dependent people and enterprises to more fully reap the benefits of forest landscapes. The Project will integrate productivity and forest landscape management activities as a means of increasing economic opportunities, while promoting sustainable forest management and conservation. 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