PROGRAM INFORMATION DOCUMENT (PID) (Appraisal)

February 7, 2012

Report No.: AB6972 (The report # is automatically generated by IDU and should not be changed)

Operation Name Strengthening Social Resilience to Climate ChangeRegion LATIN AMERICA AND CARIBBEANCountry MexicoSector Other social services (50%);Sub-national government

administration (50%)Operation ID P120170Lending Instrument Development Policy LendingBorrower(s) THE UNITED MEXICAN STATES

Secretaria de Hacienda y Crédito PublicoPalacio Nacional, Patio de la EmperatrizEdificio 12, Piso 2, Col. CentroMexico City, DF 06000MexicoTel: (52-55) 3688-1438 Fax: (52-55) 3688-1216ricardo_ochoa@hacienda.gob.mx

Implementing Agency Ministry of Environment and Natural Resources (SEMARNAT)Date PID Prepared February 7, 2012Date of Appraisal Completion January 17, 2012Estimated Date of Board Approval

March 1st, 2012

Decision Project authorized to proceed to negotiations upon agreement on any pending conditions and/or assessments.

Other Decision

I. CLIMATE CHANGE ENGAGEMENT IN MEXICO

1. The Government of Mexico (GoM) has requested a Strengthening Social Resilience to Climate Change Development Policy Loan (DPL) in the amount of US$300,751,879.70 million. This request underscores the GoM’s continuing desire to engage with the World Bank in its efforts to promote sustainable, resilient development through improved climate change adaptation and mitigation policies that benefit the poor.

2. The Government of Mexico and the World Bank have a long-standing, deep engagement on climate change. This commitment encompasses the initial steps of international efforts to build a broad agenda. This engagement has progressed in recent years, with subsequent stages built on previous actions. The Bank’s engagement in the field of climate change in Mexico currently comprises the full range of Bank instruments, including:

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a. Knowledge Services: providing advice on a range of development options to tackle climate change and acting as an incubator of innovation.

b. Financial services: including investment lending, Development Policy Loans as well as CTF concessional financing, GEF and other grants. The Bank also provides credit enhancement, hedging swaps, catastrophe risk management and advisory services.

c. Convening and Coordination Services: including knowledge sharing, South-South exchange, event organization and high-level coordination.

3. Four stages of climate change engagement between the Bank and the GoM can be distinguished: (i) Foundations; (ii) Early Support; (iii) Strengthening; and (iv) Consolidation. During the first stage, Foundations (before 1999), Bank support was focused on small investment projects in the waste, transport and forest management areas. Moreover, with the launch of the Global Environment Facility (GEF) in 1991, Mexico gained new opportunities for grants on projects related to biodiversity, climate change, international waters, land degradation, the ozone layer, and persistent organic pollutants. Although climate change was not explicitly included in this phase, it laid the foundations of the climate change engagement between the Bank and the GoM, leading to the creation of the Mexican Office for Greenhouse Gas Mitigation in FY99.

4. The second stage, Early Support (1999–2007), corresponds to Mexico’s ratification of adherence to the Kyoto Protocol, which led to the establishment of a national strategy and sectoral committee on climate change issues. During this stage, support to the climate change agenda became explicit. The projects were mainly focused on specific sectors such as clean transport, waste management and energy provision. The Bank’s leading role in knowledge on climate change was recognized by a series of Knowledge Services and represented a new relationship with the GoM, going beyond traditional financial services. The Programmatic Environment Development Policy Loans I and II (US$200 million each) recognized and supported national environmental strategies on tourism, energy, forestry and water, some of them explicitly related to climate change.

5. In the third stage, Strengthening (2007–2010), Bank support was focused on cross-sectoral strategies to address climate change and was closely related to the National Climate Change Strategy. The flagship of this period was the Climate Change DPL (US$501 million) which was presented to the Board in 2007 for its approval along with a new Country Partnership Strategy (CPS). In this stage, the analytical and knowledge activities continued to increase considerably, evidencing the GoM’s intensifying demand for the Bank’s technical expertise on climate change.

6. One of the key activities developed during this stage was the preparation of the Clean Technology Fund (CTF) Investment Plan (IP), which provides support for the low-carbon growth objectives in Mexico’s 2007–2012 National Development Plan, Climate Change Strategy and Special Climate Change Program. Preparation of the IP was led by the GoM and the Bank, in partnership with the Inter-American Development Bank (IADB) and the International Finance Corporation (IFC). The IP addresses programs in three key sectors: urban transport, renewable energy, and energy efficiency. The choice of programs reflects a combination of the GoM’s

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ambitious strategies and sector implementation readiness, as well as the development banks’ capacity and focus, and priorities established by the CTF.

7. In the fourth and current stage, Consolidation (2010–), the focus has been on mainstreaming mitigation and adaptation to climate change across sectors and levels of government. Some of the key instruments that were deployed during this stage and are underway include:

a. The Urban Transport Transformation Program (UTTP, 2010), which combines various Bank instruments, including a Clean Technology Fund (CTF) loan in the amount of US$200 million and an IBRD loan in the amount of US$150 million. The program is also supported by a GEF grant of US$ 5.4 million aimed at the development of clean transport solutions at the local level. The objective of the UTTP is to contribute to the transformation of urban transport in Mexican cities toward a lower carbon growth path by improving the quality of service provided by urban transport systems.

b. The Green Growth DPL (2010) in the amount of US$1.504 billion, which recognized and supported the cross-cutting mitigation measures embedded in the objectives of the Programa Especial de Cambio Climático (PECC, Special Program for Climate Change).

c. The Low-carbon DPL (2010) in the amount of US$401 million, which recognized and supported the GoM’s reforms and implementation of policies and programs under the PECC. This DPL included the energy, transport, urban housing and forestry sectors and was informed by the flagship Low-carbon Study (MEDEC).

d. The Subnational Climate Change Program (2010–), which is composed of a series of activities, including: (i) the Subnational Climate Change Plans, financed by a grant from the Spanish Fund for Latin America and the Caribbean (SFLAC) and Bank budget. Its aim is to develop State Adaptation Plans. The Bank has been supporting five states (Michoacán, Campeche, Quintana Roo, Oaxaca and Zacatecas) in capacity building, and has been providing technical advice related to climate change adaptation and risk management strategies; (ii) the SFLAC grant for Local Sustainable Development, which aims to provide advisory services to develop a Municipal Climate Vulnerability Index and Guidelines for Municipal Climate Change Action Plans; and (iii) the Cities Alliance Grant to support the municipality of Othon P. Blanco, Quintana Roo, in developing a municipal sustainability and climate change strategy.

e. These are complemented by an Engagement in the Water Sector and Climate Change, which defines an integrated series of instruments, including: (i) the Adaptation to Climate Change in the Water Sector DPL (2010) in the amount of US$450 million, which supports the GOM’s efforts to strengthen the institutional framework and monitoring capacity in Integrated Water Resources Management and Mainstreaming Adaptation to Climate Change in Water Programs; (ii) Adaptation to Climate Change Impacts on the Coastal Wetlands in the Gulf of Mexico (2010), partially financed by a GEF grant in the amount of US$ 4.5 million, which promotes adaptation to climate impacts in the coastal wetlands of the Gulf of Mexico and will assess the overall impacts of climate change and potential response options, with a focus on coastal wetlands and associated watersheds; and (iii) the Strategic Engagement Program (SEP) to Support Adaptation of the Water Sector to Climate Change (2011), which furthers the partnership between Mexico and the Bank by strengthening CONAGUA’s capacity to address the challenges that climate

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change and population growth pose to the security of the water supply needed for Mexico’s economic and social development.

8. During FY12 and FY13, the engagement will be further consolidated through incorporation of new sectors and instruments. Some of the ongoing and planned activities that deserve prominence include:

a. The Strengthening Social Resilience to Climate Change DPL (FY12), which is proposed in this document.

b. The Forests and Climate Change Investment Program (FY12), which will further implementation of the related policies recognized by this DPL. It will deploy various instruments, including technical assistance (e.g., South–South collaboration on REDD+), policy advice, convening services (e.g., the Forest Carbon Partnership Facility), institutional strengthening and direct support to communities (e.g.proposed Forest and Climate Change SIL), and the piloting of innovative financial services (including a possible Forest Bond with the Bank’s Treasury Department). The program will also support innovative and cross-cutting activities in Mexico through the Forest Investment Program (FIP), which explicitly mainstreams climate resilience considerations and will contribute to multiple co-benefits such as biodiversity conservation, protection of the rights of indigenous peoples and local communities, and poverty reduction through rural livelihoods enhancements.

c. Other future activities. These include the Modernization of the National Meteorological Service Specific Investment Project (FY12), and the Climate Change Public Expenditure Review (FY12).

9. The Bank program of climate change in Mexico constitutes an outstanding example of engagement with a sophisticated middle-income country in which the Bank has deployed the full range of available instruments to support the evolution of the government’s program through the years in a consistent manner. The focus has been on using the existing range of Bank instruments in ways that build collective synergy and have delivered knowledge services combined with lending services.

DPL: Strengthening Social Resilience to Climate Change through Adaptation and Forestry Mitigation Policies

10. Climate change threatens socially sustainable development in Mexico, as it does elsewhere, but it also provides an important opportunity to bring to the forefront the needs of the poor in adaptation and mitigation strategies, policies and programs. It is indisputable that the poor are the least resilient to climate change. Strengthening social resilience to the impacts of climate change (i.e., climate change adaptation) and ensuring inclusive benefits of mitigation policies are closely intertwined with sustainable approaches to development and poverty reduction. Natural disasters occurring between 2000 and 2005 increased poverty in Mexico by 3.7 percent.1 Disasters expose the cumulative consequences of many earlier decisions, notably disorderly and unsustainable patterns of territorial and urban development. Climate

1 Rodriguez-Oreggia et al. (2010). “The Impact of Natural Disasters on Human Development and Poverty at the Municipal level in México” in CID Working Paper No. 193, Harvard University. January.

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change multiplies the existing vulnerabilities of poor people to extreme weather events, such as increased water insecurity, greater health risks, and loss of livelihoods due to the collapse of ecosystems. One ecosystem of particular importance in Mexico is its forests. Not only do the forests have significant carbon emissions reduction potential in Mexico, they also represent a physical and financial buffer against natural disasters (i.e., storms and droughts) and constitute a source of revenue and livelihood for thousands of rural and indigenous communities, which manage 70 percent of the forests in the country. Thus, reducing deforestation and forest degradation is an essential element of a pro-poor mitigation and adaptation policy.

11. The Strengthening Social Resilience to Climate Change DPL is the first World Bank lending operation whose central, explicit theme is the reduction of the impacts of climate change and variability on the poor. The three policy areas recognize and support the GoM’s progress in addressing critical obstacles to enhancing social resilience to climate change. These obstacles, which are articulated in the Government’s Mid Term Adaptation Policy Framework, are: (i) the lack of policy frameworks, state-level institutional arrangements, and funding to facilitate adaptation to the differentiated effects of climate change on the poor and vulnerable; (ii) the lack of incentives to promote disaster resilient and socially sustainable territorial and urban planning and weaknesses in pro-poor targeting of agriculture sector disaster insurance; and (iii) and institutional weaknesses in forestry management, and weak municipal capacity. The three areas are:

i. Strengthening social resilience through long-term climate change adaptation planning oriented to the state level. The DPL addresses a core challenge by recognizing the development of national frameworks and funding mechanisms that foster intersectoral, intergovernmental, and multi-stakeholder coordination and collaboration to promote socially inclusive and pro-poor adaptation policies and programs.

ii. Strengthening social resilience through disaster risk reduction and territorial development oriented to the municipal level. The DPL addresses core challenges by recognizing financial and other incentives for disaster risk reduction and for socially and environmentally resilient territorial development and urban development.

iii. Strengthening social resilience at the community level through pro-poor sustainable community forest management. The DPL addresses core challenges by recognizing policies and programs to foster community-based forest management and public participation in policy-making, in order to enhance the resilience of poor rural and indigenous communities that derive their livelihoods from forests while at the same time mitigating carbon emissions from deforestation and forest degradation.

II. COUNTRY CONTEXT

A. Recent Economic Developments

12. The Mexican economy rapidly recovered from the impact of the global economic crisis. After a severe contraction in late 2008 and early 2009, resurgence in demand for Mexican manufactured exports led to a sharp rebound of economic activity. By the end of 2010 output returned to its pre-crisis level, with an upturn in domestic demand sustaining growth of 5.4 percent for the year, and supporting convergence to the country’s potential output.

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13. Strong links between the Mexican and U.S. manufacturing industry contributed to a surge in external trade. With almost 80 percent of trade directed to the U.S., a recovery of economic activity and, in particular, of industrial production in the U.S. led to a sharp rebound of Mexican exports. Manufactured exports increased by 30 percent in 2010, surpassing their pre-crisis level, and continue to expand at a healthy annual rate of 14 percent in 2011. The rapid expansion of exports led to an increase of Mexico’s market share in the U.S. to over 12 percent from 10.5 percent prior to the crisis. Recent external competitiveness gains are the result of moderate wage growth, a relatively weaker peso and higher global transport costs.

14. The recovery spurred a moderate increase in employment. Though the Mexican labor market is recovering from the trough, unemployment remains above pre-crisis levels. The unemployment rate, which reached a record high of 6.4 percent in September 2009, has remained over 5 percent over the last two years, two percent above the average pre-crisis level. After net job destruction in 2009, approximately 500 thousand formal sector jobs have been created annually leaving an equal number of net labor force entrants to look for other alternatives in self- or informal sector employment. Over the past four years, real wages in the formal sector have languished, compared to an annual average increase of one percent previous to the crisis.

15. After more than a decade of rapid growth, outward migration and remittances have stagnated. Recent population census data show that the number of Mexican migrants in the U.S. remained at 12 million between 2007 and 2010, compared to an estimated average annual net migration of 500 thousand in the preceding years. This is likely due to tighter migration controls and the downturn of U.S. economic activity, in particular in the construction sector. As a result, annual remittance inflows of US$ 22.7 billion in 2011 are still 13 percent below their end-2007 peak. The impact of the slump in remittances in terms of purchasing power, poverty relief and domestic consumption was somewhat mitigated by currency depreciation in 2008-2009 and more recently in the second half of 2011.

16. Credit growth has recovered and is now in line with nominal Gross Domestic Product (GDP) growth. Consumer and corporate credit have expanded at an annual nominal rate of about 12 percent. Housing finance has trailed behind, with 10 percent annual nominal growth, partly attributed to the demise of the specialized housing non-bank financial intermediaries (Sociedades Financieras de Objeto Limitado - SOFOLES). Commercial banks non-performing loan ratio remains at 2.7 percent and is adequately provisioned for. Provisioning levels (180 percent) are significantly higher than in the rest of the region.

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Chart 1: Mexico Selected Macroeconomic ChartsFig.1-Aggregate demand (2008:II=100) Fig.2- Labor market indicators

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17. The authorities are gradually withdrawing the fiscal stimulus to reassure markets of Mexico’s fiscal sustainability. Fiscal discipline and strong fiscal policy frameworks, including the establishment of stabilization funds and the acquisition of oil price hedges, provided the authorities with some space to conduct countercyclical policy during the height of the crisis

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without jeopardizing long-term sustainability. Fiscal stimulus in 2009 was mainly financed by non-recurrent revenue that was no longer available in 2010, when the authorities initiated a program of fiscal consolidation by increasing taxes and containing public expenditures. To moderate the withdrawal of fiscal support a modest budget deficit was allowed in 2010, 2011 and 2012, with a return to a balanced budget as stipulated in Mexico’s fiscal responsibility law envisaged for 2013.2

18. Monetary policy remains accommodative after substantial easing in 2009. The sharp contraction of economic activity in 2009 created a particularly large output gap, suggesting that the economy may, for the medium-term, expand moderately above its potential without generating inflation pressures. Consumer price inflation has trended down for the major part of 2011, and is currently at 3.8 percent within the authorities’ target interval of 3 plus/minus 1 percent.

19. International reserve accumulation and a new International Monetary Fund (IMF) Flexible Credit Line (FCL) strengthen Mexico’s insurance against external shocks. The buildup of international reserves stems from net public sector foreign exchange receipts, due to elevated oil prices, and the introduction of a rules based mechanism that enables market participants to sell foreign exchange to the Central Bank. Gross international reserves now stand at US$142 billion, an increase of US$29 billion over the last twelve months. A new FCL was contracted with the IMF in January 2011 for a two-year period to an amount of approximately US$73 billion.

20. Over the past two years Mexico experienced substantial capital inflows, mainly directed at the domestic government bond market. Loose global monetary conditions and inclusion of Mexican local currency government bonds in Citibank’s World Government Bond Index (WGBI) in October 2010 led to a surge of capital inflows of about US$16 billion in the last half of 2010 and first half of 2011, respectively. However, increased global risk aversion has recently put pressure on asset and currency markets. Mexico’s flexible exchange rate and increased financial cushion (reserves and the FCL) should help mitigate the effect of a sudden, sharp reversal in capital flows.

21. The Mexican authorities recently adjusted their foreign exchange intervention mechanism in response to sharply increased market volatility. The higher degree of risk aversion on the back of the European sovereign debt and banking sector problems has triggered a sharp depreciation of the peso and increased the volatility of the peso-U.S. dollar exchange rate. To reduce market volatility, the authorities reintroduced in end-November 2011, a rules-based foreign exchange intervention mechanism that announces the auction of USD400m on days when the Mexican peso has depreciated by 2 percent or more compared to the previous day. At the same time, the authorities suspended the monthly sale of dollar put options through which the Central Bank accumulated additional international reserves. The measure aims at enhancing liquidity conditions in the foreign exchange market and therefore reducing USD/MXN volatility.

2 The budget balance targeted in the Fiscal Responsibility Law excludes investments in the oil sector amounting to about 2.0 percent of GDP annually over the past couple of years. A broader deficit measure like the Public Sector Borrowing Requirements (PSBR) does include these outlays as well as additional adjustments for concepts such as inflation-indexed debt and financial intermediation by development banks.

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22. Food price inflation and the economic crisis have increased poverty over the past few years. Total poverty increased from 44.5 to 46.2 percent between 2008 and 2010, according to a new official poverty measure. Approximately a quarter of the poor, 10.4 percent of the total population in 2010, live in extreme poverty. These figures are the result of a new poverty measure based on a multidimensional concept of poverty. Though no historical time series of the new poverty measure exist, the previous income based poverty measure exhibited a reversal in the declining trend of poverty as of 2008. The increase was largely attributed to food price increases, whereas the recent increase in poverty levels is mainly due to the economic crisis and labor market slack.

B. Macroeconomic Outlook and Debt Sustainability

23. Economic growth has moderated but is forecast to remain healthy in 2012. Economic growth has moderated to about 3.8 percent in 2011. Growth in 2012 is projected to slow to 3.3 percent, and stabilize at 3.5 over the medium-term (see base case scenario Table 1).3 Despite a slowdown in U.S. growth, external demand will likely remain buoyed by growth in U.S. industrial production and improved Mexican external competitiveness. Domestic demand is expected to remain expansionary and driven by labor market improvements, credit growth and infrastructure investment. Downside risks to growth, associated with a U.S. slowdown and the ongoing problems in Europe, remain significant.

24. A lower case growth scenario may materialize if Mexico’s main trading partner falls back into a recession in the near term (see Box 1). Weaker demand for Mexican exports and a slowdown in investment may lead to a below potential rate of growth in the short term, 2012, of about 2 percent. Such a low case scenario also includes a return to the lower bound of Mexico’s medium-term potential output growth range at 3.0 percent and impacts the Government’s fiscal and debt projections. A greater emphasis on growth-oriented structural reforms is crucial to improve Mexico’s medium-term growth potential, which is driven by growth of the labor force and capital accumulation but remains constrained by lack of any significant productivity improvements.

25. Mexico’s security situation continues to impact growth and pose challenges for the authorities. The growing violence, in particular in northern Mexico, stems from the conflict between drug cartels and among cartels and Mexican security services. The domestic security threat is undermining economic growth and investment, in particular in the areas most impacted by violent crime. As a result, improving public security remains one of the Government’s priorities. Increasing resources needed to address the rise in violence could detract from spending on social needs and public investment.

26. Uncertainty over the global outlook and a more moderate domestic growth outlook will continue to restrain price pressures. Annual headline consumer price inflation, 3.8 percent by the end of 2011, maintains a downward trend, approaching Bank of Mexico’s medium

3 See also IMF Selected Issues (2011).

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term target. A deceleration in the economic recovery is slowing the closure of the output gap, suggesting that monetary conditions can remain relatively accommodative.

27. The current account deficit has widened moderately with the upturn in domestic demand. Mexico’s current account deficit will likely widen to around 0.9 percent of GDP in 2011, and be financed via FDI investment, projected at US$20 billion. Export growth, projected at approximately 18 percent in 2011, will likely moderate over the medium term, and average approximately 9 percent annually, while the current account deficit may widen but remain financeable by FDI. Remittances are projected to amount to $22.7 billion in 2011 and may increase modestly if the economic environment in the U.S. improves.

28. The Government remains on track with its fiscal consolidation plan. The fiscal deficit, in terms of the Public Sector Borrowing Requirements (PSBR), is expected to narrow to 2.9 percent of GDP in 2011 and the Government plans on a further deficit reduction to 2.8 percent in 2012. Stronger oil related revenues are compensating for slightly weaker tax revenue. Similar to 2010 and 2011, the Government has proposed to remove the caps on the stabilization funds for 2012.

29. Improvements in Mexico’s debt structure mitigate the impact of shocks on public finances. The Government’s debt management strategy continues to favor the local debt market, and use external financing in a complementary manner. Due to ongoing uncertainty and volatility in international financial markets, Mexico will continue to meet the Government’s financing needs with the lowest cost and risk combination of internal and external debt, while strengthening local debt markets and maintaining a diverse access to credit.

30. A return to a balanced budget as of 2013 would ensure a sustainable public debt path. The public sector debt-to-GDP ratio increased over the past few years mainly due to the partial inclusion in 2008 of public sector workers’ pension liabilities in public debt following the ISSSTE (Instituto de Seguridad Social al Servicios de los Trabajadores del Estado)-pension reform, the fiscal stimulus program and sharp drop in economic activity in 2009. Nevertheless, Mexico maintains a moderate net public debt-to-GDP ratio at about 37 percent and the Government’s medium term fiscal framework foresees a 2 percent reduction in the debt-to-GDP ratio over the next five years.

31. The main risk to the public debt-to-GDP ratio is the uncertainty surrounding the GDP growth rate. The GOM’s medium term fiscal projections show a declining debt-to-GDP path based on a diminishing PSBR from 2.3 percent of GDP in 2013 to 2.0 percent in 2017 and annual economic growth of 3.9 percent. Net debt-to-GDP diminishes under these assumptions from 36.3 percent in 2013 to 34.6 percent in 2017. The base case scenario presented in Table 1 projects annual medium term growth of 3.5 percent, which maintains a downward debt-to-GDP path towards a ratio of 35.4 percent by 2017, whereas a low case scenario of 3 percent annual growth would roughly stabilize the debt-to-GDP ratio over the medium term.

32. Despite significant foreign ownership, Mexico’s financial sector remains relatively insulated from problems in Europe. Strong capitalization levels and prudential policies implemented over the last few years have strengthened the sector’s vulnerability to shocks.

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Though foreign ownership is significant in the banking sector and ring fencing measures are difficult to implement, recent policies including tighter limits on dividend distribution and related-party lending should limit contagion from the European banking sector. However, a sovereign default and/or ongoing instability in European debt markets would reinforce global risk aversion, intensify stock market volatility, heighten capital outflows and tighten domestic credit growth. Furthermore, Mexican institutional investors (pension, mutual and insurance funds) could experience asset losses, which could in turn generate domestic market instability.

33. Notwithstanding the significant challenges posed by the current global economic climate, Mexico’s macroeconomic policy framework is considered adequate for the purposes of the proposed Development Policy Loan.

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Box 1: Weakening global growth prospects and increased financial volatility: Impact on Mexico

Extraordinary downward adjustments in the prospects for global economic activity and extremely high global financial market volatility have been observed over the past few months. Since end-July 2011, global markets have suffered major financial turbulence and a flight from risky assets, related to weak economic activity and fiscal problems in the U.S., the sovereign debt crisis in several European countries and associated weakness in the European banking system. The perceived lack of political resolve in both regions significantly increases downside risks to the world economy.

Weakening growth prospects in advanced economies, in particular in the U.S., and global financial market volatility led to rapid adjustment in Mexico’s growth prospects and currency valuation. Private sector analysts’ average growth estimates for 2011 and 2012 fell from 4.2 and 4.1 percent respectively to 3.8 and 3.4 percent within a period of two months (July-September). The deteriorating outlook and flight to quality led to a depreciation of the peso by 16 percent between end-July and beginning December, reversing the gradual appreciation trend that followed the currency collapse during the 2008-2009 financial crisis.

Rapidly deteriorating domestic growth prospects are due to the strong links between Mexican industry and the U.S. economy, the market for almost 80 percent of Mexican manufactured exports. Weakening external demand also has an important impact on the service sector as the share of services directly linked to manufacturing in Mexico is high by international standards (Organization for Economic Co-operation and Development -OECD 2011). An external demand shock generated by the U.S. falling back into recession would create a substantial short-term impact on economic growth in Mexico. Even in the case of a prolonged weakness in the U.S., strong macroeconomic policy fundamentals should favor a recovery of the Mexican economy and a return to the medium-term potential output rate of growth.

An abrupt decline in commodity prices and of oil in particular, would have a negative impact on economic activity and the trade balance, though lower oil production has reduced net oil exports to less than 1 percent of GDP thereby significantly diminishing the terms of trade effect of oil price fluctuations. In terms of public finances, a reduction of the oil price by US$10 per barrel reduces public sector revenue by 0.3 percent of GDP.

The recent sharp currency depreciation suggests a reversal in capital flows. In the year prior to the current instability (July 2010-June 2011), investment by foreign residents in peso-denominated government bonds amounted to US$32 billion, while international reserves increased by US$28 billion. The policy response to what has been perceived as a disorderly depreciation and excess volatility of the peso dollar exchange rate has been to intervene in the foreign exchange market through a rules based mechanism that has been applied earlier with success (see paragraph 24). The weaker peso has led to some easing of monetary conditions, however concerns about a pass-through to domestic prices are relatively muted in the current environment of low inflation and weakening economic activity.

According to the monthly survey among private sector analysts by Banco de Mexico.

Table 1: Main macroeconomic indicators (2007-2014), base case scenario          Est. ProjectionIndicator 2007 2008 2009 2010 2011 2012 2013 2014National Accounts annual real percent change, unless noted      Real GDP 3.3% 1.2% -6.1% 5.4% 3.8% 3.3% 3.5% 3.5%Consumption 3.9% 1.6% -5.7% 4.7% 4.2% 3.2% 3.7% 3.4%Gross Domestic Investment 3.3% 3.0% -15.9% 6.8% 6.7% 4.9% 4.8% 4.9%Gross Domestic Investment ( % of GDP) 26.5% 26.9% 23.5% 25.0% 25.7% 25.9% 25.9% 26.2%External Accounts in US$ billions, unless noted        Current Account Balance -8.9 -16.3 -6.4 -5.6 -10.2 -15.2 -18.7 -19.5Current Account Balance (% of GDP) -0.9% -1.5% -0.7% -0.5% -0.9% -1.4% -1.5% -1.5%

Trade Balance -10.1 -17.3 -4.7 -3.0 -3.1 -6.2 -8.3 -9.2Merchandise Exports Current 271.9 291.3 229.7 298.5 353.7 384.9 416.5 444.8Merchandise Exports Current (annual growth) 8.8% 7.2% -21.2% 29.9% 18.5% 8.8% 8.2% 6.8%

Oil Exports 43.0 50.6 30.8 41.7 55.0 52.7 51.4 49.7Non Oil Exports 228.9 240.7 198.9 256.8 298.7 332.2 365.0 395.1

Merchandise Imports Current 281.9 308.6 234.4 301.5 356.8 391.1 424.7 454.0Merchandise Imports Current (annual growth) 10.1% 9.5% -24.0% 28.6% 18.3% 9.6% 8.6% 6.9%

Transfers, net 26.4 25.5 21.5 21.5 22.7 24.4 25.6 26.9Factor and non factor services , net -25.2 -24.5 -23.2 -24.1 -29.8 -33.4 -36.1 -37.2

Direct Investment 29.7 26.3 15.3 18.7 19.0 20.5 21.3 22.2Portfolio Investment 7.3 2.4 7.6 23.8 28.0 18.0 15.0 15.0Gross Reserves 87.2 95.3 99.9 120.6 142.5 149.3 156.3 163.3Public Sector in percent of GDP, unless noted        Total Revenues 22.0% 23.5% 23.7% 22.7% 21.7% 21.6% 21.3% 21.2%

Oil Revenues 7.8% 8.7% 7.4% 7.4% 7.4% 7.6% 7.4% 7.3%Non Oil Revenues 14.2% 14.8% 16.4% 15.3% 14.3% 14.1% 13.9% 13.9%

Tax 9.3% 9.9% 9.5% 10.1% 9.9% 9.8% 9.7% 9.7%Non tax 1.4% 1.2% 3.2% 1.4% 0.7% 0.5% 0.5% 0.5%Public Enterprises 3.5% 3.7% 3.7% 3.8% 3.7% 3.7% 3.7% 3.7%

Public Expenditure (%) 23.0% 25.1% 26.3% 26.1% 24.6% 24.4% 23.6% 23.4%Current Expenditure 18.7% 19.7% 21.2% 21.1% 20.0% 20.3% 19.8% 19.6%Capital Expenditure 4.3% 5.4% 5.1% 5.1% 4.6% 4.1% 3.8% 3.8%

PSBR Balance (% GDP) -1.0% -1.6% -2.6% -3.5% -2.9% -2.8% -2.3% -2.2%Net Public Sector Debt (% GDP) 29.3% 33.4% 36.9% 36.8% 36.7% 36.7% 36.7% 36.4%Prices                Inflation (e.o.p.) (%) 3.8% 6.5% 3.6% 4.4% 3.8% 3.1% 3.0% 3.0%Nominal Exchange Rate (average- pesos/dll) 10.9 11.1 13.5 12.6 12.4 13.5 13.0 13.2Oil Price (US$ per barrel) 61.6 84.4 57.4 72.3 100 97.7 95.5 92.2Source: INEGI, Banxico, SHCP, and WB estimates.

C. Context for Sustainable and Resilient Development

34. This section presents an overview of the challenges that human settlements face in Mexico due to climate related problems: (a) Mexico’s long-term climate challenges and the need to plan for them; (b) Mexico’s current vulnerability to natural disasters and the need to strengthen the adaptive response through disaster risk reduction and territorial development; and (c) current forest management patterns and the need to strengthen them to ensure long-term sustainability of this socially and economically important resource.

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Long-term climate change challenges37. Climate change will add to existing climatic risks that are already high in Mexico due to its largely arid geography, extensive low-lying coastal areas, and exposure to hydrometeorological events arising in the Pacific Ocean as well as in the Atlantic and Gulf of Mexico. Climate change models, both for Mexico and the world, predict that climate change will lead to more extreme weather events, rising temperatures, changing rainfall patterns, sea level rise, and shifting patterns of diseases.4 In Mexico, mean annual temperature is projected to increase by 0.5±0.5°C in the south and by 1.3±0.8°C in the northern areas by the end of 2020; by 1.3±0.3ºC in the south and by 2.3±1.0°C in the north by the end of 2050; and by an estimated 2.5±0.3ºC in the south and 3.5±1.3°C in the north by the end of 2080.5 Temperatures have already increased by 0.6°C since 1960.6 The projected rate of warming is similar in all seasons, but more rapid in the north and central regions of the country. Mean annual rainfall is projected to decrease in most regions of Mexico.7 Humid tropical zones are expected to receive more rainfall and this, combined with extreme events and sea level rise, is expected to result in more frequent and severe floods. In agriculture, many small-scale farmers depend on rainfed agriculture, which is likely to be severely impacted by the increasing irregularity of rainfall affecting productive capacity and competing needs for water resources. Some projections suggest that in the arid Northern parts of Mexico temperatures in the A2 scenario8 could exceed 4C9– dangerously close to climate thresholds – and would call for a fundamental change in rural livelihoods.

38. Mexico’s social diversity and varied geography require locally-driven, tailored approaches to adapting to the impacts of climate change. Indigenous peoples and rural communities that depend on rainfed agriculture are among those most affected by climate change/variability due to their stronger dependence on natural environments, particularly forests, for their livelihoods. Indigenous peoples are among the most vulnerable people, with or without climate change, given their limited capacity to cope with long-term changes and greater exposure to natural climate related hazards. Climate change will have severe impacts on coastal populations of Mexico where large numbers of people dwell in low-lying areas and rely on climate sensitive coastal assets. The impacts too would likely differ. For instance sea level rise 4 At a global level, UNFCCC (2007) states, “As a result of global warming, the type, frequency, and intensity of extreme events, such as tropical cyclones (including hurricanes and typhoons), floods, droughts and heavy precipitation events , are expected to rise even with relatively small average temperature increases. Changes in some types of extreme events have already been observed, for example, increases in the frequency and intensity of heat waves and heavy precipitation events.” (Meehl et al. 2007)5 Mexico 4th National Communication on Climate Change to the UNFCCC. Analysis included the use of an ensemble of 20 IPCC models downscalled at 50x50 km for A2 SRES scenario.6 Word Bank Climate Change Knowledge Portal (http://climateknowledgeportal.worldbank.org) and Mexico 4th National Communication on Climate Change to the UNFCCC.7 Projections of mean annual rainfall from a range of IPCC models in an ensemble are broadly consistent in indicating overall decreases in rainfall for Mexico. Model ensemble median values for almost all seasons and emissions scenarios are negative. Climate projections vary between -60% and +8% change from 1980-2000 baseline by the 2090s, with model ensemble median values of -3% to -15%. Relative changes in projected rainfall show the strongest decreasing signal in dry season (December, January, and February and March, April, and May) rainfall.8 Scenarios are alternative images of how the future might unfold and are an appropriate tool with which to analyse how driving forces may influence future emission outcomes and to assess the associated uncertainties. They assist in climate change analysis, including climate modeling and the assessment of impacts, adaptation, and mitigation. Four different narrative storylines were developed to describe consistently the relationships between emission driving forces and their evolution and add context for the scenario quantification (A1, A2, B1, B2). (see IPCC 2000, IPCC Special Report Emission Scenarios, for a description of each scenario).9 Ibid

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and flooding are the more likely scenarios in the South of Mexico (the Yucatán); while drought and erratic rainfall would be the main challenge further North. In short, there will be no “one-size-fits-all” adaptation strategy.

39. Successfully reducing vulnerability to climate change and climate variability requires national frameworks and policies that identify the current and future needs of the most vulnerable and strengthen both autonomous and planned adaptation.10 National policies need to provide meaningful adaptation frameworks and incentives for actions, while state and local levels need to tailor those frameworks and incentives to suit their specific climate threats and economic conditions.

Natural disasters and unplanned urban growth40. Mexico has a high level of exposure to natural hazards. Both coasts of the country stand in the path of hurricanes and tropical storms originating in the Caribbean Sea and the Atlantic and Pacific Oceans. The country also lies within one of the world’s most active seismic regions, is prone to volcanic activity, and its northern zone and central areas are prone to recurrent droughts. This wide geographic exposure renders more than two-thirds of the country’s population and GDP at hazard risk (de la Fuente 2009). The bulk of natural hazards (turning into disasters) that affect Mexico are hydro-meteorological. More worryingly, the occurrence of disaster events in Mexico over the last five decades has shown an increasing trend (see Figure 1) and would increase in severity with climate change.11

Figure 1. Incidence of Natural Disasters in Mexico (1960–2009)

Source: Centro de Investigación sobre Epidemiología de los Desastres, Universidad Católica de Lovaina

41. The trend towards increasingly frequent and increasingly severe weather-related natural disasters in Mexico and the social damage associated with those disasters reinforce the need to place more attention on climate change adaptation in the national poverty agenda and on poverty reduction in the national climate change adaptation agenda. A disaster’s effect on an economy’s output is not the same as its effect on people’s welfare, health and well-being. In many cases (particularly in large economies), a major disaster will not have

10 Autonomous adaptation is that which is done by individuals without government assistance; planned adaptation needs policy to induce individuals or organizations to change their practices and behaviors.11 Mexico is ranked 23 amongst the countries at relatively high economic risk from multiple hazards. Around 41% of Mexico’s territory and 31% of its population are exposed hurricanes, storms, floods, earthquakes and volcanic eruptions. In economic terms, this translates into 30% of GDP considered to be at risk from three or more hazards and 71% at risk from two hazards or more.

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large or lasting effects on the macroeconomic outlook. However, at the micro level, poor households are invariably affected most severely and can be trapped in poverty by being hit by even “small” hazards that do not garner media attention.

42. There is ample evidence that the poor not only often face greater exposure to natural hazards, but also have lower adaptive capacities. A Poverty and Social Impact Analysis (PSIA) conducted for this DPL found that poverty in Mexico correlates with a higher susceptibility to suffer losses from hazard events. Likewise municipal data on disaster risk show that disaster-prone municipalities in Mexico are those that are predominantly rural and indigenous, with limited access to services, high rates of deforestation and other environmental problems. The poor also hold more of their wealth in physical assets that are climate sensitive – notably assets related to agriculture, forestry, or fishery based activities.

43. Rapid urbanization in Mexico adds to the cumulative risks of disasters. More than 70 percent of the population lives in urban areas, and the projections show that by 2025 as much as 80 percent of the population will live in the 358 cities than comprise the Sistema Urbano Nacional. The pattern of territorial and urban development of Mexican cities is quickly increasing the vulnerability of the urban population, as populations, particularly the poor, concentrate in vulnerable areas. Poor urban planning and land use are key underlying factors contributing to hazard events becoming disasters. In particular it is the poor who live in structures and in areas that are more vulnerable to hazards. Housing and urban policies that promote sustainable cities are one of the no-regrets options that should be promoted, because they provide benefits with or without climate change.

Community forest management44. In Mexico, sustainable community based forestry management has an important role to play in increasing the social resilience of the poor in the face of climate change, from both a mitigation and an adaptation perspective. Sustainable community forest management contributes directly to social resilience of the poor to climate change in important ways, including: (i) providing sources of income that are less susceptible to short-term droughts or flooding; (ii) reducing the risk of floods that inflict loss of life and significant damage; (iii) helping to control forest fires which, other things being equal, will tend to increase in Mexico with climate change; (iv) providing ecosystem services that enhance people’s livelihoods, including the provision of food and fuel and the regulation of water flows and temperature; and (v) helping to increase communities’ social capital, which enhances social resilience.

45. Synergies between mitigation and adaptation to climate change in the forestry sector are widely recognized. Mexico ranks twelfth worldwide in forest cover, with more than 64 million ha of forests, about half of which are considered commercially viable. With its wide range of ecosystems, species richness is expectedly high and the country ranks fourth worldwide in terms of its overall biological diversity. Fifty-five percent of the estimated 13 million inhabitants living in the forests suffer from extreme poverty. About 8,500 indigenous communities and ejidos12 own around 70 percent of the country’s forests under a legally

12Communities and ejidos are landholdings with either indigenous or non-indigenous members with rights, stipulated by law, to communal resources under which an individual family has a right to an individual plot of land allocated formally by the community as well as access to communally owned lands (often forest lands, pastures and waterways).

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recognized collective land ownership system–a situation unique in the world.13 Officially, around 300,000 people are employed in the forest sector, and forestry activities account for about 1.8 percent of GDP. Official net deforestation rate is moderate, while forest degradation is relatively high;14 and both show significant variation across the country.

46. Forests play an important role in adaptation to climate change. While Mexico’s forests have long been valued as a source of timber, they are increasingly being appreciated for their role in helping to regulate the environment. For example, by providing a protective canopy and roots that hold and bind the soil, forests greatly reduce erosion and storm flow, which helps to regulate the hydrologic cycle and protect watersheds. Moreover in times of natural disasters (e.g., floods and droughts), forests not only lessen the physical impacts, but also provide livelihood and marketable resources that build economic resilience to the impacts of extreme events. For instance in times of disaster access to timber and non-timber forest produce can provide an alternative stream of income to cope with short term emergencies.

47. The forestry sector provides the single greatest potential for reducing greenhouse gas emissions over the coming decades in Mexico. Because trees and forests sequester carbon through their photosynthetic processes, they provide efficient mechanisms for fixing carbon (either by reducing carbon dioxide emissions from conversion of forests to non-forests or by removing carbon dioxide from the atmosphere and sequestering carbon in growing biomass and soils, thereby reducing carbon concentrations in the atmosphere). It is estimated that REDD interventions have an emissions reduction potential of 1,120 Mt CO2e.15 Other forestry interventions with high greenhouse gas mitigation potential are reforestation and restoration (10 percent) and afforestation (9 percent)16. The GoM recognizes that only by improving forestry management, including reducing the emissions from deforestation, can the country meet its climate mitigation goals.

III. BANK SUPPORT TO THE GOVERNMENT PROGRAM

A. Link to Country Partnership Strategy

48. Mexico and the World Bank Group have a long-standing partnership that encompasses a full menu of financial, knowledge, and coordination and convening services. The Country Partnership Strategy (CPS) for Mexico, which was discussed by the Board in April 2008, and the February 2010 CPS Progress Report, build on the Mexican authorities’ desire to maintain a strong financial and knowledge-based relationship with the Bank, focusing on flexibility and innovation in responding to the partner’s development challenges and demand for borrowing as market conditions evolve. The aim of the CPS is to provide a flexible framework for World Bank Group support to Mexico. The strategy is based on a streamlined approach to lending that is in line with the priorities set in the 2007–2012 PND. The CPS envisioned a multi-sector DPL, such as this, to support the GOM’s Climate Change strategy.49.13 Food and Agriculture Organization (FAO). 2010. Global Forest Resources Assessment 2010. Rome; Italy14 Government estimates for annual deforestation and forest degradation rates are 0.25 percent and 0.45 percent, respectively (based on the Readiness Preparation Proposal–CONAFOR 2011).15 Based on the six REDD interventions proposed by the Low-carbon Study (MEDEC).16 However, is hard to compare percentage to the REDD+ potential expressed in Metric tons (Mt).

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IV. THE PROPOSED OPERATION

A. Operation Description

50. The proposed Strengthening Social Resilience to Climate Change DPL constitutes an essential piece of the consolidation stage (2010-) of the Bank’s climate change engagement in Mexico. The objective of this operation is to strengthen social resilience to climate change through policies that will directly and indirectly benefit the poor by improving: (a) adaptation planning oriented to the state level; (b) disaster risk reduction and territorial development oriented to the municipal level; and (c) sustainable forest management at the community level. Prior actions are summarized in Box 4.

Box 4. Summary of Prior ActionsPolicy Area 1: Strengthening Social Resilience through Long-term Climate Change Adaptation Planning oriented to the state levelThe CICC’s Adaptation Working Group has: (i) approved a Mid-Term Adaptation Policies Framework (Marco de Políticas de Adaptación de Mediano Plazo), which requires the development of measures for reduction of differential vulnerability and strengthening of local adaptive planning; and (ii) created a Technical Advisory Committee to facilitate participation of experts and key stakeholders in the formulation of a future national adaptation strategy of Mexico.The States of Yucatán, Campeche, and Quintana Roo have signed a “General Coordination Agreement on the Yucatán Peninsula’s Climate Change” to develop a Regional Strategy for Climate Change Adaptation in the Yucatán Peninsula and a Climate Action Fund for the Yucatán Peninsula, coordinated by the Climate Change Regional Commission for the Yucatán Peninsula.Congress has approved a new budgetary program “National Program for Climate Change Adaptation and Prevention of Natural Disasters” (Programa Nacional de Adaptación del Cambio Climatico y de Prevencion de Desastres Naturales), to finance climate change adaptation initiatives in an amount of 300 million Pesos, and implemented by SEMARNAT.Policy Area 2: Strengthening Social Resilience through Disaster Risk Reduction and Territorial Development Actions oriented to the municipal levelSEDESOL has strengthened the delivery of risk reduction actions in Municipalities through (i) the creation of a new program for risk prevention in human settlements (“Prevención de Riesgos en los Asentamientos Humanos”), which offers financing for risk reduction actions to Municipalities; and (ii) the issuance of the new operational rules of the temporary employment program (Programa de Empleo Temporal, PET) for the fiscal year 2011, to orient it toward the financing of local disaster prevention projects for the fiscal year 2011.SEDESOL’s guidelines for sustainable urban development, aimed at fostering sustainable urban territorial development and increased social resilience, have been incorporated by selected housing institutions of the Borrower, such as CONAVI with its upfront subsidy program “Esta es tu casa”, and INFONAVIT with its mortgage origination criteria.SAGARPA strengthened and improved the targeting of its natural disaster risk management and prevention program (CADENA) for low income farmers, by lowering the eligibility ceiling for disaster and catastrophe insurance payouts.Policy Area 3: Strengthening Social Resilience at the Community Level through Sustainable Community Forest ManagementCONAFOR signed bilateral cooperation agreements (Convenios de Colaboración), with SAGARPA and SEMARNAT, fostering the sharing of information among said institutions on forestry programs, and aligning procedures and incentive programs on agricultural, livestock and forestry issues.A national multi-stakeholder consultative technical council and three state-level multi-stakeholder consultative technical councils (CTC–REDD) have been created. The Board of JIRA approved REDD+ as a strategic line for its multi-annual work program.

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Policy Area 1. Strengthening Social Resilience through Long-term Climate Change Adaptation Planning oriented to the state level

51. Policy Context and Challenges: Climate change adaptation has a predominantly local dimension. People adapt to the specific contours of their physical and natural environments and state and local governments have responsibility for implementation of many adaptation activities. The relevance of this local dimension is particularly evident in Mexico, given its diverse geography, which includes coastal zones, mountainous areas, lowlands, forested tropical hills, and drought-prone environments in the north. PECC focuses mainly on sectors and federal responsibilities while state governments focus on managing or coordinating services directly for the population in their territories. Thus, reducing vulnerability to climate change and climate variability requires that national policies allow for and strengthen participatory autonomous adaptation. It also requires that national programs provide states and local communities with useable information about risks (short- and long-term), cost-effective adaptation measures, modalities to spread risk, etc. Ensuring that adaptation is successful at the appropriate subnational levels (territorial units, municipalities, watersheds etc.) also requires strengthening the mechanisms for coordination between different levels of government and different government institutions. Adequate financing to support implementation of state-level adaptation measures has also been lacking.

52. The objective of this policy area is to recognize the development of national and state government policy frameworks and funding mechanisms that foster intersectoral, intergovernmental, and multi-stakeholder coordination and collaboration to promote socially inclusive and pro-poor adaptation policies and programs.

53. Prior Actions : Three prior actions have been completed.

54. Prior Action 1.1. The CICC’s Adaptation Working Group has: (i) approved a Mid-Term Adaptation Policies Framework (Marco de Políticas de Adaptación de Mediano Plazo), which requires the development of measures for reduction of differential vulnerability and strengthening of local adaptive planning; and (ii) created a Technical Advisory Committee to facilitate participation of experts and key stakeholders in the formulation of a future national adaptation strategy of Mexico.

55. The Mid-Term Adaptation Policies Framework, which the GoM unveiled at the COP16 in December 2010, responds to the challenges identified above.

a. The Framework emphasizes the importance of autonomous adaption, draws attention to the municipal governments’ responsibility for implementing actions and decisions affecting land use, and points to the need to strengthen their participation in the design, implementation, monitoring and evaluation of measures to reduce vulnerability to climate change in urban and rural areas. It calls for capacity building measures to help the municipalities mainstream climate change adaptation in their development, land use, and civil protection plans. To this end, SEDESOL has begun development of a Municipal Guide for Climate Change Adaptation. The Framework also flags the need to strengthen municipal and inter-municipal institutions and communication channels.

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b. The Adaptation Framework highlights the need to identify the most vulnerable population and those living in high risk places, both in cities as well as in rural areas. Following up on this, the GT–ADAPT is developing municipal-level “disaster risk scores” and a Municipal Climate Change Vulnerability Index to identify particularly exposed areas and people in order to improve targeting and the use of adaptation funds. The Bank’s advisory services associated with this operation have been supporting development of this index.

c. The Framework recognizes the vital role that local institutions, community and indigenous organizations, civil society, and the private sector must play in shaping local adaptation strategies. In this connection, GT-ADAPT created a Technical Advisory Committee (TAC) to facilitate participation of experts and key stakeholders in the formulation of the National Adaptation Strategy so as to draw on their experience in a broad range of climate change adaptation areas, including vulnerability of human settlements, ecosystems, infrastructure, and productive systems.

56. Prior Action 1.2. The States of Yucatán, Campeche, and Quintana Roo have signed a “General Coordination Agreement on the Yucatán Peninsula’s Climate Change” to develop a Regional Strategy for Climate Change Adaptation in the Yucatán Peninsula and a Climate Action Fund for the Yucatán Peninsula, coordinated by the Climate Change Regional Commission for the Yucatán Peninsula.

57. This action responds to the necessity to improve regional inter-governmental cooperation to address climate change adaptation needs that cut across political and administrative boundaries and have particular importance in the special context of the Yucatán Peninsula. The Peninsula is highly vulnerable to climate change impacts due to its geographical location and topography, high incidence of extreme hydrometeorological events such as hurricanes and severe floods, low agricultural productivity, and high levels of biodiversity and endemic species. It is home to 22 per cent of Mexico’s bird species, 40 per cent of mammals, 24 per cent of mangroves and has the second largest ecological reserve in Latin America. This, together with its 1,100 km of coastline, makes it one of the most important ecotourism centers in the country and in Latin America. Despite its vulnerability to climate change impacts, the Peninsula also makes a substantial contribution to climate change mitigation due to its extensive forest reserves. The forests in the Sian Kaan-Calakmul Natural Corridor are one of the biggest carbon reservoirs in the world after the Amazonian Forest.

58. The Agreement signed in December 2010 by Campeche, Quintana Roo and Yucatán, the three states of the Yucatán Peninsula, represents a breakthrough in Mexico’s environmental history, as it recognizes for the first time the key role of local governments in adaptation to climate change and empowers the three governments to work jointly to build resilience to the common challenges of climate change and efficiently manage natural resources at a regional scale. The agreement establishes a framework for coordination to develop a regional climate change adaptation and mitigation action plan setting forth sustainable socioeconomic development strategies. The agreement will be initially implemented through three projects:

The Regional Strategy of Adaptation to Climate Change of the Yucatán Peninsula; The Regional program of Reduction of Emissions from Deforestation and Forest

Degradation (REDD+) in the Yucatán Peninsula; and

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The establishment of a Fund for Climate Action of the Yucatán Peninsula

59. Prior Action 1.3. Congress has approved a new budgetary program “National Program for Climate Change Adaptation and Prevention of Natural Disasters” (Programa Nacional de Adaptación del Cambio Climatico y de Prevencion de Desastres Naturales), to finance climate change adaptation initiatives in an amount of 300 million pesos, and implemented by SEMARNAT.

60. The Climate Change Adaptation and Natural Disasters Program is a new budgetary program that aims to address the lack of adequate financing to support implementation of state-level adaptation and natural disaster risk reduction measures. It was established in the Mexican Federal Budget of 2011 by the Chamber of Deputies with an initial allocation of approximately 300 million Mexican pesos (US$22 million), demonstrating the commitment of the GoM to continue pioneering in the field of climate change adaptation by bringing to bear its own domestic resources to complement those available internationally. The initial allocation has been earmarked for the States of Chiapas (MX$240 million) and Tabasco (MX$60 million). Subject to the availability of budget resources going forward, it will be extended to other states. Tabasco and Chiapas were chosen due to their high vulnerability to climate change and natural disasters, as well as their great ecologic value. In addition, they have high levels of socioeconomic vulnerability (Tabasco is ranked 21/32 and Chiapas 32/32 in the latest national ranking of the Human Development Index).17

61. Resources will be channeled through CONANP, CONAFOR and CONABIO to finance projects in the following areas: (i) prevention and attention to environmental contingencies; (ii) conservation and management of priority forests, (iii) productive reconversion for the integration of biological corridors; (iv) restoration and conservation of coastal and marine ecosystems; (v) restoration of terrestrial ecosystems; (vi) dissemination, communication and knowledge activities and (vii) climate monitoring.

62. Expected results and Government Medium-term Agenda . The GoM expects these three actions to strengthen the capacities at the state and municipal levels to develop adaptation strategies that integrate the perspectives and needs of a range of public, private, expert and community groups, recognize and address the differential impacts of climate change across space and social groups, and orient themselves by natural rather than political or administrative boundaries. At least half of the state-level climate change adaptation strategies that have been completed have monitoring and evaluation systems with defined indicators of vulnerability and resilience. These systems provide for continuous monitoring, establishing the feedback loop that is needed for a flexible strategy that can adjust to the dynamics of vulnerability in the context of uncertain climate change projections.

63. Over the next three years, the GoM aims to deepen and scale up its adaptation policy. It expects to launch its National Adaptation Strategy at Rio +20 in June 2012 and then present its 5th National Communication to UNFCCC at COP18 in December 2012. Both documents will emphasize actions to reduce the social impacts of climate change by strengthening the resilience of the most vulnerable groups. To deepen and extend its engagement on adaptation, the

17 Informe sobre Desarrollo Humano México, 2011. Programa de las Naciones Unidas para el Desarrollo. México

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Government intends to continue increasing its efforts to support state- and municipal-level adaptation plans. Having developed guidelines for state climate change plans, the GoM intends to begin a consultation, revision and implementation of the plans. Of the thirty-two states that form the Mexican federation, only two states (Veracruz and Nuevo León) plus the Federal District have finished their State Climate Change Plans (SCCPs). Twenty states are at various stages of the development of their SCCPs, and ten have not started yet. In addition, the government is aiming to focus in developing information and decision making instruments to support improved access to climate-relevant information for development of policy actions. With high uncertainty, knowledge is crucial for defining and where necessary adjusting adaptation priorities. INE has requested Bank support to link to its Climate Change Knowledge Portal and develop a Climate Change Adaptation Country Profile tailored to serve as a potential knowledge and decision support tool at the national and subnational levels. The Bank will provide training and technical assistance for this purpose.

Policy Area 2. Strengthening Social Resilience through Disaster Risk Reduction and Territorial Development Actions oriented to the municipal level

64. Policy Context and Challenges : The GoM recognizes that disaster risk management in Mexico has in general been reactive and is in need of strengthening, not only to manage current levels of risk effectively, but also to build resilience to long-term climate change impacts, especially on the poor. One key challenge has been to develop mechanisms to integrate disaster risk considerations into territorial and urban planning and create synergies with other government programs. Among the barriers to such integration has been the lack of adequate technical and financial support to municipalities, which bear the responsibility for the bulk of territorial planning as well as for disaster response. Another weakness in the DRM system has been the lack of policies, guidelines, and incentives to arrest the uncontrolled, extensive pattern of urban areas development, which has resulted in the expansion of human settlements into increasingly hazardous areas and created demands for infrastructure that cannot affordably be met. A final challenge has been the need to provide greater protection to the rural poor against climatic variability and reduce their migration to urban areas, which adds to the disorderly urban expansion. This DPL supports aspects of the Government’s program that aim to address these challenges by moving toward a more proactive, flexible and accountable disaster risk management system that is better linked to government programs, protects the poor from hazard event impacts more effectively, and strengthens long-term resilience to climate change impacts.

65. The objective of this policy area is to recognize government program’s incentives that enhance disaster risk reduction, increase social resilience and promote sustainable territorial development at the municipal level.

66. Prior Actions : Three policy actions have been completed.

67. Prior Action 2.1. SEDESOL has strengthened the delivery of risk reduction actions in Municipalities through (i) the creation of a new program for risk prevention in human settlements (“Prevención de Riesgos en los Asentamientos Humanos”), which offers financing for risk reduction actions to Municipalities; and (ii) the issuance of the new operational rules

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of the temporary employment program (Programa de Empleo Temporal, PET) for the fiscal year 2011, to orient it toward the financing of local disaster prevention projects.

68. SEDESOL’s new Program for Risk Prevention in Human Settlements (Prevención de Riesgos en los Asentamientos Humanos, PRAH) extends financing of risk reduction action to all municipalities, filling a critical gap. While risk reduction support is available to states through FOPREDEN, municipalities face challenges in accessing the funds. SEDESOL’s Habitat program supports risk reduction activities in municipalities, but only those belonging to the National Urban System (cities of 15,000 or more inhabitants)18. According to the PSIA undertaken for the proposed DPL, high disaster-risk-prone municipalities in Mexico are predominantly rural and indigenous, which have populations of less than 15,000 inhabitants. Launched in 2011 with a budget of MX$184 million (US$15 million), the PRAH overcomes the operational limitations of the Hábitat Program, which only benefits poverty polygons19 in urban areas,20 and makes all municipalities with high or very high risk of disasters eligible for disaster risk reduction support. PRAH finances the development of municipal risk atlases, climate-resilient infrastructure, reforestation efforts, improvements in building code practices, and awareness raising activities related to disaster risk reduction. Furthermore, the operational framework of PRAH recognizes the potential effects of climate change and extreme weather events and their relation to social vulnerability and insufficient management of disaster risk. In its first year of operation, 135 municipalities sought funding for municipal risk atlases, greatly exceeding SEDESOL’s expectation of 38, showing the strong appetite of municipalities for risk reduction tools.

69. The design and implementation of this program constitutes a significant step forward in the integration of risk prevention activities in the framework of urban development strategies. Programs like FOPREDEN and Hábitat both address risk prevention activities, but are managed by different government agencies (Ministry of Interior and SEDESOL, respectively) which has made program coordination challenging. SEDESOL, as the government agency with the mandate to execute the social policy and plan the urban development and land use in the country, is best endowed to become the leading integrator between the two closely interlinked fields (urban development and disaster risk management). SEDESOL has the planning and program executing capacity and experience, as well as a highly decentralized structure that allows for the successful

18 SEDESOL’s Hábitat Program was originally developed in order to align urban development and land use planning with federal social policy to help reduce urban poverty and improve the quality of life of marginalized urban communities. The program has three elements aimed at improving the urban environment, fostering social and community development, and promoting of urban development. Hábitat includes prevention, mitigation, and recovery components, such as investments to mitigate threats to infrastructure and the natural environment, education activities focused on urban population, and the replacement of appliances for urban households. From 2003 to 2009, Hábitat provided over MX$915 million in financing for mitigation and prevention activities and works, which corresponds to 3.46 percent of the total executed budget of the Program. The Program supports 1,257 urban municipalities from a total of 2,456 municipalities in Mexico.19 Poverty Polygons are defined by SEDESOL as areas that: (i) are located in cities of 15,000 inhabitants or more; (ii) have at least 50 percent (30 percent in specific cases) of its households considered to suffer from asset poverty; (iii) have insufficient infrastructure and urban services; (iv) at least 80 percent of the allotments are occupied; (v) are clearly defined and within the city limits; (vi) are not irregular settlements; (vii) are not in an area of ecological or archeological interest.20 See Diagnóstico nacional de los asentamientos humanos ante el riesgo de desastres: http://www.sedesol2009.sedesol.gob.mx/archivos/802567/file/Diagnostico_PRAH.pdf

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operation of programs at the regional and local level. The PRAH builds on the lessons learned of disaster risk management experience in Mexico and in the world and therefore prioritizes the execution at the local level. 70. SEDESOL has also changed the 2011 Operational Rules of its Temporary Employment Program (Programa de Empleo Temporal, PET) to orient it toward financing local disaster prevention projects. PET targets the extreme poor and provides employment in labor intensive public works to build infrastructure or in works related to environmental or sustainable agricultural improvements. While its primary function is to provide employment to the poor during the agriculture sector low season, it also has a safety net component (PET Inmediato, PETi) where incremental funds are made available for additional employment in areas that have been affected by systemic shocks due to natural hazards or other causes. PET successfully combines a poverty alleviation function with a shock mitigating function, serving two purposes: (i) absorbing seasonal unemployment in rural areas affecting especially the very poor, thus alleviating poverty; and (ii) providing assistance in situations of emergency. By having beneficiaries engage in public works that reduce disaster risk, the program will provide a dual protection function of reducing the physical and livelihood risks of the poor. In addition to supporting disaster risk reduction in a more proactive and pro-poor way (about 20 percent of PET Inmediato goes to prevention), SEDESOL plans to take its efforts further in 2012 by adding climate change adaptation efforts as an area of activity for PET support.

71. Prior Action 2.2. SEDESOL’s guidelines for sustainable urban development, aimed at fostering sustainable urban territorial development and increased social resilience, have been incorporated by selected housing institutions of the Borrower, such as CONAVI with its upfront subsidy program “Esta es tu casa”, and INFONAVIT with its mortgage origination criteria.

72. Poor urban planning and land use policies are key underlying factors contributing to hazard events becoming disasters. This is especially important in Mexico where more than 70 percent of the population currently lives in urban areas. By 2025 as much as 80 percent of the population is expected to live in the 358 cities that comprise the Sistema Urbano Nacional. The pattern of territorial and urban development of Mexican cities since 2000 has been largely determined by the expansion of housing construction, which has resulted in uncontrolled urban sprawl, creating demand for infrastructure and services that cannot be met. There is an urgent need to promote development and densification of inner cities, where the infrastructure investments needed to reduce the probability of abandoned housing units and deteriorating neighborhoods are less costly. To address this issue, SEDESOL developed guidelines that promote sustainable and resilient urban and housing development. These guidelines were a necessary first step in the definition of what constitutes sustainable housing and urban development and how it should be measured. The guidelines call for a relatively modest densification, accompanied other changes to promote sustainability such as an increase in mixed-use and green spaces per capita and more options for non-motorized transport. The increase in densification, while modest, results in a lower net present value cost of provision of adequate infrastructure services, compared with the prevailing extensive model of territorial development.21 These guidelines have influenced at least two very important policy programs

21 Mexican cities have an average density of 50 persons per hectare, but medium-sized cities (100,000 to 1,000,000 population) have lower than average densities (45 persons per hectare) and are the most rapidly growing in terms of

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and instruments which are expected to result in increased environmental and social sustainability at local level: INFONAVIT’2011-2015 financial plan, and the 2012 program rules for the main up-front housing subsidy program Esta es Tu Casa operated by CONAVI.

73. INFONAVIT’s 2011-2015 Financial Plan operationalized the guidelines within its mortgage-lending mandate. INFONAVIT recently revised its mission statement from pure mortgage lending to focus more on improving the quality of life of its beneficiaries22. An underlying premise of the Financial Plan is that sustainable housing and urban policies can also help strengthen INFONAVIT’s loan portfolio by lowering vacancy and default ratios and reducing exposure to natural hazards of new housing developments. The new Financial Plan hence envisages offering incentives for households that select housing units that incorporate sustainability criteria. At a first stage, incentives include faster loan disbursement or the possibility of a federal subsidy attached to the loan. At a later stage, INFONAVIT is contemplating introducing other incentives such as a lower interest rate or a higher subsidy.

74. INFONAVIT’s methodology to define and evaluate a sustainable housing unit combines inputs from SEDESOL’s urban sustainability guidelines, CONAVI’s “green” subsidy policy, and the Municipal Competitiveness Index (MCI) jointly developed with the Instituto Mexicano de la Competitividad (IMCO). Broadly, the methodology takes into account three components (described below) to construct a final “grade” for each housing unit, which INFONAVIT then takes into account when deciding if a “sustainability incentive” is applicable. These components are briefly described below:

a. Municipal Competitiveness Index: A system to assess the degree to which urban codes, regulations and practices incorporate sustainability criteria. The index includes indicators related to municipalities’ institutional capacity, codes and regulations (with higher scores for higher densities and mixed-use areas), ability of the municipality to identify natural hazards (for example through the preparation of risk atlas) and mitigate them, community participation, infrastructure and governance. INFONAVIT conducts periodic assessments of municipalities and has developed jointly with SEDESOL capacity building training for municipalities that score lower.

b. Qualitative Evaluation of the House and the Environment (ECUVE): A comprehensive list of indicators to evaluate (i) the eco-technologies incorporated into the housing unit at construction stage (as defined by CONAVI for the green subsidies); and (ii) the urban environment in which the housing unit is located, including such factors as access to basic infrastructure and services, proximity to jobs and markets, green areas, and accessibility as defined by SEDESOL’s sustainable urban guidelines. Preliminary evaluations conducted in 2010 found that existing (i.e. older) housing, which is normally located closer to city center, in general scored higher than new housing. This finding has led INFONAVIT to encourage customers to seek a house from the existing housing stock.

75. Community Organization: Research shows that housing units (in particular the newer developments) are more likely to keep their value over time when there is strong community

population and territorial reach and. While cities of all sizes are struggling to provide adequate infrastructure services, those with higher density are facing particularly high net present value costs of meeting infrastructure demand.22 INFONAVIT’s affiliates are private-sector employees that contribute monthly to this housing fund.

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organization and participation. For this reason, INFONAVIT grades those housing developments that have implemented community organization and participation mechanisms higher than those that do not have this feature.23 Typically these community participation mechanisms have been established by housing developers seeking to minimize the reputational risk associated with housing units that do not keep their value over time. To extend this good practice to a larger number of developers, INFONAVIT created a program called Local Social Promoters (Promotores Sociales Vecinales, PSVs) whereby recognized professionals work with the new inhabitants to promote social cohesion and community organization within new housing developments.

76. In December 2011, CONAVI published the changes to the operational rules of the government’s main up-front housing subsidy program – Esta es tu Casa. Amongst the most important changes is the inclusion of a sustainability rating as part of the eligibility criteria. The rating assigns a value for each of the criteria included in SEDESOL’s guidelines for sustainable urban development. Subsidy eligibility depends on a minimum “sustainability scoring”, which allows flexibility for developers to choose which of the criteria is most relevant for the project site. The combination of subsidy and mortgage whch refer to the same sustainability guidelines is expected to increase social resilience also for the poorer segments of the population, which suffer the most the consequences of poor urban planning.

77. Prior Action 2.3. SAGARPA strengthened and improved the targeting of its natural disaster risk management and prevention program (CADENA) for low income farmers, by lowering the eligibility ceiling for disaster and catastrophe insurance payouts.

78. The PACC includes a component on natural disaster risk management in the agriculture, livestock, and fishing sectors. The component consists of a direct payout in addition to a catastrophe insurance component. For the catastrophe insurance component, the premium is paid by SAGARPA. Insurance payouts are triggered by either an excess or deficit of rainfall (a parametric trigger). While parametric insurance products have been found to have the advantages of transparency, cost-effectiveness, and quick disbursement, they also have inherent basis risk. CADENA manages the basic risk through a complementary mechanism at the state level that draws on information from other sources to assess the potential mismatch between the payouts to farmers and their actual overall income losses and provide additional compensation where appropriate.

79. A recent econometric study found that PACC positive economic benefits. The study took advantage of the staggered roll out of the program across counties to assess the economic impact of the Weather Index Insurance (WII) component of PACC (now CADENA). Results showed that WII significantly increases yields per hectare by 6 percent and WII increases income by 8 percent, pointing towards a positive spillover effect. Exploring the potential mechanisms of this spillover effect, the authors find that WII decreases the planted area of maize (Mexico’s main crop) by 8 percent. This allows farmers to use the gained land potentially more effectively by substituting into other cash crops raising overall farm output. Important credit constraints are likely relaxed as well. Generally, the most significant benefits occur in ‘medium’ income

23 In this case, scores are binary (i.e. having vs. not having a community organization scheme in the housing development)

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counties, raising productivity by 8 percent. WII has instead less affects in the very richest counties. The authors also find that the Government is paying a very high premium (16 percent) when compared to other countries like India that pay 9 percent.24

80. With the shift in rules from PACC to CADENA, disaster assistance is better targeted, as the maximum hectares that a farmer can have in order to be eligible is 10 rather than the previously established cut-off point of 20 hectares. This ensures that poorer, smallholder farmers with less land are the focus of the program. In addition, the payout to farmers through CADENA was increased to a maximum of MX$1,200 per hectare (formerly MX$900/hectare) for rainfed annual crops and up to MX$2,000 per hectare for irrigated crops. This expands the coverage of the program to poorer, smallholder farmers. Table 2 presents the payouts for each type of activity covered under CADENA. Table 2: Payouts by CADENA per type of activity covered

Support Scheme Direct Support Catastrophic Insurance Support

Amounts

A. AgricultureAI. Annual crops Up to 5 hectares per

farmerUp to 10 hectares

per farmerMX$1,200 per hectare in rain fed cropsMX$2,000 per hectare in irrigated crops

AII. Perennial crops (fruits, coffee)

Up to 5 hectares per farmer

Up to 5 hectares per farmer

MX$2,000 per hectare both in rain fed and irrigated crops

B. Livestock activity Up to 45 hectares per farmer in case of

nutritional supplement

Up to 45 hectares per farmer in case of

nutritional supplement

MX$600 per Animal Unit

Up to 5 animal units in case of death

MX$1,500 per Animal Unit

C. Fishing activity One boat per producer One boat per producer

MX$10,000 per boat

D. AquacultureDI. Extensive or semi-intensive system

Up to 2 hectares per producer

Up to 5 hectares per producer

MX$8,000 per hectare

DII. Intensive System Up to 2 aquaculture units per producer.

Up to 2 aquaculture units per producer

MX$8,000 per aquaculture unit

DIII. Mollusk culture Up to 2 aquaculture units per producer.

Up to 2 aquaculture units per producer

MX$1,000 per aquaculture unit

81. Expected Results and Government’s Medium-term Agenda: Over the medium-term, the GoM expects to continue shifting progressively the focus of the disaster risk management framework from ex-post/reactive approaches to a more proactive, preventive, and inclusive approach to disaster risk management that mainstreams considerations of climate change adaptation and sustainability in urban, housing, and territorial planning and development and better targets the poor and most vulnerable. Moreover, it aims to mainstream social inclusion and resilience, disaster risk reduction and sustainability within the existing government programs (for example PETi and CADENA and INFONAVIT's lending) while increasing capacity at local levels (in particular at the municipal level) to adapt and plan accordingly. Achieving this will take a strong coordination effort since several agencies and programs are involved. In this regard, one of the highlights of this operation is its support for arrangements to bring several agencies together towards a cross-cutting theme (such as DRM), instead of looking at it in a

24 Fuchs, Alan and Hendrik Wolff (2011). “Drought and Retribution: Evidence from a Large Scale Rainfall Indexed Insurance in Mexico.” http://www.gwu.edu/~iiep/adaptation/docs/Wolff

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typical sector-based approach. The PRAH is expected to increase capacity at the municipal level to understand and cope with disaster risk, in particular for indigenous and rural municipalities which, to date, have not been eligible to receive counterpart funding from the federal programs for risk identification and mitigation initiatives. The decision to “house” PRAH within SEDESOL’s Urban Development and Territorial Planning Under-secretariat within SEDESOL is expected to strengthen the links between disaster risk identification and mitigation and urban planning, the general principles and guidelines for which are the Under-secretariat’s responsibility. A critical issue in Mexico has been the development of “proper” risk atlas (which includes adequate analysis of social vulnerability in addition to hazard exposure). A compounding issue has been linking the risk atlas to development planning. With the policy actions of the DPL, it is expected that municipalities that have had their risk atlas financed by PRAH are integrating the information into their municipal development plans. In the first year, at least ten percent of the 617 municipalities with high and very high risk of disaster will be implementing risk reduction institutional strengthening and investment activities supported by PRAH.

82. The changes in the operational rules of PET to increase financing for local disaster prevention projects are expected to increase social resilience of the most vulnerable, rural poor by reducing their physical vulnerability to disasters. This will be accomplished within framework of the program’s central function of income support during the agricultural low season and, through PETi, restoration of livelihoods in the aftermath of disasters.

83. The changes in INFONAVIT’s credit origination policies, aligned with the 2012 subsidy program rules are expected to promote sustainable territorial development by stimulating greater consumer demand for sustainable housing as potential home buyers come to know that INFONAVIT provides priority access to mortgage financing for dwellings classified as sustainable, both in terms of location/surroundings and specific characteristics. The subsidy component will ensure that sustainability is not only a privilege for the middle or upper income segments. Over the medium-term, the criteria will also act as an indirect incentive to housing builders to invest in sustainable developments, which can be more rapidly sold, and to municipalities to take advantage of the new financing available from SEDESOL to support risk reduction investments, including the development of municipal risk atlases, which will increase their municipal competitive index scores.

84. At a later stage, INFONAVIT is expected to introduce additional incentives for sustainable housing through higher subsidies or lower interest rates. The subsidy would be provided through the federal Esta Es Tu Casa (This Is Your House) program of the National Housing Commission (Comisión Nacional de Vivienda, CONAVI) and would be linked to a credit from a public or private lender for the acquisition or improvement of a house. The proposed budget for this program is MX$9.0 billion, up substantially from MX$5.0 billion in 2011. This will support INVONAVIT’s on-going efforts to move down market, providing mortgage financing to individuals earning only 1.5 MW, which had not previously been possible. In addition, CONAVI is contemplating for 2012 additional subsidies specifically geared at promoting higher densities in housing development.

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85. With the expansion of the CADENA program to poorer households in rural areas, it is expected that their capacity for consumption smoothing in times of disaster will be strengthened and that, over time, their livelihood resilience will increase. Specifically, in the short-term, it is expected that the percentage of poorer smallholder farmers owning less than ten hectares of land who are covered by the climate risk management insurance will increase.

Policy Area 3. Strengthening Social Resilience at the Community Level through Sustainable Community Forest Management

86. Policy context and challenges :  Forests are owned by about 10,000 communities among the poorest in Mexico, and among those, about 3,000 depend on forest as their primary economic, social, and cultural asset and source of income. Forests are vulnerable to climate change (pest, fires, and drought) and managing them sustainably will enhance communities' resilience to natural disasters and economic downturns related to climate change. If sustainably managed, forests provide communities with stable and sustainable employment and income. They also help communities to build social organization, which is key for community resilience in general. Moreover, sustainable forest management has an important mitigation impact (reducing carbon emissions, REDD+) which is increasingly recognized as an environmental service of global value and may in the future sustain financial flows (payments for reduced emissions) to communities, hence generating a new type of community income.  Mexico’s progress in promoting sustainable community forest management is increasingly being recognized as a worldwide reference. Though much work remains to be done, these early experiences are recognized as global good practices in reducing deforestation and mitigating climate change while at the same time contributing to adaptation and social resilience by providing income and employment opportunities, building social capital, and strengthening communities’ resilience to natural and economic disasters that may be induced by climate change. However, a series of barriers hinder the achievement of sound policy objectives in the field.

87. The prior actions of the forestry pillar address three main challenges in forest management in Mexico: (i) the discrepancies with between forestry and other rural policies and programs especially agriculture and livestock, reducing overall development impact and sustainability); (ii) the interest to promote increasing public participation in policy making including in the innovative REDD+ area; and (iii), geographical fragmentation of forest management efforts that operate only at the level of individual communities, hence missing economies of scale and synergies, while a broader landscape approach can better link the federal, state, and local levels. 

88. The objective of this policy area is to strengthen sustainable community forest management practices in order to enhance the resilience of poor rural and indigenous communities that derive their livelihood from forests while at the same time mitigating carbon emissions from deforestation and forest degradation.

89. Prior Actions : Three prior actions have been completed.

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90. Prior Action 3.1. CONAFOR signed bilateral cooperation agreements (Convenios de Colaboración), with SAGARPA and SEMARNAT, fostering the sharing of information among said institutions on forestry programs, and aligning procedures and incentive programs on agricultural, livestock and forestry issues.

91. Mexico’s Special Program for Climate Change (PECC) and the Mid-Term Climate Change Adaptation Policy Framework highlight the importance of inter-institutional cross-cutting cooperation to promote climate change adaptation. There has been, however, a lack of instruments that allow the timely exchange of information and policies among SAGARPA, CONAFOR, SEDESOL and other institutions working on in the rural landscape to ensure that their various programs as a whole support adaptation. For example, the National Development Plan sets forth as an objective halting the encroachment of the agricultural frontier on forests. Since 1995, however, the GoM has offered agricultural subsidies through the farm-support program Programa de Apoyos Directos al Campo (PROCAMPO) led by SAGARPA, and the livestock-support program Programa de Estímulos a la Productividad Ganadera (PROGAN). The lack of inter-institutional information exchange and collaboration heightens the risk that the incentives of these programs work at cross purposes with the objective of the PND to promote sustainable forest management. Closer collaboration between the agencies will make it easier for communities to engage in sustainable forest management, thereby raising their incomes, assuring the survival of their own natural asset, and increasing both their economic and natural resilience to climate change.

92. The objective of the Convenios de Colaboración between CONAFOR and SEMARNAT and CONAFOR and SAGARPA is to mitigate such risk by sharing information among institutions, and coordinating procedures and incentive programs at the landscape level .

93. The Convenio de Colaboración CONAFOR-SEMARNAT signed on November 7, 2011 aims to: (i) define the basis for analysis and exchange of information from both the Sistema Nacional de Información Forestal (SNIF-CONAFOR’s system) and the Sistema Nacional de Gestión Forestal (SEMARNAT’s system) with the intention of having current and reliable information to design indicators relevant for the forestry sector; (ii) design development indicators based on the environmental and forest statistics; (iii) collaborate in forestry reports and statistics; and (iv) design statistical and economic indicators relevant to the forestry sector and useful for SNIF’s users. This will help to address the lack of alignment among incentives that has impeded the achievement of sound policy objectives with respect to climate change adaptation and mitigation in the forestry sector.  

94. The Convenio de Colaboración CONAFOR-SAGARPA signed on November 9, 2011 states that both institutions will work together in: (i) joint support to REDD+ and climate change strategies; (ii) promotion, support and integration of regional activities for water basin management; (iii) identification, design, development and/or consolidation of economic integration projects; (iv) sharing of information between SAGARPA and CONAFOR; and (v) establishment of training and advisory services to potential beneficiaries related to CONAFOR’s and SAGARPA’s respective subsidy programs. This Convenio envisions jointly developed special guidelines aimed at encouraging agroecology and silvopastoral models to improve economic results while reducing impacts on natural habitats.

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95. This policy action aims to foster community management of forests by strengthening the synergies among rural policies and incentive programs, which in the current situation are still disconnected from each other. In medium-term, rural and forest policies and incentive programs are expected to be better aligned in the field through enhanced procedures, joint databases and cross-checking mechanisms. As stated in the PECC, the cross-cutting coordination will enhance the climate change adaptation capacity of ejidos and communities. By project end, it is expected that the inter-sectoral harmonization will be the basis to create synergies among the tools, programs and policies of SAGARPA, CONAFOR, SEMARNAT and other government institutions working in forestry areas. The development of an information system of national forestry management within SEMARNAT and the identification of synergies among tools, programs and policies with SAGARPA are also expected. This should create easier access to public programs and a better coherence between those programs, giving the communities a real opportunity to develop sustainable management strategies and improve their resilience and adaptation to climate change.

96. Prior Action 3.2. A national multi-stakeholder consultative technical council and three state-level multi-stakeholder consultative technical councils (CTC–REDD) have been created.

97. Until recently, none of the existing forums for the design and monitoring of REDD+ or climate change policies allowed for significant inputs from civil society organizations (CSOs) and community representatives. The formalization of the national Comité Técnico CTC–REDD+ in June 2011 was a key step toward greater civil society participation. The CTC–REDD+ was conceived as an advisory body of the government’s REDD+ Working Group (GT-REDD+). It comprises academics, representatives of indigenous communities, civil society organizations, the private sector and government agencies. Throughout 2010, the CTC–REDD+ participated in the preparation of Mexico’s National REDD+ Vision which was launched by President Calderon at the 16th Conference of the Parties in Cancún, December 2010. It held regular meetings and maintained a public networking website (www.reddmexico.org). Nevertheless, greater civil society participation at federal, state, and local levels is needed to promote successful climate change adaptation and mitigation programs in the field.

98. This policy action aims to foster public participation in policy-making related to forests and climate change. Addressing this need to increase the voice of civil society in forestry sector policies and programs, the prior action is the creation of three local-level multi-stakeholder REDD+ committees (CTC–REDD+) to parallel the national CTC. Each local CTC–REDD+ works independently and comprises civil society, academics and other local organizations. The representation of indigenous and vulnerable groups is also essential. CONAFOR participates as an external agent, providing technical and logistical advice. The local CTCs REDD+ were formally established as a partnership among government, civil society and academia in: (i) Chiapas August 12, 2011; (ii) Quintana Roo in August 25, 2011; and (iii) Campeche in August 29, 2011.

99. In the medium-term, the creation of these committees will help sustain more inclusive, locally designed REDD+ strategies. It represents an essential step to enhance civil society participation in policy making and reach important livelihoods and social resilience co-benefits

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that are expected through this program, contributing to social resilience to the expected effects of climate change.

100. Prior Action 3.3.The Board of JIRA, approved REDD+ as a strategic line for its multi-annual work program.

101. Inter-municipal organization is essential for sustainable territorial development and community forest management. It may help reduce the fragmentation of efforts and the risk of potential discrepancies among isolated forest management initiatives. The ecological boundaries of Mexico’s watersheds and forests cut across the political and administrative boundaries of Mexico’s 2,441 municipios. Individual municipios vary greatly in their capacity to operate programs and mobilize financial resources. Moreover, inter-municipal cooperation is also required to provide some degree of continuity in the three-year municipal electoral cycle.

102. The prior action promotes greater geographic integration and collaboration among communities and municipalities at landscape level, in order to achieve synergies and economies of scale in implementing sustainable community forest management.. The decentralized Junta Municipal del Río Ayuquila (JIRA) brings together 10 municipios in the State of Jalisco. In July 15 2010, JIRA became the first REDD-related inter-municipal initiative in Mexico, signing a collaboration agreement with CONAFOR to design, with the active involvement of local stakeholders, REDD+ strategies for long-term sustainable territorial development along the Ayuquila River in Jalisco to customize, and implement the national REDD+strategy at local level. CONAFOR provides technical assistance and matching funds.

103. JIRA previously received support for this from the French Development Agency (Agence Française du Développement, AFD). The first component of AFD’s Climate Change technical cooperation program with the GoM, linked to its DPL of €185 million, supports integrated forest management and national REDD+ strategy through capacity building workshops and design of mechanisms to link rural development and integrated forest management, in particular in poor communities, with international payments for the reduction of deforestation and forest degradation (REDD+). The second phase of this pilot project is progressing.

104. In the medium-term, it is expected that inter-municipal collaboration and others local development agents25 will drive local REDD+ initiatives and provide the foundation for inclusive federal incentive programs. Arrangements such as JIRA represent the technical agent for bringing to the communities the opportunity of a sustainable way of development and adaptation to climate change. As the inter-municipal associations develop capacities to implement REDD+ strategies, in medium-term they will be the key actors for the implementation of strategies to foster adaptation and social resilience to climate change.

25 The Local Development Agents could also include Agentes Técnicos Locales (ATLs) or Agentes de Desarrollo Local (ADLs). ATLs are local public agencies with a mandate in integrated rural development (for example, JIRA); ADLs are civil society organizations that support and help implement one or several CONAFOR programs in specific regions. Collaborating with ATLS and ADLs would allow for a broader spatial integration at the regional level which is found important for successful REDD+ initiatives, instead of just responding to individual community demands.

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105. By project end, building on the example of JIRA, it is expected that CONAFOR will sign similar agreements with other inter-municipal associations and local development agents. CONAFOR’s project on “Early REDD+ Actions on Priority Water Sheds” financed by AFD-AECID (with European Union funds called Latin America Investment Facility--LAIF) is currently fostering the constitution of six more inter-municipal associations (in Quintana Roo, Campeche, Yucatán and Jalisco). There are potential synergies between REDD+ and the ability of populations to cope with the impacts of climate change such as an increase of water scarcity and changes in crop yields due to rising temperature. As a consequence, REDD+ is a mechanism which can enable climate change adaptation, helping to protect biodiversity and reducing erosion, whilst also building resilience of local livelihoods and resources.

106. Expected results and Government’s Medium-term Agenda. By better aligning forestry, livestock and agriculture rural investment programs, by fostering public participation in policy-making on REDD+ and forestry in general, and by promoting a broader integrated landscape approach based on new models such as the intermunicipal associations, the proposed DPL provides a framework that will help communities better manage their forest assets, protect it against climate-induced disasters, and use it as a source of income and community organization. By doing so, it represents a major breakthrough to help forest-dependent communities to strengthen their economic, social and physical resilience to climate change. This should have positive environmental and social resilience to climate change through: (i) carbon sequestration and biodiversity conservation, with more forests under sustainable management; (ii) poverty alleviation, with more communities earning an income for the sustainable extraction of their natural resources; and (iii) increasing the communities’ resilience capacity by decreasing climate change risks and vulnerabilities. However, it is important to note this long-term outcome also depends on multiple other factors. The DPL only contributes to achieving it by establishing a conducive, enabling policy framework (short-term outcome, addressing the three above-mentioned bottlenecks on the path to improved community-based management leading to improved social resilience).

107. The prior actions of the forestry pillar are fully consistent with the GoM priorities in the area of Forests and Climate Change. The prior actions complement the broad Forests and Climate Change package described in Section IV, C. For example, the SIL/FIP Component 1 will support Policy Design, and Cross-Sector Coordination, and Component 3 will include Building Capacities of Local Governance Structures for REDD+ in Early Action Areas –all related and mutually reinforcing with: better alignment of rural policies (DPL prior action 3.1), public participation in policy-making (DPL prior action 3.2), and integrated landscape management (DPL prior action 3.3).

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IV. Tentative financingSource: ($)Borrower/RecipientIBRD US$300,751,879.70IDAOthers (specify)Total US$300,751,879.70

V. Contact pointWorld Bank Contact: Rodrigo Serrano-BerthetTitle: Sr. Social Development Specialist,Tel: (202) 458-5380Email: rserrano1@worldbank.org

Borrower/Client/RecipientContact: Ricardo OchoaTitle: Chief of the International Relations Unit, Secretaría de Hacienda y Crédito Público (Ministry of Finance)Tel: [52] (55) 3688-1154Email: ricardo_ochoa@hacienda.gob.mx

Implementing AgencyContact: Roberto Cabral, SEMARNATTitle: General Director of Strategic FinancingTel: (52-55) 5490-2124Email: roberto.cabral@semarnat.gob.mx

VI. For more information contact:The InfoShopThe World Bank1818 H Street, NWWashington, D.C. 20433Telephone: (202) 458-4500Fax: (202) 522-1500Web: http://www.worldbank.org/infoshop

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