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 Change
Region / LATIN AMERICA AND CARIBBEAN
Country / Mexico
Sector / Other social services (50%);Sub-national government administration (50%)
Operation ID / P120170
Lending Instrument / Development Policy Lending
Borrower(s) / THE UNITED MEXICAN STATES
Secretaria de Hacienda y Crédito Publico
Palacio Nacional, Patio de la Emperatriz
Edificio 12, Piso 2, Col. Centro
Mexico City, DF 06000
Mexico
Tel: (52-55) 3688-1438 Fax: (52-55) 3688-1216

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

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 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:

  1. 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.
  2. 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).
  3. 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).
  4. 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.
  5. 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 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 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.

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.