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PROJECT IDENTIFICATION FORM (PIF) PROJECT TYPE: FULL-SIZED PROJECT THE GEF TRUST FUND

Submission Date: November 9, 2007 Re-submission Date: February 13, 2008 PART I: PROJECT IDENTIFICATION 1 GEFSEC PROJECT ID : 3537 INDICATIVE CALENDAR GEF AGENCY PROJECT ID: P108766 Milestones Expected Dates COUNTRY(IES): Mexico Work Program (for FSP) 04/2008 PROJECT TITLE: Mexico Rural Development CEO Endorsement/Approval 11/2008 GEF AGENCY(IES): World Bank GEF Agency Approval 12/2008 OTHER EXECUTING PARTNER(S): SAGARPA/FIRCO Implementation Start 04/2009 GEF FOCAL AREA (S): Full-sized ProjectClimate Change Mid-term Review (if planned) 04/2012 GEF-4 STRATEGIC PROGRAM(S) : CC-SP2; CC-SP4 Implementation Completion 06/2014 NAME OF PARENT PROGRAM/UMBRELLA PROJECT:

A. PROJECT FRAMEWORK (Expand table as necessary) Project Objective: The Global Environment Objective of the proposed project is to contribute to the goals of the National Strategy on Climate Change by reducing GHG (CO2) emission through the adoption of emission-reduction technologies. The project objective would be achieved through: (i) promoting energy efficiency practices in the context of supporting agro-industry sub-sector (being financed by the World Bank loan); (ii) increasing sustainable biomass production, conversion, and use as energy; (iii) promoting the use of renewable energy sources in sustainable productive processes; and (iv) strengthen SAGARPA’s institutional capacity to address overall environmental issues and the agricultural sector’s impact on climate change. Inv, Indicative Indicative Project TA, or Expected Outcomes Expected Outputs GEF Co- Total Components STA** Financing* financing* ($M) ($M) % ($M) %

1. Promotion of Inv Reduction of GHG (CO2) from X number of energy 5.0 6 80.0 94 85.0 investment projects the use of renewable energy efficient sub-projects have with low GHG sources and energy efficient been successfully emissions technologies. implemented.

Small and medium-sized Proportion of small and producers and processors medium-sized producers adopted low carbon intensity and processors accessing technologies. government programs increases by X%.

X KWh of energy saved from adoption of energy efficient technologies and corresponding tons of

avoided CO2 e emissions.

X MWH energy is produced by biomass and Y tons of

CO2 e emissions avoided.

2. Production TA Increased beneficiary capacity X energy efficiency and /or 2.0 8 23.5 92 25.5 support services to prepare and/or apply low renewable energy sub- carbon technologies in agro- projects prepared for industries. financing.

1 Project ID number will be assigned initially by GEFSEC. 1 PIF Template, August 30, 2007 X energy efficiency and /or renewable energy sub- projects received technical assistance on energy efficiency technologies during implementation.

X producers and processors have participated in training events organized by the project to apply energy efficient technologies and /or renewable energy in their production and processing practices.

3. Institutional TA Institutional and regulatory An inter-institutional 2.55 34 5.0 66 7.55 Strengthening capacity at the national and coordination mechanism on local level strengthened to Climate Change issues is reduce GHG (CO2) emission established and functioning. from the agricultural sector. One unit within SAGARPA with the capability to formulate, implement and monitor Climate Change mitigation and adaptation policies and programs.

4. Project 0.95 5 18.8 95 19.75 management Total project costs 10.5 8 127.3 92 137.8

* List the $ by project components. The percentage is the share of GEF and Co-financing respectively to the total amount for the component. ** Inv=Investment; TA = Technical Assistance; STA = Scientific & technical analysis.

B. INDICATIVE FINANCING PLAN SUMMARY FOR THE PROJECT ($) Project Preparation* Project Agency Fee Total GEF 10,500,000 1,050,000 11,550,000 Co-financing 755,000 127,300,000 128,055,000 Total 755,000 137,800,000 1,050,000 139,605,000 * Please include the previously approved PDFs and planned request for new PPG, if any. Indicate the amount already approved as footnote here and if the GEF funding is from GEF-3. C. INDICATIVE CO-FINANCING FOR THE PROJECT (including project preparation amount) BY SOURCE and BY NAME (in parenthesis) if available, ($)

Sources of Co-financing Type of Co-financing Amount Project Government Contribution Cash 67,300,000 GEF Agency(ies) Loan 60,000,000 Total co-financing 127,300,000

2 PIF Template, August 30, 2007 PART II: PROJECT JUSTIFICATION

A. STATE THE ISSUE, HOW THE PROJECT SEEKS TO ADDRESS IT, AND THE EXPECTED GLOBAL ENVIRONMENTAL BENEFITS TO BE DELIVERED:

1. Mexico’s rural sector has experienced substantial reforms over the past 15 years, which have led to a largely liberalized, market-oriented, and private sector-driven rural economy. However, agriculture remains a relatively weak sector of the Mexican economy. A number of second generation reforms will need to be pursued in order to diversify the country’s productive pattern and respond to the challenges of an increasingly integrated global market. Agriculture and agro-industries contributes to GHG emissions through the use of internal combustion engines for machinery and electricity generated from fossil fuels. To partially address this challenge the Government of Mexico has prioritized increasing the competitiveness and sustainability of agriculture and agro-industries, through promoting energy efficiency practices and the use of renewable energy sources.

2. The Government’s present objective for the rural sector is to promote environmentally and economically sustainable rural development through the provision of technical and financial incentives in improved productivity, sustainable utilization of natural resources, mechanisms to improve market access, extended use of energy efficiency practices, and development of renewable energy sources. To that end, the Ministry of Agriculture (Secretaría de Agricultura, Ganadería y Pesca, SAGARPA) has retained and expanded the national agricultural and rural development program (Alianza para el Campo). This program was originally launched in 1996 to increase capitalization in the agricultural sector and to promote improved agricultural productivity and increased income to farmers. Part of this program was supported by the Bank, between 1999 and 2003, with its USD$444 million Productivity Improvement Project (ALCAMPO), which fostered agricultural productivity by promoting productive investments (under a matching-grant scheme) and providing more effective support services (research, extension, information, training) for a wide range of agricultural sub-programs. The Alianza para el Campo program offers the opportunity and operational mechanism to implement a decentralized, demand-driven approach to channel technical and financial assistance directly to small farmers. Since 2002, SAGARPA (through FIRCO) is implementing a program to promote agro-industry and agribusiness aimed at improving productivity and value-added by strengthening the participation of existing, as well as new, enterprises in the various production chains. This program, known as FOMAGRO, has promoted a total of 900 sub-projects between 2002 and 2006 with a total investment of over USD$1 billion, of which about USD$ 170 million (17% of the total) were financed by FOMAGRO and the rest by beneficiaries’ contribution.

3. The Government of Mexico has also developed mechanisms to promote environmentally friendly technologies in rural areas, through increased contribution of private sector investment and the use of renewable energy, energy efficiency practices, and biomass energy production. These mechanisms include specific financing to expand small and medium-sized producers’ participation in the various production chains as a means to increase their productivity and incomes. Between 2000 and 2006, SAGARPA/FIRCO implemented the USD$21.7 million Renewable Energy for Agriculture Project (PERA), supported by a USD$8.9 million grant from the GEF and implemented by the Bank. The objectives of PERA were to promote the use of renewable energy for productive activities relating to agriculture and livestock, particularly solar water pumping, solar heating, and biogas heating, in order to improve the productivity and incomes of small-scale producers. The project was a pilot exercise which managed to successfully promote the use of renewable energy sources in more than 2,300 productive sub-projects, as well as to widen the technological knowledge about the various sources of renewable energy. The project Implementation Completion Report (ICR) rated the project Successful and provided lessons learned which will be valuable to the overall design of a future project seeking to promote energy efficiency and the reduction of greenhouse gases.

4. During the last 18 months, FIRCO has begun to integrate the activities promoted by PERA with those of FOMAGRO. The purpose of this integration is not only to reduce the environmental impact of the sub-

3 PIF Template, August 30, 2007 projects financed by FOMAGRO, but also to contribute to the Government’s programs and policies related to climate change and the agreements reached within the United Nations Framework Convention on Climate Change. In March 2007, the Secretaries of SAGARPA and SHCP (Finance) requested Bank assistance for the preparation and implementation of a project to promote sustainable rural development through stimulating a larger participation of small- and medium-sized producers in rural enterprises and promoting the adoption of energy efficient practices. Specifically, the Government of Mexico indicated its interest in continuing to work with the Bank through Bank and GEF financing to promote modern agribusiness development as well as assist government efforts to address climate change issues in the agricultural sector.

5. The main objective of the proposed project would be to promote environmentally and economically sustainable agro-processing facilities, while contributing to the goals of the National Strategy on Climate Change by facilitating the adoption of low carbon intensity technologies. The project objective would be achieved through: (i) promoting increased private investment in small and medium-scale integrated agro- industries and agri-businesses, thus increasing the value added of primary products; (ii) promote energy efficiency practices, including sustainable biomass production, conversion, and use as energy; (iii) promote the use of renewable energy sources in sustainable productive processes; and (iv) strengthen SAGARPA’s institutional capacity to address the agricultural sector’s impact on climate change. At the field level, this project is expected to allocate resources from the GEF to support beneficiary investments in energy efficiency technologies, to expand the technological knowledge of energy efficient agro-industrial production systems and energy production from biomass, and assist SAGARPA with the implementation of its strategy to mitigate the effects of climate change.

6. The proposed project is fully blended with a $60m IBRD loan. The GEF support of $10.5m will provide incremental financing to small and medium sized producers for adopting energy efficient technologies and for producing biomass energy. The component description includes all sources of financing. The project would achieve its objectives through four components:

 Component 1 – Promotion of investment sub-projects among small and medium-sized producers and processors that increase value-added in the various stages of the production chain for agricultural products, while incorporating low carbon intensity and energy efficient technologies. A large majority of the financing will be provided to sub-projects that meet eligibility criteria for project resources. The funding will be provided through a matching grant mechanism to ensure the highest level of ownership by the farmers and cost-effectiveness of investment. The project financing will promote: (i) the establishment and/or modernization of new and/or existing small and medium-sized agro-industries, to improve their productivity and their energy consumption efficiency; (ii) development of new energy-efficient small and medium-sized agro-industries, mainly in the fruit, vegetable, dairy and beef sectors; (iii) improved productivity and produce quality of small- and medium-sized producers (e.g. improved production technologies, on-farm produce selection and grading facilities, milking equipment), and supporting their efforts to access a production chain; (iv) investment in energy efficient technologies in existing agro-industries (e.g. energy efficient cooling station for dairy products, drying and packaging facilities for fruit and vegetables, meat processing plants), with strong participation of small and medium-sized producers; and (v) the development of energy production from biomass, both through direct support from GEF funds and through access to carbon credits, which would provide financial and environmental sustainability of the investments. This component promotes, inter alia, the use of biodigestors to dispose animal manure (from swine and confined dairy cattle) which is currently disposed in anaerobic lagoons generating important volumes of methane. Through this project, biodigestors would use the methane to generate electricity for the farm's self-consumption. The GEF support for the biomass energy production will be primarily granted to small and medium size producers to provide the initial capital investment and remove technological barriers. Project design would ensure that GEF resources and carbon credits are adequately allocated, to avoid financing overlaps.  Component 2 – Production support services, which would include technical assistance to beneficiaries in sub-project preparation and implementation; demonstration of low carbon intensity technologies; and training including in integrating energy efficient production and processing technologies in their farms and agro- industries.

4 PIF Template, August 30, 2007  Component 3 – Institutional Strengthening, including assistance for policy development to address issues related to climate change and the environmental impact of sub-projects. In particular, institutional strengthening of areas within SAGARPA that will address the targets outlined within the National Strategy on Climate Change. Also, support to FIRCO would be given to improve their capabilities, at both the central and local offices, with regards to promotion and implementation of FOMAGRO (the aforementioned agribusiness support program).  Component 4 – Project Management, which would include management of project implementation activities and development/operation of a Monitoring and Evaluation System.

B. DESCRIBE THE CONSISTENCY OF THE PROJECT WITH NATIONAL PRIORITIES/PLANS: 7. The proposed project contributes to the objective of the Government’s rural sector strategies, in particular to promote environmentally and economically sustainable rural development through the provision of incentives for increased private investment in environmentally friendly economic activities, extended use of energy efficiency practices, and development of renewable energy sources. Furthermore, the proposed project contributes towards the goals of the Government’s National Strategy on Climate Change (Estrategia Nacional de Cambio Climático—Mexico, May 2007) by deployment and dissemination of energy-efficient technologies and practices within the small producers and the agro-industrial sector.

C. DESCRIBE THE CONSISTENCY OF THE PROJECT WITH GEF STRATEGIES AND STRATEGIC PROGRAMS: 8. The project is consistent with GEF Climate Change Focal Areas, in particular with GEF Operational Program 5 – Energy Efficiency, and the following strategic programs under GEF-4: SP2 “Promoting Energy Efficiency in the Industrial Sector,” and SP4 “Promoting Sustainable Energy Production from Biomass”. The GEF incremental financing would contribute to ensure that project activities would promote global environmental benefits in addition to national and state benefits in Mexico. The activities that would be included to achieve this would encourage the adoption of globally beneficial renewable energy sources, energy efficient agriculture production practices, and contribute to the Government’s National Strategy on Climate Change. In particular, Component 1 will contribute to the reduction of GHG gases by establishing and/or modernizing the existing small and medium-sized agro-industries, to improve their productivity and their energy consumption efficiency. The component will support the development of new low carbon intensity small and medium-sized agro-industries, mainly in the fruit, vegetable, dairy and beef sectors. Furthermore, it will support the development of energy production from biomass, mainly in intensive livestock production operations. Component 3 will provide necessary support to the national and local institutions to strengthen their capacity to implement not only the project but also to apply the Government’s National Strategy on Climate Change (Estrategia Nacional de Cambio Climático—Mexico, May 2007).

D. OUTLINE THE COORDINATION WITH OTHER RELATED INITIATIVES: 9. The climate change agenda in Mexico is growing rapidly and expanding to include all carbon-emitting sectors. The Bank is working closely with the Government of Mexico on a low-carbon study (the G8+5 initiative), a climate-change focused Development Policy Loan, and dozens of initiatives financed through IBRD loans or carbon finance. Coordination among these activities is assured through “focal points” within both the Government and the Bank. The Country Partnership Strategy is also being revised to include a growing climate change agenda as part of the Bank’s policy and strategy discussions. The proposed project complements the overall GEF support in Mexico for reducing the GHG emissions either through the grid- connected photovoltaic project being implemented by UNDP, the Action Plan for Removing Barriers to the Full-scale Implementation of Wind Power project, or transport project being implemented by the Bank. The project team will seek opportunities to strengthen the coordination among these projects to enhance the project impacts and avoid duplications during project preparation and implementation.

E. DISCUSS THE VALUE-ADDED OF GEF INVOLVEMENT IN THE PROJECT DEMONSTRATED THROUGH INCREMENTAL REASONING : 5 PIF Template, August 30, 2007 10. Without the GEF support, the potential significant global environmental benefit in terms of GHG (CO2) emissions reduction from using energy efficient technologies and promoting renewable energy in productive uses will not be fully realized. Although the momentum gained through the recently closed World Bank/GEF supported PERA project will continue to generate global environment benefits, the barrier to adopt energy efficient technologies in the agriculture sector will prevent a substantial gain. The current barrier will hinder small and medium size farmers in rural areas in venturing into latest technologies to make their production practices more energy efficient. Furthermore, without the GEF support the agriculture and agri-business sectors would not fully adopt technologies that have potential for substantially reducing CO2 emission. The country would have limited success in promoting energy efficiency as an effective policy and institutional instrument for achieving the country’s Climate Change objectives.

11. The GEF incremental support will provide much needed upfront investments, knowledge, and technical assistance to make the agriculture sector less emitter of GHGs. Furthermore, the GEF incremental support will provide necessary technical capacity at the national and local levels to address challenges faced by the GOM in implementing Climate Change strategies in agriculture sector.

F. INDICATE RISKS, INCLUDING CLIMATE CHANGE RISKS, THAT MIGHT PREVENT THE PROJECT OBJECTIVE(S) FROM BEING ACHIEVED, AND IF POSSIBLE INCLUDING RISK MEASURES THAT WILL BE TAKEN: 12. Risk: There may be a risk that the various units within of SAGARPA, SEMARNAT, and other agencies involved in climate change policies and programs would not be able to work effectively together. Mitigation: The means to mitigate this potential risk would be to ensure that key staff members from all relevant units and institutions are involved in project preparation and that the institutional arrangements for project implementation ensure that these staff are kept involved during project execution and included in key events and decisions.

13. Risk: The size of the loan proposed by SHCP may be insufficient to fully support the specific activities of the project, thus reducing the Bank’s leverage to influence sector policies and programs. Moreover, a small loan could make the operation less attractive to the Bank. Mitigation: This issue would be addressed in the broader context of the definition of the Bank’s lending program for Mexico and the subsequent negotiations with SCHP on the size of the loan.

14. Risk: Climate variability in Latin America, from inter-seasonal to long term, could be associated with extreme weather patterns, producing possibly detrimental agricultural productivity, socioeconomic and environmental consequences, exacerbated by global warming and associated climate change. Current projections indicate different level of impacts on different areas of Mexico, particularly in terms stream flow, precipitation, temperature, and extreme events that could threaten project objectives. Mitigation: Project preparation and implementation would need to monitor projections of potential future climate conditions, based on climate change scenarios to undertake any possible mitigation procedures. Furthermore, the Government of Mexico has committed to implement necessary measures to comply with the Kyoto Protocol targets—this fact, in itself, reduces the overall climate change risk of the project.

G. DESCRIBE, IF POSSIBLE, THE EXPECTED COST-EFFECTIVENESS OF THE PROJECT: 15. A detailed economic and financial analysis will be carried out during project preparation which will provide quantitative and/or qualitative information to assess the cost effectiveness of the project. Since the proposed project will be integrated with the proposed IBRD loan, the cost-effectiveness of the project would be maximized through the benefit of shared costs. The proposed project would apply the least cost options to generate maximum possible impacts by selecting energy efficient technologies. Furthermore, the proposed project would seek different incentive schemes including providing matching grants to farmers who adopt economically viable energy efficient technologies to reduce their carbon emission. Where feasible, quantifiable models to estimate the reduction of tons of GHG emission would be developed and presented at CEO endorsement. 6 PIF Template, August 30, 2007 H. JUSTIFY THE COMPARATIVE ADVANTAGE OF GEF AGENCY: The proposed project is an investment operation and is consistent with the comparative advantage of the World Bank as stipulated in the Comparative Advantage matrix.

7 PIF Template, August 30, 2007 PART III: APPROVAL/ENDORSEMENT BY GEF OPERATIONAL FOCAL POINT(S) AND GEF AGENCY(IES)

A. RECORD OF ENDORSEMENT OF GEF OPERATIONAL FOCAL POINT (S) ON BEHALF OF THE GOVERNMENT(S): (Please attach the country endorsement letter(s) or regional endorsement letter(s) with this template).

Claudia Grayeb Bayata, GEF Focal Point, Date: January 17, 2008 Secretaria de Hacienda y Crédito Publico, Mexico

B. GEF AGENCY(IES) CERTIFICATION This request has been prepared in accordance with GEF policies and procedures and meets the GEF criteria for project identification and preparation.

Jocelyne Albert Project Contact Person

Steve Gorman GEF Executive Coordinator The World Bank Date: February 13, 2008 Tel. and Email: (202) 473-3458 [email protected]

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8 PIF Template, August 30, 2007