Document of The

FOR OFFICIAL USE ONLY

Public Disclosure Authorized Report No. 65160-MX

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT ON A PROPOSED

Public Disclosure Authorized STRENGTHENING SOCIAL RESILIENCE TO CLIMATE CHANGE

DEVELOPMENT POLICY LOAN

IN THE AMOUNT OF US$ 300,751,879.70 TO THE UNITED MEXICAN STATES

Public Disclosure Authorized

January 27, 2012

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

Public Disclosure Authorized

This document is being made publicly available prior to Board consideration. This does not imply a presumed outcome. This document may be updated following Board consideration and the updated document will be made publicly available in accordance with the Bank‘s policy on Access to Information. CURRENCY EQUIVALENTS (Exchange Rate Effective December 7th, 2011) Currency Unit = Mexican Pesos MX$1.00 = US$0.0740 US$1 = MX$ 13.510

ABBREVIATION AND ACRONYMS

AECID Spanish Agency for International Development Cooperation (Agencia Española de Cooperación Internacional para el Desarrollo) AFD French Development Agency (Agence Française de Développement) CADENA Componente de Atención a Desastres Naturales en el Sector Agropecuario y Pesquero CCCR Carbon Cities Climate Registry CCKP Climate Change Knowledge Platform CCPI Climate Change Performance Index CDI National Indigenous Peoples‘ Commission (Comisión Nacional para el Desarrollo de los Pueblos Indígenas) CDM Clean Development Mechanism CENAPRED National Center for Disaster Prevention (Centro Nacional para la Prevención de Desastres) CFAA Country Financial Accountability Assessment CICC Interministerial Climate Change Commission (Comisión Intersecretarial de Cambio Climático) CO2 Carbon dioxide CO2e Carbon dioxide equivalent CONABIO National Commission for the Knowledge and Use of Biodiversity (Comisión Nacional para el Conocimiento y Uso de la Biodiversidad) CONAFOR National Forestry Commission (Comisión Nacional Forestal) CONAGUA National Water Comission (Comisión Nacional del Agua) CONANP National Council of Protected Natural Areas (Consejo Nacional de Áreas Naturales Protegidas) CONAVI National Housing Commission (Comisión Nacional de Vivienda) COP16 16th Session of the Conference of the Parties (UNFCCC) CPAR Country Procurement Assessment Report CPS Country Partnership Strategy CSOs Civil Society Organizations CTC Consultative Technical Council (Consejo Técnico Consultivo) CTF Clean Technology Fund DOF Official Gazette of the Federation (Diario Oficial de la Federación) DPL Development Policy Loan DRM Disaster Risk Management DUIS Integrally planned urban development (Desarrollos Urbanos Integrales Sustentables) ECUVE Qualitative Evaluation of the House and the Environment (Evaluación Cualitativa de la Vivienda y su Entorno) ENACC National Climate Change Strategy (Estrategia Nacional de Cambio Climático) ESW Economic and Sector Work FAO Food and Agriculture Organization FCPF Forest Carbon Partnership Facility FONDEN Fund for Natural Disasters (Fondo para Desastres Naturales) FOPREDEN Disaster Prevention Program (Fondo para la Prevención de Desastres) FY Fiscal Year GDP GEF Global Environment Facility GHG Greenhouse Gases GiZ German Agency for International Cooperation (Gesellschaft für Internationale Zusammenarbeit) GoM Government of Mexico GT–ADAPT Working Group on Policies and Strategies for Adaptation (Grupo de Trabajo sobre Políticas y Estrategias de Adaptación) IBRD International Bank for Reconstruction and Development IADB Inter-American Development Bank IFC International Finance Corporation IMCO Mexican Institute for Competitiveness (Instituto Mexicano de la IMF Competitividad) International Monetary Fund INE National Institute of Ecology (Instituto Nacional de Ecología) INFONAVIT National Workers Housing Fund (Instituto del Fondo Nacional de la Vivienda para los Trabajadores) JIRA Environment Intermunicipal Board for the Integral Management of the Lower Basin of the Ayuquila River (Junta Intermunicipal de Medio Ambiente para la Gestion Integral de la Cuenca Baja del Río Ayuquila) LAIF Latin America Investment Facility LULUCF Land use, land-use change, and forestry MCP Pact MEDEC Low-carbon study for Mexico (México: Estudio sobre la disminución de emisiones de carbono) mt Million tons MOU Memorandum of Understanding PACC Program for Climate Contingencies (Programa de Atención a Contingencias Climatológicas) PECC Special Program for Climate Change (Programa Especial de Cambio Climático) PEF Federal Expenditure Budget (Presupuesto de Egresos de la Federación) PER Public Expenditure Review PET Temporary Program (Programa de Empleo Temporal) PETi Emergency Temporary Employment Program (Programa de Empleo Temporal inmediato) PFM Public Financial Management PND National Development Plan (Plan Nacional de Desarrollo) PRAH Program for Prevention of Risks in Human Settlements (Prevención de Riesgos en los Asentamientos Humanos) PROCAMPO Farm-support program (Programa de Apoyos Directos al Campo) PROGAN Livestock support program (Programa de Estímulos a la Productividad Ganadera) PSIA and Social Impact Analysis PSV Local Social Promoters (Promotores Sociales Vecinales) REDD+ Reduced Emissions from Deforestation and Forest Degradation, Conservation of Forest Carbon Stocks, Sustainable Management of Forest and Enhancement of Forest Carbon Stocks in Developing Countries SCCP State Climate Change Plans SAGARPA Ministry of Agriculture and Rural Development (Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentación) SEDESOL Ministry of Social Development (Secretaría de Desarrollo Social) SEGOB Ministry of Interior (Secretaría de Gobernación) SEMARNAT Ministry of Environment and Natural Resources (Secretaría de Medio Ambiente y Recursos Naturales) SEP Strategic Engagement Program SFLAC Spanish Fund for Latin America and the Caribbean SFP Ministry of Public Administration (Secretaría de la Función Publica) SHCP Ministry of Finance (Secretaría de Hacienda y Crédito Público) SHF Federal Mortgage Corporation (Sociedad Hipotecaria Federal) SINAPROC National Civil Protection System (Sistema Nacional de Protección Civil) TA Technical Assistance TESOFE Treasury of the Federation (Tesorería de la Federación) UN UNDP United Nations Development Program UNEP United Nations Environment Program UNFCCC United Nations Framework Convention on Climate Change URA Urban Risk Assessment UTTP Urban Transport Transformation Program WDR World Development Report WII Weather Index Insurance

Vice President: Hasan A. Tuluy Country Director: Gloria M. Grandolini Sector Director: Ede J. Ijjasz-Vasquez Sector Manager: Maninder Gill Sector Leader: Alexandra Ortiz Task Team Leader: Rodrigo Serrano-Berthet Co-Task Team Leader: Angélica Núñez Co-Task Team Leader: Laurent Debroux THE UNITED MEXICAN STATES STRENGTHENING SOCIAL RESILIENCE TO CLIMATE CHANGE DEVELOPMENT POLICY LOAN

TABLE OF CONTENTS

LOAN AND PROGRAM SUMMARY ...... I

I. CLIMATE CHANGE ENGAGEMENT IN MEXICO ...... 1

II. COUNTRY CONTEXT ...... 8 A. Recent Economic Developments 8 B. Macroeconomic Outlook 11 C. Context for Sustainable and Resilient Development 16

III. THE GOVERNMENT PROGRAM AND PARTICIPATORY PROCESSES ...... 21 A. The Government Program 21 B. The Participatory Process 30

IV. BANK SUPPORT TO THE GOVERNMENT PROGRAM ...... 33 A. Link to Country Partnership Strategy 33 B. Collaboration with IMF and Other Development Partners 33 C. Integrated World Bank Engagement on Social Resilience, Forest Policies and Climate Change 34 D. Analytical Underpinnings 39

V. THE PROPOSED OPERATION ...... 42 A. Operation Description 42

VI. OPERATION IMPLEMENTATION ...... 59 A. Poverty and Social Impacts 59 B. Environmental Aspects 62 C. Implementation, Monitoring and Evaluation 63 D. Fiduciary Aspects 64 E. Disbursements and Audit 66 F. Risks and Risk Mitigation 66

ANNEXES ...... 69

ANNEX 1. LETTER OF DEVELOPMENT POLICY ...... 69

ANNEX 2. POLICY AREAS, PRIOR ACTIONS AND OUTCOMES ...... 73

ANNEX 3. FUND RELATIONS NOTE ...... 76

ANNEX 4. LONGER-TERM CLIMATE CHANGE ...... 77

ANNEX 5: NATURAL DISASTERS AND UNPLANNED URBAN GROWTH ...... 80

ANNEX 6: FOREST MANAGEMENT ...... 84

ANNEX 7 – PARTICIPATORY PROCESSES ...... 86

ANNEX 8 - LESSONS LEARNED ...... 88

ANNEX 9 – MEXICO AT A GLANCE ...... 92

ANNEX 10. MAP OF MEXICO ...... 96

This DPL was prepared by a team led by Rodrigo Serrano-Berthet (LCSSO), Angélica Núñez (LCSUW), and Laurent Debroux (LCSAR) and included Ricardo Hernández, Sr. Environment Specialist (LCSEN); Margaret Arnold, Sr. Social Development Specialist (SDV); Richard Damania, Lead Environmental Economist (LCSEN); Ana Elisa Bucher, Climate Change Specialist (ENV); Oscar Ishizawa, Disaster Risk Management Specialist (LCSUW); Ulrich Hess, Sr. Economist (CPMF); Fabio Pittaluga, Sr. Social Development Specialist (LCSSO); Alejandro de la Fuente, Social Development Economist (SDV); Todd Crawford, Lead Operations Consultant (LCSSD); Nicolas Perrin, Sr. Social Development Specialist (ECSS4); Maria Poli, ETC (LCSSO); Gisela Campillo, JPO (LC1); Ana Paola López, STC (LCSSO); Maximillian Ashwill, ETC (LCSSO); Graciela Reyes Retana, JPA (LC1); Maribel Cherres, Program Assistant, (LCSSO); Damaris Garay, Language Team Assistant (LC1); Nancy Montes de Oca, Language Team Assistant (LC1); Diana Jimenez, Language Team Assistant (LC1); Mariangeles Sabella, Sr. Counsel (LEGLA); Gamila Kassem (LEGLA); Xiomara Morel, Sr. Financial Management Specialist (LCSFM); Joost Draaisma, Sr. Country Economist (LC1), and Victor Ordoñez (CTRLN). The Team is grateful for the close collaboration of the Government of Mexico during the preparation of the loan. Maninder Gill (LCSSO), Gustavo Saltiel (AFTWR), Alexandra Ortiz (LCSSD), and Harold Bedoya (LC1) provided internal quality oversight. The peer reviewers are Robin Mearns, Lead Social Development Specialist, Team Leader Social Dimensions of Climate Change (SDV); Abhas Jha, Lead Urban Development Specialist, Regional Coordinator DRM (EASIN); and Benoit Bosquet, Lead Carbon Finance Specialist (ENVCF).

LOAN AND PROGRAM SUMMARY

THE UNITED MEXICAN STATES STRENGTHENING SOCIAL RESILIENCE TO CLIMATE CHANGE DEVELOPMENT POLICY LOAN

Borrower The United Mexican States Implementing Ministry of Environment and Natural Resources Agency

US$300,751,879.70, IBRD Flexible Loan with a variable spread, commitment linked, bullet repayment on August 15, 2023, all Financing Data conversion options (currency, interest rate and Caps/Collars), and February 15 and August 15 as payment dates.

Operation Type Single Tranche Development Policy Loan

Social Development, Disaster Risk Management, Urban Main Policy Areas Development, Forestry, Climate Change, Subnational Planning

Long term adaptation planning  Number of States designing Climate Change Action Programs during 2012 that have included specific measures to promote social resilience (baseline: 0, target: 3)  Regional Strategy for Climate Change Adaptation in the Yucatán Peninsula has included measures (supported by SEMARNAT and/or INE) to address unsustainable growth of tourism in coastal areas and livelihood co-benefits of climate policies for indigenous communities.  Number of States designing Climate Change Action Programs during 2012 that have included civil society participation in the design of social resilience initiatives. Key Outcome (baseline: 0, target 3) Indicators (by March 2013) Disaster Risk Management and Sustainable Territorial Development  Percentage of municipalities with high and very high scores in PRAH's disaster risk index which are implementing risk reduction institutional strengthening and investment activities supported by PRAH. (Source: PRAH's Risk Index; Baseline January 2012: 0; target by March 2013: 60 municipalities).  Number of urban development projects evaluated within the DUIS Working Group that have incorporated at least the following criteria specified in SEDESOL's Sustainable Urban Development Guidelines: (i) location, (ii) connectivity and accessibility, and (iii) risk prevention (target: 5 between January 2012-March 2013).  Percentage of eligible surface that is covered by climate risk insurance (baseline: 69%; target: 74%)

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Sustainable Community Forest Management  Number of REDD+ collaboration initiatives between CONAFOR and/or SAGARPA and subnational Governments in REDD+ Early Action areas that are operational (baseline:0; target: 2)  Active social participation in REDD+ policy making at sub- national level trough the operation of local CTC-REDD+ (participation of civil society in all meetings as reflected in minutes, with a minimum 3 meetings per year per CTC).  Percentage of participating communities in REDD+ Early Action Areas receiving support from regional landscape management agents (baseline 0%, target 33%) The objective of this operation is to strengthen social resilience to climate change through policies that will directly and indirectly Program benefit the poor by improving: (a) adaptation planning oriented to the Development state level; (b) disaster risk reduction and territorial development Objective(s) and actions oriented to the municipal level; and (c) sustainable Contribution to community forest management at the community level. A multi- CPS sectoral DPL to enhance climate change adaptation capacity is anticipated in the CPS.

Economic. A sharp weakening in the economic recovery of the would pose downside risks to Mexico‘s growth due to the high degree of integration. Even in the case of a prolonged weakness in the U.S., strong macroeconomic policy fundamentals should favor recovery of the Mexican economy and a return to the medium-term potential output rate of growth. A greater emphasis on growth-oriented structural reforms is crucial to improve Mexico‘s medium-term growth potential, which is driven by labor force and capital accumulation growth but remains constrained by lack of any significant productivity improvements.

Fiscal. Sovereign debt problems in Europe and fiscal sustainability concerns in other countries, could increase global risk aversion, and lead to higher volatility in Mexico‘s financial markets. The Risks and Risk Government‘s record of sound and predictable macroeconomic Mitigation management, reflected in their successful response to the 2009 global crisis, and the increased insurance provided by the international reserve accumulation and a successor IMF Flexible Credit Line mitigate some of the tail risks of global financial market volatility.

Institutional. The implementation of programs recognized by the proposed DPL will require significant multi-institutional collaboration. Five of the nine prior actions proposed in this DPL mitigate this risk by strengthening mechanisms of inter-sectoral coordination. These measures are supported by complementary activities by the Bank to assist the government through capacity- building programs and investment lending that strengthens the ability of institutions to plan, implement, and monitor sectoral programs. The Working Groups for REDD+ and Adaptation and their respective Consultative Technical Committee or Expert Technical Committee

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bring together the agencies and civil society.

Political. Political support to the climate change program could weaken, particularly given the upcoming national elections and the subsequent government transition in January 2013. This risk is considered low. Mexico was the first of the two non-Annex 1 countries to date that have submitted their third communications to the UNFCCC (the other being Uruguay) and is the only one to have submitted its fourth. It is already at work on its fifth. The National Climate Change Strategy and Special Program for Climate Change were widely consulted and enjoy broad support among political parties, all levels of government, civil society organizations, and Mexico‘s academic and scientific communities. With these and with Mexico‘s effective management of COP 16, it has consolidated its reputation as a global leader on climate change adaptation. It is not likely that Mexico would cede that leadership role. The Bank‘s on- going engagement with the government on climate change matters is also expected to help maintain political support.

Environmental and social. Likelihood of unanticipated environmental and social impacts is low as most of the potential impacts are well known and manageable. Overall, the operation is likely to have strong, positive environmental and social impacts. Also, the key agencies involved in the DPL have strong track-records as well as significant capacity to address environmental and social issues, the resolution of which constitutes a core part of their mandate.

Stakeholder. The manner in which Mexico has been able to build a strong consensus among stakeholders, including government agencies, civil society and the private sector on a range of climate- related actions, particularly in the run-up to COP 16, provides significant assurance that the risk of stakeholder opposition to the proposed policy actions is small. The fact that most of the actions will be highly beneficial to a broad range of stakeholders should also contribute to strong support among them. Operation ID P120170

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THE UNITED MEXICAN STATES STRENGTHENING SOCIAL RESILIENCE TO CLIMATE CHANGE DEVELOPMENT POLICY LOAN

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. As shown in Figure 1, this engagement has progressed in recent years, with subsequent stages built on previous actions. The Bank‘s engagement in the field of 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.

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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: 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, , and ) 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

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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 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 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).

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Figure 1: Stages of climate change engagement in Mexicoa

Stages of Climate Change Engagement in Mexico

Foundations Early Support Strengthening Consolidation (Before 1999) [1999–2007) [2007–2009] [2010–)

 LAC Region Landfill Gas  Carbon Finance Assistance  Social Impacts of Climate Change

Initiative (P104757) Program for Mexico (P112024)  Evaluation of Energy (P104731)  MoU Subnational CC (P105849) Efficiency Initiatives  Low-carbon Study  Othon P. Blanco Sustainable (P099734) (MEDEC) (P108304) Development Strategy (P122021)

 Economic Assessment of  Mass Urban Transport-  SEP Adaptation of the Water Policy Interventions in the Federal Program (P110474) Sector to CC Water Sector (P096999)  CC Public Expenditure Review (FY12)

Knowledge Services  Forest Carbon Partnership Facility (FY11-13)  Solid Waste Management  Renewable Energy for  Mexico: Waste Management  Adaptation to Climate Change Pilot Project (P007628) Agriculture Project (P060718) and Carbon Offset Project Impacts in the Coastal Wetlands in  Urban Transport Project  Introduction to Climate- (P088546) the Gulf of Mexico (P100438) (P007615) friendly Measures in Transport  Climate Change DPL  Urban Transport Transformation  Community Forestry (P059161) (P110849) Program (P107159) (P007700)  Programmatic Environment  Environmental Sustainability  Green Growth DPL (P115608) DPLs I and II (P079748) DPL (P095510)  Adaptation to CC in the Water  Sustainable Rural Sector DPL (P120134) Development (P108766)  Low-carbon DPL (P121800)  Strengthening Social Resilience to CC DPL (FY12) Financial Services  Forest and Climate change SIL, and Forest Investment Program (FY12)  Modernization of National Meteorological Service SIL (FY12)  Consolidation & Strengthening  Preparation of the CTF  Water sector events in the lead-up

of the Mexican Office for Investment Plan to COP16

Greenhouse Gas Mitigation  Energy-efficiency conference (P060412)  High-level facilitation activities

related to COP16 Services

 Agriculture and forestry sector Coordination Convening and events during COP16 a The figure highlights several significant examples and does not aim to exhaustively illustrate all climate change activities.

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 (see Figure 2). 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.

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Figure 2: Timeline of the Bank engagement with the GoM in climate change 1995

1993 Community member 2000 2005 2007 2010 2012 Ratification participation Advisory Ratification of the Kyoto Protocol National Climate COP 16 National UNFCCC Councils for Sustainable Kyoto Protocol entered into force Change Strategy Cancun Adaptation Development Strategy

Foundations Early Support Strengthening Consolidation

1999 … 2007 2010 …

FY86 FY99 Solid Waste Greenhouse FY08 FY11-FY12 Management Gas Mitigation FY01 Low-carbon FY09 Social Resilience Pilot Project Office Methane Gas FY03 Sustainable and CC DPL Study (MEDEC) Capture and Use Introduction to Rural FY97 Climate-friendly FY06 Forest and CC FY00 at a Landfill FY04 Second Development Program FY90 Community Measures in Renewable LAC Region Forestry Forestry Transport Programmatic Social Impacts of Energy for Landfill Gas Environment Development Project FY09 Climate Change Agriculture Initiative DPL Project Project Climate FY10 Change DPL Green Growth DPL Adaptation to Climate Change in the Water Sector DPL

MoU Subnational Climate Change

1992 1994 1997 2001 2004 2006 2009 Adoption UNFCCC Adoption of Mexico‘s Second National Mexico‘s GHG Mexico‘s Third National Special Climate UNFCCC entered intothe Kyoto Communication to the Program Communication to the Change Program force Protocol UNFCCC UNFCCC (PECC)

Mexico‘s First National Mexico‘s Fourth5 National Communication to the Communication to the UNFCCC UNFCCC

Strengthening Social Resilience to Climate Change DPL 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 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 over ten thousand 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. Thinking about resilience has evolved over recent years beyond the ability of a community to cope and recover from disturbances to incorporate also their ability to learn, change, and adapt in response to stresses and shocks. Among the authors grappling with defining and measuring resilience of social systems in the face of climate change, Martin-Breen and Anderies (2011)2 lay out a spectrum of resilience, with a synthesis of resilience theory and its applications across disciplines. In the face of unpredictable climate changes, the most useful definition for social resilience comes from complex adaptive systems: the ability of systems— households, people, communities, ecosystems, nations—to generate new ways of operating and new systemic relationships. Hence in the context of climate change, social resilience is best defined as the ability to withstand, recover from, and reorganize in response to crises. Function is maintained, but system structure may not be.

12. 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, including misaligned policies and

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. 2 Martin-Breen, Patrick and J. Marty Anderies. Resilience: A Literature Review. The Rockefeller Foundation, September 2011. 6

incentives, limited community and civil society involvement, 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.

13. World Bank President Zoellick has stated that climate change “offers an opportunity for economic and social transformation that can lead to an inclusive and sustainable .” The GoM‘s progress in formulating and implementing its climate change adaptation strategy and programs provides a unique opportunity to support improvements in social inclusion and sustainable poverty reduction through improved climate change planning at the state level, strengthened disaster risk reduction capacity at the municipal level, better territorial and urban planning, better targeted programs to cushion the poor against adverse weather events, and promotion of synergies between climate change mitigation and adaptation in the forestry sector benefiting especially indigenous, poor communities.

14. The document is structured as follows: Section II describes the country context, paying special attention to key challenges that the country faces in terms of sustainable and resilient development. Section III outlines the Government‘s program to deal with these challenges. Section IV sets forth the Bank‘s recognition of the Government‘s program. Section V describes the proposed operation. Section VI discusses program implementation, including key risks and risk mitigation measures. Ten annexes provide greater detail on several aspects of the operation.

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II. COUNTRY CONTEXT

A. Recent Economic Developments

15. 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.

16. 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.

17. 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.

18. 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.

19. 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 Charts Fig.1-Aggregate demand (2008:II=100) Fig.2- Labor market indicators

6.5 15.5 115 Pub. Exp. 110 6.0 15 105 GDP 5.5 Exports 14.5 100 5.0

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09:IV 10:IV 08:IV 20. 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 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 2013.3

21. 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.

22. 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.

23. Over the past two years Mexico experienced substantial capital inflows, mainly directed at the domestic government bond market. Loose global monetary conditions and

3 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. 10

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.

24. 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 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.

25. 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 . 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

26. 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).4 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.

27. 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

4 See also IMF Selected Issues (2011).

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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.

28. 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.

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

30. 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.

31. 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.

32. 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.

33. 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

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Government‘s medium term fiscal framework foresees a 2 percent reduction in the debt-to-GDP ratio over the next five years.

34. 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.

35. 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. 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.

36. 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 estimates1 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.

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

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Table 1: Main macroeconomic indicators (2007-2014), base case scenario Est. Projection Indicator 2007 2008 2009 2010 2011 2012 2013 2014 National 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 -19.5 Current 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 -9.2 Merchandise Exports Current 271.9 291.3 229.7 298.5 353.7 384.9 416.5 444.8 Merchandise 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 49.7 Non Oil Exports 228.9 240.7 198.9 256.8 298.7 332.2 365.0 395.1 Merchandise Imports Current 281.9 308.6 234.4 301.5 356.8 391.1 424.7 454.0 Merchandise 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 26.9 Factor 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 22.2 Portfolio Investment 7.3 2.4 7.6 23.8 28.0 18.0 15.0 15.0 Gross Reserves 87.2 95.3 99.9 120.6 142.5 149.3 156.3 163.3 Public 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 13.2 Oil Price (US$ per barrel) 61.6 84.4 57.4 72.3 100 97.7 95.5 92.2 Source: INEGI, Banxico, SHCP, and WB estimates.

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C. Context for Sustainable and Resilient Development

37. 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. Annexes II to IV provide more detail.

Long-term climate change challenges 38. 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.5 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 2080.6 Temperatures have already increased by 0.6°C since 1960.7 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.8 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 scenario9 could exceed

5 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) 6 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. 7 Word Bank Climate Change Knowledge Portal (http://climateknowledgeportal.worldbank.org) and Mexico 4th National Communication on Climate Change to the UNFCCC. 8 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. 9 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 16

4C10– dangerously close to climate thresholds – and would call for a fundamental change in rural livelihoods.

39. 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 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.

40. 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.11 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 growth

41. 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 3) and would increase in severity with climate change.12

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). 10 Ibid 11 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. 12 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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Figure 3. Incidence of Natural Disasters in Mexico (1960–2009) 12

10

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1964 1967 1973 1976 1985 1988 1994 1997 2006 2009 1970 1979 1982 1991 2000 2003

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

42. 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 , health and well-being. In many cases (particularly in large economies), a major disaster will not have 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.

43. 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 (see Table 1 in Annex 5). 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.

44. 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.

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Forest management

45. In Mexico, sustainable 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.

46. 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 13 million inhabitants living in the forests suffer from extreme poverty. About 8,500 indigenous communities and ejidos13 own around 70 percent of the country‘s forests under a legally recognized collective land ownership system–a situation unique in the world.14 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;15 and both show significant variation across the country.

47. 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.

48. 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

13Communities 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). 14 Food and Agriculture Organization (FAO). 2010. Global Forest Resources Assessment 2010. Rome; Italy 15 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). 19

(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 16 interventions have an emissions reduction potential of 1,120 Mt CO2e. Other forestry interventions with high greenhouse gas mitigation potential are reforestation and restoration (10 percent) and afforestation (9 percent)17. The GoM recognizes that only by improving forestry management, including reducing the emissions from deforestation, can the country meet its climate mitigation goals.

16 Based on the six REDD interventions proposed by the Low-carbon Study (MEDEC). 17 However, is hard to compare percentage to the REDD+ potential expressed in Metric tons (Mt). 20

III. THE GOVERNMENT PROGRAM AND PARTICIPATORY PROCESSES

A. The Government Program 49. Since the inauguration of President Calderón on December 1, 2006, the need to address the challenges of global climate change has been a unifying, consistent and increasingly high-profile theme of Mexican social and economic policy. The 2007–2012 Plan Nacional de Desarrollo (NDP or National Development Plan) was the first broad statement of the Calderón administration‘s development priorities and, following broad consultation with civil society, incorporated environmental sustainability as one of its four pillars, reflecting the close connection between environmental sustainability and livelihood sustainability of the poor in Mexico. This pillar advocates four strategies: (a) design and develop national adaptation capacity; (b) design regional (subnational) climate scenarios for Mexico; (c) evaluate the impacts of vulnerability to, and the capacity to adapt to, climate change in different socioeconomic sectors and ecological systems; and (d) promote the dissemination of information on the impacts, the vulnerabilities associated with, and the measures to improve adaptation to climate change.

50. Building on NDP, the Estrategia Nacional de Cambio Climático (ENACC or National Climate Change Strategy), approved in May 2007 by the Comisión Intersecretarial de Cambio Climático (CICC or Interministerial Climate Change Commission), was the GoM’s next important step in furthering its climate change agenda. Announced by President Calderón himself, ENACC placed climate change adaptation and mitigation at the core of Mexico‘s national development policy, establishing the long-term agenda and setting medium- to long-term adaptation and mitigation goals. Since 2007, nine ministries and two specific sectoral programs have incorporated climate change adaptation goals into their programs. These include environment and natural resources, agriculture and fisheries, civil protection, social development, health, energy, communications and transport, and the statistics bureau, in addition to the strategies and programs of CONANP and CONAGUA.

51. The Programa Especial de Cambio Climático (PECC or Special Climate Change Program), published in August 2009, established the GoM’s plan of action for addressing the challenges of climate change. It includes sectoral programs and targets for reducing greenhouse gas (GHG) emissions, identified the principal climate change risks and broad plans for adaptation, and established cross-cutting policy initiatives. It outlined three phases of action: Phase 1 (2008 to 2012) to assess the country‘s vulnerability and conduct an economic evaluation of priority measures; Phase 2 (2013 to 2030) to strengthen strategic adaptation capacities; and Phase 3 (2030 to 2050) to consolidate the overall mitigation and adaptation work at all levels in the country. It established 142 adaptation goals to be monitored through 2012 pertaining to knowledge generation, key actions and economic activities to deal with the population‘s vulnerability to the impacts of climate change, and financial instruments to support them. PECC also called for coordination among federal government actions.

52. By establishing sector-specific reduction targets and adaptation measures, the PECC has mainstreamed climate change in the country’s economic and social

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development. To date, Mexico is one of only two UNFCCC non-Annex 1 countries18 to have submitted its Third National Communication (the other being Uruguay) and the only one to have submitted its Fourth and, moreover, is already at work on its Fifth for submission by 2012. Recognizing Mexico‘s leadership in terms of both its domestic policies and programs and its international commitments, Mexico is ranked 11th among all countries in the Climate Change Performance Index (CCPI) for 2010.

53. Following PECC’s launch, the GoM has supported states and municipalities in designing their climate change strategies. The focus has been on promoting the creation of intersectoral commissions and co-financing the generation of Greenhouse Gas Inventories and Climate Change Scenarios, which constitute the minimum knowledge bases to design their mitigation and adaptation strategies. The National Institute of Ecology and the Council for Science and Technology have provided critical support for these tasks.

54. The Federal District of Mexico City and the states of , Guanajuato, , and Nuevo León have already developed climate change programs, while others are planning to produce them in the short term.19 The World Bank is providing technical assistance to develop climate change plans for the States of Michoacán, Campeche, Zacatecas, Quintana Roo and Oaxaca. IADB will provide technical assistance to the states of and Yucatán to develop climate change plans and this assistance will subsequently be extended to and Campeche. The Municipality of has also developed a Climate Action Plan while the Municipality of Othón P. Blanco is currently developing a Climate Change and Sustainable Development Plan. The Federal District has been among the subnational actors showing the greatest leadership in the climate change agenda.

55. While the PECC provides the country with a robust framework for long-term policy engagement on climate change, there is a consensus that it has three important challenges with regard to reducing the impacts of climate change on the population, particularly the poor:

 First, the PECC emphasizes mitigation over adaptation objectives. This is not uncommon among other countries since mitigation objectives are easier than adaptation objectives to transform into concrete, measurable, and outcome related goals. The GoM acknowledged this at the COP-16 and stressed its commitment to strengthen the pro-poor adaptation agenda moving forward.  Second, while the PECC highlights that the socio-economic characteristics of places and people make them differently vulnerable to climate change, its typology of vulnerable populations is very general, and it does not provide clear guidance on the policy instruments to accommodate the differences among those populations.  Third, the PECC was structured predominantly along sector ministry lines. Since the PECC was approved three years after the start of the current administration, it had to build upon the pre-existing sectoral programs created along the lines of the legal mandate

18 See list at: http://unfccc.int/parties_and_observers/parties/non_annex_i/items/2833.php 19 The states of and Yucatán are expected to complete their Climate Change Plans in 2011, followed by Campeche, Zacatecas, Aguascalientes, Jalisco, Quintana Roo, and in 2012. , , Durango, Querétaro, and Tabasco are also elaborating plans. 22

and scope of action for each ministry. While the PECC highlights the cross-sectoral, intergovernmental, and multi-stakeholder nature of the climate change agenda, it leaves many of the mechanics and details for cross-sectoral and inter-institutional strategies and action plans to be worked out more fully in later stages.

56. Over the last year or so, the GoM has taken a number of steps to strengthen the social resilience of poor people to climate change and variability through new policies, institutional arrangements, and programs in three areas: (i) long term adaptation planning at the state level; (ii) pro-poor disaster risk reduction and territorial development at the municipal level; and (iii) pro-poor mitigation and adaptation policies in the forestry sector. These steps aim to:

 Fill gaps in the PECC with respect to the adaptation agenda as evidenced by: (a) approving a Mid-term Adaptation Policy Framework, which points to the differential, adverse effects of climate change on the poor as one of the central issues to address in the formulation of a National Adaptation Policy; (b) passing a battery of programs and reforms aimed at reducing and managing disaster risks, again with particular emphasis on the disproportionate impact of natural disasters on the poor; and (c) including climate change considerations within its disaster risk management policy.  Strengthen the pro-poor orientation of its adaptation and mitigation policies as evidenced by the socially inclusive approach which is the guiding principle of the Mid- term Adaptation Policy Framework and which is also central to the REDD+ Vision.  Promote a cross-sectoral, inter-governmental and multi-stakeholder approach to climate change policies by strengthening state, municipal and territorial level planning and management instruments that bring together local and national actors around climate change actions.

These new steps are further described below.

Climate Change Adaptation Policy 57. The National Medium-term Climate Change Adaptation Policy Framework, which the GoM presented at COP 16 in December 2010 is a key outcome of the first phase of the PECC and responds to the consensus described above regarding the important gaps in the PECC.Elaborated by the Working Group on Policies and Strategies for Adaptation20 under the coordination of SEMARNAT and supported by UNDP, process for preparing the Framework involved all relevant government sectors. It served to build an understanding both broader and deeper of the language, concepts, and instruments of adaptation and the need to address climate vulnerability differentiated by population group, geographic area, and sector of activity. By engaging all relevant government sectors, the Framework goes beyond the sectoral orientation of the PECC and its focus on mitigation, provides a truly cross-sectoral, inclusive vision of the solutions required to adapt to Mexico‘s climate change challenges. .

20 Grupo de Trabajo sobre Políticas y Estrategias de Adaptación, GT-ADAPT. Led by SEMARNAT, it also incorporates SAGARPA, SALUD, SCT, SE, SEDESOL, SEGOB, SENER, SHCP, SER, and SECTUR. 23

58. The Framework sets forth the path for development of the National Adaptation Strategy and its implementation plan. It establishes the guiding principles, strategic priorities and courses of action to strengthen the adaptation capacities of society, ecosystems and productive systems through a process that involves all social groups. It focuses on reducing social vulnerability, promoting adaptation at the state, municipal, and local level, and ensuring broad stakeholder support. The prior actions for this operation map to the key elements of the Framework, which are outlined in Table 2 below and include the reduction of disaster and climate risk, improved municipal development planning, intersectoral coordination, and promoting synergies between forestry activities, REDD+ (which has been recognized as instrument to bring both adaptation and mitigation benefits), and climate change adaptation.

Table 2. Components of the National Mid-Term Climate Change Adaptation Policy Framework (in bold: the courses of action that are being recognized through or are closely related to this DPL)

Objective: To develop and strengthen the adaptation capacities of society, ecosystems and productive systems Guiding Strategic Priorities Courses of action principles 1. Territorial and I. Institutional development, I.1 Strengthening of cross-sectoral coordination mechanisms ecosystem cross-sectoriality, and I.2 Coordination among the three levels of government approach coordination I.3 Collaboration between the public sector and other sectors of society II. Coordination, II.1 Achievement of international treaties and instruments implementation, and II.2 Legal instruments evaluation of public policies II.3 Planning instruments and land-use planning 2. Human rights, II.4 Management instruments social justice II.5 Economic instruments and gender II.6 Monitoring and evaluation equity III. Reduction of social and III.1 Reduction of vulnerability in human settlements physical vulnerability III.2 Reduction of vulnerability of productive sectors III.3 Reduction of vulnerability of infrastructure

IV. Conservation and IV.1 Protection and conservation of ecosystems and

restoration of the ecological biodiversity 3. Ensuring the function of landscapes and IV.2 Design and implementation of an ecological-territorial participation of basins connectivity strategy society IV.3 Restoration of ecosystems linked to hydrological function of basins and coasts IV.4 Productive conversion in agricultural areas with high vulnerability

V. Financing for adaptation V.1 Planning and exercising of public spending 4. Access to V.2 Coordination of funding sources information V.3 Financial instruments for risk reduction and transparency VI. Technological research VI.1 Generation and deepening of knowledge on climate change and development scenarios VI.2 Generation of scenarios of climate change vulnerability and adaptation at different scales VI.3 Social, environmental and economic evaluation of adaptation activities VI.4 Technology development and appropriation VI.5 Development of an inventory of good adaptation practices VII. Communication for VII.1 Development of a strategy for communication, vulnerability and adaptation and promotion of adaptation actions to climate change

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Source: Government of Mexico (2010). Mid-Term Adaptation Policy Framework.

59. The GoM’s current expectation is that the National Adaptation Strategy will be fully consulted and ready for publication in June 2012. A firm schedule is, however, difficult to establish. The issues are complex and ample consultations are required at the federal, state, and municipal levels of government, as well as with a wide range of sectors and business, local, and other civil society stakeholders. The schedule of presidential and subnational elections in 2012 is an additional factor adding to the uncertainty of the time line for finalizing and publishing the National Adaptation Strategy.

Disaster Risk Management and Territorial Development 60. The PECC recognizes that institutional, policy, and program changes are required in the areas of ex ante disaster risk reduction, urban planning, and ex post disaster response in order to strengthen capacity at the state, municipal, and local (including household) levels to confront the challenges of climate change successfully. Key institutions have tended to focus on disaster preparedness and response and have lacked the mandate or policy orientation to develop a proactive integrated risk management strategy.

 The Ministry of the Interior (Secretaría de Gobernación, SEGOB) is the main agency responsible for civil protection, but apart from efforts to raise awareness and promote disaster prevention, it has hitherto not oriented its efforts to influencing investment decisions to incorporate considerations of ex ante disaster risk mitigation. Aware that it needs to shift its focus from preparedness and response toward proactive integrated risk management, SEGOB is publishing a new National Strategy for Disaster Mitigation, which recognizes the cross-sectoral nature of disaster risk management and seeks to coordinate more closely with government agencies and civil society that can have greater influence on ex ante risk reduction.

 The National Civil Protection System (SINAPROC), created in 1985 after the Mexico City earthquake, was not designed with the then-unanticipated potential impacts of climate change in mind. In general, the system works well for such functions as early warning, evacuations, etc. Municipal governments are responsible for identifying high-risk areas; taking precautionary measures to move and house people in temporary shelters; and developing appropriate local legislation to increase security. State governments step in when the municipalities lack the necessary capacity, and the federal government steps in when the states lack the resources. Despite arrangements for inter-governmental coordination and a range of advisory bodies and mechanisms for community participation, post-disaster response systems, however, have weaknesses – fragmented among agencies and programs and uncoordinated at lower levels of government. Financial resources are sometimes not timely and sufficient and disaster aid does not reliably reach the poorest and most vulnerable.

61. To address these weaknesses, the GoM has taken a number of steps to strengthen risk identification and ex ante risk reduction. These include:

 The GoM modified the operational rules of its flagship disaster prevention program, the Fondo para la Prevención de Desastres (FOPREDEN), to require the preparation of

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risk assessments prior to approval of disbursements for civil works. Cofinancing formulas are variable, depending on the cost-benefit analysis, the number of municipalities involved, and the per capita cost. Reflecting the new emphasis on prevention, FOPREDEN will finance 100 percent of the development of Risk Atlases in all 32 states, using the same methodology as was used for the Atlas Nacional de Riesgos prepared by National Center for Disaster Prevention (Centro Nacional para la Prevención de Desastres, CENAPRED).

 SEDESOL established a new program, Program for Risk Prevention in Human Settlements (Prevención de Riesgos en los Asentamientos Humanos-PRAH), to address a key gap in assistance to municipalities to strengthen disaster risk reduction. Previously, risk reduction support was available to states through FOPREDEN, but municipalities faced challenges in accessing the funds. SEDESOL‘s Habitat Program supports risk-reduction activities in municipalities but only those with 15,000 or more inhabitants whereas, as shown by the PSIA, the most disaster- prone municipalities are predominantly rural, indigenous, and small. PRAH fills this gap by making resources available to all municipalities located in risk areas.

 SEDESOL also changed the 2011 Operational Rules of its Temporary Employment Program (Programa de Empleo Temporal, PET) to orient it toward financing of local disaster prevention projects. PET‘s fundamental objective is to absorb seasonal unemployment of the very poor. By having beneficiaries engage in public works that reduce disaster risk, the program will now provide a dual-protection function of reducing both the physical and livelihood risks of the poor.

 Finally, in 2009, the GoM required that CENAPRED and the Ministry of Education include the topic of integrated disaster risk reduction into school curricula for the six levels of basic education, and this effort has now been completed. This is expected over time to increase the public‘s awareness of exposure to risk and of the role that individuals and communities can play in reducing and better managing risk.

62. The GoM has also taken steps to strengthen ex post disaster risk financing system which, while relatively sophisticated, is still unable to meet post-disaster obligations. The Fund for Natural Disasters (Fondo para Desastres Naturales, FONDEN), established in 1966 as part of the SINAPROC to provide support for rapid recovery following disasters saw its reserves were wiped by a single event, Hurricane Alex, which struck northeastern Mexico in July 2010, leaving it unable to play a significant role after the historic floods that subsequently affected various southern states. The Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público, SHCP) and FONDEN are now trying to transfer the risk to the market by insuring FONDEN against the major natural hazards and, to that end, Mexico was the first MIC to issue a catastrophe bond, which provides coverage for very large hurricanes and earthquakes to FONDEN. Recognizing, however, that the drain on FONDEN‘s resources arises not so much from the severe, but infrequent catastrophes as it does from the more frequent but less severe events, the GOM has also taken some steps in connection with the latter:

 The Ministry of Agriculture, Livestock, Rural Development and Fisheries (SAGARPA) has strengthened the poverty focus of its catastrophic insurance program, CADENA,

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formerly called the Programa de Atención a Contingencias Climatológicas (PACC). The program helps low-income agricultural producers that suffer weather-related disasters, droughts in particular, to smooth their consumption and resume productive activities. It covered 3.4 million poor smallholder farmers in 2009. To target poorer rural households better, CADENA lowered the eligibility cut-off point from a maximum of 20 hectares to a maximum of 10 hectares and increased the maximum to eligible farmers from MX$900 to MX$1,200 per hectares. CADENA uses two instruments: index-based and traditional crop and livestock insurance or direct income transfers. Weather-indexed insurance is jointly contracted by the state and the federal governments, with the federal government paying 90 percent of the costs and the state governments the remainder for high risk and underdeveloped municipalities; for lower risk, more developed municipalities, the split is 70:30, respectively. CADENA‘s direct support component indemnifies affected rural smallholders where state governments have not purchased insurance or where the insurance- triggered payouts are insufficient to cover damaged crop areas or livestock.

 The Emergency Temporary Employment Program (Programa de Empleo Temporal Inmediato, PET Inmediato), which is largely administered by SEDESOL, targets the poor and provides employment after disasters through labor-intensive public works to rebuild infrastructure or clean up.

63. Recent disasters such as Hurricane Alex, which hit the northern states of Mexico in June 2010, have highlighted how poor urban planning and management increase vulnerability in urban areas. The PECC calls for integrating existing planning instruments (urban, ecological and territorial plans) in order to strengthen ―strategic capacities for adaptation.‖ As a starting point in the urban sector, the PECC calls for the publication of urban design guidelines to be applied to housing developments that receive funding through federal subsidies.21 A number of actions support this objective:

 In 2009, SEDESOL published guidelines for sustainable urban and territorial development for large-scale housing developments. Adherence to the guidelines was envisaged as an eligibility criteria to access federal funding. Guidelines called for adequate risk assessments prior to the works and also for investments in green spaces, social services, public transport, and other infrastructure to ensure that the new developments would be socially inclusive and linked to employment and economic opportunities. These guidelines faced initial opposition from the developer industry and municipal governments (due to concerns about the impact on affordability) and were never formally approved as mandatory. However, during 2010 and 2011 several housing institutions incorporated the core elements of the guidelines into their policy and programs as part of the country‘s Sustainable Housing Program (Programa Sustentable de Vivienda). Importantly, the Instituto del Fondo Nacional de la Vivienda para los Trabajadores (INFONAVIT), which finances 70 percent of all mortgages in Mexico, included environmental and social sustainability within its core mandate as part of their 2011-2015 financial plan launched in December 2010. In December 2011, the Comisión Nacional de Vivienda (CONAVI) modified the operational rules of the government‘s main

21 The Federal Government has a limited ability to influence urban design and planning. Since these are the responsibility of municipal governments, the most effective way may be to link the guidelines as conditions to disburse federal subsidies for low-income housing. 27

up-front subsidy program to include a sustainability rating as part of the eligibility criteria. Both INFONAVIT‘s 2011-2015 financial plan and CONAVI‘s new subsidy rules evaluate social and environmental sustainability based on the guidelines prepared by SEDESOL in 2009.

 SEDESOL‘s guidelines have also been incorporated into the Desarrollos Urbanos Integrales Sustentables (DUIS) initiative led by SHCP and Sociedad Hipotecaria Federal (SHF). The DUIS initiative is a coordination effort whereby sixteen national-level agencies (including sector agencies, development banks and public mortgage institutions) agree to support an integrally planned urban development and housing project, provided it complies with certain eligibility criteria. In a nutshell, projects are submitted for DUIS approval by private or public sponsors and if they adhere to a set of eligibility criteria – which incorporates SEDESOL‘s guidelines - they can receive a comprehensive package of subsidies and incentives from local and federal government. The DUIS initiative is expected to promote integral urban and territorial development throughout Mexico in coordination with private sector and local governments.

 INFONAVIT has begun working with CENAPRED to incorporate within the recently completed Atlas Nacional de Riesgos a module to screen the suitability of proposed sites for large housing developments in order to reduce the potential home buyers‘ vulnerability to natural disasters. This will complement the PRAH by helping to fill gaps in the information that municipalities need in order to carry out their responsibilities for updating building codes, developing urban plans, and issuing building licenses.

 In parallel, the legislative branch has started to consider constitutional reforms and changes to the General Law for Human Settlements (Ley General de Asentamientos Humanos) and other legislation to foster long-term urban planning at all levels of government, not just at the municipal level as is currently the case. Working with the federal government, legislators have undertaken consultations on the proposed amendments at three regional forums and the reform package is expected to be presented for discussion by mid-2011.

Sustainable Community Forest Management 64. Mexico´s progress with sustainable community forest management is increasingly recognized as a worldwide good practice reference. In various states throughout the country, indigenous communities carry out forest management and marketing operations, operate community-based enterprises, and in some cases have obtained third-party certification from the Forest Stewardship Council. Though much work remains to be done, these early experiences are recognized as global good practices in terms of reducing deforestation and mitigating climate change while at the same time ensuring income and employment opportunities and building social organization and strengthening communities‘ resilience to natural and economic disasters that may be induced by climate change, hence contributing to adaptation.

65. The 2007–2012 National Development Plan states that it is a priority of the GoM to protect Mexico’s forest cover and to increase the areas with sustainable forest management. Some of the key strategies envisaged in the NDP are to promote sustainable community forest management; restore degraded forests, and better manage the advance of

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agriculture over forest frontiers. Over 30 percent of the objectives of the PECC are related to forestry, and include: (i) increasing forest areas under sustainable management; (ii) creating new forest plantations; and (iii) designing an incentive scheme to reduce emissions from deforestation and forest degradation.22

66. Mexico has made substantial progress toward achieving its sustainable forestry goals through the design and implementation of key related programs, guided by the 2025 Strategic Forestry Program for Mexico (Programa Estratégico Forestal para México 2025).23 The federal umbrella initiative for forest-related strategies, ProÁrbol, was created in 2007 by the Ministry of Environment and Natural Resources (Secretaría de Medio Ambiente y Recursos Naturales, SEMARNAT), under the operation of the National Forestry Commission (Comisión Nacional Forestal; CONAFOR) in order to unite and expand several previous forestry programs under a single framework. The core objective of ProÁrbol is to foster development and increase the living standards of the population that lives in the poorest areas of Mexico, with the valuation, conservation, recovery and sustainable use of Mexico‘s forests, and arid lands.24 During 2007–2009 more than US$1.3 billion were allocated to ProÁrbol.25 The six support areas under the 2011 Operational Rules and Special Guidelines (Reglas de Operación and Lineamientos Especiales) are: (i) Forestry Studies; (ii) Forestry; (iii) Certification; (iv) Commercial Forestry Plantations; (v) Reforestation and Lands; (vi) Environmental Services; (vii) Community Forestry; (viii) Forestry Productive Chain; (ix) Forests Sanitation; and (x) Special Programs. 26 Around 8 million hectares under sustainable community management are currently supported by CONAFOR. The main focus of CONAFOR‘s policies has been to empower local communities to manage and protect their forest area for their own long-term benefit.

67. The Government of Mexico reaffirmed its commitment to reduce emissions from deforestation and forest degradation in Mexico’s REDD+ Vision, led by CONAFOR and launched by President Calderón during the session of the Conference of the Parties to the UNFCCC in December 2010 in Cancún. Mexico is among the first countries in the world to adopt a comprehensive national policy document on REDD+. President Calderon‘s personal commitment in sharing his country‘s REDD+ Vision with the rest of the world reflects the importance of the REDD+ agenda for Mexico and Mexico‘s global leadership in this area. Mexico‘s REDD+ Vision supports REDD+ as an instrument for reducing carbon emissions, while at the same time supporting sustainable economic development for poor forest-dependent communities and strengthening community resilience to disaster risks. The REDD+ Vision is a milestone of the government-social sector cooperation (See Box 2) and represents the first step towards the National REDD+ Strategy, which includes both adaptation and mitigation benefits.

22 Comisión Intersecretarial de Cambio Climático, 2009. Programa Especial de Cambio Climático 2009–2012. México 23 CONAFOR. 2001. Programa Estratégico Forestal para México 2002. México 24 Comisión Nacional Forestal (CONAFOR) 2011. Official Webpage http://www.conafor.gob.mx. Consulted January 4, 2011 25 Comisión Intersecretarial de Cambio Climático. 2009. Cuarta Comunicación Nacional ante la Convención Marco de las Naciones Unidas sobre el Cambio Climático. México 26 Secretaría de Medio Ambiente y Recursos Naturales (SEMARNAT). 2011. Reglas de Operación del Programa ProÁrbol 2011. México. Secretaría de Medio Ambiente y Recursos Naturales (SEMARNAT). 2011. Lineamientos Especiales del Programa ProÁrbol 2011. México. 29

Box 2. Mexico’s REDD+ Vision

The REDD+ Vision emphasizes the importance of enhancing cross-sector coordination especially with the agricultural and livestock sectors, and the involvement of civil society and sub-national institutions in climate change strategies. The REDD+ Vision has been adopted by the Comision Intersecretarial para el Desarrollo Rural Sustentable (Intersecretarial Commission for Sustainable Rural Development) led by SAGARPA. It was developed by ten ministries and more than 40 civil society organizations and experts, guided by the CTC-REDD+ and coordinated by CONAFOR.

The key action lines stated in the REDD+ Vision that are essential to develop the REDD+ Strategy by 2012 are as follows: a) Institutional arrangements and public policies; b) Financing mechanisms; c) National forest baseline, and measurement reporting and verification system; d) Capacity building; and e) Communication, social participation and transparency

The document identified more than 15 policy tools for forest and climate change in Mexico, and an additional 11 policy tools that affect forestry in the agricultural and livestock sectors.

B. The Participatory Process

68. Mexico is at the forefront of regional efforts to promote open, participatory and accountable governments. Particularly in the past ten years, the National Congress and the federal government have championed several landmark laws, institutions and policy measures that have enhanced the environment for a participatory democracy. In practice, this has led to the development of a broad legal and institutional framework, establishing access to information and participation mechanisms in public programs, including participatory rule-making procedures, and civil society engagement in state, regional and municipal planning processes. This applies to social and territorial development, disaster risk management, environment and climate change, and forestry sectors. Therefore, the programs, policies and procedures recognized by this DPL integrate civil society participation in their design and implementation through various mechanisms.

69. The government relied on a wide set of consultation and participatory mechanisms to develop the policy actions recognized by this operation which are reflected in the participatory content of many of them:

 The Mid-Term Adaptation Policy Framework defines the need to ensure citizen participation in climate change adaptation as one of the basic principles to be contained in the National Adaptation Strategy. State level climate change plans include consultative bodies or processes to channel civil society inputs during the design process and validate the final plan.  The National System for Civil Protection (SINAPROC) provides for a system of intergovernmental cooperation and mechanisms for community participation. Operational

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rules for the Programa de Empleo Temporario (PET) require the creation of ―Social Participation Committees‖ composed of representatives of communities in which PET projects are executed. Technical proposals submitted by municipalities under the new Program for Risk Prevention in Human Settlements (Programa de Prevención de Riesgos en Asentamientos Humanos) must indicate whether local communities have provided their no-objection to project implementation. The new methodology to be applied by INFONAVIT in housing origination procedures includes criteria on community participation and is piloting the use of ―local social promoters‖ to assess community integration in housing developments as one criterion for prioritizing access to INFONAVIT finance.  The forestry sector also relies on several participatory institutions for policy design and implementation. The main advisory body in the forestry sector is the Forestry Advisory Council (Consejo Asesor Forestal, CONAF), which supervises and assesses the policy instruments included in the General Law of Sustainable Forestry Development. Other consultation mechanisms include the Sustainable Development Consultative Councils (Consejos Consultivos de Desarrollo Sustentable, CCDS), the Technical Advisory Council of the Indigenous Peoples Development Council (Consejo de Desarrollo Indigena, CDI), the Comités Técnicos Consultivos (CTCs, multi-stakeholder groups supported by this operation), and annual regional and local consultations.

70. In addition, the identification of the proposed operation is the result of a wider engagement with Mexico on climate change issues through an array of knowledge and financial services during which the Bank has collaborated with the GoM in an active dialogue with local and national government stakeholders, NGOs, community organizations, academia, and private sector. All of these activities facilitated an understanding of perspectives of various stakeholders to inform the content of this operation. Key activities include:

 Over the last two years the Bank has had a robust engagement supporting state and municipal climate change plans, which included many instances for civil society participation. Recognizing the pivotal role that state governments will have in the implementation of climate change policies, in FY10, the Bank started to reinforce its work at the subnational level. The government of Michoacán, with the support of the Bank, developed a consultative process which included a Strategic Environmental Assessment that had wide participation from civil society and other local stakeholders. Similar processes have been followed in the state climate change engagement in Campeche, and Oaxaca, as well as in forestry through the Bank‘s support to several SFLAC and GEF activities.  At the municipal level, the Bank supported the development of an action plan for a sustainable and resilient Othón P. Blanco which began with a two-day workshop with local representatives from civil society and state and municipal government to discuss the basic challenges and opportunities in this area. Critical areas identified for action were disaster risk management, sustainable tourism, and sustainable forest management. The workshop was followed up with a wider consultation of communities throughout the municipality based on Local Agenda 21 approach to develop priorities for action.

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 Joint workshops with the Gesellschaft für Internationale Zusammenarbeit (GIZ) on climate change adaptation planning and the National Adaptation Strategy: In partnership with GIZ, the Bank team co-hosted two workshops in Mexico City in relation to the identification, prioritization and design of adaptation measures and access to tools and climate information for improved decision making. Held in June and October, 2011, the workshops engaged a cross section of national, state and local authorities, academics and civil society representatives and fostered knowledge sharing among local research and public institutions, as well as dialogue among similar communities of practices. A particular outcome of the workshop was a formal request submitted by INE to the World Bank requesting an additional training event (hands-on and training for trainers sessions) and the possibility of having the CCKP (and the Mexico Climate Change Country Adaptation Profile) tailored to the needs of Mexican government  REDD+ dialogue: The Bank participated as an invitee in all the meetings that civil society organizations had to organize the CTC-REDD+ and continues to do so after its official launch.

Annex 7 expands on the most relevant participatory provisions and actions incorporated under the three policy areas covered by the DPL.

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IV. BANK SUPPORT TO THE GOVERNMENT PROGRAM

A. Link to Country Partnership Strategy

71. 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.

B. Collaboration with IMF and Other Development Partners

72. The proposed operation has benefited from collaboration with other agencies:

 UNDP has assisted SEMARNAT in preparing a national climate change adaptation strategy. The Bank has coordinated with and provided feedback to UNDP and SEMARNAT on this activity.  The French Development Agency (AFD) has contributed to the financing of GoM Climate Change strategy through two DPLs. The first €185 million Climate Change Loan has been totally disbursed. The second in the amount of €300 million –focused on forestry and coordinated with this Bank Social Resilience to Climate Change DPL- was disbursed in two tranches in September and November 2011. AFD is supporting the GoM in five important activities: (i) Mexico‘s Climate Change agenda (mainly PECC) through financial support; (ii) a Technical Cooperation Program in the Forestry Sector focused on the REDD+ pilot project in Jalisco‘s Coastal Basins; (iii) implementation of REDD+ early actions in priority water basins through local governance mechanisms; (iv) analytical studies of sustainable territorial planning; and (v) methodology and results evaluation of the actual PECC in order to issue recommendations for the next one. The Bank and AFD collaborated together in developing with the GoM the policy matrix for the Forestry pillar of this operation, which will constitute the framework for AFD and the proposed DPL.  The Government of Spain has been an important source of finance for the advisory services through which the Bank has supported climate change adaptation. Grants from the Spanish Fund for Latin America and the Caribbean (SFLAC) have supported: (i) advisory and capacity building services for strengthening the Subnational Climate Change Plans, which the States of Michoacán, Campeche, Oaxaca, Quintana Roo and Zacatecas; and (ii) the development of training guides and indices to promote sustainable and resilient local development in poorest . With support from an additional SFLAC grant, the World Bank will carry out for the first time a Climate

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Change Public Expenditure Review at the national level to inform decisions on further implementation of the Special Program on Climate Change (PECC).  The Inter American Development Bank (IADB) has been collaborating with the Bank within the framework of the Forest Investment Program (FIP - P124988). At the GoM‘s request, the Bank will be the leading Multilateral Development Bank of the FIP in the country. IADB will collaborate on one project included in the FIP to design and implement innovative financial products, a project which is expected to promote learning and innovation and have potential global benefits. During scoping, preparation and assessment of this project, the Bank and IADB had a series of joint meetings with CONAFOR and Financiera Rural.  On October 26, 2011, the Forestry pillar of this operation was discussed jointly with a number of donors working in Mexico in Forests and Climate Change in order to assure coordination and complementation with other operations: AFD, USAID, Norway Embassy, GIZ, Spanish Cooperation Agency (AECID), United Nations Environment Program (UNEP), Food and Agriculture Organization (FAO), and the European Union.  The Bank also co-hosted with GIZ two workshops on climate change adaptation planning and the National Adaptation Strategy in Mexico City, focusing on the identification, prioritization and design of adaptation measures and access to tools and climate information for improved decision making.

C. Integrated World Bank Engagement on Social Resilience to Climate Change

73. The World Bank is supporting through a variety of complementary financial and knowledge-based instruments the government‘s objectives to reduce the impacts of climate change on the poor. Key milestones of this engagement in the three policy areas that are part of this DPL are highlighted in Box 3.

74. The proposed operation builds on a long-standing and comprehensive policy dialogue and operational relationship between the World Bank Group and the GoM on disaster risk management dating back to 1998. In 1998, the first activity of the Bank‘s newly- created Disaster Management Facility was an analysis of disaster risk management capacity in Mexico, which prompted the GoM to request the first World Bank loan on disaster risk management.27 The Bank also supported Mexico in becoming the first developing country to issue a catastrophe bond, which provides coverage to FONDEN for very large hurricanes and earthquakes. In 2011, the Bank carried out a study on the Urban Poor, Disaster Risk Management and Climate Change in Mexico City, to better understand climate change and disaster risks for the urban poor and form the basis for developing strategies to address those risks for the more vulnerable population in cities.

75. As part of the preparation for this operation, specific support has been given to address the poverty related dimensions of natural disasters through:

27 Kreimer, Alcira; Arnold, Margaret; Barham, Christopher; Freeman, Paul; Gilbert, Roy; Krimgold, Frederick; Lester, Rodney; Pollner, John D.; Vogt, Tom. Managing Disaster Risk in Mexico: Market Incentives for Mitigation Investment, World Bank, 1999. 34

 real time and video seminars with Bank experts on global lessons related to index insurance for disaster risk and the integration of disaster risk management into social protection programs;  analytical work on a municipal disaster risk index to inform adaptation investment decisions;  exploration of innovative for risk financing tools for the poor. These include: (i) technical support to an impact evaluation of the PACC to assess awareness and interest in insurance products for additional coverage; (ii) risk modeling for the Emergency Temporary Employment Program (Programa de Empleo Temporal Inmediato (PETi); and (c) the establishment of community vouchers and a regional hurricane risk pooling mechanism as part of climate change adaptation strategies in the states of Oaxaca and Yucatán peninsula.

76. In addition, the Bank is currently preparing with the GoM a Fiscal Risk Management DPL with a natural disaster risk management component. This is expected to improve the Government‘s ability to respond to the effects of natural disasters on the poor and mitigate the budgetary impact of natural disasters.

77. In the area of urban development and housing, the Bank has had an ongoing engagement with SEDESOL and CONAVI through the programmatic series of Housing and Urban Development DPLs and an associated technical assistance loan (2005-2009). Through these operations the Bank supported, inter alia:

 the preparation of a methodology for municipal governments to undertake a risk analysis under the Habitat program;  a new housing construction code be used as reference by local governments;  technical assistance to municipal governments on community participation for urban infrastructure investments: and  technical assistance to municipal governments on crime and violence prevention through urban design and management.

78. In the area of adaptation to climate change, the Bank’s multifaceted, multilevel engagement includes analytical, advisory and financial support, with an important focus on adaptation planning at the subnational level. In addition to what has already been mentioned in sections I. and IV.B, there are two initiatives worth highlighting. First, the access and use of real-time climate relevant information through the WB Climate Change Knowledge Portal (CCKP) and the development of a Climate Change Country Adaptation Profile28; these virtual platforms will facilitate the analysis, exploration, and synthesis of global, national, and sub- national climate change impacts and risk reduction datasets at multiple levels of details. The Bank provided training to Mexico Government officials and NGOs in using the CCKP to support the National Adaptation Strategy and the development of the 5th national communication to the UNFCCC. With high uncertainty, knowledge is crucial for defining and where necessary adjusting adaptation priorities. The Government has requested Bank support to link the CCKP

28 In partnership with the Global Facility for Disaster Recovery and Reconstruction. http://climateadaptationprofiles.gfdrr.org (under development) 35

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 with the objective to support Mexican states in their development of their State Climate Change Plans. Second, through a Cities Alliance Grant the Bank has supported the municipality of Othon P. Blanco, Quintana Roo, in developing a sustainability and climate change strategy, which is serving to explore how to use participatory approaches to introduce sustainability and climate change considerations in municipal plans.

79. Since the 1990s, the Bank has been supporting Mexico’s community-based approach to forest management with two Community Forestry Projects (CFP-I, US$18 million, 1997- 2003; and CFP-II, US$26 million, 2003-2009). The Bank‘s engagement contributed to the creation of the National Forestry Commission and the launching of new instruments, particularly the Payment for Environmental Services (2005), which has now nearly two million hectares of forests under active conservation agreements.

80. The Bank and the GoM are currently engaging in a new, comprehensive package of collaboration in the area of Forests and Climate Change. This package would combine the proposed DPL with various other instruments, including:

 The US$350 million Forest and Climate Change SIL. The SIL will help consolidate the community forestry and payments for environmental services programs, scale them up at national level, and reduce emissions from deforestation and degradation (REDD+) while enhancing communities‘ resilience to the impacts of climate change. Most resources will be used to support demand-driven, community based initiatives. The SIL mainstreams climate resilience considerations and is expected to 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  The FIP financing. This pilot program of the Climate Investment Funds (CIF) aims to design and scale up new approaches for reducing emissions from deforestation and degradation (REDD+) in eight pilot countries worldwide. In Mexico, US$42 million of FIP resources will be merged with the SIL and will focus on: promoting the alignment of public policies dealing with rural development, specially forest, agriculture and livestock; on promoting public participation in policy making; and promoting geographical integration for better management of the rural landscape. The FIP resources will be implemented in the REDD+ Early Action Areas.29  The Forest Carbon Partnership Facility (FCPF) for Readiness Preparation. This will finance studies and consultations that are expected to culminate in a Readiness Package consisting of a national REDD+ strategy, a national forest reference level, a forest monitoring and verification system, and a system for addressing environmental and social safeguards. In the future, and building upon the Readiness Preparation, Mexico

29 Initial Early Action areas have been identified for their REDD+, learning, implementation, and replication potential, and were included in Mexico‘s FIP Forest Investment Plan. The project will support piloting of new approaches for REDD+ initially in two of those areas (State of Jalisco and the Yucátan Península). Expansion to other areas will be considered based on project progress, lessons learned and opportunities for further learning and implementation. 36

may also access the FCPF Carbon Fund which would pilot a system of payments for verified emissions reductions.  The Program on Forests (PROFOR). This consists of grants to support CONAFOR in: conducting a South-South exchange initiative on REDD+ and benefit-sharing mechanisms, re-designing the Mexican Forest Fund, and assessing the competitiveness of Mexico‘s community forestry enterprises in local and global markets.  A pilot Forest Bond, which the GoM is currently exploring with the Bank‘s Treasury Department.

81. The forest component of this DPL would build upon the policies recognized and supported by four recent DPLs to the Government of Mexico: the Climate Change DPL (March 2008); the Environmental Sustainability DPL (September 2008); the Climate Change in the Water Sector DPL (May 2010); and the Low-carbon DPL (October 2010). The proposed DPL would consolidate and deepen policies recognized by these operations and help Mexico bring its forest and climate change agenda an additional step forward.

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Box 3. Schematic of Programmatic Engagement by Policy Area

…2006 2011 and beyond…

Social Resilience through Adaptation Planning Knowledge Services Economic Assessment of Policy Addressing Mexico‘s Water Challenges Sustainable Climate Resilience in Othon P. Interventions in the Water Sector (P119943) (2009) Blanco (P122021) (P096999) (2006) MX Water Sector Adaptation Technical Subnational Climate Change Program Cooperation Program (P122166) (Michoacán, Campeche, Q. Roo, Oaxaca, Zacatecas (P105849) Social Impacts of Climate Change ESW (P112024) (2011) Municipal Climate Vulnerability Index – SFLAC Climate Change Public Expenditure Review (CC PER) Access to Mexico Country Adaptation Profile and virtual Climate Change Knowledge Portal (FY 12) Financial Services Programmatic Environmental DPL Adaptation to Climate Change in the Water Strengthening Social Resilience to Climate (P079748) (2005) Sector DPL (P120134) (2010) Change DPL (P120170) (FY12) Adaptation to Climate Change Impacts on Coastal Wetlands in the Gulf of Mexico (P100438) (2010) Social Resilience through Disaster Risk Prevention and Territorial Development Knowledge Services Study on Urban Poor and Climate Change in PSIA of Disaster and Climate Risks in Mexico City Mexico Territorial Development and Climate Change in Mexico Southern States Sustainable Michoacán Development (P116549) MOU on Disaster Risk Financing and Management Just-in-time advice to SAGARPA on Impact Evaluation of PACC Financial Services Programmatic Housing and Urban Low-carbon DPL (sustainable housing) Strengthening Social Resilience to Climate DPL&TA (2005-2009) Change DPL (P120170)

Social Resilience through Sustainable Forest Management Knowledge Services CDM Technical Assistance (P082219) Low-carbon Study, MEDEC (P108304) Support to Mexico ‗s participation in the (2006) (2007) Forest Carbon Facility Partnership (FCPF) Readiness Fund (FY11-13) PROFOR support for: (i) South-South collaboration on PES and REDD finance (FY12); (ii) Competitiveness in the forestry sector (FY11), and (iii) good practices with forest funds (FY12) Financial Services MX Community Forestry (P007700) Climate Change DPL (P110849) (2008) Strengthening Social Resilience to Climate (1997) Green Growth DPL (P115608) (2009) Change DPL (P120170) (FY12) 2nd Indigenous Community Forestry Low-carbon DPL (P121800) (2010) Forests and Climate Change SIL (FY12) Development Project (P055827) (1997) Forest Investment Program (FY12) Community Forestry (P035751) (2003) Support to design of Forest Bond with World Environmental DPL I and II (P079748) Bank Treasury (FY12) (2005) Biodiversity and Ecosystems Resilience DPL (FY13)

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Potential financial assistance from the FCPF Carbon Fund (FY13-) D. Analytical Underpinnings

82. The design of the proposed operation is backed by solid analytical work and dialogue conducted by the Bank, the Government of Mexico and others and a rich set of technical assistance activities covering climate change adaptation, disaster risk management and risk financing, territorial development, forest management, and—more broadly—climate change, social development and environmental management. Table 3 shows the links between the components included in the DPC and the recommendations provided by recent analytical work.

Table 3: Links between the DPL and Prior Analytical Work Links to Analytical Reports – Findings and Recommendations DPL Prior Actions I. LONG TERM ADAPTATION PLANNING The report looks at the distributional impacts of climate change on different regions, sectors and social groups of Mexico. It examines the level of vulnerability—as a function of climate exposure, sensitivity and adaptive capacity—experienced across municipalities, sectors such as agriculture, and social groups such as types of small farmers, indigenous peoples, and others. It World Bank (forthcoming measures the welfare impacts and levels of risk that Mexico‘s 2012). The Social 1.1., 1.2., municipalities, sectors, regions and population groups face from Dimensions of Climate 1.3. natural disasters and the effectiveness of certain social programs in Change in Mexico.. reducing those impacts. The GoM will draw on some of the background papers of the study (particularly the ones related to CC impacts on and poverty and the municipal vulnerability index) to inform the social dimensions aspect of the National Adaptation Strategy and the 5th Communication of UNFCCC. The study is the product of a broad and extensive collaborative effort between the World Bank and the Government of Michoacán. Damania et al (2011). A cutting-edge risk management approach was pioneered to Confronting a Changing combine the complexities of climate science with local expertise in 1.1, 1.2 Climate in Michoacán. World an iterative and participatory process. The approach was used to Bank. build consensus on priorities for adaptation in the water and agricultural sectors. The work has informed and fed into the state‘s climate change plans and the state level dimension of the DPL. The report looked at the ways in which communities in Mexico are Territorial Development and affected socially by climate change and the strategies they are using Adaptation to Climate 1.2 to adapt to it, including changes to natural resource practices, Change in Michoacán (2010) agricultural diversity, and migration. Technical Assistance Program with SEDESOL and This developed a Climate Vulnerability Municipal Index and 1.3. SEMARNAT on Climate supported the municipality of Othon P. Blanco, Quintana Roo, in Change Adaptation formulating a sustainability and climate change strategy. This analysis focused on the previously neglected and poorly understood social dimensions of climate change. It highlighted Social Dimensions of Climate equity and vulnerability as central organizing themes and illustrated Change: Equity and the multiple ways that pro-poor climate policy and action should be 1.1, 1.2. Vulnerability in a Warming integrated into existing approaches to poverty reduction and World (2010) development, from the local to global level, in order to better manage the social risks and potential benefits associated with

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measures to reduce greenhouse gas emissions.

II. DISASTER RISK MANAGEMENT AND TERRITORIAL DEVELOPMENT Poverty in Mexico correlates with a higher susceptibility to losses Cruz, de la Fuente, Soriano from hazard events. Disaster-prone municipalities in Mexico are (2011). Riesgo de Desastres those that are predominantly rural and indigenous, with limited a Nivel Municipal en México: access to services, high rates of deforestation and other Diagnóstico General y 2.1 environmental problems. The poor also hold more of their wealth Correlación con Pobreza. in physical assets that are climate sensitive – notably assets related Report prepared as part of to agriculture, forestry of fishery based activities. PSIA for this DPL. As part of the Project preparation the team prepared an inventory of the different programs and financing mechanisms for risk Ballesteros, Luis (2011). reduction and climate change adaptation: Catalog Catálogo de Mecanismos del of Federal mechanisms for Natural Disaster Risk Reduction in Gobierno Federal Mexico (2011). The document focuses on developing a catalog of Relacionados con la the different mechanisms, policy instruments, information systems, 2.1, 2.3 Reducción del Riesgo de financing sources, cooperation mechanisms and functions, within Desastres Naturales en the various units and departments of the Mexican Federal México. Report prepared for Government whose operation has a positive potential reducing the this DPL. risk of disasters, including those earmarked for (structural) climate change adaptation.

Dickson et al (2011). Urban This diagnosis of climate change and disaster risks for the urban Poor, Disaster Risk poor in Mexico City forms the basis for developing strategies to 2.1. Management and Climate address those risks for the more vulnerable population in cities. Change in Mexico City The WDR demonstrates that in order to reduce vulnerability to climate change, societies will need to increase natural resource protection efforts and pursue other intersectoral, ―climate-smart‖ practices. It concludes that urbanization, if adequately managed, can increase resilience to climate-related risks. Higher population densities lower the per capita costs of providing piped treated water, sewer systems, waste collection, and most other World Development Report infrastructure and public amenities. Sound urban planning restricts 2010–Development and 2.2. development in flood-prone areas and provides critical access to Climate Change services. Infrastructure developments (embankments or levees) can provide physical protection for many people and will require additional safety margins where climate change increases risk. Well-established communication, transport and early warning systems help evacuate people swiftly. Such measures can increase the ability of urban dwellers to cope with shocks in the short term and adapt to a changing climate in the long term. III. SUSTAINABLE COMMUNITY FOREST MANAGEMENT IPCC Reports (for example, IPCC (2001) Climate change 2001: mitigation, contribution of working group III to the third assessment report of the IPCC reports strongly recognize the synergy between mitigation Intergovernmental Panel on and adaptation to climate change in the forestry sector. 3.1, 3.2, 3.3 Climate Change. and IPCC (2001) Climate change 2001: impacts, adaptation and vulnerability, summary for policy makers)

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Comisión Intersecretarial de Cambio Climático (2009) The PECC highlights the importance of inter-institutional cross- 3.1 Programa Especial de Cambio cutting cooperation to promote climate change adaptation. Climático (PECC) Coordinated by the CTC–REDD+, this document represents the first step toward Mexico‘s National REDD+ Strategy. The document presents some of the complex problems of forest CONAFOR (2010). Mexico reduction and deforestation in Mexico. The document is consistent 3.1, 3.2 and with the selected prior action, as it stresses the importance of REDD+ Vision. 3.3 intersectoral coordination, civil society participation and strengthens of local governance structures in the context of adaptation and mitigation to the effects of climate change.

Developed by CONAFOR as part of the FCPF Readiness Preparation, the Proposal is explicit about the poverty alleviation benefits of GoM‘s REDD+ strategy, noting, for example, the social as well as environmental benefits of sustainable community forestry management and biodiversity conservation. Mexico´s Forest Investment Plan, developed by CONAFOR as part of the FIP, identifies among the main underlying causes of deforestation and forest degradation in Early Action REDD+ Areas: (i) high CONAFOR (2010), Mexico’s transaction costs due to forest regulatory compliance; (ii) leakages Readiness Preparation 3.1, 3.2, 3.3 and perverse incentives for agriculture and livestock production; Proposal (RPP) (iii) weak indigenous and local community organizational structure; and (iv) limited government capacity for forest control and supervision. The Investment Plan also suggests potential mitigation measures: (i) the creation of cooperative agreements between rural government agencies for sectoral policy alignment and implementation, and multi-sectoral action; and (ii) establishment of the Territorial Management Entity to coordinate technical and financial services. The Mexico´s Forest Investment Plan developed by CONAFOR as part of the FIP is fully consistent with the Prior Actions included in this operation. The plan states as some of the main underlying causes of deforestation and forest degradation in Early Action REDD+ Areas are: high transaction cost due to forest regulatory compliance; leakages and perverse incentives for agriculture and livestock production; weak indigenous and local community CONAFOR (2011). Mexico´s 3.1., 3.2, organizational structure; and limited government capacity for forest Forest Investment Plan 3.3. control and supervision. The Investment plan also suggests as potential mitigation measures: the creation of cooperative agreements between rural government agencies for sectoral policy alignment and implementation, and multi-sectoral action and establishment of the Territorial Management Entity to coordinate and facilitate technical assistance action and financial services.

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V. THE PROPOSED OPERATION A. Operation Description

83. 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 Actions Policy Area 1: Strengthening Social Resilience through Long-term Climate Change Adaptation Planning oriented to the state level 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. 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 level 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 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 Management 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. 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 84. 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.

85. 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.

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

87. 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.

88. 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.

89. 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.

90. 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.

91. 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

92. 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.

93. 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).30

94. 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.

95. 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.

96. 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

30 Informe sobre Desarrollo Humano México, 2011. Programa de las Naciones Unidas para el Desarrollo. México 45

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

97. 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.

98. 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.

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

100. 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.

101. 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)31. 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 polygons32 in urban areas,33 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.

102. 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

31 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. 32 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. 33 See Diagnóstico nacional de los asentamientos humanos ante el riesgo de desastres: http://www.sedesol2009.sedesol.gob.mx/archivos/802567/file/Diagnostico_PRAH.pdf 47

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. 103. 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.

104. 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.

105. 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.34 These guidelines have influenced at least two very important policy programs

34 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 48

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.

106. 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 beneficiaries35. 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.

107. 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.

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. 35 INFONAVIT‘s affiliates are private-sector employees that contribute monthly to this housing fund. 49

108. 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 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.36 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.

109. 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.

110. 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.

111. 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.

112. 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

36 In this case, scores are binary (i.e. having vs. not having a community organization scheme in the housing development) 50

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 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 that pay 9 percent.37

113. 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 4 presents the payouts for each type of activity covered under CADENA.

Table 4: Payouts by CADENA per type of activity covered Support Scheme Direct Support Catastrophic Amounts Insurance Support A. Agriculture AI. Annual crops Up to 5 hectares per Up to 10 hectares MX$1,200 per hectare in rain fed crops farmer per farmer MX$2,000 per hectare in irrigated crops AII. Perennial crops Up to 5 hectares per Up to 5 hectares per MX$2,000 per hectare both in rain fed (fruits, coffee) farmer farmer and irrigated crops B. Livestock activity Up to 45 hectares per Up to 45 hectares MX$600 per Animal Unit farmer in case of per farmer in case of nutritional supplement nutritional Up to 5 animal units in supplement MX$1,500 per Animal Unit case of death C. Fishing activity One boat per producer One boat per MX$10,000 per boat producer D. Aquaculture DI. Extensive or Up to 2 hectares per Up to 5 hectares per MX$8,000 per hectare semi-intensive system producer producer DII. Intensive System Up to 2 aquaculture Up to 2 aquaculture MX$8,000 per aquaculture unit units per producer. units per producer DIII. Mollusk culture Up to 2 aquaculture Up to 2 aquaculture MX$1,000 per aquaculture unit units per producer. units per producer

114. 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

37 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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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 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.

115. 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.

116. 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.

117. 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.

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In addition, CONAVI is contemplating for 2012 additional subsidies specifically geared at promoting higher densities in housing development.

118. 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

119. 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.

120. 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, leading to insufficient buy-in and inapplicability of new policies and instruments; 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.

121. 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.

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

123. 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.

124. 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.

125. 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 .

126. 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.

127. 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

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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.

128. 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.

129. 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.

130. 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 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.

131. 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.

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132. In the medium-term, the creation of these committees will help sustain 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 that are expected through this program, contributing to social resilience to the expected effects of climate change.

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

134. 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.

135. 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.

136. 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.

137. In the medium-term, it is expected that inter-municipal collaboration and others local development agents38 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+

38 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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strategies, in medium-term they will be the key actors for the implementation of strategies to foster adaptation and social resilience to climate change.

138. 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.

139. Expected results and Government‘s Medium-term Agenda. By better aligning forestry, livestock and agriculture rural investment programs, by ensuring 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).

140. 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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Box 5. Good Practice Principles for Conditionality

Principle 1: Reinforce Ownership • The policy content of this operation is fully aligned with government plans and strategies including the 2007-2012 PND, ENACC, PECC, and Medium-term Climate Change Adaptation Policy Framework, all of which have been consulted with civil society, political and governmental bodies, and expert groups. • As discussed elsewhere in this document, Mexico has a consistent track record of commitment to addressing issues of climate change adaptation and mitigation through domestic and international actions going as far back as its adoption of the UNFCCC in 1992. • As outlined in Table 3, the policy content of this operation is underpinned by a substantial analytical and advisory work through which the Bank and the GoM have engaged to strengthen Mexico‘s resilience to climate change and its contributions to the global agenda for climate change mitigation.

Principle 2: Agree up front with the government and other financial partners on a coordinated accountability framework • The policy and outcomes matrix in Annex 2 and the GoM‘s Letter of Development Policy provide an agreed accountability framework for measuring progress under the program. Outcomes and their indicators constitute essential aspects of program implementation to be monitored. • AFD is supporting, through its DPL, objectives similar to those of this operation in the forestry sector and is also using GoM targets and indicators to monitor progress in program implementation.

Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances • The choice of a single-tranche DPL for Board review in the first half of calendar year 2012 responds directly to the GoM‘s request for support for its debt management strategy. • The policy areas that this operation supports are all core aspects of the GoM‘s own strategy to strengthen social resilience to climate change at the state, municipal, and community levels through improvements in long-term climate change adaptation planning, disaster risk management and sustainable territorial development, and sustainable forest management.

Principle 4: Choose only actions critical for achieving results as conditions for disbursement • Prior actions have been limited to nine – three for each of the policy areas – and have been agreed with the GoM as essential to achieving its objectives with respect to strengthening social resilience to climate change, particularly the resilience of urban and rural poor and indigenous peoples. • As indicated above, each of the prior actions is drawn directly from the GoM‘s own plans.

Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial support • Progress reviews will be conducted jointly by the Bank and SEMARNAT, in collaboration with SHCP, SEDESOL, SAGARPA, CONAFOR, and other concerned agencies. • The policy and outcomes matrix in Annex 2 has been agreed with the GoM and, coupled with the GoM‘s Letter of Development Policy in Annex 1, will provide a transparent basis for monitoring progress in program implementation.

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VI. OPERATION IMPLEMENTATION

A. Poverty and Social Impacts

141. The policy actions recognized by this DPL are expected to have significant positive poverty alleviation and social impacts by reducing the climate vulnerability of the poor, improving disaster risk management in both rural and urban areas, and promoting more sustainable forestry management. Specific impacts will include more spending on risk reduction and resilience building in poor, underserved communities; improved access to information and risk management infrastructure and services; increased voice of civil society in the development of adaptation policy; and the restoration of forest, wetland, and other ecosystem services that both protect the poor from disaster impacts and contribute to their livelihoods. A robust PSIA was undertaken for this project and has served as a key element in policy dialogue for the preparation of this DPL and associated advisory services.

142. The PSIA found that climate variability and change are likely to have significant and disproportionate effects on poor communities and people. Poverty levels increased between 1.5 and 3.7 percent (depending on the poverty measured considered) in those municipalities affected by disasters between 2000 and 2005, with floods and droughts being the most detrimental. Disaster affected municipalities lost on average two years of gains in human development over the same period.39 Other studies also showed the impact of climate variability on poverty in the agricultural sector,40 on rural consumption,41 on the propensity of children under five to get sick,42 on stunting,43 on dropping out of school in rural areas in Central Mexico,44 and on the occurrence of .45 In terms of climate change, the PSIA looked at the impact of climate change on rain fed maize agriculture which is grown by 2.94 million small holders, mostly for subsistence, and represents the main source of livelihood for the rural poor in Mexico. Looking at 354 municipalities located in 13 states in the Pacific, Gulf, and Central regions, results suggest that climate change will reduce maize yields in 2030 by 5.31 percent (or 0.12 tons per hectare) on average which represents over one fifth (21.3 percent) of the total

39 Rodríguez-Oreggia et al. 2010. ―The Impact of Natural Disasters on Human Development and Poverty at the Municipal Level in Mexico‖, en: CID Working Paper No. 193. Harvard, January, 2010. 40 Ahmed et al 2009), 41 Skoufias, E. and Katja Vinha. 2010. ―The Impacts of Climate Variability on Household Welfare in Rural Mexico‖. The World Bank. 42 De la Fuente, A. and R. Fuentes. 2010. ―The Impact of Natural Disasters on Children Morbidity in Rural Mexico,‖ in Ricardo Fuentes and Papa Seck (eds.). Risk, Vulnerability and Human Development: On the Brink. Palgrave Macmillan. New York: N.Y 43 Emmanuel Skoufias, Katja Vinha (2011). ―Climate Variability and Child Height in Rural Mexico‖ Economics and Human Biology (revised and resubmitted). They found that in 2002 children under 3 in rural Mexico become shorter (measured by the height-for-age z score) when temperatures increase and precipitation decreases. 44 De Janvry, Alain, Frederico Finan, Elisabeth Sadoulet, and Renos Vakis. (2006) ―Can conditional cash transfer programs serve as safety nets in keeping children at school and from working when exposed to shocks?‖ Journal of Development Economics Vol. 79 (2), 349– 373. 45 Ministry of Environment and Natural Resources, Inter-Ministerial Commission on Climate Change. 2007. Mexico‘s Third Communication to the United Nation‘s Framework Convention on Climate Change. National Institute of Ecology. (INE-SEMARNAT) 59

production in the sample. Preliminary results also suggest significant impacts of reduced yields on malnutrition and poverty.46

143. The effects are likely to be higher for the poor and other vulnerable groups. For instance, municipal data on disaster risk was used to construct profiles according to the level of hazard, exposure or disaster risk concentration by municipality. High disaster-prone municipalities in Mexico are predominantly rural and indigenous, with limited access to health and other basic services, high probability of deforestation and other environmental problems, and a mixed display of institutional capacity to manage disaster risks. They receive relatively higher public relief following disasters, but there is a lower presence of civil protection services and risk awareness (e.g., through risk maps) that would help to prepare communities before events occur. (see Annex 5 for additional information).

144. The reforms recognized by this operation strengthen the Government’s capacity to build resilience to climate variability and change. The National Adaptation Strategy will encourage the development of diagnostic, planning, and financing mechanisms to target and protect social groups that are more vulnerable to climate change, particularly poor people. The Yucatán Peninsula Climate Change agreement and the Climate Change Adaptation and Natural Disasters Program will strengthen the capacities of sub-national governments to develop climate change actions that are customized to the local realities and specific forms of social vulnerability to climate change. All these reforms are expected to amplify the voice that local stakeholders have in adaptation planning, therefore strengthening feedback loops to learn about what works and what does not and make adjustments throughout implementation.

145. SEDESOL’s new Program for Risk Prevention in Human Settlements (PRAH) will benefit underserved high-risk communities by extending risk reduction investment support to rural municipalities that were previously ineligible for SEDESOL support under its Habitat program (which reaches only municipalities with 15,000 inhabitants or more). The program will give priority to high ranking disaster-prone municipalities and will benefit the most deprived and vulnerable municipalities in the country. In addition, the Emergency Temporary Employment Program (PET Inmediato), which already supports low-income households that suffer from climatic shocks, will reinforce its pro-poor focus and impact protecting its budget from political pressures. Both PRRAH and PET Inmediato fund the construction and maintenance of public critical infrastructure for disaster emergencies, such as schools and roads, which are lower than average (in value and number) for the poorest municipalities in the country.47

146. A better targeting of CADENA resources on smaller farmers should help expand its economic benefits among the poor. A recent econometric 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

46 Olivera, Marcelo and A. de la Fuente. 2011. ―The Impact of Climate Change on Rain Fed Maize Productivity, Poverty, and Malnutrition in Mexico.‖ Background paper for the PSIA on Building Resilience of the Poor to Disaster and Climatic Risk in Mexico. 47 Cruz, Denisse, A. de la Fuente and J. Soriano (2011). ―Riesgo de Desastres a Nivel Municipal en México: Diagnóstico General y Correlación con Pobreza.‖ Background paper for the PSIA on Building Resilience of the Poor to Disaster and Climatic Risk in Mexico. 60

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 counties, raising productivity by 8 percent. WII has instead less affects in the very richest counties.48

147. As urban disaster risk is also rapidly increasing, the integration of incentives for urban sustainability and social resilience in housing origination procedures are expected to improve the quality of life of poor people living in both urban and peri-urban areas. The regulatory changes included in the operation are likely to bring benefits to the poor and the population at large through the generation of risk maps and other relevant information. Overlapping this information with other administrative data can go a long way in helping resource-constrained municipalities to harmonize territorial and ecological land use planning including climate change considerations. Introducing risk-related property valuations in housing markets and risk considerations in the benefit-cost analysis of large-scale public infrastructure operations will promote construction in safer areas and encourage preventive protective measures that will benefit the poor.

148. The creation of a Technical Advisory Committee (TAC) for the National Adaptation Policy and or National and local REDD+ Consultative Technical Councils (CTCs) will facilitate participation of experts and a broad set of stakeholders in these policies, likely benefitting poor constituencies and vulnerable sectors of society to climate change by giving them an opportunity to influence decision making. Most proposed (adaptation and prevention) actions will have distributional implications. Prior actions for this project call for the government to disclose information and plans related to climate change adaptation, and to engage the views of those who have less economic power or political voice.

149. The policy actions related to sustainable community forest management will have a significant effect on the capacity of poor communities and ejidos to participate in making decisions on the use of their natural resources, which should strengthen the resilience of their livelihoods and reduce their climate risk. Evidence from Mexico and other countries around the world suggests that community-based management of natural resources not only generates higher economic benefits to the communities, but also creates social capital and strengthens cohesion. The incorporation of more hectares under participatory sustainable management schemes through REDD+ programs should generate additional income and employment opportunities for the ejidos and forestry communities. Both the PRAH and PET Inmediato contemplate reforestation and soil conservation actions, among other activities, to recreate environmental buffers that offer communities protection from recurrent climate events, environmental degradation, and deforestation hazards to which they are disproportionately vulnerable. In some agriculture areas, there may be a short-term negative impact if agricultural incomes fall due to new, participatory programs to promote sustainable forestry management.

48 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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However, this is mitigated because in Mexico forests belong to communities and participation in forest management programs is community-based, demand driven, and on a voluntary basis. The risk that communities would abandon profitable agriculture/livestock for less profitable forest management appears limited. Furthermore, the cross-sector alignment with SAGARPA as supported in this DPL is meant to reduce the risk of discrepancies and negative competition between forests and agriculture/livestock agencies and programs.

B. Environmental Aspects

150. The GoM’s policies to increase social resilience to climate change that are supported by this operation are expected to have significant positive environmental impacts. Actions in the areas of long-term climate change adaptation planning, disaster risk management and sustainable territorial development, and sustainable forestry development should produce environmental benefits over the medium- to long-term, for example: (i) reduced vulnerability to climate change, including extreme hydrometeorological events, restoration of sensitive ecosystems, biodiversity protection; (ii) more sustainable land use, including incentives for ―green‖ urban densification; climate change adaptation, disaster risk management, and natural resource management plans that are more evidence-based and, due to stakeholder participation in their formulation and implementation, better adapted to local conditions; and (iii) improvements in forestry management leading to climate change mitigation and adaptation co-benefits.

151. With respect to the first policy area, long-term adaptation planning at the state level, the Mid-term Adaptation Policy Framework, which is part of this operation, should strengthen stakeholder participation in adaptation planning, resulting in plans that are more suited to local conditions and improve identification of areas and populations that are vulnerable to climate-related hazards, thus permitting improved targeting of public funding for climate change adaptation and reducing settlement in those areas. The agreement among the states of the Yucatán Peninsula to develop a regional strategy for climate change adaptation, to be supported by a climate action fund is expected to focus policies and financing on protecting sensitive ecosystems and biodiversity and reducing extreme weather-related risks to lives and property. The GoM‘s climate change adaptation and natural disasters expenditure program, the establishment of which this operation recognizes, is targeted to two disaster-prone and ecologically rich states, Chiapas and Tabasco. Investments that this fund will support are expected to produce benefits in terms of sustainable forest management, integration of biological corridors, and restoration of terrestrial, coastal, and marine ecosystems that serve, inter alia, to protect communities from hazard impacts.

152. The second policy area, relating to disaster risk reduction and sustainable territorial development at the municipal level, should also be environmentally beneficial. SEDESOL‘s new program, PRAH, the establishment of which is recognized by this operation, is expected to support the capacity of municipalities to identify high risk areas, invest in disaster reduction infrastructure, improve building codes, and facilitate restoration of degraded lands through reforestation. INFONAVIT‘s prioritization of financing for sustainable housing development is expected to contribute to a reduction in urban sprawl and settlement in disaster-prone areas, promote use of non-vehicular and other ―green‖ transportation options with lower greenhouse gas emissions, and expansion of green spaces in urban areas, with associated benefits to the

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physical environment. By improving smallholder farmers‘ access to catastrophe insurance and disaster compensation, SAGARPA expects to be able to reduce incentives for unsustainable agricultural practices as well as provide income support during times of high crop losses.

153. The third policy area of this operation, sustainable forestry management, is also expected to have significant positive environmental impacts. The program will bring more hectares of forest under sustainable management schemes, thus protecting this critical resource. In addition, it will provide incentives to forestry communities and ejidos to engage in sustainable forestry practices and strengthen their leadership role in protecting the forests and will support the national REDD+ strategy presented within the framework of COP-16 in the Mexico‘s REDD+ Visión (see Box 2 in Section III).

154. The GoM has in place adequate environmental impact assessment requirements to guarantee an appropriate screening of eventual management practices and works associated with any physical investments that might arise from the policies recognized by this operation. Although the World Bank would not supervise such private or public investments, it does have an ongoing relationship with the GoM to support the consistent strengthening of the legal framework and the institutional capacities of the environmental authorities.

C. Implementation, Monitoring and Evaluation

155. Implementation of the program will require close coordination among Government agencies and the World Bank. SEMARNAT constitutes the primary counterpart, and SEDESOL, SAGARPA and CONAFOR will also be involved in program implementation. As the World Bank‘s primary counterpart, SEMARNAT will be responsible for coordinating information reporting on the program‘s monitoring indicators, and the World Bank team will also maintain a close dialogue with Government counterparts. The matrix of proposed indicators is presented in Annex 2.

156. The sectoral Ministries and agencies responsible for the monitoring and evaluation of the different policy areas are: a. Policy Area 1: Strengthening Social Resilience through Long-term Climate Change Adaptation Planning oriented to the state level. SEMARNAT has the main GoM mandate for climate policy. It launched the Grupo de Trabajo de Adaptación (GT–ADAPT) to follow up on the objectives stated in the PECC and to facilitate cross-sectoral coordination on climate change issues. It will be responsible for monitoring the development of national frameworks and funding mechanisms that foster inter-sectoral, intergovernmental, and multi-stakeholder coordination and collaboration to promote socially inclusive and pro-poor adaptation policies and programs. b. Policy Area 2: Strengthening Social Resilience through Disaster Risk Reduction and Territorial Development Actions oriented to the municipal level. SEDESOL is the agency responsible for both social and human development and urban and territorial planning. This Ministry will be responsible for monitoring and evaluating the development and implementation

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of the financial and institutional arrangements related to ex ante risk reduction and resilient urban and territorial development. SAGARPA is the agency responsible for promoting agricultural and rural development. This Ministry will be responsible for monitoring and evaluation the development and implementation of the financial and institutional arrangements related to catastrophic agricultural insurance. c. Policy Area 3: Strengthening Social Resilience at the Community Level through Sustainable Community Forest Management. CONAFOR led the development of Mexico’s REDD+ Vision launched at the 16th Conference of the Parties in December 2010 in Cancún. CONAFOR will be responsible for monitoring and evaluating REDD+ as an instrument for reducing carbon emissions, while at the same time supporting sustainable economic development for poor forest-dependent communities and strengthening community resilience to disaster risks.

157. The proposed monitoring framework for this operation includes monitoring indicators and corresponding expected outcomes, which can be considered strategic milestones in assessing progress in the implementation of the DPL. The Bank will monitor actions taken to achieve these outcomes and review progress in the implementation of the DPL, as well as subsequent government actions, through the closing of the loan.

158. The monitoring and evaluation of environmental and social effects of the forestry pillar of this operation will benefit from the monitoring of complementary Bank operations in Mexico. The forest pillar included in this operation is part of a broader engagement in Mexico related to forests and climate change, which deploys analytical, convening and financial services. Complementary operations include a series of REDD+-related workshops with civil society and the use of Strategic Environmental and Social Assessment for the REDD Readiness, among other initiatives.

159. In the long term, the Government of Mexico‘s adaptation policies anticipate having a system to monitor improvements in household resilience and livelihoods across time. Resilience could be measured by a demonstrable change in risk perception revealed by head of household through household surveys, and a decrease in adverse impacts on livelihood indicators as a result of climate events. The GoM could use its poverty indicators to gauge progress.

D. Fiduciary Aspects

160. As documented in the latest Country Financial Accountability Assessment (CFAA), the Country Procurement Assessment Report (CPAR), and other analytical work, the country public financial management (PFM) systems at federal level are adequate to support development policy lending. As envisioned in the CPS, the Bank has been collaborating with the Mexican Government at the central and sub-national level in strategic areas aimed at modernizing and reforming public finances, and increasing transparency. This has been supported by a number of knowledge services to the SHCP and Secretariat of Public Administration (Secretaría de la Función Pública, SFP), through a package of different Bank financing instruments.

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161. In the last decade, the Government has introduced a number of laws and policy reforms in public finances aimed at improving fiscal responsibility and transparency by modernizing the budget process and creating a more efficient and transparent fiscal framework in line with international good practices. The funding from this DPL will support the Federal Expenditure Budget (Presupuesto de Egresos de la Federación, PEF) and, accordingly, will be subject to provisions of the annual PEF Law, the Federal Budget and Fiscal Responsibility Law, the Government Accounting Law, and the Rules of Budget Procedures among others. The PEF is published and available in the Web site of the SHCP for the current and prior years.49 The date of the publication of the latest Mexican budget is December 7, 2010. This set of legal and regulatory arrangements, together with the country financial management operating systems, provides for sound budget formulation, execution and internal control arrangements for public expenditures. Other internal control aspects are ruled by the Federal Public Administration Internal Control Standards.

162. Although rules and procedures governing the budget, accounting and public expenditure laws are clear and comprehensive, and the budget monitoring and control systems perform well, there remain areas within the public finances where further advances could be pursued. Developing a long-term focus for the budget, including performance results in the budget formulation process, and engaging the public sector to focus on results are key priorities. Currently the Government is working towards achieving the envisioned PFM reforms, including harmonizing budget and financial reporting, modernizating of its treasury operations, as well as designing and implementing an integrated financial information management system at federal level, which is expected by 2012.

163. The current Government has the objective to align public procurement more closely with economic expenditure policy, aimed at producing value for money, ensuring transparency, economy and efficiency, while improving the overall quality of the goods and services. In addition, operational changes as well as amendments to the legal and regulatory framework advanced in 2009 and 2010 have taken several important steps towards addressing the issues identified in previous World Bank assessments of the federal procurement system in Mexico (200750, 201051, and 201152). As envisioned in the Country Procurement Strategy, the World Bank is collaborating with the Mexican Government in modernizing its public procurement and other aspects of the PFM. This support is being provided by a number of knowledge services as well as lending instruments.

164. As for external oversight, the Federal Supreme Audit Institution conducts a number of regular performance, financial and compliance audits of Government federal programs. The annual public accounts are prepared and sent to Congress within four months of the end of each fiscal year. The external audit of these accounts is undertaken by the Auditor General‘s

49 See http://www.shcp.gob.mx/ApartadosHaciendaParaTodos/paquete_economico_2012/index.html 50 The World Bank Country Procurement Assessment Review (CPAR) of 2007 (prepared jointly with the IADB) identified issues in the public procurement system including excessive regulatory complexity and need for more effective governance and coordination. 51 Relevant aspects of the legal, operational and institutional structures of the federal procurement system in Mexico was reviewed as part of the Strengthening the Business Environment for Enhanced Economic Grow Development Policy Loan, November 2010. 52 World Bank knowledge Services, November 2011 65

office and submitted to the legislature fourteen months after the end of each fiscal year in accordance with national legislation. Audit reports are comprehensive and there is a system in place to follow up on audit findings and recommendations, in coordination with SFP. The results of audits by the Auditor General‘s office are made public in the Annual Audit Report on the Federal Public Accounts. Recent amendments to the Federal Constitution and a new Law on Supreme Auditing and Accountability have contributed to the overall strengthening of country fiscal transparency and accountability.

E. Disbursements and Audit

165. The flow of fund arrangements for this operation will be those customarily observed in DPLs for Mexico, per long-standing agreements with the Government. The SHCP has informed the Bank that Nacional Financiera (NAFIN) will be the financial agent of the Borrower with regard to this DPL.53 Under this arrangement, upon effectiveness and compliance with any withdrawal tranche release conditions, the Bank would deposit the single tranche disbursement to a designated account of the financial agent in US Dollars for subsequent credit to an account of the National Treasury (SHCP/Tesorería de la Federación, TESOFE) used for budgeted expenditures. Based on the review of the 2010 audit reports of the financial agent and the extensive experience between the Bank and the financial agent regarding funds flow from Bank- financed projects, there is no evidence that the banking control environment into which the DPL proceeds would flow is other than adequate. If requested by the Bank, the SHCP would provide the Bank with a written confirmation of the described transaction after funds are disbursed by the Bank.

166. Based on the assessment of the borrower’s current PFM and the conclusion that the fiduciary arrangements for this financing are adequate, the Bank will not require an audit of the designated account of the financial agent, and no additional fiduciary arrangements are considered necessary at this time.

F. Risks and Risk Mitigation

167. The matrix below sets out of the principal risks and their mitigating measures.

Economic and Fiscal Risks Mitigation Measure A sharp weakening in the economic recovery An external demand shock generated by the U.S. falling back of the United States would pose downside into recession would create a substantial short-term impact on risks to Mexico‘s growth due to the high economic growth in Mexico. Even in the case of a prolonged degree of integration. Sovereign debt weakness in the U.S., strong macroeconomic policy problems in Europe and fiscal sustainability fundamentals should favor recovery of the Mexican economy and concerns in other countries could increase a return to the medium-term potential output rate of growth. A global risk aversion and lead to higher greater emphasis on growth-oriented structural reforms is crucial volatility in Mexico‘s financial markets. to improve Mexico‘s medium-term growth potential, which is driven by labor force and capital accumulation growth but remains constrained by lack of any significant productivity improvements.

53 The use of a financial agent and designated account is a standard procedure of the Government of Mexico for their control purposes and not an additional requirement by the Bank. 66

Sovereign debt problems in Europe and fiscal The Government‘s record of sound and predictable sustainability concerns in other countries, macroeconomic management, reflected in its successful response could increase global risk aversion and lead to to the 2009 global crisis, and the increased insurance provided by the international reserve accumulation and a successor IMF higher volatility in Mexico‘s financial Flexible Credit Line mitigate some of the tail risks of global markets. financial market volatility.

Political and Institutional Risks Mitigation Measure Five of the nine prior actions proposed in this DPL mitigate this risk by strengthening mechanisms of inter-sectoral coordination. Agencies involved in the DPL are keen to coordinate with each The implementation of programs recognized other since it is clear to them that the next set of gains on by the proposed DPL will require significant sustainable climate change mitigation and adaptation will come multi-institutional collaboration. The cross- from stronger inter-sectoral coordination. institutional nature of the program and the uneven capacity across the sectoral agencies at These measures are supported by complementary activities by the federal, regional, state, and municipal levels Bank to assist the government through capacity-building present a risk to an even and timely programs and investment lending that strengthen the ability of implementation of reforms going forward. institutions to plan, implement, and monitor sectoral programs. The Working Groups for REDD+ and Adaptation and their respective Consultative Technical Committees bring together the agencies and civil society while the process for gaining approval of the PECC has entailed a strong collaboration among federal government agencies as well as with sub-national institutions. Mexico was the first of the two non-Annex 1 countries to date that have submitted their third communications to the UNFCCC (the other being Uruguay) and is the only one to Lack of continuing political support to the have submitted its fourth. It is already at work on its fifth. As climate change program, particularly given such and as was witnessed in Cancún, it has consolidated its the upcoming national elections and the reputation as a global leader on climate change adaptation. subsequent government transition in Political support is therefore likely to continue. Participatory January 2013 and consultative processes and arrangements are likely to maintain the support of other stakeholders. The Bank‘s on- going engagement with the government on climate change matters is also expected to help maintain political support. Social and Environmental Mitigation Measure

Likelihood of unanticipated environmental and social impacts is extremely low as most of the potential impacts are well known and manageable. Overall, the operation is likely to Unanticipated environmental and social have strong, positive environmental and social impacts. Also, impacts associated with the program the key agencies involved in the DPL have strong track- records as well as significant capacity to address environmental and social issues, the resolution of which constitutes a core part of their mandate.

The manner in which Mexico has been able to build a strong consensus among stakeholders, including government Stakeholder opposition to some of the agencies, civil society and the private sector on a range of proposed policy actions: climate-related actions, particularly in the run-up to COP 16, provides significant assurance that the risk of stakeholder opposition to the proposed policy actions is small. The fact that most of the actions will be highly beneficial to a broad

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range of stakeholders should also contribute to strong support among them.

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ANNEXES

ANNEX 1. Letter of Development Policy

OFICINA DEL C. SECRETARIO

OFICIO NUM. . 0 0 lOr. SlECRETARlA DE: MlDIO AMllIENTE Y ItECUR80I NATUItALU C IUDAD DE MexiCO, A 1 9 EIE 2012

Robert B. Zoellick Presidente del.!'lanco Intemacional de Reconstrucci6n y Fomento Presellte ,. • EI Gobierno de Mexico ha lIevado a cabo y continua promoviendo reformas institucionl'lles y nuevas polfticas para alcanzar un desarrollo humane sustentable . .Estas medidas correspond en a las :estrategias y Ifneas de acci6n para proteger y mejorar el nivel de vida de los mexicanos, contenidas en ef Plan Nacional de Desarrollo 2007-2012. Dicho plan incluye el eje 4 de polftica destinado a la ·Sustentabilidad ambiental", con especial enfasis en el eambio climatico.

As!, en el marco de un desarrollo humane sustentable, uno de los objetivos fundamentales de la gesti6n ambiental ha side alcanzar una · mejor . integraci6n de las polfticas sectoriales ql:le influyen en el acCeso a los recursos naturales y alteran el medio ambiente, buscando la articulaci6n entre. un mayor crecimiento econ6mico, fortalecimiento de la competitividad de la economfa, mejorfa del nivel de vida y perrnanente superaci6n de la pobreza, con un aprovechamiento racional de los recurSos naturales y del medio ambiente.

Desde el inicio de la Administraci6n se ha otorgado especial enfasis al tema de las emisiones d!l gases de efecto invernadero y a la protecci6n de la poblaci6n frente a los fen6menos climatol6gicos extremes agudizados p~r el cambio climatico.

Por ello, esta Secretarfa apoya a la decisi6n de la Secretarfa de Hacienda y Credito Pubico de suscribir el prestamo denominado Strengthening Social Resilience to Climate Change Development Poll~y Loan, con el Banco Boulevard Adol fo Ruiz Cortlnez 42 09, Col . Jardlnes e n 1& Ho ntaft., Del. Tl alpan, M~xico D. F. , 14210 T61 . (55) 5628 0600 · www .semarnat.gob.mx

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OFICINA DEL C. SECRETARIO

OFICIO NUM: 00 lOr,

CIUDADDEMtXlCO,A 1 g ENE 2012

a su digno cargo, el cual representa reconocer los avances en las pollticas publicas dirigidas al fortalecimiento de la adaptaci6n social al cambio climatico, principalmente en los siguientes ejes: i) planeaci6n para la adaptaci6n a largo plazo; ii) reducci6n de la exposici6n de riesgos frente a desastres naturales y iii) el manejo sustentable forestal.

Esperamos que esta nueva colaboraci6n entre el Banco Mundial yel Gobierno de Mexico contribuya al fortalecimiento de nuestras capacidades institucionales frente a los retos del cambio climatico y sirva de ejemplo para sentar las bases de una nueva actitud de la comunidad internacional frente a este gran problema global.

Aprovecho la oportunidad para reiterarle las seguridades de mi mas distinguida consideraci6n.

EL SECRETARIO

~ING.JU~~

C.c.p. J0s6 Antonio Meade KuribreftJ!. Secretario de Hacienda y Cr6d1tO PUblIc:o. Presente. Femando Tude!a. Sublea8tario de Pllneadiln y PoUtica Amblental.-PteMnta Ricaldo Ochoa. Tltullt de II Unldad de Aauntosintemacionilies de Hacienda. Pnlsenta

Boulevard Adolfo Ruiz Cort1nez 4209, Col. Jardines en 14 Hontana, Del. Tlalpan. H6xico D.F. , 14210 T61. (55) 5628 0600 ) www .semarnat.gob.mx

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English Translation of Development Policy Letter

LVC/LGC

SEAL OF THE UNITED MEXICAN STATES OFFICE OF THE Hon. SECRETARY Secretariat of the Environment and DOCUMENT NUMBER: 00106 Natural Resources Mexico City, January 19, 2012

Robert B. Zoellick, President International Bank for Reconstruction & Development

The government of Mexico has carried out institutional reforms and keeps on encouraging new policies to achieve sustainable human development. These measures correspond to strategies and action lines bound to the protection and improvement of the living conditions of contained under the National Development Plan 2007 – 2012. Such Plan includes the policy’s axis 4 for “Environmental Sustainability” with special emphasis in climate change.

Thus, within the framework of sustainable human development, one of the fundamental objectives of environmental management under this administration has been the achievement of an improved integration of sectorial policies that influence the access of natural resources and that affect the environment, looking for the articulation between greater economic development, strengthening of economy competitiveness, improvement of living conditions and the permanent surmounting of poverty, with rational exploitation of natural resources and environment.

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Since the beginning of this Administration, special emphasis has been given to the greenhouse effect gas emission question and to the protection of the population in the event of extreme climate phenomena worsened by climate change.

That is why this Secretariat supports the decision of the Treasury Department to subscribe the loan known as Strengthening Social Resilience to Climate Change Development Policy Loan with the Bank that you represent, acknowledging the advancement of public policies bound to the strengthening of social adaptation to climate change, mainly in the following axis: i) planning for long-term adaptation, ii) reduction of risk exposure in the event of natural disasters and iii) sustainable forest management.

We hope this new collaboration between the World Bank and the Mexican Government contributes to the strengthening of our institutional capabilities to face the climate change challenges, and to be the example to set the grounds of a new attitude of the international community concerning this huge global problem.

Respectfully yours,

The Secretary

Signature

Eng. Juan Rafael Elvira Quesada

Copies: Jose Antonio Meade Kuribreña, Secretary of the Treasury Department – Present Fernando Tudela, Sub-secretary of Environmental Policy and Planning – Present Ricardo Ochoa, Head of the Office of the Treasury Department’s International Affairs – Present

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ANNEX 2. Policy Areas, Prior Actions and Outcomes

Objective: The proposed Strengthening Social Resilience to Climate Change DPL constitutes an essential piece of the consolidation stage (2010-) of 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.

Medium-term Objective Issues and Obstacles Prior Actions Outcomes at ICR Date Outcomes (March 2013) (December 2014) Policy Area 1: Strengthening Social Resilience through Long-term Climate Change Adaptation Planning oriented to the state levela Strengthening social Lack of policy The CICC‘s Adaptation Working Group has: (i) Number of States that State governments‘ resilience to climate frameworks and approved a Mid-Term Adaptation Policies Framework completed during 2012-2013 capacity for flexible change through instruments to facilitate (Marco de Políticas de Adaptación de Mediano Plazo), Climate Change Action learning and multiple long-term local adaptation to which requires the development of measures for Programs that included feedback loops has adaptation planning climate change and to reduction of differential vulnerability and specific adaptation measures been developed. address the strengthening of local adaptive planning; and (ii) to promote social resilience differentiated effects of created a Technical Advisory Committee to facilitate (baseline: 0, target: 3) Indicator: Number of CC on the poor and participation of experts and key stakeholders in the States that developed more vulnerable formulation of a future national adaptation strategy of and used Climate groups. Mexico. Change Knowledge Inclusion of measures Platforms to support The States of Yucatán, Campeche, and Quintana Roo supported by SEMARNAT decision making and have signed a ―General Coordination Agreement on the to address unsustainable monitoring of climate Yucatán Peninsula‘s Climate Change‖ to develop a growth of tourism in coastal change adaptation and Regional Strategy for Climate Change Adaptation in areas and livelihood co- social resilience the Yucatán Peninsula and a Climate Action Fund for benefits of climate policies initiatives (baseline: the Yucatán Peninsula, coordinated by the Climate for indigenous communities 0, target 3) Change Regional Commission for the Yucatán in the Regional Strategy for Peninsula. Climate Change Adaptation in the Yucatán Peninsula.

Congress has approved a new budgetary program Number of State Climate Lack of funding at ―National Program for Climate Change Adaptation and Change Action Programs that federal government Prevention of Natural Disasters‖ (Programa Nacional included civil society level for adaptation. de Adaptación del Cambio Climático y de Prevención participation in the design of de Desastres Naturales), to finance climate change social resilience initiatives. adaptation initiatives in an amount of 300 million (baseline 0, target 3) Pesos, and implemented by SEMARNAT. 73

Policy Area 2: Strengthening Social Resilience through Disaster Risk Reduction and Territorial Development Actions oriented to the municipal level Strengthen disaster Reactive approach to SEDESOL has strengthened the delivery of risk Percentage of municipalities risk reduction and disaster risk reduction actions in Municipalities through (i) the with high and very high resilient territorial management, creation of a new program for risk prevention in human scores in PRAH's disaster development dominated by ex post settlements (―Prevención de Riesgos en los risk index which are policy responses, Asentamientos Humanos‖), which offers financing for implementing risk reduction limited mechanisms risk reduction actions to Municipalities; and (ii) the institutional strengthening and incentives to issuance of new operational rules of the temporary and investment activities mainstream disaster employment program (Programa de Empleo Temporal, supported by PRAH. Number of risk reduction in PET) for the fiscal year 2011, to orient it towards the (Source: PRAH's Risk Index; municipalities of the territorial and urban financing of local disaster prevention projects. Baseline January 2012: 0; National Urban planning, especially at target by March 2013: 60 System that have the municipal level, and municipalities). incorporated disaster weak and insufficient risk management incentives to reduce actions with support uncontrolled urban SEDESOL‘s guidelines for sustainable urban Number of urban from the Federal growth and promote development, aimed at fostering sustainable urban development projects Government (baseline sustainable urban territorial development and increased social resilience, evaluated within the DUIS 2011: 100; target: planning. have been incorporated by selected housing institutions Working Group that have 250; Source: PECC of the Borrower, such as CONAVI with its upfront incorporated at least the monitoring system) subsidy program ―Esta es tu casa‖, and INFONAVIT following criteria specified in with its mortgage origination criteria. SEDESOL's Sustainable Urban Development Guidelines: (i) location, (ii) connectivity and accessibility, and (iii) risk prevention (target: 5 between January 2012-March 2013).

SAGARPA strengthened and improved the targeting of Percentage of eligible surface Percentage of eligible its natural disaster risk management and prevention that is covered by climate surface that is covered program (CADENA) for low income farmers, by risk insurance (baseline: by climate risk lowering the eligibility ceiling for disaster and 69%; target: 74%) insurance (baseline: catastrophe insurance payouts. 69%; target: 76%)

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Policy Area 3: Strengthening Social Resilience at the Community Level through Sustainable Community Forest Managementb Foster the Lack of harmonization CONAFOR signed bilateral cooperation agreements Number of REDD+ Increase in number of involvement of in statistical data (Convenios de Colaboración), with SAGARPA and collaboration initiatives communities building federal agencies, generation and SEMARNAT, fostering the sharing of information between CONAFOR and/or social organization civil society and distribution among among said institutions on forestry programs, and SAGARPA and subnational and generating local actors in SEMARNAT, aligning procedures and incentive programs on Governments in REDD+ income from community forest CONAFOR and other agricultural, livestock and forestry issues. Early Action areas that are sustainable production management and sister agencies. operational (baseline:0; of forest goods and climate change Difficulty in aligning target: 2) services (baseline strategies in line policies and incentives 2011: 4000; target with the National affecting forestry 2014: 12% increase) REDD+ Vision to territories. build resilient Limited involvement of A national multi-stakeholder consultative technical Active social participation in livelihoods in rural local civil society council and three state-level multi-stakeholder REDD+ policy making at and forest areas organizations to help consultative technical councils (CTC–REDD) have sub-national level trough the adapt the national been created. operation of local CTC- sustainable forestry REDD+ (participation of management strategy to civil society in all meetings local conditions. as reflected in minutes, with a minimum 3 meetings per year per CTC).

Percentage of participating Restricted capacity of The Board of JIRA approved REDD+ as a strategic communities in REDD+ municipios in the area line for its multi-annual work program. Early Action Areas receiving of sustainable forestry support from regional management, due to landscape management economic, geographic agents (baseline 0%, target and political 33%) limitations.

a The GoM intends to use these indicators as part of its monitoring of the on-going implementation of its overall program to strengthen social resilience to climate change after the closing date of the DPL. They are listed here to give the reader an idea of the GoM‘s medium-term targets b In order promote coordination among development partners and alignment with the GoM‘s policies, the Bank and AFD are using the same SOM policy actions for the forestry component of their respective operations.

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Annex 3. Fund Relations Note

IMF Executive Board Completes Review of Mexico’s Performance Under the Flexible Credit Line

Press Release No. 11/480 December 22, 2011

The Executive Board of the International Monetary Fund (IMF) completed on December 21, 2011, its review of Mexico’s qualification for the arrangement under the Flexible Credit Line (FCL) and reaffirmed Mexico’s continued qualification to access FCL resources. The Mexican authorities have indicated that they intend to continue treating the arrangement as precautionary. The two year arrangement for Mexico for SDR 47.292 billion (about US$73 billion), approved in January 10, 2011 (see Press Release No. 11/4), was the first under the reforms to the FCL approved in August 30, 2010 (see Press Release No. 10/321). Following the Executive Board discussion of Mexico, Mr. David Lipton, First Deputy Managing Director and Acting Chairman of the Board, made the following statement: “The Flexible Credit Line (FCL) arrangement for Mexico, approved a year ago in a context of heightened risks to the global economic outlook, has played an important role in supporting the authorities’ overall macroeconomic strategy, providing an insurance against global tail risks and bolstering market confidence. Today, the Executive Board reaffirmed that Mexico continues to meet the qualification criteria for access to FCL resources. “Mexico’s rapid rebound from the global crisis and the resilience of economic activity in recent months bear witness to Mexico’s sound fundamentals and skillful policy management. The strong policy track record and frameworks, including a balanced-budget rule, a credible inflation targeting regime, and prudent financial oversight, have underpinned sound public and private balance sheets. “The authorities are committed to rebuilding policy buffers gradually in light of heightened global risks. Fiscal consolidation and supportive monetary policy are poised to be maintained, while the increase in external buffers is being complemented by the FCL arrangement. The floating exchange rate regime will continue to play a key role in buffering external shocks. “Downside risks to Mexico’s near-term outlook arise from unsettled global growth prospects and the turbulence in international financial markets. However, Mexico retains policy space to contain the potential fallout from external shocks, supported by the FCL arrangement, and the authorities remain committed to the rules-based macroeconomic framework and to adjust policies as needed,” Mr. Lipton said.

IMF EXTERNAL RELATIONS DEPARTMENT

Public Affairs Media Relations

E-mail: [email protected] Phone: 202-623-7100

Fax: 202-623-6278 Fax: 202-623-6772

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Annex 4. Long-term climate change impact in Mexico Climate change brings additional layers to existing risks, including more extreme weather events, changing rainfall patterns, rising sea levels, and shifting patterns of disease. For example, humid tropical zones are expected to receive more rainfall; combined with extreme events and sea level rise, this will result in more frequent and severe floods. In agriculture, many small-scale farmers depend on rainfed agriculture, which will be severely impacted by the increasing irregularity of rainfall affecting productive capacity as well as access to water for domestic purposes. In urban areas, the lack of urban development policy, planning, regulation and public investment has led to the settlement of rural immigrants in risky areas such as hillsides and riverbeds. Climate change will have differential impacts on the population of Mexico, and understanding specific forms of economic and/or territorial vulnerability will be crucial to design effective adaptation policies. In the water sector, for example, the availability of water does not correspond to the distribution of the population and of economic activity, creating water stress in several of the most highly populated areas of the country (see Box 1). Seventy-seven percent of Mexico‘s residents live in the arid and semiarid northern, central and northeastern regions, an area that accounts for 87 percent of national GDP but receives only 31 percent of the available water. The discrepancy between the physical supply and economic demand for water has played out in different ways. At present at least 33 million people—or about 32 percent of Mexico‘s total population—face water scarcity (pressures ranging from 40 to over 80 percent). In all climate change scenarios, water stress is expected to increase, with detrimental impacts both for poor peasants who depend on rain for their crops and for the urban poor who are settled in marginal areas with deficits in access to . It is expected that the cost of water, will increase, affecting the poor the most.

Indigenous peoples and rural communities are among those most affected by climate change/variability due to a stronger dependence on natural environments for their livelihoods, particularly forests. Indigenous peoples are among the most vulnerable people with or without climate change, with limited capacity to cope with long-term changes and a greater exposure to natural climate related hazards.

Box 1. The figures below illustrate how Mexico‘s current water scarcity situation will be significantly aggravated in the future, especially when not only socioeconomic projections but also climate scenarios are considered.

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(left) Degree of present pressure on water resources in Mexico (2005), without climate change impact considered. (right) Degree of future pressure on water resources for 2030 when both socioeconomic projections and climate scenarios are considered. Source: Ministry of Environment and Natural Resources, 2007.

Climate change will have severe impacts on smallholders whose livelihoods depend on rainfed cash crops as well as subsistence agriculture. In 2005, about 38.7 percent of the extreme rural poor were engaged in agricultural activities either as independent farmers or through agricultural wage labor. Poor dryland farmers in the northern states of , and Chihuahua are particularly at risk as they face falling productivity caused by worsening water shortage and soil degradation. Many of these arid regions are already at risk of desertification. At present there is a high degree of erosion in Mexico with 36 percent of all irrigated land affected, 54 percent of the rainfed crop area and 90 percent of the rangeland area (LADA). Climate variability is likely to speed up the salinization and desertification of agricultural lands, compounding the effects of reduced rainfall. An estimated 48 percent of all the land in Mexico is considered vulnerable to the impacts of climate change, particularly in the north and in densely populated areas (Hernandez et. al, 1995). Severe impacts on poor agriculturalists will be felt by other regions as well. For example, Chiapas is one of the Mexican states richest in biodiversity and is Mexico‘s main coffee-producing state, with an average annual production that surpasses 115 million kg. One million jobs depend on coffee production in the state, and 60 percent of the producers are smallholders, farming fewer than five hectares each, the majority of whom are indigenous peoples. However, a recent study shows that the specific climate conditions on which this coffee production depends may not persist much longer.

Climate change will have severe impacts on coastal populations of Mexico. Climate change is likely to compound the damage to natural ecosystems, including mangroves and coral reefs, caused by human activities, placing severe pressure on poor coastal communities both directly as the result of storms and rising sea levels, and indirectly by gradually degrading the ecosystems on which their livelihoods depend. Mangroves and coral reefs, for example, play vital roles in the livelihoods of millions of people who depend on them for fisheries and tourism. In the past 50 years, nearly 80 percent of corals reefs in the Caribbean Sea have died off due to abuse as well as to climate change and variability impacts such as coral bleaching. Furthermore, as much as 65 percent of mangrove coverage in Mexico was lost from 1978 to 1998. Although fisheries add very little to overall GDP in Mexico (0.8 percent of GDP), they play a significant role in local economies, supporting the small households and villages along its coast. In 2006, 257,600 persons were employed in fisheries. However, if persons employed in related industries are added up and fishermen‘s families are counted, it is safe to say that more than a million are directly reliant on fisheries (FAO 2008 [Fisheries and Aquaculture profile]).

Reducing vulnerability to climate change and climate variability will require national frameworks and policies that identify the needs of the most vulnerable and strengthen both autonomous and planned adaptation. National policies need to provide meaningful adaptation frameworks at the state and local levels, offering local communities useable information about risks (short- and long-term), cost-effective adaptation measures, modalities to spread risk, etc. Maladaptation too remains a challenge with a reliance on water intensive crops in arid areas.

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Paradoxically, the introduction of monoculture with high-tech seeds that require more intensive use of land and agrochemicals could also increase vulnerability by concentrating risk, whereas the diversification of products and varieties and the use of altitudinal corridors contribute to improved resilience to climate shocks and hence the food security of the large number of small- scale farmers by better distributing risk (ceteris paribus).

Adaptation to climate change requires a strong subnational focus due to Mexico’s territorial, environmental and social diversity. Under the constitutional distribution of competencies between federal and state governments, together with the ―federalization‖ (decentralization) of a large number of sectoral development programs, state and municipal governments are responsible for most of the practical measures that can be implemented to increase the vulnerable population‘s resilience to climate change impacts.

In addition, the scientific literature on adaptation stresses that adaptation has, and will continue to have, a predominantly local dimension because people adapt to the specific contours of their physical and natural environments, which in Mexico are extremely heterogeneous and include two very diverse coastal zones, mountainous areas, lowlands, forested tropical hills, and drought-prone environments in the north. Thus, participation of people (including the poor and most vulnerable) in the definition of adaptive policies will be crucial because they embody the practical knowledge of local environments on which their resilience depends. In that context, special attention should be given to the role of groups such as the “nucleos agrarios,” community forestry groups, and indigenous traditional authorities in leading adaptation strategies at local levels, in conjunction with national, state and municipal efforts. Such informal institutions may play a crucial role in providing information to the most vulnerable sectors of Mexican society (those who rely heavily on natural resources for their livelihoods, those who live in remote areas, etc.), incorporate valuable local traditional ecological knowledge in adaptation strategies, plans and actions, monitor the implementation of adaptation initiatives and provide feedback to formal authorities on the effectiveness of the measures undertaken.

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ANNEX 5. Natural disasters and unplanned urban growth

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 cone 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). More worryingly, the occurrence of disaster events in Mexico over the last five decades has shown an increasing trend (see Figure 1).

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

12

10

8

6

Eventos 4

2

0

1964 1967 1973 1976 1985 1988 1994 1997 2006 2009 1970 1979 1982 1991 2000 2003

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

The bulk of natural hazards (turning into disasters) that affect Mexico are hydro- meteorological. Under the current Mexican system of disaster assistance, the Ministry of Interior is responsible for declaring a ―natural disaster‖ upon request from the governor of the affected state. Between 1999 and 2007, there have been around 6,500 disaster declarations at municipal level, out of which 90 percent relate to rains, floods and hurricanes (see Figure 2). Output damages (as a share of GDP) accounted for only 0.5 percent of national GDP during 2005 and 2007. However, Hurricanes Stan and Wilma, both in 2005, represented a huge blow to the GDP of the southern states of Chiapas (9.2 percent) and Quintana Roo (14.4 percent), respectively, as were the floods in Tabasco two years later (10 percent).

Figure 2: Number of Disaster Declarations by Natural Event (1999–2007)

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Source: Diario Oficial de la Federación. (Secretaría de Gobernación)

The social impacts of natural disasters in Mexico underscore the need to place more attention on such events as part of the national poverty 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 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 regularly by even ―small‖ hazard events that do not garner media attention. The poor have fewer assets to respond to and recover from hazard events, and often have less access to formal assistance mechanisms.

There is ample evidence from a number of sources that the poor often face greater exposure to natural hazards and have lower adaptive capacities. For instance a Poverty and Social Impact Analysis (PSIA) conducted for this DPL found that poverty correlates with a higher susceptibility to suffer losses from hazard events (see Table 1). The PSIA constructed scores of disaster risk (the probability of losses from floods, hurricanes and earthquakes in schools, health clinics, roads and bridges, and low-income housing) for all municipalities in the country. These were then spatially correlated with the poverty incidence and Human Development Index in 2005. It was also found that the poorest municipalities had lower levels (in value and number) of critical public infrastructure for disaster emergencies, such as schools, hospitals and roads (Soriano, de la Fuente and Cruz 2011).

Table 1 . Correlati o n Between Disaster Risk and Deprivation Deprivation Indicators

Human Capacity Asset Marginality Food Poverty FGT2 Indicadores de Riesgo: Development Poverty Poverty

Earthquake Risk (Housing in Poverty) 0.458 - 0.370 0.453 0.456 0.456 0.377

Hydro-Meteorological Risk (Housing in Poverty) 0.479 - 0.386 0.414 0.412 0.405 0.414

Earthquake Risk (Public Portfolio) 0.406 - 0.313 0.407 0.413 0.419 0.352

Hydro-Meteorological Risk (Public Portfolio) 0.253 - 0.158 0.195 0.201 0.213 0.217

Earthquake Risk (Total Portfolio) 0.451 - 0.360 0.446 0.450 0.454 0.382

Hydro-Meteorological Risk (Total Portfolio) 0.380 - 0.280 0.321 0.324 0.331 0.327

Earthquake & Hydro Risk (Total Portfolio) 0.514 - 0.394 0.475 0.482 0.492 0.419

Notas: Hydro - meteorological risk includes floods and cyclones. Public portfolio includes federal schools, clinics, roads and bridges. FGT2 is a poverty indicators that takes into account poverty depth as well as the income distribution across poor people.

Source: Own calculations. Marginality Index (CONAPO), Human Development and FGT2 (UNDP, Oficina de Investigación sobre Desarrollo

Humano en México), and Food, Capacity and Asset Poverty (CONEVAL).

While correlations between poverty and hazards do not provide conclusive evidence on causation, additional studies on the impact of natural disasters on human development (measured through the Human Development Index developed by UNDP) and poverty (measured under three different lines of income poverty: food, skills and assets) during the 2000–2005 period show significant adverse effects. Poverty levels increased between 1.5 and 3.7 percent, based on the measurement considered. Moreover, for affected municipalities, the impact on the Human Development Index was similar to going back an average of two years in

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human development over the same period analyzed. Floods and droughts had the most adverse effects (Rodríguez-Oreggia et al. 2010).

Municipal data on disaster risk also helped to construct profiles according to the level of hazard, exposure or disaster risk concentration by municipality. High disaster-prone municipalities in Mexico are predominantly rural and indigenous, with limited access to health and other basic services, high probability of deforestation and other environmental problems, and a mixed display of institutional capacity to manage disaster risks. They receive relatively higher public relief following disasters, but there is a lower presence of civil protection services and risk awareness (e.g., through risk maps) that would help to prepare communities before events occur.

A disaster exposes the cumulative implications of many earlier decisions, some taken individually, others collectively, and a few by default.54 Several factors contribute to explain why a disaster happens; for example, poor building standards or designs are immediate causes. Poor urban planning and land use are key underlying factors contributing to hazard events becoming disasters. This is especially important in Mexico where 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 increasing the vulnerability of the urban population. Moreover, poor urban planning and disorderly expansion are also resulting in higher CO2 emissions (through lower densities and longer motorized trips), disintegration of the social networks for the most vulnerable people (who end up living further away), higher transportation costs for the poor, and inability to take advantage of agglomeration economies. A recent study of a sample of 21 cities, which analyzed the expansion of the urban areas between 1996 and 2006, suggests increases of at least 23 percent and reaching up to 80 percent in the smaller cities55 (see Table 2).

Table 2: Urban areas, selected cities Base Extended Extended Difference Base urban City size (inhabitants) radio* radio** urban area* (km2) (km2) (%) (km) (km) area** More than 3 million 18.2 21.9 260.04 376.55 116.51 44.8 Between 1 and 3 million 11.44 12.69 102.87 126.47 23.6 22.9 Between 100,000 and 1 million 5.13 6.16 20.63 29.85 9.22 44.7 Between 15,000 and 100,000 3.59 4.81 10.14 18.17 8.03 79.2

* From the city center to the urban limit (average) ** From the city center to the new housing complex limit (average) Source: SEDESOL

The poor face risks to their livelihoods and social capital due to the poorly planned urban expansion, and climate change will add an additional layer of risks. Properly planned urbanization can increase resilience to climate-related risks: sound urban planning restricts development in flood-prone areas and provides critical access to services; infrastructure development can provide physical protection in risk areas; and effective early warning systems

54 Natural Hazards, UnNatural Disasters – the economics of effective prevention, UN–WB. 55 Estudio de la Integración Urbana y Social en la Expansión reciente de las Ciudades en México 1996–2006: Dimensión, características y soluciones, R. Eibenschutz Hartman, Carlos Goya Escobedo Coordinadores 82

combined with well-established transportation systems help evacuate people in a timely manner (WDR 2010). Climate-smart urban design can also promote synergies between mitigation and adaptation, especially related to building characteristics (green roofs provide cooling and attenuate storm water).

Mexico has begun to rethink the urban sector policies, programs and incentives to make more efficient use of the territory and promote more competitive cities, mitigate carbon emissions from the urban sector, adapt urban planning to respond to climate variability and change, while at the same time continuing to promote access to housing. This challenge requires coordination from federal, state and municipal governments since most of the incentives for housing are federal but responsibilities for urban planning are held at municipal level.

Some cities are already taking steps in this direction. Notably, Mexico City has taken the lead in promoting the so-called Mexico City Pact (MCP). The MCP consists of two parts: the first mentions considerations as to why cities are strategic in combating global warming; the second establishes a set of voluntary commitments to promote strategies and actions aimed at mitigating GHG emissions and adapting cities to the impacts of climate change. To establish and follow up on cities‘ commitments, the signatories will establish their climate actions in the Carbon Cities Climate Registry (CCCR) powered by the Bonn Center for Local Climate Action and Reporting (carbon). The CCCR will provide cities with a sound and transparent instrument for establishing links and negotiations with multilateral, regional, subregional and national financing agencies, by having a common methodology supported by scientific and technical criteria that validates their climate actions.

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. The concept of ―adaptive management‖ (as defined in the WDR 2010) is an approach to guide intervention in the face of uncertainty: the basic principle is that management actions should be informed by explicit learning from policy experiments and the use of scientific information, monitoring the outcome of these interventions and developing new practices. Adaptive management aims to improve the ability to make decisions under uncertainty, using existing scientific information and learning from policy experiments, and places decisions with the scale of ecological contexts and processes, having a long-term planning horizon. The actions recognized in the proposed operation respond to this category.

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ANNEX 6. Forest Management

The majority of the forest territories in Mexico belong to rural communities and ejidos, many of them indigenous, vulnerable and/or poor. Mexico ranks twelfth worldwide in forest cover, with more than 64 million hectares (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 13 million inhabitants living in the forests suffer from extreme poverty. About 8,500 indigenous communities and ejidos56 own around 70 percent of the country‘s forests under a legally recognized collective land ownership system–a situation unique in the world.57 Officially, around 300,000 people are employed in the forest sector, and forestry activities account for about 1.8 percent of GDP.

Official rates of deforestation in Mexico are moderately high, but the annual change rates have been decreasing. From 1990 to 2010, the annual net loss was about 354,000 ha per year (- 0.52 percent); from 2000 to 2005 about 235,000 ha per year (-0.35 percent); and from 2005– 2010 the annual change was about 155,000 ha per year (-0.24 percent). Forest degradation is also high, estimated at approximately 457,000 ha annually (0.7 percent). Historically, three patterns of deforestation have been observed in Mexico: (i) clearing of temperate coniferous, tropical and subtropical forests for subsistence agriculture and cattle grazing; (ii) deforestation in tropical forests associated with the settling of land under the agrarian reform; and (iii) land clearing for commercial large-scale cattle ranching and farming. Causes of degradation include unsustainable and/or illegal logging, unsustainable forest grazing, pests, fires and other human impacts. However, Mexico‘s forestry efforts placed it in the top ten countries with the largest area of reforestation and afforestation (2005).

CONAFOR operates a range of thematic, demand-driven, community-based incentive programs, collectively known as Pro-Árbol. The scope of these programs has evolved rapidly since 2001, from traditional forest management to payment for environmental services and climate change mitigation and adaptation activities in the forest landscape. CONAFOR‘s budget increased from $27 million in 2001 to $486 million in 2011, and its portfolio has reached a total of about 12,000 transactions annually benefiting about 4,000 communities.

In Mexico, given the demographics of the forestry sector, sustainable forestry management has a key role to play in increasing the social resilience of the poor in the face of climate change, in terms of both mitigation and adaptation. Sustainable community forest management contributes to social resilience to climate change in important ways.  Forests provide sources of income that are less susceptible to short-term droughts or flooding. Analysis of flood data from 56 developing countries found a significant link between forest loss and flood risk. ‖Unabated loss of forests may increase or exacerbate

56Communities 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). 57 Food and Agriculture Organization (FAO). 2010. Global Forest Resources Assessment 2010. Rome; Italy 84

the number of flood-related disasters, negatively impact millions of poor people and inflict trillions of dollars in damage in disadvantaged economies over the coming decades.‖58 In Mexico specifically, floods caused the loss of approximately 100,000 lives and US$1 trillion in damage during the 1990s.59  Forest fires will tend to increase in Mexico due to changes in atmospheric and soil temperatures and the amount and geographic and temporal distribution of rainfall. With the variability of climate, pests and diseases may also develop new patterns and affect forest stands on a large scale, effective sustainable forest management can help control this hazard.  Forests provide ecosystem services that enhance people‘s livelihoods, including the provision of food and fuel and the regulation of water flows and temperature. 60  Finally, forest resources in Mexico are typically managed by communities, increasing their social capital and enhancing social resilience.

Synergies between mitigation and adaptation to climate change in the forestry sector are widely recognized. While Mexico‘s forests have long been valued as a source of timber, they are increasingly appreciated for their role in regulating 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. In addition, because trees and forests sequester carbon through their photosynthetic processes, they provide efficient mechanisms for reducing greenhouse gas emissions, especially carbon dioxide, which contribute to climate change.

The forestry sector provides the single greatest potential for reducing Mexico’s greenhouse gas emissions over the coming decades, even though energy-related emissions dominate its current and projected CO2e trajectories. Emissions from deforestation and forest degradation 61 interventions have a reduction potential of 1,120 Mt CO2e. Other forestry interventions with high greenhouse gas mitigation potential are reforestation and restoration (10 percent) and afforestation (9 percent).

The Government of Mexico recognizes that only by improving forestry management, including reducing the emissions from deforestation, can the country meet its climate mitigation goals. Land use, land-use change, and forestry (LULUCF) contributed about 14 percent of Mexico‘s GHG emissions in 2006, with 10.5 percent of emissions due to deforestation associated with forest conversion to agriculture and pasture. The remaining 3.5 percent of GHG emissions in 2006 were due to degradation driven by factors such as over-logging, illegal logging, high grading (harvesting only the best trees), bad management, forest grazing, pests, fires and other human activities.

58 Bradshaw, C. J. A.; Sodhi, N. S.; Peh, K. S. -H. and Brooks, B.W. (2007) ―Global evidence that deforestation amplifies flood risk and severity in the developing world‖, Global Change Biology 13 (11), 2379–2395. 59 Laurance, W. F. (2007) ―Environmental science: Forests and floods‖, Nature 449, pp409-410. 60 Millennium Ecosystem Assessment (2005). ―Ecosystems and Human Well-being: Synthesis‖. Island Press, Washington, DC. 61 Based on the six REDD interventions proposed by the Low-carbon Study (MEDEC). 85

ANNEX 7. Participatory Processes in Sector Policy Making

An extensive array of participatory institutions and mechanisms has been mainstreamed into sector policy making, implementation and monitoring at national and local levels. Most sector programs have set up advisory bodies aimed at receiving periodic feedback from external stakeholders. For instance, the National System for Civil Protection (SINAPROC) provides for a system of intergovernmental cooperation and mechanisms for community participation. The system involves a wide range of stakeholders in coordination and functional/advisory relationships from national through municipal level, including government departments, academics and NGOs. The forestry sector also relies on several participatory institutions for policy design and implementation. The main advisory body in the forestry sector is the Forestry Advisory Council (Consejo Asesor Forestal, CONAF), which supervises and assesses the policy instruments included in the General Law of Sustainable Forestry Development.62

Prior actions under Policy Area 1 encompass consultation and participation mechanisms that build on the GoM’s progressive development of climate change adaptation policies. The Mid-Term Adaptation Policies Framework defines the need to ensure citizen participation in climate change adaptation as one of the basic principles to be contained in the National Climate Change Adaptation Policy. The framework includes specific actions aimed at promoting collaboration between the public sector and civil society, including communication, education and adaptation actions. External stakeholders, including civil society organizations and think tanks, were informally consulted in the preparation of the adaptation framework. Participatory provisions contained therein, along with the need to devise a participatory mechanism for obtaining external feedback throughout the preparation of the National Adaptation Policy, have prompted the GoM‘s decision to create a Technical Advisory Committee. The TAC will contain a core nucleus of distinguished experts on climate change adaptation from academia, civil society, and government; and a broader group formed by a wider set of individuals and organizations committed to climate vulnerability reduction.

Several provisions regarding participatory processes and integration of community participation criteria are embedded in the programs and regulations identified as prior actions for Policy Area 2:  Operational rules for the Programa de Empleo Temporario (PET) require the creation of ―Social Participation Committees‖ composed of representatives of communities in which PET projects are executed. In addition, under the revised 2011 rules, prioritized activities under the newly incorporated natural disaster prevention category include social communication and citizen education in PET‘s local disaster prevention projects.63  Technical proposals submitted by municipalities under the new Program for Risk Prevention in Human Settlements (Programa de Prevención de Riesgos en Asentamientos

62 Other consultation mechanisms include the Sustainable Development Consultative Councils (Consejos Consultivos de Desarrollo Sustentable, CCDS), the Technical Advisory Council of the Indigenous Peoples Development Council (Consejo de Desarrollo Indigena, CDI), annual regional and local consultations. 63 See Official Gazette (Diario Oficial de la Federación), ―Acuerdo por el que los integrantes del Comité Técnico del Programa de Empleo Temporal modifican las Reglas de Operación del Programa de Empleo Temporal para el ejercicio fiscal 2011‖, DOF 31/12/2010, accessed at http://dof.gob.mx/nota_detalle.php?codigo=5173564&fecha=31/12/2010 on February 17, 2010. 86

Humanos) must indicate whether local communities have provided their no-objection to project implementation. The program is also required to promote the participation of beneficiaries through ―social monitoring‖ activities, as in the case of PET.64  The new methodology to be applied by INFONAVIT in housing origination procedures includes criteria on community participation (in the municipal competitiveness index), and is piloting the use of ―local social promoters‖ to assess community integration in housing developments.

Prior actions under Policy Area 3 also focus on consultation and participation mechanisms that build on the GoM’s progressive development of climate change mitigation and adaptation policies. CONAFOR carried out extensive consultations with forest sector stakeholders during the preparation of the Readiness proposal. Over 70 representatives from the public sector, academia, national and international civil society organizations participated in workshops and meetings. This participatory mechanism around the REDD+ was formalized at the COP16, where the GoM, under the leadership of CONAFOR, presented the Consultative Technical Council (Comité Técnico Consultivo, CTC), an advisory body of CICC‘s REDD+ Working Group. CTCs are made up of civil society organizations, including academic and private sector institutions, and indigenous communities‘ representatives. During a CTC REDD ordinary session held in Mexico City the 9th of June 2011, CONAFOR and the Bank consulted the forestry policy area included in this operation with 81 participants from forestry communities, civil society and government. This discussion helped to confirm the institutional actions supported by this operation.

64 Operational Rules for the Programa de Prevención de Riesgos en Asentamientos Humanos, accessed at http://www.sedesol.gob.mx/index/index.php?sec=342 87

ANNEX 8. Lessons Learned

Adaptation Planning

The focus of the proposed operation on sub-national/local levels in adaptation planning, and on multi-stakeholder engagement in framing adaptation actions and priorities, reflects learning from the latest Bank research and the frontier of global discourse on how best to support climate change adaptation. Participatory research through the Bank‘s social component of the Economics of Adaptation to Climate Change (2011) and Pro-Poor Adaptation to Climate Change in Urban Centers (2010) both indicate the important of recognizing the ways that poor communities are already adapting to climate change. The findings suggest that delivering resources to the local level to support these strategies can be an effective part of long term investment for building climate resilience. A key first stage is understanding how communities are already experiencing and responding to climate change.

Findings from these and other studies indicate that while climate science is limited and laden with uncertainty, this should not be a constraint on thinking how to build resilience. Indeed, by drawing on the living experience of communities much can be learned about both the impacts of climate change and ways in which autonomous adaptation can be supported. The scientific literature on adaptation stresses that adaptation has, and will continue to have, a predominantly local dimension, as people adapt to the specific contours of their physical and natural environments. This is particularly important in Mexico, with its social diversity and varied geography including two very diverse coastal zones, mountainous areas, lowlands, forested tropical hills, and drought-prone environments in the north. Thus, local adaptation solutions developed in a participatory way will be crucial to reflect the practical knowledge of local communities and their environments on which their resilience depends. Participatory Scenario Development Approaches for Identifying Pro-Poor Adaptation Options (World Bank 2010) reinforces this message and demonstrates that engaging communities in their own process of assessing climate risk and developing resilience strategies can develop locally relevant options for adaptation while informing actors of potential trade-offs and consequences of climate action.

Finally, as the Bank’s work on The Social Dimensions of REDD+ (2011) (including a case study on Carbon Rights in Mexico, 2010) and the forestry pillar of this DPL show there are important synergies between pro-poor adaptation and REDD+. The case study analyzes the current legal framework on ownership rights on forest lands in Mexico, addresses issues related to benefit-sharing and participation of indigenous peoples and ejidos in REDD+ programs. The study highlights the implications for indigenous peoples and forest communities in terms of potential economic benefits, risks, and liabilities. As programs like REDD+ become more widespread, promoting low-carbon livelihood options that deliver development co-benefits— particularly in the areas of agriculture, forestry and sustainable land management—will be an important benchmark for the success and sustainability of climate mitigation. This calls for participatory approaches that place particular emphasis on robust safeguards and equitable benefit-sharing opportunities. Work from REDD-net reinforces that REDD+ can contribute to human adaptation to climate change at different scales through its support to ecosystem services.

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For example, REDD+ aims to conserve the global ecosystem service of carbon sequestration and may contribute to conserving other services (e.g. water regulation, provision of goods).65

Disaster Risk Reduction and Territorial Development

The design of this project takes into account the lessons learned from 25 years of Bank operations and programs in the area of disaster risk management, as reflected in the flagship study by the Independent Evaluation Group (IEG), entitled ―Hazards of Nature, Risks to Development: An Evaluation of World Bank Assistance for Natural Disasters.‖66 The report recommends that the Bank assist its most vulnerable clients to shift from focusing entirely on disaster response to implementing programs and policies for comprehensively managing disaster risk. Key lessons from the more than 500 projects that were evaluated are described below:  Disaster risk needs to be proactively managed rather than dealt with as an exogenous shock to social and economic development. Disasters must be managed instead of being treated as exogenous shocks to development that cannot be proactively addressed. In addition to the IEG study, it has been documented in a wide array of studies and is the underpinning of the Hyogo Framework for Action, the international agreement adopted by 168 governments.67 The GoM has acknowledged that hazard risk is a manifestation of flawed development plans, and that managing risk is an integral part of sustainable development.  Disaster risk management is most efficient when based on robust risk identification. To support programs that mainstream risk reduction and prepare for hazard events, the GoM is supporting the development of risk atlases in all states. The information available in the country is used to support decision making and land-use planning, and as an input for risk modeling and the design of projects for prevention and risk reduction.  Ex ante risk financing mechanisms can help to limit the diversion of funding from ongoing development priorities to relief and recovery activities. It is essential for faster recovery after a disaster event that a country prepare for how to finance the recovery and reconstruction process. When this is not done, the results have often been expensive debt instruments, diversion of resources from ongoing development programs, and/or slow and insufficient reconstruction financing. Funding mechanisms recognized by this operation will strengthen the country‘s risk financing strategy, thus helping to minimize budget restructuring and ensure continuity in the implementation of development programs, including those financed by the Bank. The immediate availability of liquidity is essential for a government to reestablish critical services as fast as possible in the aftermath of a disaster event. This can help accelerate recovery, minimize business interruption, which is often the highest economic cost associated with disaster events, and secure critical public facilities such as those for health services.

65 REDD+ and Adaptation to Climate Change. UK Department for International Development, 2011. Available on www.redd-net.org 66 ―Hazards of Nature, Risks to Development: An IEG Evaluation of World Bank Assistance for Natural Disasters,‖ World Bank Independent Evaluation Group, 2006. 67 The Hyogo Framework for Action (HFA) was formulated as a comprehensive, action-oriented response to international concern about the growing impacts of disasters on individuals, communities and national development. Based on careful study of trends in disaster risks and on practical experience in disaster risk reduction, and subjected to intensive negotiations during 2004 and early 2005, the HFA was finally adopted by 168 governments at the World Conference on Disaster Reduction, held in Kobe, Hyogo Prefecture, Japan, January18–22, 2005.

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Sustainable Community Forest Management

The design of this project takes into account the lessons learned from Bank operations and programs in the forestry sector worldwide, including over 20 years of Bank operations and sector work in Mexico. The Bank‘s first Mexican operation in the forestry sector was shut down prematurely. The lessons drawn by the Bank included: i) the need for a more decentralized and participatory project management; ii) the importance of integrating adequate environmental and social assessment during project preparation; and iii) the requirement to communicate more effectively with non-governmental organizations, which had criticized the Bank for failing to give a more central role to the indigenous communities that occupied much of the land in the project area. Following a comprehensive series of studies that led to the Forest ESW Report (1995), a new innovative engagement in the forestry sector included the Community Forestry series which paved the road to innovative approaches including the Environmental Services Project and Biodiversity Endowment Fund, the GEF Indigenous and Community Biodiversity Conservation Project, the Mexico- Mesoamerican Biological Corridor and the new GEF operation under preparation: Fostering Sustainable Competitive Production Chains.

The major keystones in the sector policy supported by the Bank in the last decade are summarized in the successful implementation of the forestry triggers of the Environment SAL and DPL series, including: (i) preparation of a long term plan (Programa Estratégico Forestal 2025); (ii) updating of the regulatory framework (Ley Forestal); (iii) creation of the National Forestry Commission (CONAFOR); (iv) consolidation of the Community Forestry program and restructuring of the three main subsidy programs: Prodefor (native forest sustainable management), Prodeplan (commercial plantations) and Pronare (reforestation); (v) support to forest management certification and best practices; and (vi) introduction of a Payment for Environmental Services program. The current initiative to formalize a forum for civil society participation builds on the consultations for the Community Forestry project and the creation of a Consultative Technical Committee during the design and operation of the Payment for Environmental Services project.

The broad acceptance of the Community Forestry Model indicates that the best approach for REDD+ will be to build on the forest communities’ and ejidos’ organizational and technical capacities to design and implement forest management strategies68. The Community Forestry project gained acceptance through a participatory approach which helped identify the needs of the forest landowners (over 80% ejidos and indigenous communities) and initiate the promotion through local technicians and peer-to- peer exchange (“Seminarios de Comunero a Comunero”) to improve the communities‘ capacities to plan the use of their resources and obtain larger benefits while ensuring long term conservation and improvement of their natural capital. CONAFOR has expanded the use of the Community Forestry model to approach the nearly ten thousand ejidos and communities with forest resources and contribute to the design of their long term communal

68 However, it is acknowledged a below-average performance in the three plantation program of CONAFOR (which is not included in this or any Bank operation). 90

strategies where the different programs should fit in, including: sustainable management, productive chains, commercial plantations, reforestation and restoration, and environmental services (water, biodiversity and carbon). Having the consensus of the assembly around a long-term strategy facilitates the technical and feasibility assessments for each one of the programs and increases the probability of success and sustainability.

There are also some relevant lessons from other international agencies’ activities. The first phase of cooperation between the GoM and the French Agency of Development‘s project (AFD) with JIRA was executed between September 2010 and July 2011 (second phase is going from October 2011-2012). It aimed to implement a pilot project in the watershed of the Ayuquila river with the following activities: (i) REDD+ workshop with local stakeholders, (ii) elaboration of the methodology for a local Monitoring, Reporting and Verification System (MRV) required to access REDD+ financing, (iii) capacity building workshops on forest management, (iv) development of the key components for the systematization of the governance model, and (v) design of the work plan for the forest component of the JIRA general strategy. This first phase led to the hiring and training of additional staff, an integration plan, and management actions for the alignment of forestry and agricultural development policies and public programs. To achieve those objectives, it was necessary to prioritize validation processes of the Plans of Territorial Management in the Priority Micro-watershed and also obtain expert staff to carry out an analysis of land use changes with a scale of 1:50,000 in order to obtain the reference level and deforestation trends in the JIRA‘s municipios.

Throughout this project, JIRA built a Strategy for Sustainable Management of Productive Systems and Natural Resources. This strategy displays actions for adaptation and mitigation of the global climate change, contributing to reduce emissions from deforestation and forest degradation, and improving the life level of rural population and MRV system‘s design.

While working on the project, awareness arose of the need to consolidate the first phase in order to obtain important insights for the capitalization and the replication of this technical and institutional pilot to other watersheds and link the implementation of such project with the national REDD+ strategy.

Therefore, another project was financed by the AFD with the collaboration of the AECID (Spanish Agency of International Cooperation for Development) and funds of the European Union (LAIF) in order to replicate the JIRA model: ―Early REDD+ Actions on priority water sheds‖. The strategic lines of that project are: planning of the territorial management; strengthening of communal, institutional and small landowners‘ capacities; social participation for planning and territorial management; alignment of programs and fundraising; activation of productive economical flows (markets); and Monitoring, Reporting and Verification (MRV). An early output of that project is the formalization of two intermunicipal associations: JISOC (Junta Intermunicipal de Medio Ambiente de Sierra Occidental y Costa) and JIRCO (Junta Intermunicipal de Medio Ambiente para la Gestión Integral de la Cuenca del Río Coahuyana), both in Jalisco. JISOC is finishing its constitutive documents while JIRCO has already done some activities in order to implement REDD+ actions.

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ANNEX 9. Mexico at a glance

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• • Mexico at a glance 10/31/11

Latin Upper Key Development Indicators America middle M exico & Carib. income Age distribution, 2009 (2010) • Male Female

Population, mid-year (millions) 108.5 572 1,002 75-79 Surface area (thousand sq. km) 1,964 20,422 48,659 60-64 Population growth (%) 1.0 1.1 0.9 Urban population (% of total population) 78 79 75 45-49 30-34 GNI (Atlas method, US$ billions) 1,008.0 4,510 14,410 15-19 GNI per capita (Atlas method, US$) 9,290 7,802 5,884 GNI per capita (PPP, international $) 15,010 10,951 9,904 0-4 10 5 0 5 10

GDP growth (%) 5.4 6.0 6.0 percent of total population GDP per capita growth (%) 4.3 4.9 5.1

(most recent estimate, 2003–2010)

Poverty headcount ratio at $1.25 a day (PPP, %) 4 8 .. Under-5 mortality rate (per 1,000) Poverty headcount ratio at $2.00 a day (PPP, %) 8 17 .. Life expectancy at birth (years) 75 73 71 Infant mortality (per 1,000 live births) 15 19 20 60 Child malnutrition (% of children under 5) 3 4 .. 50

40 Adult literacy, male (% of ages 15 and older) 95 92 95 Adult literacy, female (% of ages 15 and older) 91 90 92 30 Gross primary enrollment, male (% of age group) 115 118 111 20

Gross primary enrollment, female (% of age group) 113 114 110 10

0 Access to an improved water source (% of population) 94 93 95 1990 1995 2000 2008 Access to improved sanitation facilities (% of population) 85 79 84 • Mexico • Latin America & the Caribbean

N et A id F lo ws 1980 1990 2000 2008 a

(US$ millions) Net ODA and official aid 55 156 -58 149 Growth of GDP and GDP per capita (%) Top 3 donors (in 2008): United States 9 23 24 103 8 Germany 15 9 15 39 6 European Commission 0 5 4 22 4 2 0 Aid (% of GNI) 0.0 0.1 0.0 0.0 -2 Aid per capita (US$) 1 2 -1 1 -4 -6 -8 Long-Term Economic Trends 1980 1990 2000 2010 -10 95 05

Consumer prices (annual % change) 26.4 26.7 9.5 4.2 GDP implicit deflator (annual % change) 33.4 28.1 12.1 4.4 GDP - GDP per capita Exchange rate (annual average, local per US$) 0.0 2.8 9.5 12.6 - Terms of trade index (2000 = 100) 194 106 100 111 1980–90 1990–2000 2000–10 (average annual growth %) Population, mid-year (millions) 67.6 83.2 98.0 108.5 2.1 1.6 1.0 GDP (US$ millions) 194,851 262,710 581,428 1,034,804 1.1 3.1 2.1 (% of GDP) Agriculture 9.0 7.8 4.2 3.9 0.8 1.5 1.7 Industry 33.6 28.4 28.0 34.3 1.1 3.8 1.3 M anufacturing 22.3 20.8 20.3 18.1 1.5 4.3 1.1 Services 57.4 63.7 67.8 61.7 1.4 2.9 2.5

Household final consumption expenditure 65.1 69.6 67.0 64.8 1.4 2.3 2.9 General gov't final consumption expenditure 10.0 8.4 11.1 11.7 2.4 1.8 1.1 Gross capital formation 27.2 23.1 23.9 25.0 -3.3 4.7 0.4

Exports of goods and services 10.7 18.6 30.9 30.3 7.0 14.6 4.6 Imports of goods and services 13.0 19.7 32.9 31.8 1.0 12.3 4.7 Gross savings 22.0 20.3 20.5 24.2

Note: Figures in italics are for years other than those specified. . .. indicates data are not available. •a. Aid data are for 2008.

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Mexico

Balance of Payments and Trade 2000 2010 Governance indicators, 2000 and 2009 (US$ millions) Total merchandise exports (fob) 166,121 298,473 Total merchandise imports (cif) 174,458 301,482 Voice and accountability Net trade in goods and services -10,660 -3,009 Political stability Current account balance -18,743 -5,632 Regulatory quality as a % of GDP -3.2 -0.5

Rule of law Workers' remittances and compensation of employees (receipts) 7,525 21,914 Control of corruption

Reserves, including gold 35,520 120,277 0 25 50 75 100

D 2009 Country's percentile rank (0-100) Central Government Finance higher values imply better ratings D 2000 (% of GDP) Total revenue (including grants) 18.5 22.7 Source: Kaufmann-Kraay-Mastruzzi, World Bank Tax revenue 9.1 9.6 Programmable expenditure 13.4 20.0 Public Sector Borrowing Requirements n.d. -3.5 Technology and Infrastructure 2000 2008 Budgetary surplus/deficit -1.0 -2.8 Paved roads (% of total) 32.8 38.2 Highest marginal tax rate (%) Fixed line and mobile phone Individual .. 28 subscribers (per 100 people) 27 90 Corporate 35 28 High technology exports (% of manufactured exports) 22.4 19.4 External Debt and Resource Flows Environment (US$ millions) Total debt outstanding and disbursed 150,901 200,081 Agricultural land (% of land area) 55 55 Total debt service 58,509 31,216 Forest area (% of land area) 34.3 33.3 Debt relief (HIPC, M DRI) –– Terrestrial protected areas (% of surface area) .. 8.0

Total debt (% of GDP) 26.0 19.3 Freshwater resources per capita (cu. meters) 4,090 3,846 Total debt service (% of exports) 30.4 9.2 Freshwater withdrawal (billion cubic meters) 78.2 ..

Foreign direct investment (net inflows) 18,110 18,679 CO2 emissions per capita (mt) 4.0 4.5 Portfolio equity (net inflows) 447 4,169 GDP per unit of energy use Composition of total external debt, 2010 (2005 PPP $ per kg of oil equivalent) 8.0 7.6

Energy use per capita (kg of oil equivalent) 1,505 1,750

Short-term, IBRD, 12,462 39,013 World Bank Group portfolio 2000 2010 Other multi- lateral, 8,651 (US$ millions)

Bilateral, 4,542 IBRD Total debt outstanding and disbursed 11,444 12,462 Disbursements 1,748 2,449 Principal repayments 1,330 194 Interest payments 890 113

US$ millions Private, IDA 135,413 Total debt outstanding and disbursed –– Disbursements –– Private Sector Development 2000 2009 Total debt service ––

Time required to start a business (days) – 13 IFC (fiscal year) 2000 2009 Cost to start a business (% of GNI per capita) – 11.7 Total disbursed and outstanding portfolio 1,234 683 Time required to register property (days) – 74 of which IFC own account 723 611 Disbursements for IFC own account 179 132 Ranked as a major constraint to business 2000 2009 Portfolio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own account 66 113 • Anticompetitive or informal practices .. 19.0 • Corruption .. 17.8 M IGA Gross exposure –– Stock market capitalization (% of GDP) 21.5 38.7 New guarantees –– Bank capital to asset ratio (%) 9.6 9.6

Note: Figures in italics are for years other than those specified. 10/31/11 .. indicates data are not available. – indicates observation is not applicable.

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Millennium Development Goals Mexico

With selected targets to achieve between 1990 and 2015 (estimate closest to date shown, +/- 2 years) M exico

Goal 1: halve the rates for extreme poverty and malnutrition 1990 1995 2000 2008 Poverty headcount ratio at $1.25 a day (PPP, % of population) 4.5 7.0 4.8 4.0 Poverty headcount ratio at national poverty line (% of population) 53.5 69.0 53.6 47.4 Share of income or consumption to the poorest qunitile (%) 3.9 4.3 3.9 3.9 Prevalence of malnutrition (% of children under 5) 13.9 .. 6.0 3.4

Goal 2: ensure that children are able to complete primary schooling Primary school enrollment (net, %) 98 98 97 98 Primary completion rate (% of relevant age group) 88 97 100 104 Secondary school enrollment (gross, %) 55 58 73 90 Youth literacy rate (% of people ages 15-24) 95 96 97 98

Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education (%) 97 97 100 102 Women employed in the nonagricultural sector (% of nonagricultural employment) 37 36 37 39 Proportion of seats held by women in national parliament (%) 12 14 18 26

Go al 4: reduce under-5 mo rtality by two -thirds Under-5 mortality rate (per 1,000) 45 37 26 17 Infant mortality rate (per 1,000 live births) 36 31 22 15 M easles immunization (proportion of one-year olds immunized, %) 75 90 96 95

Goal 5: reduce maternal mortality by three-fourths M aternal mortality ratio (modeled estimate, per 100,000 live births) 93 85 90 85 Births attended by skilled health staff (% of total) .. 86 .. 93 Contraceptive prevalence (% of women ages 15-49) .. 67 70 73

Goal 6: halt and begin to reverse the spread of HIV/AIDS and other major diseases Prevalence of HIV (% of population ages 15-49) 0.2 0.3 0.3 0.3 Incidence of (per 100,000 people) 61 44 32 17 Tuberculosis case detection rate (%, all forms) 28 28 58 93

Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improved water source (% of population) 85 88 90 94 Access to improved sanitation facilities (% of population) 66 72 76 85 Forest area (% of total land area) 36.2 .. 34.3 33.3 Terrestrial protected areas (% of surface area) ...... 8.0 CO2 emissions (metric tons per capita) 4.3 3.8 4.0 4.5 GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) 7.0 7.0 8.0 7.6

Goal 8: develop a global partnership for development Telephone mainlines (per 100 people) 6.4 9.7 12.6 19.4 M obile phone subscribers (per 100 people) 0.1 0.8 14.4 70.8 Internet users (per 100 people) 0.0 0.1 5.2 22.2 Personal computers (per 100 people) 0.8 2.6 5.8 14.4

Education indicators (%) immunization (% of 1-year ICT indicators (per 100 people) olds)

125 100 100 t- 90 100 ~ ~ g ~ 80 75 75 70 60 50 50 50 40 25 30 25 0 20 2000 2002 2004 2006 2008 10 rL[~ 0 0 1990 1995 2000 2008 2000 2002 2004 2006 2008

Primary net enrollment ratio Fixed + mobile subscribers Ratio of girls to boys in primary & secondary Mexico Latin America & the Caribbean • --- education • • • Internet users Note: Figures in italics are for years other than those specified. .. indicates data are not available. 10/31/11

95

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