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Project Appraisal Document (PAD) for the Above-Mentioned Project for Your Final Endorsement

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Project Appraisal Document (PAD) for the Above-Mentioned Project for Your Final Endorsement THE WORLD BANK/IFC/M.I.G.A. OFFICE MEMORANDUM DATE: May 12, 2000 TO: Mr. Mohamed El-Ashry, CEO/Chairman, GEF FROM: Lars Vidaeus, GEF Executive Coordinator EXTENSION: 34188 SUBJECT: COSTA RICA: Ecomarkets Project Final GEF CEO Endorsement 1. Please find attached the electronic file of the Project Appraisal Document (PAD) for the above-mentioned project for your final endorsement. 2. The PAD is fully consistent with the objectives and content of the proposal endorsed by Council as part of the December 1999 Work Program. Some changes related to project area targeting and scope have been introduced during final project preparation and appraisal. GEFSEC, STAP, and Council comments received at Work Program entry have also been addressed. The changes introduced and comments addressed are outlined below. Changes in Scope 3. The number of conservation areas to be supported by the GEF funds has been expanded. The three original target conservation areas (Tortuguero, La Amistad- Caribe, and Osa) have been expanded to include additional areas deemed to be rich in biological resources that fall within the Mesoamerican Biological Corridor (MBC), as defined in the 1996 GRUAS Report. The GEF-financed GRUAS Report was prepared by the Ministry of Environment & Energy, together with UNDP, the Central American Commission on Environment and Development (CCAD), the National Institute on Biodiversity (INBio), the Tropical Science Center (CCT) and other national and international environmental organizations to identify priority areas for conservation within the Costa Rican portion of the MBC. 4. The rationale for this change was based on the need to avoid placing unnecessary restrictions on funds provided by the Government of Costa Rica (including the IBRD loan), given that the Government of Costa Rica will finance over 85% of the total annual payments for the Costa Rican program. Simulation models executed during final preparation and appraisal demonstrated that targeting only these three areas would have unnecessarily tied a very large proportion of all conservation funds under the Environmental Service Payment (ESP) program, thus reducing the overall impact of the program and likewise diminishing domestic political support. The expansion of eligible areas for GEF funding will result in a significant increase in the quantity of Mr. M. El-Ashry -2- May 12, 2000 global benefits generated: whereas the GEF Council-approved document was based on a target of incorporating 50,000 hectares of privately owned lands within Tortuguero, La Amistad Caribe and Osa Peninsula Conservation Areas into Costa Rica's ESP program, the final version of the PAD includes the contracting of 50,000 hectares of privately owned lands within Tortuguero, La Amistad Caribe and Osa Peninsula Conservation Areas as well as 50,000 hectares of privately owned lands within other areas identified as priorities in the MBC by the GRUAS Report. 5. With respect to project financing, total costs have decreased from $59.9 million at Work Program stage to $49.2 million currently. As a result, GEF financing of $8.0 million has increased slightly as a share of total project financing, from 13.5% to 16.3%. The reduction in overall project financing of US$10 million is due to a decision to reduce the amount of GoCR financing for non-GRUAS areas. As explained above, this decrease in total project costs is not expected to decrease the quality or quantity of global benefits to be generated through GEF funds, rather the opposite is true (ie, a doubling of original estimates of conservation easements within the MBC is planned). Moreover, it should be noted that the GEF’s share of financing on a per hectare level is unchanged from the WP entry stage; as indicated in Annex 2 of the PAD, GEF resources will be utilized to reimburse FONAFIFO at a rate of US$10/hectare/year for each hectare of land integrated into the ESP program in high biodiversity areas. Comments by GEFSEC 6. Clarification of activities related to the Prototype Carbon Fund (PCF) and Certified Tradable Offsets (CTOs). GEFSEC requested that language in the Project Brief be changed to indicate that: (1) any activities funded by the PCF are included in a separate project; and (2) discussion of CTOs is limited to their potential for supporting the financial sustainability of the ESP program. These changes were introduced at Work Program entry, and Sections B.3, D.1 and F.1 in the final version of the PAD are consistent with the PCF/CTO language approved by Council in December 1999. 7. “Shot-gun approach”. During upstream consultations, the GEF Secretariat expressed some concerns with respect to the lack of targeting of priority areas. ESP selection criteria in GRUAS areas give extra weight to clustering (existence of contiguous ESP parcels), thereby assuring that GEF funds will not be dispersed and have limited conservation impact. The expanded list of eligible areas, selection criteria, and rationale for expansion are found in the PAD (see Annexes 2b, 8b and 8c, and Section D.1, respectively). Maps in the PAD indicate the contiguous nature of GRUAS priority biological corridor areas. Comments by STAP: 8. Implementation of the Mesoamerican Biological Corridor (MBC): As recommended by the STAP Reviewer, the project is working in priority areas of the MBC with regional NGOs and private sector associations which are promoting activities 2 Mr. M. El-Ashry -3- May 12, 2000 compatible with the conservation and sustainable use of biodiversity and which are providing solutions to problems resulting from deforestation and environmental degradation. In particular, institutional strengthening during project implementation will be directed to organizations that provide technical assistance to small landowners for contracting under the ESP program, and, likewise which promote contract compliance under the framework of the ESP program. For details, see sections C.3, C.4 and E.7 as well as Annexes 2, 7a and 7b. 9. Lessons learned: As recommended by the STAP Reviewer, project preparation has supported various assessments of the ESP program (e.g., targeting, impact of program on forest ecosystems; socio-economic impact of program) to derive lessons learned and to strengthen the national program during implementation. In particular, the assessment is examining the application of economic incentives to promote forest conservation in the Arenal Conservation Area and the Cordillera Volcanica Conservation Area. For greater discussion of the lessons learned from the ESP program, see section C.3. 10. Capacity building: As recommended by the STAP Reviewer, capacity building under the project will focus on field-based staff working in the critical biological corridors rather than Government of Costa Rica personnel based in San Jose. Capacity building within non-governmental organizations will focus upon locally based organizations – including NGOs working with explicitly with indigenous communities and women’s organizations – rather than NGOs headquartered in San Jose. During project preparation, discussions and workshops have been carried out with regional SINAC staff as well as locally-based NGOs to discuss the forest conservation program, priority areas for targeting, and priority activities to be financed during project implementation. More details on the project's capacity building activities can be found in sections C.3 and C.4 as well as in Annex 2. Comments by Council: 11. Post-project financial sustainability: The Council members from Germany, France, and the Netherlands raised concerns about the financial sustainability of the ESP program after the end of the project. Various sources of ongoing funding have been identified and the general issue of financial sustainability is discussed in section F.1 of the PAD. 12. Additionality and incremental benefits: The Council member from Switzerland raised the issues of additionality and incremental benefits from the ESP program. Annexes 8b and 8c detail the additional efforts required by private landowners to participate in the ESP program and the ESP selection criteria that target incremental benefits. 13. Market development: The Council member from Germany questioned whether markets were actually being created by the project. This issue has been clarified in section F.1 of the PAD that discusses how the project supports the creation of a market for environmental services in Costa Rica. Briefly, the Costa Rican program is 3 Mr. M. El-Ashry -4- May 12, 2000 applying market mechanisms through (i) identifying environmental services provided by owners of forest ecosystems, including biodiversity conservation and carbon sequestration (whose value is recognized at the global level) as well as hydrological services and scenic beauty (whose value is recognized at the local level); (ii) identifying potential buyers of these services; and (iii) determining the willingness-to- pay for these global and local environmental services. For instance, in the case of hydrological services, discussions have been carried out with private sector renewable energy producers to determine their willingness-to-pay for watershed services (e.g., hydrological stability, reduced O&M expenditures due to reduced upstream sedimentation, etc.) These private sector producers have expressed a willingness-to-pay between $10/hectare/year and $40/hectare/year for areas within their watersheds to maintain these critical services to their multi-million dollar investments in run-of-river hydropower. Presently, six separate watersheds are incorporated
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