Mexico - Aquaculture Development Project

Report No. PIC863 Project Name Mexico-Aquaculture Development Project (@#) Region Latin America and Caribbean Sector Fisheries & Aquaculture Project ID MXPA7726 Borrower Banco Nacional de Comercio Exterior (BANCOMEXT) Implementing Agency Ministry of Environment, Natural Resources, and Fisheries (SEMARNAP) Appraisal Date November 1994 Projected Board Date May 1997 Date of original PID October 1994 Date PID updated April 1997 Background 1 The aquaculture sector in Mexico is small, contributing less than 15t of total fisheries production and less than 1 of agricultural GDP and exports, but it offers significant growth potential with a rich natural resource base and an attractive regulatory framework. Since 1986, the overall body of laws affecting the aquaculture and fisheries sectors has changed significantly. 2 Although these policy developments rationalize the framework for the sector and open up a greater role for market forces, the Government is working to address several remaining issues. First, it is continuing to shift from investing directly in the sector toward regulatory and public good activities. In particular, it is seeking to strengthen the framework for aquatic health and permits for aquaculture activities. Second, the Government is striving to provide key public goods and services necessary for the development of the sector. These should be accessible to the sector's social sector producers (residents of ejidos, cooperatives and communal land groups (mainly indigenous people) and other economically disadvantaged producers) as well as its commercial producers. Third, the government is seeking to carry out the above services and investments using limited fiscal resources combined with cost recovery mechanisms to create a sector that contributes to the country's economic growth. The proposed project has been designed to support Government efforts in all of these areas. 3 As aquaculture develops, it could cause or face various social and environmental problems. A rapidly developing industry could exclude the social sector despite the fact that they are a majority of the sector's producers and own most of the coastal lands suitable for aquaculture. Environmental problems also could emerge with a rapidly growing sector. While the majority of aquaculture production is from inland water bodies, the sector's  greatest potential lies with coastal aquaculture, especially shrimp. If coastal aquaculture is developed without regard for the environment, the coastal ecosystems, wildlife and communities that have traditionally resided in these areas could be negatively affected. The proposed project would aim to improve the policies and procedures for addressing social and environmental concerns related to aquaculture development. Objectives 4 The objective of the proposed project would be to promote sustainable aquaculture development by increasing the productivity of the aquaculture sector within a framework of social consensus and environmental soundness -- thereby contributing to economic growth and poverty alleviation in Mexico. Project activities would focus on poor and low-income aquaculture producers in seven states: Baja California Sur, Tamaulipas, Veracruz, Oaxaca, Chiapas, Sinaloa and Nayarit. However, many project activities, particularly those supported by the public goods and services subcomponent, would benefit aquaculture producers, traders and processors throughout Mexico. Project Description 5 The proposed project has two components. The Regulatory Framework and Public Goods Component would assist the Government in completing and implementing the regulatory framework for the sector, and would provide key public goods to stimulate investments by the productive sector (private and social) investment in the sector. This component includes four subcomponents: (a) The Regulatory Framework Subcomponent would provide support for two programs to assist SEMARNAP in (i) simplifying and improving the procedures for granting aquaculture concessions, and (ii) completing the regulatory framework for aquatic health. (b) The Environment and Coastal Resources Management Subcomponent aims to strengthen the capacity of SEMARNAP at the federal and state levels to address environmental issues related to aquaculture. The project would support: (i) an integrated and participatory coastal resource management pilot; (ii) a coastal inventory and water quality monitoring program; and (iii) improved environmental planning and assessment procedures. (c) The Public Goods and Services would support the provision of key goods and services through support for a Research Fund and a regional diagnostic laboratory network. (d) The Project Coordination and Institutional Strengthening Subcomponent would be geared toward strengthening the capacity of the Aquaculture - 2-  Department to implement the project and address social and environmental concerns. 6 The second main objective of the project is supported by the Social Sector Development Component. This component of the project would: (a) raise the productivity of the assets owned by social sector producers (mainly land and labor) via joint investments in aquaculture parks and hatcheries, as well as other small scale aquaculture activities, and via training and technical assistance; and (b) create a financial framework to facilitate the involvement of social sector producers in aquaculture using well-defined principles of cost recovery and cost sharing. The component is built on a Social Strategy and Indigenous Peoples Development Plan prepared by the Government with Bank assistance, and has two subcomponents: (a) The Social Aquaculture Production Subcomponent would invest in productive infrastructure, and in particular: (i) seven aquaculture parks and hatcheries (one shrimp, three tilapia, one pen shell scallop hatchery and one abalone hatchery, one specific pathogen resistant shrimp hatchery); and (ii) a targeted investment fund for promoting small-scale aquaculture development among economically disadvantaged social sector aquaculture producers. (b) The Institutional Development Subcomponent would support training and technical assistance programs and would provide an innovative financial and institutional framework with the AcuaMexico Fund to assist social sector producers get access to and manage aquaculture investments over time. Cost and Financing 7 Total project cost is estimated at US$58.8 million, including contingencies. The proposed loan would provide US$40 million. The World Bank and the government of Mexico would finance approximately 66% and 16% of project costs, respectively. Beneficiaries would finance approximately 18%. Implementation 8 Overall responsibility for the project lies with SEMARNAP (in particular, the SEMARNAP Project Committee and the Department of Aquaculture). The AcuaMexico Fund would finance with operational support from a management company: (i) the aquaculture parks and abalone and pen shell scallop hatcheries together with social sector investors; (ii) the specific pathogen free shrimp hatchery together with productive sector investors; and (ii) the park investor and management training and monitoring program with assistance from the individual park management teams. Civil society organizations, educational institutions, productive sector actors and public and private research institutions would participate in: (i) the Targeted Investment Fund; (ii) the regional diagnostic - 3-  laboratory network (together with the central aquaculture laboratory); (iii) the aquaculture parks and hatcheries and (iv) the Research Fund. Sustainability 9 This project provides a needed impetus for the GOM to implement critical reforms in the aquaculture sector to make it more fiscally, environmentally, and socially sustainable. The regulatory framework and public goods supported by the project are urgently needed for the Government and productive sector to manage the environmental, public health and disease risks that have undermined aquaculture in other countries in Latin American and Asia. Moreover, the emphasis on raising asset productivity among social sector producers and expanding government capacity in social sector issues contributes toward rural poverty alleviation, without which sustained and equitable growth will not be possible in Mexico. The cost recovery and cost sharing in the delivery of public goods strengthens the fiscal sustainability of the Government's aquaculture policy and promotes an efficient allocation of public and private resources in the sector. The project's strong support for applied research promotes new technology appropriate for the varied aquaculture conditions in Mexico and provides a base for long-term growth. Finally, the project puts into place an institutional framework -- with well- defined roles for the public and private sector and a strengthened government capacity -- that will be needed for addressing the technological, social and environmental issues of an expanding sector. Lessons learned from past operations 10 Although the Bank has relatively limited experience in aquaculture and fisheries development, some lessons can be drawn. First, the sector requires an attractive regulatory and policy framework for successful development. Second, within an appropriate public sector/goods framework, the private sector is capable and interested in aquaculture investments and its role should be fully considered in project design. Third, cost recovery from producers has not always been successful given the high-risk nature of aquaculture investments and the inappropriate use of funds on some projects. Fourth, intensive staff training and technical assistance should be incorporated into project design. Fifth, the land tenure rights of social groups residing in coastal areas should be reflected in project design. All of the above lessons have been taken into consideration and are reflected in the design of this project. The principal lessons from the Bank's limited experience in coastal resources management include the need for significant institutional strengthening, high-level political support (given the complexity of the issues involved), and involvement of only a few institutions (to simplify planning and implementation and avoid interagency rivalry). Pilot interventions have been more successful than large-scale coastal zone management projects. Environmental Aspects -4-  11 The project has a Category A environmental rating as some investments occur in or near environmentally sensitive areas. A sectoral environmental assessment report was prepared and submitted by the Government to the Bank and an environmental management plan was developed which was largely incorporated into the Environment and Coastal Resources Management Subcomponent. The project addresses environmental concerns associated with aquaculture on two levels. On a sectoral level, the environmental and coastal resources management component strengthens the capacity of the federal, state, and local government and resource user groups to manage and evaluate the environmental impact of aquaculture. At the subproject level, as the particular investments were not identified until the appraisal mission, the project supports full environmental assessments for all new constructions (aquaculture parks, pen shell scallop hatchery, SPR hatchery) and the implementation of environmental management plans at each site (including the preparation of an Environmental Best Practices Manual at each site) both of which will be part of the subproject's feasibility studies. A Social Assessment Report was also prepared which became the basis of the Indigenous Peoples Development Plan and Social Aquaculture Development Component. Individual social assessments will also be carried out for the aquaculture parks and hatcheries as part of the individual park feasibility studies. Poverty and Program Objective Categories 12 The project is formally designated in the Program Objective Category as Poverty Alleviation and is classified as a Program of Targeted Intervention. The investments supported under the targeted investment fund (10w of total costs) would be specifically targeted toward economically disadvantaged social sector producers. In addition, the initial investors in the aquaculture parks, abalone hatchery and pen shell scallop hatchery (44w of total costs) would mainly be from the social sector. As a result, it is expected that at least 90- of the project's beneficiaries would be low-income producers. Participatory Approach 13 In December 1994 and January 1995, project proposals were presented in a series of workshops with resource-poor producer groups in the states of Nayarit, Oaxaca, and Veracruz. It was also discussed formally and informally with members of NGO groups, e.g., Red de Pescadores Riberenos, Consejo Directivo Pesquero del Literal Oaxaqueno, Cooperative Tepepan, the Friedrich Ebert Stiftung, Ducks Unlimited, and Greenpeace. Beneficiary and NGO involvement will be promoted in project implementation by the aquaculture parks, the participatory exercises for the integrated coastal resource management pilot, and the pilot targeted investment program. Benefits 14 About 7,800 social sector aquaculturalists and their families would be the primary direct beneficiaries of the project. About 300 social sector producers would benefit from the aquaculture parks - 5 -  and hatcheries, while approximately 7,500 poor producers would benefit from the targeted investment fund. In the case of the aquacutlure parks, the project would provide social sector producers with an opportunity to participate, as investors and without direct subsidies, in commercial aquaculture. In the case of the targeted investment fund, economically disadvantaged social sector producers would expand their involvement in small-scale aquaculture with investment and technical assistance. 15 The project would also benefit directly all aquaculture producers via: (i) investments in key public goods and the regulatory framework (research fund, regional diagnostic laboratories, aquatic health regulations and aquaculture permitting), which would increase the productivity of aquaculture, expand the sector's access to export markets and reduce the risk of disease epidemics; and (ii) the environmental and coastal resources subcomponent, which would increase the capacity of the federal and local governments as well as local interested actors to address environmental issues associated with aquaculture. 16 The comprehensive ERR/NPV for the seven aquaculture parks and hatcheries, the SPR shrimp hatchery is 35%. It reflects 83% of project costs (Aquaculture parks and hatcheries, AcuaMexico management contract, training and monitoring programs, the permitting study, the environmental and coastal resources management subcomponent, the Research Fund, and the regional diagnostic laboratory network). Exchange rate fluctuations have a minimal impact on economic viability, as the benefit of higher output prices is offset by the higher input prices. A 10% decrease in production and price levels would reduce the comprehensive ERR to 28% and 27% respectively. Risks 17 The project is an innovative operation that aims to tackle important social, technical and environmental issues in a difficult sector. As such, there are risks related to project design, the overall macro situation in Mexico and the project's institutional demands. However, project design has been modified to take these into account and to provide the World Bank and the Government with the opportunity to respond quickly and flexibly to any issues should they arise. 18 The proposed project poses several risks: (a) Project Design Risks: (i) social sector investors may lack the capital, technical and managerial resources to acquire and manage a controlling share of the park and hatchery corporations; (ii) a disease epidemic could wipe out an aquaculture park, particularly the shrimp farms; (iii) social and environmental problems could undermine the effectiveness of and support for the AcuaMexico subprojects; and (iv) the ability of the AcuaMexico Fund not to become a drain on the government budget is uncertain as it calls for the creation of a new Government Fund and its financial health depends upon the successful privatization of its - 6 -  investments. (b) Macro Economic Risks: (i) the economic crisis coupled with past World Bank experience in Mexico suggest that the project may encounter problems in receiving sufficient counterpart funds; and (ii) high real interest rates for the operating costs may make the parks financially not viable. (c) Institutional Risk: the limited management capacity of SEMARNAP could undermine its ability to adequately implement/supervise the project. 19 It is not possible to completely eliminate these risks, but their impact on the project has been minimized by the following provisions: (a) Project Design Risks: (i) SEMARNAP will not sell park shares to the private sector until the parks are financially viable -- this will give the social sector investors time to amass the necessary financial resources and will facilitate their access to credit; moreover, if at the time of privatization, the social sector investors do not own at least 51% of the park corporation shares, the difference will be placed in an escrow account to allow the investors additional time to purchase these shares; and finally, SEMARNAP will provide on-the-job and formal training to the social sector park investors in aquaculture and business management practices to assist them develop the necessary skills to manage the park corporations. (ii) The investments in aquatic health, LUCPs, the SPR shrimp hatchery and the diagnostic laboratories provide new and innovative strategies to reduce disease risks that, as yet, have not been applied in other countries; in addition, shrimp park management staff will received specialized training in shrimp disease; also, the shrimp park will have production insurance, which covers disease epidemics; and finally, the density of shrimp farms in Mexico is much lower than in other major shrimp producing countries that have experienced disease epidemics. (iii) The feasibility studies for each park (including social and environmental management plans, if necessary), the park councils, the AcuaMexico Management Company, the park management staff and the social scientist staff of the DGA will help to identify and address social problems that may emerge. Similarly, the potential negative environmental impacts will be identified and controlled by: the feasibility studies and the environmental impact assessments for each park; the agreement with the Government to drop or modify park design, if a management plan is too costly or not effective; and, the overall strengthening of the capacity of federal, state and local government and user groups to address - 7 -  environmental issues related to aquaculture. (iv) The specific legal charter under which AcuaMexico will be created does not allow this particular type of fund to have government staff; consequently, the work of the fund will be carried out by a Management Company which will have a fixed term contract; moreover, the fund's operating rules indicate that investments which are consistently not profitable may be privatized at a loss, which could limit the opportunity for specific investments to drain the fund's resources. (b) Country Specific Risks: (i) The Government and the World Bank can modify project size as necessary. Moreover, the scope of the project has been drastically reduced from the first proposed US$670 million (July 1994), which included 29 aquaculture parks, to US$58.8 million for seven subprojects in order to reflect reasonable projections on the availability of fiscal resources. (ii) The park corporations will not borrow operating capital until 1998 at the earliest, and by that time real interest rates are expected to come down. Moreover, the project will contribute to the AcuaMexico subproject operating costs in years one and two. (c) Institutional Risk: First, SEMARNAP will not be the sole implementor of the project. A Management Company will be contracted to implement the AcuaMexico investments and the monitoring and training activities. Second, the DGA will receive assistance from other areas and agencies of SEMARNAP through the Project Committee and the working groups. Third, the DGA will receive institutional strengthening in project management, as well as in environmental and social issues. Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No.: (202) 458-5454 Fax No.: (202) 522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending May 2, 1997. - 8 -