Mexico - Aquaculture Development Project

Document of The World Bank Report 16476-ME STAFF APPRAISAL REPORT MEXICO AQUACULTURE DEVELOPMENT PR()JECT March28, 1997 Mexico Department and the Sector Leadership Group Latin America and the Caribbean Regional Office  CIJRlRtNCY fQUIVAJ EN 'S Currency UJnit = Mexican Nc 1'eso (N$) IJS$I = N$7.965 (March H,1997- FISCAL YEAR January 1 - I)ecembeC 31 WEIGHTS AND MEASURES I meter (ni) - 3.28 feet (ft F 1 kilometer (km) t= ( 62 mile mn) I hectare (ha) = 10,00(() n2 -- 2 4 7 acres I square kilometer (km2) = 0.38 square milr s (mi2) I CU lia I metric ton (ni ton) = 2,205 poinids ABBREVIATIONS AND ACRONYMS AOI' Annual Operating Plan NAI L'A Northl American Free I'rade AgrLemLnt 1ANCOMFXT Foreign 't'rade 13ank of Mexico (Banco Nacional Ie "('l National Competitive 13idding Comercio Exterior) COPl.ADE State l'lanning Commission \N P Net l'resent Value C'NA National Water Commission (Coomisioii Nac ai'lt dc 1' 1' 1'rotect Implementation Plan Agua) FA Fnvirolnmental Asscssment 1. Post-larvae F .RR Economic RZate of Return P 1'( l IIPA Attoney e(icneral's 01itice lor I nvirominental lProt (Procuradura del Medio Amnbienlte) IDiA (jeneral Directorate lbr Aquaculltuire (Direccion S \ Special AccoUIt (Generale de Acuacultulra) ['IRA [rUst Fund for Agriculture (Iondo de (iaratia v S V(IAR Ministry ol'Agriculture, Livestock and Rural l'omento para la Agr icultLura( Ganaderia v D)evelopmenmt Avicultura) FONAES National f'und tbr Solidarity Enterprises (Eondo SI'lPlSCA Founier Secretari t of I ishelries (Secretaria de Nacional de Empresas de Solidaridad') Pesca) (GiM G1overnment of' Mexico SilD)t'S()I. Ministry ot'Social D)evelopmcnt (Secretaria dce l)esarollo Social) I JACC'I I lazard Analysis Critical Control lointis S \, INAI ' Ministry of Environnment, Natural Resources and l'ishleries (Secretaria de Mcdio Amhbieite, Reciursos Naturales N Plesca) IC13 Lntemnational Competitive I3idding Si li('l Ministry of, Finance (Secretarial de I lacienda y Ciedito P'ublico) ICRM Integrated Coastal Resource Management SO)I: Statement of l;xpenditure I1{N Inlections I lypodennal and I lemotopoictic Necrosis Si1R Specitic Pathogen Resistanit INE National Ecology Institute (Instituto Nacional de Ip l 1 Iargeted Investmiienlt lund Ecologia) l.(iEl`PA General Law on Ecological Fquilibrium and )R 'I'eleiis of' Reterenl(c Ernvironmental Plrotectioni IJJCP Land tJse Capability I'lans Vice President Shahid Javed ]3urki Director Olivier lafourcade Manager Michael 13axter StatY Member Louise Cord Thle followring individuals contributed to the preparation of the Mexic, > Aquaculture I)evelopment Project Messrs [Mines. Louise Cord, Mark Cackler, Rudy van Puvmbroeck Charles di lIeva, Silvia Castro, D)ouglas Olson, Adollo 13rizzi, 'I'eresa Roncal, Rodrigo Chaves, Nonni Riskaer, Auguista Molnar, Stefan Keoberle and Maria Conriia (World Bank). Philippe Vergne, D)onald Robaduie. Kevin Fitzsimmons, Mark llardin. Billie de Walt, Andrew Kaelin and l)onald l.ightner- Lidia R. Vidal, Carlos Wiinaun (Consultants). Peer reviewers were Messrs. /.iWeg, Vaii Santen, anld Ms Scura lProduction assistance was provided by Platricia lyenga and Margarete Ro(Lousaki,  MEXICO AQUACULTURE DEVELOPMENT PROJECT CONTENTS Page No. LOAN AND PROJECT SUMMARY ....................................................i 1. AQUACULTURE IN MEXICO .I. ...... I INTRODUCTION . ........................................ , I AQUACULTURE PRODUCTION AND MARKETING .................................................,, 2 INSTITUTIONAL AND REGULATORY FRAMEWORK ... 3 SOCIAL FRAMEWORK ............................................ 6 ENVIRONMENTAL CHIARACTERISTICS................. 8................,., . 8 LESSONS LEARNED ................................ I 10 RATIONALE FOR WORLD BANK INVOLVEMENT ... .... 11 2. THE PROJECT .1............... , ,, 13 PROJECT GOAL AND PURPOSE ......................... 13 PROJECT DESCRIPTION 13.................. . , .... 3 Regulatory Framework and Public Goods .................................... 13 Social Sector Development Component. ... 18 ENVIRONMENTAL ISSUES.... 2 PROGRAM OF TARGETED INTERVENTIONS . ... 29 PROJECT COSTS AND FINANcING PILAN . .,, .... 29 Project Costs .......... ,, 29 Financing .,,, , 30 Cost Recovery and Cost Sharing ..................................,,.,,,.,,.. 31 PROJECT ORGANIZATION AND MANAGEMFNT ......................................... 32 Project Implementation ...................... 32 Procurement ...... ....... 34 Disbursement . 37 Accounts and Audits . ,, 39 Implementation Monitoring and Evaluation .40 World Bank Supervision and Mid-Term Review .41 PROJECT BENEFITS AND ECONOMIC EVALUATION ............................................,.41 PROJECT RISKS ............,., ., , 44 3. AGREEMENTS AND RECOMMENDATIONS.46 .............................................. 46  LIST OF TEXT TABLES Table I Estimated Project Costs Table 2 Procurement Arrangements Table 3 Thresholds for Procurement Methods and Prior Review Table 4 Estimated Schedule of IBRD Disbursements ANNEXES A Environmental Risks and Management Plan B Project Economic Analysis and Benefits C Project Costs Summary D Flow of Funds E Lessons Learned from Past Experience F Project Logical Framework G List of Documents in the Project File H Glossary of Terms I Aquaculture Production and Marketing in Mexico MAP IBRD No. 26690 Mexico-Aquaculture Development Project  MEXICO AQUACULTURE DEVELOPMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: Banco Nacional de Comercio Exterior (BANCOMEXT) Guarantor: United Mexican States Implementing Ministry of Environment, Natural Resources, and Fisheries Agency: (SEMARNAP) Direct Beneficiaries Approximately 7,800 low-income and poor aquaculture of Physical Project producers and their families Investments: Poverty Category: Program of Targeted Interventions. Approximately 90% of the project's beneficiaries will be marginal producers and their families. See para 2.57. Loan Amount: US$40 million Terms: Standard amortization term, grace period, and interest rate for fixed rate US$ single currency loans with an expected disbursement period of 3-6 years. Commitment Fee: 0.75% on undisbursed loan balances, beginning 60 days after signing, less any waiver Project Cost US$58.8 million (see paras 2.58-2.65) and Financing Plan: Economic Rate 35% (for 83% of project costs: AcuaMexico subprojects, of Return: AcuaMexico Management Contract, Regional Diagnostic Laboratory Network, Research Fund, Environment and Coastal Resources Management Subcomponent, and Park Training and Monitoring Program. See para 2.99 and Annex B. Map: IBRD No. 26690 Staff Appraisal Report No. 13898-ME Report:   MEXICO AQUACULTURE DEVELOPMENT PROJECT 1. AQUACULTURE IN MEXICO INTRODUCTION 1.1 The aquaculture sector in Mexico is small, contributing less than 15% of total fisheries production and less than 1% of agricultural GDP and exports. However, it offers significant growth potential. Mexico's rich natural resource base includes abundant coastal and inland water resources with a wide range of water temperatures and salinities. Added to this base, there are large tracts of coastal lands well suited to aquaculture and unsuitable for agriculture. The aquaculture sector itself has an attractive regulatory and policy framework. Starting with the 1986 revision of the Fisheries Law and culminating with the 1993 Foreign Investment Law, a series of legal and regulatory changes have been designed to facilitate private and foreign investment in aquaculture and increase Mexico's access to international seafood markets (Box 1). These efforts are a good start; however, the Government of Mexico is working to make furthur improvements in the following areas. 1.2 First, the Government of Mexico is modifying its regulatory framework and public goods role to promote private sector-led involvement. In particular, it is seeking to: strengthen the framework for aquatic health, and review the regulatory framework for permits, licenses, and authorizations for aquaculture activities. Second, the Government is striving to provide the key public goods and services (research, laboratory diagnostic facilities, etc.) necessary for development of the sector. These should be accessible to 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. 1.3 Moreover, as aquaculture expands it will face a series of social and environmental challenges. For example, the developing aquaculture industry could exclude the social sector despite the fact that they comprise the majority of the sector's producers and own most of the coastal lands suitable for aquaculture. The recent changes in the regulatory framework are likely to increase private sector access to the resources traditionally held by the social sector. Although social sector producers currently possess an estimated 70-90% of the suitable coastal lands, many lack the capital and technology to fully exploit these areas for aquaculture. Private sector producers may now purchase these lands from social sector producers, which the previous legal framework did not allow, and may also enter into joint investment arrangements with social sector producers more easily (Box 1). But  2 despite the potential for profitable outcomes, a large influx of private sector investments into coastal areas could create tensions for existing communities. Another possible problem may be the difficulty social sector producers have in complying with the requirements for legal licenses and permits for aquaculture. The complexity and costs of the application process might place social sector producers at a disadvantage in gaining legal access to aquaculture resources. 1.4 Another set of problems that could emerge with a rapidly growing aquaculture sector concerns the environment. While the majority of aquaculture production is from inland water bodies, the sector's greatest potential lies with coastal aquaculture, especially for shrimp. If coastal aquaculture is developed without regard for the environment, coastal ecosystems, wildlife and communities that have traditionally resided in these areas could be negatively affected. Therefore it will be necessary to reinforce the environmental institutions created by the law, target the environmental safeguards more specifically to aquaculture, and strengthen the capacity of state and local governments to use environmental tools for resource allocation decisions in coastal areas (para 1.24). 1.5 The sector is poised for growth, but it faces the above issues. Because of their importance, how the Government addresses these challenges could provide useful models and lessons to be applied to similar issues in other areas of natural resource management and agriculture policy. The first chapter in this report describes the aquaculture sector in Mexico in a fuller context, evaluating the principal changes in the relevant regulatory framework and assessing the main environmental and social issues. The chapter concludes with a section on lessons learned by the World Bank and other donors in aquaculture and coastal areas development and a rationale for World Bank support of the Mexico Aquaculture Development Project. AQUACULTURE PRODUCTION AND MARKETING 1.6 Aquaculture is defined as the raising of aquatic species in a controlled environment (Annex H). Aquaculture production in Mexico is characterized by a large, traditional sector that includes reservoir restocking (also known as inland capture fishing) and small pond rural aquaculture, and a small, but rapidly growing, high-yield modern commercial sector (Annex I). 1.7 Aquaculture is a relatively recent activity in Mexico. It has been dominated by the production of freshwater species (tilapia, carp, catfish, charal and trout) in inland water bodies located in Mexico's coastal states. Total aquaculture output represents about 14% of total fisheries production in the country and places Mexico 14th in the world for aquaculture production. The majority of the sector's output is tilapia (46%), followed by oysters (18%), carp (15%), and shrimp (9%). Mexico currently has 65,000-70,000 ha in aquaculture production, of which 16,000 ha are shrimp farms. In the case of shrimp, this represents less than 10% of the estimated total area suitable for shrimp farming. Aquaculture production is concentrated in the 17 Pacific and Gulf coastal states, which account for 80% of total output.  3 1.8 There are factors that constrain the productivity of aquaculture production in Mexico. First, aquaculture is limited by the inadequate technical knowledge of social sector producers, which has led to poor site selection for ponds and difficulties in holding and reproducing juvenile forms, and has encouraged the quasi-exclusion of social sector producers from commercial aquaculture. Second, aquaculture is constrained by disease risks, such as the IHHN virus that reduces growth rates, production and market value as well as other diseases with the potential to cause high losses among the affected populations. Third, the development of aquaculture has been restrained by limited support services, particularly research and diagnostic laboratories. 1.9 Almost all of Mexico's aquaculture production is either marketed nationally (55%- 60%), or consumed directly by the producer (34%-39%); only 6% of the total output is exported. Rural aquaculture production is mainly for on-farm consumption with small surpluses sold in the local community. Restocking production is consumed directly by the producers or sold in local and regional markets. Commercial aquaculture production is directed toward specific urban markets (especially Mexico City, Guadalajara, Monterrey), and the better quality output is exported. Shrimp accounts for about 85% (in value) of total aquaculture exports, and the remainder consists of small amounts of tilapia, oysters, scallops, and abalone. The United States is the destination for most exports. 1.10 There are two sets of constraints to the marketing of aquaculture output. First, many of Mexico's processing plants, which until recently were almost exclusively in the public sector, lack up to date technology, infrastructure, and sanitary conditions. However, the expanded opportunities for private sector investment in production and processing activities under the new regulatory framework, coupled with the current favorable export opportunities, and the Government's promotion program to assist enterprises to meet HACCP (Hazard Analysis Critical Control Points) guidelines -- all provide increased incentives for investments in marketing infrastructure. 1.11 Second, Mexico faces competitive world markets, particularly in the medium term. While export opportunities remain very attractive for shrimp and tilapia over the next two to three years, medium- to long-term market conditions include increasing competition. The tilapia market will face increasing production from Costa Rica, Columbia and Taiwan. Similarly, the attractiveness of the shrimp market will depend on the extent to which China's and India's shrimp production recovers from the recent disease epidemics and the speed at which other competitive producers (e.g., Vietnam and Thailand) are able expand their exports. INSTITUTIONAL AND REGULATORY FRAMEWORK 1.12 In December 1994, the responsibility for policy on the environment, natural resources and fisheries was assigned to the Ministry of Environment, Natural Resources and Fisheries (SEMARNAP). The new Ministry merges the former Ministry of Fisheries (SEPESCA) and several other institutional bodies previously under the control of the Ministries of Agriculture, Livestock and Rural Development (SAGAR) and Social Affairs (SEDESOL). The SEMARNAP has the challenging task of implementing the new  4 regulatory and policy framework for environment, forestry, water, and fisheries. These four sectors are highly intertwined and significantly affect the social fabric of Mexico's rural sector. With respect to aquaculture, this new institutional framework is expected to facilitate access to water for aquaculture and create a more environmentally and socially integrated approach to aquaculture development. 1.13 Since 1986, and especially since 1992, the overall body of laws affecting the aquaculture and fisheries sectors has undergone significant changes (Box 1). The revised regulatory framework is designed to stimulate environmentally sustainable fishery production. With respect to aquaculture, there are three principal elements in the legislation. First, the new framework allows for a greater role for the private sector by: (a) eliminating the exclusive rights of the social sector in the cultivation of most high-value aquaculture species; (b) eliminating restrictions that precluded private sector aquaculturalists from collecting wild shrimp post-larvae (PL) and other juvenile forms (Annex H); and (c) opening up access to ejido lands, which include much of the country's coastal lands suitable for aquaculture, either through direct purchase or joint investments with ejidatarios (Annex H). 1.14 Second, the new framework promotes investment in the sector by: (a) adopting favorable fiscal incentives (reimbursable value added tax (VAT), accelerated depreciation schedule, and reduced profit taxes) for aquaculture investments; (b) facilitating access to key aquaculture inputs (especially imported inputs), and (c) lifting restrictions on levels of foreign investment in the sector. 1.15 Third, the Fisheries Law stresses sustainable fishing by linking permits and licenses to the biological capacity of fisheries resources, and by regulating the areas and the numbers of juvenile forms (PL, fingerlings, offspring, etc.) that may be collected from the wild. The law requires that the Government issue: (a) authorizations to collect wild juvenile forms; (b) licenses for commercial fishing (5-20 years) and aquaculture (5-50 years); and (c) permits for commercial fishing, which provide the same rights as licenses but have simpler processing requirements (technical studies are not required), and are for a shorter period of time (1-4 years). Authorizations to collect wild juvenile forms are granted by number and area, while permits and licenses are granted by area, vessel, and in some cases, by fishing unit effort or aquaculture unit effort.  5 Box 1. Regulatory Framework for Fisheries and Aquaculture The principal changes in the regulatory framework affecting aquaculture began in 1986 with the Federal Fisheries Law and cumulated in the 1993 Foreign Investment Law. The principal changes are summarized below (see paras 1 .24-1.25.) for changes in environmental regulatory framework): 1986 Fisheries Law facilitated private sector investment in aquaculture by creating a mechanism for private sector investors to enter into business agreements with cooperatives to develop shrimp farms. 1992 Fisheries Law sought to: promote private investment in aquaculture, by lifting restrictions that permitted only the social sector to cultivate and process many high-value species (e.g., shrimp, oysters, clams, lobster, abalone), thereby facilitating flows of private capital into the sector. Similarly, the natural breeding grounds of shrimp post- larvae, which previously had been exclusively reserved for the social sector, were opened to private producers, and provide greater investment security, by extending the maximum aquaculture concession from 20 years to 50 and facilitating the transfer and renewal of concessions. The law establishes biological and economic criteria as the basis to grant concessions and licenses. Reform of Article 27 of the Constitution (1992) promotes private sector involvement by facilitating joint ventures between private investors and ejidos, mainly in coastal areas, and by allowing ejidos to sell their land to non-ejidatarios. 1992 Water Law sought to: increase the sector's access to water by removing restrictions on the use of water for aquaculture and giving water for aquaculture the same priority as other productive uses of water. It also permits the use of irrigation canals for cage aquaculture and lifts the requirement for licenses for aquaculture farms (cage culture) in the sea or working floating cages in inland bodies of water. Fiscal Reforms (1989) sought to create a favorable environment for investing in the sector. In particular, individuals, cooperatives and firms involved exclusively in aquaculture activities have a 50% exemption of their income tax; reimbursement of the value added tax VAT) when the producer pays duty on imported inputs; and accelerated depreciation or write-offs for up to 62% of the initial infrastructure investment and for up to 89% of the investment in machinery and equipment. North American Free Trade Accord (NAFTA) and Trade Policy (1992) established a zero duty on imports of basic inputs for aquaculture including fingerlings, seeds and post larvae. In addition, tariffs on imports of feed for aquaculture species were reduced. Machinery and specialized equipment for export-oriented aquaculture farms qualify for promotion mechanisms such as the Temporary Imports for Export Program. NAFTA also expands Mexico's access to the United States and Canada. 1993 Foreign Investment Law permits foreign participation up to 100% for investments in aquaculture production, processing and marketing.  6 1.16 The Fisheries Law defines five key areas of responsibility for the Government with respect to aquaculture: (a) promotion of research and extension services, (b) granting of permits, authorizations, and licenses for aquaculture, inland capture fisheries and the collection of wild juvenile forms; (c) promotion of aquaculture parks and hatcheries; (d) promotion of financial support programs; and (e) identification of areas suitable for the development of aquaculture. 1.17 To implement its new regulatory framework, the Government developed the National Program for Fisheries and Aquaculture for 1995-2000. The main elements of the program are to: (a) develop aquaculture parks through the provision of shared infrastructure; (b) develop new technological models for aquaculture, together with research and educational institutions and the private sector, particularly for shrimp cultivation; (c) support aquaculture research mainly through collaborative arrangements with public and private research institutions; (d) develop regional diagnostic laboratories for aquatic diseases; (e) expand land use planning in areas with high aquaculture potential; (f) improve the management and restocking of endangered species, such as abalone; (g) promote aquaculture production in social sector communities; and (h) complete the regulatory framework for aquatic health. 1.18 Although the above regulatory and institutional changes and policy developments rationalize the framework for the sector and open it up to allow for a greater role for market forces, the Government is working to address several remaining issues. First, the Government is continuing to shift from investing directly in the sector toward regulatory and public goods activities. Second, it is working on developing a clearer strategy to promote aquaculture among social sector producers and to effectively deliver public goods and services to this group. Third, the regulatory framework for fishing and aquaculture permits and licenses needs to be further simplified and disseminated to promote increased aquaculture investment, particularly among social sector producers. As discussed in Chapter II, the proposed project has been designed to support Government efforts to deal with these issues. SOCIAL FRAMEWORK 1.19 The main populations around the large reservoirs and coastal areas most suited to aquaculture are predominantly small producers and fishermen, the majority of which are from the social sector. During the land reform program, many ejidos were granted communal lands (mud flats and salt flats) in coastal areas that were unsuitable for agriculture (para. 1.3). Most of the producers in rural/restocking aquaculture have divided their time between aquaculture/fishing and agriculture/livestock activities. They are almost exclusively involved in rural aquaculture (small pond) and restocking aquaculture (inland fishing), with almost no direct involvement in high-yield aquaculture, given the significant capital and technological requirements of this activity. The exception has been high-yield cage culture operations in inland water bodies, which have attracted an increasing number of small rural producers.  7 1.20 Women have an important role in aquaculture. They mainly are involved in the processing and marketing of oysters and shrimp. Women generally do not fish or cultivate aquaculture products directly, with the exception of the collection of wild PLs. Commonly, the main job of women in aquaculture is to remove the oysters from their shell or to peel shrimp, activities that are generally carried out in the house. Women are also often involved in the commercialization of shellfish and finfish in local markets. 1.21 In addition, indigenous people have an important role in aquaculture. While the majority of these people are concentrated in the inland areas at higher elevations, a significant indigenous population is found along the coastal areas or in ejidos and indigenous communities near lakes, rivers, or large, seasonal water bodies, which are important for restocking aquaculture. Furthermore, upland indigenous farmers are increasingly becoming engaged in rural and restocking aquaculture as the population increases and land use intensifies. Currently, rural and restocking aquaculture are mainly a subsistence activity to supplement the traditional indigenous diet. 1.22 The social assessment carried out for the project identifies four sets of potential social issues likely to affect Mexico's aquaculture sector during the next decade. They are: (a) Coastal Aquaculture (i) The recent changes in the regulatory framework affecting aquaculture seek to stimulate investment in the sector, particularly in high- yield modern aquaculture (paras 1.13 and 1.14). However, some social sector producers may not be able to participate in commercial aquaculture due to insufficient capital and technology. (ii) Other coastal residents, not directly involved in aquaculture, could be adversely affected by the development of the sector. They may lose access to coastal resources to which they have traditional use rights. For example, the increased collection of wild PL and associated by-catch of juvenile finfish and crustaceans for aquaculture ponds may be perceived as a problem by many traditional coastal fishermen and aquaculturalists. (iii) The development of coastal aquaculture in some countries has led to the degradation of fragile coastal wetlands and lagoon systems due to poorly planned dredging, road construction, shrimp farm layouts, and discharge systems. This has affected the quality of the local resource base and the livelihoods of local residents leading to tensions between them and aquaculturalists. (iv) Coastal and inland reservoir aquaculture investments have been negatively affected by pesticide run-off or soil erosion caused by agriculturalists, thereby creating tensions between the aquaculturalists and nearby farming communities.  8 (b) Permits and Licenses. The current system for allocating permits and licenses for aquaculture (cage culture) and restocking aquaculture (inland capture fisheries) is complicated, expeiisive and not fully disseminated to all aquaculture producers. These processes may make it difficult for some social sector producers to get permits, even though the Fisheries Law does mandate that producers currently exploiting the fisheries resource (many of whom are from the social sector) have priority in receiving official permits and authorizations. (c) Marketing/Processing. A portion of the small-scale informal marketing system for fish and seafood products may be negatively affected by the modernization of aquaculture and fishing. Large-scale marketing associated with high-yield aquaculture may reduce the market niches traditionally filled by the informal sector. (d) Institutional Framework. In the past, public sector agencies that dealt with fishing and aquaculture were not fully effective in resolving social concerns associated with aquaculture, despite the fact that the social sector's involvement in aquaculture was highly protected by the regulatory framework. Moreover, civil society groups, universities, technical institutes, advocacy groups, and other organizations working in the aquaculture sector were not effectively incorporated into the Government's aquacultural investment and monitoring activities. ENVIRONMENTAL CHARACTERISTICS 1.23 The impact of most of Mexico's aquaculture activities on the environment has so far been negligible (Annex A). Almost all of Mexico's aquaculture production is from inland water bodies and rural ponds, which have very little impact on the environment. Most of the negative impacts of aquaculture in Mexico relate to high-yield commercial shrimp farming, which remains a relatively recent and limited activity. 1.24 Notwithstanding the fact that aquaculture has so far had a limited impact on the environment, the Government has taken several important steps to mitigate potential negative impacts. First, in 1996 it revised the General Law on Ecological Equilibrium and Environmental Protection (LGEEPA), which reinforces the previous regulatory framework and defines with greater clarity the attributes of the three levels of government. In particular this law and associated regulations obligate SEMARNAP to the sustainable management of aquatic flora and fauna and make the National Ecology Institute (INE) responsible for the evaluation of the environmental impact of fishery and aquaculture activities. Second, the Attorney General's Office for the Environmental Protection (PROFEPA) was created in 1988 to ensure compliance with requirements listed in environmental assessment (EA) reports for particular investments and with federal Government regulations. This agency has offices in all states, jurisdiction over most aquaculture operations, and strong legal powers. 1.25 Third, a "Single Window" system was created in 1990 to assist potential investors obtain the various required permits and approvals for an aquaculture project, which may  9 involve up to 20 separate reviews, authorizations or permits from different agencies.' Under the Single Window system, the Subsecretariat of Fisheries is the only point of contact between the project promoter and the Government in the procurement of all permits. Fourth, the Subsecretariat of Fisheries and INE have initiated Land Use Capability Plans (LUCP) for the nation's coastal zones. The LUCPs provide an a priori indication of the preferred use of coastal lands, including aquaculture. An operational LUCP should facilitate the environmental assessment process for aquaculture investments, help regional and local planners avoid the siting of non-aquaculture operations that may harm or be harmed by aquaculture, and if properly designed with local input, avoid social problems related to the expansion of aquaculture. Under the direction of INE, the Subsecretariat has thus far undertaken LUCP baseline studies in six states, including five of the seven states that would be included in the project. 1.26 Despite these significant institutional and policy advances, there are problems that hinder their full and satisfactory implementation: (a) Principal constraints to the effectiveness of the environmental assessment methodology developed under LGEEPA include a large backlog in the evaluation of EA reports by INE's office in Mexico City, insufficient personnel to review EA reports, insufficient field review of projects by INE reviewers, and unclear requirements for data in the EA format. (b) PROFEPA has been preoccupied with monitoring the most serious environmental problems in the country and needs to give more attention to aquaculture development. (c) The Single Window program remains quite lengthy and cumbersome. Evaluation of permit documents is often delayed due to the geographic dispersion of agencies and the need to physically relay the body of documents from one office or region to another. (d) Current LUCP methodology, although identifying mangroves as a forest category, neither distinguishes between the various classes of mangrove forest nor classifies inter-tidal mud flats. Despite the recognized value of mangrove forests and mud flats and the fact that they offer great potential for shrimp aquaculture development, Mexico does not have a comprehensive inventory of either habitat type. This limits the effective monitoring of the impact of aquaculture and other activities on these areas. Moreover, participation needs to be incorporated into the design and upkeep of these plans if they are to be fully implemented. Some of the permits that are required are: an aquaculture concession from SEMARNAP; a water use concession from the National Water Commission or an authorization of agricultural viability from the Agrarian Reform Ministry for all investments done by social sector producers; documentation confirming the status of private sector investors from the Ministry of Foreign Relations; and approval of the environmental assessment from INE.  10 (e) Mexico does not have a coastal management policy or program. Little attention has been given to an integrated approach that would network the responsibilities of the many federal and state agencies charged with governing coastal ecosystems. The many issues and interested actors affected by the transformation of coastal lagoons due to changes in freshwater inflows, overfishing, dredging, and the manipulation of inlets and sedimentation require a participatory approach to resource management. 1.27 In short, despite significant improvements in the regulatory and institutional framework for environmental issues relevant to aquaculture, both the institutions and the instruments designed to monitor the impact of aquaculture on the environment could be strengthened. LESSONS LEARNED 1.28 The World Bank has limited experience in aquaculture and coastal areas development (Annex E). Since the first fishery project in 1964, there have been fewer than fifteen projects with a significant aquaculture component. Similarly, there is little experience with coastal areas development as there are only two ongoing coastal areas development projects, both outside the Latin America region. Nonetheless, some important lessons can be drawn from the World Bank's experience in aquaculture and fisheries development. 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. Producer access to technical assistance and close monitoring are required to ensure cost recovery. 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. Sixth, to avoid risks of disease epidemics with highly vulnerable aquaculture species (such as shrimp), land use planning, early diagnostic services and specific disease free post-larvae production technologies should be incorporated into project design. All of the above lessons have been taken into consideration and are reflected in the design of this project. 1.29 The principal lessons from the World Bank's limited experience in coastal area development projects 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 facilitate planning and implementation and avoid interagency rivalry. Pilot interventions have been more successful than large-scale coastal zone management projects. Previous non-World Bank experience with the development of coastal aquaculture in a number of countries, including Mexico, has demonstrated the need to plan investments in broader planning frameworks developed to reduce conflicts among potentially competing uses and users in coastal zones.  I1 RATIONALE FOR WORLD BANK INVOLVEMENT 1.30 The aquaculture sector is at a critical juncture in Mexico. It faces considerable institutional, environmental, social and technical challenges. Aquaculture, and especially coastal shrimp farms, will continue to expand in Mexico with or without the proposed project. The project, however, provides the World Bank with an opportunity to assist Government put in place some key public goods and services to promote overall sectoral growth and poverty alleviation and to address the potential social and environmental issues while still in their early stages. 1.31 The proposed loan is consistent with the Country Assistance Strategy that was discussed by the Board on December 17, 1996. In particular, the project would support the Strategy's objectives of poverty reduction, enhanced rural productivity, and environmental management as described below. 1.32 Poverty Reduction and Enhancement of Rural Productivity. The World Bank's most successful projects in rural poverty alleviation in Mexico have focused on the provision of (i) basic infrastructure in poor regions (e.g., First and Second Decentralization and Regional Development Projects, (Loans 3310-ME and 3790-ME respectively, and PRODERITH, Loan 2658-ME), and (ii) technical assistance to social sector producers via government extension programs (e.g., PRODERITH, Rainfed Areas Development Project, Loan 3778-ME, Chiapas Agricultural Development Project, Loan 2526-ME). An important challenge faced by the World Bank in its efforts to alleviate rural poverty in Mexico has been to find appropriate instruments for supporting productive, income-generating investments by social sector producers. 1.33 The proposed project would test a variety of mechanisms for involving social sector producers in productive aquaculture investments. For example, the proposed seven aquaculture parks and hatcheries (para. 2.24) would benefit social sector producers, while a targeted investment fund would use a variety of civil society and public sector institutions to target small-scale investment and technical assistance support to social sector aquaculture producers (para. 2.38). Overall, the project would raise the productivity of the resources owned by social sector producers to assist them in accumulating the necessary capital and technical skills to invest in commercial, as well as rural and restocking aquaculture. While the Government may have undertaken some of these production investments without the project, the involvement of the World Bank has helped to ensure that the investments are targeted to the social sector, that they take into account social and environmental risks that may emerge during aquaculture development, and that they incorporate well-defined principles of cost recovery and cost sharing. 1.34 Environmental Management. The project would support the World Bank's objective of environmentally sustainable development by improving the quality of and access to tools for the proper environmental management of aquaculture resources (coastal lands and waters, endangered species, etc.) at the federal, state and local levels (para. 2.8). The project would also support the development of a community-based, integrated coastal resource management pilot to assist the Government in addressing  12 issues related to the use of fragile coastal resources in an integrated and participatory manner. The investments supported by the project will provide useful models to the Government and civil society on how to incorporate social and environmental concerns into productive rural sector investment projects. 1.35 The project will complement other proposed and ongoing World Bank activities in Mexico, which have a focus on promoting environmentally sustainable growth in the rural sector and rural poverty alleviation. For example, it will support the On-Farm and Small- Scale Irrigation Networks Improvement Project's (Loan 3704-ME) efforts to reorient saline lands away from agriculture toward other productive uses such as aquaculture. The environmental component would expand ongoing efforts of the Northern Border Area Environmental Project (Loan 3750-ME) and the Mexico Environment Project (Loan 3461-ME) to strengthen the capacity of state and municipal governments to better monitor environmental issues. Further, the various models to promote productive investment among social sector producers will provide useful examples for the proposed Sustainable Development Project currently under preparation. Finally, the project is in line with the recommendations of the Mexico Rural Poverty Green Cover Study (Report No. 1 5058-ME) which calls for the piloting of matching grant programs to support productive investments by economically disadvantaged producers and for the provision of technical assistance to community groups to improve their production, management and marketing practices.  13 2. THE PROJECT PROJECT GOAL AND PURPOSE 2.1 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 DESCRIPTION 2.2 The proposed project has two components: (a) The Regulatory Framework and Public Goods and Services Component would assist the Government in completing and implementing its regulatory framework and would provide key public goods to stimulate productive sector (private and social) investment in the sector. This component includes four subcomponents: (i) regulatory framework, (ii) environmental and coastal resources management, (iii) public goods and services, and (iv) institutional strengthening and project coordination. (b) The Social Sector Development Component (incorporates the Social Strategy and Indigenous Peoples Development Plan) would support productive investments and training for social sector producers and develop an appropriate institutional framework that creates a more level playing field for social sector participation in aquaculture. This component includes two subcomponents: (i) social aquaculture production, and (ii) institutional development. 2.3 Project activities would focus on seven states Baja California Sur, Tamaulipas, Veracruz, Oaxaca, Chiapas, Sinaloa, and Nayarit, although many project activities, particularly those supported by the regulatory framework and public goods component, would benefit aquaculture producers, traders and processors throughout Mexico. Regulatory Framework and Public Goods Component (US$13.0 million, 25% of base costs) 2.4 The regulatory framework and public goods component assists the Government in providing a proper regulatory framework and key public goods and services.  14 Regulatory Framework Subcomponent (US$0.8 million, 1% of base costs) 2.5 This subcomponent would provide support for two programs to assist SEMARNAP in: (a) simplifying and improving the procedures for granting aquaculture concessions, and (b) completing the regulatory framework for aquatic health. Aquaculture Permitting Study and Registry System (US$0.5 million, 1% of base costs) 2.6 The regulatory framework to authorize aquaculture concessions and permits needs to be further simplified and improved to facilitate investments in aquaculture. The project would provide technical assistance, workshops and computer equipment to develop: (a) new procedures for aquaculture permitting (that would be published in Mexico's Diario Oficial), (b) a dissemination and training program to explain the new procedures to SEMARNAP's state delegations and to social sector producers; and (c) an on-line expert system and permit registry for the state SEMARNAP delegations to maintain up-to-date information on permit holders and the status of permit requests. A detailed description of the study and registry system as well as the terms of reference for the technical assistance contract to carry-out the program are presented in Annexes A. 0 and A. I of SEMARNAP's Project Implementation Plan (PIP). Aquaculture Regulations Program (US$0.3 million, 0.5% of base costs) 2.7 To complete the regulatory framework, principally in the area of aquatic health, the project would finance the development and publication of six new aquatic health regulations. The project would support: (a) technical assistance to develop the regulations, (b) their publication and translation into French and English, as required by NAFTA; and (c) seminars for aquatic health staff with their counterparts in the U.S. and Canada to ensure the consistency of the regulations within NAFTA. Annex A. 2 of the PIP contains a detailed description of the proposed regulations. Environment and Coastal Resources Management Subcomponent (US$5.1 million, 10% of base costs) 2.8 The overall objective of the environment and coastal resources management subcomponent is to create a framework for the sustainable development of aquaculture by increasing the capacity of the federal, state and local government, as well as civil society groups to monitor and manage the natural resources affected by aquaculture production. In particular, the proposed project aims to: (a) develop instruments for planning aquaculture development and monitoring its impact on the environment; (b) increase the participation of community groups, the productive sector, and civil society in the design and use of tools for environmental decision-making; and (c) promote an integrated approach to the management of coastal resources. To meet the objectives of the subcomponent, the project would support: (a) an integrated and participatory coastal resource management pilot; (b) coastal wetlands inventories and regular water quality  15 monitoring; and (c) improved environmental planning and review processes. Specific environmental issues related to physical project investments will be addressed in the feasibility studies and environmental assessments scheduled for each investment subproject (para. 2.3 5). Integrated Coastal Resource Management Pilot (US$2.7 million, 5% of base costs) 2.9 The integrated coastal resource management (ICRM) pilot in Lagoon Tamiahua, Veracruz would assist the Government in developing a national ICRM policy by demonstrating practical, participatory methods for managing and resolving conflicts over coastal resources (para. 1.22). In particular, the project would: (a) provide technical assistance, workshops and training to prepare and formally adopt an ICRM plan for the Lagoon Tamiahua; (b) finance matching grants to communities and user groups to test ICRM policies and techniques during the development of the plan and to implement priority elements of the ICRM plan once it is formally adopted; (c) provide equipment and technical assistance to develop and disseminate tested tools (lagoon models and lagoon ecological histories) for managing lagoons and their associated ecosystems; (d) provide sustained public education and dissemination programs to create awareness and interest in coastal resource management issues and the new management initiatives; and (e) carry-out regular water quality monitoring of the lagoon. The ICRM pilot will be carried-out with a single technical assistance contract that will include the provision of equipment, goods and the matching grant fund. The Terms of Reference for the technical assistance contract are included in Annex B. I of the PIP. Monitoring of Coastal Wetlands and Water Quality (US$1.8 million, 4% of base costs) 2.10 To identify the impact of aquaculture on the management and quality of coastal resources, the project would support a baseline inventory and repeated monitoring to develop the needed quantitative and descriptive databases of critical coastal wetlands and lagoon water quality. 2.11 The coastal wetlands program would inventory wetlands in Sinaloa, Nayarit, Tamaulipas, Veracruz and Chiapas, as these states have the largest mangrove forests. The inventory would produce photographs, transparencies, atlases, digitized information, and maps. The project would cover the costs of the necessary ground truthing and the production of the final information products (procurement and processing of images,  16 publication, and technical assistance) for each state. The inventories would be carried out at the start of the project (Years One and Two) and would be repeated at the end of the project (Years Four and Five). 2.12 The coastal water quality program would initiate quarterly assessments, on average, of coastal water quality and would demonstrate the value of monitoring to potential local consumers of such information. Water quality monitoring would be carried out in Sinaloa and Nayarit, the states with the most significant water quality problems, and in Tamaulipas to provide baseline and on-going water quality data in conjunction with the implementation of the San Andres Shrimp Park (para. 2.26). In each of these states, one coastal lagoon would be selected for the program via a two-step participatory process that would take into account the general characteristics and overall productivity of the area. Following an initial review of relevant research to identify problem areas, a state-level workshop would be conducted, in which local environmental agency personnel, aquaculturalists, civil society organizations and other parties interested in environmental quality would identify the targeted lagoon system. The output would include a regional atlas that interprets water quality trends and geographic information system-type database files. Funds would be provided for technical assistance, publications and dissemination costs. Annex B.0 of the PIP describes the inventory and water quality monitoring programs in more detail and Annex B.5 contains the terms of reference for the water quality monitoring contract. Environmental Planning and Assessment (US$0.6 million, 1% of base costs) 2.13 To strengthen the capacity of SEMARNAP to address potential environmental issues related to aquaculture, the project would reinforce two existing planning and assessment programs for aquaculture: the Land Use Capability Program (LUCP) and environmental impact assessments (EAs). 2.14 Land Use Capability Program. The program would develop land use capability plans for Veracruz and Baja California Sur, the only two project states currently lacking LUCP plans. The studies would be carried out in accordance with the methodology approved by [NE and SEMARNAP, and would include public participation in their design and implementation. The input of local business leaders, government, universities, and coastal resource user groups would be sought to define the issues and review the draft LUCP documents, including the policy recommendations. To develop these plans, the project would support: technical assistance, materials, workshops, and LUCP publications for Veracruz and Baja California Sur. The methodology to implement the land use plans and the specific objectives for the plans for Veracruz and Baja California Sur are described in Annexes B.0 and B.2 of the PIP. 2.15 Environmental Impact Assessments. This activity would improve the quality of INE's environmental assessments for aquaculture by developing criteria and guidelines for EA preparation specific to aquaculture with the provision of technical assistance, workshops and materials. Annexes B.0 and B.3 of the PIP explain in more detail the guidelines to be developed.  17 Public Goods and Services Subcomponent (US$4.5 million 9% of base costs) Research Fund (US$1.1 million 2% of base costs) 2.16 To encourage the generation of new technologies in aquaculture, the project would support a regional aquaculture competitive research program giving priority to Chiapas and Oaxaca, states which traditionally have had less access to research support. An operating manual for the research fund is included as Annex C.0 to the PIP. The proposed project would fund incremental recurrent research costs (reactive agents, inputs, materials, small equipment, etc.), but would not fund salaries, administrative costs or large-scale infrastructure costs. Recipient researchers would contribute these costs as cost sharing, which they would itemize in their budget proposals (para. 2.63), which would be annexed to their signed contract with SEMARNAP. Contracting of short-term support staff for up to the duration of the research activity would also be financed. Public and private institutions would be permitted to submit proposals for research funding. Regional Diagnostic Laboratory Network (US$3.4 million, 7% of base costs) 2.17 Mexico is developing a network of diagnostic laboratories to perform laboratory tests, treat diseases, conduct applied research, and carry out training activities. Such a laboratory network could play a significant role in disease prevention and control and the promotion of high-yield aquaculture. The project would equip the regional diagnostic laboratories to stimulate their involvement in aquaculture on the condition that they adopt a cost pricing policy to recover all operation, maintenance and depreciation costs. The network would be comprised of a central reference laboratory and at least two regionally specialized private or public laboratories. The central reference laboratory would: (a) oversee the laboratory network; (b) serve as a reference for diagnostic and analytical tests; (c) develop and perform unusual, diagnostic or analytical tests and/or research; and (d) provide training and technical assistance to the regional laboratories. During the mid-term review the involvement of public and private sector facilities in the network would be assessed as well as the policy requiring full cost recovery for services provided by the regional laboratories. 2.18 The project would finance: diagnostic equipment, a database on aquaculture research case studies, technical literature, publications, and the preparation of industry manuals on disease. In addition to the above, the project would finance travel and training costs for the staff from the regional laboratories to attend courses at the central aquatic laboratory. In exchange for the equipment and training, the regional laboratories would carry out research, prepare manuals, and would offer technical assistance and laboratory testing to productive sector producers with full cost recovery (para. 2.64). Terms of reference for the regional laboratory program are included in Annex D. I to the PIP.  18 Project Coordination and Institutional Strengthening Subcomponent (US$2.6 million, 5% of base costs) 2.19 The objective of this subcomponent is to strengthen the capacity of the SEMARNAP to implement the project and increase its overall effectiveness. This subcomponent would strengthen the General Directorate of Aquaculture (DGA) and the federal delegations in the seven project states. The implementation arrangements for the project are discussed in greater detail below (paras. 2.65 to 2.70) and in Annex E. 1 of the PEP. 2.20 While there will be no project coordination unit to assist the DGA implement and supervise project activities, the project would finance an administrative director, four technical promoters, one monitoring and evaluation expert, one environmental coordinator, two social scientists, and six months of technical assistance to assist with project implementation as needed (project evaluation studies for mid-term review, project monitoring system). These staff could be consultants, contractors, retrained from within the DGA, or re-assigned from other parts of SEMARNAP. In addition, the project would finance computer and communications equipment, furniture and staff travel costs. To strengthen the management and communication skills of the DGA, the project would support staff training courses in management, computer science, English, and social science. The project would also finance purchases of relevant databases, journal subscriptions and textbooks for the Department's library, as well as technical assistance to assist the department in addressing critical areas of concern as they arise. 2.21 As a condition of project effectiveness, SEMARNAP shall have employed and ready to assume their functions an administrator, two social scientists and an environmental specialist all acceptable to the World Bank. Social Sector Development Component (US$38.4 million, 75% of base costs) (incorporates the Social Strategy and Indigenous Peoples Development Plan) 2.22 The social sector development component aims to find successful mechanisms to promote the involvement of social sector producers in aquaculture. It is a pilot strategy, whose implementation will be well monitored. In particular, this component 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 and institutional framework to facilitate and monitor the involvement of social sector producers in aquaculture using well-defined principles of cost recovery and cost sharing. However, if and where the social sector is not competitive in aquaculture, the project provides the mechanisms for increased private sector participation. This component addresses the issues raised in the project's sectoral social assessment (para.  19 1.22) and incorporates the management plan developed in the social strategy and Indigenous Peoples Development Plan (SS/IPDP) prepared by the Government. 2 2.23 Social Strategy and Indigenous Peoples Development Plan. The SS/IPDP aims to: (a) avoid potential sector wide and project related conflicts (para. 1.22); and (b) promote the involvement of social sector producers in the aquaculture sector. To achieve the above objectives, the SS/IPDP included the: (a) provision of social institutional strengthening to the DGA to expand its capacity to address social concerns related to aquaculture development; (b) promotion of beneficiary monitoring systems and training programs around subproject investment sites to assist communities participate in and monitor project activities; (c) carrying-out of feasibility studies before implementing project investments in commercial aquaculture to identify potential social issues associated with the investments and to design a management plan, if necessary; (d) establishment of a targeted investment fund to test mechanisms to provide social sector producers with investment resources, technical assistance and training; and (e) creation of a wild post larvae program to improve the collection and handling of wild post larvae and to reduce conflicts associated with their harvest. The social aquaculture component described below incorporates the above activities, with the exception of the wild post larvae program, where SEMARNAP already had an existing similar program. Social Sector Aquaculture Production Subcomponent (US$32.8 million, 64% of base costs) Aquaculture Parks and Hatcheries (27.2 million, 53% of base costs) 2.24 The project would support investments in aquaculture parks and hatcheries. Aquaculture parks provide potential investors and the Government with many advantages, some of the most important being: lower investment and operating costs due to shared infrastructure; group acquisition of permits, land and inputs; and controlled aquaculture development that lowers disease and environmental risks. The objective of the park investments would be to build environmentally and financially sustainable, commercial aquaculture enterprises in which, after an initial transition period, investors from the social sector would be able to purchase all or a significant portion of the company's assets or sell them to the private sector. In addition, the parks would provide a model on how to properly incorporate social and environmental concerns into modern commercial aquaculture. 2.25 The project would support the creation of four aquaculture park enterprises and three hatcheries, together with interested investors from the social and private sectors (in the case of the specific pathogen resistant shrimp hatchery). This would involve support for feasibility, engineering, and environmental impact studies in accordance with Mexican law, the on-farm and shared infrastructure costs of the parks and hatcheries, as well as the 2 The original SS/IPDP was submitted to the World Bank by the Government on October 20, 1994. It was further developed during the appraisal and post-appraisal missions by a joint World Bank/GOM team.  20 environmental and social management plans, and initial operating costs. The project would also fund training activities for park and hatchery investors to ensure that they have the proper technical and management skills to ultimately assume a significant managerial responsibility (para. 2.44). The institutional, financial and management arrangements for the parks and hatcheries are discussed below with the AcuaMexico Fund (para. 2.47) and in the cost sharing section (para. 2.63). The section below details what the project would finance with respect to the four aquaculture parks and three hatcheries. 2.26 The construction of one shrimp park (San Andres, Tamaulipas), and in particular: (a) the construction of the shared park infrastructure (canals, access roads and bridges, pumping stations, power supply systems, equipment, basic infrastructure, and land purchase costs); (b) the construction of individual park ponds/farms (land purchase costs, nursery and grow-out ponds, intake and outlet structures, basic infrastructure, and equipment); (c) park operating costs for the first two years (park management, technical staff, labor, electricity, fuel, materials, chemicals, crop insurance and maintenance) (80% in 2000 and 50% in 2001) ; (d) technical assistance for studies (feasibility, engineering, environmental assessments); and (e) the implementation of the environmental and social management plans, as necessary. 2.27 The construction of three tilapia parks (Vicente Guerrero, Tamaulipas; El Portillo, Chiapas; and Cerro de Oro, Oaxaca). In particular, the project would support: (a) docks, boats and cage installations; (b) operating costs for two years (labor, materials and inputs) (80% in 2000 and 50% in 2001); (c) technical assistance for studies (engineering, social, environmental and feasibility); and (d) the implementation of the environmental and social management plans, as necessary. 2.28 Specific Pathogen-Resistant Shrimp Hatchery. One of the critical factors facing shrimp farming in Mexico is the spread of infectious diseases (para. 1.8). Infected PLs are one of the main sources of transmission of shrimp disease. The use of specific pathogen- resistant (SPR) broodstock in the production of shrimp PLs helps to ensure that PLs are resistant to certain diseases. The main difference between a SPR and non-SPR hatchery is the technology and protocol used to manage the laboratory. An SPR population is developed through exposing animals to specific pathogens. The progeny of the surviving animals are then used as broodstock. Great care is used to construct SPR hatcheries in isolated areas to reduce possibilities of contamination from other activities. There are several successful SPR hatcheries in the United States However, importing SPR PLs is not a desirable option, as the international market for this commodity is very thin and unstable, and international trade in PLs, even SPR PLs, provides a way for disease to spread. 2.29 The project will support the construction of one SPR hatchery to produce SPR PLs, nauplii and broodstock to accelerate the introduction of this new technology in Mexico. The Government's involvement in the hatchery will be limited in time and resources. The investment will be undertaken jointly with the productive sector and privatized within one year after it is operational. During the first year, the disease resistant broodstock will be developed and there will be a training program in the SPR protocol and  21 a testing program to ensure the disease resistance of the SPR Pis. The testing program will be done with a laboratory with an international reputation specialized in shrimp pathology and the SPR technology. The objective of this investment is for the Government to serve as a catalyst to ensure the rapid introduction and adaptation of this technology to Mexico's shrimp industry. The SPR hatchery would be constructed using a turnkey contract which would include the: (a) civil engineering to construct the SPR hatchery and broodstock facilities (indoor maturation tanks, feed storage areas, seawater well, etc.), (b) technical assistance for feasibility, engineering and environmental studies; (c) equipment; (d) a technology fee; (e) contracts with shrimp pathology laboratories to provide technical assistance, training and testing services); and (f) the implementation of the environmental management plan, if necessary. In addition, the project would cover a maximum of 51% of the 1999 operating costs. 2.30 The rehabilitation of one abalone hatchery (Punta Eugenia, Baja California Sur) and in particular: (a) investment costs to rehabilitate an abalone hatchery (pumps, blowers, tanks basic infrastructure, vehicles, etc.); (b) technical assistance for engineering and feasibility studies; (c) partial operating costs for the first two years3; and (d) the implementation of the environmental and social management plans, if necessary. 2.31 The construction of one pen shell scallop hatchery in Sinaloa. The hatchery would restock designated areas for seeding of pen shell scallops that would be off-limits for exploitation. The restocking program would benefit the entire Pacific coast. There is no other pen shell scallop hatchery in Mexico and supply has decreased due to over- exploitation. The project would support technical assistance for engineering, environmental and feasibility studies, land purchase costs, civil works, equipment, boats, and the implementation of the environmental and social management plans, as necessary. 2.32 The four parks and three hatcheries were selected from among 29 potential park sites proposed by the seven state task forces and reviewed during appraisal by a joint World Bank/Government working group. The final investment subprojects parks were selected according to technical, economic, environmental and social (level of organization, interest of local community, and general income level of local communities) criteria. Prefeasibility technical and environmental studies were carried out during preparation for each site. 2.33 Feasibility Studies. Feasibility studies will be prepared for each park and hatchery. Terms of reference for the San Andres Shrimp Park and the SPR hatchery are included in Annexes F. 1. and F.2. to the PIP. The feasibility studies for the other AcuaMexico investments will be carried out using similarly designed terms of reference as for the San Andres park. The feasibility studies will consider technical, basic engineering (general 3 The 1992 Fisheries Law requires that abalone producers who are almost exclusively social sector producers in isolated coastal communities, restock this specie. However, there is no functioning abalone hatchery in Mexico to assist producers comply with the law and imports are difficult to obtain as the international market for abalone spat is very thin  22 construction plans, layout, etc.) economic, financial, institutional, social and environmental aspects to define and detail a project plan that best meets the project's purpose (para. 2.1). The feasibility studies will specifically take into account relevant social and environmental aspects in the evaluation of alternative plans and will include measures necessary to prevent and address any negative environmental or social impacts identified during the planning process. 2.34 Creation of Limited Liability Corporations. Concurrent with the preparation of the feasibility studies, the Management Company (para. 2.53) responsible for overseeing the implementation of the parks and hatcheries will assist project beneficiaries in forming limited liability corporations to operate the parks and hatcheries. This will involve the preparation and registration of Articles of Incorporation for each park corporation, as appropriate. 2.35 The feasibility studies, including the environmental and social management plans (and the Best Practices Manual for the shrimp park) as well as the Articles of Incorporation for each park, would be agreed with the World Bank before the World Bank and SEMARNAP would agree upon the terms of reference for the detailed engineering studies and the Mexican environmental impact assessments. If a subproject was determined to be not feasible from an environmental or other standpoint, the resources for the concerned park could be reassigned toward another suitable park investment. 2.36 Environmental Assessments. Mexican law requires that an environmental impact assessment be carried out after the engineering study is completed. Consequently, prior to the construction of each park and hatchery, environmental impact assessments will be prepared in accordance with GOM regulations. These assessments will take into account environmental aspects and include management and prevention measures where necessary. Terms of reference for the assessments for the San Andres Shrimp Park are included in Annex B.4. of the PIP. As a result of the Mexican environmental impact assessment, the social and environmental management plans developed during the feasibility studies may only be strengthened and may not be weakened. 2.37 Preliminary environmental analysis of the specific subproject investments carried- out during preparation revealed the following potential environmental issues with the shrimp and tilapia parks (no major environmental issues were identified for the hatcheries): (a) Shrimp Park. The shrimp park presents some environmental risks, although they are minimal as it is located on 800 ha of grassland (Annex A). Some of the general environmental problems that may affect the shrimp park are: (a) siting and construction impacts, (b) organic loading in pond discharge; and (c) predator control operations, which may impact aquatic birds. The shrimp park will have a Category A environmental rating. There will be an environmental assessment carried out as a part of the feasibility study (paras. 2.33-2.35), as well as an environmental impact study that will be carried out upon competition of the  23 engineering study (para. 2.36)4. The terms of reference for the feasibility study for the San Andres shrimp park will include the preparation of a management plan and a "Best Practices" Manual in accordance with Mexican law to assist park management make environmentally appropriate decisions. (b) Tilapia Parks. The principal environmental issue with the three tilapia parks is the use of tilapia spp., a non-native but already introduced species, in the cage culture operations located in inland reservoirs (Annex A). However, the introductions will take place in relatively new reservoirs that show little resemblance to natural, freshwater aquatic communities and where tilapia are already present. An additional potential environmental risk with the tilapia parks is increased rates of eutrophication, as excess feed and waste contribute to the organic load of the parent water body. However, this is not expected to be a problem, as the cage culture area is limited in scope. The project will support the introduction of 100 cages at each park. For the three tilapia aquaculture parks, environmental assessments (and management plans if necessary) would be prepared as a part of the feasibility studies prior to initiation of the engineering studies. In addition, Government will carry out a separate environmental impact assessment upon the completion of the engineering study, in accordance with Mexican law. Targeted Investment Fund (US 5.6 million, 11% of base costs) 2.38 The targeted investment fund (TIF) aims to test different mechanisms to promote aquaculture development among social sector producers who lack sufficient land, capital and technical skills to participate in an aquaculture park. The targeted investment fund would concentrate its activities in the states of Nayarit, Chiapas, Oaxaca and Veracruz where there is a larger proportion of economically disadvantaged social sector aquaculture producers compared to other project states. 2.39 In particular, the targeted investment fund would finance: (i) individual or community aquaculture investments (rural ponds, cages, the renovation of coastal shrimp impoundments, wild PL collection and storage centers, etc.); (ii) technical assistance for individuals or communities in preparing management plans, studies and other required documentation for obtaining concessions and permits or for follow-up assistance for an on-going investment project financed by the TIF; and (iii) workshops organized and run by producer groups to transfer experiences and best practices. 2.40 The TIF would be implemented by civil society associations and public sector organizations which have an internal governing body and are able to maintain separate accounting records for the resources of the fund. Interested participants would submit well-defined proposals to the Fisheries Subcommittee of the COPLADE (State Planning Commission) in each state for a pre-selection on a semi-annual basis as indicated in the 4 The subproject environmental and social assessments were not carried out prior to project appraisal because the specific subproject investments were not selected until the appraisal mission.  24 PIP. This pre-selection committee will include at least two representatives from civil society organizations. The final selection of the projects to be funded will be done by a technical committee within SEMARNAP. 2.41 SEMARNAP would assume responsibility for the environmental analysis of the TIF's investments in accordance with Mexican law and the state INE representative would participate in the COPLADE selection committee. The environmental and social impact of the proposed subprojects as well as proposed management activities would be evaluated before the support is authorized. Moreover, the funding proposal would include monthly environmental and socio-economic monitoring indicators for the proposed TIF investment. During the regular supervision and mid-term review missions of the World Bank, the TIF's review processes for environmental and social issues would be reviewed. The implementation and environmental screening arrangements for the TIF are presented in the operating manual in the PIP. 2.42 A total of US$5.6 million would be allocated to the TIF. The resources are expected to be split between investment activities; technical assistance; and workshops in accordance with the procedures in the PIP. The resources will be targeted toward economically disadvantaged social sector producers and will be provided on a grant basis, although beneficiary cost sharing will be required for the investment project in the form of labor, land, local materials, and cash (approximately 25% of investment costs). The maximum cost of each contract is US$50,000 and the average would be US$40,000. An estimated 150 proposals would be supported by the project. The proposals will contain a detailed budget for expenditures which will be annexed to the signed contract with SEMARNAP. Institutional Development Subcomponent (US$5.6 million, 11% of base costs) 2.43 A principal objective of the project is to remove key constraints that have made it difficult for social sector producers to get involved in aquaculture. A critical constraint for these producers has been a lack of financial resources, technological skills and management know-how. The project 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. Training and Monitoring (US$1.4 million, 3% of base costs) 2.44 Park Investor Training. To provide the park investors with the necessary technical and management skills, the project would fund workshops, long-term formal training scholarships, park councils and foras. The objective is to develop the capacity among community investors to play a significant role in park management, especially once the Government privatizes its share in the parks. The project would support a fund for scholarships to provide formal management and technical training to park investors and their families. Candidates would have to be nominated by their respective communities. Following the completion of their training, the recipients would be required to work at the  25 park for a time equal to the time spent in training, or to pay back to the Fund the cost of the training. An operations manual for the scholarship fund is presented in Annex H. 1. to the PIP. The project would also finance bi-annual workshops for each aquaculture park to train the park investors in selected management and technical topics. 2.45 To assist the park investors in gaining experience in park management, the project would support the creation of a five-member park council in each project-supported park. The council members would: participate in management decisions (review procurement and audit documents); serve as a liaison between the park investors and management and between outside actors and the parks, and monitor social sector ownership in the parks. To establish and support the councils, the project would finance technical assistance to set up the park councils and identify their work program, and small stipends for council members (US$250/year). The park council members, together with the AcuaMexico Management Company, would organize bi-annual foras for all park participants to discuss the overall direction of the park. Interested outside participants may be invited to the fora to discuss their concerns about the park. Annex H.O. to the PIP, describes the operation of the park councils, park fora, and park workshops. 2.46 Park Management Training. The project would also train the management staff of each park. To ensure that the parks are well managed during the critical start-up years, the project would provide an intensive course of training and internships for the park managers (one per park), farm managers (three to five per park), and technicians (ten per park). The project would finance course fees, per diem, travel costs as well as a training coordinator, printing of manuals, classrooms, dormitories, and teaching ponds. The park management training arrangements are also summarized in Annex H.0 of the PIP. AcuaMexico Fund (US$4.2 million, 8% of base costs) 2.47 The AcuaMexico Fund, would be created to carry out the investments in the aquaculture parks and hatcheries. The AcuaMexico Fund would also finance the training and monitoring activities for park managers and investors. The AcuaMexico Fund would support direct investments in aquaculture by: (a) promoting a high level of social sector participation in economically viable, commercial aquaculture enterprises (e.g., the aquaculture parks); (b) promoting the introduction of new technology into the commercial aquaculture sector (e.g., the SPR hatchery); and (c) creating an institutional and financial framework that will secure the privatization of government investments in high-yield productive aquaculture. 2.48 The AcuaMexico Fund will be created by SHCP as a mandate fund. BANCOMEXT would be the mandate holder and would have the responsibility of managing the Fund's finances and ensuring that its resources are spent in accordance with the objectives of the Mandate. SHCP would transfer the resources to BANCOMEXT,  26 however, because the Fund would be sectoralized under SEMARNAP (SHCP cannot directly support federal investments in aquaculture), the resource flows to the AcuaMexico Fund would be included in SEMARNAP's regular investment budget. 2.49 The AcuaMexico Fund, together with resources from the productive sector (social sector and private investors), would finance investment and operating costs for the seven aquaculture park and hatchery corporations. These seven investments will be referred to as the AcuaMexico subprojects. Under the terms of the SHCP mandate, a Mandate Committee would be responsible for the overall management of the resources of the AcuaMexico Fund and would provide appropriate instructions to BANCOMEXT. Accordingly, the Mandate Committee would be responsible for the initial operation and eventual privatization of the aquaculture parks (as long as the BANCOMEXT holds the majority of the park corporation's share as the AcuaMexico Fund mandate holder) (para. 2.53). A technical secretariat will support the Mandate Committee in the day to day management and follow-up of project activities. In order to obtain the necessary technical expertise and manpower, the Mandate Committee will obtain, through BANCOMEXT, the services of a management consulting firm experienced in aquaculture management and development, particularly among social sector producers (referred to as the management company). 2.50 The specific responsibilities of the Mandate Committee and the Management Company are briefly described below (paras. 2.51-2.53) and in the Mandate Contract, the AcuaMexico Fund Operating Rules and the terms of reference for the Management Company found in Annexes 1. 1, 1.2, 1.3 of the PIP. AcuaMexico will operate according to the principles, objectives and procedures outlined in the deed, and the content of the deed, operating manual and management contract will not be changed during the life of the project unless agreed with the World Bank. Prior to disbursements for technical assistance for the SEMARNAP subprojects, the deed, operating rules, and Management Contract must be signed by all relevant parties and agreed with the World Bank. 2.51 The Mandate Committee will approve, inter alia: the Annual Operating Plan (including the budgets for the park corporations); the projects to be financed with the Fund's resources; changes to the AcuaMexico Deed and Operating Rules; the selection of the Management Company; and the privatization plans for the AcuaMexico investments. The Mandate Committee would consist of the SEMARNAP Subsecretaries of Fisheries, Planning and Natural Resources, International Affairs and Budget/Accounting Controls; the SHCP Subsecretary for Expenditures; the Federal Environmental Protection Procurator; the Presidents of the National Fisheries Institute (INP) and INE; the Director General of CNA; and the Directors General of FIRA and FONAES. In addition, the committee would have three invited members: one representative of private commercial aquaculture, one from the social sector and one from the park corporations formed through the Mandate. From time to time, representatives from the seven project state SEMARNAP delegations, civil society organizations, the National Agrarian Development Institute, the National Indigenous Institute (INI), the National Council of Science and Technology (CONACYT) and BANCOMEXT may be invited to attend meetings of the Mandate Committee.  27 2.52 The Management Company would be selected according to competitive bidding and would need to satisfy, inter alia, the following criteria: (a) technical capacity in salt water and inland aquaculture; (b) experience working with indigenous groups and cooperatives; (c) management experience in Mexico; (d) privatization experience in Mexico; (e) experience in the assessment of the environmental and social implications of aquaculture; (f) experience finance and rural credit; and (g) knowledge of world wide aquaculture markets and marketing practices. It is not likely that a single firm will meet all of these criteria, instead a consortium of different firms will most likely be most appropriate. The specific responsibilities of AcuaMexico Management Company would include, inter alia, (a) contracting out the feasibility, engineering and environmental impact studies, according to the conditions stated above (paras. 2.33-2.36); (b) ensuring that the management plans outlined in the feasibility studies are properly carried out prior to and during the construction and implementation of the AcuaMexico investments; (c) finalizing the participants in the park and hatchery investments, based on the results of the above studies; in the case of the shrimp SPR hatchery, it would issue a request for proposals for investors interested in participating; (d) assisting the ejidatarios in obtaining final legal title to their land for the shrimp park; (e) legally establishing the limited liability park and hatchery corporations with the productive sector investors and the preparation and registration of the Articles of Incorporation; (f) assisting the park corporations contract out and supervise the construction of the parks and all procurement; (g) hiring the park management; periodically reviewing the financial statements of the parks as well as monitoring their overall financial performance; and providing technical, administrative and financial backstopping to the park management (as long as the AcuaMexico Fund is the majority shareholder); ensuring that all park management participate in the training program as stipulated in its operating manual; (h) ensuring that all park management participate in the training program as stipulated in its operating manual; (i) ensuring that park councils are established at each park and that a non- voting member is elected from among all the councils to sit on the Mandate Committee; the Management Company staff for the AcuaMexico Fund would also attend the meetings of the park councils and ensure that social concerns raised by the parks are frlly addressed by the park management;  28 (j) overseeing the implementation of the investor training program (e.g., establishing the park councils, the on-the-job training program, bi-annual workshops/corporation, scholarship fund, bi-annual park foras), together with park management and the park councils, to ensure that the social sector investors get the necessary management and technical skills to assume significant management responsibilities for the parks (para. 2.44), and (k) maintaining an information database for each park on basic indicators. 2.53 Privatization arrangements. In the case of the aquaculture parks and abalone and pen shell scallop hatcheries, BANCOMiEXT, as mandate holder would sell the AcuaMexico shares when the parks are financially viable (estimated to be three years after they are operational), while in the case of the SPR hatchery, it would sell its shares after the first year it is operational. The privatization arrangements for each of the AcuaMexico subprojects would be reviewed annually. BANCOMEXT is expected to privatize AcuaMexico's shares in the parks and hatcheries via a public offering and sell its SPR hatchery shares via a strategic privatization (to the investor that contributed 49% of the capital costs). Should after a reasonable period of time, an AcuaMexico investment not be profitable, BANCOMEXT (acting on advice from the Mandate Committee) may privatize the particular investment at a loss, in which case the producers might lose some or all of their capital and labor returns - this risk would be fully explained to the social sector producers at the time their park corporation is created. 2.54 Prior to their privatization, park investors could buy AcuaMexico shares from BANCOMEXT at book value. Also prior to the privatization, the park investors could buy and sell shares among themselves and BANCOMEXT. If at the time of privatization, the social sector investors do not have a minimum 51% of the park corporation shares, BANCOMEXT would place the difference (51% minus the percentage of shares owned by the ejido park investors) into an escrow account. The social sector investors could buy the shares in the escrow account at their market or book value - whichever is less expensive. A portion of the social sector's dividends from its shareholdings could be used to buy shares in this escrow account. While in the escrow account, the Mandate Committee would maintain voting rights over these shares. BANCOMEXT, also acting on instructions from the Mandate Committee, would use its recuperated resources to reinvest in the social and/or high technology sector. BANCOMEXT may not invest AcuaMexico resources in any existing government enterprise or parastatal in which the Government has a financial interest. These privatization arrangements are described in Annexes 1. 1. and 1.2 of the PIP. ENVIRONMENTAL ISSUES 2.55 A primary focus of the project is to promote environmentally sustainable development by strengthening the regulatory and institutional framework and through the promotion of specific assessment and amelioration efforts as needed. The project has a Category A environmental rating, as some investments occur in or near environmentally sensitive areas. A sectoral environmental assessment (SEA) report was prepared and  29 submitted by the Government to the World Bank (Annexes A and G). On a sectoral level, the environmental and coastal resources management subcomponent strengthens the capacity of the federal, state and local government and resource user groups to manage and evaluate the environmental impact of aquaculture (para. 2.8). At the subproject level, the project supports environmental assessments that will be carried out as part of the feasibility studies as well as a Mexican environmental impact study for all new constructions (aquaculture parks, SPR and pen shell scallop hatcheries), and the implementation of the environmental management plans, where necessary (para. 2.37). PROGRAM OF TARGETED INTERVENTIONS 2.56 The investments supported under the targeted investment fund (10% of total costs) would be specifically targeted toward approximately 7,500 social sector aquaculture producers (para 2.38). In addition, the estimated initial 600-800 investors in the aquaculture parks and hatcheries (44% of total costs) would be mainly ejidatarios from the social sector. Ejidatarios comprise 83% of Mexico's subsistence rainfed farmers and on average earn less than half of the farm income of non-ejido producers. It is expected that at least 90% of the project's beneficiaries would be social sector producers. PROJECT COSTS AND FINANCING PLAN Project Costs 2.57 Total project costs are estimated at US$58.8 million, including contingencies (14%), incremental recurrent costs, duties and taxes (Table 1). Baseline costs are estimated at US$51.4 million and contingencies at US$7.4 million. Annual price increases were applied to foreign costs in all categories in US dollar terms at a rate of 2.6%. Annual price contingencies for local costs were calculated using the projected NP inflation rate.5 Physical contingencies were calculated at I0% for civil engineering and 5% for equipment, vehicles, and on-farm investments. Throughout the project, the exchange rate is estimated to adjust for domestic inflation without any additional peso depreciation. The main expenditure categories include civil works, equipment, technical assistance, training, operating costs, a turnkey contract, and grants for the research fund and the TIF. The costs are summarized in the table below. Inflation rates for local costs are 1996 - 28.9%; 1997 - 12.4%; 1998 - 8.1%; 1999 - 5.5%; and 2000 -4.7%  30 Table 1 Estimated Project Costs (US$ million) (US$ Million) % % Total Foreign Base Local Foreign Total Exchange Costs A. Regulatory Framework and Public Goods 1. Regulatory Framework Aquaculture Permitting 0.3 0.3 0.5 53 1 Aquaculture Regulations Program 0.1 0.2 0.3 72 1 Subtotal Regulatory Framework 0.3 0.5 0.8 59 2 2. Environment and Coastal Resources Management Integrated Coastal Resources Management Pilot 0.4 2.3 2.7 85 5 Monitoring of Coastal Wetlands and Water Quality 1.8 - 1.8 - 3 Environmental Planning and Assessment 0.6 - 0.6 - I Subtotal Environment and Coastal Resources Management 2.8 2.3 5.1 45 10 3. Public Goods Research Fund 1.1 - 1.1 - 2 Regional Diagnostic Laboratory Network 0.9 2.5 3.4 73 7 Subtotal Public Goods 2.0 2.5 4.5 55 9 4. Project Coordination and Institutional Strengthening 2.5 0.1 2.6 6 5 Subtotal Regulatory Framework and Public Goods 7.6 5.4 13.0 41 25 B. Social Sector Development 1. Aquaculture Production Parks and Laboratories 24.5 2.6 27.2 10 53 Targeted Investment Fund 5.6 - 5.6 - 11 2 Institutional Development AcuaMexico Fund 0.6 3.6 4.2 85 8 Training and Monitoring 1.3 0.1 1.4 4 3 Subtotal Institutional Strengthening 1.9 2.7 5.6 65 11 Subtotal Social Sector Development 32.0 6.3 38.4 16 75 Total BASELINE COSTS 39.7 11.7 51.4 23 100 Physical Contingencies 1.8 0.2 2.1 12 4 Price Contingencies 4.4 0.9 5.3 17 10 Total PROJECT COSTS 46.0 12.8 58.8 22 114 Numbers do not add up due to rounding Financing 2.58 The World Bank loan of US$40.0 million would have the standard amortization term, grace period, and interest rate for fixed rate US$ single currency loans with an expected disbursement period of 3-6 years. The World Bank and the Government of Mexico would finance approximately 66% and 16% of project costs, respectively. Beneficiaries would finance approximately 18%. 2.59 The loan would not finance vehicles (boats and cars) or land purchases. The loan would finance 100% of all foreign exchange costs and 70% of the domestic currency costs (Annex C). The relatively high share of financing for domestic costs is explained by their high proportion in the overall budget (78% of total costs) and by the project's strong focus on economically disadvantaged social sector producers. The loan would be made to  31 BANCOMEXT as the borrower, which would transfer the loan proceeds to SHCP, which would in turn, transfer them back to BANCOMIEXT (as mandate holder for the AcuaMexico Fund) and SEMARNAP (Annex D). The loan will be guaranteed by the United Mexican States. 2.60 In the past, inadequate counterpart funding has been a principal cause for the slow and partial implementation of World Bank projects in Mexico. During project preparation this issue was discussed fully with Government and the project size was modified to reflect the likely availability of Government counterpart resources, especially in light of the 1995 economic crisis in Mexico. 2.61 Operating Costs. The project includes US$8.6 million of recurrent costs, representing 15% of total project costs. The loan would finance US$4.9 million or 42% of these costs. Operating costs for the parks and the abalone and pen shell scallop hatcheries would be financed 80% by the project in year 2000 and 50% by the project in year 2001. The productive sector investors would finance the remaining operating costs. The project also would finance 51% of the operating costs during the first year of operation of the SPR hatchery (1999). The remainder of the SPR hatchery operating costs in 1999 would be financed by the investors. The project would not finance any operating costs after 1999 for the SPR hatchery, as it is to be privatized after the first year of operation. The park and hatchery operating costs include: park management, technical staff, labor, electricity, fuel, materials, chemicals, crop insurance and maintenance. 2.62 The project also includes US$1.5 million of recurrent costs for the regional diagnostic laboratories which will be entirely financed by the participating laboratories via fees charged on services provided to users. The remaining project operating costs are for maintenance, travel, supplies, and utilities for the DGA for overall project management. These costs would be financed by the loan on a decreasing basis and the balance by the Government. In 1997 and 1998, the loan would finance 90% of the operating costs, 50% in 1999 and 2000, and 10% in 2001 and 2002. Recurrent government salaries are not financed by the project. Cost Recovery and Cost Sharing 2.63 The project involves a high element of cost recovery and cost sharing to ensure the development of a sustainable and efficient aquaculture sector. The provisions for cost sharing include: (a) Beneficiaries of the Research Fund would contribute cost sharing which would include the salaries of researchers and the administrative and infrastructure costs of the research institutions. These costs are estimated to be at least 50% of the total cost of the research grants (para. 2.16). (b) Beneficiaries of the Targeted Investment Fund would provide labor and local materials for the investment subprojects, which are estimated to cover about 25% of the investment costs of the projects financed by the fund (para. 2.38).  32 (c) Beneficiaries of the ICRAMtpilot practical exercises will provide at least 30% in matching contributions (para. 2.9). (d) The AcuaMexico subproject investments would involve both cost sharing and cost recovery. The investors in the aquaculture parks and pen shell scallop and abalone hatchery would have to contribute about 10% of total investments costs, either in the form of land (shrimp park); investment capital (tilapia parks and pen shell scallop hatchery); or the existing hatchery infrastructure (abalone hatchery). The investors in the SPR hatchery would contribute 49% of the investment costs. In addition, the beneficiaries of the parks and hatcheries would contribute operating costs. In the case of the parks and the pen shell scallop and abalone hatcheries, the investors would contribute 20% of the operating costs in year one and 50% in year two. Year one operating costs for the SPR hatchery will be split between the productive sector investors (49%) and the AcuaMexico Fund (51%) (para. 2.61). 2.64 Cost Recovery. SEMARNAP, through BANCOMEXT, would recover its investments in the park corporations and the abalone and pen shell scallop hatcheries through the sale of its assets (para. 2.53). Initially, they would be sold at book value to the original park investors, however, after the park is commercially viable, the shares would be sold to the public at market value. The SPR hatchery would be sold to the productive sector investor at market value after the first year of operation. There would also be cost recovery provisions for the regional diagnostic laboratories, as the latter would recover their operating and investment costs through the fees they will charge users (para. 2.17). The cost sharing and cost recovery arrangements are described in the PIP. PROJECT ORGANIZATION AND MANAGEMENT Project Implementation 2.65 Overall responsibility for the project lies with SEMARNAP. The implementation responsibilities are outlined below and are summarized in the PIP. The supreme decision making authority will be the Project Committee. Among the committee's responsibilities will be the approval of the annual work program, budgets and investment plan, as well as the approval of any modifications to the PIP. The Project Committee would consist of the SEMARNAP Subsecretaries of Fisheries, Planning and Natural Resources, International Affairs and Budget/Accounting Control; the Federal Environmental Protection Procurator, the Presidents of the National Fisheries Institute (INP) and INE; the Director General of CNA; and representatives from the seven state delegations plus other invited guests as warranted. Prior to effectiveness, the SEMARNAP project committee will be functional.  33 2.66 The Project Committee will be assisted by the DGA, which will serve as its technical committee. In particular, the DGA will be responsible for the implementation and supervision of the project, which will include: (a) project planning, including the preparation of the AOP(Annual Operating Plan) and budget; (b) project monitoring and supervision through: (i) the maintenance of a computerized project monitoring system that would monitor: the log frame indicators (Annex F); the detailed impact, implementation and financial monitoring indicators that are included in the PIP; and the specific projects funded by the research fund and the TIF; (ii) the preparation of twice-yearly progress reports for the World Bank; (iii) the preparation and implementation of the mid-term review and the project launch seminar; (iv) assisting the World Bank organize and carry- out twice-yearly supervision missions; (v) assuring the involvement of specialized environmental, social and administrative staff and technical assistance as needed to implement and supervise the project; (vi) overseeing procurement, including the review of all terms of reference for contracts and technical specifications of equipment; and (c) implementation of all project activities, with the exception of the AcuaMexico investment projects and the training and monitoring activities. 2.67 In addition, there would be eight SEMARNAP working groups composed of relevant staff from SEMARNAP and its sectoralized agencies (e.g. CNA, INE, etc.) that would assist the DGA in the implementation of their respective project activities. The working groups would be for: aquaculture permitting, aquaculture regulations, environment, research and technological development, diagnostic laboratory network, AcuaMexico, Targeted Investment Fund, and training and monitoring. 2.68 The AcuaMexico Fund would finance, under the Mandate Committee's guidance and with operational support from the management company: (i) the aquaculture parks and abalone and pen shell scallop hatcheries together with social sector investors; (ii) the SPR shrimp hatchery together with productive sector investors; and (iii) the park investor and management training and monitoring program with assistance from the individual park management. 2.69 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 laboratory network (together with the central aquaculture laboratory); (iii) the aquaculture parks and hatcheries; and (iv) the Research Fund. 2.70 PIP. During negotiations assurances were obtained that the project will be implemented in accordance with the PIP, which will be modified to reflect the changes agreed to during negotiations and submitted to the World Bank prior to the submission of  34 the project to Board. The AOPs for the coming year will be prepared by the DGA, for further review and approval by the World Bank by September 30 of each year. The AOPs will outline each component's objectives for the coming year, the implementation schedule, and the specific human resources and financial allocations required. Adherence to the AOPs would be reviewed annually. An acceptable 1997 AOP will be part of the final PIP. Procurement 2.71 All project components financed under the proposed World Bank loan would be procured in accordance with the Guidelines for Procurement under World Bank loans (January 1995, revised January and August 1996) and as further described below. Table 2 below summarizes procurement arrangements. The project would finance civil works, technical assistance, turnkey contracts, grants, equipment (laboratory, computer, office, construction), studies, training, and recurrent costs. Vehicles, including boats and motors, would be procured by the Government and would not be reimbursable against the loan. Standard Bidding Documents agreed by the World Bank and the Government would be used for procurement of goods and works under NCB. 2.72 Civil works would consist of the construction of aquaculture parks, hatcheries and teaching facilities. No international competitive bidding (ICB) is expected due to the size of contracts. NCB procedures satisfactory to the World Bank would be used, although interested foreign bidders would be allowed to participate. Small works valued at less than US$350,000 would be procured on the basis of lump-sum fixed priced contracts awarded on the basis of quotations from at least three qualified domestic contractors, provided they do not exceed an aggregate amount of US$1.5 million. 2.73 Goods. Wherever possible, goods would be packaged into contracts valued at US$350,000 or more to be procured under ICB procedures. Goods to be procured under ICB include the information technology equipment, laboratory equipment, geographic information system equipment and specialized materials. Contracts of goods expected to cost more than US$50,000, but less than US$350,000, would be procured under NCB in an aggregate amount not exceeding US$700,000. Office equipment, furniture and other similar goods expected to cost less than US$50,000 per contract would be awarded on the basis of price quotations from at least three suppliers, provided they do not exceed an aggregate of US$400,000. 2.74 SPR shrimp hatchery. Because of the complexity and importance of integrating design, implementation and startup, the SPR shrimp hatchery would be procured as a turnkey operation according to the ICB procedures.  35 Table 2 Procurement Arrangements (US$ million) Procurement Method International National Category Competitive Competitive Bidding Bidding Other N.B.F. Total A. Civil Works - 17.3 1.5 - 18.8 (I 1.4) (1.1) ~~(12.5) B. SPR Hatchery /a 2.7 - - - 2.7 (1.5) (1.5) C. Goods /b 2.8 0 7 0.4 - 3.9 (2.4) (0.6) (0.3) (3.3) D. Vehicles and boats - - 0.I 0.1 E. Technical Assistance - - 14.3 14.3 (12.2) (12.2) F. Training 0.9 0.9 (0.7) (0.7) G. Grants Research Fund 1.2 - 1.2 (0.6) (0.6) TIF 6.1 6.1 (4.6) (4.6) H. Land - - - 2.2 2.2 I. Recurrent Costs - - 6.9 1.5 8.5 (3.5) (0.1) (3.6) Total 5.5 18.0 31.4 3.8 58.8 (3.8) (12.0) (23.0) (0.1) (40.0) Note: Figures in parenthesis are the respective amounts financed by IBRD \a Turnkey contract \b Equipment, furmiture and publications. 2.75 Consultants, Training, and Studies. The World Bank's "Guidelines on the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency" (August 1981) would govern all consultancies financed under the project. Employment of consultants would be carried out using a standard letter of invitation agreed with the Government and a World Bank-issued standard form of contract. 2.76 Research Fund. Grants for the development of new technologies in aquaculture would be awarded to national research institutions on a competitive basis and would be subject to the signature of a research contract. No contract would exceed the amount of US$50,000. Expenditures would be made against a standard contract between SEMARNAP and the research institution, which specifies the detailed budget breakdown and the work program. Eligibility criteria for the institutions participating in the Research Fund and the standardized contract are in the Research Fund Manual attached to the PIP. 2.77 The Targeted Investment Fund (TIF) would consist of matching grants to communities to test different mechanisms to promote aquaculture development among  36 economically disadvantaged social sector aquaculture producers. The TIEF would finance: (i) individual or community aquaculture investments (rural ponds, cages, the renovation of coastal shrimp impoundments, wild PL collection and storage centers, etc.); (ii) technical assistance for individuals or communities, including assistance to prepare management plans, studies and other required documentation for obtaining concessions and permits; and (iii) workshops organized and run by producer groups to transfer experiences and best practices. Expenditures would be made against a standard contract between the SEMARNAP delegation and the promoter, specifying the detailed budget breakdown and the work program. No contract would exceed the amount of US$50,000. The TIF would be implemented by civil society organizations and qualified public sector groups. Strict eligibility criteria for the private and public promoters, and for the eligible projects, as well as the standardized contract are included in the TIF Manual that is part of the PIP.  37 2.78 Prior Review by the World Bank. Table 3 summarizes the thresholds to be applied: Table 3 Thresholds for Procurement Methods and Prior Review (US$) Category Contract Value Procurement Method Contracts Subject to (Thresholds) Prior Review by World Bank Works < 10,000,000 NCB First 3 < 350,000 Lump-sum contracts None Goods > 350,000 ICB All 50,000 - 350,000 NCB First 3 < 50,000 National shopping None SPR Hatchery > 350,000 Turnkey contract All Consulting Services Firms > 100,000 Selection according to All Consultants Guidelines < 100,000 TORs only Individuals > 50,000 All < 50,000 __ TORs only Grants under the Up to $50,000 National shopping Selection criteria Research Fund Lump-sum contracts only of Research Institutions Grants under the TIF Up to $50,000 National shopping Selection criteria of under contracts with civil society and public civil society and public organizations only organizations I _I * Exemption from prior review does not apply to consultants contracts below the thresholds in cases of: single source selection of firms, assignments of critical nature, and amendments to contracts raising contract value above the thresholds. Disbursement 2.79 All disbursements will be handled by BANCOMEXT. Prior to effectiveness, signed contractual arrangements between BANCOMEXT and the Government, acceptable to the World Bank, will be in place. Disbursements would take place over the six project years (Table 4). The project completion date would be July 1, 2002. The loan closing date would be December 31, 2002.  38 2.80 The loan would be disbursed against eligible project expenditures at the rates of (i) 70% for civil works; (ii) 85% for goods; (iii) 51% for the SPR Hatchery; (iv) 100% for technical assistance, training and studies; (v) 100% for grants for the Research Fund; (vi) 100% for grants under the TIF; (vi) operating costs for parks at 80% in 2000 and 50% in 2001; (vii) operating costs for SPR Hatchery at 51% in 1999; and (viii) incremental recurrent costs on a declining basis, 90% in 1997 and 1998, 50% in 1999 and 2000 and 10% thereafter (Annex C). 2.81 Documentation of Expenditures. Disbursements would be made on the basis of full documentation for all expenditures made under contracts requiring prior review by the World Bank and amendments to contracts raising the value of such contracts above the prior review limits (Table 3). For all other expenditures disbursements would be made against Statements of Expenditures (SOE) for which supporting documents would be maintained by SEMARNAP and would be available to the World Bank for staff review. 2.82 Special Account. The borrower, BANCOMEXT, would establish a Special Account (SA) in the Banco de Mexico with an authorized allocation of US $2.5 million, with an initial deposit of US$ 2.0 million to correspond to estimated project expenditures during the first four to six months of project implementation. The borrower may not use funds from the Special Account for expenditures under disbursement categories with disbursement conditions, until the World Bank has confirmed that the conditions have been met. As a condition of effectiveness, the Borrower and the Guarantor would sign an agreement acceptable to the World Bank for the transfer of the loan proceeds. The SA would be replenished monthly on the Borrower's request (but no less frequently than every three months), or whenever one third of the authorized amount has been withdrawn, whichever occurs first. 2.83 Documentation. The DGA would be responsible for submitting regular replenishment requests with appropriate supporting documents for expenditures under the project. The documents would include: (i) a standard withdrawal application (Form 1903) for the total amount of eligible project expenditures to be replenished into the Special Account with a copy of the monthly bank statement for that account; (ii) the SOE form which will provide the summary of category expenditures including grants to communities; (iii) standard summary sheets (designed for each sub-project and included in the disbursement letter) and supporting documentation for all expenditures above the procurement prior review thresholds; and (iv) a reconciliation statement for the SA. The use of grants by the beneficiaries would be checked through auditing procedures, the monitoring systems and project supervision arrangements.  39 Table 4 Estimated Schedule of IBRD Disbursements (US$ million) World Bank FY FY98 FY99 FY00 FY01 FY02 FY03 Annual 3.1 4.8 5.3 112 12.6 3.0 Cumulative 3.1 7.9 13.2 24.4 37.0 40.0 2.84 Retroactive Financing. There will be retroactive financing for expenditures for goods, training, incremental operating costs and technical assistance related to: the regulatory framework subcomponent; the environment and coastal resources management subcomponent; institutional strengthening and project coordination; and the establishment of the AcuaMexico Fund. To qualify for retroactive financing, the expenditures must be: carried out in accordance with World Bank guidelines; incurred after December 31, 1996; and less than US$4 million. Accounts and Audits 2.85 Project Financial Statement and Financial Reporting. Project financial statements to be prepared by SEMARNAP would include a statement of sources and uses of funds, and a register of project assets or balance sheet where appropriate. The funds flow statement would indicate sources (the World Bank, as well as counterpart financing) and expenditures in accordance with the main project components and disbursement categories. Project financial statements would show actual and pending payments against those budgeted. 2.86 SEMARNAP and BANCOMEXT, operating both in its capacity as borrower and as mandate holder for the AcuaMexico Fund, would maintain separate central accounts with respect to all project expenditures (Annex C). The state delegations of SEMARNAP would also maintain separate accounts for project expenditures incurred by them. All accounts would be subject to SEMARNAP's and BANCOMEXT's internal and external audits: they would adequately reflect expenditures made for the project, in accordance with sound accounting practices agreed with the World Bank. Financial documents in support of disbursement requests would be reviewed by SEMARNAP and BANCOMEXT before submission to the World Bank. 2.87 A certified copy of the project audit (for both SEMARNAP and BANCOMEXT), to be done by independent external auditors acceptable to the World Bank and in accordance with the March 1982 World Bank "Guidelines for Financial Reporting and Auditing of Projects Financed by the World Bank," and in line with the November 1991 audit agreement with SECODAM would be submitted to the World Bank not more than six months after the completion of each Government financial year. The audit report would include a separate opinion by the auditor on disbursements against certified SOEs and the Special Account.  40 Implementation Monitoring and Evaluation 2.88 Implementation Monitoring. The SEMARNAP Project Committee together with the DGA would be responsible for monitoring project implementation. The principal tools they would use are: (a) implementation, impact and financial indicators as presented in the PIP; (b) regular meetings of the Project Committee, the Technical Secretariat and the working committees, (c) regular field visits by DGA staff, (d) the annual operating plan prepared by the DGA, (e) the DGA database on all proposals funded by the Research Fund and the Targeted Investment Fund and (f) regular reports from the management company for the AcuaMexico Fund. 2.89 The DGA would maintain the computerized project monitoring system updated and issue semestrial monitoring reports presenting the various monitoring indicators that would be accessible to the borrower and the World Bank. In addition, the DGA would update the monitoring system every two months to support the internal discussions of the technical secretariat and the working groups. The DGA also would maintain an updated computerized database on each proposal funded under the Targeted Investment Fund and the Research Fund. Similarly, the management company for the AcuaMexico Fund would maintain detailed indicators on financial, technical and social indicators for each of the seven AcuaMexico subprojects. The project would install a computerized system of project monitoring to be maintained by the DGA, which would be operational as a condition of project effectiveness. These monitoring arrangements are described in the PIP. 2.90 The Government would provide the World Bank with a semestrial report within 30 days of the end of each semester. The report to the World Bank would include: (a) the semestrial status report of the financial, physical, and impact indicators; (b) an updated project logframe (Annex F), (c) a summary of key events and activities that occurred within the past six months; and (d) a discussion of any problems or concerns with the project. 2.91 Project Evaluation. External evaluations would be conducted of each project component by a team of external experts prior to the end of the second full year of project implementation, which would be a key input into the mid-term review. In addition, there would be external evaluations of each component in Year Five of the project. The purpose of the evaluations would be to provide input to SEMARNAP regarding problems to be addressed and modifications to be made in operating guidelines and project implementation practices, and to identify progress made and positive experiences that might be generalized beyond the project. Government would also prepare and review with the World Bank, not more than six months after the close of the project, a plan for the future operation of project activities. 2.92 There would also be outside evaluations of activities financed by the AcuaMexico Fund in Years Two and Three in order to analyze the Fund's ability to address the particular needs of the park communities and to incorporate the ejidatarios in management decisions for the particular parks. This evaluation would be carried out by a  41 local group with social sector representation, together with an international firm/university with social science expertise. The seven above-mentioned evaluation studies are discussed in the PIP. World Bank Supervision and Mid-Term Review 2.93 During negotiations, assurances were received that World Bank supervision would take advantage of three important sets of project reports: (a) the annual work plan, prepared by component, which would be prepared by SEMARNAP and discussed and agreed upon with the World Bank September 30 of each year; (b) the semestrial monitoring reports; and (c) prior to the submission of SOEs, SEMARNAP would provide the World Bank information about the subprojects and expenditures contained on the SOE, including sufficient information to allow the determination of project eligibility. There would be World Bank reviews twice a year, which would focus on: (a) the full set of impact and implementation indicators; (b) the technical quality, and economic, social and environmental sustainability of physical investments (parks, SPR hatchery, ICRM pilot practical exercises and Targeted Investment Fund); (c) procurement, disbursements, and audit procedures; (d) management of the AcuaMexico Fund, the Targeted Investment Fund, the practical ICRM exercises, the Research Fund, and the regional diagnostic laboratories; (e) the extent of social sector participation in the park management and ownership; and (f) any other issues that may arise. 2.94 During negotiations, assurances were received that there would be a project mid- term review to analyze the first two years of implementation experience and to confirm the investment program for the remainder of the project. Input to the mid-term review would include: (a) the semestrial monitoring reports; (b) the second year evaluation of each project component; (c) the first independent evaluations of AcuaMexico in project Year Two; (d) and annual workplans for the first two Project Years. The mid-term review would assist SEMARNAP and the participating states and agencies, as well as the World Bank, identify project successes and problems to be addressed and needed modifications to project procedures and investments for the second half of the project. The mid-term project review would be held no later than December 31, 1999, according to terms of reference agreed with the World Bank. Thereafter, SEMARNAP will take all such actions as agreed with the World Bank for the efficient execution of the project and the achievement of its objectives. PROJECT BENEFITS AND ECONOMIC EVALUATION 2.95 Benefits and Beneficiaries. Aquaculture producers, and in particular, social sector producers would be the primary direct beneficiaries of the project. About 300 social sector producers would benefit from the aquaculture parks and hatcheries, while approximately 7,500 economically disadvantaged social sector producers would benefit from the targeted investment fund. In the case of the aquaculture parks, the project would provide social sector producers with an opportunity to participate, as investors and without direct subsidies, in commercial aquaculture. This would be accomplished with the  42 financing structure of the aquaculture parks, and the technical assistance and training to be provided by the AcuaMexico Management Company and the park management. The aquaculture parks and hatcheries would also provide employment for social sector producers and their families (Annex B). 2.96 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. This would provide them with additional income, food and employment opportunities. The institutional strengthening of SEMARNAP and the park councils would also expand the capacity of the Government and its programs to attend to the needs of economically disadvantaged producers. Finally, the aquaculture permitting study would evaluate and facilitate access to aquaculture permits in the current regulatory framework for aquaculture producers, including economically disadvantaged and indigenous producers. 2.97 The project would also benefit directly all aquaculture producers via: (a) investments in key public goods and regulatory framework (Research Fund, diagnostic laboratories, aquatic health regulations, and aquaculture permitting), which would increase the productivity of aquaculture, expand the sector's access to attractive urban and export markets, and reduce the risk of disease epidemics; and, (b) the environmental and coastal resources subcomponent, which would increase the capacity of the federal and local governments as well as local interested actors/beneficiaries to address environmental issues associated with aquaculture. 2.98 Economic Analysis. The economic rate of return (ERR) and the net present value (NPV) are calculated for each AcuaMexico subproject investment and in addition a comprehensive ERR/NPV is prepared for all the investments and the SPR shrimp hatchery (Annex B). The comprehensive ERR/NPV reflects 83% of project costs. In addition to the park and hatchery investments, it includes the costs of the AcuaMexico Management Contract; the training and monitoring program, the regional diagnostic laboratory network, the Research Fund, and the environment and coastal resources management sub- component. The data was collected using 1994 prices. Prices and costs were adjusted to reflect 1995 levels, according to whether or not they are a tradeable or non-tradeable or some combination thereof The analysis assumes constant 1995 prices and expenditures. The market value of all inputs and outputs is assumed to reflect the economic value. The base model uses an average exchange rate of 6.5 NP/IJS$. Sensitivity analysis was carried out to determine the impact of changes in the exchange rate, output prices, and production on the economic viability of the investments. In addition, the impact of possible implementation delays, which would affect production levels in Year One and Year Two of the project were estimated. 2.99 The cumulative base case ERR is 35% (AcuaMexico subprojects and public goods) and the base case ERR is 45% (AcuaMexico projects only). Exchange rate fluctuations have a minimal impact on economic viability, as the benefit of higher output prices is offset by the higher input prices. Given possible medium-term declines in shrimp and tilapia prices, the model estimated the impact of a 10% decline in output prices. The  43 latter would reduce the base case ERR (AcuaMexico projects only) to 35%, while a 33% decline in output prices would drop the base ERR to 12% and cause the NPV to become negative. Also in light of the volatility of aquaculture production, particularly shrimp, the model assessed the impact of changes in production levels on the economic viability of the operations. A 10% decline in production levels for all species brings the base ERR to 37%, while a 39% decline in production brings the base ERR to 12% and causes the NPV to become negative. The model also tests for the impact of production delays during the start-up phase of the investments. A 20% reduction in production in Year One coupled with a 10% reduction in Year Two causes the base ERR to fall to 41%. Finally, a combined scenario was tested involving a 15% devaluation, a 10% fall in output prices and start up delays causing output reductions of 20% and 10% in Years One and Two respectively. This causes the base ERR to drop to 33%. 2.100 Project Sustainability. In the past 15 years, Mexico has undergone two deep macro-economic upheavals. The 1982 debt crisis catalyzed the adoption of significant macro economic reforms in the areas of fiscal policy, financial sector reform, exchange rate policy and trade liberalization. Similarly, the 1995 exchange rate crisis appears that it will deepen many. of the financial reforms. However, sectoral and micro-economic reforms have often lagged behind the macro policy changes, partially explaining the limited response of the economy to the reforms. This project provides a needed impetus for the Government to push forward some critical sector reforms in the aquaculture and fisheries sector, thereby putting in place the framework for a fiscally, environmentally and socially sustainable aquaculture and fisheries sector. 2.101 The regulatory framework and public goods supported by the project provide the Government and the productive sector with the tools to manage the environmental, public health and disease risks that have so undermined the aquaculture sectors in other countries in Latin American and Asia. Moreover, the emphasis placed on finding effective mechanisms to raise the productivity of the assets owned by low-income and poor producers and to expand the capacity of the Government to deal with social sector issues contributes toward rural poverty alleviation, without which sustained and equitable growth will not be possible in Mexico. Similarly, the importance placed on cost recovery and cost sharing in the delivery of public goods in the project strengthens the fiscal sustainability of the Government's aquaculture policy and promotes an efficient allocation of public and private resources in the sector. In addition, the project's strong support for applied research (Research Fund and regional diagnostic laboratory network) promotes the generation of new technology appropriate for the varied aquaculture conditions in Mexico, providing a significant impetus for long-term growth. Finally, the project puts into place an institutional framework with well-defined roles for the public and private sector and with a strengthened government capacity to address the technological, social and environmental issues that are likely to arise as the sector expands.  44 PROJECT RISKS 2.102 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. 2.103 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 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 implenment/supervise the project. 2.104 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 5 1% 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  45 epidemics; and finally, the density of shrimp farms in Mexico is much lower than in other major shrimp producing countries that have experienced diseas 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 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.  46 3. AGREEMENTS AND RECOMMENDATIONS 3.1 During Negotiations, the following assurances were obtained: (a) the project will be implemented in accordance with the PIP as indicated in para. 2.70; and (b) reporting and review arrangements for the project will be carried out by SEMARNAP as indicated in paras. 2.93 and 2.94. 3.2 The following are special conditions of effectiveness: (a) the DGA is staffed as indicated in para. 2.21, the DGA monitoring system is operational, and the SEMARNAP Project Committee has been constituted (para. 2.70); (b) signed contractual arrangements between BANCOMEXT and Government acceptable to the World Bank (para 2.79). 3.3 Prior to disbursements for technical assistance for the AcuaMexico subprojects, the following documents must be signed by the respective parties and agreed with the World Bank: (i) the AcuaMexico deed, (ii) the AcuaMexico Operating Rules and (iii) the AcuaMexico Management Contract (para. 2.50) 3.4 Recommendation. With these agreements and conditions, the project would be eligible for a single currency fixed rate US Dollar IBRD loan of US$40.0 million.  ANNEXES Annex A Environmental Risks and Management Plan Annex B Project Economic Analysis and Benefits Annex C Project Costs Summary Annex D Flow of Funds Annex E Lessons Learned from Past Experience Annex F Project Logical Framework Annex G List of Documents in the Project File Annex H Glossary of Terms Annex I Aquaculture Production and Marketing in Mexico   Annex A Page lofli Environmental Risks and Management Plan Background 1. The Mexico Aquaculture Development Project has a Category A environmental rating for the Bank, as some investments occur in or near environmentally sensitive areas and, in some cases, may involve the permanent conversion of these areas. A sectoral environmental assessment (SEA) report was prepared and submitted by the Government to the World Bank. It assesses the environmental risks associated with the expansion of aquaculture in Mexico, evaluates the legal and institutional framework to address these risks, and proposes several project investments to ensure the sustainable development of the sector.1 Preliminary environmental analysis of the specific subproject investments carried- out during preparation revealed no major environmental risks, with the exception of the coastal shrimp park. This subproject has a Category A environmental rating and an environmental assessment study will be carried out as part of the overall feasibility study, according to terms of reference agreed with the Bank. No major environmental risks were identified among the three tilapia parks, the rehabilitation of the abalone and the construction of the pen shell scallop hatcheries, as well as the construction of a specific pathogen resistant shrimp hatchery. However, an environmental assessment will also be carried out for these investments as part of the overall feasibility studies. In addition, the shrimp park, the tilapia parks, the pen shell scallop hatchery, and the SPR hatchery will have a Mexican environmental impact study (the rehabilitation of the abalone hatchery will not require an environmental assessment under Mexican law). 2. This Annex first summarizes the environmental risks related to the aquaculture sector and the capacity of the regulatory and institutional framework to address these issues. Second, it reviews the specific environmental risks associated with the subproject investments. Third, it presents the environmental and coastal resource management subcomponent, which is the management plan that addresses the issues identified in the SEA and in the prefeasibility environmental analysis of the specific subproject investments. I Mark Hardin, "Sectoral Environmental Assessment for the Mexico Aquaculture Development Project", KBN Engineering and Applied Sciences, Inc., May 1994. The SEA is based on findings from two missions to Mexico, covering the periods November 29 to December 11, 1993, and January 23 to February 13, 1994. Extensive interviews with representatives from key federal agencies, as well as federal and state government offices in all seven project states were conducted as preparation for the sectoral environmental assessment. In addition, workshop sessions were held with groups of fishermen and aquaculturists to discuss environmental quality issues affecting the success and sustainability of aquaculture in Mexico.  Annex A Page 2 of 11 Aquaculture and the Environment 3. Sectoral Environmental Risks of Aquaculture. The impact of most of Mexico's aquaculture activities on the environment has, so far, been relatively little. Almost all of Mexico's aquaculture production is from rural grow-out ponds and inland water bodies, which have very little impact on the environment. Almost all of the limited negative impacts of aquaculture in Mexico relate to semi-intensive shrimp farming, which remains a relatively recent and limited activity. The potential negative effects of aquaculture on the environment are outlined below, as well as an assessment of the relative importance of each issue in Mexico: (a) Displacement of coastal mangrove estuaries by shrimp ponds, with consequent loss of ecosystem production, was a serious problem in many countries during the 1960-1970s. This has not been a significant problem in Mexico, in light of Mexico's land use regulations and as the discovery of mangrove soils' poor suitability for aquaculture in the 1980s. Moreover, most shrimp farms are located in areas where there are few mangrove forests: 83% of Mexico's 15,600 ha of shrimp farms are in the states of Sinaloa and Sonora, which have only 17% of the country's mangrove forests. (b) Alteration of local hydrology due to construction of pond dikes, access roads and the dredging of water supply channels has occurred in some cases due to the construction of agriculture farms. The extent to which such problems are associated with aquaculture is relatively limited, given the recent introduction of industrial aquaculture in Mexico. (c) Eutrophication from pond water effluent discharged during drainage or routine exchange can enrich receiving waters, resulting in local degradation in water quality and loss of ecosystem function and diversity. This occurs primarily when there is a high density of shrimp farms in areas with restricted hydrology. There have been no studies associating shrimp farm effluent with local water quality degradation, and no mention was made of the problem in numerous interviews. This could change as the density of farms on coastal lagoon systems increases, as the latter are characteristically plagued with restricted hydrology. Mitigating this threat is Mexico's recognition of the problem that Ecuador and Honduras have experienced, and the observed tendency towards master-planning regional shrimp farm development. (d) Eutrophication from waste feeds may arise near large cage-culture and net-pen culture operations that are sited in areas of hydrologically restricted water exchange. Again, this issue has not  Annex A Page 3 of 11 emerged yet in Mexico on any significant scale, given the relatively recent introduction of cage aquaculture. (e) Aquaculture may endanger vulnerable wildlife. For example, capture fishing in inland reservoirs (restocking aquaculture) with gill nets has entangled and drowned american crocodiles (Crocodylus acutus) in one known reservoir in Mexico.2 Other examples are the overfishing of pen shell scallop and abalone along the Pacific coast in Mexico. (f) The introduction of exotic species such as tilapia may displace native organisms by direct competition or the introduction of new pathogens. Tilapia were widely introduced to Mexico in the 1 960s and 1970s, and now occupy every watershed in the country. Artificial reservoirs account for 97% of the freshwater in Mexico, and 100% of these reservoirs have established populations of tilapia. Though endemic aquatic species have been negatively affected by the introduction of tilapia, the major trauma occurred decades ago, and the surviving endemic species have long established an equilibrium state with the new species. 4. Environmental Risks for Aquaculture Development. Aquaculture is also influenced by the quality of the surrounding environment: (a) Water contamination from agricultural chemicals is a particular concern in Chiapas and Sinaloa. Fertilizers seem to be the most problematic in Mexico. Mexico is in the process of phasing out the most persistent organochlorine pesticides to organophosphorus pesticides that have less environmental impact. (b) Deforestation and erosion of watersheds results in the sedimentation of river and estuarine channels and connections to open water. Chiapas and Oaxaca are experiencing high rates of 2 According to the International Union for the Conservation of Nature's (IUCN) 1994 "Red List of Threatened Animals," C. acutus are considered "vulnerable" throughout a range that includes the Pacific coast from Mexico to Ecuador, as well as the Atlantic drainage from Guatemala to Florida. According to IUCN terminology, "vulnerable" indicates that a species could become endangered unless present trends are reversed. Data on worldwide numbers of C. acutus are virtually nonexistent due to their occurrence in isolated populations over a wide geographic range. Mexican law classifies C. acutus as a "special management" species within the INE's four-tiered rating system, a status that allows captive propagation for conservation purposes. Finally, the International Commission on the Trade in Endangered Species (CITES) includes the species in their Appendix 1, indicating a categorical prohibition on commercial trade in products derived from wild animals (i.e., products from cultivated animals may be allowed).  Annex A Page 4 of 11 erosion from deforestation or conversion of permanent tree crops to other types of agriculture in upper watersheds. (c) Reduction in freshwater inflow to estuaries, as a result of damming, degrades coastal water quality and coastal morphology. This has occurred in most coastal states of Mexico. (d) Contamination of residual waters with domestic sewage is an important problem in the coast of the Gulf of Mexico. The Pacific coast is also beginning to experience sewage pollution problems in certain areas, but the situation is less critical at the moment. Bivalve shellfish quality has been severely degraded, particularly in Veracruz and Tamaulipas. (e) Toxic effects on fisheries of fugitive oil contamination from petroleum extraction and transportation in coastal areas, particularly in Veracruz, has led to reduced populations and degraded quality of shellfish and shrimp. (f) Entrainment at thermal power plant cooling intakes has led to the destruction of large numbers of juvenile aquatic forms. 5'. Regulatory and Institutional Framework. To address the above issues, the GOM has taken several key steps to mitigate the impact of aquaculture on the environment. First, it revised the General Law on Ecological Equilibrium and Environmental Protection (LGEEPA) in 1996. This law and associated regulations obligate SEMARNAP (previously SEPESCA) to the sustainable management of aquatic flora and fauna, and makes fNE responsible for the evaluation of the environmental impact of fishery and aquaculture activities. Second, the Attorney General's Office for Environmental Protection (PROFEPA) was created within the past three years to assure compliance with EA conditions and federal government regulations. This agency has jurisdiction over most aquaculture operations, and is backed by fairly powerful legal authority. 6. Third, the "Single Window" system was created in 1990 to address the administrative complexity of the permitting process for fisheries and aquaculture, which may involve up to 20 separate reviews, authorizations or permits from different agencies. The new system made the Subsecretariat of Fisheries the only point of contact between the project promoter and government in the procurement of all permits. Fourth, the Subsecretariat of Fisheries and INE have initiated a land use capability planning (LUCP) program for the nation's coastal zones. The LUCPs provide an apriori indication on the natural vocation and preferred use of coastal lands, including aquaculture. An operational LUCP should facilitate the environmental assessment process for aquaculture investments, helps regional and local planners avoid the siting of non-aquaculture operations that may harm or be  Annex A Page 5 of 11 harmed by aquaculture, and if properly designed with local input, an LUCP can avoid social conflicts associated related to the introduction of aquaculture. Under the direction of INE, SEMARNAP has thus far undertaken LUCP baseline studies in six states, including five of those proposed in the Aquaculture Development Project. 7. Despite these significant institutional and policy advances, several problems hinder their full and satisfactory implementation: (a) Principal constraints to the effectiveness of the environmental assessment methodology developed under LGEEPA include a serious backlog in the evaluation of EA reports by INE's office in Mexico City, a lack of personnel to review the EA reports, a lack of field review of projects by INE reviewers, and unclear requirements for data in the EA format. (b) PROFEPA has been preoccupied with monitoring the most serious environmental problems in the country and has been able to give aquaculture development relatively little attention. (c) The single window program remains quite lengthy and cumbersome, reportedly requiring up to 30 months from initiation to completion in some cases. Evaluation of permit documents is often delayed due to the geographic dispersion of agencies and the simple need to physically relay the body of documents from one office or region to another. (d) Present LUCP methodology, although identifying mangroves as a forest category, neither distinguishes between the various classes of forest (i.e., dwarf/sparse vs. high/dense), nor classifies intertidal mudflats. Despite the recognized value of these areas, Mexico does not have a comprehensive inventory of either habitat type for those regions where the potential for shrimp farm development is greatest. The lack of such information can limit effective monitoring and planning of these valuable ecosystems (mangroves and mudflats) in the face of intensified coastal aquaculture. Moreover, community participation needs to be incorporated into the design and upkeep of these plans to ensure their sustained and full implementation. Finally, funding is not available to implement the LUCP program in all states with aquaculture potential. (e) Mexico does not have a coastal management policy or program. Little attention has been given to an integrated approach that would network the responsibilities of the many federal and state agencies, charged with governing coastal ecosystems. The many issues and groups affected by the transformation of coastal lagoons due to  Annex A Page 6 of 11 changes in fresh water inflows, overfishing, dredging, and the manipulation of inlets and sedimentation, require a participatory approach to coastal resource management. Direct Environmental Impacts of Project Activities 8. The majority of the environmental risks related to project investments are linked to the shrimp aquaculture park, San Andres. This park is located on pasture lands and playons (elevated mud flats). The principal environmental issues will be the planned use of exotic species in culture operations (P. vannamei) and a significant need for dredging to improve lagoon water quality. 9. Three areas on the Laguna San Andres lagoon shoreline are considered as sites for the San Andres Park. Two sites are on the south and north sides of the mouth of the Rio Tigre, and the third is near the municipality of La Presita. The San Andres lagoon is subject to a tidal amplitude of less than 60 cm, and the shoreline is in fact more prone to flooding from wind rather than tidal action. The intertidal zone throughout the lagoon is accordingly narrow, ranging from approximately 200 to 500 m, and has the sparse cover of dwarf Avicennia, Sesuvium, Salicornia, and Sporabola ssp. and other holophytic vegetation that characterizes poorly inundated areas. Just inland of the intertidal zone, the flat coastal plain has either been converted to pasture land or left with the native thorny scrub composed chiefly of huisache, mesquite or ebony (Acacia, Prosopis, and xx spp. respectively). Given the abundance of flat uplands with clay soils, shrimp farm construction can avoid the intertidal wetland fringe (with the exception of the effluent and intake canals). 10. The principal environmental issue with the three tilapia parks is the use of tilapia spp, a non-endemic specie, in the cage culture operations located on inland reservoirs. The introductions will take place in relatively new reservoirs that show little resemblance to natural, freshwater aquatic community structure or species composition and where tilapia are already present. An additional environmental problem that could arise in the tilapia reservoirs is the risk of eutrophication, as excess feed and waste contribute to the organic load of the parent water body. In addition, the project will support the rehabilitation of an abalone hatchery and the construction of a pen shell scallop hatchery, and a shrimp specific pathogen resistant hatchery. These subprojects present no major environmental problems, although an environmental assessment will be prepared for each investment project as part of the feasibility study, and there will be an Mexican environmental impact study after the detailed engineering design, except in the case of the abalone hatchery, which is a rehabilitation project.  Annex A Page 7 of 11 Environmental and Coastal Resources Management Subcomponent 11. The overall objective of the environment and coastal resources management subcomponent is to strengthen environmental policy for aquaculture and to avoid any potential negative effects due to the sector's expansion and the specific subproject investments. To strengthen environmental policy for aquaculture the proposed project aims to: (a) decentralize environmental decision- making to the state and community levels; (b) increase participation of community groups, the private sector and civil society organizations in the design and use of tools for environmental decision making; (c) expand the availability of high quality data for environmental monitoring of aquaculture and other activities that occur in fragile coastal lands; and (d) promote an integrated approach to the management of coastal resources. To meet these objectives, the project will support one coastal resource management pilot, improved evaluation and planning procedures for aquaculture, and monitoring of coastal wetlands and water quality. Integrated Coastal Resource Management Pilots 12. The objective of the integrated coastal resource management (ICRM) pilot in the Lagoon Tamiahua in Veracruz is to develop innovative approaches for integrated and participatory ICRM at the local and state levels. This area faces: over harvesting and gear conflicts in coastal and lagoon fisheries; and water circulation and quality problems, aggravated by past dredging and breachway construction, coastal flooding, loss of mangrove ecosystems, urban development and water pollution. Oyster culture and lagoon fisheries dominate the lagoon area. 13. The ICRM pilot aims to resolve resource use conflicts, identify appropriate utilization of coastal systems, and to demonstrate practical, participatory methods for applying the existing framework of environmental decision making (land and shore use planning, environmental impact assessments, one-stop permitting, and law enforcement). To achieve these objectives, the pilot will: (a) Prepare and formally adopt a site-specific ICRM plan. The plan will guide case-by-case decision making, as well as stimulate restoration and conservation initiatives. To develop the plan the project will provide technical assistance, workshops and training. (b) Test new policies, procedures and management practices by sponsoring "practical exercises" in community based coastal resources management and by providing matching grants to communities and user groups to implement priority elements of the ICRM plans. (c) Develop and disseminate tested tools for managing lagoons and their associated ecosystems, which will be a key input into the ICRM plan. A lagoon model will be developed to assess lagoon  Annex A Page 8 of 11 conditions and predict changes to the ecology over time, and an ecological lagoon history will be prepared using scientific and technical reports, census data, the LUCP study and interviews with long-time resource users and elders, newspaper files and historical records. The report will document how people have used the coastal ecosystem over time, track trends in the productivity and conditions of the system, and provide the social and environmental context for current issues and potential solutions. Portions of the plan will serve as addenda to the existing regional development plans and state and local ordinances. (d) Provide sustained public education programs to create awareness and interest in the resource management issues and the new management initiatives (annual outreach strategy, press releases, organization of public meetings to discuss ICRM outputs, coordination with other public and private environmental groups). (e) Carry out regular water quality monitoring in the lagoon. Environmental Planning and Assessment 14. To strengthen the capacity of SEMARNAP to address potential environmental issues related to aquaculture, the project would reinforce two existing planning and assessment programs for aquaculture: Land Use Capability Program (LUCP) and environmental impact assessments (EAs). 15. Land Use Capability Program. The program would develop land use capability plans for Veracruz and Baja California Sur, the only two project states currently lacking LUCP plans. The studies would be carried out in accordance with the methodology approved by INE and SEMARNAP, and would include public participation in their design and implementation. The input of local business leaders, government, universities, and coastal resource user groups would be sought to define the issues and review the draft LUCP documents, including the policy recommendations. To develop these plans, the project would support: technical assistance, materials, workshops, and LUCP publications for Veracruz and Baja California Sur. 16. Environmental Impact Assessments. This activity would improve the quality of INE's environmental assessments for aquaculture by developing criteria and guidelines for EA preparation specific to aquaculture with the provision of technical assistance, workshops and materials.  Annex A Page 9 of 11 Monitoring of Coastal Wetlands and Water 17. To identify the impact of aquaculture on the management and quality of coastal resources, the project would support a baseline inventory and repeated monitoring to develop the needed quantitative and descriptive databases of critical coastal wetlands and lagoon water quality. 18. The coastal wetlands program would inventory wetlands in Veracruz, Sinaloa, Nayarit, Tamaulipas and Chiapas, as these states have the largest mangrove forests. The inventory would produce photographs, transparencies, atlases, digitized information, and maps. The project would cover the costs of the technical assistance and the production and dissemination of the final information products (procurement and processing of images) for each state. The inventories would be carried out at the start of the project (Years One and Two) and would be repeated at the end of the project (Years Five and Six). 19. The coastal water quality program would initiate, on average quarterly assessments of coastal water quality and would demonstrate the value of monitoring to potential local consumers of such information. Water quality monitoring would be carried out in Sinaloa and Nayarit, the states with the most significant water quality problems, and in Tamaulipas to provide baseline and on- going water quality data in conjunction with the implementation of the San Andres Shrimp Park. In each of these states, one coastal lagoon would be selected for the program via a two-step participatory process. Following an initial review of relevant research to identify problem areas, a state-level workshop would be conducted, in which local fisheries and environmental agency personnel, aquaculturalists, civil society organizations and other interested actors in environmental quality would identify the targeted lagoon system. The output would include a regional atlas that interprets water quality trends and geographic information system-type database files. Funds would be provided for technical assistance, publication and dissemination.  Annex A Page 10 of 11 SECTORAL ENVIRONMENTAL ISSUES AND MANAGEMENT PLAN Etwim nme~a RikLqlC~s int/ Projot~ Fraiwmwork Li~~mitation Hydrological Modification -Forestry Law -Insufficient Baseline Data -Wetlands Inventory (indirect wetlands degradation) -General Environmental Law -EA methods -EA strengthening * Environmental Assessment (*) not specific on issue guideline Development -Specific Environmental Law -EA application decentralization * Mangrove Protection (*) lack of EA field review OD 4:01 Wetlands Conversion -Forestry Law -Insufficient Baseline Data -Wetlands Inventory (Direct) -General Environmental Law -EA Methodology -EA strengthening EA (*) -Lack of EA field review guideline Development LUCP -Insufficient LUCP coverage decentralization -Specific Environmental Law (*) -LUCP methodology OD 4:01 mangrove protection -LUCP extension (to BCS & Vc) protected areas -LUCP methodology (participation) -International Treaties (*) Migratory birds RAMSAR NAWCC -INE institutional policies * priority wetlands list Eutrophication -Water Law (CNA enforcement) -Insufficient baseline Data -Support of Park concept -Environmental Law -EA methodology -Water quality monitoring I EA (*) -EA methodology -Fisheries Law (-) guidelines development Predator control -Environmental law (t*) -lack focus on the issue -Best Practices -Wildlife/Hunting laws (SAGAR) -lack of knowledge Seed Capture -Fisheries Law (*) -Awareness -Training * INP supervision -Best Practices Introduction of Exotics -Fisheries Law (*) -EA application -EA strengthening -Environmental Law (*) -Training and monitoring -EA (*) denotes enforcement by PROFEPA  Annex A Page 11 of 11 Subproject Environmental Issues and Management Plan Potential Envirormental Issues Management General Iasuea a. Project to supports EAs for each park that will include Bank review, a. siting and construction impacts (hydrology and wetlands) and extensive analysis of hydrological parameters and wetlands issues. b. Organic loading from pond discharge water a. San Andres Park to be sited on non-wetland area. c. Increased capture of wild seedstock and incidental by-catch b. Park concept allows master planning of discharge canals such that maximum destruction dilution and minimal impact occurs. d. Predator control operations may impact aquatic birds b. Nutrient loading will be modeled during EA. e. Cultivation of tilapia in cages in inland reservoirs could threaten c. SPR hatchery is supported to minimize wild seed capture. endemic species d. Training and Best Practice Manual will focus predator control away from most specie, and emphasize non-lethal methods. e. Since tilapia is well established throughout Mexico, little increase is anticipated in long-term standing fish stocks, and the stocking will occur in artificial environments; the incremental environmental risk posed by these projects is considered to be very small San Andre- (Tamaulipas) a. EA preparation team will ensure development of exotic species management plan. a. use of exotic species in culture operations a. Pacific white shrimp have already been accidentally introcuced along Gulf coast (P. vannamei) from Texas-based culture facilities. b.Significant need for dredging to improve lagoon water quality. b. LA preparation team will ensure dredging impacts are adequately addressed. Tilapia Parka (reservoir) a. Large size of most impoundments ensures minimal organic loading and risk of a. Contribution of organic load to parent waterbody from excess feed eutrophication. and wastes. b. Use of exotic culture species. b. Tilapia is already established in all Mexican reservoirs and watersheds. c. Viua/astetcderaatonfomflatngcgeadenc. Low use for 'scenic" tourism or residential communities minimizes significance c. Visual/aesthetic degradation from floating cages and pens.I of aesthetic impacts of cage culture in reservoirs.   Annex B Page 1 of 5 Project Economic Analysis and Benefits 1. This Annex presents the economic rate of return (ERR) and net present value (NPV) for the AcuaMexico subprojects. It also identifies incremental production, employment, and major project beneficiaries. Economic Analysis 2. ERRs and NPVs are calculated for each of the seven AcuaMexico subprojects. In addition, a comprehensive ERR and NPV is calculated for the seven subprojects, which also includes the cost of the permitting study, the environment and coastal resources management subcomponent, the research fund, the regional diagnostic laboratory network, the training and monitoring program and the management contract for the AcuaMexico Fund. This comprehensive ERR/NPV reflects 83% of project costs. Most of the data was collected using 1994 prices. Prices and costs were adjusted to reflect 1995 levels, according to whether or not they are a tradeable or non-tradeable or some combination thereof The analysis assumes constant 1995 prices and expenditures. The market value of all inputs and outputs is assumed to reflect the economic value. 3. The base model uses an average exchange rate of 6.5 NP/US$. The domestic inflation rate is assumed to be 40% for 1995. Sensitivity analysis was carried out to determine the impact of changes in the exchange rate, output prices, and production on the economic viability of the investments. In addition, the impact of possible implementation delays, which would affect production levels in Year One and Year Two of the Project were estimated. Shrimp and PLs are assumed to be fully tradeable, while only 30% of the tilapia is assumed to be tradeable (the remainder is not of an sufficient export quality). The abalone and pen shell scallop spat are non- tradeables as well as the depurified oysters. Appendix Table I presents the net present value (NPV) (in millions of NP$) and the economic rate of return (ERR) for each scenario. The production and cost assumptions are shown in Appendix Table 2. The detailed farm models are in the project file (Annex G). The base case ERRs are 45% (AcuaMexico subprojects only) and 35 % (including other public goods). Exchange rate fluctuations have a minimal impact on economic viability, as the benefit of higher output prices is offset by the higher input prices. Given possible medium-term declines in shrimp and tilapia prices, and the uncertain price of abalone and pen shell scallop spat, the model estimated the impact of a 10% decline in output prices. The latter would reduce the base ERR to 35% (for the AcuaMexico subprojects), while a 33% decline in output prices would drop the ERR to 12% and cause the NPV to approach zero. Also in light of the volatility of aquaculture production, particularly shrimp, the model assessed the impact of changes in production levels on the economic viability of the operations. A 10% decline in production levels for all species brings the ERR (for AcuaMexico subprojects) to 37%, while a 39% decline in production brings the ERR to 12% and causes the NPV to become negative. The model also tests for the impact of production delays during the start-up phase of the investments. A 20% reduction in production in Year One coupled with a 10% reduction in Year Two causes the ERR to fall to 41%. Finally, a combined scenario was tested involving a 15% devaluation, a 10% fall in output  Annex B Page 2 of 5 to fall to 41%. Finally, a combined scenario was tested involving a 15% devaluation, a 10% fall in output prices and start up delays causing output reductions of 20% and 10% in Years One and Two respectively. This causes the cumulative ERR to drop to 33%. Incremental Production 4. Table C. I compares the national estimated production of shrimp and tilapia in 2005 with and without the project (calculated using the average 91-94 growth rate). Overall, the incremental contribution of the project to production is small, less than 1% for tilapia and shrimp. However, it is not clear that the 1991-94 growth rate for shrimp is sustainable, although the sector has significant potential. Similarly, the incremental impact of the project on tilapia is small due to the importance of this species in Mexican aquaculture (46% of total production). The contribution of the SPR shrimp hatchery is also estimated to be relatively small (7%). However, this facility is included in the project to provide as a model for the SPR technology and to catalyze other private/social sector hatcheries to adopt this technology. The hatcheries to produce abalone and pen shell scallop spat will be the first of their kind in Mexico. Table C. l: Incremental Project Production (metric tons) National National Incremental National Production w/o Project Production Increase due Production Projecta Production with Project to Project Product 1994 2005 2005 2005 Shrimp (tons head 15,509 923,914 2,185 926,099 0.2% on) Tilapia (in tons) 81,490 105,780 895 106,675 0.9% Shrimp (in millions of PL) 875 2,496 173 2,669 7%b a. Based on average 1991-94 growth rates for shrimp and tilapia. The 1991-94 average growth rate was 45% for shrimp and 2.4% for tilapia. b. Assumes that PL production increases at 100/o/year.  Annex B Page 3 of 5 Beneficiaries 5. The project would benefit 7,810 low income and poor aquaculture producers via investments in the aquaculture parks and the TIF and via the training programs. The project would create a total of 139 permanent employment positions with the majority from the aquaculture parks. Table C.4 provides a summary of these beneficiaries. Table C.2: Beneficiaries 1 3 1 l Pen Shell 1 Indicator Shrimp Tilapia Abalone Scallop SPR TIF b/ Total Park Parks Hatchery Hatchery Hatchery Employment Generated (# of 80 20 7 12 20 n/a 139 jobs created) a/ Direct 250 60 n.a. n.a owners SPF Beneficiaries (# company 7500 of people) c/ plus shrimp 7 7,810 producers who purchase the SPR PLs n.a. Data not available. a. Defined as number of jobs created in the management and operation of each park or hatchery. b. Assumes 150 TIF proposals for an average of US$40,000 will be funded with an average of 50 direct beneficiaries per contract. c. Expected number of social sector investors.  Annex B Page 4 of 5 Appendix Table C.1: Base Option (1) Production Exchange Rate Output Prices Implementation Scenario (3) Plus 10% Minus 10% 15% Depreciation 15 % Appreciation Plus 10 % Minus 10% Delays (2) San Andres Shrimp Park NET PRESENT VALUE AT 12 % 116,735,192 142,353,740 91,116,644 138,699,852 94,770,532 148,476,593 84,993,791 111,305,058 96,792,976 ECONOMIC IRR (%) 49 56 41 50 46 58 39 45 38 Cerro De Oro Tilapia Park NET PRESENT VALUE AT 12 % 2,507,465 3,915,055 1,099,875 2,098,286 2,916,644 3,915,055 1,099,875 2,074,250 201,264 ECONOMIC IRR (%) 39 55 24 33 47 55 24 31 14 Vincente Guerrero Tibpia Park NET PRESENT VALUE AT 12 % 2,507,465 3,915,055 1,099,875 2,098,286 2,916,644 3,915,055 1,099,875 2,074,250 201,264 ECONOMIC IRR (%) 39 55 24 33 47 55 24 31 14 El PortMio Tigapia Park NET PRESENT VALUE AT 12 % 2,507,465 3,915,055 1,099,875 2,098,286 2,916,644 3,915,055 1,099,875 2,074,250 201,264 ECONOMIC IRR (%) 39 55 24 33 47 55 24 31 14 Panta Eugenia Abalone Hatchery NET PRESENT VALUE AT 12 % 5,581,248 7,721,197 3,441,299 3,970,324 7,192,172 7,721,197 3,441,299 4,761,873 1,092,937 ECONOMIC IRR (%) 35 45 26 27 46 45 26 30 16 Pen Shell Scallop Hatchery NET PRESENT VALUE AT 12 % 7,514,353 9,646,503 5,382,203 7,769,256 7,259,449 9,646,503 5,382,203 7,072,978 5,031,194 ECONOMIC IRR (%) 31 35 26 29 32 35 26 29 23 SPR Hatchery Facility (shrisp PL) NET PRESENT VALUE AT 12 % 13,066,929 16,643,917 9,489,941 15,236,173 10,897,686 16,643,917 9,489,941 12,081,622 10,102,843 ECONOMIC IRR(%) 45 54 35 45 43 54 35 40 32 ADl AcuaMexico Subprojects NET PRESENT VALUE AT 12 % 146,734,422 184,492,636 108,976,208 167,810,553 125,658,292 190,615,489 102,853,355 137,622,972 109,245,492 ECONOMIC IRR (%) 45 53 37 45 44 54 35 41 33 AcuaMexico Subprojects and public goods (4) NET PRESENT VALUE AT 12 % 107,257,926 139,954,729 74,561,124 123,793,977 90,721,875 145,176,791 69,339,061 98,282,092 72,134,706 ECONOMIC IRR (%) 35 42 28 36 34 43 27 32 25 (1) Base option assumes 1995 constant prices; 6.5 NP/US$ exchange rate and 40 percent inflation rate (the latter is assumed to be 40 percent of the depreciation/appreciation of the NP). (2) Implementation delays refers to a 20 percent production loss in year I and a 10 percent production loss in year 2. (3) Scenario assumes a 15 % depreciation, a 20 % and 10 % implementation delay in year I and 2, respectively, and a 10 % decline in output prices.  Annex B Page 5 of 5 Appendix Table C.2: Production and Cost Assumptions for Economic Analysis All tilapia in Pen Shell Punta SPR Shrimp Indicator San Andres cages (b) Scallop Eugenia Hatchery Species Shrimp Tilapia Pen Shell Abalone Spat SPR PL Scallop Spat Production Area (ha)a 800 100 cages (6.5 N/A N/A N/A M3 each) I Investment Costs 1995 85.9 1.4 7.1 8.5 11.2 million NP$ Operating Costs 1995 38.5 2.2 2.0 1.9 2.0 million NP$ (a) Output Price 36.4 NP/kg 8.4 NP/kg 293 NP/ha 5.2 NP/000 41 NP/000 restocked Crops/Year(&) 2 2 20,000 Ha 1 12 restocked Stocking Densities (a) 17 1 80/m3 N/A n/a n/a Survival Rates (a) 60-75% variable 85% after 50g N/A n/a 40% (after nursury pond) Yield 2.73 mt/ha/yr 459/kg/m3 N/A 600,000 173 million PLs/ kg/yr/spat Feed Conversion Ratio 1.8:1 1.8:1 N/A N/A N/A a. At full production. b. Includes Cerro de Oro, El Portillo, Vincente Guererro.   Annex C Page 1 of 9 Components Project Cost Summary (NS '000) (USS '000) % % Total Foreign Base Local Foreign Total Local Foreign Total Exchange Costs A. Regulatory Framework and Public Goods 1. Regulatory Framework Aquaculture Pemiittmg 2,003 1 2,219 5 4,222 6 253 6 280 9 534.5 53 1 AquacultureRegulationsPrograrn 624.9 1,6163 2,241 2 791 204.6 283.7 72 1 SubtotalRegulatoryFramework 2,6280 3,8358 6,4638 3327 485.5 818.2 59 2 2. Environment and Coastal Resources Management Integrated Coastal Resources Management Pilot 3,160 4 17,908.9 21,0693 4001 2,2670 2,667.0 85 5 MonitoringofCoastal Wetlands and WaterQuality 13,935 6 - 13,935 6 1,764.0 - 1,764.0 - 3 Environmental Planning and Assessment 4,935 1 - 4,935 1 624.7 - 624.7 I Subtotal Environment and Coastal Resources Management 22,031 1 17,908 9 39,940 0 2,788 8 2,267.0 5,055.7 45 10 3. Public Goods Research Fund 8,769.0 - 8,7690 1,1100 - 1,1100 . 2 Regional Diagnostic Laboratory Network 7,231.3 19,608.2 26,8395 915.4 2,482.0 3,397.4 73 7 Subtotal Public Goods 16,0003 19,608.2 35,608 5 2,0254 2,482.0 4,507.4 55 9 4. Project Coordination and Institutional Strengthening 19,407.2 1,152.5 20,559 8 2,456.6 145 9 2,602.5 6 5 Subtotal Regulatory Framework and Public Goods 60,066 6 42,505 4 102,572 0 7,603 4 5,380.4 12,983.8 41 25 B. Social Sector Development 1. Aquaculture Production Parks and Laboratories 194,103.1 20,812.4 214,9156 24,570.0 2,634.5 27,2045 10 53 Targeted Investment Fund 43,888 5 - 43,888 5 5,555,5 - 5,555.5 - 11 Subtotal Aquaculture Production 237,9916 20,812.4 258,8040 30,125 5 2,634.5 32,760.0 8 64 3. Institutional Development AcuaMexico Fund 5,003 4 28,352.7 33,356 2 633.3 3,589 0 4,222 3 85 8 TrainingandMonitornng 10,653.9 470.1 11,1240 1,348.6 59.5 1,408.1 4 3 Subtotal Institutional Development 15,657.4 28,8228 44,4802 1,981 9 3,648.5 5,630.4 65 11 Subtotal Social Sector Development 253,6489 49,6352 303,284.2 32,107.5 6,282.9 38,3904 16 75 Total BASELINE COSTS 313,715 6 92,140.6 405,856 2 39,710 8 11,663.4 51,374 2 23 100 Physical Contingencies 14,583.3 1,956.9 16,5403 1,846.0 2477 2,0937 12 4 Price Contingencies 189,697.0 44,439.9 234,1369 4,394.3 8969 5,2912 17 10 Total PROJECT COSTS 517,9959 138,537.4 656,5333 45,951 1 12,8080 58,759.1 22 114 Table C.1  Annex C Page 2 of 9 Expenditure Accounts Project Cost Summary (NS '000) (USS '000) % % Total Foreign Base Local Foreign Total Local Foreign Total Exchange Costs 1. Investment Cosb A. Civil Works 120,571.0 - 120,571.0 15,262.2 - 15,262.2 - 30 B. Turnkey Contract 9,020.2 9,020.2 18,0404 1,141.S 1,141.S 2,283.6 50 4 C. Goods LabEquipment 3,271.4 18,538.1 21,809,5 414.1 2,346.6 2,760.7 85 5 Office Equipment andPublications 418.4 104.6 523.0 53.0 13.2 66.2 20 - Furniture 177.8 - 177.8 22.5 - 22.5 - - Computers 2,445.8 2,445.8 4,891.7 309.6 309.6 619.2 50 1 Subtotal Goods 6,313.4 21,088.5 27,401.9 799.2 2,669.4 3,468.6 77 7 D. Vehicles 711.0 - 711.0 90.0 - 90.0 - E. Consultants and Technical Assistance International Consultants 10,863.0 61,557.1 72,420.1 1,375.1 7,792.0 9,167.1 85 18 Local Consultants 28,967.3 4.7 28,972.1 3,666.8 0.6 3,667.4 - 7 Subtotal Consultants and Technical Assistance 39,830.3 61,561.8 101,392.2 5,041.8 7,792.6 12,834.5 61 25 F. ResearchFund 11,925.1 - 11,925.1 1,509.5 - 1,509.5 - 3 G. PTIF 43,888.5 - 43,888.5 5,555.5 - 5,555.5 - 11 I. Training and Workshops Intemational training 83.0 470.1 553.0 10.5 59.5 70.0 85 - Local training 6,173.1 6,173.1 781.4 - 781.4 - 2 Subtotal Training and Workshops 6,256.0 470.1 6,726.1 791.9 59.5 851.4 7 2 I. Land 15,800.0 - 15,800.0 2,000.0 - 2,000.0 - 4 Total Investmnent Costs 254,315.5 92,140.6 346,456.1 32,191.8 11,663.4 43,855.2 27 85 L Recurrent Costs B.OperatingCostsforParks 49,797.7 - 49,7977 6,303.5 - 6,303.5 - 12 C. Operating Costs for Laboratories 1,794.9 - 1,794.9 227.2 - 227.2 - D. Incremental Recurrent Costs 7,807.6 7,807.6 988.3 - 988.3 - 2 Total RecurrentCosts 59,400.1 - 59,400.1 7,519.0 - 7,519.0 - 15 Total BASELINE COSTS 313,715.6 92,140.6 405,856.2 39,710.8 11,663.4 51,374.2 23 100 Physical Contingencies 14,583.3 1,956.9 16,540.3 1,846.0 247.7 2,093.7 12 4 Price Contingencies 189,697.0 44,439.9 234,136.9 4,394.3 896.9 5,291.2 17 10 TotalPROJECTCOSTS 517,995.9 138,537.4 656,533.3 45,951.1 12,808.0 58,759.1 22 114 Table C.2  Annex C Page 3 of 9 Project Components by Year -- Totals Including Contingencies (US$ '000) Totals Including Contingencies 1997 1998 1999 2000 2001 2002 Total A. Regulatory Framework and Public Goods 1. Regulatory Fromework AquaculturePermitting 564 3068 959 1161 - - 575.1 Aquaculture Regulations Program 62.5 66.1 68.0 70.0 37.9 - 304 5 Subtotal Regulatory Framework 119.0 372 9 163.9 186.0 37.9 8 879.7 2. Environment and Coastal Resources Management Integrated Coastal Resources Management Pilot 541 1 556.8 573.0 589.6 606 7 2,867.2 Monitoring of Coastal Wetlands and WaterQuality 2141 3361 304.0 753.8 3025 - 1910 6 Environmental Planning and Assessment 227.8 245 9 66.8 56.6 58.2 - 655 3 Subtotal Environment and Coastal Resources Management 9829 1,1389 9438 1,400.0 967.5 5,4332 3. Public Goods Research Fund 225.2 231.8 2385 2454 252.5 - 1,193.3 Regional Diagiostic Laboratory Network 693.7 677.2 723.4 778.5 954.0 3,826.8 SubtotalPublicGoods 918.9 9089 961.9 1,023.9 1,206.5 - 5,020.1 4. Project Coordination and Institutional Strenthening 616.9 546 5 554.5 538.1 551.6 - 2,807.6 Subtotal Regulatory Framework and Public Goods 2,6377 2,967 2 2,624.1 3,148.1 2,763.5 - 14,1406 B. Social Sector Development 1. Aquaculture Production Parks and Laboratories 2,648 7 1,587 6 1,593.2 9,493.6 12,407.1 4,639.8 32,369 9 TargetedInvestmentFund 1860 522.0 1,014.5 1,965.1 2,445.4 6,132.9 Subtotal Aquaculture Production 2,834.7 2,109 5 2,607.7 11,458.7 14,852.5 4,639.8 38,502.8 3. Institutional Development AcuaMexico Fund 507.3 1,043.9 1,133.9 1,007.1 859.4 - 4,551.6 Traimngand Monitorng 89.4 216.0 857.8 193.8 207.1 - 1,564.1 Subtotal Institutional Development 596.6 1,2599 1,991.8 1,200.8 1,066.5 6,1157 Subtotal Social Sector Development 3,431.3 3,369.4 4,599.4 12,659.5 15,919.1 4,639.8 44,618 5 Total PROJECT COSTS 6,069.0 6,336 6 7,223.5 15,807.7 18,682 6 4,639.8 58,759.1 Table C.3  Annex C Page 4 of 9 Expenditure Accounts by Years -- Totals Including Contingencies (US$ '000) Totals Including Contingencies 1997 1998 1999 2000 2001 2002 Total I. Investment Costs A. Civil Works - - 5067 8,9344 9,365.0 - 18,806.2 B. Tumnkey Contract 1053 1,206.5 1,3453 - - - 2,657.1 C. Goods Lab Equipment 420.2 548 1 626.7 682.9 862.5 - 3,140.4 OfficeEquipmentandPublications 29.1 194 11.3 6.5 6.7 - 72.9 Fumiture 16.0 - - 8.7 - - 24.7 Computers 315.7 110.8 111.4 130.6 12.4 - 681.0 Subtotal Goods 781.0 678.3 749 4 828.7 881.6 - 3,919.0 D. Vehicles 63.9 32 9 - - - 96.8 E. Consultants and Technical Assistance Intemational Consultants 1,436.9 2,271.7 1,9314 2,222.2 2,008.9 - 9,871.1 Local Consultants 735.7 864.9 652.4 1,071.1 612.5 - 3,936.6 Subtotal Consultants and Technical Assistance 2,172.6 3,136.6 2,583.8 3,293.3 2,621.4 - 13,807.7 F. Research Fund 244.9 278.8 347.2 368.4 391.8 - 1,631.2 G. PTIF 186.0 522.0 1,014.5 1,965.1 2,445.4 - 6,132.9 H. Training and Workshops Intemational training - - 75.2 - - - 75.2 Local training 118.8 243.9 183.8 126.6 165.0 - 838.1 Subtotal Training and Workshops 118.8 243.9 259.0 126.6 165.0 - 913.2 I. Land 2,191.3 - - - - - 2,191.3 Total Investment Costs 5,863.9 6,098.9 6,805.8 15,516.4 15,870.4 - 50,155.4 11. Recurrent Costs B. Operating Costs for Parks - - 152.3 - 2,499.3 4,639.8 7,291.4 C. Operating Costs for Laboratories 49.0 51.7 52.9 48.3 41.5 - 243.3 D Incremental RecurrentCosts 156.1 186.0 212.5 243.0 271.4 - 1,069.0 Total Recurrent Costs 205.1 237.7 417.6 291.3 2,812.2 4,639.8 8,603.7 Total PROJECT COSTS 6,069.0 6,336.6 7,223.5 15,8077 18,682.6 4,639.8 58,759.1 Table C.4  Annex C Page 5 of 9 Expenditure Accounts by Financiers (US$ '000) Local IBRD GOM Productive Sector Total For. (Excl. Duties & Amount % Amount % Amount % Amount % Exch. Taxes) Taxes A. Civil Works 12,495.1 664 5,976.4 31 8 3346 1 8 18,806.2 32.0 - 15,985.3 2,820.9 B. SPRHatchery 1,355.1 51.0 0.0 - 1,3020 490 2,657.1 4.5 1,328.6 930.0 3986 C. Goods Equiprnent 3,329.2 84.9 589.8 15.1 - - 3,919.0 6.7 3,024.4 306 7 587.8 SubtotalGoods 3,329.2 84.9 589.8 151 - 3,9190 67 3,0244 3067 5878 D. Vehicles I Vehiclesandboats - - 96.8 1000 - - 96.8 0.2 - 823 145 Subtotal Vehides - - 96.8 100.0 - - 96.8 0.2 - 82 3 14 5 E. Technical Assistance 10,542.3 85.0 1,860.4 15.0 - - 12,402.8 21.1 6,774.3 3,768.0 1,860.4 F. Technical Assistance forParks 1,6168 85.0 285.3 15.0 - - 1,9021 32 1,616 8 - 2853 G Training 725.8 85.0 128.1 150 - 8539 1 5 639 661 9 128 1 HL Grants 1. Research Fund 596.7 500 - - 596.7 50.0 1,193.3 2.0 - 1,014.3 1790 2. PTIF 4,599.7 75.0 0.0 - 1,533.2 25.0 6,132.9 10.4 - 5,213.0 919.9 Subtotal Grants 5,196.3 70.9 0.0 - 2,129.9 29.1 7,326.2 12.5 - 6,227.3 1,098.9 L Operating Cost Operatingcosts for PARQUES 2,999.3 50.0 0.0 - 2,9993 50.0 5,998.6 102 - 5,0988 8998 OperatingCostsforLabs - - 00 - 1,383.9 100.0 1,3839 24 - 1,1763 2076 OperatingCostsforSPRHatchery 777 51.0 - - 746 490 1523 03 - 1295 228 Incremental recurrent costs 545.7 51.0 523.3 49.0 - - 1,069.0 1 8 908.6 160 3 Subtotal Operating Costs 3,622.7 42.1 523.3 6.1 4,457.8 51 8 8,603.7 14.6 - 7,313.2 1,290.6 J. Land - - - - 2,191.3 100.0 2,191 3 3 7 - 1,862.6 328 7 Total 40,033 4 662 9,460.1 16.1 10,415.6 177 58,7591 1000 12,808.0 37,137.2 8,8139 Table C.5  Annex C Page 6 of 9 Components by Financiers (US$ '000) Local IBRD GOM Productive Sector Total For. (Excl. Duties & Amount % Amount % Amount % Amount % Exch. Taxes) Taxes A. Regulatory Framework and Public Goods 1. Regulatory Framework Aquaculture Permitting 488.9 85.0 86.3 150 - - 575.1 1.0 302.7 186.2 86.3 AquacultureRegulationsProgram 258.8 85.0 45.7 15.0 - - 304.5 0.5 216.8 42.0 45.7 SubtotalRegulatoryFramework 747.7 85.0 132.0 15.0 - - 8797 1.5 519.5 228.2 132.0 2. Environment and Coastal Resources Management Intepated Coastal Resources Management Pilot 2,437.1 85.0 430.1 150 - - 2,867.2 4.9 2,437.1 - 430.1 MonitoringofCoastalWetlandsandWaterQuality 1,624.0 85.0 286.6 15.0 - - 1,910.6 3.3 - 1,624.0 286.6 EnvironrnentalPlanningandAssessment 557.0 85.0 98.3 15.0 - - 655.3 1.1 - 557.0 98.3 SubtotailEnvironmentandCoastalResourcesManagement 4,618.2 85.0 815.0 15.0 - - 5,433.2 9.2 2,437.1 2,181.0 815.0 3. Public Goods Research Fund 596.1 50.0 - - 596.7 50.0 1,193.3 2.0 - 1,014.3 179.0 RegionalDiagnosticLaboratoryNetwork 3,045.9 79.6 537.5 14.0 243.3 6.4 3,826.8 6.5 2,816.0 436.8 574.0 SubtotalPublicGoods 3,642.6 72.6 5375 10.7 840.0 167 5,020.1 8.5 2,816.0 1,451.1 753.0 4. Project Coordination and Institutional Strengthening 1,939.3 69.1 868.3 30.9 - - 2,807.6 4.8 157.2 2,229.3 421.1 Subtota RegulatoryFrameworkandPublicGoods 10,947.8 77.4 2,352.8 16.6 840.0 5.9 14,140.6 24.1 5,929.9 6,089.6 2,121.1 B. Socel Sector Development 1. Aquaculture Production ParksandLaboratonries 18,213.6 56.3 6,114.0 18.9 8,042.3 24.8 32,369.9 55.1 2,945.4 24,569.1 4,855.5 Targeted InvestmnentFund 4,599.7 75.0 0.0 - 1,533.2 25.0 6,132.9 10.4 - 5,213.0 919.9 SubtotalAquacultureProduction 22,813.2 593 6,1140 15.9 9,575.6 24.9 38,502.8 65.5 2,945.4 29,782.0 5,775.4 3. Institutionl Development AcuaMexicoFund 3,868.9 85.0 682.7 150 - - 4,551.6 7.7 3,868.9 - 682.7 TrainingandMonitoring 1,253.5 80.1 310.6 19.9 - - 1,564.1 2.7 63.9 1,265.6 234.6 Subtotal Institutional Development 5,122.3 83.8 993.4 16.2 6,115.7 10.4 3,9328 1,265.6 917.4 Subtotal Social SectorDevelopment 27,935.6 62.6 7,107.4 15.9 9,575.6 21.5 44,618.5 75.9 6,878.1 31,047.6 6,692.8 Total Disbursement 40,033.4 662 9,460.1 161 10,415.6 17.7 58,759.1 100.0 12,808.0 37,137.2 8,813.9 Table C.6  Annex C Page 7 of 9 Local/Foreign/Taxes by Financiers (US$ '000) IBRD GOM Productive Sector Total Amount % Amount % Amount % Amount % I Foreign 12,808.0 100.0 - - - - 12,808.0 21.8 II. Local (Excl. Taxes) 27,225 4 70.2 3,602.7 9 7 7,459.2 20.1 37,137.2 63.2 III Taxes - - 5,8574 66.5 2,956.4 33.5 8,813.9 15.0 Total Project 40,033 4 66.2 9,460.1 16.1 10,415.6 17.7 58,759.1 100.0 Table C.7  Annex C Page 8 of 9 Procurement Arrangements (US$ Million) Procurement Method International Local CompetiUve Competitive Ial Direct Consulting Bidding Bidding Shopping Contracting Services N.B.F. Total A. Civil Works - 17.3 1.5 - - - 18.8 (11.4) (I1) (12.5) B. SPR Hatchery /a 2.7 - 2.7 (1.4) (1.4) C Goods /b 2.8 0.7 0.4 - - - 3.9 (2.4) (0.6) (0.3) (3.3) D Vehicles and boats - - - - - 0.1 0.1 E Technical Assistance - - - 0.4 13.9 - 14.3 (0.4) (11.8) (12.2) F. Training -0.9 - 0.9 (0.7) (0.7) G. Grants Research Fund - - - - 1.2 - 1.2 (0.6) (0.6) PTIF - - - - 6.1 - 6.1 (4.6) (4.6) H. Land - - - - - 2.2 2.2 1. Reciurent Costs - - - 7.1 - 1.5 8.6 (3.5) (0. 1) (3.6) Total 5.5 18.0 1.9 8.4 21.2 3.8 58.8 (3.8) (12.0) (1.4) (4.6) (17.0) (0.1) (40.0) Note: Figures in parenthesis are the respective amounts financed by IBRD \a Turnkey contract \b Equipment, furniture and publications. Table C.8  Annex C Page 9 of 9 Allocation of Loan Proceeds IBRD (US$ '000) Disbursement Loan Amount % A. Civil Works 11,200.0 70.0 B. Goods /a 3,000.0 85.0 C. SPR Hatchery 1,200.0 51.0 D.Technical Assistance 9,500.0 100.0 E. Technical Assistance for Parks 1,500.0 100.0 F. Training 700.0 100.0 G.Grants 1. Research Fund 500.0 100.0 2. Targetted Investments Fund 4,100.0 100.0 H. Recurrent Costs 1. Operating Costs Parks 2,700.0 80% in 2000 and 50% 2001 2. Operating Costs for SPR Hatchery 100.0 51% in 1999 90% in 1997 and 1998, 50% in 1999 3. Incremental Recurrent Costs 500.0 and 2000, 10% in 2001 and 2002 Unallocated 5,000.0 Total 40,000.0 Loan arnounts financed by IBRD \a Equipment, furniture and publications Table C.9   Annex D Page 1 of I Project Flow of Funds EXTERNAL FUNDS FEDERAL FUNDS OTHER FUNDS I I ~~~~~~~~~~~~~~~~~~Producers, Commercial I I ~~~~~~~~~~~~~~~~~~ak,Research World Bank SHCP - SEMARNAP InstRutions, etc. AcuaMexico Programs [ ACUAMEXICO 16[SEMARNAP Investment and Operating Capital (Parks, Hatchenes, General Directorate of Aquaculture Training and Monitonng) - Aquaculture Permitting Aqu _Oro-. - Aquatic Health San Andres Producers local communities and - Pilot ICRM Project (with Veracruz) 9 ---government Punta Eugenb - Coastal Inventory and Monitonng Cerro de Oro - Environmental Planning and Assessment El Porto Regional Diagnostic Labs University and Other Labs Vincente Guerrero - Research Fund .4 Research institutions -Project Coordination and Institutional SPR Hatchery Strengthening Penn Shel Scao,o Hatchen - Targeted Investment Fund (with states) 4 - Producers/civil society/public institutions Producers (Land and Capital) Commercial Banks (Operating Costs)   Annex E Page lof 11 Lessons Learned from Past Experience Aquaculture Development 1. Background. Since the first fishery project in 1964, the Bank has supported 97 projects involving fisheries, totaling US$616.5 million in Bank loans. Of these projects only 35 focused on fisheries; in the other projects, fisheries development was just a component. By 1984, when the first review of Bank experience in fisheries was done, aquaculture components amounted to 10% of overall Bank lending for fisheries; there were eight closed and ongoing projects with an aquaculture component and only two had aquaculture development as the main target. Aquaculture has grown significantly in recent years as has Bank involvement in the activity. At present, there are more than ten ongoing projects financed by the Bank promoting aquaculture development. All Bank aquaculture projects are in Asia, reflecting the fact that 80% of the reported world cultivated fish output in 1987 came from Asia, 12% from Europe and 8% from Latin America and Africa. 2. In general, all projects have similar components: (a) off-farm public infrastructure for the construction or rehabilitation of embankments, canals, reservoirs, water control structures, and other facilities to supply farms with fresh water; (b) credit lines to farmers to finance on-farm infrastructure (e.g. minor canals, ponds, pumps, etc.); (c) credit lines to private firms or to public firms for support facilities, especially hatcheries, feed mills, and marketing services (ice plants and cold storage); and (d) institutional support, technical assistance and training for project and government agencies' staff and beneficiaries (Annex Tables F. 1 and F.2). 3. Lessons Learned. The Operations Evaluation Department (OED) work "Review of Bank Experience with Fisheries Development" (1984) found that the overall performance of the Bank's fisheries portfolio had been poor; 46% of the completed fisheries projects were judged by OED audits to have failed to achieve their major objectives. Although there is no specific reference to aquaculture, the report offers good lessons for fisheries projects, which may also be applied to aquaculture investments. Almost all problems encountered could be attributed to administrative and managerial weaknesses in the implementing agencies; weak project concept and design; low technical, extension, and other staff recruitment; and the lack of a coherent Bank approach to the sector due to a shortage of in-house fisheries technical staff. 4. As mentioned, Bank experience with aquaculture projects is limited, most aquaculture projects are at appraisal or at implementation, and only two projects are completed: the Inland Fisheries Project implemented in India from 1980 to 1989 and the Fisheries Credit Project implemented in Indonesia from 1974 to 1981. Their PCRs highlight important lessons learned during implementation.  Annex E Page 2 of 11 5. The Inland Fisheries Project was highly successful in reaching its objectives according to the PCR. Incremental carp production surpassed 220,000 mt (appraisal target was 200,000 mt). The ERR was 65% and exceeded the appraisal estimate (42%), mainly due to higher than expected producer prices. The project also resulted in important employment generation for over 200,000 people and benefits for lower income groups, and contributed to the foundation of a new fish seed industry. Nevertheless, project implementation was delayed due to poor public hatcheries design, shortage of technical staff in the implementing agencies as well as in the Bank, and failure to recognize the private sector role. 6. The Indian project had an unsuitable design of hatcheries that produced problems in finding adequate sites for them and delayed construction. Once the poor design was evident, the Bank was rigid in accepting modifications to the original design. Finally, when the hatcheries were ready, they were large and difficult to manage, especially as there was not enough trained and experienced staff Private sector investors with technical help from the government compensated for the bad performance of the public hatcheries and ensured the overall success of the project. 7. Private entrepreneurs' involvement in the project was not considered at appraisal, but when public hatcheries' failure delayed aquaculture development, the government was glad to technically support investors interested in this profitable activity with adequate size and good management. The private sector also performed extremely well in other areas not included in the project that were not government supported, such as feed production, ice production, cold storage, and other support activities and marketing services. 8. At appraisal, the Government of India considered a subsidy to cover 25% of investment and first year inputs cost for the poorest farmers. Later, during implementation, the government tried to ensure the fastest possible development of aquaculture. It decided to extend the subsidy to every farmer, not only the poorest, and to cover any cost or investment, not just the 25% considered at appraisal. The cost incurred for this subsidy had a negative effect on the government's budget and farmers could take up fish farming without any equity. It is doubtful whether it was necessary to promote aquaculture to such extent given the industry's relatively high profitability. 9. The Fisheries Credit Project implemented in Indonesia from 1974 to 1981 also provides some good lessons. Contrary to the previous example, production was less than estimated due to insufficient credit. Individual loan amounts were insufficient to cover the cost of the necessary improvements. Consequently, farmers could not reach the expected technical requirements to ensure a high production. 10. Cost recovery of the Indonesian project was poor due to low fishpond productivity (para. 9); farmer's lack of understanding of long-term loans; and most of  Annex E Page 3 of 11 the farmers spent their money in other needs and used poor climatic conditions and other excuses for non payment. To ensure a good cost recovery an automatic mechanism of deduction from farmers' fish sales was introduced in a later aquaculture project in Indonesia (Annex Table F. 1) 11. Summarizing, nearly all the most serious problems faced by aquaculture projects, as well as fisheries projects (para. 3), reflect inadequate technical preparation and weaknesses in the implementing agencies, mainly because there was not experience promoting aquaculture and a shortage of specialized and experimented staff in the area. The Bank also suffered from similar weaknesses, and lacked a coherent approach to the sector and sufficient fisheries technical staff. Lessons learned from previous projects suggest an extensive preparation and a realistic evaluation of technical and administrative capacity of national fisheries agencies. For projects introducing a new technology in a country a pilot phase or small-scale initial phase should be considered. Finally, participation and involvement of the private sector should be encouraged. Private investors have been extremely successful and helpful involving in support activities and marketing services. 12. Lessons from Previous Experience with Fisheries in Latin America Latin America and the Caribbean amounted to only 10% of the Bank fisheries lending. When the OED reviewed Bank experience in fisheries development, the region had no project under active consideration. The Bank has not financed any aquaculture project in the region. The report cites the following important lessons from fisheries projects implemented in the Latin American region: (a) with proper legislation and the right incentives, a strong private sector can emerge; (b) the private sector should be involved in project design and implementation; and (c) special attention should be focused on effectiveness of legislation and soundness of pertinent policies and institutions concerning the sector. 13. In 1992, a Bank paper, "Strategy for Fisheries Development," cautions Latin American governments and producers from over-specializing in one or two high value export species, such as shrimp and oyster. The risk is that producers will become too exposed to international price trends. In contrast, aquaculture farmers in Asia produce a variety of fish for the domestic market and are less vulnerable to international price fluctuations. 14. Three agricultural projects implemented in Mexico have had a small fisheries components. The projects covered many different activities, such as livestock, agriculture, fruits, forestry, agro-industries, etc. Fisheries was, in each of the projects, a small component (about 1% of the total project cost). The fisheries components financed: off-shore facilities, such as docks and repair shops; marketing services, cold storage, ice plants and refrigerated trucks; and training courses and extension activities. In general the projects were judged over ambitious and too dispersed. Coordination among the numerous agencies involved was more difficult than expected. The performance of the fisheries components were unsatisfactory. Major  Annex E Page 4 of 11 problems were a weak appraisal design and a lack of technical assistance. Most of the equipment financed was repossessed by the National Fisheries Bank (BANPESCA), or became inoperative due to poor maintenance. There also were many complex social problems regarding fisheries rights, as under the old Fisheries Law only cooperatives and ejidos were allowed to exploit the highest value species. 15. A report for USAID on the socioeconomic development of the shrimp industry in Honduras highlights that steps must be taken to address the social problems caused by converting common resources into concessions for private gain. Local people were denied to access to those areas used as common resources for hunting, fishing and firewood collection that were given in concession for shrimp culture to private fans. Coastal Areas Management 16. There has been no Bank lending specifically for coastal area management in Latin America and experience in other regions is limited (Annex Table F.3). There are two projects now at appraisal in Africa. First, these projects concentrate on the creation or strengthening of existing governmental environment agencies through staff development, training, provision of facilities, and funds for studies. Second, the projects support the development of environmental information systems, which includes the collection, interpretation and presentation of data, in such areas as, land ownership, topographic conditions, meteorological information, etc. Third, they seek to promote public awareness and environmental education through electronic media, print campaigns, etc. Finally, they include pilot programs to improve environmental resources management with the participation of local governments and communities. 17. The Latin America and the Caribbean Technical Department has proposed the following recommendations after studying some cases in the Caribbean: (a) set-up an effective coastal zone management agency in each country; (b) include environmental concerns and studies in the early stages of project development; (c) various studies are often necessary to understand the natural system and thus design the most appropriate and cost effective solution. The study also gives recommendations on the most important functions of a coastal area management agency. They are: environmental planning and permit regulation; monitoring of coastal systems; environmental awareness and education; and legislation, surveillance, and enforcement of legislation. 18. Finally, some Asian agencies' have done case studies on Coastal Area Management Programs (CAMPS) in Southeastern Asia. This work highlights several constraints to the successful implementation of CAMPS. The Ministry of Science, Technology and Environment, Kuala Lumpur; Johor State Economic Unit Planning, Johore Bahru, Malaysia; and International Center for Living aquatic Resources Management, Manila, Philippines.  Annex E Page 5 of 11 a. Interagency rivalry. Agencies feel threatened by losing authority or budget, if many are involved. b. Ineffective law enforcement. Bureaucracy, insufficient trained manpower and budget are main reasons for this constraint. c. Lack of political will. The inability to obtain support of political leadership makes it difficult to implement CAMPs. Political leaders should view CAMPs as programs that provide long- term solutions to multiple-use resource conflicts. d. Lack of alterative livelihoods. Many inhabitants of coastal areas who are heavily dependent on coastal resources lack any other way to earn a living. e. Insufficient budget and institutional capabilities. A smaller geographical area for CAMP implementation has a greater chance of success, especially when funding is a major constraint.  Annex E Page 6 of 11 Table F.1: Background Information on Projects with Significant Aquaculture Components Project Shrimp and Fish Culture Coastal Land Development Fisheries Support Services Inland Fisheries Project Country India China Indonesia India SAR Date 1991 1988 1986 1979 Total Project Cost US$ 95 million US$ 217 million US$ 41 million US$ 67 million Bank Loan US$ 85 million US$ 100 million US$ 24.5 million US$ 19 million Components and - Construction of off-farm and - Aquaculture development, - Off-farm infrastructure - Construction of government Share of Total on-farm facilities (61%) construction of ponds hatcheries, rehabilitation (40%) owned and managed hatcheries Project Cost - Line of credit to entrepreneurs ice plants, feed mills, cold storage, - On-farm facilities improvement (16%) for hatcheries, feed mills, ice etc. (77%) (47%) - Line of credit for farmers to plants, and other support - Animal husbandry development, - Training and technical assistance improve on-farm facilities (32%) facilities (18%) breeding stocks, on-farm facilities, on hatcheries (2%) - Subsidy for on-farm facilities - Line of credit to farmers for feed mills, market facilities, etc - Line of credit to a private firm to improvement and first year inputs first year inputs (9%) (12%) improve cold storage and ice (48%) - Project management, training, - Agricultural development, production (2%) - Training centers and technical extension, and technical support establishment of fruit and nuts - Restructuring of a public fisheries assistance (4%) tbr project staff and beneficiaries production and support facilities firm, technical development and (12%) (6%) support, and coastal zone pilot - Aquaculture animal husbandry, project (a suitable institution and agriculture technology provides inputs and poor fishermen development and extension (5%) labor) (7%) Economic Rate of 30% Aquaculture 30 to 45%, animal 26% 42% in SAR, 65% at evaluation Return in SAR husbandry 28 to 43%, agriculture 16 to 25% Cost Recovery Credits on comnmercial Farmers, entrepreneurs and state Farmers would repay through Hatcheries through commercial basis;other components full cost enterprises would pay loans automatic deduction from fish sales, operation; subsidies were not recovery through leasing according to schedules determined private firms on conmmercial basis, recovered by local governments; extension no cost recovery on the other and training through service fees components  Annex E Page 7 of 11 Table F.1: Background Information on Projects with Significant Aquaculture Components (Cont.) Project Shrimp Culture Freshwater Fisheries Third Rural Credit Fishenies Credit Country Bangladesh China China Indonesia SARDate 1985 1986 1987 1983 Total Project Cost US$ 36.7 million US$ 198 million US$ 340 million US$ 16.8 million Bank Loan US$ 22 million US$ 60 million US$ 170 million US$ 6.5 million Components and - Embankmnents and water control - Construction and improvement of - Aquaculture development, - Provision of boats and other Share of Total structures and hatcheries for existing off-farm facilities, ponds, construction of ponds hatcheries, ice goods for a public enterprise and Cost demonstration and commercial canals, water controls, etc. (70%) plants, feed mills, cold storage, etc. fishermen's cooperatives (28%) purposes (39%) - Construction of hatcheries, feed (10%) - Construction of support - Line of credit for farmers for on- mills and other support facilities - Livestock development, breeding facilities such as ice plants, and farm facilities (24%) and marketing services like cold stocks, on-farm facilities, feed mills, cold storage (40%) - Line of credit to private storage (29%) market facilities, etc (16%) - Line of credit to farmers for entrepreneurs for hatcheries, feed - Training and technical assistance - Agricultural development, improvement of ponds and other mills, ice plants, etc. (8%) for farmers (I%) establishment of fruit, rubber, tea, facilities for shrimp culture - Institutional strengthening and and support facilities (33%) (32%) technical assistance (29%) - Agro-processing development, fruit, rubber, tea, meat, and oilseeds processing plants (40%) - Training and technical assistance for farmers (1%) Economic Rate of 27% 28% 24% 24% for the aquaculture Return in SAR component in SAR, 29% at evaluation Cost Recovery Full cost recovery through Farmers, entrepreneurs and state Farmers, entrepreneurs and state Farmers and cooperatives would licensing fees and export tax enterprises would pay loans enterprises would pay loans repay according to schedules according to schedules determined according to schedules determined coordinated with harvest, public| by local governments; extension by local govermnents; extension and enterprise through commercial and training through service fees training through service fees operation  Annex E Page 8 of 11 Table F.2: Economic and Social Benefits and Environmental Impact on Projects with Significant Aguaculture Components Project Shrimp and Fish Culture Coastal Land Development Fisheries Support Services Inland Fisheries Country India China Indonesia India Economic Benefits Increase in shrimp production Increase in production of Increase in shrimp and skipjack Increase in carp production shrimps, levier, minks, goat, production ducks, fruit, and nuts Poverty Alleviation Higher incomes for 14,200 families Increase in living standards of Creation of 4.3 million man- Creation of 4,000 full-time jobs from the poorest sections of the 115,000 families day/year employment and 10,000 part-time jobs population Environmental - Revegetation with mangroves to - The project would not affect - Support coastal fisheries Reduction of unutilized water Effects compensate necessary removal wildlife intensification rather than the bodies which are breeding grounds - Monitoring wild shrimp seed - Agro-processing plants' design creation of new ponds to preserve for mosquitoes that carry malaria collection and training on shrimp would include waste control the habitat of many wild species and fish conservation - The pilot component will be - Construction of sluices gates for carried out with sound effective water management environmental procedures - Test of shrimp flesh for potential contamination from heavy metals and other contaminants from near-by industries Implications for - Join ownership of ponds by The input and marketing service The input and marketing service Not indicated in SAR Women husband and wife would be required industries would provide industries would provide - The input and marketing service extensive labor opportunities for extensive labor opportunities for industries would provide extensive women women labor opportunities for women Implications for NA NA NA NA Indigenous Groups I  Annex E Page 9 of It Table F.2: Economic and Social Benefits and Environmental Impact on Projects with Significant Aquaculture Components (Cont.) Project Shrimp Culture Freshwater Fishenes Third Rural Credit Fisheries Credit Country Bangladesh China China Indonesia Economic Benefits Increase in shrimp production Increase in fish production Increase in production of tea, Increase in fish and shrimp rubber, fruit, meat, fish, and other production products Poverty Alleviation Increase in living standards of 3,700 Creation of 16,800 temporary Creation of 326,000 full-time Creation of 750 full-time families and employment generation jobs and 6,600 full-time permanent jobs permanent jobs permanent jobs Environment Effects Elimination of salt water from No adverse effects on Improvements to reduce erosion Not indicated in SAR agricultural land environment Implications for Not indicated in SAR Not indicated in SAR Not indicated in SAR Not indicated in SAR Women Implications for NA NA NA NA Indigenous Groups  Annex E Page 10 of 11 Table F.3: Background Information on Coastal Zone Management Projects Project Egyptian Red Sea Coastal and Marine Resource Management Environmental Resource Management Country Egypt Ghana SAR Date 1992 1992 Total Project US$ 5.73 million US$ 35.9 million Cost Bank Loan Grant US$ 18.1 million Components - Preparation of the Coastal Zone Management Plan - Strengthening of existing institution: human resources development, and Share of - Development of government agencies to evaluate, regulate, and environmental education, collection and monitoring system development (62%) Total Project monitor the impact of coastal area development, staff training, and - Introduction on a pilot basis of improved land and water management to reduce Cost facilities land degradation with participation of local governments and communities - Development of facilities to monitor and enforce marine pollution (18%) control - Demarcation of five coastal areas for seabird habitat conservation, - Promote training and public awareness development of a Wetland Management Unit, inventory and monitoring oh the ecology, study of forms of development preserving environment, construction of a marine out-fall sewage (20%) Econoznic Rate NA NA of Return I Economic and - Allocate resources and promote policies for sustainable economic - Improve management of environmental resources, improve availability of Social Benefits development and income generation from tourism, oil, fishing, and information required to make decisions, better understanding of environmental nature conservation implications, and early warning of pollution and degradation - Protection of egyptian reefs and other coastal habitats and actions to - Promote the management of their own environmental resources by mitigate pollution communities - Preservation of ecosystems in coastal wetlands, identification of development options that are compatible with ecological integrity  Annex E Page 11 of 11 Bibliography Chua, Thia-eng, and Daniel Pauly. Association of Southeast Asian Nations. Coastal area Management in Southeast Asia: Policies, management strategies, and case studies. Kuala Lumpur Ministry of Science, Technology, and the Environment, 1989. DeWalt, Billie R. Environmental Study of the Gulf of Fonseca Region, Honduras. Consulting Report for USAID/Honduras. Report still in process. Loayza, Eduardo A. A Strategy for Fisheries Development. World Bank Discussion Paper. Washington D.C., 1992. The World Bank. Environmental Resource Management Project - Republic of Ghana - SAR. Document of The World Bank, Report No. 10691, 1992. . Egyptian Red Sea Coastal and Marine Resource Management Project - Egypt - SAR. Document of The World Bank, Report No. 11131, 1992. -. Shrimp and Fish Culture Project - India - SAR. Document of The World Bank, Report No. 10046, 1991. Inland Fisheries Project - India - PCR. Document of The World Bank, Report No. 9415, 1991. -. Inland Fisheries Project - India - SAR. Document of The World Bank, Report No. 2496, 1979. F. isheries Credit Project - Indonesia - PCR. Document of The World Bank, Report No. 4468, 1983. Fisheries Support Services Project - Indonesia - SAR. Document of The World Bank, Report No. 6290, 1986. Shrimp Culture Project - Bangladesh - SAR. Document of The World Bank, Report No. 5561, 1985. Fresh Water Fisheries Project- China - SAR. Document of The World Bank, Report No. 5976, 1986. Coastal Land Development Project - China - SAR. Document of The World Bank, Report No. 6986, 1988. . Third Rural Credit Project - China - SAR. Document of The World Bank, Report No. 6903, 1987. . Pider II Integrated Rural Development Project - Mexico - PCR. Document of The World Bank, Report No. 6333, 1986. Pider III Integrated Rural Development Project - Mexico - PCR. Document of The World Bank, Report No. 9175, 1990. Seventh Agricultural credit Project - Mexico - PCR. Document of The World Bank, Report No. 7931, 1989. . Coastal Zone Management: Case studies from the Caribbean. Latin America and the Caribbean Technical Department, Regional Studies program, Report No. 26, 1992 . Harvesting the Waters - A Review of Bank Experience with Fisheries Development. Operations Evaluation Department, Report No. 4984, 1984. . The World Bank and the Environment. A progress Report, Washington D.C., 1991.   Annex F Page 1 of 4 Project Logical Framework Narrative V Verifiable Indikators Nia of Inuportant Assumptions Summar O Economically, 1I A minimum 10 % real increase in the 1.1 AcuaMexico and environmentally and income of social sector investors in the individual park corporation socially sustainable project's parks and hatcheries by EOP annual reports aquaculture (end of project). development 1.2 The commercial aquaculture parks 1.2 INE documents accepting comply with Mexican environmental law enviromnental assessments at all times, and periodic environmental audits dunng project as required by INE. 1.3 70% and 60% of the completed 1.3 Mid-term and final projects of the Targeted Investnent Fund project reviews are operational without external support (except technical assistance) at the mid- term review and at EOP review, respectively. Pu= ae ==__ ___._..___._._... Increase productivity of 1. I By EOP, 1500 mt of shrimp, 900 mt 1. I Annual AcuaMexico, (Purpose to Goal) the aquaculture sector of tilapia and 600,000 abalone spat aquaculture enterprise reports 1. I Demand for aquaculture products within a framework of produced: and monitoring indicators. remains stable (or increases) and real social consensus and (a) with AcuaMexico and social prices do not decline by more than environmental and private investors; and, 10%V. soundness. (b) according to the 1. I There is no major disease environmental procedures defined by INE, epidemic (especially for shrimp the parks' best practices manuals, the production) affecting project areas. environmental assessments and in light of 1 I Input prices for commercial the water quality and planning data aquaculture production do not produced by the project. increase by more than 100/o in real 1.2 120 rural aquaculture investment 1.2 Semestrial project terms. projects operational with social sector monitoring reports. investors. X o utp ts _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ . Regulatory I. la Time between submission of permit 1. Ia Md-term and fmnal (Output to Purpose) framework improved request and receipt final of pernut reduced project reports and 1. I ncreased demand for aquaculture and operational to 140 days by December 1998. monitoring indicators. permits from producers (including l. I b New permitting procedures adopted 1. I b SEMARNAP directives social sector producers) by SEMARNAP by July 1998. 1. I Adequate enforcement and 1. Ic New permitting procedures 1. Ic Dissemination monitoring systems exist to enforce disseminated to aquaculture producers by publications and monitoring permiitting requirements. December 1998 (including social sector indicators. 1.2 Adequate government capacity producers). exists to enforce new regulations. 1.2 Two new regulations on genetics and 1.2 Diario Oficial 1.2 U.S. and Canada agree to chemical substances adopted by Mexican regulations I SEMARNAP July 1998. 1 1 tAssumes that 20 percent of the total 150 investment projects supported by the fund are not operational by the end of the project.  Annex F Page 2 of 4 Narrative j erifiable Indicators | Means of Important Ass"gtlons Summary Verification . 2. Management of 2. la Integrated coastal zone management 2. Ia Publication in Veracruz 2.1 Communities and state and environment and coastal plan for Laguna Tamihahua adopted by Diario Oficial. municipal governments have resources improved. Veracruz State Congress by January 2000 adequate resources and interest to 2. lb Integrated coastal zone management 2. lb Annual report of implement ICZM plan. plan is being implemented by local technical assistance firm communities with state and municipal (implementing the pilot) government assistance starting in January indicating amount of money 2000. spent by local governments 2.2a Quarterly water quality monitoring and communities to program operational in Sinaloa, Nayarit implement plan. and Tamaulipas in 1998 with public dissemination program of results within three months of each sampling. 2.2b Coastal wetlands inventories 2.2 Semestrial project 2.2 Producers and communities use undertaken twice (1998 and 2000/01) in monitoring reports and water the wetlands inventory and water Sinaloa, Chiapas, Nayarit, and Tamaulipas quality and coastal inventory monitoring data in their natural and results disseminated to local publications and resource management and investment communities and interested civil society dissemination materials. decisions. organizations within six months of each inventory. 2.3a Land use plans developed in 2.3a Published land use plans 2.3 Producers, communities and Veracruz and Baja California Sur by for Veracruz and Baja government officials (municipal, state December 1999. California Sur. and federal) use the land use plans to 2.3b New guidelines adopted by INE to 2.3b SEMARNAP directive guide their resource allocation assess envirownental impact of publishing new guidelines. decisions. aquaculture investmnents by July 1998. 3. New and improved 3.1 30 research proposals implemented 3.1 Semestrial project public goods and by 2001 with support from the Research monitoring reports and services operational Fund and results disseminated in review of research publications/final reports. Not more than institutions publications 8 proposals are for commercial during mid-term. aquaculture. 2 3.2 At least two laboratories are 3.2 Semestnal project incorporated into the regional diagnostic monitoring reports. laboratory network by Decemnber 1999 4. Expanded capacity 4.1 Three tilapia parks, one shrimp park, 4.1 Annual reports of park 4.1 and 4.2 Social sector producers for commercial and rural one penn shell hatchery, one SPR hatchery enterprises and semestrial have sufficient interest, capital and aquaculture involving and one abalone hatchery operational with project monitoring reports. resources (e.g. land) to participate in social sector social sector and AcuaMexico Fund the aquaculture enterprises. participation in place investment (excluding the SPR hatchery which may not involve social sector investment) by December 31, 2000. 4.2 150 rural aquaculture investment projects with economically deprived social 4.2 Semestrial project sector producers supported by Targeted monitoring reports, and mid- Rural Investment Fund by EOP 3 term and final project reports. I 2Assumes the average proposal will be for US$37,000 and that the total fund budget is US$ 1.1 10 million. 3Assumes the average project size for the targeted investment fund is US$35,000 and that US$300,000 of the allotted US$5.5 million is for technical assistance.  Annex F Page 3 of 4 Narrative Verifiable Indicators Means of Important Assumptions Summary Verification 5. Institutional 5.1 70 % of social sector producers in the 5 1 Mid-term review and framework in place to parks maintain that they have received final project reviCW support social sector and adequate technical assistance and training innovative commercial to understand operation of the enterprise aquaculture investments during the mid-term and final project reviews. 5 2 Aquaculture parks are efficiently 5 2 Mid-tenn and final managed and disease, enviromental and project reviews. AcuaMexico social risks are minimized throughout the arunual reports, and enterprise life of the project. aninual reports 5.3 New aquaculture investment 5.3 2 new aquaculture enterprises 5 3 AcuaMexico lund annual projects and investors are identified supported by AcuaMexico Fund by reports that are in accordance with the December 2001 AcuaMexico mandate contract 4 Activities: Inputs (US$) I. I a SEMARNAI1 to (1.1) 50(),0()0 (Activity to Output) develop and disseminate new guidelines for , - rm.l I to 5.2 I'he Directorate General of aquaculture permiting PIroject annual budget Aquaculture has sufficient material lI.b SEMARNAP to submitted to SHCP for and human resources to implement establish on-line permit prograrmed expenditures iI the project. registry D)ecember anid SeMeStrial 1.2 SEMARNAP to (1.2) 300,000 fdinancial moiitoring develop and adopt six indicators lo: actual new aquatic health cxpenditures regulations 2.1 Develop, formally (2.1) 2,700.000 adopt and initiate implementation of coastal zone pilot mangement plan in Veracruz with local community and municipal govemnnent involvement 2.2 Establish regular (2.2) 1,800,000 water quality monitoring program and wetland inventory and publish and disseminate results 4Without physical and price contingencies  Annex F Page 4 of 4 .arrative Verifible Iiiiators Means of . Imp orant A mptoni SummEnary . : . . Verificataon. Activities: Inputs (US$): 2.3 SEMARNAP to (2.3) 600,000 contract, adopt and disseminate new guidelines for EA preparation for aquaculture investments. 3.1 Establish and (3.1) 1,100,000 operate research fund 3.2 Equip and train staff (3.2) 3,400,000 in at least two regional public or private diagnostic laboratories and in the central aquaculture laboratory. 4.1 Project coordination (4.1) 2,600,000 and institution strengthening 5.1 Construct 7 new (5.1) 27,200,000 5.1 Social sector producers have commercial aquaculture sufficient interest and resources to production facilities and participate, there are no land tenure operationalize with problems or important difficulties social sector with interested actors. participation (except the SPR facility). 5.2 Establish and (5.2) 5,600,000 5.2 Interest and quality proposals are operate Targeted put forth. Investment Fund. 6. la Design and (6.1) 1,400,000 implement park investor training and monitoring program (scholarship fund, bi-annual workshops, park councils and bi-annual fora). 6. lb Design and implement park management training program (includes construction of training facilities). 6.2 Establish (6.2) 4,200,000 6.2 Receive sufficiently qualified AcuaMexico Mandate proposals with appropriate Fund and hire experience and skills mix. management company  Annex G Page I of I List of Documents in Project File GOM Documents Mexico Fisheries Law, 1992. Programa de Acuacultura Rural (Marzo de 1993) Programa de Desarrollo Integral de la Acuacultura (1990-1994) Parques Acuicolas-Modelo Administrativo y Operativo Acuerdo Nacional para la Modernizacion en la Acuacultura Plan Para el Desarrollo Social y de Comunidades Indigenas (October 27, 1994) Sectoral Environmental Assessment for the Mexico Aquaculture Development Project, May 1994. Programa de Pesca y Acuacultura 1995-2000 Project Working Papers Working Paper No. 1: Review of Aquaculture Financing in Mexico, August 1993. Working Paper No. 2: Aquatic Health in Mexico, November 1994. Working Paper No. 3: Environmental and Integrated Coastal Resources Management Components. Working Paper No. 4: Economic Analysis Tables, February 1997. Working Paper No. 5: Project Cost Tables, February 1997 Working Paper No. 6: Aquaculture Development in Mexico Technology Integration and Resource Management, December 1994 Working Paper No. 7: Social Assessment of Mexico Aquaculture Project, April 1994. Working Paper No. 8: Social Strategy and Indigenous Peoples Development Component (Annex A of Yellow Cover, Staff Appraisal Report), March 6, 1995. Working Paper No. 9: Informe de Trabajo sobre Mexico Aquaculture (Fundacion Chile), (June 1995) Working Paper No. 10: Mexico Aquaculture Development Project, Marketing Component, Pre-appraisal report, September 1994   Annex H Page 1 of 3 Glossary of Terms Aquaculture Farming of aquatic plants or animals. Aquaculture Research Basic Aquaculture Research analyzes nutritional, growth, reproductive and environmental requirements of aquaculture production. Disease issues may also be addressed. Rural Aquaculture Research analyzes issues associated with reservoir and small pond, river, and canal aquaculture (carrying capacity, effluent management, stocking levels, identification of locally available resources, etc.). Environmental Aquaculture Research assesses: (a) the impact of aquaculture on the surrounding environment (water quality, wetlands ecosystems, etc.); (b) the impact of the environment on aquaculture (mainly water quality issues associated with deforestation, agro-chemicals and sewage); (c) issues related to endangered and overexploited aquaculture species. Commercial Aquaculture Research evaluates issues related to operating a successful commercial aquaculture enterprise (farm design, costs and impact on financial viability, disease management and prevention, etc.). Battered Fish product that has been coated with a flour-based product. Broodstock Male and female adult forms of shrimp or fish used in hatcheries to spawn larvae. Butterflied A shrimp tail that has been split in half and flattened. Cage aquaculture Farming of aquatic animals, typically fish, in cages made of wood or other water-resistant materials, immersed in areas of large water bodies such as reservoirs, lakes, or bays that are protected from strong wind and wave action. Catch per unit effort A measure used in capture fisheries to assess the average volume of catch (measured in tons or kilograms) per unit of fishing time for a known gear type and vessel class. Communal land communities A community created under Spanish rule that consists of a special charter of land allocated mainly to indigenous groups. The special rights and charters of communal lands were recognized by the agrarian reform legislation of 1915 and 1992. Depuration Holding filter-feeding bivalve mollusks, such as oysters, in clean water for a period of approximately 1-2 days to remove any pathogens that may have accumulated in the gut.  Annex H Page 2 of 3 Ejidatario A member of an ejido. Ejido Land and water resources the title of which has been given to a village as a whole (since the Agrarian Reform of 1915) and which are exploited collectively or individually by the members of the village. The revised Article 27 of the Constitution grants ejidos ownership rights over their landholdings and allows them to sell their land to non-ejido members. Fingerlings Small, juvenile form of fish, just after egg-fry stage when the egg sack has been absorbed. Fisheries The hunting and gathering of wild aquatic species. Growout ponds Earthen ponds used to grow shrimp to market size. These ponds can be stocked directly with PLs or with larger animals transferred from nursery ponds. Commercial Aquaculture Relatively large-scale, high-yield farming of aquatic plants or animals, typically done as semi-intensive or intensive mono-cropping. Infectious Hypodermal and Hematopoietic Necrosis (IHHN) Virus A virus causing infection and disease, of varying severity, that occurs among all commonly cultured species of shrimp world wide. IHIHN virus was most probably introduced to Mexico in the mid-1980s with imported stocks of P. vannamei, the shrimp species most commonly cultured in the Western Hemisphere. Runt deformity syndrome in P. vannamei has been linked to IHHN virus infections. Hazard Analysis Critical Control Points (HACCP) A management system designed to control, at each critical point in the production and processing chain of seafood, the biological, chemical or physical hazards that present unacceptable risks to the consumer. Nauplii The larval from of shrimp just prior to metamorphosis to the PL form. Nauplii are sometimes sold by larger hatcheries to smaller hatcheries for the production of post-larvae. Nursery ponds Small, earthen ponds used to grow shrimp from PL to juvenile form, typically to a size of 1 gram or less. These ponds are used to facilitate more accurate stocking of grow-out ponds. Peeled butterflied A shrimp tail with the carapace removed. Post-larvae (PL) An early juvenile benthic (bottom-dwelling) form of shrimp just after metamorphosis from the larval, planktonic form. PLs, either collected from the wild or produced by hatcheries, are the typical form of shrimp used to stock nursery or grow-out ponds. Restocking aquaculture Release of hatchery produced fingerling fish into open water bodies, such as reservoirs, for later capture by fisherman using boats and nets. Also known as inland fishing in Mexico. Outside Mexico, commonly known as capture fisheries enhancement stocking.  Annex H Page 3 of 3 Rural aquaculture Relatively small-scale, low-yield farming of aquatic plants or animals, often integrated with terrestrial crop and livestock production or other nonagriculture income- generating activities. Also known as integrated agriculture-aquaculture. Small pelagic fisheries Offshore, open water fishing activities targeting small fish, such as sardines and anchovies, that live at medium depths. Social sector producer A producer who is a member of an ejido, cooperative, communal lands community, as well as any economically disadvantaged producer. Spat Juvenile, benthic form of mollusks, including bivalves such as oysters, just after metamorphosis from larval, planktonic form. Spat settle out of the water column onto the bottom or other suitable substrate where they then grow to adult size. Specific Pathogen Resistant (SPR) shrimp hatchery A shrimp hatchery specially designed and stocked with SPR broodstock, and operated under strict quarantine protocols to produce PLs that are resistant to specific pathogens.  I  Annex I Page 1 of 3 Aquaculture Production and Marketing in Mexico Production Aquaculture is defined as the raising of aquatic species in a controlled environment (Annex H). Aquaculture production in Mexico is characterized by a large, traditional sector that includes reservoir restocking (also known as inland capture fishing) and small pond aquaculture, and a small, but rapidly growing, high-yield modern commercial sector. The three main forms of aquaculture practiced in Mexico are: (a) Restocking aquaculture or inland capture fishing takes place in large, natural or constructed (reservoirs, irrigation canals) water bodies. There are 13,535 dams and reservoirs in Mexico, covering approximately 1.2 million ha, although 72% of the restocking output is from a few (23) large dams with surfaces exceeding 10,000 ha. Restocking aquaculture accounts for the majority of the sector's output (64%), and Mexico is the largest reservoir fish producer in Latin America. Government- supported fingerling stations (hatcheries) annually stock hundreds of reservoirs and dams with finfish fingerlings (mainly tilapia and carp). Government aquaculture policy in the 1970s and 1980s focused on restocking aquaculture and built most of the existing hatcheries. The actual harvest is by small artisanal and commercial fishermen and is a form of capture fisheries. Many social sector families exploit restocked reservoirs, as this business requires a minimal investment and only basic technical skills. (b) Rural aquaculture is often combined with agricultural efforts by small farmers. Rural aquaculture is based on the introduction of juvenile forms into small, permanent or temporary bodies of water, which may also be used for livestock and small-scale irrigation. Only a relatively small fish population can be supported in a given water body with rural aquaculture, as it relies upon no inputs other than those provided by nature. Rural aquaculture is most common among subsistence- oriented producers. (c) High-yield commercial aquaculture was introduced in Mexico in the 1980s and occurs in specific areas designed for semi-intensive and intensive aquaculture production. It requires skilled labor, as well as significant capital investments, and involves relatively high operating costs (mainly feed, electricity and diesel fuel). Coastal shrimp farms and inland reservoir cage culture are the most important forms of high-yield commercial aquaculture. Commercial aquaculture offers the greatest potential for growth. Thus far, private investors dominate this type of aquaculture.  Annex I Page 2 of 3 2. Aquaculture is a relatively recent activity in Mexico. It has been dominated by the production of freshwater species (tilapia, carp, catfish, charal and trout) in inland water bodies located in Mexico's coastal states. Total aquaculture production in 1994 was 176,200 tons. This represented about 14% of total fisheries production in the country and placed Mexico 14th in the world for aquaculture production. The majority of the sector's output is tilapia (46%), followed by oysters (18%), carp (15%), and shrimp (9%). Mexico currently has 65,000-70,000 ha in aquaculture production, of which 16,000 ha are shrimp farms. In the case of shrimp, this represents less than IO% of the total area suitable for shrimp farming. 3. Aquaculture production is concentrated in the 17 Pacific and Gulf coastal states, which account for 80% of total output. The 11 Pacific coastal states account for the majority of tilapia production and almost all of shrimp output. Oysters are the principal contribution of the six Gulf coastal states. The share of the inland states in total output is 20% and has risen slightly since the late 1980s, reflecting the increased production of freshwater species (especially trout and carp). 4. Aquaculture production increased steadily during the 1980s, but with the exception of shrimp and trout, has either stagnated or declined in the 1990s. Since 1990, captures of freshwater fish in inland water bodies have stagnated, reflecting declining production of fingerlings by government hatcheries, as well as overexploitation of inland water bodies. In contrast, trout production has increased due to greater private sector involvement and better management of government trout hatcheries, which have traditionally charged for trout fingerlings. Oyster harvests have also declined, dropping by 55% between 1989 and 1993, reflecting the reduced demand for oysters during the cholera epidemic in 1991-92 on the Gulf coast, which produces 91 % of all oysters. Data for 1995 suggest that oyster output has started to recover as the epidemic has been brought under control. In contrast, shrimp production increased by more than five time between 1989 and 1993, although it remains a small share of total aquaculture production (9% in 1994). The rapid expansion of shrimp production reflects its attractive economic prospects and the lifting of restrictions on private sector involvement in shrimp. 5. Several factors constrain the productivity of aquaculture production in Mexico. First, aquaculture is limited by the inadequate technical knowledge of social sector producers, which has led to poor site selection for ponds and difficulties in holding and reproducing juvenile forms, and has encouraged their quasi-exclusion from commercial aquaculture. Second, aquaculture is constrained by disease risks, such as diseases similar to the Taura syndrome that causes cumulative losses of 50% to 90% of the affected populations and the IHHN virus that reduces growth rates, production and market value. Third, the development of aquaculture has been limited by inadequate support services, particularly research and diagnostic laboratories. Marketing 6. Almost all of Mexico's aquaculture production is either marketed nationally (55%-60%),  Annex I Page 3 of 3 or consumed directly by the producer (34-39%); only 6% of the total output is exported Rural aquaculture production is mainly for on-farm consumption with small surpluses sold in the local community. Restocking production is consumed directly by the producers or sold in local and regional markets. 7. Commercial aquaculture production is directed toward specific urban markets (especially Mexico City, Guadalajara, Monterrey), and the better quality output is exported. Shrimp accounts for about 85% (in value) of total aquaculture exports, and the remainder consists of small amounts of tilapia, oysters, scallops, and abalone. The United States accounts for most exports However, small amounts of oysters and abalone are exported to Asia (mainly Japan and Hong Kong), and small amounts of shrimp are also exported to Canada and Europe Processing activities remain fairly basic and most of the shrimp are exported frozen/headless/shell-on, as opposed to peeled/frozen/ headless, peeled/butterflied, or battered/butterflied, all of which offer greater value added. 8. Prior to 1992, most exports were through processing and marketing companies owned by the Government (e.g., Ocean Gardens), and to a lesser extent, the social sector. Since the adoption of the 1992 Fisheries Law (Box 1), private producers may have their own processing facilities and may engage in direct sales. As a result, in the last two years many private investors have purchased facilities owned by Ocean Gardens or the social sector to form integrated production, processing and marketing companies, particularly for shrimp 9. There are three sets of constraints to the marketing of aquaculture output. First, many of Mexico's processing plants that until recently were almost exclusively in the public sector, have out-of-date technology, infrastructure, and sanitary conditions. Many of these plants will not be able to satisfy the HACCP (Hazard Analysis Critical Control Points) program guidelines, developed for the European Union (EU) and US markets, which are expected to be adopted in Mexico in 1997. After 1998, Mexican firms that do not meet HACCP criteria will not be able to export to the US or the EU However, the expanded opportunities for private sector investment in production and processing activities under the new regulatory framework, coupled with the current favorable export opportunities, provide increased incentives for investments in infrastructure. 10. Third, Mexico faces competitive world markets, particularly in the medium term. While export opportunities remain very attractive for shrimp and tilapia over the next two to three years, medium- to long-term market conditions include increasing competition. The tilapia market will face increasing production from Costa Rica, Columbia and Taiwan. Similarly, the attractiveness of the shrimp market will depend on the extent to which China's and India's shrimp production recovers from the recent disease epidemics and the speed at which other competitive producers (e.g.. Viet Nam and Thailand) are able expand their exports   IBRD 2669oR 100' 90, BAJAnod -SFlp J -N~~~~~-1 - UNITED STATES OF AMERICAPid-Nq-~ BAJA C0 N d0 9 A CHIHUHUAHUA SATE I 2~~~~~~~~~~~~~~~~~~ All I~ ~ ~ ~~~~~-- - CAIFRI N1~ ALO EHAH PR ST _ * oLoPenLo,' AQU~~~~~~~~~~~~~~~~LEN nACULTURK RES POJC G- NATr(NocoMrc. ~PONEALAIA Obregac S~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ SAECPTATES 21 CALIFORNIA <2 oNoaoIQoK I .h ,6 0U RA G RICALLO CITESHCH PARK SITES 'N -. I % Macglean ~~~~~~~~~~~~~~~~~GurrC - -SHRIMP PONARKITES 3 '~~~ ILODEIL&OtA OGcccen* Tnrrtr~~~~~~~~~~~~~~~ S~~~hIkC