Mexico - Agricultural Productivity Improvement Project

Document of The World Bank 18640 ME PROJECT APPRAISAL DOCUNIENT ON A PROPOSED LOAN IN THE AMOUNT OF US$444.45 MILLION EQUIVALENT TO NACIONAL FINANCIERA, S.N.C. WITH THE GUARANTEE OF THE UNITED MEXICAN STATES FOR A AGRICULTURAL PRODUCTIVITY IMPROVEMENT PROJECT NOVEMBER 30, 1998 Environmentally and Socially Sustainable Development Mexico Country Managing Unit Latin America and the Caribbean Region  CURRENCY EQUIVALENTS (Exchange Rate Effective September 1998) Currency Unit = Mexican Peso (Mx$) Mx$1.0 = US$.11 US$1.0 = Mx$9.0 FISCAL YEAR ABBREVIATIONS AND ACRONYMS ALCAMPO Proyecto de Mejoramiento de la Productividad Agropecuaria Agricultural Productivity Improvement Project BANRURAL Banco Nacional de Credito Rural S.N.C. National Rural Credit Bank CADER Centro de Apoyo para el Desarrollo Rural Rural Development Support Center CEA Consejo Estatal Agropecuario State Agricultural Council CNA Comisi6n Nacional del Agua National Water Commission COTEGAN Comisi6n T&enica de Ganaderia Livestock Technical Commission CPT Cedula de Perfil Tecnico Technical Profile Forrn DDR Distrito de Desarrollo Rural Rural Development District DGPOP Direcci6n General de Programaci6n, Organizaci6n y Presupuesto General Directorate for Programming, Organization and Budget ECP Equipo de Coordinaci6n del Proyecto Project Coordination Team FIRCO Fideicomiso de Riesgo Compartido Trust Fund for Shared Risk GOM Gobiemo de Mexico Government of Mexico [NE Instituto Nacional de Ecologia National Ecology Institute INI Instituto Nacional Indigenista National Institute for Indigenous Affairs INIFAP Instituto Nacional de Investigaci6n Forestal, Agricola y Pecuaria National Institute of Forestry, Agricultural and Livestock Research Vice President: Shahid Javed Burki Country Director: Olivier Lafourcade Sector Manager: Maritta Koch-Weser Sector Leader: Adolfo Brizzi Task Team Leader: Michael Carroll  M&E Seguimiento y Evaluaci6n Monitoring and Evaluation MIS Sistema de Informaci6n Gerencial Management Information System O&M Operaci6n y Mantenimiento Operation and Maintenance PAC Programa Alianza para el Campo Alianzapara el Campo Program PEAT Programa Elemental de Asistencia Tecnica Elemental Technical Assistance Program PRODAT Programa de Desarrollo de Areas de Temporal Rainfed Areas Development Project PRODEP Programa de Desarrollo de Riego Parcelario On-Farm Minor Irrigation Improvement Project PRODUCE Fundaciones PRODUCE PRODUCE Agricultural Research Foundations PROFEPA Procuraduria Federal de Protecci6n del Ambiente Federal Environmental Protection Agency SAGAR Secretaria de Agricultura, Ganaderia y Desarrollo Rural Secretariat of Agriculture, Livestock, and Rural Development SECODAM Secretaria de Control de Administraci6n Secretariat of Administrative Control SEMARNAP Secretaria de Medio Ambiente, Recursos Naturales y Pesca Secretariat of the Environment, Natural Resources and Fisheries SINDER Sistema Nacional de Extension Rural National Extension System TRA Autoridad de Revisi6n Tecnica Technical Review Authority  MEXICO AGRICULTURAL PRODUCTIVITY IMPROVEMENT PROJECT CONTENTS A. Project Development Objective .................................................................2 1. Project development objective and key performance indicators .........................................2 B. Strategic Context .................................................................2 1. Sector-related CAS goal supported by the Project ...............................................................2 2. Main sector issues and Government strategy ..............................2 3. Sector issues to be addressed by the project and strategic choices .................... ..................4 C. Project Description Summary ................................................................5 1. Project components .................................................................5 2. Key policy and institutional reforms supported by the project ...................... .....................5 3. Benefits and target population .................................................................5 4. Institutional and implementation arrangements ................................................................. 6 D. Project Rationale ................................................................ 10 1. Project alternatives considered and reasons for rejection ................................................... 10 2. Major related projects financed by the Bank and/or other development agencies ............. 11 3. Lessons learned and reflected in proposed project design ............................ ..................... 12 4. Indications of borrower commitment and ownership ......................................................... 12 5. Value added of Bank support in this project ............................................................... 12 E. Summary Project Analyses ............................................................... 13 1. Economic ................................................................ 13 2. Financial ................................................................. 13 3. Technical ............................................................... 14 4. Institutional ............................................................... 14 5. Social ................................................................ 15 6. Environmental assessment ................................................................ 15 7. Participatory approach ................................................................ 16 F. Sustainability and Risks ............................................................... 16 1. Sustainability ................................................................ 16 2. Critical risks ................................................................ 17 3. Possible controversial aspects ................................................................ 17 G. Main Loan Conditions .................................................................18 1. Effectiveness conditions ..................................................... 18 2. Other .................................................... 18  H. Readiness for Implementation ....................... 18 I. Compliance with Bank Policies .18 Annexes Annex 1. Project Design Summary ........................................ 19 Annex 2.a Detailed Project Description ........................................ 21 The Alianza para el Campo Program ... ..................................... 21 Project Activities ......................................... 23 Environmental Aspects ....................................... 27 Annex 2.b Participation of Indigenous Communities ....................................... 31 Annex 2.c Project Monitoring and Evaluation ....................................... 35 Annex 3. Estimated Project Costs ....................................... 45 Annex 4. Cost-Benefit Analysis Summary ........................................ 46 Annex 5. Financial Summary ....................................... 51 Annex 6. Procurement and Disbursement Arrangements ..................... .................. 52 Table A. Project Costs by Procurement Arrangements ....................................... 55 Table B. Thresholds for Procurement Methods and Prior Review ............................. 56 Table C. Allocation of Loan Proceeds ........................... 57 Annex 7. Project Processing Budget and Schedule ........................... 58 Annex 8. Documents in Project File ........................... 59 Annex 9. Statement of Loans and Credits.................. .. . 61 Annex 10. Country at a Glance ............ .. 63  MEXICO AGRICULTURAL PRODUCTIVITY IMPROVEMENT PROJECT Project Appraisal Document Latin America and the Caribbean Region Mexico Country Management Unit Date: November 30, 1998 Task Team Leader/Task Manager: Michael Carroll Country Director: Olivier Lafourcade Sector Manager/Director: Maritta Koch-Weser Project ID: 48505 Sector: Agriculture Program Objective Category: Environmentally Sustainable Development Lending Instrument: Specific Investment Loan Program of Targeted Intervention: [XI Yes [ ] No Project Financing Data [X] Loan I ] Credit [I Guarantee I] Other ISpecifyl For LoanslCredits/Others: Amount: US$444.45 million Proposed terms: I Multicurrency [XI Single currency. UJS Dollar Grace period (years): 3 years [ Standard Variable [Xl Fixed I I LIBOR-based Years to maturity: 9 years Commitment fee: % Front end fee: % Financing plan (US$m): Source Local Foreign Total Federal Government 66.2 12.0 78.8 State Government 32.3 0.0 32.3 IBRD 332.7 111.8 444.5 Total 431.2 124.4 555.6 Borrower: Nacional Financiera S.N.C. (NAFIN) Guarantor: United Mexican States Responsible agency: Ministry of Agriculture, Livestock and Rural Development (SAGAR) Estimated disbursements (BankFY/US$M): 1999 2000 2()01 2002 2003 Annual 71.1.0) 120.9 124.6 87.5 39.9 Cumulative 71.1 192.1 316.7 404.1 444.5 Project implementation period: 4.5 yrs. Expected effectiveness date: March 1999 Expected closing date: 06/30/2003  Project Appraisal Document Page 2 Country: MexAco Project Title: Agricultural Productivity Improvement Project A: Project Development Objective 1. Project development objective and key performance indicators (see Annex 1): To increase capitalization of small farmers and improve their productivity and income by promoting the adoption of sustainable agricultural production systems, by providing technical and financial assistance to eligible beneficiaries under a matching grant scheme. This would be done within the framework of selected programs currently being executed under the ongoing Agricultural Development Program Alianzapara el Campo (PAC). This objective would be achieved through: (i) the improvement of access of small and poor farmers to the activities currently supported by the three programs of the currently 90% disbursed Bank-financed Rainfed Areas Development Project (PRODAT) (Loan 3778-ME), as well as the Rural Development Program, that are being executed under Alianza; (ii) promotion of a better integration of the various activities of Alianza aimed at the development of irrigated and rainfed agriculture; (iii) generation, validation and transfer of technologies suited to small farmer production conditions; (iv) strengthening production support services for small farmers; and (v) support of the Government promoted decentralization process by strengthening the planning and implementation capacity of the State institutions and producers' organizations. Key performance indicators of progress towards project objectives are outlined in Annex 2c. They will be measured through a M&E system centered on physical-financial input and output indicators for monitoring purposes, combined with outcome and impact indicators for the purpose of evaluating development performance. Performance indicators would mainly focus on changes in farm productivity, household income, level of farm capitalization and adoption rates of new technologies being promoted. B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1): GAS document number: R96-207 CAS Program Report R98.49 Discussed March 26, 1998 The joint IBRD/IFC Mexico Country Assistance Strategy and the latest CAS Progress Report emphasizes a development agenda with three core interrelated aims: (i) sustainable growth; (ii) social development; and (iii) modernization of the State. The proposed project, which is a targeted operation, will contribute directly to the CAS objectives of sustainable development through improved productivity of small farmers and expanding the opportunities of this sector to access financial assistance for investment. It will also contribute the modernization of the State by assisting the Government in its decentralization efforts, bringing beneficiaries into the decision making process, and fostering closer cooperation between public services and the private sector. 2. Main sector issues and Government strategy: Agriculture remains a weak sector of the Mexican economy. In 1996, agricultural Gross Domestic Product (GDP) accounted for about 6% of total GDP, down from 19% in 1960. The sector's slow growth coupled with stagnating productivity and wages, has resulted in a decline in the sector's employment from 50% to 25% of the total labor force during the same period. Nevertheless, agriculture could remain an important economic sector provided, on the one hand, its commercial sector continues to be competitive through the permanent use of modern technologies and increased yields and on the other, the productive potential of the small farmer agriculture, especially in rainfed areas, can be fully developed.  Project Appraisal Document Page 3 Country: Mexico Project Title: Agrcultural Productivity Improvement Project During the late 1 980s and early 1 990s, the Government of Mexico implemented an important set of reforms in the agricultural sector including liberalization of prices and marketing, trade reforms, and privatizations. Additionally, it also revised the regulatory and legal framework of land tenure as well as of the water and forestry sectors. The Government also promoted a greater role of the private sector in the provision of support services. Following these reforms, Government support switched from commodity price subsidies to non-distortionary direct income transfer to producers through the PROCAMPO program and has established the bases for a gradual exposure of the Mexican economy to international trade and globalization, mainly to the North American Free Trade Agreement (NAFTA). Despite the reforms and policy changes, the performance of the agricultural sector has been lagging and for most of the 1 990s its growth has stagnated. Sector performance has remained relatively isolated from recent macro-economic events such as the major financial crisis and devaluation at the end of 1994, the impressive recovery in 1996-1997, and the economic crisis that afflicted the country at the end of last year. However, agricultural exports are expanding and some diversification of production is taking place. But the impact of the reforms and the production response seems to have been limited mostly to the commercial sector. Furthermore, rural poverty has been expanding in recent years and the limited options available to small producers to cope with income and consumption fluctuations, have induced farmers into risk averse investment strategies thus widening the gap with the modern commercial sector competing in the international market. Improving the delivery of financial services to the rural population remains one of the main constraints to the development of the agricultural sector. The Government has started a process of liberalization of interest rates, phasing out government support to state-owned financial institutions, while providing incentives for the private financial sector to increase its presence in the rural areas. Penetration of financial services, in general, in the rural areas remains deficient, although some schemes of savings and loans and micro-finance activities have developed. However, access to financial resources for productive investment continues to be rather limited, especially for small farmers. The Government's sector development strategy, which would be supported by the Bank, includes the following main lines of action: a) maintaining the policy framework and strengthening the market economy; b) pursuing second generation type of reforms in factor and output markets (financial services, access to output markets, land and water markets; labor markets); c) increasing agricultural productivity of small and medium-sized farmers; d) promoting the integration of small farmers in the economic growth process; and e) strengthening institutional development and decentralization and better integrating cultural and gender perspectives. In 1996, the Government launched a national agricultural and rural development program (Alianza para el Campo) to increase capitalization in the agricultural sector with the aim of promoting improved agricultural productivity and production, and increased income of farmers. It fosters agricultural productivity by promoting productive investment (under a matching-grant scheme) and providing more effective support services (research, extension, information, training) for a wide  Project Appraisal Documnent Page 4 Country: Mexico Project Title: Agricultural Productivity Improvement Project range of agricultural sub-programs. The cornerstone of the Alianza program is its decentralized approach, with a delegation of administration and decision-making to the States, as well as a substantive contribution of the States to the program's budget. The program offers the opportunity and the operational mechanism to implement a decentralized, demand-driven approach to channel technical and financial assistance directly to small farmers. 3. Sector issues to be addressed by the project and strategic choices: The project would aim at assisting the Government in its effort to increase capitalization in agriculture and promote sustainable agricultural productivity and facilitate the access of small farmers to the benefits of the Alianza program and agricultural development in general. In shaping the underlying strategy of the project the Government has made a number of choices: a) it promotes, under its federalization policy, the transfer of responsibility for implementation of the programs to the states and the strengthening of local ownership; b) it recognizes the lack of capital for productive investment as a key constraint to unleash the development potential of small farmer agriculture and adopts a demand-driven and participatory approach for investment decisions; c) it facilitates access to financial resources required through a matching grant system to promote productive investments, while moving away from traditional general subsidy schemes; d) it places demand-driven and participatory approaches also at the core of a capacity building process in which beneficiaries and farmer's organizations become partners and clients in the provision of support services.  Project Appraisal Document Page 5 Country: Mexico Project Title: Agncultural Productivity Improvement Project C: Project Description Summary 1. Project components (see Annex 2a for a detailed description and Annex 3 for a detailed cost breakdown): Component Category Cost Incl. % of Bank- % of Contingencies Total financi Bank- (US$M) (US$M) financing 1.- Productive Investment Physical 343.3 62 272.0 80 Under this component, the project would finance small grants for demand- driven subprojects currently financed under the ongoing Bank-financed PRODAT Project, aimed at small irrigation development and modernization, improved pasture establishment and management, improved dairy production technology and marketing, as well as subprojects providing small-scale on-farm infrastructure and minor equipment and supplies. 2.- Production Support Services Capacity 172.9 32 137.0 80 This component would include Building financial support for applied research and technology transfer as well as demand-driven extension, technical assistance and training to small farmers. 3.- Institutional strengthening and Institutional 34.9 6 31.0 100 Project Administration Building/ This component would support training Project and technical assistance to staff with Management implementation responsibilities at the central and state levels, with particular emphasis on subproject preparation and selection mechanisms and procedures; the development and implementation of a comprehensive monitoring and impact evaluation system; and the establishment and operation of a Project Coordination Team (ECP) Total 551.1 100 440.0 80 'Total Loan amount is US$ M4.45 due to the supplemental front end fee of 1% 2. Key policy and institutional reforms supported by the project: The project builds on existing policy and institutional framework and does not pursue key policy and institutional reforms, but focuses on strengthening the decentralization process and progressive delegation of decision-making responsibilities at the state and local levels. 3. Benefits and target population: The project would provide technical and financial assistance: a) for productive investments to some 240,000 small commercial farmers who would improve their productivity and competitiveness in an  Project Appraisal Document Page 6 Country: Mexico Project Title: Agrcultural Productivity Improvement Project increasingly open economy; b) for subprojects providing small-scale on-farm infrastructure and minor equipment and supplies for up to 750.000 poor rural households; and c) for demand-driven technical assistance, training and extension activities to approximately 1.5 million poor and small farmers to improve their level of income and standard of living. The project activities, although nationwide in scope, would be targeted to groups of eligible beneficiaries including indigenous people, women and rural youth located mostly in the Center and Southern States of the country, i.e., the areas with the largest concentrat.un of small and poor farmers. Eligibility of households would be screened applying simple and easily verifiable criteria based on size of holding and/or livestock assets. Economic benefits of the project would be the result of increased agricultural production and farmers' income. The analysis of a sample of farm models would indicate that small commercial farmers wou!d generate a significant increase in on-farm income as a result of productive investment financed under the project (see Annex 4). Project investments targeted to poor farmers would have not only a positive impact on household income but would also result in improvement in overall food security. As a result of project activities, small rural business and enterprises are expected to develop, which would have a positive impact on local employment. The project would also promote private sector participation in the provision of production sunport services, particularly technical assistance to producers, which is expected to increase the impact of project-financed on-farmn investments. Sustainability of project benefits is expected to be high, given that the increase in physical assets would be complemented with improvements in social and human capital through training, technical assistance, organization and better access to project financial, marketing and technological services. About 62% of project resources are likely to be channeled to productive investment demanded by beneficiaries, while an additional 32% would be allocated to technical assistance and training of the target population. The combination of improved provision of production-related support services, and the assistance to decentralized management and administration of rural services is expected to increase the effectiveness and efficiency of public expenditures. 4. Institutional and implementation arrangements: Implementation period: 4.5 years Executing Agency: Secretariat of Agriculture Livestock and Rural Development (SAGAR) Implementing Agencies: Implementation of the Productive Investment Component would be highly decentralized, utilizing the institutional structure established by the Government for the administration of the ongoing Alianzapara el Campo Program. Formal agreements (Convenios) would be signed annually between SAGAR and each state, which include Technical Annexes describing proposed project activities, subproject features and approval process and the annual budget, with the respective financial commitments of the federal and state governments. Beneficiaries, either individually or organized in groups, would be responsible for subproject implementation, consistent with a highly participatory demand-driven approach to subproject identification, design and selection. Delivery of demand-driven Support Services (technical assistance, extension and training) would be based on direct contracts from beneficiary organizations or groups to private sector individuals or small firms, within the ongoing SINDER and PEAT programs for poor farmers and the recently established programs for small commercial livestock and  Project Appraisal Document Page 7 Country: Mexico Project Title: Agricultural Productivity Improvement Poject irrigation producers. Technology Transfer and Adaptive Research would be implemented by the existing Agricultural Research foundations (PRODUCE) in each state, who would award contracts either directly to INIFAP or on a competitive basis to specialized institutions, including INIFAP, State research agencies, Universities and private sector organizations. The innovative feature of the Alianza program is its cost sharing arrangements between the federal level, the states and the producers. A Trust Fund (Fideicomiso) has been established in each state to channel financial resources funds from the federal and state governments to the various sub-programs of the Alianza. Definition of priorities of the various sub-programs, selection of investment proposal, and approval of transfer of financial resources to beneficiaries, is the responsibility of the State Agricultural Council (CEA), the maximum Alianza-related authority operating in each State. CEAs are comprised of state representatives form the various institutions involved in rural development, the SAGAR delegate, and producer and civil society organizations. In terms of project cycle, beneficiaries, either individually or in groups, may submit proposals to Alianza at the local level in different ways, but most commonly through the Rural Development Districts (DDRs) located in each municipality. The DDRs receive the application forms, review that they contain the minimum required information and forward them to the operational branches of the CEAs at the regional level. These operational branches of the CEAs are the committees (Comisiones de Desarrollo Rural or CDRs), which are formed by, and depend of, the CEAs. The CDRs have specialized technical groups ("Vocalias T&cnicas") that carry out the actual analysis and recommendation for technical approval of the proposals submitted. Upon approval by the CEAs, the subproject proposals are forwarded to the Fideicomiso for technical approval by the Technical Committee of the Fideicomiso and payment to the provider of goods and services associated with the subprojects. CEAs also promote inter-institutional coordination and foster synergy and complementarity of the programs operating within the state. Given the programmatic nature of Alianza, its decentralized implementation structure with federal and state institutions involved, and the fact that the project will support some of the programs within the Alianza framework, the existence of a detailed project manual is considered a key tool for successful implementation. The Project Implementation Manual would not only contain an itemized description of the operational rules, technical, financial and environmental criteria and specific procedures for all federal and state institutions involved in project implementation, but it would also include institutional arrangements, procurement details, monitoring and evaluation reporting requirements and standard terms of reference for recruitment of technical assistance and annual program evaluations. A draft Project Implementation Manual, prepared following a table of contents agreed with the Bank during project preparation was reviewed at negotiation, while the final version, satisfactory to the Bank, would be required as condition for loan effectiveness. Project Management: The project would be implemented, within the framework of the Alianza para el Campo, by SAGAR, through its Subsecretariats of Agriculture and Rural Development and the Project Coordinating Team (ECP), which will be located in the General Directorate of Agricultural and Livestock Development (DGDA) of SAGAR. The main functions of the small ECP to be established would be to coordinate project activities with SAGAR, ensure adequate differentiation between the project and overall Alianza activities, consolidate technical and financial reporting requirements, implement the monitoring and evaluation system, and perform as the focal point between the project and both the Borrower (NAFIN) and the Bank. In addition, a Project Administration Committee, comprised of Director-level representatives of DGDA, DGPOP, and the Delegation Coordinating Directorate of SAGAR, as well as senior ECP staff, would be established to  Project Appraisal Document Page 8 Country: Mexico Project Title: Agricultural Pmductivity Improvement Project provide oversight to project implementation activities. The establishment of the ECP with staffing, functions and responsibilities satisfactory to the Bank would be a condition of loan effectiveness. Accounting, financial reporting and auditing arrangements (See Annex 6): The financial management, accounting system, and internal controls are already in place as part of the Alianza program and are currently utilized by the Rainfed Areas Project and the On-farm and Minor Irrigation Project. They have been operating satisfactorily and their use would be continued under the present project. Resources and mechanisms that would permit financial monitoring and reporting of the project will be in place prior to effectiveness. SAGAR has begun to take steps to adapt it financial management systems in line with Bank's new Loan Administration Change Initiative (LACI), with the intention of e .tablishing the project as a pilot and model for LACI implementation in Mexico. A transition phase, tentatively expected to extend for the first two years, would allow for training, software development, adaptation to new FMRs and integration of technical reporting while full conversion to LACI-style disbursements takes place, which is expected to occur sometime after the second year of project implementation. At the state level Financial reporting would be carried out by the SAGAR Delegation, including information required for preparation of simplified Statements of Expenditures (SOE). The Fideicomiso would carry out financial accounting and maintain separate project accounts and records for project related expenditures in accordance with sound and accepted accounting practices. Financial reports and SOEs would be consolidated at the central level by SAGAR through the PCT with the assistance of FIRCO and NAFIN for submission to the Bank. Financial audits would be carried out annually by an independent auditor acceptable to the Bank and GOM regarding technical agents. Audit reports would be prepared in accordance with International Auditing Standards (IAS), FARAH and MET (Framework agreement existing between the Bank and the Secretariat for Administrative Control-SECODAM). The annual auditors' opinion would be submitted to the Bank within six months of the end of each calendar year. SAGAR would also prepare annual progress reports each April, and annual planning reports each October. Procurement (See Annex 6): Procurement of goods and small works financed by the project would be carried out in accordance with the Bank's Guidelines for Procurement under IBRD Loans and IDA Credits (January, 1995). All consulting services to provide technical assistance and training would be selected in accordance with the Bank's Guidelines for the Use of Consultants, of January 1997 and revised in September 1997. Most of the goods, small works and services to be procured under this project will be carried out with direct participation and financial contribution of the beneficiaries, and implemented as part of the Productive Investment Component. Procurement would be carried out by the beneficiaries, and payments made through the State Fideicomiso. Eligibility criteria and operational procedures would be included in the Project Implementation Manual. Given the remote and scattered location of many rural communities and in order to encourage community participation in project execution, simplified procurement and disbursement procedures, including the utilization of local shopping and direct contracting, will be applied to subprojects with a Federal and State contribution of less than US$50,000 equivalent. Individual subprojects with a total cost exceeding US$50,000 equivalent would be procured through local bidding. The implementation of these procedures would be closely monitored during project supervision and would place a substantial demand on the national staff in SAGAR and its regional branches,  Project Appraisal Document Page 9 Country: Mexico Project Title: Agricultural Productivity Improvement Project which would be strengthened on pircurement matters as part of the project's training program. Details on the procedures and mechanisms for the procurement of goods and services under the Institutional Strengthening Component, as well as prior review arrangements, are provided in Annex 6. The Project Procurement Plan would be incorporated in the Project Implementation Manual, to be submitted to the Bank as a condition of effectiveness. Monitoring and Evaluation arrangements: Given the highly decentralized nature of the project, adequate monitoring would be essential to effective project implementation. In order to provide improved supervision of activities implemented, as well as an assessment of the impact of project interventions on beneficiaries, a comprehensive Monitoring and Evaluation System (M&E) System would be established at the central level within the ECP to undertake overall project M&E. This special area would work in close coordination with the States' CDRs (the operational branches of the CEA at regional level), the Fideicomiso and offices of the implementing agencies for project monitoring at the local level. A new computerized centralized management information system (MIS) would be set in place; it would replace the existing heterogeneous systems presently operated by the different implementing agencies in charge of each Alianza program to be financed by the project. The structure of the MIS would be based on three different modules: programming and administration (PA); physical and financial monitoring (PFM); and performance evaluation (PE). The system would allow to collect and process information uniformly and periodically on the set of indicators needed by the M&E system to achieve its purposes. Indicators would be divided into three main categories: a) physical-financial; b) performance (divided in up to five categories: input, output, outcome, process and impact); and c) efficacy (divided into two categories: efficiency and effectiveness), thus providing the conceptual basis for the M&E framework. M&E activities would be based on the first two groups of indicators, while the third group would be developed and used for management purposes by the units within SAGAR responsible for the technical oversight of Alianza programs. Monitoring. Tracking of project activity progress would be based on the group of physical-financial indicators (PFM). The MIS's PA module would produce the Annual Plans (APs) and provide the necessary background information to assess implementation progress, as well as to produce the necessary financial and expenditure statements. The MIS's PFM module would provide up to date information to allow monitoring of project physical and financial implementation, and also to verify that implementation is consistent with the rules and criteria included in the Project Manual. Evaluation. The evaluation of the overall implementation performance and development impact of the project would be coordinated by the ECP and would be either processed or contained in the MIS's PE module. It would involve different areas of activities, including evaluation of project implementation performance, and both continuous and global evaluation of development impact. In all, these activities would entail the assessment of physical and financial implementation performance based on input and output indicators, coupled with specific evaluations based on a complementary set of indicators, to determine the specific results and impacts attained by the activities financed by the project. The project would promote a tiered system of evaluations ofproject implementation performance, based on the annual evaluations currently carried out at the state and federal level. Annual evaluations of individual programs at the state level would be based on agreed sets of indicators and  Project Appraisal Document Page 10 Country: Mexico Project Title: Agricultural Productivity Improvement Project would be carried out utilizing standard terms of references satisfactory to the Bank, so that quality would be uniform and results would be comparable and additive. Under these conditions the state evaluations could provide valuable input for the program evaluations at the federal level; they would also provide a sound basis for the annual project implementation reports and the midterm project evaluation. Given the time horizon on which they would be based, these evaluations would focus mostly on input and output indicators, and provide a quantitative assessment of physical and financial implementation performance, complemented with qualitative analyses of the implementation process by both beneficiaries and other agents involved. Furthermore, the MIS's PE module would contain the information regarding achievement of development objectives. Information would come from two different areas of activity: a continuous evaluation area and an independent system encompassing the performance evaluation activities per se. Continuous evaluation would be closely associated to the monitoring system and it would be based on the evolution of a small group of indicators of "potential development" based on known relationships between activities' outputs and development impacts. Actual global evaluation of development impact would be based on a series of studies, including a baseline study, as well as midterm and final evaluation reports. These activities would allow, in the medium term defined by the project life, to measure trends toward attainment of the development objectives defined at the outset both for the different components and for the project as a whole. D: Project Rationale I. Project alternatives considered and reasons for rejection: The initial project proposal was designed to provide assistance to beneficiaries of all 18 national subprograms comprising the Alianza para el Campo Program. During project preparation, it became evident that the existing institutional structure lacked the capacity to address the objectives of the project on such a broad spectrum of activities. This assessment, combined with the realization that the ongoing Rainfed Areas Development Project (Ln.3778-ME): (i) was close to completion, (ii) had been satisfactorily implemented with indications of positive impact on beneficiaries; and (iii) presented evidence of a considerable level of unattended demand and/or need for consolidation of activities, resulted in the decision to narrow the focus of the project, concentrating the actions on the three programs currently supported by the Rainfed Project. Furthermore, recognizing that the entire target population of the Alianza Program could not be reached with the available resources, SAGAR and the Bank agreed to apply a well-defined targeting mechanism that would enhance the poverty alleviation impact of these resources.  Project Appraisal Document Page 11 Country:' Mexico Project Title: Agricultural Productivity Improvement Project 2. Major related projects financed by the Bank andlor other development agencies (completed, ongoing and planned). Sector Issue X Project Latest Supervision (Form 590) I | Ratings ;______________________________ {___________________ (Bank-financed projects only) Implementation Development Progress (IP) Objective (DO) Bank-financed Rehabilitation of irrigation and Irrigation and Drainage S S drainage infrastructure and transfer of Sector Project (Ln. their O&M to beneficiaries 3419) Assist private sector with the On-Farm and Minor S S improvement of on-farm irrigation Irrigation Improvement efficiency Project (Ln. 3704) lImprove productivity of rainfed Rainfed Areas S S farming activities Development Project (Ln. 3778) Small scale municipal infrastructure, Second Decentralization U S institutional strengthening & Rural Dev. (DRD 11) Poverty alleviation in highly Rural Development in marginalized rural areas Marginal Areas S S Development of rural financial Rural Finance T.A. S S services; policy coptent (Pilot) - Irrigation/drainage, rural infrastructure, extension 2nd Tropical Agricultural NA NA Development Project Rural and social infrastructure, (Completed) NA NA decentral. & linstitutional Strengthening Decentralization & Rural Dev. (DRDI) (Completed) Other development agencies Rehabilitation of irrigation and Irrigation and Drainage drainage infrastructure and transfer of Sector Project their O&M to beneficiaries (IDB) I P/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)  Project Appraisal Document Page 12 Country: Mexico Project Title: Agricultural Productivity Improvement Project 3. Lessons learned and reflected in project design: The proposed project builds on the experience of decentralized, rural development investment programs. In general, they indicate that flexibility and grass-root demand-driven approaches are key in building ownership, defining local priorities, and setting the ground for better implementation and sustainability. The Bank's record of financing this type of programs in Mexico and elsewhere is on the whole satisfactory, and there is consensus on continuing this line of financial assistance. In Mexico, positive examples can be drawn from the first and second Decentralization and Rural Development projects (DRD I and II) as well as the Rainfed Areas Development Project (PRODAT). Over time, however, some shortcomings in the implementation of these programs have emerged: a) Past municipality-based demand-driven approaches (DRD I and 11) have been globally successful in the promotion of rural infrastructure and social investments. However, because investment decision by municipalities tend to favor collective investments, little has been achieved in triggering production-oriented activities and tapping the productive potential of existing resources; b) Notwithstanding their intrinsic merits, micro-investments tend to form a disparate collection of interventions, and may not reach the critical development mass required to attract the private sector, generate buyers competition, facilitate access to markets, and foster the establishment of support services; c) It is important that access to resources for productive investments be accompanied by the required technical support for technology validation and community organization; and d) Poor timing and lengthv budgetary and bureaucratic processes are likely to jeopardize the implementation of this type of programs particularly in agriculture where natural cycles impose rigid time constraints. The proposed project would take up the challenge of trying to overcome these limiting factors by: (i) promoting decentralized and agile mechanisms for subprojects approval and disbursement at the state level; (ii) providing a broad range of technical assistance and training to small producers to improve the quality of project design and implementation, thus strengthening the demand-driven nature of proposed productive investments; and (iii) fostering more integration between investment projects and technical assistance to small farmers. 4. Indications of borrower commitment and ownership: The project is an integral part of the ongoing nationwide Government initiative Alianza para el Campo launched in mid 1996, with strong political support and the provision of a substantial increase in budget allocation for SAGAR in 1998. Its decentralized strategy and matching contributions by the states ensures a stronger involvement and ownership at the state level. 5. Value added of Bank support in this project The Bank, with its extensive experience in poverty alleviation and decentralized, demand driven projects in Latin America oftentimes under matching grant arrangement, is uniquely qualified to support the Government of Mexico in its efforts to reduce rural poverty by improving access to physical and technological production inputs, stimulating the rural economy and promoting sustainable agricultural production and agro-enterprises. In the context of this project, value added  Project Appraisal Document Page 13 Country: Mexico Project Title: Agricultural Productivity Improvement Project of the Bank would be directed to: a) improve small farmer access to existing Alianza programs by providing targeted training and technical assistance programs; b) strengthen participation of producer's associations in the preparation and selection of investment proposals to be financed under the project c) develop monitoring and evaluation mechanisms consistent with other sectoral programs and activities d) support the Government's effort for decentralizing agricultural support services; e) foster markets for private-sector delivery of technical assistance and training. Additionally, the Bank has built considerable experience in Mexico and worldwide on policy dialogue and operations dealing with rural investment funds. The Bank can facilitate access to information and advisory capacity on design issues and lessons learned with comparable projects and subsequent incorporation of the lessons of these experiences. E: Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): Cost-Benefit Analysis: NPV=US$2,104.4 million; ERR= 18.5% Given the demand-driven nature of investments to be made by project beneficiaries, it is not possible to etermine a priori the exact composition of the investment program to be financed under the project. Some working hypotheses were developed to estimate the internal economic rate of return of the project's Productive Investment Component. Economic Return estimates were based on a sample of investment subprojects likely to be demanded by beneficiaries, following actual Alianza expenditures over the past two years. The results obtained from individual farm models were aggregated, according to the relative importance of the various productive investment proposals as indicated by historical demand patterns, to obtain an estimate of the projects likely overall rate of retum. 2. Financial (see Annex 4): NPV=US$2,338.2 million; FRR= 26.3 % The financial rates of return of individual farm models are considerably higher than the ERR, given the subsidy element in investment cost, and most models show increases in total on-farm income between 30 and 80 % at full development, thus indicating that given the adequate combination of investment incentives and technical assistance, the proposed programs would be attractive to small farmers. Fiscal impact: The project will be implemented under the Alianzapara el Campo Program, which has a total budget for 1998 of about US$250 million equivalent from the Federal Government and an estimated budget of about US$140 million contributed by the States. The federal financial resources allocated to the Alianza Program in 1998 represent about 14% of SAGAR's budget. The total cost of the Project, excluding farmers' contribution, is estimated at about US$550 million, or about US$ I10 million per annum, of which roughly two-thirds would come from federal sources and the remaining one-third from state governments. The proposed project would support ongoing SAGAR  Project Appraisal Document Page 14 Country: Mexico Project Title: Agrcultural Productivity Improvement Project programs and would operate within the existing budget allocation of SAGAR and the state government, and will not generate additional budge.ary financial requirements beyond the US$90 million per annum in matching grants already foreseen in SAGAR's budget for these programs. Incremental tax revenues accrued to the Federal Government as a result of project activities would be negligible as agricultural sector-related activities are mostly exempt from Value Added Tax (IVA). Income tax revenues from incremental profitability of on-farm production would also be negligible given the level of income of the target population. Consequently, the fiscal impact of the project would be negative, but it would be equivalent to that of the current Alianza programs. 3. Technical: The project is considered technically sound, given that: a) The basic constraints to improved productivity and living conditions of rural poor households and small-holder farmers have been adequately diagnosed during preparation; b) The key elements of the innovative mechanisms that would be utilized by the project to provide direct financial assistance to beneficiaries are already known by the implementing agencies, as they are being applied by SAGAR since 1996; c) The main technical aspects of the ongoing matching grant program that would improvements (technical assistance to subprojects, compatible extension methodologies, demand-driven delivery of technology generation and dissemination programs, and subproject planning, monitoring and evaluation) have been defined and agreed upon during preparation, with specific actions to address these limitations incorporated into project design; d) The compliance of individual beneficiary subprojects with acceptable technical and operational standards would be ensured through a combination of instruments, including improved screening mechanisms, provision of technical support for the identification, preparation and implementation of proposals, and the establishment of a detailed monitoring and evaluation system. 4. Institutional: Although project design poses a considerable institutional challenge due to the decentralized nature of implementation, the project is considered institutionally sound. This assessment is based on the fact that the Alianza Para el Campo Program was initiated in 1996 as a financial and operational partnership between Federal and State institutions. Despite the natural difficulties encountered initially, all participating agencies have now acquired considerable experience in applying the rules and procedures of the Alianza in each State appear to be fairly consolidated. As a result, the roles and responsibilities of institutions involved in the beneficiary subproject cycle are well defined, a key element for successful implementation of the main component of the project. The current weaknesses in the institutions involved in the implementation of Alianza were identified during preparation as a result of a comprehensive Institutional Arrangement and would be addressed by the project as part of the Institutional Strengthening Component, with emphasis on the administrative, environmental, and monitoring and evaluation capacity of decentralized institutions. In addition, SAGAR's efforts to gradually improve the institutional framework currently involved in the delivery of support services would be supported.  Project Appraisal Document Page 15 Country: Mexico Project Title: Agricultural Productivity Improvement Project 5. Social: During project preparation, a systematic analysis of the socioeconomic, organizational and institutional factors that could interfere with project implementation was conducted. Based on this analysis, targeting and eligibility criteria responsive to the beneficiary's characteristics were designed and included in the project's Implementation Manual. The project is expected to provide technical and financial assistance to an estimated I million small farmers and rural poor households. Women farmers and young producers would have equal access to project benefits. To ensure the monitoring and evaluation (M&E) of project results and impacts, the base line study, with terms of reference satisfactory to the Bank, would undertake a socioeconomic analysis of project beneficiaries. This assessment would serve as a benchmark to assess project impacts on social features and living conditions of beneficiaries. With respect to indigenous peoples, the project would continue to strengthen the existing mechanisms implemented by Alianza regarding the utilization of culturally appropriate instruments to ensure access and active participation of indigenous communities in the project. This would be supported by information and experience gained through the recent World Bank report on indigenous peoples in MexicoI and the preparation and implementation of the ongoing "Rural Development in Marginal Areas Project"2. These and other available documents3 provide a great deal of background on the opportunities and constraints to project approaches aimed at ensuring that indigenous organizations, including those representing indigenous women and youth, participate actively. This material, and experience with the Marginal Areas Project will be routinely reviewed and incorporated in the implementation of project activities addressing indigenous communities.(See Annex 2b) 6. Environmental assessment: Environmental Category [] A [ X] B []C The project is designed to improve the efficiency and sustainability of agriculture in the small-farm sector. Due to the specific resource management focus adopted, all potential impacts in most types of subproject should be positive or insignificant. Overall the project is expected to have no negative environmental impacts. In order to achieve this, rigorous environmental procedures will be applied. The Implementation Manual would include screening criteria oriented primarily to the mitigation of potential contamination arising from selected types of subproject. The Manual contains a list of these subproject, the environmental checklist to be applied, and the procedures to be used at the state level in which state delegations of federal agencies responsible for environmental monitoring (SEMARNAP and the National Water Commission [CNA]) will participate. In addition, a list of activities which would not be eligible for project financing has been established in the Implementation Manual including: deforestation, new road construction, resettlement, restrictions on use of agro-chemicals and encroachment on natural habitats, wetlands, parks and reserves. Implementation of environmental procedures and compliance with the negative list will be the responsibility of the Technical Agent for each investment program. All recommendations will be reviewed by state technical committees and the State Agricultural Councils (CEA) in which World Bank, "Mexico, Indigenous Peoples Profile". Washington D.C., June 1998. 2 World Bank, "Mexico: Rural Development in Marginal Areas Project". Report No: 17263-ME. Washington D.C., December 1997. 3 Grupo Knode, S. A. "Programa de Desarrollo Productivo Sustentable en Zonas Indigenas - Opciones de Reinversi6n Local de Recursos" Mexico, D.F., junio de 1997. Red Ingenieria, S.A. de C.V., "Sistemas de Comercializaci6n y Formaciones Microempresariales en las Huastecas Potosina, Hidalguense y Veracruzana". Mexico, D.F., agosto de 1997.  Project Appraisal Document Page 16 Country: Mexico Project Title: Agricultural Productivity Improvement Project representatives of both state and federal agencies with responsibility for environmental oversight participate. The ECP will prepare an annual report on environmental procedures, and at the end of the first year operation, will conduct an evaluation of such procedures with a view to recommending modifications where needed (see Annex 2a). 7. Participatory approach: Preparation Implementation Operation Beneficiaries/community IS/CON IS/COL COL groups__ _ _ _ _ _ _ __ _ _ _ _ _ _ Intermediary NGOs IS/CON IS/COL COL Academic institutions IS/CON IS/COL COL State and Local government CON/COL IS/COL COL IS = Information Sharing CON = Contribution COL = Collaboration F: Sustainability and Risks 1. Sustainability: The project is expected to be sustainable, as it would increase the long-term viability and impact of the Government's existing matching grant program (Alianzapara el Campo). This would be achieved by improving the quality of proposed productive investments, through strengthening small farmer participation in project selection, and by addressing a series of technical, institutional and financial aspects directly linked to the sustainability of project activities, including the development and adoption of improved technologies, the incorporation of financial criteria for the evaluation and selection of subproject proposals, the promotion of decentralized delivery mechanisms, and the implementation of adequate monitoring and impact evaluation systems. The project's sustainability would be strengthened as it would finance only subprojects that are technically and financially viable and sustainable from an environmental viewpoint. Regarding the financial criteria for the evaluation and selection of subproject proposal, only projects with a rate of return of more than 12% would be approved for financing. Any subproject with an investment of more than US$50,000 would require a feasibility study; subprojects with an investment between US$30,000 and US$50,000 would require a technical profile and a simple benefit-cost analysis. Smaller projects would require only cash flow analysis to determine its financial viability.  Project Appraisal Document Page 17 Country: Mexico Project Title: Agrcultural Productivity Improvement Project 2. Critical Risks (reflecting assumptions in the fourth column ofAnnex 1): Risk Risk Rating Risk Minimization Measure Project outputs to development objectives Productivity gains do not meet expectations N Project would improve integration of TA with investrnent programs; training components of l technology transfer would be strengthened. l Subprojects are not sustained N-M Project would improve subproject screening mec'hanisms, including output market linkages. Macroeconomic conditions change M.... Macroeconomic condition change M Project investments continue to address high- sincat negh potential production systems; poverty alleviation measures would be adapted to meet immediate critical production and processing support. Drought conditions worse than ten-year M Project would continue to support small-scale average irrigation investments and water-conserving dryland production. Project components to outputs Subprojects submitted inadequate for M On-going training of service providers would significant increases in productivity and ensure designs appropriate to beneficiary needs; income. subproject screening mechanisms would be improved to address appropriate criteria. TA strategies ineffective in technology M TA strategies would be evaluated annually and transfer necessary changes incorporated to the Technical Annexes; state-level training programs would adjust to training of service providers. Research does not generate technology M Research strategies would be evaluated annually required and PRODUCE Foundations would incorporate changes to proposal evaluation and resource allocation. Institutions do not adjust policy to reflect M Annual external evaluations of investmnent beneficiary needs programs and TA strategies would be key instruments for identifying critical policy constraints; policy changes would be negotiated annually through Technical Annexes. Political interference M Clear targeting criteria and well defined subproject selection procedures and enforcement of demand driven mechanisms should minimize political interference. Strong State Government participation should contribute to the project's continuity beyond the present administration Substantial efforts dedicated to capacity building to improve project implementation procedures Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk) 3. Possible Controversial Aspects: No controversial aspects are envisaged.  Project Appraisal Document Page 18 Country: Mexico Project Title: Agricultural Productivity Improvement Project G: Main Loan Conditions 1. Effectiveness Conditions: a) Establishment of the Project Coordinating Team with staffing, functions and responsibilities satisfactory to the Bank. b) Approval of the Project Implementation Manual. c) Approval of the Annual Plan (AP) for Year I of the project. 2. Other: Conditions of disbursement would be the review and approval of the first five subprojects of each type (irrigation, pasture establishment, dairy development and on farm minor equipment and supplies), as well as the first five research subprojects. H. Readiness for Implementation [ I The engineering design documents for the first year's activities are complete and ready for the start of project implementation. [XI Not applicable. [XI The procurement documents for the first year's activities would be ready for the start of project implementation. [XI The Project Implementation Plan would be reviewed at negotiations. A realistic and satisfactory version of the Project Implementation Plan is expected to be finalized prior to effectiveness. 1. Compliance with Bank Policies [XI This project complies with all applicable Bank policies. [signature] Task Team L: ie 11 LCSES [signature] k( t Sector Dire r: a o W LCSES [signature]e6 Country Director. Olif ier Lafourcade LCCIC I  Project Appraisal Document Page 19 Country: Mexico Project Title: Agricultural Productivity Improvement Project Annex 1 AGRICULTURAL PRODUCTIVITY IMPROVEMENT PROJECT Project Design Summary Narrative Summary Key Performance Indicators I Monitoring and Supervision Critical Assumptions CAS Objective Reduce incidence of rural poverty Political commitment and Improve the well-being of the among beneficiaries by project financial support at federal and rural population and expand the completion Mid-Term and Impact state levels to implement policies integration of small holders into Increase sustainable productivity Evaluations and actions to improve the the growth process of small scale agriculture livelihood of small holder farm families PROJECT DEV. OBJECTIVES To improve the productivity and Average beneficiary household Beneficiary surveys Modified Alianza, integrating income of small farmers by income increased by 25% by TA, is the best approach to promoting the adoption of Project Completion. Participatory Rural Appraisals achieving productivity gains sustainiable agricultural production systems Productivity increases of 25% in Implemented subprojects bring target farming systems. Mid-term and Impact Evaluations sustained and widespread technology improvements, Annual State-level External including micro-enterprise Program Evaluations development Project MIS Macroeconomic conditions and price stability translates productivity gains into higher income levels Regional drought conditions no worse than ten-year average PROJECT OUTPUTS I. Delivery of improved services Improved irrigation systems on Monthly reports of BANRURAL Beneficiaries implement to assist beneficiaries in the >300.000 ha subprojects according to plan; identification, design, Monthly reports of FIRCO or plans adequate for significant implementation and maintenance Pastures established on > 2 m ha Technical Agents increases in productivity and of investments. income Milk production established or Minutes of CDR meetings 2. Improved access by improved on > 10,000 TA strategies effective in beneficiaries to financial production units Minutes and reports of technology transfer and extension resources for achieving and VOCE/COTEGAN maintaining sustainable Rural support activities reach > Fundaciones PRODUCE able to productivity gains. 750.000 beneficiaries TA provider end-of-cycle reports define research needs and select best provider; research generates 3. Improved nanagement and TA integrated to investment Annual State-level External technology required. administration of matching grant projects in > 50% participating P. 'gram Evaluations programs through enhanced M&E states Economies of scale can be systems, allowing better focus Project MIS achieved in input purchase and and strengthened decentralized output marketing institutions. ECP Progress Reports SINDER, PEAT and PAI programs reach 350,000, 1.2 m, Institutions adjust policy and and 15,000 beneficiaries, operational systems to reflect respectively client needs > 50% research projects address ALCAMPO beneficiary needs Project executes pilot subprojects Pilot projects addressing district addressing distinct and/or and/or municipal design and municipal design and management of agricultural management of agriculture development. development.  Project Appraisal Document Page 20 Country: Mexico Project Title: Agricultural Productivity Improvement Project Narrative Summary Key Performance Indicators Monitoring and Supervision Critical Assumptions PROJECT COMPONENT 1. Rural Investments financing US$ 343 million allocated for Project MIS Subprojects addressing limiting minor works, goods and services productive investments over the constraint(s) are submitted for related to beneficiary-demanded life of the project Disbursement records financing subprojects for on-farm productive infrastructure and US$173 million allocated to Audit reports Subproject evaluation and equipment, community beneficiaries' TA and research approval mechanisms are investments, and small rural strategies ECP Progress Reports effective enterprises. US$35 million allocated to FMRs, once LACI system is Timely release of funds 2. Suppon Services financing institutional strengthening of implemented adaptive research, contracting of selected departments within Coordination mechanisms technical assistance staff, and SAGAR and state institutions, effective in managing multi- training of farmers and producer and to develop the M&E System institutional resources organizations Political interference has minimal 3. Institutional Strengthening impact on subproject cycle financing consultant services, equipment, studies and training of participating agencies. I_I Project Implementation Manual includes a comprehensive list of indicators to be monitored. The supplemental letter to the loan agreement contains specific impact indicators with quantifiable benchmarks.  Project Appraisal Document Page 21 Country: Mexico Project Title: Agricultural Productivity Improvement Project Annex 2a AGRICULTURAL PRODUCTIVITY IMPROVEMENT PROJECT Detailed Project Description A: The Alianza para el Campo Program During the late 1 980s and early 1 990s, the GOM implemented an important set of reforms in the agricultural sector including liberalization of prices and marketing, trade reforms, and privatizations. In 1996, as a complement to those measures, the GOM launched a national agricultural and rural development program, Programa Alianza para el Campo (PAC) directed at generating a profound change in the agriculture sector through increased capitalization. Within this framework, the program supports investments in human capital, technology, infrastructure and equipment in the agricultural sector with the aim of promoting improved agricultural productivity and production, as well as increased income of farmers. The working scheme focuses on an integrated management of present instruments of agricultural policy and strengthening of federalism, based on the implementation of several sub-programs under the Alianza "umbrella", destined to reactivate production and improved living conditions of the rural population. The program promotes productive investment under a matching-grant scheme and supply of more effective support services (research, extension, information, training) for a wide range of subprograms. The cornerstone of PAC is its decentralized approach, with a delegation of administration and decision-making to the States. The program offers the opportunity and the operational mechanism to implement a decentralized, demand-driven approach to channel technical and financial assistance directly to farmers. Formal agreements (Convenios) are signed between SAGAR and each state, which include Technical Annexes describing proposed project activities and the annual budget with the respective financial commitments of the federal and state governments. A Trust Fund (Fideicomiso) has been established in each state to channel financial resources from the federal and state governments to the various sub-programs of the Alianza. Definition of priorities of the various sub-programs, selection of investment proposal, and approval of transfer of financial resources to beneficiaries, is the responsibility of the Rural Development Commission (CDR) operating in each State. CDRs comprise state representatives form the various institutions involved in rural development, the SAGAR delegate, and producer organizations. Subsequent to the approval by the CDRs, the subproject proposals are forwarded to the Fideicomiso for payment to the provider of goods and services associated with the subprojects, upon fulfillment of their obligations. For productive investments, beneficiaries either individually or organized in a group are responsible for subproject implementation, consistent with a highly participatory demand-driven approach to subproject identification, design and selection. Demand-driven support services (technical assistance, extension and training) are delivered based on direct contracts from beneficiary organizations or groups to private sector individuals or small firms. Finally, Technology Transfer and Adaptive Research is implemented by the PRODUCE Foundations in each state, who award contracts on a competitive basis to specialized institutions, including INIFAP, State research agencies, Universities and the private sector.  Project Appraisal Document Page 22 Country: Mexico Project Title: Agrcultural Productivity Improvement Project The Alianza para el Campo program started in 1996 with the implementation of 22 programs (17 with national coverage and 5 regional), and was later expanded in 1997 to 27 programs with a budget allocation of approximately US$350 million (Table A2a. 1). Programs are roughly divided into six groups, encompassing productivity increase, agriculture (crops), livestock, programs targeted for less developed areas, general support programs and irrigation related programs implemented by the National Water Commission (CNA). The following table summarizes the programs and budget allocations for the 1997 Alianza. Table A2a.1 - Alianza para el Campo (1997) Budget allocations ('000 Mx$) and number of beneficiaries Program Resources Beneficiaries Federal State | Total TOTAL 2,044,438.5 1,176,787.7 3,221,226.2 1 3,359,682 SAGAR 1,574,991.3 1,176.787.7 2,751.7779.0 3,232 073 - Irrigation development 238,039.2 114,222.2 352,261.4 13.451 - Mechanization 159,023.7 93.950.6 252.974.3 61.807 - Kilo per kilo 109,552.2, 45,976.1 155,528.3 282.127 - Saline soils rehabilitation 13,000.0 4,149.0 17,149.0 1,602 - Oil seeds 34,424.3 16,316.4 50.740.7 1.984 - Coffee program 92,841.2 37,420.3 130,261.5 172.000 - Cacao program 4,075.4 2,876.5 6,951.9 16.436 - Rubber program 12,531.0 8,602.5 21,133.5 1.707 - Plant health 61,446.6 62.370.8 123,817.4 515,060 - Improved pasture establishment 153,176.9 84,151.1 237,320.0 40,859 - Dairy technology improvement 62.360.4 46,302.6 108,663.0 13,197 - Improved cattle 63,470.1 81,993.7 145,463.8 26,896 - Genetic Improvement 42,111.8 57,819.4 99,931.2 32,989 - Animal health 61,240.8 48,477.7 109,718.5 450,540 - Rural equipment 197,709.5 168,828.3 366,537.8 461,486 - Development of Indigenous areas [ 26,936.0 17,094.1 44,030.1 7,200 - Technology transfer 78,041.6 54,677.8 132,719.4 N/A - Training and extension 63,939.1 53,709.5 117,648.6 205,300 - Elemental technical assistance program 51,465.4 76,661.3 128,126.7 850.000 - Bee keeping program 6,527.2 7,273.6 13,800.8 13,396 - Other (state) programs 43,078.9 93,914.2 136,993.1 61.036 CNA [ 469,447.2 469,447.2 127,599 - Rehab./modernization of irrig. Districts 84,435.2 | 84,435.2 47,000 - Efficient use of water and power 96,611.0 96,610.0 12,400 - Parcel development program 244,401.0 244,401.0 53,000 - Full use of rural hydraulic infrastructure 44,000.0 44,000.0 15,199  Project Appraisal Document Page 23 Country: Mexico Project Title: Agricultural Productivity Improvement Project B: Project Activities The Agricultural Productivity Improvement Project, ALCAMPO, is an innovative, decentralized project mechanism designed to provide opportunities for economic development to Mexico's smaller and poorer farmers who are normally unable to obtain financing through regular channels, and who lack the technical tools to improve their current production systems. Building on Alianzapara el Campo, the Federal Government's strategic agricultural development thrust, ALCAMPO would focus on four investment programs and four strategies for support services. It would address all 32 states of the nation. Component 1: Productive Investment - US$343.3 million (about 62% of total project cost) The project would finance demand-driven investment subprojects to ilicrease capitalization of small farmers and improve their agricultural productivity and the sustainability of their production systems as well as to improve their standard of living. Investments would be financed through a matching grants system under which beneficiaries' contribution would be up-front, either in cash or/and in kind and would be about 50% of subproject cost, in the case of proposals presented by small farmers, and not less than 30% in the case of the poverty alleviation-oriented program (Rural Development). Additionally, ceilings would be established for the grant-financing that would be provided in the various investment categories financed under the project. The specific level in each category would be established in the Project Implementation Manual. Under this component, the project would finance investment subprojects currently financed under the investment programs supported by the ongoing Bank-supported Rainfed Areas Development Project (PRODAT) and the On-Farm and Minor Irrigation Improvement Project (PRODEP). Characteribtics of each program are as follows: a) Irrigation Development: Objective: Efficient water use and diversification into high-value crops. Beneficiaries: Approximately 33,000 producers with individual farm size of up to 30 ha. Eligible investments: Soil and water conservation practices, purchase and installation of new irrigation materials, equipment and irrigation systems of high or low pressure, ferti-irrigation equipment (tanks, filters, injectors, mixers), meters, shelters, replacement pumps (as part of complete system), project design and technical assistance in installation, start-up and operation. Financial assistance: the Federal Government would finance, on a non reimbursable basis, about 35% of total investment of a subproject, but with a ceiling of US$340 per hectare; the State Government would finance on average an additional 10% ot total investment. Up to 10% of these funds could be utilized to cover the cost of subproject preparation and technical assistance during implementation. b) Dairy Technology Improvement: Objective: Improved milk production systems leading to greater productivity and end-product value-added.  Project Appraisal Document Page 24 Country: Mexico Project Title: Agricultural Productivity Improvement Project Beneficiaries: Approximately 51,000 producers in 10,000 group production units, each producer with no more than 70 cows. Eligible investments: Construction materials, specialized equipment and its installation, inputs for improving and modernizing milk production systems (silos, forage harvesters, balers, mixers, mills. grader blades, front-end loaders, molasses systems, milkers and cooling tanks), and equipment and construction or rehabilitation of basic infrastructure (collection centers, stables, stores, silos and milking sheds), and design support for farm development. Financial assistance: the Federal and State Governments would finance each, on a non-reimbursable basis, about 25% of total investment of a subproject. c) Improved Pasture Establishment: Objective: Improved pastures for meat, milk and wool production. Beneficiaries: Approximately 110,000 producers on more than 2 million ha, each producer with no more than 70 cows or their equivalent in minor species. Eligible investments: Acquisition of seed and implements for establishing and rehabilitating pastures and rangeland (cutters, borderers, harrows, fert-zer spreaders and sprayers), materials and installation of fences (conventional or electric), livestock watering points (including alternative energy methods), power lines, work corrals and equipment (scales, presses and ectoparasite equipment), and design support for farm development. Financial assistance: the Federal Government would finance, on a non reimbursable basis, about 40% of total investment of a subproject, but with a ceiling of US$7,780 per farm; the State Government would finance on average an additional 10% of total subproject investment. d) Kiral Development Program Objective: Promote the capitalization and improved incomes of poor and small producers whose production systems have economic potential. Beneficiaries: Approximately 750,000 poor rural households farming on less than 20 ha of rainfed land or 5 ha irrigated land, and/or whose animal production is based on less than 20 cows, or 100 sheep or goats. Eligible investments: Activities and small equipment that would bring about improvements in productivity (purchase of land preparation and cultivation tools and small soil and water management equipment, green houses, and livestock) as well as constructing and rehabilitating basic infrastructure for on farm production and small rural processing facilities for post-harvest value-adding. Financial assistance: the Federal Government would provide up to US$2,220 per beneficiary per annum to finance approved investment proposals, on a non reimbursable basis; this ceiling would increase to US$5,835 in the case of investment proposals submitted by groups of beneficiaries; and to US$6.6700 in the case of subprojects presented by groups of producers which promote the adoption of new technologies.  Project Appraisal Document Page 25 Country: Mexico Project Title: Agricultural Productivity Improvement Project Component 2: Production Support Services - US$172.9 million (about 32% of total project cost) Under this component the project would provide financial support for the programs that are currently being executed under the Alianza Program for applied research and technology transfer as well as extension, technical assistance and training for small farmers. The project would promote integration of technical assistance with investment programs to maximize the impact of technologies financed by the project and to improve farmer understanding of the value of technical assistance relative to other goods and services. Built upon three existing and one new support program within the Alianza: a) Research and Technology Transfer Objective: Adaptive research in, and transfer of, productivity-improving appropriate technology mainly for small-farming systems. Beneficiaries: Technologies would be available to the entire farmning community, although dissemination efforts by the project would be concentrated on project beneficiaries. Method: A combination of assigned (to INIFAP) and competitive research activities to finance subprojects addressing principal production constraints identifieJ by farmers and prioritized by the state-!evel farmer-led PRODUCE research foundations. In each state, PRODUCE Foundations would allocate resources and coordinate technology transfer activities for technical assistance providers. Technology transfer would include training, demonstration units and publications. b) Training and Extension (SINDER) Objective: Technological change in small-farming systems to achieve improvements productivity and income. Beneficiaries: Approximately 350,000 small farm families of the same stratum as beneficiaries of the Rural Development Program. Method: Demand-driven TA contracts with locally-based individuals or small firms providing intensive community-based attention.  Project Appraisal Document Page 26 Country: Mexico Project Title: Agricultural Producfivity Improvement Project c) Elemental Technical Assistance Program (PEAT) Objective: Improved crop production. Beneficiaries: Approximately 1.2 million producers with small areas of high-potential rainfed or irrigated land. Method: Seasonal demand-driven TA contracts with individuals or small firms providing crop- module attention. d) Integrated Projects (PAI) Objective: Improved livestock production. Beneficiaries: Approximately 6,000 livestock producers beneficiaries of the Dairy Development and Improved Pasture Establishment programs. Method: Demand-driven group-based TA contracts with individuals or small firms providing attention in areas of high livestock concentration. e) Technical Assistance to beneficiaries of the Irrigation Development Program: This program would represent a pilot scheme in which technical assistance would be integrated from subproject start-up. Farmers would be entitled to allocate up to 10% of their total investment in direct-contract TA services with providers registered in their state. The experience with this program would be used to address improvements and integration of TA services to other investment programs and the overall development of a market for TA services. Component 3: Institutional Strengthening, Monitoring and Evaluation, and Project Administration - US$34.9 million (about 6% of total project cost) This component would provide financing for investments in equipment and technical assistance aimed at improving the operational capacity of SAGAR and state agencies involved in the implementation of Alianza. In addition, the component would support the establishment of a comprehensive Monitoring and Evaluation System, as well as the operation of the Project Coordinating Team (ECP). More specifically, this would involve: a) training for staff directly involved in project implementation, both at the federal and state, but with special emphasis on the latter to support the decentralization process initiated by the Government; b) the installation and operation of a computerized network linking SAGAR Headquarters with all 32 delegations in each state; c) training and technical assistance to federal and state agencies involved in Alianza to improve subproject preparation selection and monitoring systems; d) implementation of a comprehensive monitoring and evaluation system (see Annex 2b);  Project Appraisal Document Page 27 Country: Mexico Project Title: Agrcultural Productivity Improvement Project e) a series of studies on relevant small farmer development issues, including in the first year of the project: i) strengthening private-sector TA and training service delivery; ii) evaluation methodology for demand-driven TA through the SINDER, PEAT and PAI programs; and iii) state-level integration of demand-driven TA programs. f) the establishment and operation of a small team (the ECP), comprised of a group of highly qualified professionals who would be responsible for coordination of project activities within SAGAR, ensuring adequate differentiation between the project and overall Alianza activities, consolidating technical and financial reporting requirements, implementing the monitoring and evaluation system, and performing as the focal point between the project and both NAFIN and the Bank. In addition, a Project Administration Committee, comprised of Director-level representatives of DGDA, DGPOP, and the Delegation Coordinating Directorate of SAGAR, as well as senior ECP staff, would be established to provide oversight to project implementation activities. C: Environmental Aspects 1) Environmental Issues The project is designed to promote the improvement and sustainability of small-scale agriculture and, due to the specific resource management approach adopted and the size of individual subprojects, potential environmental impacts of the types of subprojects to be financed are expected to be positive or insignificant, particularly compared to the production practices currently being utilized by the small farmer community. In this context, only the four investments subcomponents (irrigation development, dairy and forage production, and small scale on-farm infrastructure) could generate potential environmental consequences, mainly associated with use of agrochemicals, excessive pumping of groundwater, intensive livestock production systems and small-scale agroindustries. These potential risks would be addressed by the project through a clearly defined set of environmental screening and monitoring procedures, combined with the enforcement of a negative list of subprojects. More specifically, project activities are expected to contribute to an improvement of environmental conditions in the following areas: Groundwater exploitation: A critical environmental issue associated with agriculture in Mexico is potential over-exploitation of certain aquifers from irrigation. The issue of over-exploited aquifers in Mexico, together with the related question of official registration of water rights is a top priority for the National Water Commission (CNA); two Bank operations are directly supporting the effort. The subprojects under ALCAMPO involving mini-irrigation and increased irrigation efficiency (none of which will involve any increased extraction of groundwater) would continue to meet the same rigorous environmental review applied by CNA under the ongoing Rainfed Areas Development Project (PRODAT, Ln. 3778-ME). Contamination of ground and surface water: Given the expected size of most subprojects funded under these four programs, the expectation of any significant environmental damage is remote. Erosion and loss of soil fertility: much of the area targeted by Alianza is characterized by these two types of degradation. All eight programs under ALCAMPO are designed to reverse this situation. Accordingly, except in the positive sense, no environmental issues arise in the project from this source. Deforestation and loss of biodiversity: these two aspects are closely linked to erosion and loss of soil fertility and, like the latter, are characteristic of much of Alianza 's target area. As in the case of  Project Appraisal Document Page 28 Country: Mexico Project Title: Agricultural Productivity Improvement Project erosion and fertility decline, the project is designed to stop and reverse these processes. Thus, there will be no potential negative environmental impacts on these issues. Toxic agro-chemicals: Mexican law on the use of high-risk agro-chemicals is consistent with Bank guidelines. In particular, funding under the project will not be available for purchasing of chemicals such as those classified by WHO as IA or l B. A detailed list of prohibited and restricted pesticides would be included in the Operations Manual for the project. Protected areas: the project will follow the same rules with respect to protected areas as those which apply to the overall Alianza program. The "Negative List" of activities prohibited under the project in the Implementation Manual specifies that no support would be provided for proposed subprojects which would affect natural habitats, wildlands of special concern, or protected areas recognized by the federal or state governments. Change in land use: in view of the small-scale nature of the majority of subprojects to be funded under the proposed project, there will be no significant changes in land use that could be threatening to the environment. Integrated resource management: Alianza's current structure offers limited opportunity to engage in integrated watershed or river basin management, or to specifically target certain beneficiary populations. Systematic monitoring and evaluation (M&E) is applied to the project's geographic referencing of both investment and production support subprojects. This, combined with capability to identify the total number of subprojects approved for each individual or group applicant, will enable progressive coordination of activities within a spatial context, with positive implications for both natural resource management and social impacts. 2) Environmental Benefits Most of the actions supported under the proposed project would produce environmental benefits. Some examples are: overall sustainability of improved practices promoted by the project; measures for soil conservation that reduce soil loss and nutrient runoff into water sources; gully control and reclamation by check dams that restore damaged land to productive use; technology transfer for crop diversification that reduces soil erosion and permits greater groundwater recharge; technology transfer that rationalizes and reduces input use; and improved range and pasture management. 3). The "Negative List" The Project Implementation Manual would specify exclusion of the following activities from the project: a) deforestation; b) road construction or rehabilitation, except small access roads; c) resettlements; d) encroachment or modification of reserve areas including natural habitats, wildlands or wetlands of special concern; and e) reconversion out of shaded coffee. 4) Renewable Energy Program Implemented by FIRCO, a program in renewable energy sources for remote marginal rural areas in Mexico provides an interesting opportunity for Alianza in general, and ALCAMPO in particular, to disseminate this environmentally-friendly technology beyond the current pilot phase. Financing of renewable energy systems as part of subprojects for marginal areas (outside the electricity grid service), largely inhabited by marginal rural households, appear to be an appropriate focus for ALCAMPO. In this respect, the preparation of a GEF-funded project to further support this complementary initiative has been tentatively agreed with the Bank and preparation is expected to  Project Appraisal Document Page 29 Country: Mexico Projectritle: Agricultural Productivity Improvement Project begin shortly. 5) Environmental Procedures All subprojects in the four investment programs will be subject to standard procedures applied by SEMARNAP. Additionally, in the case of two of the investment programs (Dairy Technology Improvement and Rural Development) certain types of subprojects would be subject to special environmental procedures (application of an environmental checklist). This is because in spite of their small size, which exempts them from standard procedures, these types of subprojects have a potential for water contamination, particularly in areas of concentrated population e.g. semi-urban. The checklist would be completed by the technician who approves the subproject proposal ("Cedula de Perfil Tecnico" or CPT) prior to its presentation to the Technical Agents for these two programs. The respective Technical Agents will be responsible for review of the checklist and decision on rejection on environmental grounds, acceptance or contracting of additional environmental studies to define necessary mitigative measures. 6) Monitoring and Evaluation of Environmental Performance The Project Coordination Team (ECP) will be responsible for monitoring and evaluation of the environmental screening procedures. An annual report containing statistical data on CPTs by program will be produced, showing: a) number registered by the Technical Agents; b) number with "dictamen ambientar' approved by SEMARNAP; c) number where environmental checklists were applied; d) number where environmental studies were conducted; e) number where environmental mitigation measures modified the original project design; and f) number rejected or withdrawn on environmental grounds. At the end of the first year of operations, the ECP will contract an evaluation of the specific environmental procedures applied and recommend changes in procedures as deemed appropriate. The evaluation of positive environmental impacts - reduced rate of natural resource degradation, water and energy savings and improved sustainability of agriculture - will be undertaken within the context of evaluation of overall ALCAMPO performance. Specific environmental indicators would be incorporated in the Project Implementation Manual. 7) Institutional Capacity to Implement Procedures and Training Requirements The responsible federal entity (SEMARNAP), and its subsidiary agencies (CNA, INE and PROFEPA), have a total of 2,500 staff members in their state delegations. CNA and INE are responsible for approving the required environmental impact evaluation and issuing the official environmental report ("dictamen ambiental"). PROFEPA conducts environmental auditing and carries out inspections and applies the sanctions called for under the law. These agencies are adequately staffed and no additional institutional strengthening would be required to apply environmental procedures. The point of departure for the environmental procedures lies with the Technical Agents for the respective investment programs. In their technical reports ("dictamen tecnico") to the CEAs or their technical sub-commissions, they will certify compliance with the negative list, banned pesticides, application of checklist, the "dictamen ambientar', water rights, etc. The state delegations of  Project Appraisal Document Page 30 Country: Mexico Project Title: Agricultural Productivity Improvement Project SEMARNAP will provide technical support to the CEAs and their sub-commissions as well as to the Technical Agents. 8) Consultation with Local Groups and NGOs. The proposed project constitutes a part of eight of Alianza 's 47 programs that have been underway for the past two years under agreements between SAGAR and all 32 state governments. Since local communities and NGOs have been formally and informally involved in all aspects of the implementation process, adequate consultation on environmental aspects of those portions of the four investment programs addressed by the project has been conducted.  Project Appraisal Document Page 31 Country: Mexico Project Title: Agricultural Productivity Improvement Project Annex 2b AGRICULTURAL PRODUCTIVITY IMPROVEMENT PROJECT Participation of Indigenous Communities The poverty alleviation program of the Alianza, known as the Rural Development Program (Programa de Apoyo al Desarrollo Rural) has been in operation since 1996 and has experienced a continuous process of reform to improve both access of the rural poor and its impact on rural poor communities, including indigenous people. The Program is geared towards poor rural households farming on less than 20 ha of rainfed land or 5 ha irrigated land, and/or whose animal production is based on less than 20 cows, or 100 sheep or goats, and it finances activities and small equipment that would bring about improvements in productivity (purchase of land preparation and cultivation tools and small equipment, green houses, and livestock) as well as constructing basic infrastructure for small rural processing facilities for post-harvest value-adding. The Rural Development Program of Alianza is one of the four investment programs of Alianza included in the Productive Investment Component of the Agricultural Productivity Improvement Project (ALCAMPO). In budgetary terms, this program is expected to account for about US$163.0 million, equivalent to almost 50% of total expenditures allocated by the project to providing financial assistance to beneficiaries. Together with the SINDER Program, the extension program of Alianza targeted to potential beneficiaries of the Rural Development Program, (which represents an estimated US$50.0 million, or 30% of the total budget for the Support Services Component) the project is expected to implement a sound strategy of integrated technical and financial assistance to rural poor communities. In the context of the assessment of the rural poverty alleviation elements of the project, the situation of indigenous communities, which represent a significant portion of the rural poor community was analyzed during project preparation. This was mainly based on the background information provided by the recent World Bank report on indigenous peoples in Mexico4 and the "Rural Development in Marginal Areas Project" (also known as "The Program for Sustainable Development in Indigenous Areas")5 which were considered valuable references to assess the opportunities and constraints that indigenous organizations, including those representing indigenous women and youth, are facing to participate actively in the activities promoted under the Rural Development Program. In particular, the information provided by the intensive assessments conducted in the State of Oaxaca as part of the preparation of a rural development program, which subsequently became the basis for the preparation of the Marginal Areas Project. During preparation, discussions were held with representatives of SAGAR's Subsecretary of Rural Development, to analyze the mechanisms utilized to both adapt and incorporate the experiences of the design of the Marginal Areas Project into the strategy and operation of the other Alianza programs under their responsibility, including the Rural Development and SINDER Programs. Most importantly, the lessons learned through these various activities are 4 World Bank, "Mexico, Indigenous Peoples Profile". Washington D.C., June 1998. 5 World Bank, "Mexico: Rural Development in Marginal Areas Projecf'. Report No: 17263-ME. Washington D.C., December 1997.  Project Appraisal Document Page 32 Country: Mexico Project Title: Agricultural Productivity Improvement Project contained in and have been systematically incorporated in SAGAR's discussions with the State governments on ways to better adjust their individual implementation strategies for Alianza 's poverty alleviation activities.6 Thus, project preparation benefited from prior consultations carried out in the context of the Rural Development in Marginal Areas Project and the Indigenous profiles, in which extensive consultation with indigenous communities took place. Also, during project preparation, INI staff and representatives from NGOs working with indigenous peoples at the state level, as well as state government authorities were consulted regarding the mechanisms used in the Alianza 's poverty alleviation program to address the specific requirements of the indigenous communities. At the same time, project preparation benefited from the case studies completed as part of the Ej ido Study, which gave special attention to the assessment that indigenous beneficiaries had of the various Alianza programs. The demand-driven approach of the project and the decentralized nature of its implementation, means that local communities are substantially involved in all aspects of the implementation process. Furthermore, the strong State government participation in the annual programming and decision-making process of the Alianza, ensures that local development priorities and needs are taken into account in the various programs. Through joint supervisions, the experience with the implementation of the Marginal Areas Project will be routinely reviewed and utilized to improve the implementation of ALCAMPO activities involving indigenous communities. The proposed project includes eight of Alianza 's 47 programs, which have been underway for the past two years through contracts between SAGAR and all 32 state governments and the Federal District. The Rural Development Program has a country-wide scope, but priority is given in its implementation to the 800 poorest rural municipalities, and despite its primary focus on rural poverty, regardless of other characteristics of potential beneficiaries, indigenous people are an important part of the Program's beneficiaries as the priority municipalities include most of the indigenous people living in rural areas. Municipalities are selected first, on the basis of a rural poverty criterion, and second, on a criterion of agricultural potential. The Rural Development Program is expected to benefit some 750,000 poor farmers, or about 75% of ALCAMPO Project beneficiaries. Data from the first two years of Alianza implementation show that this program is already active in about 70% of the rural municipalities in the country, of which 28% are classified as indigenous municipalities. A municipality is classified as indigenous when more than 50% of its population belongs to indigenous groups, consequently the number of indigenous people actually benefited by the program is higher than what those percentages would suggest. It is evident t'iat the overall program is focused on alleviation of rural poverty through increase in efficiency and productivity in agriculture and related micro enterprises. It is not solely targeted to indigenous peoples, but to the extent that these communities comprise a large proportion of the poorest of the poor, they are routinely incorporated, subject to application of the criterion that they have access to land and water resources with potential for viable intensification. The specific needs of indigenous people with no potential for intensification of agricultural production are being addressed by the Marginal Areas Project, which is currently being implemented in four states but 6 Grupo Knode, S. A. "Programa de Desarrollo Productivo Sustentable en Zonas Indfgenas - Opciones de Reinversi6n Local de Recursos". Mexico, D.F., June 1997. Red Ingenieria, S.A. de C.V., "Sistemas de Comercializaci6n y Formaciones Microempresariales en las Huastecas Potosina, Hidalguense y Veracruzana". Mexico, D.F., August 1997.  Project Appraisal Document Page 33 Country: Mexico Project Title: Agricultural Producivity Improvement Projeed would be gradually expanded to cover most of the indigenous communities in other states. As indicated above, the Marginal Areas Project and the poverty alleviation activities-of the project would have strong synergies and complementarities, including the facts that both are managed by the same unit within SAGAR, and that active integration of Bank's supervision efforts for the project is envisaged. Alianza operates in a context where the ethnic plurality of the nation is guaranteed under Article 4-of the Constitution, which recognizes the cultural rights of indigenous peoples and specifically provides for other legal protection. Article 27 enables indigenous rural communities to convert ejidal to communal lands, which are inalienable. Notwithstanding these overall legal guarantees, Alianza's strategy regarding indigenous farmers, which has been fully incorporated into the ALCAMPO Project, includes: (a) the participation of the National Indigenous Institute (INI). NNhich has general responsibility for the protection and development of indigenous communities, in the State Agricultural Councils (Consejos Estatales de Agricultura, CEA) in all states where indigenous population predominates; representing about 90% of the indigenous municipalities participating in the program. The CEA is the entity that is responsible for defining policy and pr;-rities, and providing coordination of the program at the state level; (b) the enforcement of a much smaller level of beneficiary contribution than in the rest of the Alianza Programs, i.e. between 20% and 40% of the total investment cost of the subproject submitted for financing; (c) the use of bilingual material and officers to promote the Rural Development Program in indigenous municipalities; (d) the use of bilingual extension officers in indigenous municipalities to facilitate the participation of indigenous people in the poverty alleviation program; (e) the project would continue to strengthen the existing mechanisms implemented by Alianza regarding the utilization of culturally appropriate instruments to ensure access and active participation of indigenous communities in the Rural Development Program; and (f) the annual evaluation of the program carried out at the state level incorporates a consultation to beneficiaries, including indigenous communities, on its effectiveness. In the context of the comprehensive set of monitoring and impact indicators that would be utilized to assess performance of the poverty alleviation activities of the project, a set of specific indicators would be measured to enable monitoring of s-ervices to indigenous communities, including: a) number of indigenous municipalities participtti. - in the Program; b) number of bilingual extension agents supporting the Rural Development Program's activities by state; and c) number of extension publications in indigenous languages. In addition, both the baseline study, the Mid-Term Review, and the evaluation of project impact, would include surveys of representative samples of indigenous communities. Additionally, the Bank, in association with INI, has proposed the development of a GIS specially oriented to indigenous peoples, making a clear distinction between the characteristics of urban and rural areas.7 At such time as this proposal becomes operational ALCAMPO would collaborate in providing relevant information. 7 World Bank, (June 1998), op.cit.  Proec Appraisa Doment Page 34 CouWt. Mexdco Prec Tie: Agricultral ProdudhMty Improvement Project Consistent with the agreements reached regarding the implementation of the strategy to address indigenous communities as part of the poverty alleviation objective of the project, the Operation Manual of the Project would include specific references to: (a) detailed information of the states in which INI participates as a member of the CEA; (b) the bilingual extension officers hired in the indigenous municipalities; (c) the bilingual material used for the promotion and dissemination of the Rural Development and SINDER Programs in indigenous municipalities; (d) the consultation process that would take place as part of the state annual evaluations of the program; and (e) the monitoring indicators of services to indigenous communities provided by the project.  Project Appraisal Document Page 35 Country: Mexico Project Title: Agricultural ProductivityImprovement Project Annex 2c AGRICULTURAL PRODUCTIVITY IMPROVEMENT PROJECT ProjectMonitoringand.Evaluation---: A: Operationalarrangements Given the highly decentralized nature of the project, adequate monitoring would be essential to effective project implementation. In order to provide adequate supervision of project implementation, as well as an assessment of the impact of project interventions on beneficiaries, a comprehensive Monitoring and Evaluation System (M&E) would be established and operated by an M&E area within the Project Coordination Team (ECP). This M&E area at central level would be specially created to undertake overall project M&E, and its staff would work in close coordination with the State CEA, CDRs and offices of the implementing agencies for effective project monitoring at the local level. A specialist within the ECP would be responsible for management of the M&E System and the overall supervision of the decentralized data collection process. The ECP would also be responsible for introducing any modifications needed to overcome constraints to adequate project implementation and to guide participating agencies to adjust their actions. Institutions participating in project implementation would collect data on agreed indicators regarding the activities they execute. The ECP would ensure that these institutions carefully record the required information in the central database, and monitor the respective institutional performances in project implementation. They would also be required to submit full periodic progress reports to the ECP, as well as other relevant project information. A new computerized centralized MIS would be developed to replace the existing heterogeneous systems presently operated by the different implementing agencies in charge of each program supported by the project. It would be implemented, among other things, to collect and process data to monitor physical and financial progress of the project, as well as data for ongoing impact evaluation. The MIS would provide the basis for standardizing, coordinating, processing, consolidating and reporting on the input and output data generated by the individual agencies involved in project implementation. The new system would take advantage of existing communications infrastructure and capabilities to allow close to real time data recording and processing of information. It would have a centralized data storage location at the ECP level, with decentralized data input and access features to avoid duplication of data recording efforts, maximize system usefulness at all users levels, and promote ownership of and commitment to recording of up to date quality data. State level users would be able to use the data they collect to generate their own specific planning and monitoring information, but still share it with the central level who would use it for overall project planning, monitoring and evaluation purposes. Since the project would be driven by beneficiaries' demands for the activities initially included in the programs supported by the project, and others that may be included at a later date, the MIS would allow the ECP to: (i) monitor the overall project's and the specific programs' progress in terms of their established goals and objectives; (ii) verify that project activities are compatible with project guidelines; (iii) monitor compliance with project procedures, selection criteria and other provisions of the project's Implementation Manual; (iv) keep track of status of input, output and ongoing  Project Appraisal Document Page 36 Country: Mexico Project Title: Agncultural Productivty Improvement Project evaluation indicators; (v) have easy access to baseline data; (vi) ensure that the institutions would transfer the required information accurately and in a timely manner; and (vii) assess the need to support new activities demanded by beneficiaries. Using MIS data, together with periodic controls on the performance of the implementing institutions, field visits, etc., the ECP would have a good understanding of the overall implementation of the project and its components and programs. Due to the comprehensive monitoring, the ECP would be able to quickly detect poor performing areas, identify the cause of the weaknesses, and take appropriate corrective measures. The MIS would provide information on the beneficiary population (by categories of beneficiaries) which would be used for project programming, especially for training and promotion of new project supported activities. The MIS would also provide a basis for validating the Annual Plans (APs), facilitating the introduction of adjustments to those plans and their corresponding annual budgets. B: Conceptual basis The structure of the MIS would be based on three different modules: programming and administration (PA); physical and financial monitoring (PFM); and performance evaluation (PE). The system would allow to collect and process information uniformly and periodically on the set of indicators needed by the M&E system to achieve its objectives. Indicators would be divided into three main categories: a) physical-financial; b) performance (divided in up to five categories: input, output, outcome, process and impact); and c) efficacy (divided into two categories: efficiency and effectiveness), thus providing the conceptual basis for the M&E framework. M&E activities would be based on the first two groups of indicators, while the third group would be developed and used by the different implementation sectors for management purposes. The new MIS system and associated indicators structure would help ECP support and improve present monitoring and evaluation efforts of the executing institutions; compile and prepare reports required by the Bank for administrative and monitoring purposes; and produce implementation progress reports that would be submitted to the Bank twice a year, in time for the biannual Bank supervision missions. Most importantly, beyond these capabilities, the proposed system is expected to meet the requirements for being adopted by other Alianza programs, or even for the entire Alianza itself if deemed useful, since the division into programs is merely administrative and all integration efforts between programs is a positive step toward larger implementation efficiency. C: Monitoring of Project Implementation Tracking of project activity progress would be based on a group of physical-financial indicators. The MIS's PA module would provide the information necessary for the APs, produce them and monitor their implementation, as well as produce the necessary financial and expenditures statements under the initial SOEs system and also the LACI system to be implemented at a later stage. The PFM module would provide up to date information to allow monitoring project physical and financial implementation and also to verify that implementation is consistent with the rules and criteria included in the Project Manual. The PE module would contain information regarding achievement of development objectives.  Project Appraisal Document Page 37 Country: Mexico Project Title: Agncultural Productivity Improvement Project D: Evaluation of Project Implementation and Impact Performance The evaluation of the overall implementation performance and development impact of the project would be coordinated by the ECP. It would involve different areas of activities, including; evaluation of project implementation performance, and both continuous and global evaluation of development impact. In all, these activities would entail the assessment of physical and financial implementation performance based on input and output indicators, coupled with specific evaluations based on a complementary set of indicators, to determine the specific outcomes and impacts attained by the activities to be financed by the project. The project would promote a tiered system of evaluations ofproject implementation performance, based on the annual program evaluations currently carried out at the state and federal level. Annual evaluations of individual programs at the state level would be based on agreed sets of indicators and would be carried out under standard terms of references approved by the Bank, so that quality would be uniform and results would be comparable and additive. Under these conditions the state evaluations could provide valuable input for the program evaluations at the federal level; they would also provide a sound basis for the annual project implementation reports and the midterm project evaluation. Given the time horizon on which they would be based, these evaluations would focus mostly on input and output indicators, and provide a quantitative assessment of physical and financial implementation performance, complemented with qualitative analyses of the implementation process by both beneficiaries and other agents involved. Besides, the MIS's PE module would contain the information regarding attainment of development objectives. The development impact assessment would focus on specific indicators, some of which would measure: (i) changes in farm productivity; (ii) changes in farm household income; (ii) changes in the level of capitalization; and (iv) adoption rates of new technologies being generated. Information would come from two different areas of activity: a continuous evaluation area and an independent system encompassing the performance evaluation activities per se. Continuous evaluation would be closely associated to the monitoring system and it would be based on the evolution of a small group of indicators of "potential development" based on known relationships between activities' outputs and development impacts. Based on the information about these indicators the MIS would allow to assess the project's ability to achieve its proposed development objectives. Actual evaluation of development impact would be based on a series of studies, including a baseline, a midterm and a final evaluation study. These activities would allow, in the medium term defined by the project life, to measure trends toward attainment of the development objectives defined at the outset both for the different sub-components and for the project as a whole. A list of indicators to be monitored is provided in Table A2c. I. Main development performance indicators include change in beneficiary's household income, change in productivity of target farming systems, change in irrigated area, change in area with pastures, change in percentage of Alianza projects receiving integrated technical assistance and change in research projects addressing smallholder needs. Based on the table, list of selected key indicators was developed. Agreed upon during negotiations and included in the Project Implementation Letter.  Project Appraisal Document Page 38 Country: Mexico Project Title: Agicultural Productivity Improvement Project E: Products 1) Reports. The ECP would be responsible for the preparation of the following types of progress reports: Annual budget and work plan. Annual plans would be produced, no later than December 15 of each year, describing all project activities to be done in the subsequent year along with their corresponding budgets. Semiannual reports. Semiannual reports on all project activities in the previous six months would be produced no later than Marcch 31 and September 30. The reports would have a format and coverage acceptable to the Bank, including presentation of project implementation indicators. The reports would basically contain a physical and financial analysis, stemming from a synthesis of MIS data, indicating implementation,progress. - Annual review. Annual-project reviews would be produced no later than March 31 of each year. The annual review would cover project implementation in the past year and analyze the proposed budget and work plan for the subsequent year with respect to the project's implementation indicators and agree on any necessary changes in implementation. This Report would utilize the standard format of the semiannual Project Progress Report agreed upon with the Bank, but would also include summaries of the status of Project Performance Indicators; status of specific institutional strengthening activities; compliance with procedures outlined in the Project Implementation Manual; and analyses and recommendations relevant for optimizing project implementation, based on technical studies. Project midterrn review report. A midterm review (MTR) of the project would be held to evaluate overall progress with project implementation, to assess results and to define measures to reorient the project as necessary. The MTR would constitute the annual review for the year 2000 and examine implementation based on the indicators agreed upon. Data for the MTR would include all information about project costs and activities and observed or expected benefits from those activities. All data would be complete for the first 24 months of project implementation. Besides the quantitative data, the MTR report would also include an overall project evaluation and individual program evaluations that would be especially carried out as part of the review process. The MTR's function would be to evaluate the project's overall performance in terms of achieving its expected outcomes. The MTR would assist the GOM, the ECP and the World Bank in identifying positive experiences as well as problems occurring during the initial years of project implementation. This evaluation would recommend any adjustments required during the second half of project implementation. The MTR would evaluate the efficiency and effectiveness of project activities; the performance of the institutions involved in implementation; management performance; the supervision mechanisms and the MIS; the effectiveness of institutional strengthening and technical assistance activities; and the project's targeting mechanisms. The MTR would be based on the management monitoring reports, the Semi-Annual and Annual Reports, technical studies and socioeconomic assessments. At negotiations, GOM and Bank would agree on: a) that the ECP would prepare a framework for the formulation of the TORs for the MTR; and b) to make necessary adjustments in project implementation as recommended by the MTR. 2) Evaluations. Evaluation of the overall performance and development impact of the project would involve standard evaluation procedures complemented with beneficiary assessments (socioeconomic impact on beneficiaries, with emphasis on small farm modernization/diversification and income  Project Appraisal Document Page 39 Country: Mexdco Projec Tile AWWur Producty IMoent Prject changes). Operationally, the evaluation of development aspects of the project would be coordinated by the ECP and would be conducted by a specialized team staffed from independent sources with extensive relevant experience nationwide. The socioeconomic impact assessment would be based on a sample of beneficiaries representative of the different types of interventions supports and their geographical distribution. The assessment would focus on specific issues, including: (i) level of farm productivity; (ii) level of farm household income; (iii) adoption rates of new technologies being generated; (iv) effectiveness of technical assistance; etc. The assessment process would encompass three different studies during three different stages of project implementation: a) a baseline study to determine the initial status of project beneficiaries; b) a set of mid-term evaluation studies covering both for the overall project and the different Atianza programs supported (end of second year), to allow assessment of any implementation corrective measures needed; and c) a final project evaluation complementary of the baseline study (end of fourth year), that would allow to assess project outcomes and trends in development impact of project activities.  Project Appraisal Document Page 40 Country: Mexico Project Title: Agricultural Productivity improvernent Project Table A2c-.1: MAIN PERFORMANCE MONITORING INDICATORS Indicator Unit Program' INPUT Systems installed and in working order (by type) ID Independent technicians hired # ID Despachos (TA providers) hired # ID Basic infrastructure supported and in working order, by type (barns, silos, DTI milking parlors, etc.) and by category (new, rehabilitated) Equipment purchased and in working order, by type (refrigerated tanks, DTI milking machines, forage and silage equipment, etc.) Seed supplied by species ton IPE Equipment supplied, by type (fertilizers, sprayers, etc.) IPE Supplies and equipment provided, by type (wire, drinking troughs, electric unit IPE fence equipment, scales, pumps, pens, etc.) Supports given by stage (services, production, processing and marketing) RD Sprayers supplied # RD Mini-Tractors supplied RD Ag. Tools supplied RD Greenhouses installed RD Demonstration modules installed RD Livestock modules supported and head of cattle supplied RD i'oultry modules supported and head of poultry supplied RD Ovine and other small animal modules supported and head supplied RD Rabbit modules supported and head supplied # RD Small irrigation project supported and area benefited #, ha RD Vegetable production plots supported #,ha RD Fruit orchards supported #,ha RD Rural micro enterprise projects supported (by type) RD Improved services market projects supported (by type) RD Marketing of non-traditional ag. products projects supported (by type) RD Applied research projects RTT Validation projects # RTT Days of training by type of recipient (technicians, professionals, other) RTT Field days # RTT s p - Project-wide ID - Irrigation development DTI - Dairy technology improvement IPE - Improved pasture establishment RD - Rural development RTT - Research and technology transfer TE - Training and extension ETA - Elemental technical assistance IP - Integrated projects ISPA - Institutional Support and Project Administration  Project Appraisal Document Page 41 Country: Mexico Project Title: Agrcultural Producfivity Improvement Project Fairs and shows supportd_ RTT Exhibitors in fairs and shows (by type) _ RTT Demonstration lots # RTT Technology tours by destination (national, inteMational) RTT Days of qualified consultants hired by origin (national, international) ______ _ RUT "Fact sheets" produced #RTT Other dissemination materials ('Dipticos and tripticos") produced # RTT Flyers produced ._# RTT Bulletins produced :_____ RTT Technical videos produced RTT RU TV programs produced # RTT Technicians hired for ADR # TE Coordinators hired for ADR _ TE Technicians hired for PA (by type of project) # TE Coordinators hired for PA (by type of project) # TE TT PADEMs (by type of project, except for "other projects") # TE TT MODEMs (by type of project) # TE TT exchange tours (by type of project) TE CP community workshops (by type of project) -_:_# TE CT regional workshops (by type of project) # TE CT technical workshops (by type of project) # TE Specialist/hours hired for CT (by type of project) _______TE PEAT technicians hired ETA PEAT coordinators hired # ETA PEAT modules . ETA PEAT PADEM # ETA Seed exchanged in the "Kilo por Kilo" program ton, $ ETA Projects approved (by type) # IP Individual promoters hired (by type of project) L__ IP Despachos (TA providers) hired (by type of project) . IP Technical workshops # IP GGAVATT(by type of project) I IP Requests for DTI supplies # IP Requests for IPE supplies # IP Request for other supplies F IP Training events (by type and agency) #_ISPA Equipment purchased (by type and agency) ISPA Financial resources available by source a_ _ISPA Manuals produced ISPA AP produced at federal level - #_ISPA AP produced at state level # ISPA Quarterly project progress reports produced # ISPA Bi-annual project progress reports produced #_ISPA Annual project progress reports produced # ISPA OUTPUT L X Beneficiaries per program #: I p Change in irrigated area ( % change and new area incorporated) ha,, % ID Irrigatee area rehabilitated ha ID Water made available by type of intervention (decreased losses, increased 000m31yr ID  Project Appraisal Document Page 42 Country: Mexico Project Title: Agricultural Productivity Improvement Projed pumping capacity) l_l_l Capacity (in2 , # of animals, tons, etc.) of barns, silos and other new Unit DTI infrastructure installed and in working order Capacity (M2 , # of animals, tons, etc.) of barns, silos and other Unit DTI infrastructure rehabilitated and in working order Processing capacity of equipment supplied and in working order (by type: Unit DTI refrigerated bulk tanks [It/day], milkers [units], baler, choppers and other forage processing equipment [ton/hr], etL.) Pasture improvement supported and effcctive: installed, b\ type (new Ha IPE improvements -by type-, rehabilitation of exisiing improvements -including "agostaderos") Beneficiaries with fencing supplies by type (conventional, electric) IPE Tianguis sponsored RD Attendees to tianguis sponsored RD Persons trained by type (technicians, professionals, other) RTT Attendees to field days RTT Attendees to fairs and shows RTT Visitors to demonstration plots RTT Participants in technology tours, by destination (national, international) RTT Attendees to technical videos shows RTT Airings of TV programs produced RTT Municipalities covered by ADR TE Communities covered by ADR TE Beneficiaries of PA (by project type) TE Producers trained (by project type) # TE Producers trained in PADEM (by project type) L TE Producers trained in MODEM (by project type) # TE Technicians trained (by project type) TE Municipalities covered by PEAT # ETA Communities covered by PEAT # ETA Beneficiaries ETA Area covered by PEAT, by crop (beans, wheat, rice, sorghum, barley, oats, ha ETA soybeans, other) Promoters trained # IP Basins covered IP Municipalities covered # IP Regional development basins set up and developed # IP Beneficiaries (by type of project/activity) # IP Personnel trained # ISPA - Environmental Subproject proposals registered by the Technical Agents P Subproject proposals with "dictamen ambiental" approved by SEMARNAP P Subprojects to which the environmental checklist was applied P Subprojects where environmental studies were contracted P Subprojects where environmental mitigation measures modified the original P project design Subprojects not approved or withdrawn due to environmental problems P - Indigenous Peoples - Indigenous municipalities covered P States with an INI representative within the Alianza structure # P Bilingual extensionists working with indigenous communities # P  Project Appraisal Document Page 43 Country: Mexico Project Title: Agricultural Productivity Improvement Project Dissemination/promotional publications in indigenous language P Indigenous beneficiaries in Rural Development and SINDER activities P OUTCOME Change in proportion of cropland destined to commercial crops %, ha ID Change in proportion of production marketed %,ton ID Change in productivity of main crops (ton/ha), by crop and former Ton/ha, % ID production system (irrigated/non-irrigated) Change in gross value of production %, $ ID Change in water consumption by type of system %, m3/ha/yr. ID Change in power consumption by type of system %, kw/ha/yr ID Change in fuel consumption by type of system %, It/ha/yr ID Change in fertilizer consumption %, ton, ton/ha ID Incremental water consumption 'OOOm3/yr ID Change in head of cattle milked mechanically %,# DTI Change in volume of milk milked mechanically I%,t DTI Change in the proportion of refrigerated milk marketed %, It DTI Change in total volume of milk marketed %,It DTI Change in total volume of refrigerated milk marketed %, It DTI Change in carrying capacity %, AU/ha IPE Percentage of inductions that derive in adoption of technology % IP Change in % of extensionists that attend at least one training event and a % RTT field day per year Change in % of producers that adopt at least one technology developed % RTT Change in the participation of non-INIFAP research institutions in the total % RTT value and the total number of research and validation projects implemented A central database of completed and on-going research is created RTT A common operational set of procedures is adopted for processing and RTT approval of research projects D A monitoring system for research and validation projects is implemented RTT % of subprojects with TA cost included as part of total investment cost % TE % of subprojects receiving operational TA _ TE TA cost as % of total subproject cost % TE % of subprojects in which the producer pays a fraction of TA costs % TE % of total TA costs that is covered by producers _TE- ETA % of subprojects in which TA is self-financed % TE- ETA N