Mexico - Renewable Energy for Agriculture Project

Document of The World Bank Report No: 19912-ME PROJECT APPRAISAL DOCUMENT ONA PROPOSED GRANT FROM THE GLOBAL ENVIRONMENT FACILITY TRUST FUND IN THE AMOUNT OF SDR 6.5 MILLION (US$8.9 MILLION EQUIVALENT) TO THE UNITED MEXICAN STATES FOR A RENEWABLE ENERGY FOR AGRICULTURE PROJECT NOVEMBER 24, 1999 Environmentally and Socially Sustainable Development Mexico Country Managing Unit Latin America and the Caribbean Region  CURRENCY EQUIVALENTS (Exchange Rate Effective June 1999) Currency Unit = Mexican Peso (Mx$) Mx$1.0 = US$0.10 US$1.0 = Mx$9.7 FISCAL YEAR January 1 - December 31 ABBREVIATIONS ALCAMPO Proyecto de Mejoramiento de la Productividad Agropecuaria Agricultural Productivity Improvement Project ALIANZA Programa Alianza para el Campo Alianzapara el Campo Program FIRCO Fideicomiso de Riesgo Compartido Trust Fund for Shared Risk SAGAR Secretaria de Agricultura, Ganaderia y Desarrollo Rural Secretariat of Agriculture, Livestock, and Rural Development USAID United States Agency for International Development USDOE United States Department of Energy Vice President: David De Ferranti Country Director: Olivier Lafourcade Sector Manager: John Redwood Sector Leader: Adolfo Brizzi Task Team Leader: Michael Carroll  MEXICO RENEWABLE ENERGY FOR AGRICULTURE CONTENTS A. Project Development and Global Objective 1. Project development objective and key performance indicators ......... .................. 2 B. Strategic Context 1. Sector-related CAS goal and GEF Operational Program supported by the project ......2 2. Main sector issues and Government strategy .............................. .................... 3 3. Sector issues to be addressed by the project and strategic choices ......... ................ 5 C. Project Description Summary 1. Project components ........................................................... 6 2. Key policy and institutional reforms supported by the project .............................. 7 3. Benefits and target population ....................................................... .... 7 4. Institutional and implementation arrangements ....................... ........................ 8 D. Project Rationale 1. Project altematives considered and reasons for rejection ............ ...................... 9 2. Major related projects financed by the Bank, GEF and other development agencies 11 3. Lessons leamed and reflected in proposed project design ........... ...................... 12 4. Indications of borrower commitment and ownership .............. ........................ 12 5. Value added of Bank support in this project .......................... ...................... 13 E. Summary Project Analyses 1. Economic ........................................................... 13 2. Financial ........................................................... 14 3. Technical ........................................................... 14 4. Institutional ............................................................ 15 5. Social ........................................................... 15 6. Environmental assessment ............................................................ 15 7. Participatory approach ........................................................... 16 F. Sustainability and Risks 1. Sustainability ........................................................... 16 2. Critical risks ........................................................... 17 3. Possible controversial aspects ...................................................... ..... 17  G. Main Loan Conditions ........................ 18 H. Readiness for Implementation ........................ 18 I. Compliance with Bank Policies ........................ 18 Annexes Annex 1. Project Design Summary .20 Annex 2. Detailed Project Description .22 Annex 3. Estimated Project Costs .29 Annex 4. Economic and Financial Analysis .30 Annex 5. Financial Summary .34 Annex 6. Incremental Cost Analysis .35 Annex 7. Environmental Assessment .40 Annex 8. Monitoring and Evaluation Program .42 Annex 9. Procurement and Disbursement Arrangements ................................ 47 Annex 10. Project Processing Budget and Schedule ................. .................... 52 Annex 11. Documents in Project File ..................................... 53 Annex 12. Statement of Loans and Credits ..................................... 54 Annex 13. Country at a Glance ..................................... 56  MEXICO RENEWABLE ENERGY FOR AGRICULTURE PROJECT Project Appraisal Document Latin America and the Caribbean Region Mexico Country Managing Unit Date: November 24, 1999 Task Team Leader: Michael Carroll Country Director: Olivier Lafourcade Sector Manager: John Redwood Project ID: MX-GE-60718 Sector: Agriculture Program Objective Category: Enviromnentally Sustainable Development GEF Supplement ID: Focal Area: Climate Change Financial Instrument: GEF Grant Program of Targeted Intervention: [ ] Yes [X] No Project Financing Data [] Loan [] Credit [ ] Guarantee [X] Grant [] Other [Specifyl Amount: GEF Grant: various currencies equivalent to SDR 6,452,000 (currently valued at US$8.9 million) Financing plan (US$ '000): Source Local Foreign Total Beneficiaries 5,255 1,640 6,895 Government 1,800 -- 1,800 IBRD' 8,820 4,875 13,695 GEF 6,090 2,810 8,900 Total 21,965 9,325 31,290 Grant Recipient: Nacional Financiera, S.N.C. Responsible Agency: Trust Fund for Shared Risk (FIRCO) Estimated disbursements of GEF Grant (Bank FY/US$M): 2000 2001 2002 2003 2004 Annual 1.0 3.0 2.5 2.0 0.4 Cumulative 1.0 4.0 6.5 8.5 8.9 Project implementation period: 4 years Expected effectiveness date: Jan 2000 Expected closing date: June 30, 2004 'Via the Federal Government's Alianzapara el Campo Program, with financing from the Bank-supported Agricultural Productivity Improvement Project (ALCAMPO) (Loan 4428-ME, approved December 22, 1998).  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document A: Project Development Objective 1. Project development objectives and key performance indicators (see Annex 1). The project's development objectives are: a) to provide unelectrified farmers with reliable electricity supply for productive purposes in a least-cost and sustainable manner using renewable energy technologies; b) to increase the productivity and income of unelectrified farmers by supporting the adoption of productive investments and improved farming practices; and c) to improve FIRCO's ability to catalyze the penetration of renewable energy technologies in the agriculture sector. Performance indicators, outlined in Annex 1, would focus on the installation of renewable energy systems and changes in farm productivity and incomes. 2. Project global objectives and key performance indicators (see Annex 1): This is the first GEF project to target renewable energy in the agriculture sector. It's global objectives are: a) to promote the use of renewable energy for productive purposes in Mexico's agriculture sector by removing barriers and reducing implementation costs; and b) to reduce greenhouse gas emissions in the agriculture sector. Performance indicators, outlined in Annex 1, would focus on the removal of barriers and growth in demand for renewable energy systems among unelectrified farmers, as well as avoided greenhouse gas emissions. Operating within the context of the ongoing Agricultural Productivity Improvement Project (ALCAMPO), the project would support the above development and global objectives by removing barriers to the penetration of renewable energy technologies in Mexico's agriculture sector. Despite the fact that, in certain applications, renewable energy systems are less costly than conventional gasoline- powered systems on a life-cycle basis, several barriers impede their market penetration. The project would remove these barriers by a) implementing a nation-wide promotion campaign to increase farmers' awareness of renewable energy systems; b) building the capacity of technicians and agricultural extensionists through training; c) introducing technical specifications and certification procedures for farm-based renewable energy equipment; d) carrying out studies on the potential market and applications for renewable energy in Mexico's agriculture sector; e) installing renewable energy systems (such as solar- and wind-powered pumps, solar-powered refrigerated milk storage tanks, etc.) on selected farms as demonstration units to reduce other farmers' perceived risk; f) supporting the proper operation of these renewable energy systems through the provision of on-going technical assistance to participating farmers by trained extensionists; and g) testing innovative vendor financing mechanisms for farm-based renewable energy systems in four states. B: Strategic Context 1 (a). Sector-related Country Assistance Strategy (CAS) themes supported by the project (see Annex 1): Report number: R 99-92, IFC/R 99-82 Discussed: June 8, 1999 The World Bank Group Mexico Country Assistance Strategy emphasizes a development agenda with three core themes: (i) social sustainability; (ii) removing obstacles to sustainable growth and maintaining Page 2  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document macro-economic stability; and (iii) more effective public governance. The project would contribute directly to all three themes. The social theme would be addressed by increasing the income of farmers and thereby improving the standard of living in rural areas. The growth theme, as well as its key element of protecting the environment, would be addressed by improving the productivity of farmers using environmentally-benign, least-cost renewable energy technologies. Finally, the public governance theme would be addressed by assisting the Government in its decentralization efforts and building the capacity of government agencies to provide farmers with technical assistance in the use of renewable energy technologies. The project is also directly consistent with the World Bank Group's strategy on the environment in Mexico, under which "priority will be given to identifying "win-win" investment opportunities, where global environmental benefits and national economic benefits can be generated through an integrated and mainstreamed approach to development priorities". h. GEF Operational Program objective addressed by the project: The project is fully consistent with GEF Operational Program 6: Promoting renewable energy by removing barriers and reducing implementation costs. GEF support would help to: a) remove information and awareness barriers among unelectrified farmers by supporting a renewable energy promotion campaign aimed at the unelectrified agriculture sector; b) remove human capacity barriers by training private sector and government technicians, agricultural extensionists and vendors in the design, installation, operation and maintenance of farm-based renewable energy systems; c) remove consumer confidence barriers by introducing technical specifications and certification procedures for renewable energy equipment and services; d) remove information barriers and reduce market entry costs by supporting market and technology assessments of renewable energy in Mexico's agriculture sector; e) remove perceived risk barriers by supporting the installation of renewable energy systems on farms in selected states as demonstration units; and f) contribute towards the removal of financing barriers by testing innovative vendor financing mechanisms for farm-based renewable energy systems. 2. Main sector issues and Government strategy: The project addresses issues in the agriculture and energy sectors. Agriculture: Agriculture remains a weak sector of the Mexican economy. Rural poverty has been expanding in recent years and many farmers have limited options to cope with income and consumption fluctuations. Nevertheless, agriculture could remain an important economic sector provided a) its commercial sector continues to be competitive through the permanent use of modern technologies and increased yields and b) the productive potential of small-scale farming can be fully developed. Improving the delivery of financial services to the rural population remains one of the main constraints to the development of the agricultural sector. Financial services remain severely deficient in rural areas and access to financial resources for productive investment continues to be limited, especially for small farmers. In 1996, the Government launched a national agriculture and rural development initiative - theAlianza para el Campo (Alianza) Program - to increase capitalization in the agriculture sector with the aim of promoting improved agricultural productivity and production and increased farmer incomes. The Program fosters agricultural productivity improvement by financing productive investments (under a matching grant scheme) and by providing support services (research, extension, information and training) for a wide range of agricultural activities. In providing matching grants for the acquisition of capital equipment, Alianza essentially substitutes for absent rural finance services. The cornerstones of the Page 3  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Alianza program are its decentralized approach, with a delegation of administration and decision-making to the States, and its demand-driven nature, providing financing and support services only in response to requests from farmers. The Government most recently developed the Agricultural Productivity Improvement Project' (ALCAMPO) to support and improve Alianza 's delivery of financing and technical services. The project was approved for a loan of US$445 million from the World Bank in December 1998 and began implementation in early 1999. The Government is also engaged with the World Bank on a number of initiatives to improve rural finance. In 1994, the Government worked with the Bank on a study of rural financial markets. In 1996 it initiated the Rural Finance Technical Assistance and Pilot Project with World Bank assistance to encourage private banks to increase their services in rural areas. Through the Bank-supported Rural Development in Marginal Areas Project, the Government is experimenting with community-based revolving loan funds and cost-recovery withinAlianza. SAGAR is currently working with the Bank on a new study of the potential for savings mobilization and deposit instruments in marginal areas. And SAGAR is also exploring the possibility of a World Bank loan to finance its Micro-Credit Fund for Rural Women. Energy: Approximately 5 percent of Mexico's population remains without access to electricity, including an estimated 5 million people, 88,000 villages and 600,000 livestock farms. While governments at all levels recognize the productivity and social development benefits of rural electrification, and especially of the electrification of farms, budget limitations and rural poverty will prevent the electrification of the vast majority of these energy users in the foreseeable future. The Federal Government supports rural electrification through transfer payments to state and municipal governments for infrastructure and social development investments. The decision over how to use these funds, whether for rural electrification or other purposes, is left to state and municipal governments. Several states have used these federal funds to support the electrification of rural households with renewable energy by providing matching grants towards the purchase of solar home systems. In 1994, the Federal Government began to support the electrification of farms with renewable energy in 8 of the country's 32 states through FIRCO's participation in the USAID/USDOE-supported Mexico Renewable Energy Program.2 The experience gained by FIRCO through this program has enabled the government to expand the scope of Alianza to cover the electrification of farms with renewable energy systems. Farmers can now receive matching grants from Alianza towards the purchase of renewable energy systems to pump water and power farm equipment. Further, farmers can receive proportionately larger grants for renewable energy systems than for conventional farm equipment and infrastructure. However, a number of barriers have been encountered in the implementation of this program, which have impeded the development of a self-sustaining market in farm-based renewable energy systems. The barriers impeding penetration of renewable energy technologies in Mexico's agriculture sector include: a) the lack of awareness among unelectrified farmers regarding renewable energy technologies; b) a lack of trained technicians and vendors that can design, install and service renewable energy systems and agricultural extensionists that can advise farmers on their proper operation; c) the lack of technical specifications and certification processes for renewable energy equipment; d) uncertainty within the Mexican renewable energy industry regarding the potential market for renewable energy systems in the agricultural sector and potential applications of renewable energy technologies on farms; e) farmers' 'MX-PE-48505 Further information on this program is provided in Annex 2: Project Background and Description. Page 4  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document perception of renewable energy technologies as risky, simply because they are novel; and f) the high initial cost of renewable energy systems, relative to conventional alternatives, coupled with deficient rural finance services that prevent farmers from financing their higher initial cost over time.' 3. Sector issues to be addressed by the project and strategic choices: The agriculture sector issues noted above are being addressed through the on-going Alianza program, with the help of the Bank-supported Agricultural Productivity Improvement Project. The project would address the identified barriers to the penetration of renewable energy technologies in Mexico's agriculture sector by a) implementing a nation-wide promotion campaign to increase farmers' awareness of renewable energy systems; b) building the capacity of technicians and agricultural extensionists through training; c) introducing technical specifications and certification procedures for farm-based renewable energy equipment; d) carrying out studies on the potential market and applications for renewable energy in Mexico's agriculture sector; e) installing renewable energy systems (such as solar- and wind-powered pumps and solar-powered refrigerated milk storage tanks, etc.) on selected farms as demonstration units to reduce other farmers' perceived risk; f) supporting the proper operation of these renewable energy systems through the provision of on-going technical assistance to participating farmers by trained extensionists; and g) testing innovative vendor financing mechanisms for farm-based renewable energy systems in four states. Together, the above activities would build upon the achievements of the USAID/USDOE-supported Mexico Renewable Energy Program and expand the foundation for growth in the market for farm-based renewable energy systems. The a) promotion campaign and b) specifications and certification would seed the market by vastly increasing the number of farmers that are a) aware of renewable energy systems and b) assured that they meet basic quality standards. Seeing demonstration units operating on farms throughout the country would substantially reduce the risk that unelectrified farmers perceive in investing in this new technology. Trained technicians and agricultural extensionists would be able to provide quality services and advice to farmers on their renewable energy systems. Information from the market and technology assessments would increase the confidence of vendors and distributors to enter the renewable energy market while training would build their capabilities to provide quality equipment and services. And finally the vendor financing program would demonstrate whether this is a viable option with which to finance farm-based renewable energy systems. One of the most important strategic choices adopted for the project is to implement it within the framework of the federal government's Alianza para el Campo Program. Alianza is an established and well-run program that covers the entire nation and enjoys substantial support among farmers and all levels of government. Its demand-driven and participatory approach to the provision of financial and technical assistance to farmers supports economic efficiency and local ownership. Alianza provides the project with an established vehicle with which to deliver renewable energy-focused financial and technical assistance to unelectrified farmers throughout the country. Another strategic choice is to experiment with vendor financing as an approach to the financing of farm- based renewable energy systems. Given the deficiency of consumer financing in rural areas, vendors of renewable energy systems represent an efficient conduit with which to deliver financing to farmers. l Renewable energy systems (and specifically solar- and wind-powered water pumping systems and solar-powered refrigerated milk storage tanks) are substantially more expensive to purchase then conventional, gasoline-powered systems but are typically less costly on a life-cycle basis. Page 5  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document C: Project Description Summary 1. Project components (see Annex 2for a detailed description and Annex 3for a detailed cost breakdown): Component Category Cost, % of Bank- % GEF % Total financing Financing (USS '000) (US$ '000) (US$ '000) 1. Promotion A promotion campaign targeting renewable Institutional $1,824 6 $1,298 71 energy for productive purposes in the strengthening agriculture sector will be carried out. 2. Institutional Strengthening Technicians, agricultural extensionists and Institutional $1,590 5 $1,298 82 renewable energy system vendors will strengthening receive training. 3. Specifications and Certification Technical specifications and certification Institutional $275 I $212 77 procedures will be introduced for farm- strengthening based renewable energy equipment and its installation. 4. Market Development Studies will be carried out on the potential Institutional $686 2 $662 97 market and productive applications for strengthening renewable energy systems in the agriculture sector. 5. Demonstration Renewable energy systems (such as solar- Physical $18,770 60 $8,965 48 $3,830 20 and wind-powered water pumping systems and solar-powered refrigerated milk storage tanks, etc.) will be installed among participating farmers as demonstration units. _ 6. Technical Assistance Renewable energy-trained agricultural Capacity $4,919 16 $3,530 72 $434 9 extensionists will advise participating building farmers on the proper operation of their renewable energy systems. _ 7. Vendor Financing A pilot program will test innovative vendor Institutional $2,261 7 1,200 53 $636 28 financing mechanisms for farm-based strengthening renewable energy systems in four states. 8. Project Management Project administration, auditing, monitoring Project $965 3 $530 55 and evaluation will be carried out or management coordinated by FIRCO. Total $31,290 100 $13,695 44 $8,900 28 'Including contingencies. Page 6  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document 2. Keypolicy and institutional reforms supported by the project: The project builds on the Government's existing policy and institutional framework in the agricultural sector. It aims to fully integrate renewable energy into the Govemment'sAlianza program of financial and technical assistance to farmers. 3. Benefits and target population: The project's target population is the estimated 600,000 unelectrified livestock farms throughout Mexico and the potential industry of renewable energy vendors and service providers that could cater to this market. The project's demonstration component would targetAlianza participants while the rest of the project's components would target Alianza participants and non-participants. A select number of farmers within the target population will be wealthy enough to purchase renewable energy systems without financial assistance from Alianza or the GEF. While they will not participate in the demonstration component, that and other project components would increase their awareness of, and confidence in, renewable energy systems and thereby increase their purchase of these systems. Poorer farmers that would be unable to purchase a renewable energy system on their own, even with the project's financial assistance, would still be able to participate by joining with neighboring farmers to purchase a renewable energy system that would serve them as a group. For example, several farmers with adjacent properties could construct a central watering trough connected to a solar-powered pump. Many of the solar- powered pumps installed by the USAID/USDOE-supported Mexico Renewable Energy Programs supply water to two or more farmers. Market research to be carried out early in project implementation will improve this definition of the target population. The project's economic benefits will be increased farmer incomes derived from investments in production systems that are made possible due to the superior reliability and lower life-cycle costs of renewable energy systems in comparison to conventional gasoline-powered systems. Experience under the USAID/USDOE-supported Mexico Renewable Energy Program indicates that solar-powered pumps are more reliable than gasoline-powered pumps, in part because they have fewer moving parts. Fuel costs make up roughly half the life-cycle cost of gasoline-powered pumps and since solar- and wind- powered pumps have no fuel costs, this leads to an immediate saving among participating farmers and an average 16 percent return on investment. Further increases in participating farmer incomes of between 85 and 190 percent would result from production increases that are made possible by the low operating costs of renewable energy systems. Since additional operation of solar- and wind-powered pumps is essentially free, some farmers pump more water and use the excess to irrigate a small field for forage or fruit and vegetable production. The high fuel and operating costs of gasoline-powered pumps do not make this additional pumping economic. While the overall financial benefit to participating farmers is substantial, it is important to remember that these farmers are hosting demonstration systems and the project's financial assistance is considered necessary to overcome their perceived risk towards new renewable energy technologies in order to get these systems into the field where they can have a demonstration impact among other farmers. In social terms, the project will lead to improvements in overall food security and quality of life in rural areas. Enviromnentally, the project will avoid the emission of greenhouse gases from gasoline-powered or grid- connected systems that would be substituted with solar- and wind-powered systems. It is anticipated that the demonstration and vendor financed systems installed by the project would abate roughly 6,000 metric tonnes of carbon per year, or roughly 120,000 metric tonnes over the 20 year life span of the renewable energy systems. More importantly, the project would catalyze a national market for farm-based renewable energy systems among Mexico's estimated 600,000 unelectrified livestock farms. It is expected that the project would catalyze the penetration of renewable energy systems among one-third of the country's unelectrified farms within ten years, a development that would avoid an estimated 0.73 Page 7  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document million metric tonnes of carbon annually. In addition, the project would reduce local air, water and soil pollution associated with gasoline-powered farm equipment. The reduction in water and soil pollution is particularly significant as gasoline-powered pumps are typically located at or in wells that serve livestock and human populations. 4. Institutional and implementation arrangements: Implementation period: 4 years (2000-2003) Executing agency: Trust Fund for Shared Risk (FIRCO) Financial agency: Nacional Financiera, S.N.C. (NAFIN) The project would be executed by FIRCO, a para-statal agency operating under the Secretariat of Agriculture, Livestock and Rural Development (SAGAR), in cooperation with NAFIN as the financial agency. Through its offices in each state, FIRCO administers three of the fourAlianza sub-programs that involve energy-consuming equipment which could be powered by renewable energy: Irrigation Development (pumps), Improved Pasture Establishment (pumps and electric fences) and Dairy Technology Improvement (refrigerated milk storage tanks). The fourthAlianza sub-program involving energy consuming equipment - Rural Development - is administered by SAGAR. FIRCO will coordinate with SAGAR to ensure that farmers participating in the Rural Development sub-program are able to participate in the project if they wish. Assurances will be attained by the Bank at negotiations regarding this coordination. FIRCO has also been one of the principal Mexican counterparts in the USAID/USDOE-supported Mexico Renewable Energy Program, which has provided farmers and other end-users with technical and financial assistance towards their acquisition and use of renewable energy systems. Through its participation in this program, FIRCO staff in eight states have developed expertise in renewable energy systems and coordinated the installation of over 100 solar-powered water pumping systems on farms. In the process, FIRCO has developed a substantial capability in the provision of financial and technical support to farmers in the area of renewable energy. FIRCO would establish a Project Coordination Unit or team (PCO) in its Mexico City headquarters to direct the project's implementation, with the help of its offices in each state and a contracted firm that would carry out day-to-day project management. The PCO would execute the promotion, institutional strengthening, market development and specifications and certification components, with support from FIRCO's state offices. The demonstration, technical assistance and vendor financing components would be delegated to FIRCO's state offices, with the support of the PCO and management firm. The state offices would implement the demonstration and technical assistance components by integrating renewable energy and GEF support into their ongoing implementation of the above-mentionedAlianza sub-programs. The vendor financing pilot program would be implemented in the four target states by the FIRCO offices in those states. Accounting, financial report and auditing arrangements (See Annex 9): The financial management, accounting system and internal controls are already in place as part of the Alianza program and are utilized by FIRCO for the recently completed Rainfed Areas Development Project (Ln. 3778-ME). They have been operating satisfactorily and their use would be continued under the present project. Resources and mechanisms to permit financial monitoring and reporting of the project will be in place prior to effectiveness. Financial reporting would be carried out FIRCO, including information required for preparation of statement of expenditures (SOEs), should they be utilized. FIRCO would carry out financial accounting and maintain separate project accounts and records for project-related expenditures, in accordance with Page 8  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document sound and accepted accounting practices. Financial reports and SOEs would be consolidated for submission to the Bank. Financial audits would be carried out annually by an independent auditor acceptable to the Bank and Govemment of Mexico. Audit reports would be prepared in accordance with International Auditing Standards (IAS), FARAH and MET (Framework agreement between the Bank and Secretariat for Administrative Control - SECODAM). The annual auditor's opinion would be submitted to the Bank within six months of the end of each calendar year. Procurement (see Annex 9): 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, revised January and August 1996, September 1997 and January 1999). All consultants would be selected in accordance with the Bank's Guidelines for the Use of Consultants (January 1997; revised September 1997 and January 1999). Most of the equipment and goods to be procured under this project would be carried out with direct participation and financial contribution of the beneficiaries, and implemented as part of the Demonstration Component. Procurement would be carried out by the beneficiaries and payments made through the state FIRCO office. Eligibility criteria and operation procedures would be included in the Operational Manual. Given the remote and scattered location of beneficiaries, there is little competition among contractors for these small projects, which would lead one to expect that formal bidding at the community level will not reduce cost given all the transaction costs involved. In this case, participation substitutes for formal processes in ensuring cost-effectiveness. Consequently, simplified procurement procedures, including the utilization of local shopping and direct contracting, will be utilized. The implementation of these procedures would require strong supervision on the part of FIRCO and its state offices. However, as sole or joint implementing agency of other Bank supported projects, FIRCO has developed sufficient capacity to meet the Bank's minimum procurement management requirements, as verified by the preliminary capacity assessment performed at appraisal The Project Procurement Plan would be agreed upon during negotiations and the final version would be incorporated in the Operational Manual to be submitted to the Bank as a condition of effectiveness. Monitoring and Evaluation (see Annex 8): FIRCO would establish and implement a comprehensive monitoring and evaluation program for the project. For monitoring, FIRCO would adapt its own module within ALCAMPO's computerized management information system to track the project's inputs, outputs and outcomes and to ensure that implementation is consistent with the rules and criteria included in the Operational Manual. Information would be collected by FIRCO staff at headquarters and in state offices as well as participating extensionists. For evaluation, FIRCO would coordinate the implementation of two project evaluations -- one at mid- term and one upon project completion - by independent consultants. Evaluation would focus on the project's implementation and its development impact. The market assessment study (included in the market development component) would establish a baseline for several of the impact indicators. The results of the mid-term evaluation would inform project implementation in years three and four. D: Project Rationale 1. Project alternatives considered and reasons for rejection: With respect to the scope of the project, a broader scope encompassing all rural energy users, including Page 9  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document farms, households, schools, health clinics and small/cottage industries, was considered. While such a broad scope could offer economies of scale in catalyzing the rural market for renewable energy, it was rejected for four reasons. First, the Secretariat of Energy has requested World Bank assistance to prepare a separate rural energy project in Mexico that would address barriers to renewable energy use among other rural energy users. That project would aim to foster new approaches to rural electrification using renewable energy technologies that rely more on the private sector and less on government subsidies. Second, one of the intentions of the proposed project would be to mainstream renewable energy within Alianza -- an established nation-wide agricultural development program that constitutes a ready-made delivery mechanism for the project's activities. A more comprehensive approach would have necessitated the creation of new delivery mechanisms to reach other types of rural energy users, a change that would likely complicate and slow project implementation, and possibly hinder the mainstreaming impact within Alianza. Third, the prevalence of ejidos in rural areas would have limited the potential synergies between farm and household electrification. Ejidos are rural communities where people live in small, concentrated hamlets and travel daily to their fields in surrounding areas. Simultaneous electrification of farms and households using renewable energy systems is usually unviable in an ejido due to the long distances between them. Fourth, potential synergies would have been similarly limited by voltage and current incompatibilities between solar-powered farm and household electrical equipment. In terms of the choice of technology for the electrification of isolated farms, grid connection and gasoline-powered systems were rejected because they are not least cost on a life-cycle basis and because they would contribute to additional greenhouse gas emissions. In defining the project's delivery mechanism, implementation outside the auspices of Alianza was rejected because doing so would necessitate the creation of an entirely new institutional structure with which to reach farms throughout the country. In Alianza the project will enjoy the benefits of operating within an established, well-respected and well-run program that already provides farmers throughout the entire country with financial and technical assistance for the acquisition of capital equipment and for .improved operations. Regarding the geographical scope of the project's demonstration component, a more limited scope encompassing a smaller number of states, in order to test the impact of demonstration units in the field, was rejected based on experience under the USAID/USDOE-supported Mexico Renewable Energy Program which has proven the positive impact of demonstration units. With respect to the type of financing provided by the GEF within the demonstration component, a contingent financing approach, whereby the GEF grant to individual farmers would be repayable in the event the renewable energy system was profitable, was examined, but was rejected as not being cost- effective. Alianza does not currently recover grants from farmers, and recovering repayments for the RE systems only would entail establishing an entirely new mechanism in all participating states for a relatively small number of subprojects and repayment stream (1,230 sub-projects and a maximum of $3.8 million in grant repayments). Pursuing this option was considered impractical and costly by FIRCO and was therefore rejected. With respect to financing-related activities, a focus on consumer financing was rejected due to deficiencies in the rural financing sector and the fact that addressing these deficiencies would be beyond the scope of a renewable energy project such as this. Instead, vendor financing will be tested as an option to remove the high initial investment barrier facing renewable energy equipment. Page 10  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document 2. Major related projects financed by the Bank and/or other development agencies: Sector issue Project Latest Supervision (Form 590) Ratings - (Bank-financed projects only) Implementation Development Progress (IP) Objective (DO) Bank-financed: Agriculture and Irrigation Assist private sector with the Mexico: On-Farm and Minor S S improvement of on-farm irrigation Irrigation Improvement Project efficiency (Ln. 3704-ME) Improve productivity of rainfed Mexico: Rainfed Areas S S farming activities Development Project (Ln. 3778-ME) Poverty alleviation in highly Mexico: Rural Development in S S marginalized rural areas Marginal Areas Support capitalization and Mexico: Agricultural S S productivity improvement among Productivity Improvement small- and medium-scale farmers. Project (Ln. 4428-ME) Bank/GEF-financed: Renewable Energy Remove barriers to rural Argentina: Renewable Energy S S electrification with renewable energy in Rural Markets Project Remove barriers to rural India: Renewable Resources S S electrification and grid-connected Development Project electricity generation with renewable energy Remove barriers to rural Sri Lanka: Energy Services S S electrification and grid-connected Delivery Project electricity generation with renewable energy Remove barriers to rural Indonesia: Solar Home Systems S S electrification with solar energy Project Other development agencies Promote renewable energy in USAIDIUSDOE Mexico n/a n/a Mexico's agricultural sector Renewable Energy Program IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) Page II  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document 3. Lessons learned and reflected in the project design: Flexibility and demand-driven approaches are key to building ownership, defining local priorities and facilitating improved implementation and sustainability of rural and agricultural development initiatives. * Through its incorporation in the Alianza program, the project adopts a flexible and demand-driven approach to the provision of financial and technical assistance for renewable energy systems. Micro-investment programs risk forming a disparate collection of interventions that may not catalyze the critical mass of activities to attract the private sector, generate competition among suppliers and foster the establishment of support services. While operating within Alianza's demand-driven approach, through strategic marketing the project will aim to install an average of 34 renewable energy systems in each participating state. In this way, it will catalyze local and/or regional markets for renewable energy systems. Experience under the USAID/USDOE-supported Mexico Renewable Energy Program indicates that as few as 15 systems can lead to the entry of new renewable energy suppliers in local markets. It is important that investments in new technologies or practices be accompanied by technical assistance in their proper operation. * The project will make renewable energy-trained extensionists available to participating farmers in order to ensure the satisfactory operation of newly acquired renewable energy systems. Poor timing and lengthy budgetary and bureaucratic processes are likely to jeopardize the implementation of rural development programs, particularly in agriculture where natural cycles impose time constraints. T The project will adopt Alianza's agile mechanisms for project approval and disbursements, and will benefit from the Bank-supported ALCAMPO project's activities that will further improveAlianza's delivery of financial and technical assistance. In addition, the project will benefit from FIRCO's decentralized structure that supports a responsive approach to local demands for technology-related financial and technical assistance. Developmental considerations, rather than technology or environmental considerations, should dominate any initiative to penetrate agricultural markets with new, environmentally-benign technologies, since farmers are primarily interested in productivity and income gains than new technology or environmental benefits. * By setting the project within the auspices of theAlianza program, developmental considerations will dominate the project. It will add renewable energy systems to the menu of options thatAlianza offers farmers to address their individual needs. 4. Indications of borrower commitment and ownership: The Mexican Government has supported renewable energy systems for rural electrification since the early 1990s, when it initiated a large-scale photovoltaic development program that led to the installation of approximately 60,000 solar home systems. The Government continues to support rural electrification with renewable energy, but indirectly now that it is up to state and municipal governments to decide how to spend federal transfer payments on infrastructure and social development. Page 12  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document In 1994, the Govermnent expanded the scope of its renewable energy-based rural electrification activities when FIRCO began to promote the electrification of farms using renewable energy technologies, under the auspices of the USAID/USDOE-supported Mexico Renewable Energy Program. Through FIRCO, the Program operated in 8 of the country's 32 states, training government and private sector technicians in renewable energy systems and supporting the installation of 108 solar-powered water pumping systems on farms. The Program continues to operate in 1999, although its focus has shifted from training and investment to leveraging replication among other farmers and monitoring impacts.' The GEF project would build upon the Program's achievements and expand the scope to a national level. The proposed project would become part of the ongoing, nation-wide Alianza para el Campo Program, launched by the federal government in 1996. Alianza enjoys strong political support and received a substantial budget increase in 1998 and again in 1999. Its decentralized strategy and matching contributions by state governments ensures substantial involvement and ownership at the state level. As a result of its participation in the USAID/USDOE-supported Mexico Renewable Energy Program, the Government has expanded the scope of the Alianza program to encompass renewable energy systems. And as a result of the development of this GEF project, the Government has decided to provide incremental government grants to farm-based renewable energy systems through Alianza. Mexico's GEF operational focal point (Secretariat of Finance) has endorsed the request for GEF support for the project (in a letter dated April 23, 1999). 5. Value added of Bank and Global support in this project: The Bank, with its extensive experience in both renewable energy and decentralized, demand-driven agricultural and rural development projects, is well qualified to support the Government of Mexico in its efforts to integrate renewable energy into its agricultural development programs. Bank participation in the project would complement federal and state government expertise, bringing lessons and insights from related projects in other countries, to ensure the design of an effective program of financial and technical assistance for renewable energy in the agriculture sector. The project would also benefit from the Bank's involvement in the associated ALCAMPO project, which includes actions to strengthen Alianza's delivery of financial and technical assistance to farmers. In addition, the project support the development of a comprehensive and systematic monitoring and evaluation program within FIRCO, leading to improved operations in the provision of financial and technical assistance to farmers in the area of renewable energy. GEF support would enable FIRCO to expand the scope of its renewable energy-related activities to a national level and to adopt an integrated approach to the removal of barriers to renewable energy systems in the agriculture sector (combining promotion, demonstration, technical assistance, research and specifications and certification). This expanded scope would support accelerated penetration of renewable energy technologies in Mexico's agriculture sector. E: Summary Project Analysis (Detailed assessments are in the project file, see Annex 11) 1. Economic (see Annex 4): [XJ Cost-Benefit Analysis: NPV = US$ 25.6 million; ERR = 30.9% Economic analysis focused on the demonstration component, since it is the only component involving investments on the ground. The project's overall economic return was estimated using a) an expected 'Further information on the program is presented in Annex 2: Project Background and Description. Page 13  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document distribution of demonstration systems by type (e.g. solar- and wind-powered water pumping systems and solar-powered refrigerated milk tanks) and b) for each type, an expected economic return based on historical data from the USAID-USDOE-supported Mexico Renewable Energy Program. This rate of return reflects only the direct benefits stemming from the demonstration component and does not capture the project's positive externalities, such as lower emissions of greenhouse gases. 2. Financial (see Annex 4): NPV = US$ 32.2 million; FRR = 39.9% The financial rates of return of individual farm models are higher than the ERR due to the subsidies in certain investment costs. The models show increases in total on-farm income of between 85 and 190 percent at full development, signaling that the investment incentives and technical assistance provided should be attractive to small farmers and promote their interest in the proposed types of productive investments that are made possible by renewable energy systems. The high financial rate of return associated with the renewable energy systems installed by the project begs the question why GEF assistance is required. The answer to this question is because of the high perception of risk among isolated farmers when it comes to this new technology. The GEF contribution is necessary to overcome this perceived risk barrier and get renewable energy systems into the field where they can have a demonstration impact and help convince other farmers to invest in them. Fiscal impact: The project would be implemented under theAlianzapara el Campo Program. The total cost of the Project, excluding farmers' contribution, is estimated at about US$24.4 million (US$31.3 million inclusive of farmers' contribution), or about US$6 millionper annum. Roughly two-thirds of those costs would be covered by federal sources and state governments with World Bank support and the remaining one-third by the GEF. The project would operate within the existing budgets of SAGAR and state governments and would not generate additional budgetary financial requirements. Given the income of the target population, and the fact that agriculture-related activities are mostly exempt from Value Added Tax (IVA), incremental tax revenues accruing to the Federal Government as a result of project activities would be relatively small, amounting to approximately US$1.6 million. Therefore, while the fiscal impact of the project would be negative, it would remain within the bounds of that already derived from current Alianza programs. 3. Technical. The project is considered to be technically sound, given that: a) it involves technologies that are either proven in the field, such as solar- and wind-powered pumps, or that have been fully developed and tested prior to field installation, such as solar-powered refrigerated milk storage tanks; and b) individual systems would comply with technical specifications approved by FIRCO; c) the operation of these systems would be supported by an existing network of Alianza-supported extensionists who would receive training on the operation and maintenance of farm-based renewable energy systems; d) the project includes an integrated set of actions that are designed to remove all barriers to the increased penetration of renewable energy systems in the agriculture sector; and Page 14  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document e) the project employs Alianza 's decentralized structures that ensure state participation and contribution. 4. Institutional: The project is considered to be institutionally sound, given that: a) Alianza's ongoing matching grant program, within which the project's demonstration component would operate, is well-established, with specific limitations being addressed by the ongoing ALCAMPO project; b) through its participation in the USAID/USDOE-supported Mexico Renewable Energy Program, FIRCO has gained relevant experience for the project, including: * coordinating training programs for technicians and extensionists; * promoting renewable energy technologies among farmers; * combining Alianza and foreign funds in a matching grant scheme to support farmers' purchase of renewable energy systems; and * supporting farmers' successful operation of renewable energy technologies with ongoing technical assistance; and c) for those activities in which FIRCO lacks experience (e.g. certain aspects of promotion, specifications and certification, technology development, etc.), it will engage qualified individuals and institutions to carry out project activities. S. Social: The project is considered to be socially sound given that it will operate within Alianza which has existing mechanisms regarding the utilization of culturally appropriate instruments to ensure access and active participation of indigenous communities. These mechanisms are being strengthened by the ongoing Bank-supported ALCAMPO project, which is targeting small farmers and rural poor households, many of which do not have access to electricity and are therefore within this project's focus. Specifically, the project would make extensionists and information available to farmners in the languages of the major indigenous groups whose members are potentially eligible to participate in the project. Notwithstanding the above, the market assessment to be carried out within the Market Development component will include a socioeconomic analysis of project beneficiaries. The results of this assessment will be used to adjust project implementation if necessary. 6. Environmental assessment: (see Annex 7) Environmental Category [ ] A [X] B []C The solar and wind technologies whose agricultural applications are to be demonstrated through the project are considered to be among the most environment-friendly forms of energy. Environmental benefits at the global level will be reduction in emission of greenhouse gases; and at the local level, abatement of air, water and soil pollution through substitution of gasoline-powered equipment. All potential negative environmental impacts associated with the use of renewable energy systems to increase agricultural productivity will be addressed through the environmental procedures established the Operational Manual. This manual replicates the environmental procedures from the ALCAMPO manual, which apply regardless of the source of energy, with additions covering one aspect (battery disposal) which is specific to certain uses of solar energy. Page 15  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document In the case of wind energy, the technology itself presents no potential risks to the environment, with the exception of noise or wind-farms located in flyways of migratory birds - situations which do not apply to this project. However, the project would involve some solar energy applications that may employ batteries (e.g. refrigerated milk storage tanks and milking machines). Given the small amount of batteries that would be involved, and the fact that no formal battery recycling programs exist in Mexico, the project would not involve a formal battery recycling program. Instead, the project will take steps to mitigate potential environmental damage from improper battery disposal. The technician training program will include information on proper battery issue and disposal. In order to avoid more general environmental impacts associated with on-farm investment projects, the project would employ the same environmental procedures as required by ALCAMPO. 7. Participatory approach: The project's key stakeholders are unelectrified farmers, agricultural extensionists, renewable energy system vendors, State governments and FIRCO state offices. Through its participation in the USAID/USDOE-supported Mexico Renewable Energy Program, FIRCO has established communication channels with these stakeholders. Previous and ongoing consultations with these stakeholders, as well as FIRCO's experience in implementing that Program, contributed to the design of this project. By operating within Alianza, the project will adopt the participatory approach of that program, whereby State-level decisions on sub-program priorities, investment proposals and payments to beneficiaries are made by a committee of representatives from farmer organizations, state agencies and SAGAR. In addition, the project will adoptAlianza's participatory and demand-driven approach to investment project identification, design and selection, whereby farmers decide what equipment is installed on their farms, albeit with the advice of a trained extensionist. F: Sustainability and Risks 1. Sustainability: The project aims to remove barriers to renewable energy in the agriculture sector in order to foster sustainable markets for them. It has been prepared on the assumption that the low penetration rate of renewable energy systems among unelectrified farmers is due to the gap between a) the initial cost of renewable energy systems and b) farmers' willingness to pay for them. The project intends to eliminate this gap, and thereby catalyze widespread market penetration, by a) reducing the cost of renewable energy systems by seeding the market with 1,230 demonstration systems in states where they have yet to be demonstrated, b) testing vendor financing as a mechanism to overcome the high initial cost barrier and c) increasing farmers' willingness to pay for these systems by reducing their perceived risk through information dissemination, technical specifications and certification, field demonstration and technical assistance. Experience under the USAID/USDOE-supported Mexico Renewable Energy Program indicates that these types of activities can catalyze sustainable markets for renewable energy systems in the agriculture sector. More specifically, the prospects for sustainability of barrier removal are as follows: * Lack of awareness among farmers: The project's promotion, demonstration and technical assistance Page 16  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document components should permanently remove this barrier in participating states. News of superior technology travels fast in rural agricultural communities and the combination of promotion activities, on-the-ground demonstration and on-going extension services will go a long way towards permanently raising the awareness of farmers throughout the participating states. * Farmers' perceived risks with respect to renewable energy: The project's demonstration component should go a long way towards removing this barrier permanently. Seeing is believing in most rural areas and witnessing the successful operation of demonstration units will convince many farmers that renewable energy systems are reliable and cost-effective. * Lack of renewable energy-trained technicians and extensionists: Technicians and extensionists trained under the program would maintain their knowledge base through their work installing renewable energy systems and advising farmers on their proper operation. In addition, these trained professionals as well as their trainers would represent a pool of knowledge that could be tapped in the future to train new technicians and extensionists. * Higher initial cost of renewable energy systems, coupled with deficient rural finance services: The recently announced incremental government support for renewable energy systems will help to diminish this barrier. In addition, vendor financing, to be tested in the project's vendor financing pilot, could also contribute to removing this barrier. * Lack of information on the renewable energy market and viable applications in agriculture: This barrier would be permanently removed by the studies to be implemented by the project. - Lack of specifications and certification: This barrier would be permanently removed by introducing specifications and certification processes for farm-based renewable energy systems. Sustainability of project benefits is expected to be high, given that the investments in renewable energy systems would be complemented by technical assistance to ensure their proper operation. In addition, increases in net income as a result of the renewable energy equipment will support improved maintenance of that equipment over time and further investments in productivity-improving equipment. Page 17  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document 2. Critical Risks (reflecting assumptions in the fourth column of Annex 1): Risk Risk Risk Minimization Measure Ra tIn Project outputs to development objectives Promotion campaign does not reach target M The project will use SAGAR's Social Communication population. Department, which has substantial experience in communications with the rural sector, to plan and implement the promotion campaign. Market and technology assessments are M The project will involve active consultation with insufficient to reduce/eliminate private sector's renewable energy industry in order to ensure that the uncertainty. assessments produce the necessary information. Renewable energy is not effectively integrated N FIRCO's existing integration of renewable energy in into operations of selected Alianza sub- Alianza operations in selected states will inform similar programs. efforts in other states. Extensionists do not provide effective technical M Training programs and annual workshops will build the assistance to farmers. capacity of extensionists. Project components to outputs Component implementation procedures are M The project's supervision activities will ensure effective ineffective. implementation. Political interference impacts on project cycle. M Clear targeting criteria and enforcement of subproject selection procedures and enforcement of demand-driven mechanisms should minimize political interference. Change in government impacts Alianza and N Strong State Government participation should contribute to project implementation. the project's continuity beyond the present Federal administration. Overall Risk Rating M 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. G: Conditions for Effectiveness a) Approval of the Operational Manual, including an Implementation Plan for Year I of the project Page 18  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document H. Readiness for Implementation [ ] The engineering design documents for the first year's activities are complete and ready for the start of project implementation. [X] Not applicable. [X] The procurement documents for the first year's activities would be ready for the start of project implementation. I. Compliance with Bank Policies [X] This project complies with all applicable Bank policies. [signature) Task Team Le ichael arroll ( SES) [signature] M 2 f <, Acting Sector Mja4er: John Redwood (LCSES) [signature] Country Director: Olivier Laourcade (LCC1C) Page 19  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Annex 1 Project Design Summary Narrative Summary Key Performance Indicators Monitoring and Critical Assumptions Evaluation a. Sector-related CAS Goal: Support social sustainability and - Reduced incidence of poverty Project evaluations Continued federal and state protect the environment. among project beneficiaries. government support for actions - Increased farm productivity among to improve the livelihood of participating farms. farming families using - Fewer negative environmental environmentally-benign impacts among participating farms. technologies and practices. b. GEF Operational Program: Promote renewable energy by - 50 - 80% increase in national sales Project evaluations removing barriers and reducing of renewable energy systems for implementation costs. productive agricultural applications. - 20% reduction in average price of farm-based renewable energy systems. Project Development Objective: Provide farmers in isolated Number of renewable energy systems Project Future currency devaluations do areas with reliable electricity installed and operating correctly, implementation not significantly increase the supply for productive either directly through the project's reports cost of imported renewable purposes in a sustainable activities or via replication among energy systems. manner, using renewable 600,000 non-participating Project evaluations energy technologies where unelectrified farms. feasible. Increase the productivity and Changes in productivity and income Project evaluations income of farmers by among participating farmers. supporting productive investments and improving farming practices. Global Objectives: Remove barriers and reduce - Barriers removed: Project Targeted barriers can be implementation costs of - awareness increased implementation removed through project renewable energy in the - perceived risk reduced reports activities over 4 years. agriculture sector. - technicians, extensionists and vendors trained Project evaluations Project receives sufficient - market and technology commitment and resources to information disseminated support successful barrier - specification and certification removal. procedures introduced - Penetration of renewable energy equipment among one third of Mexico's estimated 600,000 unelectrified livestock farms within 10 years. Reduce greenhouse gas Avoided carbon emissions by project Project evaluations emissions in the agriculture completion of 30,000 metric tonnes sector. per year by renewable energy systems in productive agricultural applica- tions. Page 20  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Project Design Summary (cont'd) Narrative Summary Key Performance Indicators Monitoring and Critical Assumptions Evaluation Project Outputs: Widespread increase in awareness - Change in awareness levels Surveys of rural Promotion campaign of renewable energy systems - Publications, radio advertisements populations reaches target population. among 600,000 unelectrified and videos produced/disseminated farmers - Workshops/demonstration days Project held implementation - Fairs/expositions attended reports Up to 1,230 demonstration - Up to 1,050 solar-powered water Project Renewable energy is renewable energy systems pump systems installed implementation effectively integrated into installed and operating correctly - Up to 55 wind-powered water pump reports operations of selected systems installed Alianza sub-programs. - Up to 24 solar-powered refrigerated Vendor surveys milk storage tanks installed - A select number of other systems Participating farmers receive Farmers receive technical assistance Project Extensionists are able to technical assistance in the implementation provide effective technical operation of their renewable reports assistance on renewable energy systems energy systems. 2,500 technicians, agricultural 2,500 technicians, extensionists and Project extensionists and equipment vendors trained implementation vendors trained in renewable reports energy systems Reduced uncertainty regarding the Dissemination of results from market Project Market and technology market for, and applications of, and technology assessments. implementation assessments are sufficient renewable energy in the reports to reduce/eliminate private agriculture sector. sector's uncertainty. Improved understanding of Dissemination of lessons from Project prospects for vendor fmancing of vendor financing pilot program implementation farm-based renewable energy reports systems. Introduction of specifications and Successful introduction of Project certification procedures specifications and certification implementation procedures reports Page 21  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Project Components: Budget for each component (Us$ '000) Promotion 1,824 Component implementation Institutional Strengthening 1,590 procedures are effective. Specifications and Certification 275 Market Development 686 Political interference has Demonstration 18,770 minimal impact on project Technical Assistance 4,919 cycle. Vendor Financing 2,261 Project Management 965 TOTAL 31,290 . 1 Page 22  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Annex 2 Project Background and Description A. Background Alianzapara el Campo The proposed project would be implemented within the framework of the Alianza para el Campo (Alianza), a program established by the federal government in 1996 to increase capitalization in the agriculture sector. Operating under a matching-grant scheme, the program supports farmers' investment in equipment and infrastructure, including that powered by renewable energy, and the provision of support services, including research, extension, information and training. The program's aim is to promote improved agricultural productivity and production and increased income among farmers. Its budget was approximately US$350 million in 1997 and has been increased in 1998 and 1999. The program operates on a demand-driven basis, providing financial and technical assistance to farmers only in response to their request. Farmer's submit proposals for equipment or infrastructure investments to local rural development agencies. The proposals are reviewed and approved for funding by state-level committees made up of representatives from state and federal agencies as well as farmer associations. Farmers' requests for support services are handled in a similar manner. Depending on the type of investment or service, Alianza provides farmers with a grant that covers between 25 and 90 percent of the total cost. Alianza operates through 27 sub-programs, each of which is focused on a specific type of investment or service. Three of the larger sub-programs are a) Improved Pasture Establishment, b) Irrigation Development and c) Dairy Technology Improvement. These three sub-programs support investments that include energy-consuming equipment such as water pumps, electric fences, refrigerated milk storage tanks and milking machines. Among the hundreds of thousands of farms without access to electricity, solar and wind energy are viable alternatives to gasoline as an energy source to power these types of equipment. Renewable energy equipment is explicitly included as eligible for government support under these three sub-programs. All three sub-programs are administered by the Trust Fund for Shared Risk (FIRCO), a para-statal agency operating under the Secretariat of Agriculture, Livestock and Rural Development (SAGAR). A fourth Alianza sub-program, Rural Development, supports investments in energy-consuming equipment such as water pumps and is implemented by SAGAR. FIRCO will coordinate with SAGAR to ensure that participating farmers in the Rural Development sub-program are able to access the project's financing and support for renewable energy systems if they wish. In March 1999, the federal government adjusted the cost sharing formulas within two of the above Alianza sub-programs in order to provide additional support for renewable energy systems. The changes were a direct result of the development of this GEF project. In the Dairy Technology Improvement sub- program, the federal government will now cover 50 percent of the cost of renewable energy equipment, compared to the standard 25 percent. And in the Improved Pasture Establishment sub-program, the government will now cover 50 percent of the cost of renewable-energy powered equipment, compared to the standard 40 percent. Agricultural Productivity Improvement Project In early 1999, SAGAR and FIRCO began implementation of the Agricultural Productivity Improvement Project (ALCAMPO), a US$556 million project financed in part by a loan of US$444 million from the World Bank. The project's objective is to support and improve SAGAR and FIRCO's implementation of selected Alianza sub-programs, including the three sub-programs noted above. The idea for a GEF- Page 23  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document supported renewable energy project operating within the auspices of these three Alianza sub-programs emerged during preparation of ALCAMPO. Mexico Renewable Energy Program Since 1994, the US Agency for International Development and US Department of Energy have supported the Mexico Renewable Energy Program, which aims to increase the use of renewable energy systems in unelectrified areas of Mexico. FIRCO is one of several Mexican organizations that are participating in the program, and has increased its capability to support farmers' acquisition and operation of renewable energy systems. The program has supported the training of FIRCO and private sector technicians in 8 of the country's 32 states on photovoltaic (PV) water pumping systems and, through FIRCO, has provided financial and technical assistance to the installation of 108 PV water pumps in eight states, representing a total investment of $7.5 million. 101 of these systems were installed in just four states. Since 1996, the program has provided this support through the Alianza program. FIRCO is convinced of the developmental benefits of renewable energy systems for unelectrified farmers, and has expanded the scope of the three Alianza sub-programs that it administers to encompass renewable energy systems. Farmers can now receive matching grants from Alianza towards the purchase of renewable energy systems to pump water and power farm equipment. While the USAID/USDOE- supported program continues to support FIRCO's activities in renewable energy, its focus has shifted from training and field demonstration to leveraging replication among other farmers and monitoring impacts. FIRCO is now seeking additional financial and technical assistance to expand its renewable energy promotion and support activities throughout the country. B. Socio-Economic Characterization of the Target Population' There are an estimated 4.4 million rural production units (farms) in Mexico, of which an estimated 1.3 million are dedicated to livestock. The project would focus on livestock farms since a) renewable energy-powered pumping systems are generally too small to produce enough water for large-scale field irrigation and b) refrigerated milk storage tanks would only be located on livestock farms. An estimated 0.6 million of the 1.3 million livestock farms do not have access to electricity. Indigenous people make up an estimated 11 percent of the national population. Of this total, an estimated 51 percent speak an indigenous language and of these, an estimated 17 percent are monolingual, speaking only that indigenous language. In other words, roughly 9 percent (900,000) of the county's indigenous population does not speak Spanish. 'Based on statistics from the national statistical agency (INEGI) and Alianza. Page 24  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document The 0.6 million livestock farms without electricity can be categorized as follows: Number of Proportiorn of Number of Avg Family Number of Indigenous Farms Total Animals per Income Farmers Farm (US$1yr) (monolingual) Subsistence 276,000 46% 1-5 1,650 19,500 (3,000) Semi-commercial 216,000 36% 5-20 3,100 7,500 (400) Commercial 108,000 18% >20 8,250 750 (75) TOTAL 600,000 100% 27,750 (3,475) The above figures indicate that roughly half the target population is made up of subsistence farmers, with the balance being semi-commercial or commercial farmers. Of the 600,000 unelectrified farms, less than five percent (27,750) are owned by indigenous people, of which roughly ten percent (3,475) do not speak Spanish. C. Project Description The proposed project would be the first GEF project to target renewable energy in the agriculture sector. It would remove barriers to the use of renewable energy systems in Mexico's agriculture sector and support increased integration of renewable energy into Alianza. The project would include eight components: 1. Promotion - US$1.824 million (6% of totalproject cost) This component would aim to increase the awareness of renewable energy technologies and their potential benefits among Mexico's farmers and their associated network of private sector companies and government agencies. In addition, the component would promote participation in the proposed project. This would be achieved through a variety of media: * pamphlets and brochures; * posters; * technical briefs; * radio advertising; * videos; * workshops for farmers; * demonstration events; and * agricultural fairs and expositions. 2. Institutional Strengthening - USS1.590 million (5% of total project cost) The objectives of this component would be a) to increase the capacity of private and public sector technicians to design, install and maintain farm-based renewable energy systems in Mexico, b) to increase the capacity of both private sector and govemment agricultural extensionists to advise farmers Page 25  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document on their proper operation and c) to build the capacity of vendors to operate successfully in the renewable energy market. It would include the following sub-components: * training of trainers; * training of technicians, extensionists and vendors; and * national and regional seminars. Given the number and geographical scope of people to be trained (an estimated 2,500 throughout the country), the component would begin with the training of a selected number of professionals who would in turn deliver training to technicians, extensionists and vendors throughout the country. In this way, Mexico will develop the capacity to build and maintain the necessary human resources to support the sustainable use of renewable energy technologies in the agriculture sector. The technician and extensionist training would combine theoretical and practical subjects, culminating in the group's installation of a renewable energy system on a farm, under the guidance of qualified trainers. Prior participation in this training would be compulsory for those extensionists that would provide participating farmers with technical assistance on the operation of their renewable energy systems. Annual seminars in each of six regions would provide fora for the project's participants, and in particular government and private sector technicians that are in direct contact with farmers, to exchange ideas and experiences. Over time, as the demand for farm-based renewable energy systems grows, responsibility for supporting farmers owning renewable energy systems will switch from government-funded technicians to private sector vendors servicing local markets. 3. Specifications and Certification - US$0.275 million (1% of totalproject cost) The purpose of this component would be to improve farmers' confidence in renewable energy systems by introducing specifications and certification procedures that ensure high quality renewable energy equipment and support services. Technical specifications for solar-powered pumps would be developed based upon those currently in use by the USAID/USDOE-supported Mexico Renewable Energy Program. Specifications for other types of equipment, such as wind-powered pumps and solar-powered refrigerated milk storage tanks, would be newly developed by a contracted specialist consulting firm. Certification procedures would be introduced for renewable energy equipment and service providers, including vendors and technicians. 4. Market Development - USSO.686 million (2% of total project cost) This component would aim to reduce uncertainty regarding the potential markets for renewable energy technologies in Mexico's agriculture sector, and therefore encourage the entry of private sector equipment and service providers. This would be achieved through two types of studies: a) a market assessment and b) technology assessments. The results of these studies would be widely disseminated among potential equipment and service providers. The market assessment would document a) the number of farms lacking electricity and which therefore Page 26  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document could use renewable energy systems for their energy-consuming equipment, b) farmers' capacity and willingness to pay for renewable energy systems, and c) Mexican renewable energy system manufacturers, assemblers, vendors and service providers, as well as the technical quality and prices of - their products and services. The assessment would also analyze opportunities for the domestic renewable energy industry to improve the scope and quality of the products and services that it offers to farmers. A series of technology assessments would determine the commercial feasibility of renewable energy applications, taking into consideration technology that is currently and potentially available in Mexico. One technology assessment would focus on solar-powered milk storage tanks. Others would focus on other possibilities, including solar-powered milking machines and solar-, wind-, biomass- and biogas- powered tools and equipment. The market and technology assessments would be carried out early in the project implementation period. Their results would be widely disseminated among Mexico's renewable energy industry and incorporated into the project's relevant activities. 5. Demonstration - US$18. 770 million (60% of totalproject cost) This component would aim to reduce farmers' perceived risks in purchasing renewable energy systems by installing demonstration units throughout the country, and thereby support replication among the estimated 600,000 unelectrified livestock farms in the country. Preliminary and detailed investigation of the market for farm-based renewable energy systems during project implementation will improve estimates of the potential for replication. The component's indicative investment plan provides for the installation of up to 1,150 solar-powered water pumping systems in 28 states', up to 55 wind-powered water pumping systems in 15 states2 and up to 24 solar-powered refrigerated milk storage tanks in 12 states3, or a total of up to 1,230 systems. Some of the solar- and wind-powered pumping systems, and all of the solar-powered refrigerated milk storage tanks, are expected to be purchased by groups of neighboring farmers. Depending on the actual demand from farmers and the development of other applications for renewable energy in the sector, the final investment plan will differ from this indicative plan. The distribution of systems among unelectrified farms would be determined based on a) farmers' demands (since Alianza is a demand-driven program) and b) FIRCO's application of pre-established criteria such as location, income level and type of farm. The latter criteria will incorporate new information from the market assessment on the potential market for farm-based renewable energy systems on a state-by-state basis. GEF funds would be incorporated intoAlianza's cost sharing formula in order to provide an additional subsidy to participating farmers, to mitigate the risk that they perceive in purchasing a new and undemonstrated technology. The investment plan is indicative because, under Alianza's demand-driven approach, it is farmers who ultimately decide what investments take place. As such, it is impossible to determine at the outset exactly ' The 28 states that have not received more than one or two demonstration units under the USAID/USDOE-supported Mexico Renewable Energy Program. Four states (Baja California Sur, Chihuahua, Quintana Roo and Sonora) have each received between 14 and 34 demonstration units each through that program. 2 Where wind resources are considerable: Baja Califomia, Baja California Sur, Chiapas, Coahuila, Hidalgo, Michoacan, Nuevo Leon, Quintana Roo, San Luis Potosi, Oaxaca, Sonora, Tamaulipas, Veracruz, Yucatan and Zacatecas. 3 Where there is considerable dairy farming in unelectrified areas: Aguascalientes, Campeche, Chiapas, Guerrero, Hidalgo, Jalisco, Oaxaca, Quintana Roo, San Luis Potosi, Tabasco, Tlaxcala and Veracruz. Page 27  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document how many systems of each type will be installed under the project. However, by intensifying or de- intensifying the project's promotional activities on a regional and sub-regional basis, FIRCO will strive to achieve a rational distribution of renewable energy systems throughout the country in order to maximize their demonstration impact. Eligibility criteria and operation procedures would be included in the Operational Manual. Key eligibility criteria for participation in the demonstration component will be: a) renewable energy equipment supported by the project must be part of a technically and economically sound investment project financed by Alianza, as deemed by FIRCO; b) demonstration systems must be at least I km. from the electrical grid and a minimum distance from similar demonstration systems (to be determined on a state by state basis); c) beneficiaries must permit access to other producers wishing to view their demonstration system; and d) a minimum quantity of water must be available under license year-round in the case of water pumping systems. This component would work in conjunction with the promotion and technical assistance components to maximize the exposure of unelectrified farmers to the demonstration units. In avoiding the four states where solar-powered pumps have already been substantially demonstrated under the USAID/USDOE- supported Mexico Renewable Energy Program, the demonstration component does not overlap geographically with the vendor financing component (see below). 6. TechnicalAssistance - US$4.919 million (16% of total project cost) This component would have two aims: a) to ensure that renewable energy systems acquired under the project's auspices operate in a satisfactory manner and b) to disseminate information about the successful operation of the installed renewable energy systems among neighboring farmers. The component would support the provision of technical assistance to farmers by renewable-energy trained extensionists. Alianza already supports the provision of technical assistance to farmers by extensionists who advise farmers on livestock care, crop management and other subjects. The Institutional Strengthening component would train these existing extensionists in renewable energy systems. Using an innovative bonus scheme, extensionists would be rewarded based on the number of renewable energy systems purchased by their assigned farmers. Extensionists would receive an annual bonus of $140 per system installed by farmers that they support. This equals about 2.5 percent of their annual salary and is therefore not expected to disrupt their provision of technical assistance on subjects other than renewable energy systems. Extensionists would promote renewable energy systems among unelectrified farmers and advise participating farmers on the operation of their renewable energy system. Through their interactions with neighboring farmers, these extensionists would also disseminate information on the successful operation of the demonstration renewable energy systems. Since this component will be implemented under the auspices of theAlianza technical assistance program which is implemented by SAGAR, a coordination agreement is required between FIRCO and SAGAR. That agreement was secured in July 1999. This component would also be implemented in conjunction with the technical assistance activities within the ALCAMPO project. 7. Vendor Financing - US$2.261 million (7% of total project cost) The purpose of this component would be to establish a pilot scheme to test vendor financing of farm- based renewable energy systems. Specifically, the pilot would consist of an innovative vendor financing Page 28  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document mechanism in the four states' where solar-powered pumps have already been substantially demonstrated and vendors exist. The component would assist the renewable energy industry's introduction of equipment leasing as a financing mechanism for farm-based renewable energy systems, in order to fill the existing gap in availability of lending services in rural areas where many banks and financial institutions have withdrawn services, or are reluctant to establish new loan operations for productive purposes. A newly created and industry-owned leasing company would lease farmers renewable energy systems. Vendors would be partners of the company and would agree to purchase back those systems repossessed due to loan defaults. The leasing company would finance with GEF support the balance of the system's cost that is not covered by Alianza ( typically 60% of a capped initial value with 5/6 of that amount provided by SAGAR and the remaining 1/6 provided by the relevant state) and the farmer's down- payment (typically 10% of an uncapped initial value). The farmer's debt would include a surcharge on the amount of the loan, to cover customary markup and a commission that would help finance the operations of the leasing company and an insurance plan. The usual leasing period would be 36 months, and the interest charged would be the inter-bank loan rate. Ownership of the system would remain with the leasing company throughout the leasing period, and the producer would have the option of stopping payments at any time, return the equipment to the leasing company and surrender final ownership of the system. Monthly lease payments would be affordable given that only a fraction of the system's cost would be financed. Defaults should be minimal due to the affordability of the payments, and given the fact that those payments would count towards the purchase of the system and that the producer, with support from Alianza, would already have contributed the major part of the system's cost at the beginning of the operation. This component will not overlap with the demonstration component, which would not support the installation of renewable energy systems in these four states because many farmers are already aware of the technology there. 8. Project Management - US$0.965 million (3% of total project cost) FIRCO would execute the proposed project, using a Project Coordination Unit or team (PCO) in its Mexico City headquarters and a network of staff in each of its state offices. The PCO would be responsible for overall execution of the project, including: * coordination of all project activities; * periodic progress reporting; * management of disbursements and financial control procedures; * coordination of annual audits, to be carried out by external auditors selected by Mexico's Secretariat of Administrative Control (SECODAM); * coordination with SAGAR on Alianza- and ALCAMPO-related issues; and * monitoring of project indicators and coordination of evaluation activities. The PCO would be directly responsible for execution of six project components (promotion, institutional strengthening, specifications and certification, market development, vendor financing and project management), and would receive support as needed from FIRCO's state offices. The demonstration and technical assistance components would be delegated to state offices, which would receive implementation support from the PCO. 'Baja California Sur, Sonora, Chihuahua and Quintana Roo. Page 29  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document FIRCO would organize an annual national seminar as a forum for the project team to review progress iP project implementation and address any necessary changes in the project's activities or operating - procedures. FIRCO would also implement a comprehensive monitoring and evaluation program (detailed in Annex 8). Page 30  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Annex 3 Estimated Project Costs Project Component Local Foreign Total --------------------- US$ '000 ---------------- 1. Promotion 1,795 -- 1,795 2. Institutional Strengthening 1,565 -- 1,565 3. Specifications and Certification 270 -- 270 4. Market Development 500 175 675 5. Demonstration 10,670 7,800 18,470 6. Technical Assistance 4,840 -- 4,840 7. Vendor Financing 1,025 1,200 2,225 8. Project Management 950 -- 950 Total Baseline Cost 21,615 9,175 30,790 Contingencies 350 150 500 Total Project Cost $21,965 $9,325 $31,290 Page 31  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Annex 4 Economic and Financial Analysis (1999 US$ million) Present Value of Flows Fiscal Impact Economic Financial Taxes' Subsidies2 Analysis Analysis Benefits 51.9 51.9 1.6 13.7 Costs 26.2 19.7 Net Benefits: 25.7 32.2 IRR: 30.9% 39.9% I Agricultural production is not subject to VAT in Mexico 2 Includes value of state and federal contributions to total project costs Switching values of critical items: Investment costs: 153% Operating costs: 270% Benefits: -49% Summary of Benefits and Costs: The project would provide technical and financial assistance to some 1,230 mostly small commercial producers to carry out productive investments in new or improved production and marketing systems based on the utilization of renewable energy (RE) technology, thus improving their competitiveness in an increasingly open economy. Economic benefits of the proposed project would be increased farmer incomes, derived from more efficient agricultural production attained with lower CO2 emissions, through the use of more reliable and more economical renewable energy systems, relative to conventional gasoline-powered systems. The comparative analysis of life cycle costs for conventional energy powered equipment and renewable energy powered equipment indicates that RE equipment is up to 40 percent less expensive to operate in the long run and provides a financial rate of return on investment of 14% to 17% depending on farm size. Market penetration, however, is low because RE equipment have up-front investment costs that are up to four times higher than equivalent conventional equipment. The analysis of a sample of proposed productive systems based on the use of RE powered equipment shows that small commercial farmers would generate a significant increase in net sales. In most cases lower long run operating costs and independence from geographical proximity to the electric grid allowed new, more efficient and profitable production or marketing systems to be adopted. Sustainability of project benefits is expected to be high, given the reliability of the systems promoted along with the improvements in human capital through training, technical assistance, organization and better access to project financial, marketing and technological services. About 62 percent of project resources are likely to be channeled to productive investment demanded by beneficiaries, while an additional 31 percent would be allocated to technical assistance and training of the target population and to applied research. The combination of improved provision of production-related support services, and Page 32  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document the assistance to decentralized management and administration of rural services is expected to increase the effectiveness and efficiency of public expenditure. As a result of project activities, small business and enterprises supplying RE systems are expected to strengthen as the market for those systems and the provision of technical support establishes itself. The project would also promote private sector participation in the provision of production support services, particularly technical assistance to producers, which is expected to increase the impact of project- financed on-farm investments. The total cost of the Project, excluding farmers' contribution, is estimated at about US$24.4 million (US$3 1.3 million' inclusive of farmers' contribution), or about US$6 millionper annum. Beneficiaries' contribution would be about US$6.9 million (22%), with federal and state governments contributing US$15.5 million, supported by a World Bank loan of about US$13.7 million. The GEF would contribute about US$8.9 million. Economic Analysis: Economic return estimates were based on a sample of the investmnent subprojects to be implemented by beneficiaries of the demonstration component, using data from the systems installed as part of the USAIDIUSDOE-supported Mexico Renewable Energy Program. The impact of these investments on agricultural productivity and farmers' income was analyzed with the help of farm models illustrative of typical farming situations in the main agro-ecological zones of the country (see Table 1). Assumptions regarding yield increases and herd expansion, where applicable, were conservative to reflect the risk- minimizing production strategies that normally characterize small farrners. A summary of the main characteristics and results of these farm models are presented in the table below. The results obtained from each model were aggregated, according to their relative importance as indicated by the proposed geographical distribution of demonstrative projects, to obtain an estimate of the component's likely overall rate of return. Table 1. Sample of Illustrative Models Type of Model Farm size Investment On-Farm Income E.R.R. w/o project w/project (ha) (US$) (US$) (US$) (%/0) Livestock production _____ Model 1 - Arid & semi-arid areas 3,000 20,250 12,400 24,400 44 |Model 2 - Temperate areas 900 19,500 6,000 11,100 19 Model 3 - Tropical areas 230 15,000 5,200 12,300 35 Economic return calculations included the cost of incremental on-farm productive investment and recurrent expenditure for the adoption of sustainable agricultural production systems promoted under the project, incremental technical assistance to farmers and a share of institutional strengthening and project administration costs. The benefits considered included increased production - or improved sale prices where applicable -- and lower farm costs. Excluded from the economic analysis were the costs of the promotion, market development, certification and vendor financing components since their impact would be difficult to quantify and, in any case, would be available not only to demonstration component beneficiaries but to the farming community at large. The discount rate was assumed to be 12 percent. Under these assumptions, the internal economic rate of return was estimated at 30.9 percent. However, as calculated, this rate of return reflects only the direct benefits stemming from the productive investments Page 33  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document supported by the demonstration component and made possible by the adoption of RE systems. It does not capture the positive externalities the project is designed to create, such as lower emissions of greenhouse gases. Pricing Assumptions: Price contingencies were excluded and base costs plus physical contingencies less taxes were used for the IERR. Given the policy reforms and the opening of the economy of the last decade, the rate of exchange of the Mexican Peso is currently determined in the open market and trade restrictions have been gradually lowered and domestic prices tend to correspond much closer to border economic values. For the purposes of economic analysis, border prices were estimated for main tradables produced by the project and imported machinery. A conversion factor of 0.90 was used for the rest of tradable, machinery and other inputs. While the project would increase on-farmn and off-farm employment, it would not have an impact on unemployment and under-employment due to its scale. Thus, the shadow price for unskilled labor was estimated at 80 percent of the net market wage rate. Sensitivity Analysis: Analyses performed to measure the sensitivity of the IERR to the estimated benefits and costs of the productive investrnent activities indicated that if benefits were to fall by 10 percent from their expected estimates, the IERR would be 27.6 percent. Similarly, were investment costs to exceed their expected values by 10 percent, the IERR would be 28.4 percent. Finally, if both situations were to occur simultaneously, the IERR would fall to 24.8 percent, and would still be 16.4% were benefits to fall by 25% and costs increase by 25% simultaneously. Were the stream of benefits to occur one year later than expected, the IERR would be 24.2 percent. These results indicate that the net benefits derived from the productive investments are very stable, However, financial returns on the full costs (without any subsidies) of replacing RE systems for non RE ones are quite sensitive, falling below 12% as a result of changes as low as 15% in costs. Financial Analysis: The financial analysis was carried out to assess the financial viability of the productive investments supported by the demonstration activities. As was to be expected, given the level of subsidy provided to the various on-farm investrnents under the project, the production systems models analyzed showed relatively high financial rates of return. Increases in farmers' income, as a result of project-financed on- farm investment, ranged from about 85 percent to 190 percent at full development. The results obtained from individual productive investment models were aggregated, using the same aggregation criteria used for the economic analysis, to calculate the overall financial rate of return of the project, which was estimated at 39.9 percent. These calculations included the cost to the farmer of incremental on-farm investment and recurrent expenditure plus the incremented cost of the project's technical assistance and institutional strengthening components, including the project administration. Input and output prices were assumed constant, as was the real exchange rate, throughout the 20-year time horizon used in the financial analysis. The discount rate was assumed to be 12 percent. At 40 percent, the expected rate of return enjoyed by participating farmers is quite high, and begs the question why Alianza and GEF assistance is required to purchase the renewable energy systems. The answer to this question has two parts. First, it is important to note that this rate of return is produced by two separate effects of the systems: a) a Page 34  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document decrease in operating and maintenance costs, mostly due to the elimination of fuel costs and b) an increase in production associated with limited irrigation that is made possible by the renewable energy systems. On this latter point, the high fuel and operating costs of gasoline-powered pumps causes farmers to limit their use to watering livestock only. In contrast, the very low (practically zero) operating costs of solar- and wind-powered pumps permit farmers to not only water their livestock but irrigate a small parcel of land (e.g. 0.5 - 2 ha). On this land farmers are able to grow forage or vegetables for their own consumption or for market. Second, and more importantly, it is important to remember that the systems installed by this project are demonstration systems that are intended to introduce neighboring farmers to this new technology. Despite their high financial return, farmers will not invest in renewable energy systems due to high perceived risk. The farmers targeted by this project live in isolated, largely unelectrified areas throughout the country's 32 states and are rarely exposed to new technologies. They need to see new technologies in successful operation before they will consider investing in them. Participating farmers receive a limited windfall associated with the additional GEF contribution but this is necessary in order to get the systems into the field where they can have a demonstration impact. Fiscal Impact: The project would be implemented under the Alianza para el Campo Program. The total cost of the Project, excluding farmers' contribution, is estimated at about US$20 million, or about US$5 millionper annum, of which roughly close to one half would come from federal sources and the state governments. The proposed project would support ongoing SAGAR programs and would operate within the existing budget allocation of SAGAR and the state governments, and will not generate additional budgetary financial requirements for the Federal Government beyond the annual amounts in matching-grants already foreseen in SAGAR's budget for these programs. Productive investment and expenditure directly benefiting farmers (i.e., technical assistance and training) account for nearly 78 percent of total project cost. Incremental tax revenues accrued to the Federal Government as a result of project activities would be negligible as sales of goods and services in the agricultural sector are exempt from the Value Added Tax (IVA). Income tax revenues from incremental profitability of on-farm production would be negligible given the level of income of the target population. Consequently, the fiscal impact of the project would also be negative, but it would be below the lev'el of the current Alianza Programs, given the revenues from taxes on imported equipment, that would amount to approximately US$ 1.6 million. State governments derive the bulk of their budgetary resources from federal transfers as they cannot retain tax revenues. Consequently, financial sustainability of the states' contribution to project-financed activities would depend on the resource allocation criteria applied by various state governments rather than on their budget allocation. Page 35  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Annex 5 Financial Summary Years Ending December 31 (US$ '000) Implementation Period 2000 2001 2002 2003 Total Project Costs Investment Costs 6,900 9,900 7,500 6,025 30,325 Recurrent Costs 190 190 292 293 965 Total 7,090 10,090 7,792 6,318 31,290 Financing Sources Beneficiaries 1,377 2,290 1,790 1,438 6,895 Government 605 445 375 375 1,800 IBRD 2,660 4,583 3,589 2,863 13,695 GEF 2,448 2,772 2,038 1,642 8,900 Total 7,090 10,090 7,792 6,318 31,290 Page 36  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Annex 6 Incremental Cost Analysis Broad Development Goals The Government aims to reduce rural poverty by increasing agricultural productivity and production through investment in farm equipment and infrastructure and improved support services in the agriculture sector, including the electrification of unelectrified farms. Baseline The baseline is characterized by a continuation of the Alianza para el Campo program and the participation of the Trust Fund for Shared Risk (FIRCO) within that program, whereby farmers receive financial and technical assistance in their acquisition of energy-consuming equipment. In eight of the country's 32 states, FIRCO would continue to integrate renewable energy into these operations with limited financial and technical assistance from the USAID/USDOE-supported Mexico Renewable Energy Program. Sustainable demand for farm-based renewable energy systems would likely not develop due to the persistence of several barriers. Barriers to Renewable Energy The barriers impeding penetration of renewable energy technologies in Mexico's agriculture sector include: a) the lack of awareness among unelectrified farmers regarding renewable energy technologies; b) farmers' perception of renewable energy technologies as risky, simply because they are novel; c) a lack of trained technicians and vendors that can design, install and service renewable energy systems and agricultural extensionists that can advise farmers on their proper operation; d) uncertainty regarding the potential market for renewable energy in the agricultural sector and potential applications of renewable energy technologies on farms, e) the high initial cost of renewable energy systems, relative to conventional alternatives, coupled with deficient rural finance services that prevent farmers from financing their higher initial cost over time'; and f) the lack of technical specifications and certification processes for renewable energy equipment. Global Environmental Objective The proposed project's global environmental objectives are a) to promote the use of renewable energy for productive purposes in Mexico's agriculture sector by removing barriers and reducing implementation costs and b) to reduce greenhouse gas emissions in the agriculture sector. GEF Alternative The GEF alternative would build the capability of FIRCO and the private sector to promote and provide renewable energy systems to farmers and greatly expand the scale of FIRCO's activities in this area. A promotion campaign would build awareness of renewable energy systems and their operational benefits among unelectrified farmers throughout the country. Approximately 1,230 renewable energy systems would be installed in all 32 states as demonstration units, including up to 1,150 solar-power water pumping systems, 55 wind-powered water pumping systems and 24 solar-powered refrigerated milk ' Renewable energy systems (and specifically solar- and wind-powered water pumping systems and solar-powered refrigerated milk storage tanks) are substantially more expensive to purchase then conventional, gasoline-powered systems but are less costly on a life-cycle basis. Page 37  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document storage tanks. Other types of renewable energy systems may be installed based on the results of the market and technology assessments. Participating farmers would receive technical assistance to ensure that their renewable energy systems operate properly for several years. An estimated 2,500 government and private sector technicians, agricultural extensionists and equipment vendors would receive training in the design, installation, operation and maintenance of farm-based renewable energy systems. The results of renewable energy market and technology assessments would be disseminated among Mexico's renewable energy industry. Vendor financing of farm-based renewable energy systems would be tested in four states where these systems have already been demonstrated and vendors exist. Technical specifications and certification procedures would be introduced for renewable energy equipment and service providers, thereby improving consumer confidence in the technology. An important aim of the GEF alternative would be to achieve reductions in the price of farm-based renewable energy systems by initiating markets and creating competition among local vendors. The ongoing USAID/USDOE-supported Mexico Renewable Energy Program has demonstrated the potential for this price reduction impact. In that case, the program supported the installation of 15 to 35 solar- powered water pumping systems in each of four states between 1995 and 1997.' During that time, the average installed cost of PV pump systems decreased by 33 percent, from $24.70 to $16.60 per peak watt. The Program's managers suggest three factors are largely responsible for this price reduction: * Increased competition: The number of vendors of PV water pumping systems in each state increased in response to the Program, thereby creating more competition that forced prices downwards. Increased design capabilities among vendors: Initially, vendors with no experience in PV systems had their wholesalers design the individual systems. Wholesalers included the cost of this design service in their wholesale price. Once vendors gained some experience with the systems, they began to design them themselves at a lower overall cost. In addition, since they did not visit the individual farms, wholesalers based in Mexico City or Monterrey typically oversized the systems in order to ensure that they operated correctly in the field. Vendors were able to size the systems more appropriately since they had first-hand experience with the site conditions and water requirements of each farm. - Increased confidence amnong vendors: Through their experience with the initial systems, the confidence of vendors in PV water pumping systems increased, leading them to reduce their margin for warranty service. By initiating and expanding markets in the country's other 28 states, the GEF alternative is expected to generate price reductions there, although they may not be as great as those generated by the USAID/USDOE-supported program to the extent that the latter has generated permanent price reductions at the national level. Scope of the Analysis The analysis encompasses the national agriculture sector. One or two systems were also installed in each of four other states as part of training programs. Page 38  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Costs Demonstration Component Under the baseline scenario, farmers would acquire conventional farm equipment with a matching grant from Alianza. Under the GEF alternative, farners would acquire renewable energy-powered equipment at an additional cost. In the case of solar-powered pumping systems, an average' conventional system would cost $950 while an average solar system would cost $7,750, representing an additional cost of $6,800. Under its established cost- sharing formula, Alianza would cover $4,650 of the solar system's cost, which includes an extra 10% subsidy for renewable energy equipment. Farmers would contribute an extra $300 over the baseline, resulting in an outstanding additional cost of $2,325 to be paid by the GEF, representing 30% and 34% of the system cost and additional cost, respectively. In the case of wind-powered pumps, a larger system is assumed based on the economics of wind-powered pumps. This larger pump would serve several farmers. An average conventional system would cost $3,800 while an average wind-powered system would cost $15,000, representing an additional cost of $11,200. Under its established cost-sharing formula, Alianza would cover $9,000 of the wind-powered system's cost, which includes an extra 10% subsidy for renewable energy equipment. Farmers would contribute 20 percent less than the baseline, given the higher risk associated with their reliance on a new and undemonstrated technology. This would result in an outstanding additional cost of $4,500 to be paid by the GEF, representing 30% and 40% of the system cost and additional cost, respectively. In the case of solar-powered refrigerated milk storage tank systems, a conventional system would cost $29,000 while a solar-powered system would cost $64,000, representing an additional cost of $35,000. Alianza would cover $12,800 of the solar system's cost while a group of investing farmers would contribute $22,400, leaving an outstanding additional cost of $28,800 to be paid by the GEF, representing 45% and 82% of the system cost and additional cost, respectively. This cost-sharing formula reflects the impact of absolute limits on Alianza funding for any one subproject due to the high cost of these tank systems, with the result that farmers are required to contribute a greater share of the system cost than for pumping systems (35% vs. 10%). However, it is expected that farmers will be able to afford this greater share since it would be spread among a group of farmers, each of whom would be better able to contribute their individual share. In the case of other types of renewable energy systems, similar cost analysis will be performed by FIRCO and a cost-sharing formula developed that is agreeable to the Bank. Baseline investment costs would be $9.3 million, while the GEF alternative would cost $18.8 million, representing an increment of $9.5 million. Alianza and farmers would absorb $5.7 million (60%) of this increment, leaving $3.8 million (40%) to be covered by the GEF. Technical Assistance Component Under the baseline scenario, farmers and Alianza would co-fund agricultural extension services totaling $4.5 million over four years. These extensionists would advise farmers on a full range of farming activities, but would have no expertise in renewable energy systems. 'System costs vary with the depth of the well, or head. Page 39  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Under the GEF alternative, these extensionists would be trained in renewable energy systems and apply this knowledge to their work with participating farmers that acquired renewable energy systems. The additional time consumed in examining and testing renewable energy systems and advising farmers on their proper operation would bring the total cost for extension services to $4.9 million, representing an increment of $434,000. Other Components Under the baseline scenario, FIRCO would mobilize $3.0 million in cash and in-kind resources for renewable energy-related activities in promotion, institutional strengthening, market development, vendor financing, specifications/certification and project management Under the GEF alternative, these activities would be greatly expanded to reach the entire country and to permanently remove barriers. The total cost of these activities would amount to $7.6 million, representing an increment of $4.6 million. Summary The baseline scenario would cost $16.73 million, comprising investment ($9.3 million), technical assistance ($4.5 million), and other barrier removal activities ($3.0 million). The GEF Alternative would cost $31.29 million, with the corresponding component costs estimated at: (a) $18.8 million, (b) $4.9 million, and (c) $7.6 million, respectively. The incremental cost would therefore be $14.56 million, of which GEF is requested to provide $8.9 million in incremental cost funding (see matrix attached). Page 40  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Incremental Cost Matrix Baseline GEF Alternative Incremental Domestic Benefits Given level of Inproved level of energy Improvement in level of energy service service provided to energy service provided to provided to remote unelectrified farmers. unelectrified farmers farmers. Removal of information, Barriers removed perceived risk, human Improved government and capacity and consumer private sector services confidence barriers. Improved government and private sector capability to support electrification of farms with renewable energy. Global Environmental GHG emissions No GHG emissions. 6,000 tonnes of carbon Beneflts associated with the emissions avoided annually provision of energy through demonstration units services using gasoline or grid- 730,000 tonnes avoided connected annually with penetration of electricity. renewable energy systems among one third of Mexico's estimated 600,000 unelectrified farms within 10 years. Costs (US$ '000) 1. Promotion 526 1,824 1,298 2. Inst'l strengthening 292 1,590 1,298 3. Spec's and certification 63 275 212 4. Market development 24 686 662 5. Demonstration 9,280 18,770 9,490 6. Technical assistance 4,485 4,919 434 7. Vendor financing 1,625 2,261 636 8. Project management 435 965 530 TOTAL $16,730 $31,290 $14,560 GEF contribution $8,900 Alianzalfarmers contribution to demonstration component $5,660 Page 41  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Annex 7 Environmental Assessment The project generally involves the same environmnental issues as ALCAMPO, therefore all relevant environmental provisions of the ALCAMPO manual would be incorporated in the project's manual. Consequently, the only remaining environmental issues are those specifically related to the use of renewable energy technologies - environmental benefits and negative environmental impacts. Environmental Benefits Global environmental benefits include avoided greenhouse gas emissions from gasoline-powered or grid- connected systems that would be substituted with solar- and wind-powered systems. It is anticipated that the demonstration and vendor financed systems installed by the project would abate roughly 6,000 metric tonnes of carbon per year, or roughly 120,000 metric tonnes over the 20 year life span of the renewable energy systems. More importantly, the project would catalyze a national market for farm-based renewable energy systems among Mexico's estimated 600,000 unelectrified livestock farms. It is expected that the project would catalyze the penetration of renewable energy systems among one-third of the country's unelectrified farms within ten years, a development that would avoid an estimated 0.73 million metric tonnes of carbon annually. Local environmental benefits include reductions in air, water and soil pollution through the substitution of renewable energy systems for gasoline-powered systems. These local benefits have not been estimated, in part because renewable energy systems are financially and economically viable without the addition of these benefits and in part because the local benefits would likely be small given that they would occur in marginal areas of rural Mexico with a low density of contaminating energy sources and relatively high pollutant absorptive or dispersal capacity. Negative Environmental Impacts While this project would support the purchase and installation of water pumping equipment, depletion of groundwater resources is not a concern because the solar- and wind-powered pumping systems to be installed under the project are too small to pose a threat to these resources. The only potentially negative environmental issue associated specifically with the project's renewable energy systems relates to inappropriate disposal of used batteries from some solar applications. The potential severity of this issue hinges on the number of battery-powered systems installed by the project, the battery life affecting the rate of discard, and the opportunities and constraints in heightening the awareness of farmers and vendors on the importance of recycling. With respect to the total number of batteries involved, the project expects to install roughly 1,230 renewable energy systems throughout the country over a four-year period (2000-2003). Of these, roughly 1,050 would be solar-powered pump systems with no battery requirement, 55 would be wind- powered pump systems with no battery requirement and 24 would be solar-powered refrigerated milk storage tanks or other farm equipment (e.g. milking machines) that may or may not require batteries. Uncertainty concerning the latter systems' use of batteries is due to the fact that their final design is not yet complete and some options do not involve batteries. In sum, no more than three percent of the renewable energy systems installed by the project are expected to employ batteries. Applying this proportion to expected post-project replication (200,000 systems over ten years) yields a projected increase of 6,000 batteries nationally. Page 42  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document In order to put the above figures in perspective with respect to the potential for significant environmental damage, the experience of promoting solar home systems in Mexican rural areas in the decade of the 1990s provides some insights. During this period about 100,000 solar home systems, each employing one battery, were installed through various govemment programs, including 60,000 systems under the PRONASOL program. The latter program was poorly executed and it is estimated that up to 50 percent of the systems may have been abandoned, suggesting a high rate of battery discard. A recent evaluation of the program in three states (Hidalgo, Campeche and Quintana Roo) raised questions on battery recycling but found no evidence of negative environmental impacts. Battery recycling has clearly been difficult to implement in rural communities. It will be even more complicated in widely dispersed agricultural uses with difficult access. The above experience, combined with the enormous challenge faced by Mexico in disposing of millions of spent batteries per year suggests a) that the incremental load imposed by the project will be insignificant and b) that any effort to recycle batteries under the project would only be meaningful within a wider regulated and/or market-driven recycling system. On the question of battery life, the project will emphasize installation of quality systems, e.g. deep cycle batteries, sound operating procedures and good maintenance. As a result, average battery life is expected to exceed ten years, relative to the current average of two years for the regular lead car batteries in standard use on farms. Therefore, to the extent that solar-powered batteries replace others, the number of batteries discarded on project farms (or those replicating the systems) should be significantly reduced. In spite of the apparent disinterest in Mexico in potential harmful effects from inappropriate battery disposal, as implied above, the project will take active steps to mitigate potential environmental damage which may be attributable to large-scale replication of solar energy systems deriving from the demonstration exercise. The technician training program will include information on proper battery issue and disposal. In addition, the support components of the project - notably certification, market development and vendor financing - will emphasize equipment, installation, operation and maintenance of systems which reduce the rate at which batteries are discarded. Page 43  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Annex 8 Monitoring and Evaluation Program A: Operational Arrangements In order to support adequate supervision of project implementation progress in relation to agreed overall goals and annual targets, as well as an assessment of the project's impact on beneficiaries and the economy, a comprehensive Monitoring and Evaluation (M&E) Program would be implemented by FIRCO. Information on agreed indicators (see Table 1) would be collected by FIRCO staff at headquarters and in state offices, as well as by participating extensionists that would be in direct contact with participating farmers. FIRCO would ensure that these extensionists carefully collect the required information and monitor their respective performances in project implementation. FIRCO's module within ALCAMPO's centralized management information system (MIS) would be expanded to help collect and process data on the project's physical and financial progress as well as its impacts. As an add-on to ALCAMPO's MIS, it would inherit the latter's main features. These include taking advantage of existing communications infrastructure and capabilities to allow close to real time data recording and processing of information through a centralized data storage location with decentralized data input and access features. B: Conceptual Basis The structure of the project's MIS would be based on two different modules: one devoted to physical and financial monitoring and another to performance evaluation. The system would allow FIRCO to record and process information from different sources on the set of indicators needed by the M&E system to achieve its objectives. These indicators would be divided into five categories: input, output, outcome, process and impact, thus providing the conceptual basis for the M&E framework. Monitoring of physical and financial implementation performance would be based on the first two groups of indicators while impact evaluation would focus mostly on the last three categories. C: Evaluation FIRCO would coordinate evaluation of the project's implementation performance and development impact, to be conducted by independent entities with nationwide experience using standard evaluation procedures. The evaluation process would encompass three different studies: a) a baseline study at project initiation (to be integrated with the market assessment) to determine the initial status of project beneficiaries and market indicators; b) a mid-term evaluation at the end of the second year of implementation to permit an assessment of the any required corrections in project implementation; and c) a final project evaluation at the end of the implementation period to evaluate the project's development impact. Evaluation of the project's development impact would focus on changes in selected indicators, such as (i) prices and sales of farm-based renewable energy systems, (ii) avoided greenhouse gas emissions and (iii) participating farmers' income. Input data for project evaluation would come from continuous evaluation and periodic surveys to be implemented in conjunction with the three evaluations. Continuous evaluation would be closely associated with the monitoring system and would track a selected set of indicators of "potential development" based on known relationships between activities' outputs and development impacts. A list of performance indicators is provided in Table 1. Page 44  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document D: Reports FIRCO would be responsible for the preparation of the following reports: Annual budget and work plan. Annual plans would be produced describing all project activities to be done in the subsequent year along with their corresponding budgets. Semi-annual progress reports. Semi-annual progress reports with a format and coverage acceptable to the Bank would cover all project activities in the previous six months. The reports would document progress in project implementation in both physical and financial terms, based on the relevant performance indicators. One of the two-semi-annual reports would provide an overview of the preceding 12 months and a summary of performance indicators, a statement on the status of compliance with procedures outlined in the Operational Manual and analyses and recommendations relevant for optimizing project implementation. Mid-term evaluation. A mid-term evaluation of the project would be undertaken to evaluate a) overall progress in project implementation, b) achievement of expected results and c) the need and measures to reorient project implementation as necessary. Page 45  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Table 1 PERFORMANCE INDICATORS Indicator Unit Component -7 ~~~~~~~1 INPUTS Train-the-trainers courses held _ _IS Technician courses held # IS Company courses held iS National workshops held # IS Regional workshops held # IS Pamphlets/brochures produced # P Posters produced P Radio messages produced -_# P Videos produced P Technical brochures produced - P Demonstration days held # P Farmer workshops held e P Fairs/exhibitions attended by RE booth/display P Sub-project requests submitted D Visits to farmers by RE-trained extensionists # TA Market assessment completed _ MD Copies of market assessment report or summary distributed MD Technical studies completed MD Copies of technical study report or summary distributed # MD Specifications issued S SC Certification program initiated SC National project coordination unit formed PM Project progress reports produced # PM Monitoring system initiated ME OUTP UTS Trainers trained i is FIRCO technicians trained, by state IS Vendor technicians trained, by state # IS Other organization technicians trained, by state # IS Extensionists trained, by state # IS Acronyms: PW - Project-wide IS - Institutional Strengthening P - Promotion MD - Market Development SC - Specifications and Certification D - Demonstration TA - Technical Assistance VF - Vendor Financing Pilot PM - Project Management ME - Monitoring and Evaluation RE - Renewable energy Page 46  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Total technicians and extensionists trained, by state # IS Vendor managers trained # IS National workshop participants IS Regional workshop participants # IS Pamphlets/brochures distributed ____# P Posters distributed p Radio message airings # P Video cassettes distributed P Technical brochures distributed # P Demonstration day participants P Fair/exhibition attendees P PV pumps installed and operating correctly # D PV electric fences installed and operating correctly # D Wind pumps installed and operating correctly # D PV refrigerated tanks installed and operating correctly # D Other RE systems installed and operating correctly # D Total RE systems installed and operating correctly D Subsistence farmners participating #,% D Semi-commercial farmers participating #,% D Commercial fanners participating #,_% D States with demonstration systems D _ _D Certified technicians, by affiliation' SC Certified vendors SC Certified installations of RE systems, by type _ SC Farmers receiving advice from RE-trained extensionists TA Vendors trained in vendor financing VF RE systems purchased with vendor financing VF Proportion of project-supported RE systems purchased with vendor financing % VF Value of vendor financing issued to farmers VF Proportion of issued vendor financing in default % VF Revolutions of vendor financing revolving fund (if employed) # VF Additional training sessionsecourses delivered by trainers or trained technicians # IS Sub-projects rejected due to failure to meet specifications #% SC Proportion of trained technicians that received certification e IS, SC Change in proportion of fanners that are aware of RE technologies'2 P, D, TA New agriculture sector RE applications commercialized MD Types of RE technology applications demonstrated (with 100% financing) #D Gasoline-powered pumps replaced by RE-powered pumps #, hpD Traditional-charged batteries replaced by PV-charged batteries for electric fences #, V D REP-powered pumps irrigating land for forage production ,D R E-powered pumps irrigating land for fruit and vegetable production #D Area irrigated with RE-powered pumps Ha D Area enclosed by PV electric fences Ha D Amount of marketed milk that is refrigerated using RE systems Litres D Amount of marketed milk that is milked mechanically using RE systems Litres D Average level of satisfaction with RE systems among participating farmers % D 'Government, vendor or extensionist 2 Measured by survey at least three times: at project initiation, at mid-term and at project end. For example, RE-powered refrigerated tanks, milking machines or feed mixers. Page 47  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Proportion of participating farmers reporting dissatisfaction with RE systems _ D Proportion of participating farmers abandoning their RE systems _ _D Scheduled maintenance visits by vendors on project-supported RE systems ___ D Unscheduled maintenance visits by vendors on project-supported RE systems D RE-trained extensionists registered by FIRCO # TA Vendors selling RE systems for productive agricultural applications, by state PW Vendors offering financing to their customers for the purchase of RE systems for VF productive agricultural applications, by state IMPACTS RE systems for productive agricultural applications purchased with VF % VF Change in average price of RE systems, by type - PW National sales of RE systems for productive agricultural applications, by type1 #/yr, $/yr PW CO2 emissions avoided by project-supported RE systems Tonne/yr D CO2 emissions avoided nationally by RE systems in productive agricultural applications Tonne/yr PW Change in average net income of participating farmers %, $/yr D Change in forage production among project-supported pumps DM/AU/yr D Change in fruit and vegetable production among project-supported pumps Tonne/yr D 'Measured by survey of vendors at least twice: at mid-term and at project end. Page 48  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Annex 9 Procurement and Disbursement Arrangements As executor of the Bank-supported Rainfed Areas Development Project, FIRCO is an ongoing Bank client that is performing project administration activities in a satisfactory manner. The Bank expects FIRCO to administer this project in a similarly satisfactory manner. A detailed institutional (financial management) assessment to define specific requirements for project administration would be finalized by appraisal. However, procurement and financial management arrangements are expected to be the same as those utilized by the recently initiated ALCAMPO project (Ln. 4428-ME). Those arrangements are detailed below. Procurement Procurement of equipment and goods 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, revised January and August 1996, September 1997 and January 1999). All consulting services to provide technical assistance and training would be selected in accordance with the Bank's Guidelines for the Use of Consultants (January 1997; revised in September 1997 and January 1999). Subprojects. Most of the equipment and goods to be procured under this project would be carried out with direct participation and financial contribution of the beneficiaries, and implemented as part of the Demonstration Component. Procurement would be carried out by the beneficiaries and payments made through the state FIRCO office. Eligibility criteria and operation procedures would be included in the Operational Manual. Given the remote and scattered location of beneficiaries, there is little competition among contractors for these small projects, which would lead one to expect that formal bidding at community level will not reduce cost given all the transaction costs involved. In this case, participation substitutes for formal processes in ensuring cost-effectiveness. Consequently, simplified procurement procedures, including the utilization of local shopping and direct contracting, will be utilized for projects. The implementation of these procedures would require strong supervision on the part of FIRCO and its state offices. As sole or joint implementing agency of other Bank supported projects, FIRCO has developed sufficient capacity to meet the Bank's minimum procurement management requirements, as verified by the preliminary capacity assessment performed at appraisal. At the national level, FIRCO would have a qualified procurement officer familiar with Bank procurement rules that would be responsible for organizing the supervision and monitoring of procurement activities at the state level. In the state offices, there would be an Accounts Clerk, trained in handling the transfers of funds and in reviewing bank statements, and a Procurement Clerk, who will be able to advise and assist beneficiaries in procurement activities. At the first national seminar (part of the Promotion Component), special attention would be given to explain the project concept and the procedures for procurement and disbursement. The participants in the seminar would include staff at various levels of project execution and not be limited to senior management.. In addition, a special seminar for Procurement Clerks will be held in the Mexico resident Mission to ensure adequate project implementation. The project's Operational Manual would be reviewed at this seminar. As part of the ALCAMPO project, both national and state staff will have been trained in the steps necessary to prepare, execute and monitor the new procurement and disbursement systems, and state staff will have been trained to assist the beneficiaries in key elements of the subproject cycle, including the preparation of subproject proposals. Page 49  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Consultants. About US$1.1 million of consulting services would be procured by FIRCO utilizing the Quality and Cost-Based Selection system (QCBS). Advance procurement procedures would be utilized to facilitate project implementation, in particular the use of standard terms of reference for the contracting of assignments of similar nature and scope (e.g. technical assistance for beneficiaries'). Draft standard terms of reference will be agreed upon at negotiations and incorporate in the Operational Manual. Bank Prior Review. The Bank would prior review contracts for the first five beneficiary sub-projects under US$50,000 and contracts for all beneficiary sub-projects over this amount, as well as terms of reference of individual consultants for assignments up to US$50,000 and all contracts for assignments above this amount. In the case of consulting firms, the Bank would prior review terms of reference for assignments up to US$100,000 and all contracts for assignments above this amount. In addition, prior review would be required for assignments of a critical nature, such as the mid-term and final project evaluations. Procurement arrangements and prior review thresholds are summarized in Tables A and B, respectively. The Project Procurement Plan would be agreed upon during negotiations and the final version would be incorporated in the Operational Manual to be submitted to the Bank as a condition of effectiveness. Disbursement Use of statements of expenditures (SOEs): The Bank is examining the feasibility of implementing the project under the terms of the Loan Administrative Change Initiative (LACI). Under LACI, use of SOE's would be replaced by a system whereby disbursements would be granted to FIRCO or the executing agency on the basis of a set of agreed-upon quarterly reports, detailing the financial, physical and procurement activities (historical and planned) under the project. Conversion to PMRs based disbursement is expected within the timing agreed for the Agricultural Productivity Project, this implementation period is based on the close coordination between both agencies on the MISs. During the transition period, disbursements would be based on traditional procedures, using Statements of Expenditures (SOEs) for training expenditures (not covered by consultant fees), subprojects and consultants contracts not subject to Bank prior procurement review. Consequently FIRCO should adhere all procedures to Bank requirements under this disbursement methodology. Documentation supporting SOEs would be retained by FIRCO at the central level and by FIRCO's delegations in every state, and made available for examination by Bank staff or the auditors as requested Should SOE disbursement procedures be employed, financial reporting would be carried out by the FIRCO office in each state, including the preparation of SOE's. FIRCO would consolidate financial reports at the central level for transmission and review by the Bank. The financial management, accounting system and internal controls are already in place as part of theAlianza program and are being utilized by FIRCO for the Rainfed Areas Development Project. They have been operating satisfactorily. An action plan would be developed during project implementation by FIRCO, in coordination with Bank financial management staff, to adjust the current management information system and enable the regular production of new Project Management Reports (PMRs). Once the Bank confirms FIRCO's capacity to ' These terms of reference will be a revised version of the standard terms of reference already in place for the ALCAMPO project. The revision will insert additional responsibilities for extensionists corresponding to their promotion of renewable energy systems and their provision of support to farmers acquiring these systems. Page 50  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document generate quarterly reports that are filly consistent with LACI principals, the project would be considered by the Bank for full conversion to LACI-style disbursements. Conversion would require a request by the Grant Recipient and approval by the Bank's Loan Department. Resources and mechanisms to permit financial monitoring and reporting of project activities would be in place prior to effectiveness. Special account: In order to facilitate project implementation, the GOM would establish a special account in US Dollars at the Central Bank with an authorized allocation and initial advance of US$750,000, (or US$1,780,000 if withdrawals are made on the basis of PMRs) corresponding to the average of four months of expenditures that are expected to be made from the account. The replenishment application will be supported by the required/agreed documentation. The Special Account would be audited in conjunction with the annual financial audit of the project. Page 51  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Table A: Project Costs by Procurement Arrangements In US$ '000 equivalent, including contingencies. Figures in parenthesis are the amounts to be financed by the GEF grant. Expenditure Category Procurement Method Total Cost ICB NCB QCBS or OTHER Individual 1. Works None 2. Goods Equipment 20,861.6* 20,861.6* (4,360.0) (4,360.0) 3. Services Promotion materials & services 1,824.1 1,824.1 (1,297.9) (1,297.9) Training services 1,590.4 1,590.4 (1,297.9) (1,297.9) Extensionist services 4,918.6 4,918.6 (434.4) (434.4) Consulting services (market 1,129.9 1,129.9 development, spec's and (980.0) (980.0) certification, vendor financing) 4. Miscellaneous Project administration 965.4 965.4 (529.8) (529.8) Total 10,428.4 20,861.6 31,290.0 (4,540.0) (4,360.0) (8,900.0) * Procurement to be carried out by beneficiaries. Fifty to sixty percent of the total cost would be contributed by Alianza via Ln. 4428-ME. Page 52  Mexico. Renewable Energy for Agriculture Project Project Appraisal Document Table B: Thresholds for Procurement Methods and Prior Review Expenditure Contract Value Procurement Contracts Subject to Category Method Prior Review (US$ '000) 1. Beneficiary <50 Community First 5 subprojects Subprojects participation, such as through Direct Contracting (Reference Prices) 2 50 NCB All 2. Services (a) Individuals <50 TOR, CV TOR 2 50 QCBS All (b) Firms < 100 QCBS TOR > 100 QCBS All Table C: Allocation of Grant Proceeds Expenditure Category Amount of the GEF % of Expenditures to Trust Fund Grant be Financed Allocated (Expressed in SDR) (1) Solar-powered or wind-powered water 2,103,000 30% pumping systems and installation thereof under Part E of the Project (2) Solar-powered refrigerated milk storage 507,000 45% tanks and installation thereof under Part E of the Project (3) Solar-powered water pumping systems 362,000 30% and installation thereof under Part G of the Project (4) "Other equipment" and installation 0 30% thereof under Part E of the Project (5) Training; promotion; consultants' 3,118,000 100% services (6) Unallocated 362,000 Page 53  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document TOTAL 6,452,000 Page 54  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Annex 10 Project Processing Budget and Schedule A. Project Budget Planned Actual (At final PCD stage) US$1 I1,000 B. Project Schedule Planned Actual (At final PCD stage) Time taken to prepare the project 6 months 7 months Identification mission Jan 1999 Jan 1999 Appraisal mission June 1999 July 1999 Negotiations Sept 1999 Nov 1999 Planned date of effectiveness Jan 2000 Prepared by: Trust Fund for Shared Risk (FIRCO) Preparation assistance: Canadian consultant trust fund - US$61,000 Bank staff who worked on the project included: Name Specialty Michael Carroll Sr. AgriculturistlTask Team Leader Alvaro Soler Agricultural Economist (Cons.) John Duffy Renewable Energy Specialist (Cons.) Christine Kimes GEF Coordinator Ferenc Molnar Lawyer Alberto Ninio Lawyer Lea Braslavsky Procurement Specialist Victor Ordofiez Financial Specialist Michael Nelson Environmental Specialist (Cons.) Charles Feinstein GEF Advisor Chandra Shekhar Sinha GEF Advisor Ranjinee Rudran Team Assistant Patricia Soto Team Assistant (Mexico) Arun Sanghvi Peer Reviewer Fernando Manibog Peer Reviewer Daniel Kammen GEF STAP Reviewer (Cons.) Page 55  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Annex 11 Documents in the Project File* A. Project Implementation Plan FIRCO (1999), Manual de Operacion del Proyecto B. Bank Staff Assessments Kammen, Daniel (March 1999), GEF STAP Review Comments Nelson, Michael (April 1999), Report on Environmental Aspects Soler, Alvaro (July 1999), Economic and Financial Analysis C. Other Global Transition Consulting (June 1999), Componente de Financiamiento a Proveedores: Analisis y Recomendaciones Credit Partners (October 1999), Componente de Financiamiento *Including electronic files. Page 56  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Annex 12 Statement of Loans and Credits As of 21-Jun-99 Difference Between expected Original Amount in US$ Millions and actual Fiscal ___________________________ disbursements a/ Project ID Year Borrower Purpose IBRD IDA Cancellations Undisbursed Orig Frm Rev'd Number of Closed Projects: 143 Active Projects MX-PE-48505 1999 NAFIN AGRICULTURAL PRODUCT 444.45 0.00 0.00 444.45 36.14 0.00 MX-PE-7610 1999 BANOBRAS FOVI RESTRUCTURING 505.05 0.00 0.00 505.05 88.39 0.00 MX-PE-40199 1998 MEXICAN GOVERNMENT BASIC EDC. DEV. 115.00 0.00 0.00 115.00 17.76 0.00 MX-PE-44531 1998 GOM KNOWLEDGE & INNOV. 300.00 0.00 0.00 300.00 10.00 0.00 MX-PE-49895 1998 MINISTRY OF FINANCE HIGHER ED. FINANCING 180.20 0.00 0.00 180.20 14.03 0.00 MX-PE-55061 1998 BANOBRAS HLTH.SYSTEM REF. TA 25.00 0.00 0.00 23.00 3.60 0.00 MX-PE-7711 1998 NAFIN RURAL DEV. MARG.AREA 47.00 0.00 0.00 43.40 10.74 0.00 MX-PE-7720 1998 BANOBRAS HEALTH SYSTEM REFORM 700.00 0.00 0.00 350.00 0.00 0.00 MX-PE-7700 1997 GOVT OF MEXICO COMMUNITY FORESTRY 15.00 0.00 0.00 11.85 2.61 0.00 MX-PE-7726 1997 GOVERNMENT AQUACULTURE 40.00 0.00 0.00 39.13 6.63 0.00 MX-PE-7732 1997 GOVERNMENT RURAL FIN. MKTS T.A. 30.00 0.00 0.00 28.31 24.12 8.45 MX-PE-40685 1996 NACIONAL FINANCIERA (NAFI INFRA. PRIVATZTN TA 30.00 0.00 0.00 19.56 19.56 0.00 MX-PE-7689 1996 NAFIN BASIC HLTH II 310.00 0.00 0.00 187.25 63.26 44.53 MX-PE-7713 1996 GOM WATER RESOURCES MANA 186.50 0.00 0.00 156.53 30.61 0.00 MX-PE-34161 1995 NAFINSA FINANCIAL SEC T.A. 37.40 0.00 0.00 10.78 -3.01 10.79 MX-PE-34490 1995 NAFIN TECH EDU/TRAING 265.00 0.00 30.00 155.29 156.49 .95 MX-PE-7702 1995 SEDESOL SECOND DECENTRALZTN 500.00 0.00 0.00 144.08 140.79 93.37 MX-PE-7612 1994 BANOBRAS SOLID WASTE II 200.00 0.00 193.06 1.48 -4.46 1.35 MX-PE-7701 1994 NAFIN ON-FARM & MINOR IRRI 200.00 0.00 30.00 72.03 84.52 8.69 MX-PE-7707 1994 BANOBRAS WATER/SANIT II 350.00 0.00 0.00 171.67 171.65 0.00 MX-PE-7710 1994 BANOBRAS N. BORDER I ENVIRONM 368.00 0.00 273.40 65.36 298.36 37.40 MX-PE-7725 1994 NAFIN PRIM.EDUC.II 412.00 0.00 40.00 157.00 197.04 76.10 MX-PE-7648 1993 BANOBRAS MEDIUM CITIES TRANSP 200.00 0.00 23.00 115.70 118.31 20.74 MX-PE-7694 1993 NAFIN TRNSPRT AIRP POLL CON 220.00 0.00 43.12 79.96 123.08 75.00 MX-PE-7723 1993 BANOBRAS HWY RHB E SAFETY 480.00 0.00 0.00 123.59 38.92 0.00 MX-PE-7667 1992 NAFINSA IRRIG SCTR 400.00 0.00 50.00 51.51 101.47 6.21 Total 6,560.60 0.00 682.58 3,552.18 1,750.61 383.58 Active Projects Closed Projects Total Total Disbursed (IBRD and IDA): 2,325.83 21,290.14 23,615.97 of which has been repaid: 95.52 12,277.71 12,373.23 Total now held by IBRD and IDA: 5,782.49 9,015.45 14,797.94 Amount sold 0.00 92.34 92.34 Of which repaid : 0.00 92.34 92.34 Total Undisbursed : 3,552.18 2.99 3,555.17 a. Intended disbursements to date minus actual disbursements to date as projected at appraisal. Note: Disbursement data is updated at the end of the first week of the month and is currently as of 31-May-99. Page 57   Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Mexico at a glance Latin Upper.- POVERTY and SOCIAL. Amnerica middle- -- --- -- Mexico & Carib. Income Developmentcdiamrond* 1987 Population, mid-year (millions) 94.8 494 571 Life expectancy GNP per capita (Atlas methoct; US$) 3,680 3,880 4,520 GNP2 (Atlas method, US$ billions) 348.9 1,917 2,684 Average annual growth, 1991-97 Population ()1.8 1.7 1.5 Labor force (%v) 2.8 2.3 1 9 GNP /Gross Most recent estimate (latest year available, 1991.97) capita enolment Poverty (% of population bel ow national poverty line) Urban populaton (% of total population) 74 74 73 Life expectancy at birth (years) 72 70 70I Infant mortality (per 1, 000 live birthis) 30 32 30 J Child malnutrition (% of children under 5) 14 . ..Access to safe water Access to safe water (% of population) 83 73 79 illiteracy (%q of population a ge 15+) 10 13 is Gross primary enrollment (% of school-age population) 115 1ll 107 I Mexico Male 11 . . Upper-middle-Income grouip Female 113 KEY ECONOMIC RATIIOS and LONG-TERM TRENDS 1976 1986 1996 11997 GDP (US$ billions) 95.3 128.8 329.5 403.0 Eooi ais Gross domestic investment/GDP 21,0 18.1 23.3 28.4 Exports of goods and serviceslGDP 7.0 17.4 32.5 30.2Trd Gross domestic savings/GOPD 18.8 22.0 25.4 25.4 Gross national savingslGDP 16.5 117.4 22.7 24.5 Current account balance/GOP -3.7 -1.1I -0.6 -1.8 Dmsi Interest payments/GDP 1.4 6.0 2.5 2.2 . ~Investment ...... Total debtVGDP 25.1 78.3 47.7 37,3 Savings ~ ~ Total debt service/exports 48.5 50.3 35.4 28.4 Present value of debt/GDP . ,. 45.1 Present value of debt/exports . .. 128.9 Idbens 1976486 1987.97 1996 1997 1998-2 (average annual growth) GOP 3.8 2.8 5.2 7.0 4.9 -Mexico GNP per capita 0.9 0.8 4.0 6.2 2.9Upe-id-ncegru Exports of goods and services 10.3 11.1 18.2 13.0 7.4 STRUCTURE of the ECONOMY (% of GDP) ~~~~~ ~~~~1976 1986 1996 1997 G3rowth rtso uptadIvsmn % Agriculture 10.2 9.0 6.1 5.8 40 Industry 29.8 33.9 28.4 28.3 20 Manufacturing 21.5 24.7 21.5 21.7 0 Private consumption 71.3 68.8 64.9 65.3 .4o General government consumption 9.9 9.1 9.7 8.4 Imports of goods and services 9.2 13.5 30.3 30.2 (average anual growth)1976-86 1987-97 1996 1997 Growth rates of ex-ports an1dim_p`orts %) Agriculture 2.7 1.6 3.8 1.0 401 Industry 3.6 3.3 10.2 9.3 Manufacturing 3.2 3.7 10.9 9.8 20 Services 4.0 2.9 3.3 6.6 Private consumption 3.0 2.7 2.2 6.3 General government consumption 5.8 2.0 -0.7 1.8 9 39 Gross domestic investment -0.2 4.1 25.7 22.8 20 Imports of goods and services 0.1 13.3 22.8 22.0 -Ex-orts -lmpo Gross national product 3.4 2.5 5.8 8.0 Note: 1997 data are preliminary estimates. The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. Page 59  Mexico: Renewable Energy for Agriculture Project Project Appraisal Document Alvaro Soler P:\!MX\PROJECTS\ESSD\GEFAGRIC\PAD\PADI 124.doc 11/23/99 11:24 AM Page 60