Mexico - Environmental Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No.18922 IMPLEMENTATION COMPLETION REPORT MEXICO MEXICO ENVIRONMENTAL PROJECT (Loan 3461-ME and GET Grant 28604) February 8, 1999 Environmentally and Socially Sustainable Development Sector Management Unit Mexico Country Management Unit Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  ii CURRENCY EQUIVALENTS Currency Units = Mexican pesos $1.0 = N$9.9 GOVERNMENT FISCAL YEAR January 1 to December 31 WEIGHT MEASURES Metric System ABBREVIATIONS AND ACRONYMS BANOBRAS National Bank for Public Works (Banco Nacional de Obras y Servicios Pzblicos) CNA, CONAGUA National Water Commission (Comisi6n Nacional delAgua) Credito Pzublico Undersecretariat of Public Credit in the Secretary of Finance Egreso UJndersecretariat of Expenditures in the Secretary of Finance FMCN Mexican Fund for Nature Conservancy GEF Global Environmental Facility GET Global Environmental Trust [NE National Institute of Ecology (Instituto Nacional de Ecologia) NAFTA North American Free Trade Agreement PAM Mexico Environmental Program (Programa Ambiental de Mexico) PROFEPA Office of the Federal Attorney General for Environmental Protection (Procuraduria Federal de Protecci6n al Ambiente) SARH Department of Agriculture and Water Resources (Secretaria de Agricultura y Recursos Hidricos) SDR Special Drawing Rights SEDESOL Department of Social Development (Secretaria de Desarrollo Social) SEDUE Department of Urban Development and Ecology (Secretaria de Desarrollo Urbano y Ecologia) SEMARNAP Department of Environment, Natural Resources and Fisheries (Secretaria de Medio Ambiente, Recursos Naturales y Pesca) SINAP National System of Protected Areas SHCP Secretaria de Hacienda y Credito P[blico TAC Technical Advisory Committee Vice President Shahid Javed Burki Country Director Olivier Lafourcade Sector Director Maritta Koch-Weser Sector Leader Adolfo Brizzi Task Manager Luis Constantino  FOR OFFICIAL USE ONLY TABLE OF CONTENTS PREFACE ............................................. i EVALUATION SUMMARY ............................................. ii PART I PROJECT IMPLEMENTATION ASSESMENT . ............................1 A. BACKGROUND .1 B. DEVELOPMENT OBJECTIVES AND DESIGN .1 C. ACHIEVEMENT OF PROJECT OBJECTIVES. 3 D. MAJOR FACTORS AFFECTING THE PROJECT. 7 E. PROJECT SUSTAINABILITY. 8 F. BANK PERFORMANCE. 9 G. BORROWER PERFORMANCE .10 H. AUDITS .10 I. ASSESMENT OF OUTCOME .11 J. FUTURE OPERATIONS .11 K. KEY LESSONS LEARNED .11 PART II- ANNEXES ................................... 14 A. STATISTICAL TABLES ................................... 14 B. BORROWER'S CONTRIBUTION ................................... 45 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEXICO MEXICO ENVIRONMENTAL PROJECT (Loan 3461-ME and GET Grant 28604) IMPLEMENTATION COMPLETION REPORT Preface This is the Implementation Completion Report (ICR) for the Mexico Environmental Project (Proyecto Ambiental de Mexico - PAM), Loan 3461-ME and GET Grant 28604. The loan, approved on April 14, 1992, signed on April 28, 1992, and effective May 8, 1993, was reduced in 1995 from US $50 to US $23.8 million as a result of a request from the Government of Mexico (GOM) for a partial cancellation.' This request came on the wake and was a consequence of the Mexican financial and economic crisis that started at the end of 1994. The associated GEF grant GET-28604 of SDR 21.4 million (US$30 million equivalent) was later reduced to SDR 17.9 million ($25 million) in April 1993, and reduced to SDR 5.9 (US $8.7) in May 1997. The original closing date of the project was December 31, 1995. As a result of two one-year extensions, the project closed on December 31, 1997. The GEF grant had a first four-month extension to April 30, 1996, during which time agreements were reached to strengthen the project and the legal agreement was amended. The closing date of the amended grant was June 30, 2000. In May 1997, a further restructuring of the GEF grant was negotiated which resulted in (i) SDR 12 million ($16.3 million) being transferred to a privately managed endowment fund for protected areas in July 1997 (this became GET grant 28678, which is not discussed in this ICR) and (ii) closing of the grant GET 28604 on December 31, 1997. Adrian Demayo and Luis Constantino, Environmentally and Socially Sustainable Development Sector Management Unit, Latin American and the Caribbean Region (LCSES), prepared this Implementation Completion Report, with the assistance of Edmundo de Alba (Consultant). It was cleared by Adolfo Brizzi, Sector Leader (LCC1C), and reviewed by Christine Kimes, and Sergio Margulis. The ICR is based on the findings of field visits, discussions with government officials and a review of material in the project file. The borrower commented on the draft report and prepared its own evaluation of the project, a summary of which is attached as appendix C to this Report. ' On the closing date, December 31, 1997, an additional amount of $4.3 million, representing the undisbursed balance on that date, was cancelled to bring the balance of the loan to zero.  ii MEXICO MEXICO ENVIRONMENTAL PROJECT (Loan 3461-ME and GET Grant 28604) EVALUATION SUMMARY Introduction 1. The Mexico Environmental Project (Programa Ambiental de Mexico - PAM) was designed to strengthen the institutional and policy framework in order to enable the Government of Mexico (GOM) to carry out environmental protection and natural resource management functions in a more efficient and decentralized manner. The project, the second free-standing environmental project in the Latin American and Caribbean Region2, was approved by the Board in 1992 (Loan 3461-ME) and partially financed through a loan of US$ 50 million (Loan 3461-ME) and a Global Environmental Facility grant of US$ 30 million3 (GET 28604). Development Objectives 2. The project's development objectives were to: (A) develop and increase GOM's capacity to carry out key environmental protection and natural resource management functions. (B) strengthen the institutional and policy framework. (C) transform the federal organization responsible for environmental management into a "second tier organization", i.e., an organization that would provide the legislative framework and methodologies for environmental management in Mexico, and would coordinate and provide the quality assurance for the environmental activities carried out by other levels of government, other federal agencies, NGOs, and the private sector. (D) conserve biodiversity in selected protected natural areas. 3. To reach these objectives, the project included the following components: (l) Pollution Monitoring and Control: (A) Water Pollution; (B) Air Pollution; (C) Environmental Laboratories for INE and PROFEPA; and (D) Enforcement. (2) Minimization of Environmental Impacts of Investment Projects: (A) Ecological Zoning; (B) Minimization and Impact and Risk Assessment; and (C) Strategic Planning. (3) Biodiversity Conservation: (A) Wildlife Protection and Conservation; (B) Protection of Sea Turtles; and (C) Management of Protected Areas (4) Modernization of Environmental Management: (A) Institutional Strengthening; (B) Decentralization Program; (C) Economic Instruments for the Environment; (D) National Training Program; and (E) Regulations and Standards. (5) Strategic studies including review of legal framework, environmental impacts on health, and future environmental strategy for Mexico. 2 The first self-standing environmental project in the Latin America and Caribbean Region was the National Environmental Program of Brazil. 3 According to the SAR, the GEF grant financed reserves-related activities of the Biodiversity Conservation component, while the loan financed the central activities, including the coordination of this component.  iii (6) Project Coordination Implementation Experience and Results 4. Overall Assessment. The project's objectives were only partially achieved. While substantial achievements were made and there is a striking difference in environmental management capacity in Mexico between 1998 and 1992, due in part to the project, development objectives were only partially met. This was mostly due to reasons beyond the control of the implementing agencies. Development objectives are discussed below. 5. Develop and increase GOM's capacity to carry out environmental protection and natural resource management functions. This development objective was partially achieved. The project increased INE's capacity for emission regulation, land use planning, and environmental impact and risk assessments substantially, and PROFEPA's capacity for enforcing environmental regulations. Moreover, the project also made a noticeable difference in strengthening Mexico's training capacity on environmental topics, with involvement of universities and research institutes. On the other hand, a National Reference Environmental Analytical Laboratory to be established with project support was cancelled due to poor initial implementation of the activity. Also, due to an institutional reorganization, a Water Pollution Subcomponent was cancelled immediately following project approval. 6. Strengthen the institutional and policy framework. This development objective was achieved. Air quality management programs for the largest cities, hazardous waste policies, operational environmental assessment and permitting systems, a revised set of environmental regulations and standards, and a framework for ecological zoning were developed and partially implemented and various policy and strategy studies were completed and indicators and information developed. 7. Transform the federal organization into a "second tier" organiization. This development objective was not achieved. Project design did not account for the fact that many of the necessary conditions for making the federal environment agency a "second tier" institution are beyond the reach of the environmental agencies themselves. In order to focus the environmental agency on "second tier" roles, such as policy development, regulations, information and monitoring, while maintaining the overall quality of public environmental management, a serious complementary process of decentralization and private sector and civil society involvement is needed. Environmental decentralization is particularly important, but only after the current administration came into power in 1995 and after the shock of the financial crisis had withered away did GOM start articulating a credible decentralization process and promoting an expanded role for NGOs. The project helped establish operational environmental agencies in the states of Tamaulipas, Jalisco, San Luis Potosi, Aguascalientes, and Queretaro. But the project failed in the allocation of resources for decentralized activities. Although agreements were signed at the highest levels between the two levels of government, i.e., federal and the state, when financial constraints appeared in Mexico, the obligations under these agreements were not kept. This caused problems for the state environmental agencies that were counting on federal support to enable them to assume expanded environmental management roles. The debate over appropriate roles for federal, state, and municipal environmental agencies, for NGOs, and of mechanisms to finance these roles is starting only now, as part of a nationwide, multisectoral process. 8. Conserve biodiversity in selected protected areas. This objective was only partially achieved. The project helped to create centers for rehabilitation of wildlife and protection of turtles and to implement public educational and awareness programs. In protected area management, the project contributed to a credible administrative presence in 10 key protected areas through management plans, emergency plans, local consultative mechanisms, and in its final years, with improvements in the way indigenous peoples participate in and benefit from project implementation. The project also supported the development of a strategy for the National System of Protected Areas (SINAP), currently being  iv implemented. On the other hand, performance varied considerably across protected areas, and consultative processes and community involvement fell short of what was desired, resulting in conflictive situations in some of them. Moreover, implementation was slow due to over-ambitious effectiveness conditions and lack of adequate counterpart funds before and after effectiveness, centralized budgeting and procurement vs. the remoteness of the areas and their needs imposed by nature's cycle, and the lack of adequate personnel in INE, the implementing agency for this component. To correct those problems and to ensure long term sustainability, using the original project design, a new financial mechanism was developed (a privately managed endowment fund) in 1996-97 and in 1997 a large portion of undisbursed GEF grant funds were transferred to an NGO to support protected areas management. 9. Events affecting project performance. The only partially satisfactory project performance was due to events that were beyond the control of the implementing agency. In 1992 the federal environmental agency responsible for environmental management, SEDUE, was reorganized, just a few days before the project was presented to Board. As a result, the first year of implementation was consumed on project restructuring. In 1994 Mexico was hit by a major financial and economic crisis. The strict fiscal discipline that followed reduced the available budget for the project and led to a US$ 26.3 million cancellation of the loan, and two one-year extensions of the closing date of the project. Moreover, in 1995 another institutional reorganization led to the creation of the Ministry of Environment, Natural Resources and Fisheries, and the elimination of SEDUE. This forced further adjustments to project implementation schedule and activities. 10. Bank's performance. Bank's performance was not fully satisfactory, mostly due to problems in project design and quality at entry. Project targets were too ambitious and failed to recognize the limited capacity of the implementing agencies and budgets available for the project. Not enough effort was put into the design of procurement arrangements appropriate for the special circumstances of remote protected areas so as to improve the disbursement performance of the GEF. The project financed too many incremental staff, posing risks for project sustainability and increasing the fiscal burden on the implementing agency. Finally, the risk of institutional reorganization was not recognized in project design and no specific measures to deal with it were included in the project. But the most critical event shaping project implementation, the 1995 financial crisis that led to substantial cuts in public expenditures, could hardly have been foreseen at appraisal. This was the second free-standing environmental project in the Latin American and Caribbean Region and one of the first GEF-supported projects. Lack of experience with this type of projects may have resulted in an overly optimistic design. 11. Despite the potential threat to continuity as a result of changes in Task Manager (five) throughout the life of the project, Bank's performance during implementation was satisfactory, given the special circumstances that occurred. Although project design did not foresee many of the events that later hindered project performance, the Bank was quick in responding to Borrower's requests and in adjusting the project to the new contexts through restructuring, partial cancellations and extensions. Bank supervision missions invested considerably in negotiations with the implementing agencies and SHCP to ensure adequate budgets for project implementation and to assist project staff in streamlining and accelerating procedures. The Bank's supervision effort, together with the commitment of implementing agencies, contributed to sustaining the gains in environmental management capacity in a context where GOM's priorities were temporarily diverted to other issues. 12. Performance of implementing agencies. In light of the special circumstances brought about by institutional reorganizations and financial and economic crisis, the performance of the implementing agencies, INE and PROFEPA, is also rated as satisfactory. They treated the project as a top priority and thus key components were able to ride the turmoil created by the 1994/1995 crisis and institutional reorganizations. Once the agencies had stabilized, after the last reorganization of early 1995, their performance improved significantly. Given these organizational problems and the financial constraints,  v the fact that development objectives were partially reached was a notable achievement and attests to the effort invested by implementing agencies under very difficult circumstances. 13. Key lessons learned. The successes and failures of the project yielded the following lessons: * Technical assistance projects are an important instrument in providing the underpinnings for a basic environmental management capacity. * Very clear, tangible and quantifiable development objectives and monitoring indicators need to be put in place in environmental institution projects to avoid disbursing the project in activities whose sustainability is questionable or which have little overall impact on the status of the environment. * Institutional reform is a very slow process, implying substantial changes in institutional cultures and values, in particular for new sectors such as the environment. The project duration needs to take this fact into account. * Given the long duration of environmental institutions development projects, it is likely that they will face substantial changes in the political, fiscal and economic context. This should be taken into consideration by building sufficient flexibility in project design to allow it to adapt to change. Environmental institution development projects need to be careful with the financing of incremental staff, since their sustainability is highly questionable once the project is finished. * hDecentralization activities will not be successful at the sectoral level, and in particular for the environment, unless they are part of a clear overall political commitment forcing change across all relevant sectors and are accompanied by appropriate fiscal decentralization mechanisms. * For the development of environmental "second tier" instiitutions, a much larger, active and direct role needs to be given to the state and municipal governments, NGOs, and the private and academic sectors. * In the specific case of Mexico, once project financing has been negotiated with Credito Publico of SHCP, an effective mechanism to commit the "Egreso" part of SHCP to the agreed budgets is needed. In this respect, it is important to involve Egreso in project preparation and negotiation since it is the part of Hacienda responsible for assigning project budgets. * The specific way through which Bank's projects are financed in Mexico4 and the sophistication of its environmental institutions and experts call for a different lending approach. It is likely that much more could be achieved through a more "programmatic" approach where the loan would finance part or all of the environmental agency's program through the assigned national budget, or through adjustment type of lending tied to and disbursed against the implementation of a clear long-temi strategy and performance indicators. * In Mexico, as in many other countries, protected areas have often been created on community and private lands with little consultation or respect for the rights of local communities. While this may have been understandable given the urgency of biodiversity protection in light of the threats, securing the trust of communities, transferring some management responsibilities on their own lands, and putting in place 4Implementing agencies in Mexico see very little financial additionality from Bank's projects as they would receive the same budget from SHCP independently of the presence of external financing. The most important incentive for requesting Bank's support is the technical assistance associated with Bank supervision and the likelihood that Bank intervention will provide greater continuity and sustainability.  vi adequate consultation, participation and compensation mechanisms, need to accompany any protected area program facing these problems, for conflicts to be manageable and for the program to be successful. * Timely and streamlined release of funds is of critical importance for protected area management. Under current institutional budgetary arrangements in Mexico, these tasks are likely better accomplished by NGOs or private sector, due to typical government cumbersome procedures. For the longer term, attention needs to be given to developing a timely and reliable financial public management system for protected areas through institutional reform.  I PART L. PROJECT IMPLEMENTATION ASSESSMENT A. Background 1. In 1990, having decided to act on its commitment to take steps to improve the environmental situation in the country, the Government of Mexico (GOM) opened discussions with the Bank to partially finance the GOM's Environmental Program. From the Bank's perspective, the Mexico Environmental Project (PAM) was part of a much larger program to support economic development, with special emphasis on the social sectors and environmental protection. More specifically, the project was designed to strengthen the institutional and policy framework in order to enable the Government of Mexico (GOM) to carry out environmental protection and natural resource management functions in a more efficient and decentralized manner. The Board approved the project (Loan 3461-ME) in 1992 and it is the second freestanding environmental project in the Latin American and Caribbean Region. 2. The Bank's loan (Loan 3461-ME) amounted to US$ 50 million of the US$ 88 million total. The loan was supposed to be disbursed during the period 1992-1995, with retroactive financing for some eligible activities from 1991. To implement the Protected Areas Program, one of the components of the project, an associated GEF grant (GET - 28604) of SDR 21.4 million, or approximately US$30 million, was approved at the same time. B. Development Objectives and Design 3. The project's development objectives were to (A) develop and increase GOM's capacity to carry out key environmental protection and natural resource management functions. (B) strengthen the institutional and policy framework. (C) transform the federal organization responsible for environmental management into a "second tier organization", i.e., an organization that would provide the legislative framework and methodologies for environmental management in Mexico, would coordinate and provide the quality assurance for the environmental activities carried out by other levels of government, other federal agencies, NGOs, and the private sector. (D) conserve biodiversity in selected protected natural areas. 4. To reach these objectives, the project included the following components: * Pollution Monitoring and Control: (A) Water Pollution; (B) Air Pollution; (C) Environmental Laboratories for INE and PROFEPA; and (D) Enforcement. * Minimization of Environmental Impacts of Investment Projects: (A) Ecological Zoning; (B)Minimization, and Impact and Risk Assessment; and (C) Strategic Planning. * Biodiversity Conservation: (A) Wildlife Protection and Conservation; (B) Protection of Sea Turtles; and (C) Management of Protected Areas * Modernization of Environmental Management: (A) Institutional Strengthening; (B)Decentralization Program; (C) Economic Instruments for the Environment; (D) National Training Program; and (E) Regulations and Standards. * Strategic studies including review of legal framework, environmental impacts on health, and future environmental strategy for Mexico. * Project Coordination 5. The respective subcomponents and activities, together with the results obtained under each one, are listed in Tables 7 and 8 in Annex 7 (a more detailed version in Spanish is in the project's electronic file).  2 6. Major changes during implementation. Three major events drastically affected project implementation: * In 1992, about the time the project was being approved by the Board, SEDUE - the Undersecretariat for Ecology and the main implementing agency for PAM, was reorganized into two independent "sister" organizations: The National Institute of Ecology (INE) and the Office of the Federal Attorney for the Protection of the Environment (PROFEPA), and both became part of the Ministry of Social Development - SEDESOL. * In the end of 1994, Mexico was hit by a major financial and economic crisis. As a consequence of this crisis, GOM reduced the fiscal budget and imposed strict fiscal discipline with dramatic consequences for its environment program. * At beginning of 1995 the new administration of President Zedillio created a new Ministry of the Environment, Natural Resources and Fisheries - SEMARNAP, and fNE and PROFEPA became part of it, along with the National Water Commission (CNA). 7. Changes in components due to institutional reorganizations. As a result of these events, subcomponents, activities, and targets had to be changed in response to evolving priorities resulting from these reorganizations. The major change to the project design was the cancellation of the whole subcomponent " .A - Water pollution control" due to the restructuring of the sector in Mexico in the middle of 1992, when the then Secretaria de Desarrollo Urbano y Ecologia (SEDUE) became the new Secretaria de Desarrollo Social (SEDESOL). The functions related to water quality and forest protection, previously in SEDUE, were transferred to the then Secretaria de Agricultura y Recursos Hidraulicos (SARH). The corresponding resources in this subcomponent were reallocated to other subcomponents needing additional financial support. Also, the split of SEDUE into two new agencies, [NE and PROFEPA, required that the resources be divided between these two agencies to ensure that the project's subcomponents and activities for which they were responsible received the respective financing. 8. Partial loan cancellation and extension of the closing date due to financial crisis. Budget constraints and strict fiscal discipline that began in fiscal year 1995 led the GOM to request in 1995 the cancellation of US$ 26.2 million of the loan, as well as two one-year extensions of the closing date of the project, to December 31, 1997. The estimated reduction in the total amount of the project, i.e., including the counterpart contribution, was US$ 32.8 million, or 37.2%. 9. Because of the 1994/1995 crisis and in the context of a new federal administration, starting in FY 1995, the implementing agencies faced not only low budgets, but also considerable delays in their release. Typically, for the fiscal years 1995 to 1997, 60% of the approved budget for activities included in this project arrived in the last four months of the fiscal year. This "bunching" not only prevented the complete utilization of the budget, but in some cases also negatively affected the quality of the final products. 10. Changes in the loan agreement. The first reorganization required a restructuring of the project, including a reallocation of resources between components. An amendment letter to the loan agreement was negotiated and approved in 1993. The partial loan cancellation as well as the two one-year extensions of the closing dates also required amendments to the legal agreement. 11. Changes in the GEF component (Biodiversity Conservation) due to implementation problems. The subcomponent C.3 "Conservation of Biodiversity", financed by the Global Environmental Facility - GEF through the GET Grant No. 28604. has also undergone major changes from the original design, eventually leading to the total restructuring of the component into a new project in 1997. The implementation of the grant, especially in its first three years, ran into serious institutional and budgeting problems resulting in implementation delays and shortfalls in meeting implementation targets  3 and development objectives. Although implementation improved somewhat towards the later years of the project, many of the chronic problems persisted, including slow disbursements to the reserves, difficulties in establishing operational and participatory Technical Advisory Committees (TACs) and completing management plans in some of the reserves, unclear guidelines for the involvement of indigenous communities in project areas and serious questions regarding project sustainability. 12. To solve these problems and at the same time to provide a degree of future funding sustainability, the GOM agreed to transfer (12 million SDR or approximately US$ 16 million), into a privately managed endowment fund. Currently, the income from the fund, supplemented by GOM's own resources, is used to fund the ten protected areas with more reserves to be added as additional donations for the endowment fund are received and the income from the fund increases. In addition, under the new project, much clearer procedures have been established on the operation of the TACs and administration of project funds at the reserve and central level . The restructured project put in place strong transparency and accountability rules, developed better monitoring indicators, and is much clearer on the institutional role and that of other stakeholders on project implementation. 13. Changes in the GEF Grant Agreement. The grant agreement for the Biodiversity Conservation component was amended several times. In April 1993, as part of the first restructuring due to government reorganization, SDR 3.5 million ($5 million) was cancelled to reflect the reduction in protected areas covered in the project (17 to 12). An amendment in April 1996 introduced a series of changes to the procurement procedures, such as allowing the contracting of NGOs for the implementation of an Annual Operating Plan for a particular reserve and allowing local shopping for small purchases, a better definition of the composition and functions of the Technical Advisory Committees established in each reserve receiving funds from the grant, and the requirement of Indigenous Peoples Development Plans for five reserves. Also included in the amendment was a clause that allowed for the study and eventual establishment of the endowment fund later included in the restructured follow-up project. The May 1997 amendment included the tennination of the first grant on December 31, 1997 and the cancellation of SDR 12.0 ($16.3 million) in favor of the Fondo Mexicano para la Conservaci6n de la Naturaleza, and the negotiation of a new grant agreement supporting the establishment of an endowment fund to provide funds to the ten reserves financed by the original grant under new procedures. 14. Project Risks. The Staff Appraisal Report (SAR) failed to identify key risks that unfortunately later have come true. The SAR identified only two important risks that the project faced, i.e., (i) decline in political commitment manifested in the budget constraints, exclusion of water sector, timid decentralization efforts, and (ii) questionable sustainability that materialized in a financing crunch after the Bank financing ended (currently being resolved). Other important risks not identified were: * The change in Administration and government reorganizations, with subsequent changes in priorities, personnel and internal procedures, and which consumed significant implementation effort from both the implementing agencies and the Bank. * The financial and economic crisis and the subsequent fiscal constraints, including the delays in the release of budgets to the implementing agencies, forced cancellation of substantial portions of the loan and led the project to fall short of its development objectives and several implementation targets. * The social tensions in some protected areas which complicated the implementation of consultative mechanisms and slowed community participation in reserve management. C. Achievement of Project Objectives 15. With all the political, social, economic and environmental changes that have taken place in Mexico since 1990, the development objectives not only remained valid until the end of the project, but they have continued to be valid several years later, perhaps with a different order of priorities. Unfortunately, while  4 the project met many of its implementation targets, it only partially met all its development objectives. Details of accomplishments and failures are discussed next are listed in Tables 7 and 8 in Annex 7. 16. Develop and increase GOM's capacity to carry out environmenital protection and natural resource management functions. This development objective was partially achieved. The project substantially increased PROFEPA's capacity for enforcing environmental regulations, and INE's capacity for monitoring air pollution, carrying out environmental impact and risk assessments, preparing environmental legislation and regulation, land use planning, and in establishing information systems. This support was particularly important during a very critical period in the development of Mexico's environmental institutions. A significant part of the institutional environmlental management capacity that SEMARNAP has today is directly related to the support received through PAM. 17. The project, with involvement of local universities, also made a noticeable difference in strengthening Mexico's training capacity on environmental topics, rendering a greater likelihood of sustainability. As a result, today there are significant human resources in Mexico capable of detecting, understanding the nature of, and proposing solutions to environmental problems in their respective jurisdictions. Because the training program included personnel from the three levels of government, as well as the private sector and NGOs, it also provided an opportunity for these groups to get to know each other in non-adversarial situations, which should only help when the real issues are addressed. To carry out the training for the project, the universities committed themselves to incorporate the environmental courses into their regular program, thus providing the continuity in the development of human resources after the project ends and increasing the chances for sustainability of this activity in the future. 18. On other activities, implementation targets were not achieved. One example was the cancellation in 1997 of the activities related to the strengthening of INE's Central Laboratory, located in Mexico City. Although very necessary, the progress in this important component was very slow. At the same time, INE decided to pursue the establishment of a Central Laboratory through bilateral cooperation with Japan, and in collaboration with the Universidad Aut6noma de Mexico. Some of the analytical capacity is likely to be put in place through this project. 19. More importantly, due to the 1992 institutional reorganization, a Water Pollution Subcomponent was cancelled immediately following project approval. The most critical environmental issues in Mexico are in the water sector and, due to cancellation, the project did not address any of its objectives in this sector. (Note: Parallel World Bank loans and CNA addressed some of the issues in the water sector.) 20. Strengthen the institutional and policy framework. This development objective was achieved. The current environmental legislation in Mexico, which compares favorably with that of the other OECD countries, is an example of the evolution of environmental management in the country to which the project contributed. Air quality management programs for the largest cities, hazardous waste policies, operational environmental assessment and permitting systems, a revised set of environmental regulations and standards, and a framework for ecological zoning were developed and various policy and strategy studies were completed and indicators and information developed. 21. Transform the federal organization into a "second tier" organization. This development objective was not achieved. Project design did not account for the fact thait many of the necessary conditions for making the federal environment agency a "second tier" institution are beyond the reach of the environmental agencies themselves. In order to focus the environmental agency on "second tier" roles, such as policy development, regulations, information and monitoring, while maintaining the overall quality of public environmental management, a serious complementary process of decentralization and private sector and civil society involvement is needed. Environment decentralization is particularly critical, but it was only after the current administration came into power in 1995 and after the shock of the  5 financial crisis had faded away that GOM started to articulate a credible decentralization process and to promote an expanded role for NGOs. 22. Project design was changed during implementation in an attempt to make it more consistent with the development objective. In the original project design, the decentralization subcomponent was limited to the financing of equipment for a state environmental analytical laboratory, training of staff, and one specific study. By 1994, the need for a more decentralized environmental management in Mexico had become more apparent. The subcomponent was refocused on a broader capacity-building for the state environmental agencies, including increased emphasis on staff training rather than equipping of laboratories. As a result, the project helped establish operational environmental agencies in the states of Tamaulipas, Jalisco, San Luis Potosi, Aguascalientes, and Queretaro. For the supply of analytical services, some of the states, e.g., San Luis Potosi and Queretaro, established strategic alliances with the respective state universities and provided some laboratory equipment in exchange for laboratory services. The Bank encouraged such partnerships as a way of ensuring the long term sustainability of the laboratory services, and since it is now much clearer that for an improved environmental management in the country, the state and municipal governments, NGOs, and the private and the academic sectors have to play a much larger, active and direct role. 23. Unfortunately, the project failed in the allocation of resources for decentralized activities. Although agreements were signed at the highest levels between the two levels of government, i.e., federal and the state, in Mexico, when financial constraints appeared, the obligations under these agreements were not kept. This caused problems for the state environmental agencies that were counting on federal support to enable them to assume expanded environmental management roles. The debate surrounding appropriate roles for federal, state and municipal environmental agencies, and for NGOs, and of mechanisms to finance these roles has started only recently as part of a nationwide, multisectoral process. Future environmental projects in Mexico will have to give much higher priority to decentralization, and PAM has provided some invaluable insights on how to go about it. 24. Conserve biodiversity in selected protected areas. This objective was only partially achieved. The project helped create centers for rehabilitation of wildlife and protection of turtles, and helped implement public educational and awareness programs. In protected area management the project contributed a credible administrative presence in 10 key protected areas, in management plans, emergency plans, local consultative mechanisms, and in its final years, improvement in the way indigenous peoples benefit from project implementation. The project was also influential in the establishment of sector policies related to the natural protected areas, including the participation of private and academic sectors, NGOs, local communities and the indigenous people in activities related to protected areas management and conservation. In this context, the project supported the development of a strategy for the National System of Protected Areas (SINAP), currently being implemented. 25. On the other hand, performance varied considerably across protected areas. While some, such as Sian-Khan, Ria Lagartos and Isla Contoy, achieved considerable progress, others, such as Montes Azules, faced serious implementation problems. In the latter, the project was particularly unsuccessful in establishing credible consultative and participatory processes and in defacto delegating to communities some of the management responsibilities over their own lands. Indigenous Peoples Development Plans were only prepared for 1997 and subsequent years, as a result of the April 1996 amendments and 1997 project restructuring. Because the project required a management plan and a Technical Advisory Committee (TAC) before it would finance more than a minimum set of activities, as part of an "emergency" (interim) annual plan, many activities could not be undertaken. Both the preparation of the management plans and the assembly of an effective TAC proved to be, in some areas, very complex tasks. For example: (i) The Islas del Golfo reserve, extending over four states, because of its large and diverse ecology, poses very difficult scientific and logistic problems; an agreement on the methodology of developing a management plan was reached only in 1996, but since then, the Decree establishing the  6 reserve is being questioned due to the complex management problems it generated and the plan has been postponed; (ii) Communities in the Mariposa Monarca Reserve consistently requested changes in the reserve Decree and eventually secured GOM's agreement to review the Decree, thus rendering premature the elaboration of the management plan, which has been delayed until legal changes take place; (iii) In Montes Azules, although a management plan was elaborated and approved, the consultative process that led to it had serious limitations and is now being redone; (iv) In the same reserve, in part due to the social conflicts in the region, a TAC was only created in 1997; similar situations occurred in Mariposa Monarca, and in Manantldn, which covers areas in two states. 26. Implementation was slow due also to over-ambitious effectiveness conditions and lack of adequate counterpart funds. Effectiveness implementation was plagued by problems arising from centralized budgeting and procurement which were not appropriate to the remoteness of the areas and their needs imposed by nature's cycle. The difference in nature of the operational role of the Coordinating Unit for Natural Protected Areas (UCANP) and the regulatory role of the implementing agency for the component, the National Ecology Institute (INE) as a whole, combined with INE's lack of adequate personnel made matters worse. To improve performance, in 1996 procedures were streamlined, and in 1997 the financial mechanism was completely redesigned under a new project to finance protected area activities. Many of the obstacles to project implementation seem to have been resolved in the new GEF-supported project, although further experience must be allowed to accumulate in order to make an accurate assessment of the outcome. 27. Special objectives. With the exception of the Biodiversity Conservation component, PAM's activities were not intended to and did not have a direct impact on issues such as poverty alleviation, gender, indigenous people or vulnerable groups. The Biodiversity Conservation component, partially financed by the GEF grant, dealt in a less than satisfactory way with some of the social and indigenous people issues in the protected areas where such populations lived. Nevertheless, project implementation in this aspect improved substantially, and most problems are being addressed and resolved in the new, restructured, protected area project. For example, as part of the normal implementation procedures, whenever possible, indigenous and local people were contracted to carry out various activities included in the Annual Operating Plans or Emergency Plans for the respective reserves. Although not a requirement of the original project, the preparation of Indigenous People Development Plans (IPDPs) for each of the reserves where such a population is included in the project, became a requirement after June 1996. The progress made since 1991, in recognition of the need to consult with and obtain the direct input of local groups and have them participate in the management of the protected areas, is very significant and is an achievement of the project, although much more remains to be done for a true involvement of communities in management of the lands on which they live, consistent with biodiversity conservation objectives. 28. Environmental objectives. PAM was a technical assistance project whose main objectives were to assist the GOM in strengthening environmental management in the country. The project did not include any objectives directly addressing the global environmental issues of climate change and the depletion of the ozone layer. However, sections of the training programs and parts of the information systems supported by the project included these issues, thus assisting in the overall GOM's effort to address them. 29. Private sector development. Private sector involvement in environmental management in Mexico was only partially achieved. While this was an important project objective and a necessary condition for converting the federal environmental agencies into "second tier" institutions, it was lost as a priority in light of the substantial changes undergone by the project. Opportunities for private sector involvement abounded, for example, in operating analytical laboratory services or monitoring environmental quality, in self-reporting of compliance with environmental regulations and in introducing  7 environmental management systems in industrial plants. Some of the reasons that explain the failure to promote more private sector involvement are the complexity of the issues and the cultural changes that the objective implied, but which were either not recognized or too difficult to tackle during the project preparation phase. In 1998, when this project ended, it can safely be said that the governmental authorities have a far greater appreciation than six years before of the importance of having the direct and active participation of the private sector in environmental management in the country. Today, there is also a far wider knowledge of some of the mechanisms and incentives needed for this to happen. The new General Law for Ecological Equilibrium and Environmental Protection of 1996, as well as some of the programs implemented, either as part of this project or as part of the regular SEMARNAP work, reflect this greater understanding of the role of the private sector in environmental protection and conservation in Mexico. D. Major Factors Affecting the Project Factors not subject to governmental control 30. The financial crisis that hit Mexico at the end of 1994, and which led to a period of serious fiscal constraints and negative growth, was beyond SEMARNAP control. This crisis led to a change of priorities on the part of the Mexican government, resulting in limited budgets for the environmental sector which affected project implementation. Factors subject to government control 31. Macroeconomic conditions. As a result of the financial crisis, GOM's priorities understandably and correctly shifted to ensuring in the short run macroeconomic stability with delays in the implementation of its long tern development agenda in the environment and other sectors. In part as a result of this crisis, the annual budgets allocated to the project were much lower in US$ than those anticipated when the project was approved. The problems this caused were compounded by the significant delays in the release of the approved resources to the line agencies. The net effect was a further reduction of the resources made available for the implementation of the project's activities. As a result, and in spite of the partial cancellation of more than 50% of the loan and the two one-year extensions granted, the loan had an unspent balance of approximately US$ 4 million. 32. Counterpart funds. In Mexico, all the disbursements eligible for reimbursement from a loan are part of the regular budget of the implementing agency. Because of the apparent "non additionality" policy5 followed by SHCP in relation to externally-funded projects, the expenditures assigned to a loan are entirely mainstreamed in the line agency's budget and as a result are also affected by the lower than expected budget ceilings and by the late release of approved funds. 33. The reorganizations of 1992 and 1995, although done to strengthen the environmental management in the country, caused significant delays in effectiveness and implementation because of the realignment of major responsibilities between agencies and the subsequent changes in priorities, work plans, procedures, and staff. Even if the general objectives were not affected, the organizational changes 5 According to established mechanisms, Bank loans and GEF grants to finance projects are channeled to the executing agencies through the national budget system. Because of the inertia embedded in the national budget allocation process, line agencies receive about the same total budget from one year to the other. This implies that funds needed for the implementation of Bank's financed projects have to come from the existing budget or from internal reallocations within the implementing agency. In view of this, there may be little incentive to host Bank's projects if Bank's requirements (procurements, disbursements, audits) appear to be different from normal national procedures.  8 required extensive reprogramming of specific activities and reassignment of staff, thus slowing down the execution of the project's activities. This implied from the start of project life a need to extend the project period. 34. Administrative procedures. Especially in the early years, the implementation of PAM was seriously affected by the lack of compatibility between some of the procedures and criteria established by the Bank, and those of the GOM. This was true even in procurement where standard bidding documents were agreed to by the Bank and the Mexican authorities. The clarification of the points of incompatibility and reaching agreement on solutions consumed an important part of the efforts of the project's Coordination Unit and of operational personnel of the implementing agencies as well as of the Bank. Some of these difficulties were especially noticeable in the project components related to the protected areas and biodiversity conservation component. By its nature, this component had a large proportion of small expenditures incurred in remote areas of the country where the regular procurement procedures cannot always be applied. To address these difficulties, new procedures allowing for local, including community, procurement were adopted as part of the 1996 amendment to the grant GET-28604. Factors subject to implementing agencies' control 35. Management effectiveness. The project supported a wide diversity of activities and included the participation of many different units and people within the implementing agencies. All of them were participating for the first time in a Bank-financed project and this meant that they had to go through a learning process, lengthened because of the changes in personnel and internal regulations resulting from the reorganizations described in the previous paragraphs. In retrospect, a strong focus on training of staff of implementing agencies on Bank procedures should have been the key activity during the first year of the project and should have been included in project design. 36. Cost changes were not a major factor in this project despite the devaluation of the Mexican peso following the 1995 crisis. The implementing agencies adjusted well to the new value of the peso and prices, in many cases paying less in dollar terms after the devaluation than before, thus compensating to some extent the smaller budgets available to them. E. Project Sustainability 37. The project is likely to be sustainable, thanks primarily to the various changes and restructuring that took place. These brought the project in line with the real implementation and fiscal capacity of the implementing agency. Several factors were critical in making sustainability more likely: * Project size was reduced and several activities cancelled. * Most incremental staff is in the process of being absorbed by the implementing agencies, although this process substantially stretched their budgets. This includes the core management teams in the ten protected areas covered by the biodiversity component. D The budgets of environmental agencies, although lower thian necessary, are higher than before this project. They are likely to remain at about current levels, despite the completion of the project. * Activities piloted by PAM in both INE and PROFEPA continue as part of the regular work program of these two agencies, including: (a) the National System for Air Quality Information; (b) PROFEPA's regional laboratories; (c) land use planning; (d) INE's information system; (e) environmental impact assessment; (f) a permit granting system (g) development of economic instruments of environmental management; (h) wildlife rehabilitation centers that will be converted to centers for integral conservation with an enlarged scope of activities; (i) sea turtle protection activities; and () the National System of Protected Areas.  9 * The Project Coordinating Unit was converted to an External Credit Unit that, due to its experience, will continue coordinating Bank-financed projects as well as projects receiving financing from other external sources. * Several of the activities carried out through universities, NGOs and the private sector helped generate an informed public opinion, likely to maintain the pressure on GOM for effective environmental management. * Institutional stakeholders for environment management were established through the state level activities, and these are likely to maintain their pressure on federal agencies for support for state level environmental activities. * More effective involvement of communities in protected area management is likely to help sustain management activities. * Training capacity was created at universities, which assumed the commitment of continuing to provide training services beyond the project life. * The undisbursed amount of the GEF grant was used to finance an endowment fund for protected areas. Even with capital invasions of this fund, it is expected that it will last 25 years, de facto ensuring a sustained flow of financial resources for the Mexico protected area system. Fund-raising to expand the capital base of the endowment is also a critical activity included in the new restructured GEF grant (TF 28678). * Many of the activities piloted by the project were included in the New Ecology Law, making reversals difficult. * Some of the project objectives and activities were retaken in the Northern Border Environment Project, currently under implementation, and are likely to be included again in a follow-up operation to strengthen decentralization of environmental management activities. F. Bank Performance 38. Bank performance was not fully satisfactory, due primarily to issues of project design and quality at entry. At the time when this project was prepared, the Bank and GOM's staff experience with stand- alone technical assistance projects for environmental management was very limited, but enthusiasm was great, in part due to the process around the global environmental conference in Rio in 1992. While the project design incorporated several elements that were innovative at the time, such as the concept of a "second tier organization", decentralization, and some first steps toward the introduction of economic instruments in environmental management, development objectives and implementation targets were over ambitious. Up to that moment, environmental management in Mexico had been highly centralized and based on "command and control" mechanisms, and there was insufficient appreciation for the fundamental cultural changes that such a process required. 39. The Bank's appraisal of the risks and key variables also fell short of desirable. While issues of political commitment were identified, the risks of successive administrative reorganizations were not foreseen, nor were the social tensions affecting protected area management. Insufficient attention was given to training of project staff in Bank procedures and to promoting local participation, particularly of indigenous communities. The Bank did not and could not have anticipated the radical changes that have taken place in Mexico in the aftermath of the 1994 financial crisis. As a result of the crisis, macroeconomic stability became the overriding concern for GOM and term agendas such as environmental management were temporarily relegated to a lower priority. 40. During implementation, especially in the later years of the project, the Bank was effective in responding to issues arising from project design and from the unexpected course of events. The Bank was quick in agreeing with the Mexican authorities on the necessary changes to the project's activities to cope with the evolving context. However, high staff rotation among Bank's task managers has played against  10 institutional memory and continuity. There were five task managers in seven years and the skills mix did not cover well the biodiversity component. 41. In the early years of the project, the requirement for prior review by the Bank of the procurement activities caused significant backlogs and delays. In the later years, as the Project Coordination Unit had built a "pipeline' of procurement actions already reviewed by the Bank, tlhe prior review by the Bank ceased to be a problem. Also in the first few years of the project, for the Mexican institutions working for the first time in Bank-financed projects, as most of them were in this project, there was an inadequate realization of the significant complexity and time required for using the assigned resources due to the additional steps and participants in the decision making process. 42. Bank supervision was not fully satisfactory, particularly with regard to the biodiversity component. Not only were field visits to protected areas given lower priority at times, but the skills mix of supervision rarely included the expertise, such as in protected area management, to adequately supervise the component. Overall 18 supervision missions were carried out. G. Borrower Performance 43. Under the circumstances that existed during the implementation period, the performnance of the government and the implementing agencies in Mexico was satisfactory. The project at its inception had high-level political support in Mexico as well as a high priority amongst the other programs that addressed environmental problems in the country. It must also be remembered that the period 1990 - 1992 was a very active one for the environment because of preparation work for the United Nations Conference for Environment and Development that took place in June 1992 in Rio de Janeiro (Brazil). Mexico was an active participant in both the preparation work for the conference and in the conference itself. Later on, in 1993 - 1994 period, the negotiations of the North American Free Trade Agreement (NAFTA) kept the environment issue high on the GOM's agenda. 44. Similar considerations extend to the GEF-financed biodiversity activities. Here the lack of experience with biodiversity conservation activities on the part of both the Bank and the recipient's staff and given the intricacies of the Mexican budgeting system, a series of difficulties in the operational aspects of the reserves came about for at least the first three years of the project. SEMARNAP showed its commitment to the project objectives when it proposed restructuring of the project in order to deal with the implementation problems that were arising. The changes introduced in the new project are fundamental and extremely innovative; for example, the willingness to create an endowment fund and to transfer management responsibility over it to an NGO, and in seeking more community and indigenous peoples involvement in protected area management. 45. Towards the later years of the project, the staff of the implementing agencies working in project activities became truly committed, very often under adverse circumstances due to lack of adequate financing, working conditions not exactly conducive to productivity, and job insecurity due to reorganizations and delays in contracting. The positive contributions of the Project Coordination Unit located in [NE and the one of the coordinator in PROFEPA should be singled out. The considerable administrative skills of the PCU staff and the PROFEPA coordinator, backed up by a good information system, were key in ensuring a good overall performance in coordinating and following up on the project's implementation in INE. H. Audits 46. PAM was subject to regular annual audits carried out under the supervision of SECODAM, the Department of Control and Administrative Development of the Govemment of Mexico, with which the Bank has agreed on a standard framework of auditing arrangements. The audits showed an adequate  11 compliance with the administrative, accounting and financial requirements from the start of the credit to December 31, 1997. The audits covered organizational aspects; human, financial and material resources; and the recording and information systems. The audits found the systems of internal procedures and controls adequate, and suggested some corrective measures. For example, the audit report for 1994 commented on the delays in project's expenditures, and on the specific case of lack of a bond in one of the contracts. In the subsequent audit, for CY 1995, the auditor noted the restrictions faced by the project resulting from the fiscal restrictions of the GOM. 47. The grant GET - 28604 was audited separately from the loan 3461 -ME only starting with the CY 1995. The two audit reports covering the periods of January 1 - December 31, for 1995 and 1996 gave a satisfactory assessment, but also noted some inadequacies in the control procedures, the low rate of expenditure (CY 1995), and some inadequacies in the acquisition of goods for the reserve and the lack of insurance for a stolen vehicle (CY 1996). Subsequent audit reports noted that the control procedures had been corrected. The audit report covering the period January 1997 to July 31, 1998 received an unqualified opinion. I. Assessment of Outcome 48. The overall evaluation of the results obtained by the project in relation to its development objectives leads to the conclusion that the development objectives were only partially met. Many of the "physical" objectives of the project were achieved, in particular those related to increasing public environment capacity for environmental management and the creation of protected areas personnel and a "permanent" protected areas system, monitoring and enforcement. However, the achievement of other development objectives, such as decentralization and private sector and NGO participation, and reliable transparent mechanisms at the local level to provide an effective means for local community participation in protected area management, were only partially achieved. Nevertheless, the project went a long way in creating a lasting impact on Mexico's approach to environmental management. J. Future Operations 49. Some of the programs initiated as part of PAM, notably the decentralization of environmental management to the state and municipal levels, will also continue, hopefully at an accelerated rate, through the new Bank-financed project of "Environmental Management and Decentralization" - (PROMAD) project, currently under preparation. The proposed project will continue to support specific programs of the federal environmental agencies, especially in response to the requirements of the new Ecology Law of 1997. However, most of its resources will be allocated to decentralization activities. In order to overcome the limited budget ceiling of SEMARNAP, the preparation team is now looking at potential mechanisms which would ensure that the resources made available through the Bank's loan reach the state and municipal governments in a more direct manner, as well as mechanisms for generating fiscal revenues from the environmental sector to permit a related increase in environmental budgets. Also, the Fund for Natural Protected Areas, effective as of January 1, 1998, is a direct follow up of GEF grant 28604. The Government and the Bank have initiated a dialogue regarding a new protected area project, modeled on the success of the Fund for Natural Protected Areas, to extend support to other protected areas with biodiversity of global importance. K. Key Lessons Learned 50. Project design and execution. Project design was overly optimistic and failed to adequately assess the institutional and fiscal capacity of the implementing agencies. Some of the key lessons related to project design are:  12 * Technical assistance projects are an important instrument in providing the underpinnings for a basic environmental management capacity. * Very clear, tangible and quantifiable development objectives and monitoring indicators need to be put in place in environmental institution projects to avoid disbursing the project in activities with little overall impact on the status of the environment. * Institutional reform is a very slow process, implying substantial changes in institutional cultures and values, in particular for new sectors such as the environment, and the project duration needs to take this fact into account. * Given the long duration of environmental institutions development projects, it is likely that they will face substantial changes in the political, fiscal and economic context; this needs to be taken into consideration by building sufficient flexibility in project design to allow it to adapt to change. * Environmental institution development projects need to be careful with the financing of incremental staff since their sustainability is highly questlionable once the project is finished. * For the development of environmental "second tier" institutions, a much larger, active and direct role needs to be given to the state and municipal governments, NGOs, and the private and the academic sectors. * Decentralization activities will not be successful at the sectoral level, and in particular for the environment, unless they are part of a clear overall political commitment forcing change across all relevant sectors and are accompanied by appropriate fiscal decentralization mechanisms * In Mexico, as in many other countries, protected areas were in some cases created on community and private lands with little consultation or respect for the rights of land owners and local inhabitants. While this may have been understandable given the urgency of biodiversity protection in light of the threats, securing the trust of communities, transferring to them some management responsibilities on their own lands, and putting in place adequate compensatory mechanisms, need to accompany any protected area program facing these problems, for conflicts to be manageable and for long term sustainability. 51. Project execution, on the other hand, was fairly successful in quickly responding and adapting to a rapidly evolving context shaped by external shocks beyond the project control. A key lesson in project execution is: * Project design and execution need to be sufficiently flexible to accommodate changes in priorities resulting from changes in the social, economic and political circumstances surrounding the project. 52. Financial resources. Notwithstanding the optimism and interest of Governments in protecting the environment that existed in the period preceding the 1992 World Summit in Rio de Janeiro, when this project was being prepared, the project was over-dimensioned incorrectly assessing GOM's capacity for allocating budgets for environmental management. Some key lessons for future projects in Mexico are: * In the specific case of Mexico, once project financing has been negotiated with Credito Publico of SHCP, an effective mechanism to commit the "Egreso" part of SHCP to the agreed budgets is needed. In this respect it is important to involve Egreso in project preparation and negotiation since it is the part of Hacienda responsible for project budgets.  13 * The specific way through which Bank's projects are financed in Mexico6 and the sophistication of its environmental institutions and experts call for a different lending approach. It is likely that much more could be achieved through a more "programmatic" approach where the loan would finance part or all of the environmental agency's program through the assigned national budget, or through adjustment type of lending tied to and disbursed against the implementation of a clear long-term strategy and performance indicators. * Timely and streamlined release of funds as well as close cooperation between government agencies, NGOs, and the private sector is critical for protected area management. 53. Administrative procedures. A detailed analysis of the administrative procedures, e.g., budgeting, budget release, contracting and hiring of personnel, that come into play in the implementation of a project is absolutely necessary. This should be carried out during project preparation so that any potential obstacles can be discussed, negotiated and eventually removed before the project becomes effective. This could then be consolidated into an "Operations Manual" describing explicitly the set of procedures to be used in projects implementation, including eligible expenses and procurement, agreed to by the Bank and the Government. This lesson was applied in the restructured, new GEF protected areas project. One limitation of this process demonstrated in this project is that not all implementation problems can be anticipated, especially when the teams on both sides are new to the exercise. This aspect can be mitigated by using, whenever possible, organizational structures already in place, and persons with experience and that have performed well under similar circumstances and assuring continuity in task manager responsibilities. Finally it is important to avoid frequent changes of task manager. 54. Procurement procedures. Similar to the previous point, it is essential that the details of the procurement procedures that will be used during project implementation be put on the table, discussed, and agreed to, before the project starts. Although legally internationally-negotiated procedures prevail, in practice Mexican staff at the working level are--or feel--bound by Mexican procedures only. In spite of significant advancement in this area, some differences between the Bank and the GOM procedures still remain. Another important lesson for protected area components is that these require flexibility in the procurement procedures for small amounts, since most of them are carried out in very remote areas of the country. 6Implementing agencies in Mexico see very little financial additionality from Bank's projects as they would receive the same budget from SHCP independently of the presence of external financing. The most important incentive for requesting Bank's support is the technical assistance associated with Bank supervision and the likelihood that Bank intervention will provide greater continuity and sustainability.  14 PART II ANNEXES A. STATISTICAL TABLES I . Summary of Assessments 2. Related Bank Loans 3. Project Timetable 4. Cumulative Disbursements - Loan 3461-ME 5. Cumulative Disbursements - Grant GET -28604 6. Project Disbursement by Component and Subcomponent 7. Results by Component and Subcomponent 8. Studies Completed during Project's Implementation 9. Project costs and financing % 10. Status of Legal Covenants - Loan 3461 -ME 11. Status of Legal Covenants - Grant GET 28604 12. Staff Inputs - Loan 3461 -ME 13. Staff Inputs - Grant GET 28604 B. BORROWER'S CONTRIBUTION  15 MEXICO ENVIRONMENTAL PROGRAM (Loan 3461-ME and Grant GET 28604) Table 1. - Summary of Assessments A.- Achievement of Objectives xxx Macroeconomic Policies xxx Sector Policies xxx Financial Objectives xxx Institutional Development xxx Physical Objectives xxx Poverty Reduction xxx Gender Issues xxx Indigenous concerns xxx Environmental Objectives xxx Public Sector Management Xxx Private Sector Development xxx B.- Project Sustainabiliry xx_ Coe Bank Performance xxx Identification xxx Preparation Assistance xxx Appraisal xxx Supervision xxx xxx' D.- Borrower Performance xxx. Preparation xxx Implementation xxx xxxa Covenant Compliance xxx xxxi E.- Assessment of Outcome xxx 7 Loan 3461 -ME 8 Grant GET 28604 9 For availability of funds to the implementing agencies the assessment is "deficient" for both Implementation and Covenant Compliance  16 MEXICO ENVIRONMENTAL PROJECT (Loan 3461-ME and Grant GET 28604) Table 2. - Related Bank Loans and Grants -OCr~d~ :e l; , : - jio - . ....... Status Preceding Operations Mexico Pollution Control Facilitate industrial pollution 1982, for US$ 60 million Closed, 1988 Project (Loan 2154-ME) control investments eq.1