Mexico - Forestry Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 14625 IMPLEMENTATION COMPLETION REPORT MEXICO FORESTRY DEVELOPMENT PROJECT (LOAN 3115-ME) JUNE 2, 1995 Natural Resources and Rural Poverty Operations Division Country Department II Latin America and the Caribbean Region 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.  CURRENCY EQUIVALENTS At appraisal (September 1988) US$1 = Mex$2519 (Mexican Peso) Current (December 1994) US$1 = N$3. 10 (New Peso N$) US$322,581 = N$1 million FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES Metric System  FOR OFFICIAL USE ONLY ABBREVIATIONS AND ACRONYMS EBS Environmental Base Study FIRA Trust Fund for Agriculture Fondo de Garantfa y Fomento para la Agricultura, Ganaderfa y Avicultura GOM Government of Mexico 1DB Inter-American Development Bank IFC International Finance Corporation INI National Indigenous Institute Instituto Nacional Indigenista INE National Ecology Institute Instituto Nacional de Ecologia NAFIN Nacional Financiera NGO Non-governmental Organization O.D. Operational Directive SARH Ministry of Agriculture and Water Resources Secretarfa de Agricultura y Recursos Hidraulicos SCT Ministry of Communications and Transportation Secretarfa de Comunicaciones y Transporte SHICP Ministry of Finance and Public Credit Secretarfa de Hacienda y Credito Pdblico SEDESOL Ministry of Social Development Secretarfa de Desarrollo Social SEDUE Ministry of Urban Development and the Environment Secretarfa de Desarrollo Urbano y Ecologfa TOR Terms of Reference UCODEFO Forest Development and Conservation Unit Unidad de Conservacion y Desarrollo Forestal 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.   IMPLEMENTATION COMTLETION REPORT MEXICO FORESTRY DEVELOPMENT PROJECT Loan 3115-ME TABLE OF CONTENTS Page No. Preface . ............................................. i Evaluation Summary ...................................... ii PROJECT IMPLEMENTATION ASSESSMENT ................... 1 Background ...................................... 1 Project Objectives .................................. 2 Achievement of Project Objectives ....................... 3 Implementation Record and Major Factors Affecting the Project ... .. 4 Project Sustainability ................................ 7 Bank Performance .................................. 7 Borrower Performance ............................... 8 Assessment of Outcome ............................... 8 Future Operations .................................. 9 Key Lessons Learned ................................ 10 STATISTICAL ANNEXES ................................. 12 APPENDIX . ......................................... 33   IMPLEMENTATION COMPLETION REPORT MEXICO FORESTRY DEVELOPMENT PROJECT Loan 3115-ME Preface This is the Implementation Completion Report (ICR) for the Mexico Forestry Development Project (Loan 3115-ME) in the amount of US$45.5 million equivalent, which was approved on August 29, 1989 and made effective on June 5, 1990. The Loan was closed on July 26, 1994, compared to the original target closing date of June 30, 1996. In all, $16.3 million was disbursed against the Loan; $26.2 million was cancelled in September 1994, and the balance of $3.0 million cancelled when the final disbursement took place on October 7, 1994. This Implementation Completion Report was prepared by Augusta Molnar and Mary Stanier of the Natural Resources and Rural Poverty Operations Division of Country Department II of the Latin America and Caribbean Regional Office and reviewed by Michael Baxter, Division Chief, and Theodore Nkodo, Projects Adviser. Preparation of this ICR has been based on the findings of field visits to the project area as part of the Mexico Resource Conservation and Forestry Review by World Bank staff and consultants, interviews with government officials and other Bank staff, and the review of material in the project file. The Borrower has contributed to the preparation of the ICR by commenting on the draft ICR, and by preparing its own evaluation of the project which is included as an appendix to the ICR.   EVALUATION SUMMARY MEXICO FORESTRY DEVELOPMENT PROJECT Loan 3115-ME Introduction and Project Objectives (i) The Forestry Development Project was the first Bank project in the forestry sector in Mexico. It aimed to complement recent forest and environmental legislation and policy initiatives by: (a) improving environmental protection by introducing rational forest management practices, rehabilitating the forestry road network, monitoring forestry activities, strengthening parks and reserves administration, and financing research on and protection of endangered species; (b) increasing the productivity and efficiency of forestry activities in the states of Durango and Chihuahua by financing equipment and technical assistance to improve forest management, harvesting, and industrial technology and to permit the vertical and horizontal integration of forest producers' operations; (c) improving the quality of life by increasing rural and urban employment and family income, especially in the traditionally impoverished Amerindian communities; and (d) strengthening the management and coordination capabilities of federal and state forestry and conservation institutions. These objectives were and remain important to Mexico's long term goals for environmentally sustainable development. Implementation Experience and Results (ii) The project outcome was unsatisfactory - only a few of the planned activities were implemented, total project expenditures are estimated to be US$32 million, mostly under the credit component, compared to US$91 million estimated at appraisal, and the Bank disbursed US$16.3 million of the US$45.5 million Loan. This occurred because of a number of setbacks: (a) a project design that did not reflect, inter alia, significant post-appraisal institutional changes in the Government of Mexico (GOM) and Bank environmental requirements, (b) waning government support, and (c) public criticism. (iii) Beginning in late 1989, the project became the focus of increasing criticism by NGOs, concerned that timber harvesting they associated with the project would negatively affect biodiversity. Eventually the project became a vehicle for more generalized criticism by environmental and indigenous rights NGOs concerned with what they perceived to be the Bank's and the GOM's inadequate policies on the environment and indigenous affairs. (iv) While the Bank made the execution of environmental baseline studies and monitoring a loan condition, it had no clear guidelines for such activities. The project was designed, negotiated, and approved prior to the issuance of Operational Directive (O.D.) 4.00 on Environmental Policies (issued in October 1989) and O.D. 4.20 on indigenous peoples (issued in September 1991), and prepared prior to the establishment of procedures for complying with those guidelines. Hence, the Bank was not in a strong position to answer NGO criticisms. Bank staff did, however, arrange meetings with these groups which provided a forum for information and discussion.  iii (v) Given the project's slow start, problems with the (revised) institutional arrangements of the implementing agencies, environmental issues and the mounting public criticism of the operation, the government appeared to become reluctant to be involved in such a polemical issue and the project gradually became less of a priority. This was compounded by the budget constraints and changing agriculture priorities during 1992 and 1993, which caused the GOM to be reluctant to allocate resources to a project perceived as problematic. (vi) The project was prepared under the 1982-88 government administration and negotiated once the subsequent 1988-94 administration took office. By the time implementation was to start, major restructuring of implementing agencies had been carried out. Two factors apparently explain why the Bank did not reappraise project design in light of these institutional changes. First, the Bank did not fully appreciate the risk to project execution of these institutional changes. Second, the Bank wanted to negotiate the project as soon as possible with the new administration so as not to lose any momentum and to ensure the project stayed as a government priority. Yet these changes did have a significant effect on implementation as they altered the way funds could flow to implementing agencies, particularly at the state level, which resulted in delays caused by conflicting priorities among and within ministries and additional bureaucratic procedures. (vii) Most significantly for the pace of project implementation, these institutional changes resulted in slowing down the execution of environmental studies, upon which most other project activities were dependent. In fact, in 1991 there was an informal suspension of the loan owing to the incomplete or unsatisfactory nature of these studies. Although this suspension was eventually lifted following acceptable completion and approval of additional environmental baseline studies in October 1993, by then GOM support for the project was irretrievably lost and the GOM requested that the balance of the Loan be cancelled. (viii) With hindsight, it could be argued that had thestate governments played a more central role in project design and implementation, they could have acted as lobbyists to ensure adequate and timely flow of funds and they could have taken concrete actions to effect successful completion of activities including the environmental baseline study, thereby mitigating the effects of institutional changes. (ix) In light of the environmental issues and consequent suspension of credit and road rehabilitation activities, the project did not achieve its stated objectives. Nonetheless, some positive activities were carried out. Six road segments were rehabilitated, reducing the cost of timber transport for nearby ejidos and smallholder forest owners served by those roads. Numerous forest management plans were revised. Three hundred twenty-two subloans were made to ejidos and smallholders (representing 58,645 beneficiaries) for upgrading their transport, extraction, and processing equipment and for some small-scale industries, although unfortunately these were not linked in most cases to road rehabilitation, which could have provided an important reduction in the cost of production. Training courses were given to forest producers and forest technicians from the technical field offices (UCODEFOs) for preparing forest management plans, including harvesting plans, for groups of community and individual forest producers. These had a positive impact on the quality of management plans and their incorporation of sustainability criteria and environmental protection of fragile areas. Although findings of the long delayed environmental baseline study did not lead to the development of an agreed set of priorities for conservation, they did lead to the dissemination of important information on biodiversity, presence of old growth stands,  iv and threatened and endangered species to forest producers and forest technicians. They also provided a testing ground for Ministry of Agriculture and Water Resources (SARH) and Ministry of Social Development (SEDESOL) on how to carry out similar studies in the future. Summary of Findings, Future Operations, and Key Lessons Learned (x) The failure of the project stemmed from the following principal factors: (a) Institutional Weakness. After the change of administration and prior to negotiations, insufficient attention was paid to the potential impact of the restructuring of implementing agencies on the project and the mechanisms for project execution decisions and budget allocation appropriate to the changed circumstances were not devised. (b) Lack of Local-level Participation. The lack of state government participation in project design and subsequent commitment to the project resulted in there being no local-level advocate for the project when the federal agencies proved unable to get the project on track. (c) Unfortunate Timing of Preparation. The timing of preparation in relation to changes in Bank policies was unfortunate. The project began just as the rules and procedures for environmental issues were changing, yet too early to benefit from the positive changes that came about, such as the need to complete environmental assessments prior to negotiations and other specific guidelines. (d) Largee Remote Project Area. Particularly for a pilot operation, the project area may have been too large and remote. (e) Poor External Relations. The Bank did not effectively handle its discussions of the project with NGOs and did not have mechanisms to argue its position with the international community nor were there at the time appropriate mechanisms in Mexico for including NGOs in meaningful project dialogue. (xi) Based on this failure, lessons for the future include: (a) In case of a major institutional change following appraisal, it is advisable to reappraise the project and especially its implementation arrangements, even at the expense of some delay. (b) In Mexico, more decentralized and participatory project management is needed at the state level to strengthen Borrower commitment and improve implementation and sustainability. (c) Adequate environmental and social assessments should be completed during project preparation, and their findings built into project design. (d) Pilot initiatives should be limited in size and located in accessible areas to avoid overburdening the executing agencies.  v (e) The Bank should be more proactive in its dialogue with NGOs and with Borrower on high profile projects, and ensure that adequate mechanisms are built into operations to support the environmental concerns of the Borrower and the Bank. (xii) Partially in response to the problems of the project, the Bank and the Borrower have jointly carried out a review of the forest sector, looking more broadly at forestry and resource conservation issues. The Resource Conservation and Forest Sector Review (Report # 13114-ME) was carried out by the Bank and a multi-agency task force headed by Ministry of Finance and Public Credit (SHCP), coordinated by SARH, and with SEDESOL and Nacional Financiera (NAFIN) as other participating agencies. This study has been released, and it is expected to help the Borrower formulate its sector strategies for the new administration (1994-2000), and to provide the raw material needed to identify a stronger and broader sector strategy for effective forest and wildland management. A project for natural resources management including forestry, based on, among other things, the Resource Conservation and Forestry Sector Review and the experience of the Forestry Development Project, is tentatively under preparation.  IMPLEMENTATION COMPLETION REPORT FORESTRY DEVELOPMENT PROJECT Loan 3115-ME MEXICO PROJECT IMPLEMENTATION ASSESSMENT Background 1. When the Mexico Forestry Development Project was approved in 1989, the World Bank had been discussing the possibility of supporting a forest sector project with the Government of Mexico for nearly a decade. The sector was sliding increasingly into a crisis. Its share of the Gross Domestic Product had declined due to the long-term impact of inadequate investment in equipment and infrastructure to support forestry activities. Environmental awareness of the value of forests and the negative impacts of deforestation was on the rise, generating an interest in investments to increase sustainability in forest management. A sector review was carried out jointly by the World Bank and the Food and Agriculture Organization/Cooperative Programme in the late 1970s at the country's request as part of the Tropical Forestry Action Plan and project preparation began in the early 1980s. After a new Forest Law was passed in 1986, conditions were more favorable for appraisal of a project in the timber-rich states of Chihuahua and Durango, where need and opportunities were deemed greatest. The Inter-American Development Bank (IDB) prepared a parallel loan in the states of Oaxaca and Guerrero.' The preparation of the General Environmental Law of 1988 also provided more interest in Mexico for a project that would help implement environmentally sound forest management practices in traditional timber-producing areas with large areas of forest on ejido2 and community lands. 2. The only previous World Bank-assisted investment in the subsector was an IFC project in 1986 financing a small-scale pulpmill in Durango, which has since closed down due to the high cost of raw material, and IFC technical assistance to a sawmilling company in 1987-88, which did not result in a project. The Forestry Development Project was designed as a pilot program, with the expectation that project activities could be modified in light of experience, and that a larger project would be prepared subsequently. 3. The project was designed to help the Government of Mexico (GOM) implement a new model for forest management and forestry enterprises in the project area. Historically, forests included national forests managed by the Ministry of Agriculture and Water Resources (Secretaria de Agricultura y Recursos Hidraulicos - SARH), and private forests within the boundaries of ejidos or indigenous communities or on smallholdings. Forest concessions were replaced in the 1960s by parastatals which 1. This project never became effective because the government wished to resolve the implementation issues in the World Bank-assisted project which was approved first, before moving ahead with the simnilar IDB loan. 2. An ejido is a land reform unit peculiar to Mexico in which groups of farmers have individual rights over agricultural parcels and share rights to pasture and forest. Communities are land reform units of indigenous populations who retain communal property rights.  -2- attempted to organize forest producers into economic blocks for developing integrated forest companies. By the late 1970s these parastatals had proved inefficient and unresponsive to the needs of forest producers, and so were disbanded. Forest producers, both collective and individuals, who were left to sell or process timber products directly, did not have the equipment, capital, or technical knowhow to maximize profits and manage their resources sustainably. The Forestry Development Project was designed to support these producers through the provision of technical assistance, financing, improved road infrastructure, and training. Collective enterprises were encouraged, of which there was a limited number of well-integrated organizations of ejido and/or individual smallholders. 4. The project was prepared under the 1982-88 government administration but negotiated once the subsequent 1988-94 administration took office. By the time implementation was to start, major restructuring of the implementing agencies had been carried out. This resulted in a project with a restructured set of forestry and environmental agencies, but before the implications of this restructuring for implementing capacity could be known. Specifically, the forest corporation in SARH was combined with two smaller units and reconstituted as a Subsecretariat, with a consequent loss of fiscal independence. Another change in the forest bureaucracy was the further privatization of the technical services provided to forest producers and a more attenuated relationship between them and SARH. In addition, an Institute of Ecology (INE) was created within the Secretariat of Urban Development and Ecology (SEDUE) as the first step towards creation of the current Secretariat of Environment and Social Development (SEDESOL). 5. In short, between appraisal and negotiations, the intended primary implementing agency (the forestry corporation) was disbanded and reconstituted as a significantly weaker department of SARH, and the environment ministry increased in power and importance. Thus, the ability of SARH to implement the project effectively was significantly reduced. Project Objectives 6. The project aimed to complement recent forest and environmental legislation and policy initiatives by: (a) improving environmental protection by introducing rational forest management practices, rehabilitating the forestry road network, monitoring forestry activities, strengthening parks and reserves administration, and financing research on forest management and the protection of endangered species; (b) increasing the productivity and efficiency of forestry activities in Durango and Chihuahua by financing equipment and technical assistance to improve forest management, harvesting, and industrial technology, and to permit the vertical and horizontal integration of forest producers' operations; (c) improving the quality of life by increasing rural and urban employment and family income, especially in the traditionally impoverished Amerindian communities of the project area; and (d) strengthening the management and coordination capabilities of federal and state forestry and conservation institutions. 7. Although, as discussed below, the project outcome was unsatisfactory, the project objectives were and are important to Mexico's long term goals for environmentally sustainable development. A Resource Conservation and Forest Sector Review (Report # 13114-ME) has recently been issued. This review corroborates the validity of the original sector needs analysis and confirms that the lines of action contemplated in the project remain important to improve returns to the forest sector and  -3 - increase the income stream to ejido, community, and private smallholder forest owners. While the project may have failed to meet its objectives regardless of the environmental baseline study (EBS) issue (see below), there is no evidence that a fundamentally different set of objectives would have significantly increased the chances of project success. Achievement of Project Objectives 8. The achievement of project objectives was thwarted principally because of the unsatisfactory completion of the environmental baseline study (EBS). This study was additional to preparatory environmental analysis and was a crucial part of implementation because of the strong conditionality attached to the environmental soundness of the project. The EBS was an implementation requirement rather than a condition of effectiveness because O.D. 4.00 on Environmental Policies had not been completed when the project was being prepared and appraised. See para. 15. In addition, there was no concrete evidence that SEDUE/SEDESOL had carried out a comprehensive review of environmental issues in the roads and credit subcomponents. Hence, the Bank informally suspended disbursement against the credit and roads components of the project in July 1991 and eventually agreed to cancel a major part of the Loan. (The suspension was lifted for a period prior to cancellation, provided withdrawal applications for road and credit activities were accompanied by certification from the GOM that the concerned activities had no adverse environmental consequences.) INE in SEDUE (and later SEDESOL) failed to contract and complete the EBS and environmental monitoring activities in a satisfactory way due to the lack of institutional coordination in the forest sector both at the center and in the states. There was no experience in INE with similar studies and with their monitoring and consequently the TORs were inadequate; there were also delays because state offices were understaffed to carry out the quantity of work mandated by law. 9. The social component of the project was deficient because it was not an integral part of project design and focussed on indigenous communities rather than all communities in the project area. At the same time, coordination between implementing agencies was particularly weak in the case of the National Indigenous Institute (INI), the implementing agency assigned to the indigenous support component; INI did not have a clear link to other project agencies. The 1992 institutional capacity study judged that while INI had every intention of strengthening indigenous communities so that they could better participate in the project, the end result was continued marginalization of the communities from other agencies since INI's efforts were not integrated with those of the other implementing agencies. Obstacles to INI's dealing effectively with the social issues included: (a) inappropriate or inadequate staff expertise; (b) insufficient use of bilingual (Spanish and indigenous language) promoters; (c) a poor understanding of the timber markets and industry requirements; and (d) a tendency to intervene in community conflicts when the agency had neither the mandate nor the power to control the outcome. 10. INI's social baseline study did generate a large quantity of important information about the indigenous groups in the project area. Unfortunately, the information was not translated into clear recommendations that could be absorbed by the other implementing agencies. These other agency staff did not receive support from INI or elsewhere to improve their extension methods or modify their services to address social organizations in either indigenous or non-indigenous communities. Non- indigenous communities therefore had no technical assistance for strengthening their  -4 - own internal social organizations for forest management, unless they had contracted the Trust Fund for Agriculture (FIRA) for business management training as part of a subloan package. Indigenous groups therefore were either excluded from the attention of all agencies but INI, or confronted by multiple agencies, each with a different outlook. 11. Institutional development was recognized as a key element during project preparation, given the weakness of regulatory and other institutions providing support to forest producers. Hence the project was to finance training for the staff of the agencies involved in the project and their operational budgets. Forest producers were also to receive training to help them improve their management methods. However, apart from some training courses, little was really achieved in this area partly because of the suspension of disbursements and partly because the institutions involved had no common strategic vision and did not collaborate very well.(See para. 17.) The 1992 institutional capacity study provided a solid basis for decision-making, identifying a number of participation, coordination, and local/federal control issues. However, results were not implemented because with the disbursement suspension overall support for the project wavered within GOM. 12. FIRA, responsible for subloans to forest producers, was the most effective implementing agency. However, the non-compliance of the credit component with the environmental clearance aspects of the project and the resultant decision by the Bank not to disburse against the credit (and road) activities unless they were certified by the Government of Mexico as environmentally acceptable effectively limited its role after 1992. FIRA also faced some social equity issues, since the terms of and documentation required for its forestry loans were not well-adapted to indigenous and mixed ejidos' and communities' needs.(See para. 14.) Also, FIRA terms did not include grace periods suited to the long-term nature of forestry investment. 13. The Ministry of Communications and Transport (SCT) had the best relationship with SARH, but the roads component experienced delays related to: (a) disagreements between Bank and project staff regarding which roads and designs fit the project criteria of economically important and environmentally benign investments; and (b) slow progress by INE on the EBS. Some of these issues were resolved as the project evolved but as with the other components, the informal suspension of disbursements effectively halted disbursements against roads activities. Implementation Record and Major Factors Affecting the Project 14. There were several significant factors which adversely affected the project, some of which, with hindsight could have possibly been avoided and others which could not have been foreseen. These factors are: (i) the timing of project preparation and appraisal which occurred before the release of O.D. 4.00 on Environmental Policies; (ii) the change in institutional arrangements in Mexico after the project had been appraised; (iii) the lack of local and state government participation in project design and implementation, and institutional weakness of the government agencies involved with respect to expectations under the project (iv) vehement and unconstructive criticism of the project from NGOs both in the U.S. and Mexico. 15. Since the project was appraised prior to the release of O.D. 4.00, rather than a full scale environmental study there were various environmental assessments carried out as part of project preparation on the envisioned roads, forest management,  - 5 - harvesting and wood processing activities. A social baseline study was contemplated for the indigenous communities in the project area, to be carried out as part of the technical assistance to these communities to be provided by INI. Both of these studies were seriously delayed during project implementation. The Bank judged the EBS completed in 1991 to be deficient in depth and accuracy and requested additional studies. Although carried out, these studies were inadequate for various reasons (delay of budget release, and lack of coordinating between INE, SARH and the consultants). It should be noted, however, there were no clear guidelines in Mexico (or in the Bank) for carrying out such activities. INE was new to environmental impact assessment work and did not have well developed procedures. With regard to the social baseline studies, INI did not translate the vast information collected into actionable recommendations; moreover, the other implementing agencies had no social extension program in which to insert the findings. The supplementary environmental studies completed in October 1993 contained a body of information useful to define environmental priorities. These studies were an adequate basis upon which to lift the suspension of disbursements, but were completed too late to be incorporated into project implementation; in fact, they have not yet been fed formally or systematically into government decision-making. 16. Beginning in late 1989, the project became the focus of increasing criticism by NGOs, concerned that timber harvesting they associated with the project would negatively affect biodiversity. Eventually the project became a vehicle for more generalized criticism by environmental and indigenous rights NGOs concerned with what they perceived to be the Bank's and the GOM inadequate policies on the environment and indigenous affairs. In 1990, a Mexican, religious-affiliated NGO and two U.S. environmental NGOs began to claim that the project would lead to serious environmental and social deterioration in the Sierra Madre, particularly in and near a famous tourist attraction in Chihuahua, the Copper Canyon. These NGOs channeled their concerns through the environmental NGO network and, given the proximity of the project area to the U.S. and the interest it therefore generated among U.S.-based environmentalists, the criticisms became unusually strong. While there were some valid concerns being voiced (e.g., the lack of institutional capacity in the sector and lack of internal mechanisms for open consultation in the states regarding the project or issues it embodied), these were mixed with extreme and false allegations. Both Bank staff and the Mexican government were unconvinced by the criticism because much of the project area had in fact been logged extensively, starting in the past century, and had only limited areas (most outside the project area) with priority biodiversity. When implementation started, O.D. 4.00 was too new to have developed streamlined mechanisms for discussions with NGOs, and discussions were strained. Both involved GOM and Bank staff were frustrated by the lack of fruitful NGO dialogue. Two public workshops were held in 1991, one hosted by U.S. NGOs and one by GOM, but these resulted in statements of mutual distrust and a further distancing between NGOs, GOM and the Bank. 17. The strained relations with NGOs also affected Bank-Government relations with regard to the environmental baseline study. The Forest Subsecretariate and INE perceived Bank concerns in this regard to be add-on requirements rather than related to the originally agreed TOR, and felt the Bank was changing its position to placate the NGOs. With time, the government appeared to become reluctant to be involved in such a polemical issue and the project gradually became less of a priority. This was compounded by the budget constraints and changing agriculture priorities during 1992 and 1993, which caused GOM to be reluctant to allocate resources to a project  -6 - perceived as problematic: the chronic inadequate funding problems experienced by the project were both a reflection of GOM's concern and a cause of further inadequate progress, which could only increase the concern. 18. The project's institutional structure changed after it had been appraised. Most importantly, the forest corporation in SARH, which was to have been the principal agency in project implementation, was reconstituted as a significantly weaker department of SARH with a loss of fiscal independence. At the same time as the forestry corporation was weakened, the environmental bureaucracy was strengthened with the creation of INE within SEDUE (later SEDESOL). This made it more difficult for the forestry agency (which became the forestry subsecretary in SARH) to coordinate the project, as was intended to in the project design. There was also little shared strategic vision among the implementing agencies, and they did not individually have sufficient authority to induce fellow agencies to work as a group or follow project timetables - particularly in the case of INI. In addition, the forestry agency's job was made more difficult by the complicated monitoring system drawn up by the Bank. The requirements of the monitoring system were perceived by the other implementing agencies to demand unnecessary detail, and SARH's forestry agency bore the brunt of their dissatisfaction. 19. The lack of the SARH forestry agency's clear authority over INE, a unit in a more powerful ministry, hampered decision-making that involved the two ministries. Collaboration between the two agencies was a key of effective implementation because their individual tasks were interlinked - the forestry agency provided technical assistance to help forest producers design management plans, and INE was responsible for monitoring the environmental soundness of these plans as well as for producing the Environmental Baseline Studies. However, there were no bureaucratic mechanisms to make collaboration work. Project budget flows also became a source of conflict which made implementation difficult. 20. These difficulties at the federal level had a negative effect on their state offices which were responsible for the practical side of implementation. While state-based coordinating communities of involved agencies and beneficiaries were foreseen, these were not effective. Consequently, there was essentially no local participation in project planning and management which could have led to greater coordination and the development of solutions to the lack of agency coordination at the federal level. The state governments were only peripherally interested in the project because forestry was confined to low growth and remote areas and was generally the concern of poorer populations. Even at the municipal level, the poorer communities in forest areas found it hard to lobby for support from municipalities that valued infrastructure and job creation in higher-growth areas. While there is a growing environmental lobby in the states that could have provided positive support, this was not present when the project began. Forest producers also had no direct role in project management. They could only voice their concerns through the field forest technicians of the Forest Development and Conservation Unit (UCODEFO) preparing their management plans or through individual agency extension staff who visited them. Although generally strongly interested in the project, forest producers were too often passive recipients and unable to induce the implementing agencies to find solutions to their implementation problems. 21. One possible design change could have been to concentrate activities on only one state and thereby simplify project implementation. The project areas chosen were extremely remote and monitoring was therefore complex. However, it is not clear from  the project files and interviews whether this was a politically viable option and whether the Borrower would have accepted a more scaled down pilot project area, given that this was the first Bank forestry investment and that preparation had lasted more than five years. Project Sustainability 22. Project sustainability is unlikely. Despite some positive achievements, the activities initiated in the two states by the project are unlikely to lead to the improvements in forest management and institutional responsibilities originally expected. Although the project has played a significant role in shaping the 1992 Forest Law and its regulations, and has improved the technical skills of foresters serving forest producers in these two states, there has been little achievement of the objectives in the project states since there was such limited implementation of investments. Bank Performance 23. During project preparation, the Bank encouraged the Borrower to pay careful attention to the environmental, indigenous peoples, and institutional issues. Preliminary environmental analysis identified the key issues related to forest harvesting and the potential impact on the incidence of valuable flora and fauna, soil erosion, and water regimes. Environmental measures, including the EBS, were prepared as a part of project design. Prior to appraisal, the Bank suggested a committed agency, INI, be brought into the project to implement a component of support to disadvantaged indigenous communities. The project design was also phased to allow institutional strengthening before accelerating the activities of forest producers. Where the Bank proved weak was in failing to encourage adequate design attention to state and local participation in decision-making and implementation, and in failing to analyze issues of coordination among federal agencies at various levels. This analysis would probably have led to modifications in the social component as well. The Bank can also be faulted for not adequately anticipating the potential impact of the growing concern about environmental issues which led to O.D. 4.00 (then being drafted) and ensuring that this impact was both understood by GOM and built appropriately into project design. 24. Although a complete institutional analysis and strengthening plan was prepared, the plan was quite complicated and the mechanics not well explained to the implementing agencies or the beneficiaries. This made the plan difficult to implement and monitor. Worse, although noted in the risks section of the appraisal report, the Bank underestimated the extent to which the major institutional changes between appraisal and negotiations (para. 4), could (and, in fact, did) have an adverse impact on project design and implementation. In hindsight, it appears that the project should have been redesigned and reappraised prior to negotiations to take into account the changed institutional structure, despite the natural disinclination of both the Bank and the Borrower to accept further delays in negotiation of a project that had been many years in preparation. 25. Supervision was regular and qualified individuals were recruited from within the Bank or outside to provide guidance on difficult institutional and environmental questions. Extensive field visits were made to evaluate progress in both states. When, because of the delayed submission of a satisfactory EBS, loan disbursements were informally suspended in 1991, there was serious consideration in the Bank as to whether it was better to cancel the Loan. Although in hindsight, the Bank should have played  - 8 - a more catalytic role in resolving the institutional cc3rdination problems, it is difficult to fault the staff then involved for concentrating on the satisfactory completion of the EBS. Given the non-project, political sensitivities regarding environmental issues in Mexico, it also appears that there may have been value in dealing with the issue in a broader context within the Bank's overall environmental and country dialogue instead of trying to resolve it solely at the project level. Borrower Performance 26. During preparation, the Borrower, like the Bank, failed to invest adequate resources in analyzing the social and institutional issues, panicularly those related to state-level roles. The technical preparation work on the roads, forest management, and credit components was of high quality, and technical proposals were detailed and carefully phased. Recognition was made of the newness of the approach and the need for a pilot operation and flexibility in implementation. The weaknesses in actual implementation were due in part to the coordinating agency's (SARH) lack of authority relative to other participating agencies, and its lack of capacity to prepare annual plans and budget requests for multiple agencies and ensure budget flows in a timely fashion. Weakness also stemmed from the Government's lack of mechanisms to implement environmental laws and regulations in a realistic and timely manner, and the inadequate attention-given to resolving institutional and social concerns. These weaknesses were caused by the restructuring of federal agencies carried out shortly before negotiation, and the resources of the tasks and the agencies involved. 27. Although too late to improve project implementation, better environmental review mechanisms have been developed in SEDESOL as a result of growing staff experience and more flexible guidelines in the 1992 Forestry Law. While the mechanisms are not yet optimal, had such mechanisms been discussed at negotiations based on a reappraisal, the environmental issues may not have had such a monumental 'impact on the project's execution. However, there continues to be a need for better mechanisms to set environmental priorities and to implement regulations at the state and local levels. 28. Institutional links between the lead agency and other implementing agencies and with forist producers and their organizations were not well developed, in part due to SARH Staff's lack of authority over staff of other agencies. At one point in implementation, the Finance Ministry (SHCP) attempted to play a coordinating role, but after recognizing that it was a coordinator of budget flows rather than an operational agency, it did not try to manage project implementation. Although SHCP cannot be faulted for avoiding a direct operational role, GOM could be faulted for not finding a solution to the lack of mechanisms for timely budget allocation and release, particularly as this led to frequent turnover of staff in the state-level project coordination units and a consequent loss of momentum. The role of the state government was not well-defined or developed, limiting institutional development and local ownership of the project. Assessment of Outcome 29. Although the project has had both positive and negative results, overall the project outcome was unsatisfactory. On the positive side, it has clearly demonstrated to the World Bank, the Mexican government and the two states, the need for: (a) coordinated action in the forestry and natural resources subsector; (b) participatory  - 9 - mechanisms to address long-standing and complicated problems; and (c) clarity in environmental and social objectives from the outset of a project. 30. Six roads were rehabilitated totalling 165 kilometers, reducing the cost of timber transport for nearby ejidos and smallholder forest owners served by those roads. The amount of timber handled out by these roads total about 871,000 cm2, i.e. about 11.4% of national production. Numerous forest management plans were revised. Three hundred and twenty-two subloans were made to ejidos and smallholders (representing 58,645 beneficiaries) for upgrading their transport, extraction, and processing equipment and for some small-scale industries, although these were not linked in most cases to road rehabilitation, which could have provided an important reduction in the cost of production. Training courses were given to forest producers and to the forest technicians from the technical field offices (UCODEFOs) preparing forest management plans, including harvesting plans, for groups of community and individual forest producers. These had a positive impact on the quality of management plans and their incorporation of sustainability criteria and environmental protection of fragile areas. 31. In terms of the environment, the project provided the country with a test case for how to incorporate the Environmental Law into forest management practices and regulations. Although findings of the long delayed environmental baseline study did not lead to the development of an agreed set of priorities for conservation, as had been hoped, they did lead to the dissemination of important information on biodiversity, presence of old growth stands, and threatened and endangered species to forest producers and forest technicians. They also provided a testing ground for SARH and SEDESOL on how to carry out similar studies in the future. This experience with the environmental baseline study also influenced the decision in the 1992 Forest Law to give clear implementation of environmental regulations over forestry to SARH, and made evident the urgency of developing a close technical working relationship between INE and SARH forestry staff on interpretation of guidelines for sound forest management. 32. An issue for the World Bank and the Borrower is whether the Bank should have taken earlier more drastic remedial measures than it did (i.e., informal suspension of disbursements). Both Bank and implementing agency staff believed that once the environmental baseline study was approved and the findings incorporated into the project, a workable solution to the outstanding budget and institution problems would be found. Both parties realized that the institutional issues in the sector were complex and that one pilot operation, as the project was designed to be, could not be expected to complete all of the necessary institutional development. When the environmental issues continued to affect implementation and budget constraints became severe, GOM requested in December 1993 that the Bank close the Loan; in that the EBS was by then complete and so provided a basis to implement the project in an improved framework, the Bank feels that implementation could have usefully continued, though given the poor experience to that time, cancellation was probably the wisest course. Future Operations 33. Partially in response to the problems of the project, the Bank and the Borrower have jointly carried out a review of the forest sector, looking more broadly at forestry and resource conservation issues. The Resource Conservation and Forest Sector Review (Report # 13114-ME) was carried out by the Bank and a multi-agency task force headed by SHCP, coordinated by SARH, and with SEDESOL and NAFIN as  - 10- other participating agencies. This study has been released, and it is expected to help the Borrower formulate its sector strategies for the new administration (1994-2000), and to provide the raw material needed to identify a stronger and broader sector strategy for effective forest and wildland management. A project for natural resources management including forestry, based on, among other things, the Resource Conservation and Forestry Sector Review and the experience of the Forestry Development Project, is tentatively under preparation. Key Lessons Learned 34. The failure of the project stemmed from the following principal factors: (a) Institutional Weakness. After the change of administration and prior to negotiations, insufficient attention was paid to the potential impact of the restructuring of implementing agencies on the project, and mechanisms for project execution decisions and budget allocation appropriate to the changed circumstances were not devised. (b) Lack of Local-level Participation. The lack of state government participation in project design and subsequent commitment to the project resulted in there being no local-level advocate for the project when the federal agencies proved unable to get the project on track. (c) Unfortunate Timing of Preparation. The timing of preparation in relation to changes in Bank policies was unfortunate. The project began just as the rules and procedures for environmental issues were changing, yet too early to benefit from the positive changes that came about, such as the need to complete environmental assessments prior to negotiations and other specific guidelines. (d) Large. Remote Project Area. Particularly for a pilot operation, the project area may have been too large and remote. (e) Poor External Relations. The Bank did not effectively handle its discussions of the project with NGOs and did not have mechanisms to argue its position with the international community, nor were there at the time appropriate mechanisms in Mexico for including NGOs in meaningful project dialogue. 35. Based on this failure, lessons for the future include: (a) The project and especially its implementation arrangements should be reappraised, even at the expense of some delay, when there is a major institutional change. (b) In Mexico, more decentralized and participatory project management is needed at the state level to strengthen Borrower commitment and improve implementation and sustainability. (c) Adequate environmental and social assessments should be completed during project preparation, and their findings built into project design.  - 11 - (d) Pilot initiatives should be limited in size and located in easily accessible areas, so as to avoid overburdening the executing agencies. (e) The Bank should be more proactive in its dialogue with NGOs and with Borrower on high profile projects, and ensure that adequate mechanisms are built into operations to support the environmental concerns of the Borrower and the Bank.   - 12 - STATISTICAL ANNEXES   - 13 - Table 1: Summary of Assessments A.Achievement of objectives Substantial Partial Negligible Not applicable Macro policies F D F Fg Sector policies F Ea g