Mexico - Rural Development in Marginal Areas Project

Document of The World Bank Report No.: 17263 - ME PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$47 MILLION EQUIVALENT TO NACIONAL FINANCIERA, S.N.C. WITH THE GUARANTEE OF THE UNITED MEXICAN STATES FOR A RURAL DEVELOPMENT IN MARGINAL AREAS PROJECT December 23, 1997 Mexico Country Department Latin America and the Caribbean Region  CURRENCY EQUIVALENTS Exchange Rate Effective September 1, 1997 US$1 = $7.82 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS CDR Comisi6n de Desarrollo Rural (Rural Development Comunission) CIMMYT Centro Internacional del Mejoramiento del Maiz y el Trigo (InternationaE Center for the Improvement of Maize and Wheat) CRDS Consejo Regional de Desarrollo Sustentable (Regional Sustainable Development Councils) FAO Food and Agriculture Organization of the United Nations FIRCO Fideicorniso de Riesgo Compartido (Trust Fund for Shared Risk) FONAES Fondo Nacional de Empresas de Solidaridad (National Solidarity Business Fund) GATIT General Agreement on Tariffs and Trade GoM Government of Mexico INCA Instituto Nacional de Capacitacion del Sector Agropecuario, A.C. (National Institute for the Agricultural Sector Training) INI Instituto Nacional Indigenista (National Indigenous Institute) INIFAP Instituto Nacional de Investigaciones Forestales y Agropecuarias (National Institte for Forestry, Agriculture, and Livestock Research) NAF:[N Nacional Financiera (National Development Bank) NAFrA North American Free Trade Agreement NGO Non-Governmental Organization PROCAMPO Programa de Apoyos Directos al Campo (National Program for Agricultural Direct Support) PRODERS Programa de Desarrollo Regional Sustentable (Program of Sustainable Regional Development) SAGAR Secretaria de Agricultura, Ganaderia y Desarrollo Rural (Ministry of Agriculture, Livestock and Rural Development) SEDIESOL Secretaria de Desarrollo Social (Ministry of Social Development) SEAkRNAP Secretaria de Medio Ambiente, Recursos Naturales y Pesca (Ministry of Environment, Natural Resources and Fisheries) SINDER Sistema Nacional de Extensi6n Rural (National System of Rural Extension) Vice President: Mr. Javed Shahid Burki Country Director: Mr. Olivier Lafourcade Sector Director: Mrs. Maritta Koch-Weser Task Manager/Sector Leader: Mr. Adolfo Brizzi  Prject Appraisal Document Country. Medco Mexico Rural Development in Marginal Areas CONTENTS Page U. A. Project Development Objective 1. Program and project development objective and key performance indicators 2 B. Strategic Context 1. Sector-related CAS goal supported by the project 3 2. Main sector issues and Government strategy 3 3. Sector issues to be addressed by the project and strategic choices 5 C. Project Description Summary 1. Project components 6 2. Key policy and institutional reforms supported by the project 7 3. Benefits and target population 7 4. Institutional and implementation arrangements a D. Project Rationale 1. Project alternatives considered and reasons for rejection 10 2. Major related projects financed by the Bank and/or other development agencies 10 3. Lessons leamed and reflected in proposed project design 11 4. Indications of borrower comnmitmnent and ownership I 1 5. Value added of Bank support for the project II E. Summary Project Analyses 1. Economic 12 2. Financial 12 3. Technical 13 4. Institutional 14 5. Social 15 6. Enviromnental assessment 16 7. Participatory approach 16 F. Sustainability and Risks 1. Sustainability 16 2. Critical risks 17 3. Possible controversial aspects 18 G. Main Loan Conditions 1. Conditions of effectiveness 18 H. Readiness for Implementation 18 L Compliance with Bank Policies 18  Project Appraisal Document Country: Mexico Annexes Annex 1. Project Design Summary Annex 2. Detailed Project Description Annex 3. Estimated Project Costs Annex 4. Cost-Benefit Analysis Summary Annex 5. Financial Summary Annex 6. Procurement and Disbursement Arrangements Table A. Project Costs by Procurement Arrangements Table B. Thresholds for Procurement Methods and Prior Review Table C. Allocation of Loan Proceeds Annex 7. Project Processing Budget and Schedule Annex 8. Documents in Project File Annex 9. Statement of Loans and Credits Annex 10. Country at a Glance Annex 11. Letter of Development Program Annex 12. Legal Framework and Characterization of Indigenous People Living in the Project Areas Annex 13. Eligibility Criteria for Beneficiaries and Subprojects map  Mexico Rural Development in Marginal Areas Project Appraisal Document Latin America and the Caribbean Mexico Country Department Date: December 23, 1997 Task Manager: Adolfo Brizzi Country Director: Olivier Lafourcade Sector Director: Maritta Koch-Weser Project ID: MX-7711 Sector: Agriculture Program Objective Category: Poverty Alleviation LendingInstrument: Adaptable Program Loan (APL) Program of Targeted Interventions: [X] Yes [ No Program Financing Data (US$M) Sources of F . Total Cost Government Beneficiaries IBRD APLs Federal States (75 A of Total) FistPhase (6regions): 1998-2002 ..63.0.. 31.5 15.5 16.0 47.0 Second Phase (4 regions): 1999-2003 * 69.9 34.5 17.5 17.0 52.0 Tbird phase (10 regions): 2000-2004 123.0 61.5 31.0 30.5 92.0 Fourth Phase (4 regions) 2001-2005 50.0 25.0 12.5 * 12.5 38.0 Program Cost . 305.0 152.5 76.5 . 76.0 229.0 Project Financing Data (First Phase) [xl Loan [] Credit [] Guarantee [ ] Other Amount: US$47 million Proposed Terms: [ I Multicurrency [xI Single currency [3 ] Standard [I Fixed [xl LIBOR-Based Grace period (years): 5 Variable Years to maturity: 15 Commitment fee: 0.75% Financing plan (US$M): Source Local Foreign Total Government * Federal (50%) 27.5 4.0 31.5 * State (25%) 14.0 2.0 16.0 Producers/Beneficiaries (25%) 15.5 0.0 15.5 Total 57.0 6.0 63.0 1BRD financing (75%) 42.5 4.5 47.0 Borrower: Nacional Financiera, S.N.C. (NAFIN) Guarantor: United Mexican States Responsible agencies: Ministry for Agriculture, Livestock and Rural Development (SAGAR) and State Authorities Estimated disbursements (Bank FY/US$M): 1998 1999 2000 2001 2002 2003 (First Phase) Annual 7.0 8.0 9.0 10.0 8.0 5.0 Cumulative 7.0 15.0 24.0 34.0 42.0 47.0 Retroactive financing of up to US$4.7 million (10% of the Loan amount) is requested for eligible expenditures incurred after July 1, 1997 (but not earlier than 12 months before loan signing) due to early preparation of the project and initiation of its implementation mid 1997. Expected effectiveness date: March 1998 Closing date: 06/30/2003 * timing and amounts for implementation ofphases 2 to 4 are tentative and subject to an appraisal process  Project Appraisal Document Pap 2 Cottntry: Mexico Proje tThe Rural Oeveaopment in MUw Ams A:: Program and Project Development Objectives The Program (see the Government's Letter of Development Program in Annex 11) The Rural Development in Marginal Areas Program, of which this project is the first phase, seeks to imnprove the well-being and the income of smallholders in about 24 targeted marginal areas, which are among the poorest of the country, through sustainable increases in productivity and better food security. The program seeks to improve the productive capacity of participating farmers through a community-based approach by: (i) facilitating the introduction of sustainable agricultural production systems and diversification through improved access to financial resources and agricultural services; (ii) fostering community socio-economic development, organization, and participation; (iii) enhancing the provision of effective technical support services and training to farmers and producers organizations; and (iv) promoting an effective decentralized decision-making system fostering institutional coordination. The program would cover a total population of about 10 million people of whichi about 2 million would benefit directly from program support. To reach its goal the program ains at implementing over a period of about 8 to 10 years a phased approach of progressive geographic expansion of program activities to 24 areas. The program would tentatively consist of four phases: Phase I covers six areas and is described in this PAD; Phase II covers four additional areas; Phase III covers ten additional areas; and Phase IV covers four additional areas. Key performance indicators of progress towards program objectives will be measured through a monitoring and evaluation system focusing on: (i) the adoption of new technology, increases in yields and income, and better food security; (ii) the successful integration of sustainable natural resource management practices; and (iii) the promotion of off-farm activities and employment opportunities. Itegration of new areas under the program would be subject to an appraisal process aimed at evaluating its technical feasibility, local interest and participation, as well as to learn from the experience gained from previous phases. The leaniing process of knowledge and practice change will be key for the phasing of the program. Trigger indicators have been defined in the Attachment to the "logical framework" (Annex I) in order to assess readines for integration of new areas under the program, early identification of risks, and implementation of corrctive measures before geographic coverage expands. The Proiect The project objective reflects the program goal and airns at improving smallholders' productivity and food security in a first group of six marginal areas comprising the regions of: Mixe, Cuicateca, Mazateca (in the state of Oaxaca), and the Huasteca region, a contiguous area expanding over parts of the three states of Veracruz, San Luis Potosi and Hidalgo. The 6 regions have a physical surface of nearly 23,000 km2 with a total population of some 1.3 million inhabitants of which about 70' percent is the target population from the project, and about 40,000 families are poor small farming households which wYil directly benefit of project support. The project would promote the participation of indigenous people, as they represent about 67 percent of this target populaion, and women, as they play a key role in both agriculture and in family nutrition. In addition to the performance indicators defined in the "logical framework", this first phase includes a number of principles and features that w.ill need to be tested and adjusted as the program expands. They are related to: (i) local interest in participating to a matching grant scheme for productive investments, its effectiveness, and the functioning of the cost-recovery system; (ii) formation of social capital and community organization; (iii) establishmnent of a demand-driven and effective system for the delivery of support services and relevancy of the technical packages; and (iv) effectiveness of the administrative set-up and participation of beneficiaries in the decision-making process (see Attachment to Annex 1).  Project Appraisal Document PPge a Country: Mexico Project Tite: Rural Development h Marginl B: Strategic Context g~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~** ..*.*.*.**.*. .* . The joint IBRD/IFC Mexico Country Assistance Strategy (number R96-207; IFC/R96-204) was discussed by the Board of Directors on December 16, 1996. The overarching objective of the CAS emphasizes the need for a broad- based improvement in welfare and reduction in the country's poverty rates. This implies a development agenda with three core, interrelated thernes: (i) sustainable growth; (ii) social development; and (iii) modernization of the state. The project is a poverty-targeted operation which intervenes in the most marginalized rural areas of the country and will contribute directly to the three main thrusts of the CAS in the following way: (i) sustainable 2rowth through improved productivity in conjunction with natural resources management, expanding opportunities for the social sector to access financial resources, promotion of institutions and markets; (ii) social development by promoting social capital formation through community organization and participation in the development of the productive sectors (agriculture, forestry, and rural industry); and (iii) modemization of the State by contributing to Government's new emnphasis on decentralization, bringing the decision-making closer to the beneficiaries and fostering synergy between public services and the private sector. Moreover, the project is at the core of the Bank's Rural Focus Program under the "Compact', in support of the Southem States Initiative being pursued with the Mexican Government. It addresses development issues in a part of the country where persistent and growing poverty remains the single most important challenge to the wel-being of the mostly rural populations. The overarching objective of the Southem States Initiative is to stimulate the integration of small/marginal producers into a growth process in combination with improvements in the delivery of social services and support for institutional strengthening and private sector development. Sector nerformance and issues: Agriculture has been a weak sector of Mexico's economy. In 1995 the agricultural GDP accounted for about 7 percent of total GDP, down from 19 percent in 1960. The sector's slow growth, coupled with stagnating productivity and wages, has caused the population employed in the sector to drop from 50 percent of total labor force to about 25 percent during the same period. However, agriculture is expected to remain a significant economic force, counting on a competitive commercial sector using modem technology and achieving high yields, and on a productive potential largely untapped, especially in rainfed areas. The Governnent of Mexico engaged in swveeping reforns in the agricultural sector at the end of the 1 980s to early 1990s, addressing the whole array of issues related to the liberalization of prices and marketing, trade reforms, divestiture of State intervention, etc. Following this *vave of reforms it also embarked in a major revision of the regulatory and legal framewvork in the land tenure, water, and forestry sub-sectors. The Govenunent also sought to promote a greater role of the private sector in the provision of support services and natural resource management. During this time Govemnment support has switched from commodity price subsidies to non-distortionary direct income transfers to the producers through the PROCAMPO program and has set the basis for the progressive exposure of the Mexican economy to globalization and intemational trade through negotiations of the GATT and NAFTA agreements. Despite the important reforms and past policv measures, the performance of the sector has been lagging and over the past 5 years the agriculture growth rate has stagnated. Sector performance has remained relatively disconnected from macro-economic events that experienced turbulent trends w Xith a major financial crisis and devaluation at the end of 1994 and an impressive economic recovery in 1996 and 1997. Moreover, Mexico's rural poverty has kept widening in recent years. According to Bank's research, the high levels of risk factors in marginal rural areas and  - Poject Appraisal Document Pge 4 Cowitiy: Mexco Project rT: RurI Dvnlopntu hi MarN Aim the limited options available to producers to cope with ineome and consumption variability, have induced friners into risk averse investment strategies. This has contributed to placing them in a poverty trap. The incidence of poverty is highest in the southern states with 65 percent compared with a national average of 34 percent. The poverty rate among the indigenous population is particularly severe. More recently, especially after the devaluation, agricultural exports are expanding and diversification of the production patterns is taking place. However, the impact of reforms and supply response seem to have mosly benefited the commercial sector, and have not been felt as yet by traditional smallholders producing mainly for subsistence, thus underpinning the gap with the modem commnercial sector competing on international markets. Improving the delivery of financial services to the rural population remains one of the major issues facing the development of the sector. The Government has started a process of liberalization of interest rates, phasing-out government support to state-owned financial institutions and instead building incentives for the private financial sector to increase its presence in the rural areas. While penetration of financial services (public or private) in rural areas remains deficient, other schemes of savings and loans and micro-finance activities have developed. However, in general, access to resources for productive investments is limited especially for small fanners and in poor areas. Government's strateav to address these sectoral concerns MTe sector development agenda that the Governnent and the Bank would be pursuing is oriented towards the following main strategy lines: a) Maintaining the policy framework and strengthening the market economy, b) Pursue second generation type of reforms in factor and output markets (financial services, access to output markets, land and water markets, labor markets); c) Increase the agricultural productivity of the small and medium-sized farm sector, d) Promote the integration of small/marginal farmers in the growth process; and e) Strengthen the institutional development and better integrate social and gender perspectives. Miid 1996 the Govermnent launched a far-reaching national rural development program (Alifora para el Campo) airned at addressing the issues that affect smallholder production and income. It fosters agricultural productivity through productive investments (under a matching-grants scheme) and the provision of more effective support services (research, extension, information, training) for a wide range of agricultural sub-programs. The cornerstone of the Alianza program is its decentralized approach and the delegation of administration and decision-making to the States. The program offers the opportunity and the operational vehicle to implemnent a decentralized, demand- driven approach to channel technical and financial assistance directly to small farmers and poor communities. The Rural Development in Mareinal Areas Program Strategy and scope One of the programs under the Alianza framework is the rural development in marginal areas program. It promotes productive investments and support services for small farmers through targeted interventions in selected marginal areas with a productive potential. The program is demand-driven and based on local priorities. Its preparation had began in 1995, on a pilot basis in Oaxaca and in the Huasteca region, through a highly participatory process with support from FAO and the Bank. Preparation of this initial project has served as a starting point for SAGAR to establish the platform on which to develop a long term national rural development program for the poorest areas of the country. The program plans to progressively cover a tentative number of 24 regions grouped by state as follows: Chiapas (3), Guerrero (2), Oaxaca (4), Quintana Roo (1), Tabasco (1), Veracruz (3), Yucatan (1), Hidalgo (2), Michoacan (1), Puebla (1), Durango (1), Jalisco (l), Nayarit (1), San Luis Potosi (2); representing a total beneficiary population of about 2 million people.  ProJect Appraisal Document Pop S Country: Mexico Project Title: Rural O.eblpmnnt i Mginal Are" In order to build ownership and respond to local demand, the program would unfold by phases, each phase being constituted by a group of new areas. Because of its demand-driven strategy and long term reach, the progam cannot be engineered "ex-ante", hence justifying a "grow-as-you-go" approach that would build on successes, test local commitrnent, leam while doing and adjust. The Government plans to implement the national program through four phases. The first phase would comprise the six areas already studied, while providing long term commitment for progressive program expansion. Approval of new phases under the Adaptable Proeram Loan Bank's financing of the program under the Adaptable Program Loan instrument, will permit to provide phased but sustained support for the implementation of the long term development program that reflects local priorities and contributes to poverty alleviation. The instrument would permit to "lock-in" long-term commitment on program objectives and strategy, wvhile slicing the financing according to the size and scope of every phase. Preparation of preliminary studies and experience already gained from the implementation of previous program phases would be key to determine the capacity and the pace of the program to access newv areas. Before committing subsequent adaptable program loans, each new phase to be supported under the program would be subject to an appraisal process so as to assess the feasibility of the integration of the new areas. The following would be required before appraisal of each phase: a) Preparation of a satisfactory set of studies for each region to be included in the program, covering at least the following subjects: * technical assessment of proposed activities; * social assessment; * natural resources management and environmental assessment; and * financial and economic analysis. b) Preparation of evaluation reports assessing progress made in the imnplementation of the program under previous phases. Evaluations would be based on trigger indicators defined in the Attachment to the "logical framework" (Annex 1), so as to gauge achievement of the critical elements of the program and pemiit adjustment in the design of new phases. Through this program the Government aims at addressing, at the national level, the long term development goal of reducing the rural poverty gap and fostering sustainable agricultural productivity. In particular it aims at facilitating the integration in the development process of small farmers living in marginal areas. In shaping the strategy underlying the program the Government has made a number of choices: a) it recognizes that a targeted approach is more likely to address the specific socio-economic and natural resources management issues facing these marginal areas; b) it promotes a federalization policy transfering responsibility for the implementation of the agricultural programs at the state level and fosters implementation arrangements that strengthen local ownership; c) it places demand-driven and participatory approaches at the core of a capacity-building process where farmer organizations and communities become legitimate partners and clients in the provision of support services; d) it recognizes the lack of capital for productive investments as a kev constraint to unleash the development potential of these areas while also fostering off-farm activities as part of a poverty-alleviating growth strategy; and  Project Appraisal Document Pap 6 Country: Mexico Project Tbe: Rurtl Oepwent inMnal Ans e) it facilitates access to the "seed capital" required to invest in sustainable productive activities while moving away from traditional approaches of all-subsidy schemes. C: Project Description Summary - for the first phase (6 areas) cost Component Category Ici. % of Bank- % of Conting. Total financed Bank- ........... . US1M flnanc (1) Productive Investments Physical 40.0 64% 30.0 75% Under this component the project will finance demand-driven investment sub-projects for agricultural production, natural resources management, processing activities, and minor productive infrastructure. The investments would be financed through a matching grants system with up-front farmers ccntribution of at least 30 percent of project cost. A cost recovery mechanism will be promoted at the community level that would foster sustainability of project activities. (2) Community Development Physical/ 6.0 10% 4.5 75% Community-based sub-projects would include: (i) preparation Capacity of community-based natural resources management plans and building small works associated with themn; (ii) small projects related to community activities of indirect benefits; (iii) training and workshops to facilitate beneficiaries participation in the project (interchanges with other communities, participatory approaches, management of revolving funds, natural resources mnumagement, etc..). (3) Technical Support Capacity 13.0 20% 9.5 75% This component covers the provision of extension services, building/ technical assistance, workshops, and training for farmers, T.A. producers organizations, women's groups, and small entrepreneurs. The support wvould mainly address the needs for the preparation and implementation of sub-projects, the establishment of demonstration plots, and the start-up of specialized activities. While the basic extension services will be provided under the national extension system, the specific technical assistance required for the preparation and implementation of the investment sub-projects wrill be contracted by the communities and beneficiary groups through NGOs or the private sector and partly financed by the producers. (4) Institutional Strengthening & Project Administration Institut. 4.0 6% 3.0 75% This component would support project management and building! ad-ministration and includes (i) the establishment and operating MgJmonit  Prect Appraisal Document Page 7 CWI Meico ' Project Title: Rural Oewopmerntin Magka Ar expenditures of the Regional Sustainable Development Councils (CRDSs) and their technical support units; and (ii) expenses associated with institutional strengthening at the cental level, project management, monitoring and evaluation. Total 63.0 100% 47.0 75% The project builds on the existing policy and institutional framework. It does not pursue key policy and institutional reforms but rather focuses on strengthening the on-going capacity building effort in support of the decentralization process and progressive delegation of decision-making responsibility at the local level. The issues are discussed in greater detail under " Institutional Assesment" (Section E4). Benefits Ecowomic benefits will be generated through: a) increased agricultural production and diversification which will improve food security and fann household income. The set of economic and financial data based on farm models indicates that small farmers in these areas have a productive and economic potential and are expected to gain significantly from project activities. Indirect benefits are expected to be significant through the demonstration effect of technology transfer and improved natural resource management. 'Me promotion of cost recovery and revolving fuids schemes at the community level would strengthen the local financing capacity; and b) raised value of production through enhancement of processing and marketing activities, better organization of production, imnproved access to local markets, and rural employment opportunities. The project is expected to promote private sector activities in the provision of goods and support services, as well as small business and enterprises, generally locally based and representing important emnployment opportunities. Social benefits include: a) improved participation and access of project beneficiaries, specifically indigenous people and women, to the decision-making process and investment opportunities, hence facilitating ownership of project activities at the local level; and b) increased organization capacity of the communities involved and producers groups, contributing to the formation of social capital and sustainability of the economic benefits. Environmental benefits. The project would promote technology that will maintain the natural resource base and avoid environmental degradation in these fragile zones, particularly w ith respect to deforestation, loss of soil ferility, and soil erosion. Incdence. The distribution of project funds ensures that about 75 percent of project resources flowvs directly to the target population to support productive investments and community development. An additional 20 percent would finance agricultural services and technical support to farmers and producer groups. Targetini (see Annex 13) Detailed mechanisms and criteria have been designed in the Operational Manual to ensure effective targeting and positive incidence of project activities, including a monitoring and evaluation system. They include: a) geographic targeting has been carried out using a combination of data on marginality and poverty indexes (CONAPO/INEGI - See Map), and agro-ecological and production systems (SAGAR); b) eligibility criteria for beneficiaries are defined on the basis of verifiable criteria of available assets (land,  Prnje Appraisal Document Pag CGuntuf May!= Prej TUkk Rura D.wt inib*W Arm livestock), level of self-consurmption, access to services, preference to groups, etc...; and c) eligibility criteria for sub-projects include the definition of the nature of the interventions, sustability criteria based on economic, technical and environmental grounds, participation requiremen, individual limits of support per sub-project, co-financing requirements, and a list of activities excluded. ljnnlementation period: Implementation of the national program would extend over an approximate period of 8 to 11) years. Each phase supporting the national program would unfold for a period of about 5 years and would be constituted by a new batch of areas. Executinf Azencies: Ministry for Agriculture, Livestock and Rural Development (SAGAR) and participating stae authorities of Oaxaca, Hidalgo, Veracruz, and San Luis Potosi. Proiect Administration: Implementation of the project would take place under the 'Altanza para el Campo' framework. In line with its decentralized strategy, the program would be implemented under a fornal global agreement (Convenio) signed between SAGAR and each state participating in the program. It includes a Technical Amnex describing proposed activities, and the annual budget with the financial commitment of the federal and state Governments. An Operations Manual describing implementation arrangements for the whole programn has beca prepared and would cover operational rules and criteria for all states participating in the program. The inmovative feature of the Alianza program is its cost sharing arrangements between the federal level, the states and te producers. A Trust Fund (Fideicomiso) has been established in each state to concentrate funds from the federal and state levels, and to manage disbursements for the various sub-progamms of the Alianza. The state Rural Development Commission (CDR) is responsible for the overall coordination, planning and prioritization of resource allocation by sub-programs. CDRs comprise state representatives from the various institutions involved in rural development, the SAGAR delegate, and producer organizations. At the regional and local level, the aim has been to develop implementation arrangements that streng ownership and accountability at the community level and stimulate beneficiaries and civil society participation and involvement. Implementation mechanisms would also try to ensure access, relevance, and efficiency in the provision of services. At the level of each of the regions covered by the project, a Regional Sustainable Development Council (CRDS) would be established representing the members of communities and "ejidos", producer organizations, SAGAR, the State Government, relevant public institutions (INI, SEDESOL, FONAES, SEMARNAP) with the option of including NGOs recognized by producers and institutions. Its president wvould be a representative of the State. The Council would have responsibility for the promotion, analysis, and selection of sub-projects submitted by producers groups and communities. The CRDS would be assisted by a small technical unit to carry out the technical, economic, and social evaluation of the proposals, and make recommendations. Upon approval by the CIWS, the sub-project proposals vould be fonvarded to the Fideicomiso for payment to the provider of goods and services associated writh the sub-projects. CRDSs will also promote inter-institutional coordination, foster synergy and complementarity of the programs already operating in the region. Financing for productive investments would operate under a matching grant scheme with an up-front contribution of the beneficiaries of not less than 30 percent of project costs. Moreover, for these activities, a cost recovery mechanism would be promoted at the community level to foster sustainability, generation of resources at the local level, and beter accountability. Funds would be recuperated by the beneficiary groups through their conmunity orianizations (Comrnunity Councils) which, in many instances, are already involved in the managemnent of revolving funds (through INI) or informal micro-financing schemes. The incentive system for repayment into this revolving fund scheme would build on the concept of community responsibility and participation, including social peer pressure. In the case of non repayment to the agreed percentages by the beneficiaries, no new financing would be authorized by the CRDS to the members of the respective community. The CRDS, through their technical units, wvould have first line responsibility for monitoring implementation of the cost recovery mechanisms at the local level. Funds would keep revolving at the community level according to internal priorities and decision-making  Pfolet ApPaisal Dument Page 9 cot moco Projet reft: Rural Oewvopmmin Marginal Aram mechanisms. Proiect coordination: Project coordination would be carried out: (i) at the federal level by SAGAR's Sub- secretariat for Rural Development. It would be responsible for project oversight, overall policy guidance, the preparation of new phases, and expansion of the national program; (ii) at the state level by the CDR, and (iii) at the regional level by the CRDS. Accounting, financial reriortine and auditing arrangements: The Fideicomiso would carry out financial accounting and maintain separate project accounts and records for project related expenditures in accordance with sound and accepted accounting practices. Financial reporting would be carried out by the SAGAR delegation in each state including preparation of the Statement of Expenditures (SOE). Financial reports would be consolidated at the central level by SAGAR and NAFIN for transmission and review by the Bank. The financial management, accounting system, and internal controls are already in place as part of the Alianza program and are being implemented by the Rainfed Areas project and the On-farm and Minor Irrigation project They have been operating satisfactorily and their use would be continued under the project. Resources and mechanisms that will permit financial monitoring and reporting of the project will be in place before effectiveness. Accounts would be audited annually according to international audit standards by independent auditors acceptable to the Bank and GOM, in line with the framework agreement existing between the Bank and the Secretariat for Administrative Control (SECODAM). Such framework will be reviewed shortly at the country level to make it compatible with the new OP/BP 10.02 on financial management. Audit reports would be submitted to the Bank within six months of the end of each calendar year (Govermment of Mexico fiscal year). Procuremnent: Most of the procurement (goods, works and services) will be carried out as part of the approved sub- projects. The total cost of an individual project would not exceed US$30,000 and would be implemented with direct participation and contribution of the beneficiaries. Given the remote and scattered location of many rural communities and in order to encourage community participation in project execution, local shopping and direct contracting procedures would be applicable. Procurement would be carried out by the CRDSs and by the beneficiaries, and payments made by the State Fideicomiso. Ceiling amounts have been established and included in the Operation Manual. Prices would be compared with reference prices established at the state level where feasible. Monitoring and evaluation arrangements Monitoring: The CRDS would have primary responsibility for monitoring sub-projects implementation. The technical unit of the CRDS would implement a simple monitoring and reporting system gathering information at the local level on project implementation and submitting quarterly reports to the CDR who would in tum consolidate the information and provide bi-annual monitoring reports to the federal level. M&E would be guided by the "logical framework" matrix (see Annex IA) and permit to follow up on the output and impact indicators agreed upon. Evaluation: Evaluation of project activities, including project performance, level of participation, and efficiency of the administrative system, would be carried out twice a year for each region through independent consultants. The evaluation process wvould be based on the trigger indicators defined in the Attachment to the "logical famnework" (Annex 1). It would build on specific surveys and self-assessments. Infornation relative to project impact on productivity and income would be provided annually according to the agricultural cycles. Reporting and expansion to new phases: At the federal level, SAGAR will centralize and consolidate monitoring and evaluation information for the wvhole program. It will submit progress reports to the Bank tNwice a year. The monitoring & evaluation system will be key in providing lessons of experience and helping in the design of newv phases. In particular, the bi-annual evaluation reports for every region would provide the information needed to carry out the appraisal process of each subsequent  Prect AppFaisal Document Pop la Cauyr Mjdca P ra me.rouRui uobpnwt inM mg Ar.. phase and assess the pace at which the program can be expanded. An Irnplementation Completion Report will be prepared at least six months prior to the final disbursement of the loan; GOM will prepare its own evaluation of the project including a plan for its continued implementation. D: Project Rationale In the absence of the Adaptable Program Loan (APL) instrument, the Bank would have bad to chose between: (i) limiting its support to the areas initially studied in the state of Oaxaca and the Huasteca region, or (i) providing for a general rural investment fund type of approach of a larger scope and dimensioned to possibly cover a greater number of areas. The former alternative would have prevented a longer term perspective on key development issues and limited the leverage to support program expansion, under the sarne framework, in a flexible and progressive way. The latter would have implied a larger financial conimitmnent and would have faced higher risks and uncertainties about future program development, and ngidities in the capacity to pennanendy leam and adjusL Under the APL, preparation and irnplementation of this first phase has pernitted the Government to establish the basis for the national development progrm. Its expansion would be supported through distinct free-standing loans based on readiness, learning, partnership, previous outcomes, and financial availability. This will also permits to gather long term commitment while reducing risks and exit costs. Sector issue Projects Latest Form 590 Ratings Bankc's financed IP DO * IlTigation/drainage, rural - infastructure, extension * 2nd Tropical Agricultural Conpleted S S * Rural and social infrastructure, Development Project decentral. & institut. strengthening * Decentralization & Rural Completed s S ! Small scale municipal infrastructure, Devel. (DRD I) institutional strengthening * Second Decentralization & Ongoing U U * Productive investment, institutional Rural Devel. (DRD) II strengthening * Rainfed Areas Ongoing S S * Development of rural financial services, policy content. * Rural Finance T.A. (pilot) Ongoing S S * Building local management capacity for forest manag., institut. strength. * Community Forestry On-going S S * Productive investment, ag. services, institutional strengthening,. * Agricultural Productivity Plannd Other develoDment agencies and Governnent 2romrams: SEDESOL implements a Municipal Funds program promoting social investments and infrastructure development at the municipality level. Through INI it intervenes in the project area viith commnunity workers and development funds on activities focused on cultural and socio-economic development of indigenous people. It also promotes tirough FONAES equity participation and risk capital for small agriculture enterprises. SEMARNAP participates in natural resources management and soil conservation activities through regional development programs. These agencies and SAGAR have defined a framework of collaboration on regional development activities that will foster better articulation and complementarity of various existing programs.  Prjoe Appraisal Oocument Pae tt Countay Meaco Proect Tite: Rural Oevdopmmt in Margna Arm The proposed project builds on the experience of decentralized, rural development investnent programs. In general they indicate that flexibility and grass-root demand-driven approaches are key in building ownership, defiing local priorities, and setting the ground for better implementation and sustainability. In Mexico, positive examples can be drawn from the first and second Decentralization and Rural Development projects (DRD I and I) as well as the Rainfed Areas Development project, which already operates iunder the Alianza framework. The Bank's record of financing this type of programs is on the whole satisfactory, and there is consensus on continuing this line of financial assistance. Over time, however, some shortcomings have emerged: a) Past municipality-based demand-driven approaches have been globally successful in the promotion of rural infrastructure and social investments. However, because investment decision by municipalities tend to favor collective investments, little has been achieved in triggering production-oriented activities and tapping the productive potential of existing resources; b) Notwithstanding their intrinsic merits, micro-investments tend to form a disparate collection of interventions, and may not reach the critical development mass required to attract the private sector, generate buyers competition, facilitate access to markets, and foster the establishment of support services; c) It is imnportant that access to resources for productive investments be accompanied by the required technical support for technology validation and community organization; and d) Poor timing and lengthy administrative processes are likely to jeopardize the implementation of this type of programs particularly in agriculture where natural cycles impose rigid time constraints. The proposed project would address these issues by: (i) focusing on productive investments in areas with productive potential; (ii) promote the regional approach as a way to concentrate interventions and foster a more integrated level of development better driven by market opportunities; (iii) provide a broad range of technical assistance and training to producers and communities; and (iv) promote decentralized and agile mechanisms for sub-projects approval and disbursement. Two main features reflect Govemment's commitment and ownership: a) The project is an integral part of the nation-wide Government initiative Alianza para el Campo launched in mid 1996 with strong political support and the provision of a large increase in budget allocation for SAGARI Its decentralized strategy ensures a stronger involvement and ownership at the state level; and b) SAGAR and the four states initially involved have been preparing the project since 1995, stimulating community initiatives, ensuring involvement of the smallholders and sustaining interest, commitment and participation, despite uncertainty of Bank's financing in 1996. ~'~1i2udd~dot.flan.~.. _. ........... a) The Bank has built considerable experience in Mexico and worldwide on policy dialogue and operations dealing with poverty alleviation issues and rural investment funds. The Bank can facilitate access to information and advisory capacity on design issues and lessons learned with comparable projects and subsequent incorporation of the lessons of these experiences; b) The newv instrument of the Adaptable Program Loan would provide greater flexibility in adapting project design and financing to client needs as they evolve; and c) Bank's participation provides for better continuity for implementation of the long term national program.  Prject Appait Documet Country: MUico Projc rTie Ruaw Devaopmnwt in Muih Am. E: Summary Project Analysis (Detailed assessments are in the project file. See Annex 8) lx I Cost-Benefit Analysis [] Cost-Effectiveness Analysis ] Ol h Economic Analysis of Prototvye Sub-proiects: retkodelog Because of the demand-driven nature of the project, it will not be possible to know a ptiori which micro-projects will be actually financed, nor in which proportion. Thus the approach chosen for the financial and economic analysis is to elaborate prototype investnents and farm budgets typical of firming situations in the various regions and agroecological zones (upper, medium and lower zones). Each activity and farm model compare with and without situations and illustrate the possible changes induced by the project The activity budgets take into account recurrent costs and labor increments. Additional social and environental benefits of the project have not been incorporated in the economic analysis. However, they are substantial and are discussed under "Benefit and target population" (Section C3). R.y Assumptions of the Analysis: (i) Discount rate: 13 percent; (ii) Tine horizon: 20 years; (iii) Output prices: constant; (iv) Input prices: Constant first quarter 1997 (including family labor costs and technical assistance); and (v) Real Exchange Rate: constant. The main corrections made in order to derive economic prices were to remove taxes (especially VAT on technical assistance) and subsidies (Procampo), and to reflect the opportunity cost of labor. Border prices were calculated for major outputs (maize, coffee, beefo and inputs (fertilizer). With some exceptions (maize) there are few distortions on agricultural inputs and outputs, as they bear limited taxes and no subsidies. Assumptons about impact on markets: Impact on markets is considered limited as the project emphasizes subsistence food production. Local markets exist for local products such as chicken, fish, maize, vegetables. Na-tional and international markets are expected to absorb the production of milk, citrus, beef and honey. Coffee producers' organizations are generally strong and entirely export oriented. The development of organic coffee and other organic products represent an interesting market opportunity that the project would promote. Rehlts: Highest NPVs can be observed for diversification activities. Livestock requires high iniial invesaments that would lirnit its attractiveness. Inprovements in traditional crops (milpa and traspatio) reap lower returns but combine low costs and little risk, and may therefore be better suited to the small farmers' 'risk-coping strategy'. These results have been fed into an economic scenario analysis which aggregates individual results with different weights according to the importance given to the main features of the farning models. In Oaxaca NPVs range beiveen US$29 million and US$46 million and in the Huasteca between US$30 million and US$62 million . Financial Analysis of Prototype Sub-oroiects Resuts: The main findings of the financial analysis are: (i) most of the individual financial NPVs for the fiam models tested are positive, indicating their potential attractiveness to smallholders; (ii) the degree of profitability varies considerably between the upper, medium and lower areas. In Oaxaca, lower returns are typical of the high mountain areas compared to the other two zones, while in the Huasteca results are more variable according to the technical package proposed; and (iii) the marginal return to labor is in most cases higher than the assumed labor wage rate of NS 20/day. The analysis identifies the followxing main limitations to the adoption of technical packages: (i) high initial investments Xvhich may be beyond the financial reach of smallholders (cattle breeding); (ii) the time-lag until production starts (coffee, macadamia); (iii) high labor requirements for some activities (chili, vanilla); and (iv) the degree of changes induced to traditional practices. Sensitivity analysis: A sensitivity analysis that uses financial prices with sw-itching values and a scenario analysis  Pjct ApprMia ocumnt Page 13 conu Ma Project The Rutw Oavdopnswt in MgW Aron were prepared to calculate the impact of changes in: (i) output prices, (ii) expected yields, (iii) operation costs, and (iv) investinent cost. The main findings are that in general the various activities are not very sensitive to a relative increase in input prices with the exception of poultry breeding. Also, in general, activities show higher sensitivity to yields than to prices (especially activities related to milpa and traspatho). This may also partly explain the traditional aversion to risk of farmers when they are faced with the adoption of new technologies, as tiey may usually confront greater uncertainty on their yields. Livestock activities such as cattle and poultry breeding show high sensitivity and their initiation should be subject to careful analysis of prices, narkets, outputs, and validation of productivity parameters through adaptive research and selection of animals. Screening Criteria: Although each sub-project submitted would need to be subject to an economic analysis it is not realistic to expect a sophisticated analysis for each of them. Rather, on the basis of the prototype models developed, operational guidance would be provided to the selection of the projects that will receive support under the program. Screening criteria are thus designed to ensure that sub-projects financed under the project have positive expected net present values. Fiscal Analvsis The project operates under the nation-wide Alzanza para el Campo Program whose budget for 1997 was of about US$220 million equivalent at the federal level. The Alianza represents less than 20 percent of SAGAR's budget Within that framework, the budget for the Rural Development in Marginal Areas program (6 regions) in 1997 is of about US$3.5 million. While proportions may vary from state to state, the cost sharing arrangement for this program is on average of: 50 percent at the federal level, 25 percent at the state level, and 25 percent fiom the producers, which leads to a total project cost of about US$7 million. It is expected that in 1998 the federal budget for this first phase will increase to about US$5 million (US$10 million including all levels) and remain constant in real terns. The program will operate within the existing budget allocated to SAGAR and the states, and will not generate additional financing requirement. Recurrent expenditures represent only about 3 percent of project costs, and more than 75 percent are direct subproject-related investments. -- lefscal impact at th federal level: The fiscal impact of the project is relatively small but negative. The federal contribution to the project (6 regions) would represent about 2 percent of the total Alianza budget (assuming conservatively that the Alianza budget would not increase). Taxation income from incremental production as well as input consumption would be small, especially in view of the income level of the project population, the limited fiscal requirements to which it is submitted, and the type of activities to be implemented. As the project coverage expands to 24 areas, the budgetary impact would grow to about 25 percent of the Alianza program, in year four and five, then declining. he fiscal impact at the states level: As states are not allowved to retain federal taxation revenues, they derive the bulk of their budget from revenue sharing mechanisms of such taxation income by the federal level. Therefore, the issue of financial sustainability of the project would depend on intemal criteria for resources allocation based on local priorities and political w%illingness to support targeted interventions for productive investments in rural poverty areas. The burden of the project at the state level varies according to the number of regions that each state plans to cover. For the four states concerned the project cost remains at relatively low levels, ranging betveen 0,2 percent and 5 percent of the total state investrnent budget. The budget allocated to the project also range between 3 percent and 31 percent of the total states' contribution to the Alianza para el Campo Program of which it is part. The project has been subject to thorough studies (see Annex 8) covering all aspects related to the technical, financial, and environmental matters. In addition, an Operation Manual for the project covers the procedures and arrangements to be followed during project implementation. The Manual was developed in consultation with the states and on the basis of planning workshops held at the local level with representatives of the producer organizations. The project's technical design wvas also assessed through field visits during project preparation.  ProFect Appraisa Document Page 14 Country: Meadco Pas.t ri Ruim Deepment in MwginO AhU s One of the main challenges of the project would be to promote technical improvements adapted to local conditions and reflecting existing constraints while respecting traditional and cultural habits. The strategy for the provision of technical assistance is to foster the provision of private services and to improve accountability and administrafive control of the service providers by the beneficiaries and the communities. Moreover, the technical units assisting the C!RDSs will play a key role in reviewing, screening, and selecting project proposals so as to ensure the fiancial and environmental sustainability of technical packages. Technology generation and diffusion would build on the following elements: a) Rapid rural appraisal techniques, participatory diagnostic and planning with the involvement of research centers and technical staff, so as develop ownership of the technical package at the community level; b) Identification of the technology which is available and can be directly transferred (cofee and citrus improvement, small livestock, small irrigation and drainage works, organic cropping, soil protection metiods, on-farm processing), and the one that requires local adaptation (improvements and changes to the milpa and transpatio fanming system, new varieties for traditional crops, introduction of new crops, etc...); c) Promotion of investments that increase the ability of producers to cope with risks, or at least do not increase the overall risk level of household's activities, and do not represent a qualitative leap outside their reach; d) Implementation of a strategy of adaptive research and validation of available techniques establishing stronger links between research institutions and technical centers (INIFAP, FIRCO, CYMMIT, IICA, INCA Rral, state coffee-growers organizations, NGOs, universities), extension workers, and producer groups; e) Direct involvement of beneficiary groups in the selection, contracting, and periodic evaluation of the performance of the technical assistance; and f) The establishment of a multi-disciplinary consultative group in every state including agronomists, social scientists and economists. Wuile the development of and access to market-based financial services should represent the long term solution to capital formation, rural credit facilities are deficient or non-existant in these areas and past expenence with directed Govenmment-sponsored credit systems has been poor. The matching grant scheme implemented under the Alianza Program was judged appropriate to facilitate generation of assets for productive investments while also promoting a cost recovery mechanism at the community level that would inprove sustainability and foster savings. This would prcomote the development of the financial sector, as people who have not been able to benefit from formal financial services because of their low incomes or location, often represent a large and potentially profitable market for institutions that can develop ways to reduce costs and risks associated with serving them. Executine agencies SAGAR has a good administrative capacity at the federal level. At the State level SAGAR is represented by delegations who coordinate activities with the State Government's administration for agrculture and rural development. Institutional capacitv is uneven from state to state as well as the level of collaboration between state authorities and SAGAR delegates. However, in viewv of the decentralization trend in Mexico, capacity at the states level is being progressively strengthened as states will inevitably become the main actors in the definition of priorities and program execution. The project builds on existing institutional arrangements and will contribute to a sustained effort of instituuonal strengthening. All matters related to procurement, disbursement and audits are handled in Mexico by the Financial Intermediary (the Borrowver - NAFIN) which has a long experience in the adninistration of Bank's projects. Proiect Manazement Most of the management responsibility at the local level Nsill rely on the CRDSs assisted by a technical unit that wouild serve as their secretariat. CRDSs would foster inter-institutional coordination, and focus more sharply on the integration of activities at the regional level. Some of these CDRSs derive from existing coordination structures at the regional level which have already proven their legitimacy and are Nvell established and recognized. Others will  Projet Appraisal Document Pag 1S Country- Ma aco Projod rite Rural Deveioprient in UMgla Ares be created on the basis of existing community representation mechanisms but may initially present weak management and technical capacity, and will need to be strengthen. The institutional capacity for loan recovery at the tommunity level would generally need considerable capacity building in order to foster sustainability. However, management of revolving funds at the community level has proven to have a better track record than credit schemes extended through public programs. Institutional Strenothenine The project would provide assistance to the communities and the producers' organizations to strengthen their capacity to identify and implement the sub-projects as well as in self-assessment, management of revolving funds, and community organization. Technical workers and extensionists would be trained in rapid rural appraisal techniques and participatory diagnostic. The CDRSs would be strengthened through adequate training and by ensuring that the technical units are adequately staffed and competent. T'he institutional strengthening of SAGAR would aim at reinforcing a small teamn of well qualified professionals in the Sub-secretariat of Rural Development. They would be trained in project preparation and monitoring and in the formulation of rural development policies. This team should be capable of monitoring implementation of the projects in the various regions while organizing the studies and workshops required for the preparation of the new areas that are part of the national program. During project preparation, comprehensive socio-economic studies were carried out including detailed characterization of producer organizations. As indigenous people make up a significant percentage of the target population, the studies and workshops carried out have addressed indigenous issues in an integrated way as part of the various topics being studied (socio-economic, production systems such as milpa and transpatfo, gender, land tenure, natural resources management, etc..). These comprehensive assessments and the participatory approach followed during project design with beneficiary workshops, take into account the elements required for the empowerment of the indigenous people in a fashion that is consistent with their cultural preferences. Moreover, as the project is designed in a demand-driven way, participation is entirely voluntary and non-participants will not be affected by project activities. In particular the project would support and improve production systms that are well suited to the need and enviromnent of the indigenous people and ensure their involvement in the identification and inplementation of project activities in the same way that it has emphasized gender considerations and participation in the project. The project would initiate a learning process in the change of relationship between the communities and state and federal agencies. There are already great expectations at the community level that participation would not confine itself to project preparation but would extend to implementation and monitoring. The project would also ensure that extension workers at the conmmunity level are accepted by the groups- they serve and that they speak the local language. The project has considered land tenure systems and land management by indigenous communities. There is a long history of peasant organization and struggle against the large landowner and market intermediary classes that dominated much of these areas for a long time. In recent times, upon the progress made by the agrarian reform, especially since 1992 (see Annex 12), the situation has improved. Although land tenure conflicts may persist in some locations, institutional resolution mechanisms are in place. The project will not affect land tenure or induce changes in the rights of indigenous people over land. More recently civil society has tended to move from a purely land and human rights defense objective to a more production-oriented focus. The project meets the criteria of a social development plan of the indigenous people, preserving their social organization systems in the framework of cultural diversity. The National Indigenous Institute (INI), which has a permanent presence in these areas through their community workers, has closely participated in project preparation and will continue to collaborate as part of the project institutional mechanism (INI is a permanent member of the CRDSs).  ProjectAppraisal Document p is Country: Mexico Projec rTh RuNl Oevopmt in Mh IU k Environmental Category (] A [x] B [3 C Separate environmental analysis have been prepared for the different project regions in close collaboration with several state and federal agencies including SEMARNAP, research organizations (INIFAP, CBIMYT), faimes organizations, and NGOs. They have shown that the project would improve the productivity of local faring systems while protecting the natural resource base, hence the project would have either beneficial or neutral impacts on the environment. To achieve this, the implemnentation strategy would need to build on strong participatory diagnostic methods carried out jointly by the local communities and the technical assistance. The Operatio MaNual includes the screening criteria required to ensure that environmental considerations are taken into account during sub-project selection. Their implementation would be subject to regular monitoring. A list of actvites that would not be eligible to project financing has also been established including: creation or rehabilitation of rural roads, modification of the cropping patters of shaded-coffee, restrictions on the use of agro-chemical. The project would not involve any resettlement. Identification/Preparation Implementation Operation Beneficiaries COL COL COL Producer Organizations COL COL COL NGOs COL CONS Local government CONS CONS IS State government COL COL COL Federal Government COL COL COL Academic/research COL CONS IS=nformation Sharing; CONS=Consultation; COL=Collaboration; There is good scope for strong and responsible farmer participation in the project For this to materialize, however, it is important that state governments understand well the need to cooperate with producers' orgamzations and other civil society institutions. It is also essential that government officers be prepared to transfer to farmers and their organizations the role of promoters and managers of rural development, and be ready to consider producers' organizations leaders and their advisors as respected partners with whom to decide priorities and program activities. Participatory methods that build on these on-going processes have been promoted during preparation of the project To ensure wide producer participation during implementation, mechanisms are proposed through the CRDSs for a balamced representation of governnent authorities, producers organizations and conmnunities. F: Sustainability and Risks Sustainability would be addressed at three levels: a) technical sustainability w ould focus on the appropriate management of natural resources. The project would promote technologies capable of protecting the soil from degradation, particularly on the steep mountains. t would discourage development that may damage the natural resource base; by institutional sustainability would be promoted: (i) at the Government level, by building on and strengthening existing institutional arrangements under the Alianza para el Campo program; and (ii) at the local level, through a decentralized organizational set up that Nvould promote ownmership of the process of appraisal and approval of investment proposals; and c)i financial sustainability vwould be pursued by promoting investments and activities that would generate regular income streams over time, and which the farmers themselves would be capable of managing and maintaining.  Pvojet Appraisal Document Page 17 Counity: Me- o pro*et rile: Runa Oevelopnmnt in Marn Moreover, cost-recovery would be sought for commercial activities so as to stimulate the constitution of revolving funds at the community level. Some uncertainty will remain with respect to political commitment and therefore budgetary allocation at the end of the present administration in the year 2000.- However, there is growing concem in the public opinion about the necessity to undertake a more pro-active and targeted approach towards the most disadvantaged segments of the rural population. This makes it unlikely that major changes be introduced in the main sectoral orientations and priorites, as they benefit from wide support at the state and local level. _______________ _ _As m _ From Outputs to Develooment Rating Risk Minimization Measure Objectives (i) Small poor firtmers may not be modest :Improved agricultural services wvould increase available interested in investing in productive to high . teclmological options and know-how. Matching-grants would activities and in adopting new, ease financial constraints while improving ownership and technologies if their income largely: sustainability. Screening of proposals would promote viable depends on off-firm activities and 1sub-projects with remtus to labor above the marginal rural because of their risk-averse behavior. wage rate. Off-farm activities would also be promoted. (ii) Availability of TA with good. modest The project would promote a strategy of service provision by knowledge of participatory techniques, 'the public and private services which builds on establishing and of sustainable management of links with various centers of technical expertise; it would also natural resources management may be' implement a training program for extensionists and limited. community workers. (iii) Access to market may be. modest . The project would increase the bargaining power of local constrained by limited number of to high I communities by improving their organization capacity, intermediaries (coyotes) and limited 1 I support for micro-enterprises in transformation and possibilities for retaining added value at 1marketing, better market information, and by developing the local level; private sector provision of services. From Components to Outputs: (i) Availability of budgetary resources low The Alianza programn is expected to provide adequate resources and to receive good response at the state level. (ii) CRDSs w,ill be able to operate with . modest Close monitoring and evaluation of the performance of the autonomy and in a democratic way tCRDSs. Commnunication and sensitization. (iii) Competent staff will be appointed low to The project wvould focus on capacity building and establish to coordinate project activities and to I modest , evaluation mechanisms to ensure that competent staff is in support the CRDSs ' place. (iv) Political factors modest 'Targeting mechanisms and vell defined operational procedures in addition to close involvement of the beneficiaries in project implementation should limit political interference. Local authorities will be informed and consulted so that they endorse project strategy. Ov.erall p_e. risk rating 'modest . ...............~ ~ ~~~ ~ ~ ~ ~ ~ -------- -..... .......... . ......... ................ ...... . ..... .... ...... ..... ~..... *. .. .................. . ..  Project Appraisal Document pa is Country: Mdco Proe The: Rural Ouw,tln wlnl Arm a) Decentralization of project management at the regional level through CRDSs could be controversial in view of possible differing approaches developed by the different states on how to deal with communities and municipal dievelopment. The fact that a representative of the state govermnent would be the president of CRDSs has permitted to address Government concern with respect to oversight on the use of financial resources. On the other hand CRDSs will have to prove that they can operate in a balanced and democratic way, and that producers representatives will be able to influence decision-making. b) 'While project design has incorporated indigenous issues in a way that is consistent with cultural and socio- economic preferences at the local level, implementation of project activities could be subject to controversial interpretations on how to best deal with indigenous people development. The participatory and demand-driven approach, the development of technological packages adapted to traditional farming systems, the incorporation of the language criteria in the selection of extensionists, and the close collaboration with INI, are all elements that should help to adequately address indigenous issues. G: Main Loan Conditions _I~~~~~~~~~~~N Approval of the Operations Manual. The Government has in place the appropriate resources and mechanisms required to carry out the obligations of accounting, auditing, financial management and reporting. H: Readiness for Implementation The procurement documents for the first year's activities are complete and ready for the start of project implementation. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. I: Compliance with Bank Policies 2! project complies with all applicable Bank policies. Task Manager: Adolfo Bri Sector Director: Maritta Koch-Weser ! JLlX (Y4C) Country Director: Olivier Laoo -  pop is Project Tie: Rural Dweopmen in Margh A Annex 1 Mexico - Rural Development in Marginal Areas Project Design Summary CAS Objectives Improve the well-being of the Acknowledgment that income Surveys, sector studies, Political commitment and ural population and expand and access to productive services and independent reviews financial support at the federal the opportunities for has increased in targeted areas and decentralized level to pursue integrating smallholder policies in favor of the most marginal producers into the economically disadvantaged growth process. populations. Program Development (Program Development Objectives Objectives to CAS Objectives): Inprove the well-being and Increase of productivity by about Implementation I General economic stability in the income of smallholders in 40% to 50%/o, and increase of Completion Reports of the coutry and politc about 24 targeted marginal income by about 30% to 40% for each phase of the stability in the region. areas through sustainable participating producers. Program. 2 Price stability (10% in real increase in productivity and terms) food security. Positive impact on employment Bi-annual evaluation 3 No natural disasters, drought opportunities in the targeted reports from each phase of or floods areas. the Program 4 There are economic opportunities for the creation Successful integration of of small enterprises. sustainable natural resources 5. Sustained political and management practices in budgetary commitment to community development plans address social sector issues permitting a positive impact on 6. The regions benefit from land coverage, forest resources, irastructure and the soil conservation, and better use provision of social services of pesticides. from other development programs and institutions in a complementary way. Project Development (Project Development Objectives Objectives to Program Objectives): Increase smallholders I Producers who adopt the new 1. Biannual monitoring I The other phases of the productivity in a sustainable technology experience an reports program are prepared and way and ensure food security increase of yields of the milpa 2. Bi-annual evaluation implemented with success in the 6 marginal areas of by 40% at the end of the report 2 General economic stability in Mixe, Cuicateca, Mazateca project (EOP). 3. Mid-term evaluation the country and political (Oaxaca), and the Huasteca 2 Producers that adopt new 4. Implementation stability in the region region of Veracruz, San Luis technology improve yields of 5. Completion Report 3 Price stability (10% in real Potosi and Hidalgo. fruit, coffee and livestock by terms) 30% EOP 4 No natural disasters, drought 3 Households that adopt or floods improved technology for S There are economic traspatio production, increase I opportunities for the creation  Page 20 Pr*et Tin.: Rural O.elopmt in M"ra Ars their consumption of of small alierprises. vegetables and meaL 6. Susained political and 4 70% of the projects are still budget"y commitment to operating two years after the address social sector issues financing of the investment. 7. The regions benefit from 5 At least 70% of the producers infastructre and the supported by the project provision of social sevnices improve their income by at from other deeopment least 30% at EOP. programs and insdtutions in 6 Small enterprises supported by a complmentary way. the project generate new substantial enployment in each region at EOP. 7 Producers that adopt the improved natural resource management practices show improved soil fertility. Project Outputs: (Output to Project Development Objectives): 1. Producers have access to 1.1. Subprojects financed 1.1. Biannual monitoring 1 The majority of producers are ftmancial resources and annually during project life: reports interested in invresting in support services to Oaxaca 225 1.2 Bi-annual evaluation pmductive activities and prepare, implement and S.L.P. 150 report introducing technological maiintain sustainable Hidalgo 125 1.3 Implementation changes in spite of risk-averse practices of productivity Veracruz 100 completion report behavior. increases and natural 1.2. About 40,000 smallholders 1.4 Minutes from the 2 There is sufficient supply of resources management benefit from the project by meetings of the TA specialized on the EOP of which: Regional Council sustinable managemnta of 14,500 in Oaxaca natral resources 8,400 in Veracruz 3 Access to markets and 9,100 in San Luis Potosi adequate functiong of 8,000 in Hidalgo market services 1.3. 80 % of the projects submitted to funds recuperation implement a cost recovery system 1.4. Cost recovery would be at least at 80% of the amounts expected to be recuperated. 1.5 Adoption of methods of soil conservation and water management in 50% of the subprojects for milpa improvement in watershed areas. 1.6 Introduction of organic cropping and biological control in the relevant agricultural projects. 1.7 Natural resources management messages are _ ________________ integrated in the extension I  Page 21 Project Tide: Rural Develapmest In Margal Areas programs of the community agents. 1.8 Livestock practices are improved through better rotation and use of fodder 2. Communities participation 2.1 Community plans for natural in the project is facilitated resources management, small through better infrastructure and capacity organization, preparation building approved and of management plans, implemented in eligible small works, and capacity communities building. 3. An efficient system of 3.1. 50% of the producers that technology transfer is receive T.A. on ag. operating and meeting technology adopt proposed farmners' needs changes. 3.2. The project has permitted the establishment of one extensionist in every 4 communities assisted. 3.3. At least 60% of the subprojects financed have benefited from technical assistance considered satisfactory by the producers. 4. A coordination mechanism 4.1. A Regional Council for is operating that ensures Sustainable Development the participation of operates in every region, with beneficiaries and the balanced participation of institutions. institutions, producers organizations, community representatives, and NGOs recognized by beneficiaries and institutions. CRDSs are efficiently assisted by a small technical unit 4.2. 90% of the subprojects are subject to a maximum approval time of: * CRDS: - analysis: 15 days - approval: 15 days ! Fideicomiso: - payment: 15 days  Prect Tafrde Rwui Development In Mha! Aram Project Components Input: (Componns to outputs) 1. Pnoductive investments USS40 million 1. Bi-annual monitoring I Timely availability of Fimancing sub-projects reports including: budgetary resources at the prepared by beneficiary - financial monitonng federal and state level groups after approval by - disbursement report 2 CRDSs will be able to the CRDS. Beneficiaries - CRDS report on cost operate with autonomy and contnbute to project cost recwvery in a daeowatic way and implement cost 3 Competent staff will be recovery system at the intedto coordinate colmmunity leved lpoj project activities and to 2 C:mmunitv Development USS6 million 2. Bi-annual monitoring support the CRDSs Community projects are reports 4 No polidcal interference prepared and financed to implement natwual resources management plams, small works and training 3 Technical support USS13 million 3. Contracts, training, Contract technical and performance assistance staff and carry evaluation out training and workshops for farmers and producers organizations 4 Institutional strengthenina USS4 million and project administration 4. Management and Eslablish CRDSs and their financial reports, technical units, train pro t records, project management staf contracts, audits, carry out monitoring, and evaluation reportL contract out evaluation  Project TMe: Rural Development in Marginal Ageas Attachment to Annex I Mexico: Rural Development in Marginal Areas Trigger Indicators under the Adaptable Program Loan It is envisaged to implement the national program for rural development in marginal areas in four phases, each phase being constituted by a new group of areas. The Bank would support each phase distinctly through a new adaptable program loan. The project described in this PAD refers to the first phase of the programn as is the logical framework matrix in Annex 1. Each new phase would be submitted to an appraisal process aimed at evaluating the technical, economic, social, and environmental feasibility, as well as at to learn from the experience gained during the implementation of previous phases. This approach of learning by doing will allow for continuous adjustment to project design, early identification of risks, and the implementation of corrective measures before geographic coverage expands. In order to help incorporate required adjustment in project design, facilitate the appraisal process of each new phase, and determine its appropriateness and readiness for integration under the program, the following indicators have been defined. They would be assessed and measured as part of the monitoring and evaluation systemn in place and presented in the evaluation reports to be prepared for each areas. Evaluation of achievements and lessons of experience under previous phases will develop over time. However, prelininary results and indication of performance would be gathered during implementation and will need to be differentiated according to the time-frame on which they are based. All phases will have the same development objectives, but in different areas. Besides the regular project preparation and appraisal process, a logical framework with specific indicators will be developed for every region. The initial focus of the first phase of the program and thus the triggers for phase II will be based on the evidence that capacity building and institutional strengthening is taking place in the expected way and that the key principles underpinning the strategy of the program are sound. Therefore, trigger indicators will be more process- oriented and geared towards capacity building and learning. As the program rolls out geographically and implementation results are available, triggers for phase III and IV will be more quantitative-oriented and based on the performance indicators spelled out in the logical frameworks of previous phases. Triggers for Dossible additional Bank lendins for the Program supported by the Loan Phase II Experience from previous phase a) Regional Councils are established in each region Bi-annual evaluation reports, indicates that the project's with a balanced participation of institutions, made available to all members institutional arrangements producers organizations, conmmunity of Regional councils, to be reflect effective decentralized representatives and NGOs recognized by carried out by independent decision-making, builds local beneficiaries and institutions consultants in every region responsibility and (incorporating analysis of accountability, and implements b) Administrative arrangements permit effective and results of farmers' surveys) an effective monitoring and timely project approval and implementation evaluation system c) The monitoring and evaluation system permits to follow-up project implementation and assess achievement of project objectives  Pop 24 Project Tile: Rural Ovebpmuent h Malrg Ar_a Experience from previous phase a) Communities participate to project activities and indicate that the project develop internal mechanisms for the submission facilitates community and implementation of subproject proposals organization and development, and there is demand in a b) Revolving funds are established at the community nnatching grant scheme for level so as to introduce elements of financial productive investments. sustainability c) Beneficiaries prepare and submit subproject proposals in significant number Experience from the previous a) Sub-projects receive support from extension phase indicate that the project is workers and/or TA promoting a system of technical assistance which is community- b) Extension workers are well accepted and based and demand-driven. integrated in the community Phase III and IV Productive Investments Effectiveness of a matching a) Each project region demonstrates a substantial Bi-annual evaluation reports, grant scheme for productive adoption of proposed technology and an increase made available to all members investment, and introducing an in agricultural productivity; the improvenent of of Regional councils, to be element of financial the nutritional situation; and higher income from carried out by independent sustainability through fostering these activities (see logical framework indicators). consultants in every region community-based revolving (incorporating analysis of funds b) The number of subprojects under implementation results of farmers' srveys) in each project region is in line with the logical framework indicators and shows a real demand by producers. c) The revolving funds successfully re-channel funds to other projects in the community. Community DeveloRment A community-based Community plans for natural resources management, Bi-annual evaluation reports, participatory approach facilitates small infrastructure and capacity building are made available to all members internal organization and approved and implemented satisfactorily in each of Regional councils, to be development, and permits region carried out by independent communities to define demand consultants in every region for the support services that (incorporating analysis of meet their needs results of fhrmers' surveys)  Page25 Project Ttle: Rural Development in MArginal Areas Technical Sunnort a) Target groups are of the opinion that service Bi-annual evaluation report Establishment of a demand- delivery is useful and at least 60% of the made available to all memnbers driven and effective system for subprojects financed have benefited from technical of Regional councils, to be the delivery of support services assistance. caried out by independent consultants in every region b) Communities agree with the selection made of the (incorporating analysis of extension workers and are willing to contribute to results of farmers' surveys) part of their costs. c) Progress in knowledge and practice change in snallholder farming systems is demonstrated in each project region. Institutional strengi enin. administration and monitorin a) The Regional Councils operate satisfactorily in Bi-annual evaluation reports, each project region. The project promotes made avaflable to al members The project's institutional institutional complementarity at the regional level of Regional councils, to be arrangementS reflect effective and foster better overall impact of other carried out by independent decentralized decision-making, government programs consultants in every region builds local responsibility and (incorporating analysis of accountability, and implements b) Administrative arrangements permit effective results of farmers' srveys) an effective monitoring and and timely project approval and implementation evaluation system (see logical framework indicators) c) Monitoring and evaluation reports are submitted in time and adequately reflect implementation progress.  pa2B Project Tre: Rural Development in Marlgl Aros Anniex 2 Mexico: Rural Development in Marginal Areas Project Detailed Project Description Component 1: Productive Investments (US$40 million) Under this component the project will finance demand-driven investment subprojects for agricultural production, natural resources management, processing activities, and mninor productive infrastructure. The investments will be financed through a matching grants system. Up-front farmers' contribution will be in kind or/and in cash and will not be less than 30% of project cost. A cost recovery mechanism will be established at the beneficiaries' level to ensure sustainability of the activities. Moreover, the grant-financing amounts for the different type of activities are subject to ceilings as defined in the Operation Manual. Financing of the previous subprojects would include the following: farming equipment and tools; input for cultivation or livestock, animals; construction material, small works and installations; processing machinery; small irrigation and drainage works and equipment; plantations and nurseries; technical assistance and specialized training; storage facilities for inputs and products. The following type of subprojects will be covered by the project: [mprovements in existingt Farming Systems for Basic Grains ("Milpa"I) and home aarden production ("Transpatio" 2 'There are two combined aspects related to milpa husbandry: to increase subsistence grain production in order to improve household food security, and to disseminate sustainable grain production technologies that would improve soil and moisture conditions, mostly through minimum tillage methods, green manure, and live barriers. Inprovement of crop rotations, intercropping systems, fallow systems and better varieties are also considered. The most important requirement for tapping the existing potential is a good understanding of the complex functioning of the milpa system, of the labor and input requirements of the present and proposed technologies, and of the interaction between the milpa and other on- and off-farm activities in the family economy together with labor allocation strategies of the small-holders. Transpatio cultivation (homestead) is related to vegetable and fruit production and rearing of small animals (birds, sheep, goats and, in some places, pigs). The transpatio is mostly a women occupation and provides for both domestic consumption and for occasional sales. Diversification and Improvement of Farming Production with Commercial Objectives The most important crops concerned are coffee, sugar cane, and citrus fruits. There is much room for improvement of coffee yields and returns to investmnents in coffee production. Rehabilitation would have to proceed carefully, however, through natural attrition and the filling of the many voids in coffee groves. The expansion of the production of organic coffee is a promising line of investment in the sector. Organic coffee growers have already established certification and export channels on which the project could build. I)iversification subprojects would comprise a variety of crops with arboreal or shrub plantations (such as vanilla, macadamia, litchi, citrus, etc.); annual crops (i.e. passionflower, ginger, chilis, Milpa is the Mexican name for the crop land used by farmers to produce food for their own subsistence Maize, beans and some vegetables are normally grown in a variety of ways, including crop association and relay systems.  Page 27 Project Title: Rural Deveopment In Marginal Areas pineapple, flowers, etc.); and the development of minor stockbreeding, aquaculture, and apiculure. The production of loaf sugar from sugar cane has also a good potential. It would require some on- farm investments and technology enhancements to increase yields and improve processing and marketing of the output so as to increase the added value at the farmer's level. Citrus production improvement also offer a good potential (mandarins, sweet lemons and grapefruits) but the existence of good marketing outlets will need to be ensured. In addition to small livestock development, the project would promote technologies and investments that would foster intensification of livestock activities, such as dual-purpose cattle raising (dairy and meat) which offers the main opportunities in the lower zones. Natural Resources Management and Agroforestrv Subprojects would facilitate sustainable production of firewood, in order to help soil conservation and the utilization of medicine plants. It would also assist in the establishment of seed and plant nurseries and in the recuperation and conservation of soil. Forestry resources are currently exploited commercially for timber in parts of the upper zones by communities and ejidos. There are localized potentials to develop these activities with technical assistance for forest management, and investment in small forest trails and felling equipment. In Oaxaca the project would benefit from the technical assistance and methodology being implemented by the Community Forestry projectL Small enterprise development Subprojects would assist in the establishment of small centers for animal breeding, small store systems, transformation and commercialization of farming products and input, artisanal crafing, processing units, the production of building material, furniture consttuction, various types of wood and iron works, repair shops, basket and pottery making, etc... The project would also support the establishment of small private businesses for the provision of agricultural services. Revolving Funds While the use of directed matching grants to finance rural productive investments could be considered as a second best approach to rural finance, it was chosen due to the low performance of rural financial markets in Mexico, which are particularly deficient or non-existent in rural poverty zones. International experience has shown that directed credit has low repayment rates and high administrative costs. The approach chosen in this project would not face comparable administrative costs since fiscal recuperation of the funds is not envisaged. Rather, in addition to up-front beneficiary contribution, a cost recovery mechanism would be developed at the community level and would build on intemal management practices and control systems as an incentive mechanism for the repayment of funds and access to new financing. Moreover, careful targeting and monitoring mechanisms would need to ensure that funds go to poor small producers and their communities. Component 2: Community Development (US$6 million) This component mostly covers activities to be implemented by the communities and whose financing would not need to be recovered. Main activities include preparation and implementation of simple plans of community-based natural resources management using participatory rural assessment methods, small projects of indirect benefits related to cormmunity activities, studies for the preparation of community development plans and works, workshops and training for capacity building, participatory approaches, management of revolving funds, etc...  Page28 Project The: Rural Development in Mnal Areas Component 3: Technical Support (US$13 million) This component of the project covers the provision of extension services, technical support and training of farmers and producers organizations, required for the implementation of subprojects, the establishment of demonstration plots, and the organization of workshops and training. While the basic extension services will be provided under the national extension system (ithe SINDER program), the producers will be able to contract out, through NGOs and the private sector, the support services and technical assistance required for the identification, preparation and implementation of the subprojects. Part of the cost of the TA would be covered by the beneficiaries. * Typical activities under this component will be: * Training courses and workshops on agricultural productivity. * Establishment of demonstration plots and technology validation modules. * Tours and workshops to exchange experiences among producers' groups. * Identification of project ideas and support to project preparation, for activities to be presented under components I and 2. - Support to participative planning and progmmming. - Support for self-evaluation of the project and its impact. * Identification of the requirements for specialized technical assistance in the project zones.