The World Bank Mexico: Sustainable Productive Landscapes Project (P159835) REPORT NO.: RES45401 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF THE MEXICO SUSTAINABLE PRODUCTIVE LANDSCAPES PROJECT APPROVED ON MARCH 30, 2018 TO NACIONAL FINANCIERA, S.N.C., I.B.D. ACTING AS TRUSTEE OF THE SUSTAINABLE FUND NAFIN / FONDO SOSTENIBLE NAFIN (FSN) AND THE UNITED MEXICAN STATES AGRICULTURE AND FOOD LATIN AMERICA AND CARIBBEAN Regional Vice President: Carlos Felipe Jaramillo Country Director: Mark Roland Thomas Regional Director: Anna Wellenstein Practice Manager/Manager: Diego Arias Task Team Leader(s): Eli Weiss, Joanne Gaskell The World Bank Mexico: Sustainable Productive Landscapes Project (P159835) ABBREVIATIONS AND ACRONYMS DA Designated Account FCC Fondo para el Cambio Climático (Climate Change Fund) FEGA Fondo Especial de Asistencia Técnica y Garantía para Créditos Agropecuarios (Special Fund for Technical Assistance and Guarantees for Agricultural Loans) FIRA Fideicomisos Instituidos en Relación con la Agricultura (The Instituted Trust Funds for Agriculture) FSN Fondo Sostenible NAFIN (Sustainable Fund NAFIN) GA Grant Agreement GoM Government of Mexico GEF Global Environment Facility NAFIN Nacional Financiera, S.N.C. I.B.D. PCG Partial Credit Guarantee PDO Project Development Objective SEMARNAT Secretaría de Medio Ambiente y Recursos Naturales (Ministry of Environment and Natural Resources) SHCP Secretaría de Hacienda y Crédito Público (Ministry of Finance and Public Credit) TPS Territorios Productivos Sostenibles (Sustainable Productive Landscapes) The World Bank Mexico: Sustainable Productive Landscapes Project (P159835) BASIC DATA Product Information Project ID Financing Instrument P159835 Investment Project Financing Original EA Category Current EA Category Partial Assessment (B) Partial Assessment (B) Approval Date Current Closing Date 30-Mar-2018 30-Jun-2023 Organizations Borrower Responsible Agency Nacional Financiera S.N.C. I.B.D. acting as a Trustee of the Sustainable Fund NAFIN (FSN) Project Development Objective (PDO) Original PDO To strengthen sustainable management of productive landscapes and increase economic opportunities for rural producers in priority areas of Mexico OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing (US$, Millions) Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed TF-A7021 30-Mar-2018 24-May-2018 28-Mar-2019 30-Jun-2023 21.86 .07 21.79 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank Mexico: Sustainable Productive Landscapes Project (P159835) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. PROJECT BACKGROUND 1. The Sustainable Productive Landscapes Project (TPS, for the Spanish acronym) (P159835) was approved by the World Bank’s Board of Executive Directors on March 30, 2018 with a Grant from the Global Environment Facility (GEF) in the amount of US$21.86 million (TF0A7021). The Project is implemented by the Ministry of Environment and Natural Resources (SEMARNAT, for the Spanish acronym) and its Development Objective (PDO) is “to strengthen sustainable management of productive landscapes and increase economic opportunities for rural producers in priority areas of Mexico”. The Project’s components are: (i) Capacity Strengthening for Sustainable Landscape Management; (ii) Investments in Biodiversity-Friendly and Climate-Smart Production Systems; and (iii) Project Management, Monitoring, and Evaluation. The current closing date is June 30, 2023. With less than 12 months until closing, only US$0.07 million (0.3 percent of project resources) have been executed and disbursed. 2. The Project is aligned with the Government of Mexico (GoM)’s policy priorities and the World Bank’s strategy in Mexico. The Project remains aligned with the World Bank Group Country Partnership Framework for Mexico FY20-25, discussed by the Board of Executive Directors on February 27, 2020. Specifically, it contributes to Objective 6 to provide more inclusive and sustainable infrastructure services, and Objective 7 to support the government in reaching its climate change goals. The GoM has also confirmed the relevance of the Project and its alignment with Mexico’s National Biodiversity Strategy and Action Plan (NBSAP) submitted to the Convention on Biological Diversity (CBD), and the National Action Program (NAP) of the United Nations Convention to Combat Desertification (UNCCD), both of which address the two central topics of mainstreaming and habitat connectivity, and include drylands and ecosystems not previously considered in similar projects in Mexico. In addition, by contributing to both mitigation and adaptation objectives, the Project aligns with goals of Mexico’s ambitious Nationally Determined Contributions (NDCs) under the United Nations Framework Convention on Climate Change (UNFCCC). 3. Due to limited implementation progress, the ratings for PDO and Implementation Progress have been downgraded from moderately unsatisfactory to unsatisfactory since October 2021. Delays in implementation have largely been the result of the dissolution of the Climate Change Fund (Fondo para el Cambio Climático, FCC), which was the original Recipient of the grant funds. As part of a broader GoM’s mandate to cancel some public trust funds, on November 6, 2020, a decree published in the Official Gazette (Diario Oficial de la Federación, DOF) eliminated the FCC trust fund. Due to its extinction, the Project’s Designated Account (DA) was closed on June 30, 2021, and the remaining non utilized funds that had been advanced to the DA - US$928,142.95 out of a total initial advance of US$1 million - were refunded to the World Bank on July 8, 2021. B. RATIONALE FOR PROJECT RESTRUCTURING The World Bank Mexico: Sustainable Productive Landscapes Project (P159835) 4. A project restructuring to establish a new Grant recipient is needed to achieve the Project objective. After the dissolution of the FCC, the Ministry of Finance and Public Credit (SHCP, for its Spanish acronym), upon request of SEMARNAT, formally requested the Bank, in December 2020, to start the restructuring process of the Project and to adapt it to the new institutional circumstances and SEMARNAT’s institutional priorities. Parallel, on December 9, 2021, the GoM established the new Sustainable Fund NAFIN (Fondo Sostenible NAFIN, FSN) to receive and disburse non-reimbursable resources from International Organizations for projects related to sustainable development. In January 2022, SEMARNAT formally requested the Bank to change the Project’s recipient to FSN, with NAFIN, a Mexican public development bank which acts as fiduciary agent for the majority of the Bank’s projects in Mexico, acting as its Trustee. 5. To minimize the impact of a change in Recipient and accelerate project implementation, the World Bank and SEMARNAT have agreed on a two-step restructuring and action plan. The current restructuring changes the Recipient in the Grant Agreement from FCC to FSN, and a second restructuring is envisaged after the Project’s mid-term review, planned for October 2022, to assess progress and reflect any technical adjustments needed after the first restructuring. 6. Restructuring requirements set forth in Bank’s Policy and Directive for Investment Project Financing have been met, namely: (i) the PDO remains achievable; (ii) the Bank and the Recipient agree on actions that will be undertaken to complete the Project on time; (iii) there are no overdue audits; and (iv) the Project is not subject to suspension of disbursements. II. DESCRIPTION OF PROPOSED CHANGES 7. The proposed changes to the Project are: (a) replacement of the extinct FCC for the new FSN; and (b) the inclusion of a new type of Eligible Expenditure corresponding to NAFIN’s charges, acting as trustee of the FSN, for carrying out activities related to Component 3, Project Management, Monitoring, and Evaluation. These charges would correspond to the Project’s funds management (disbursements and management of the Project’s DA) and fiduciary and overall implementation support to SEMARNAT. 8. As part of this restructuring, the Grant Agreement and the Disbursement Letter of the Project are amended and the Project Operations Manual (POM) has been updated to reflect adjustments to the implementation, disbursement, and financial management arrangements of the Project. a. Implementation arrangements 9. The FSN, acting through NAFIN as its trustee, would be the Recipient and responsible of managing GEF Grant funds, maintaining separate accounting and financial records for Project transactions. FSN would provide fiduciary and implementation support to SEMARNAT under the terms and conditions to be set forth in the Convenio Específico, a specific agreement to be entered into between SEMARNAT and NAFIN that outlines the roles and responsibilities for both entities in relation to the implementation of Part 3 of the Project, and to be included as an effectiveness condition to the Amended Grant Agreement. The World Bank Mexico: Sustainable Productive Landscapes Project (P159835) 10. Project funds to implement Part 2.2 of the Project, Capitalization of the Partial Credit Guarantee Fund, would flow through NAFIN (as trustee of the FSN) to be transferred to the Special Fund for Technical Assistance and Guarantees for Agricultural Loans (FEGA). FEGA, the guarantee fund of the Instituted Trust Funds for Agriculture (FIRA), a second-tier development financial institution in Mexico, would remain responsible for the implementation of Part 2.2 of the Project under the terms and conditions to be set forth in the agreement to be entered into between SEMARNAT and FEGA (FEGA Agreement). The FEGA agreement will include specific provisions for SEMARNAT to request and instruct NAFIN to transfer funds for the implementation of Part 2.2 of the Project. Project funds would be disbursed as advances to a segregated DA to be opened by NAFIN, from which (and upon request from SEMARNAT under the terms to be set forth in the Convenio Específico), all payments for eligible expenditures and Project activities would be made. 11. Recipient costs. Project Management Costs under Component 3, Project Management, Monitoring, and Evaluation (equivalent to five percent of the total GEF Grant), would be split into technical and fiduciary functions between SEMARNAT and FSN: (i) a two percent of the remaining Grant proceeds would be utilized to finance the Project Coordination Unit (PCU), to be maintained by SEMARNAT with staffing and functions set forth in the POM; and (ii) a three percent of each disbursement of Project proceeds to the Recipient, which would be utilized to finance the costs directly charged by NAFIN for services rendered acting as the trustee of the FSN supporting SEMARNAT under Part 3 of the Project. The latter Recipient costs, approved on a one-time exceptional basis, would be included in the Project as a new type of Eligible Expenditure as defined in the Amended Grant Agreement and the POM, equivalent to three percent of every advance made to the DA, corresponding for services rendered by NAFIN, acting as the trustee of FSN, and set forth in the Convenio Específico in the activities related to Project management (excluding profit). These expenditures, as an integral part of GEF and Project financing, would be included in the scope of the external audit and be subject to verification by the independent auditor conducting the external audit. Recipient Costs would be an Eligible Expenditure based on the list of roles and responsibilities of NAFIN in relation to the implementation of Component 3 of the Project as outlined in the Convenio Específico between SEMARNAT and NAFIN. b. Disbursement and financial arrangements. 12. SEMARNAT would request the FSN to submit withdrawal applications to the World Bank, based on the annual operating plan previously prepared by SEMARNAT and approved by the Bank. GEF Grant funds would be disbursed as advances to a segregated DA to be opened and managed by NAFIN, acting as trustee of the FSN. Funds would be utilized to pay for Eligible Expenditures under the Project, according to the annual operating plan previously approved by the World Bank; NAFIN would make payments for Project activities and eligible expenditures upon request from SEMARNAT, under the terms and conditions set forth in the Convenio Específico. SEMARNAT would be responsible for preparing applications to document advances to the DA, which would be submitted to the World Bank through NAFIN. NAFIN would keep record of Project transactions utilizing its institutional financial and accounting systems and prepare monthly financial reports to be provided to SEMARNAT, reporting on the use of Project funds received on the DA, including the amount transferred to NAFIN as Recipient Costs. In line with the GoM request, the amount that NAFIN shall receive as consideration for rendered services supporting SEMARNAT under Component 3 shall not exceed 3 percent of every advance received in the Project’s DA made by the World Bank (the Recipient Costs financed under Part 3 of the Project The World Bank Mexico: Sustainable Productive Landscapes Project (P159835) would be incurred with every advance made to the Project’s DA). SEMARNAT shall remain accountable to the World Bank for the proper use of the entirety of the GEF Grant proceeds. 13. The following disbursement arrangements are included in the Project: (a) the DA ceiling in the Disbursement Letter (DL) would be reduced to US$3 million; (b) prior to requesting a new advance to the World Bank, an expenditures projection approved by Bank would be required – the projection should be based on the annual operating plan that is subject to prior non-objection from the Bank; and (c) new advance requests would be subject to the execution and documentation of previous advances. 14. As part of its due diligence, the World Bank assessed the financial management capacity of NAFIN, as trustee of the FSN, to carry out its role as the Recipient of the Grant. NAFIN has extensive experience acting as financial agent for World Bank Financed Projects in Mexico, its institutional financial and operational systems are considered adequate to manage and control GEF Grant funds. As a result of the financial management assessment carried out, it is considered that NAFIN has adequate capacity to manage and control Project funds and provide fiduciary and implementation support to SEMARNAT. 15. The normal audited financial statements of the FSN (Entity Financial Statements) would be required to comply with the Bank´s external audit requirements: they (i) are prepared and audited in accordance with standards acceptable to the World Bank, (ii) disclose information on activities supported by the Project and uses of GEF Grant funds in terms acceptable to the World Bank, and (iii) are audited by an independent auditor also acceptable to the World Bank. III. SUMMARY OF CHANGES Changed Not Changed Disbursements Arrangements ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ The World Bank Mexico: Sustainable Productive Landscapes Project (P159835) Results Framework ✔ Components and Cost ✔ Loan Closing Date(s) ✔ Cancellations Proposed ✔ Reallocation between Disbursement Categories ✔ Disbursement Estimates ✔ Overall Risk Rating ✔ Safeguard Policies Triggered ✔ EA category ✔ Procurement ✔ Implementation Schedule ✔ Other Change(s) ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ IV. DETAILED CHANGE(S) OPS_DETAILEDCHANGES_LEGCOV_TABLE LEGAL COVENANTS Loan/Credit/TF Description Status Action Project Coordination Unit (“PCU”): To facilitate the implementation of the Project, the Recipient, through SEMARNAT shall maintain throughout Project Partially complied TF-A7021 No Change Implementation a Project Coordination Unit with staff with and functions set forth in the Operational Manual. (SectionI.A.1 (a) of Schedule 2 of the Grant Agreement). The World Bank Mexico: Sustainable Productive Landscapes Project (P159835) Project Directive Committee (“PTC”): To facilitate the implementation of the Project, the Recipient, through SEMARNAT shall maintain throughout Project TF-A7021 Implementation a Project Directive Committee with Complied with Revised composition and functions forth in the Operational Manual. (Section I.A.1 (b) of Schedule 2 of the Grant Agreement). Project Directive Committee (“PDC”): To facilitate the implementation of the Project, the Recipient, through SEMARNAT shall maintain throughout Project Proposed Implementation a Project Directive Committee with C composition and functions forth in the Operational Manual. (Section I.A.1 (b) of Schedule 2 of the Amendment to the Grant Agreement). Regional Technical Unit (“RTU”): To facilitate the implementation of the Project and prior to the carrying out of any Project activities within a Region, the Recipient, through SEMARNAT shall establish and Partially complied TF-A7021 No Change thereafter maintain throughout project implementation with the relevant Regional Technical Unit with composition and functions set forth in the Operational Manual. (Section I.A.1 (c) of Schedule 2 of the Grant Agreement). FCC Agreement and FCC Committee: To facilitate the carrying out of the Project, the Recipient shall maintain TF-A7021 throughout Project implementation the FCC Agreement Complied with Revised and the FCC Committee. (Section I.B.1 of Schedule 2 of the Grant Agreement). “Convenio Específico": To facilitate the access to the resources assigned to the Project, a specific agreement between SEMARNAT and NAFIN, acting as trustee of the Proposed Expected soon FSN (the “Convenio Específico”) shall be signed and maintained throughout Project implementation. (Section I.B.2 of Schedule 2 of the Amendment to the Grant Agreement). TF-A7021 Subproject Agreement: To facilitate the carrying out of Not yet due Revised Part 2.1 of the Project, and prior to the carrying out of each Subproject, the Recipient, through NAFIN, shall enter into an agreement with the relevant Eligible The World Bank Mexico: Sustainable Productive Landscapes Project (P159835) Beneficiary, under terms and conditions acceptable to the World Bank. (Section I.C.1 of Schedule 2 of the Grant Agreement). Subproject Agreement: To facilitate the carrying out of Part 2.1 of the Project, and prior to the carrying out of each Subproject SEMARNAT shall enter into an Proposed agreement (“Subproject Agreement”) with the relevant NYD Eligible Beneficiary, under terms and conditions acceptable to the World Bank. (Section I.C.1 of Schedule 2 of the Amendment to the Grant Agreement). Coordination Agreement: To facilitate the carrying out of the Project, the Recipient, through NAFIN and SEMARNAT, shall no later than 90 days after the TF-A7021 Effective Date enter into an agreement with each of the Expected soon Revised Project Entities under terms and conditions acceptable to the World Bank. (Section I.C.2 of Schedule 2 of the Grant Agreement). Coordination Agreement: To facilitate the carrying out of the Project, SEMARNAT, shall, no later than ninety (90) days after the Effective Date, enter into an Proposed agreement (“Coordination Agreement”) with each of SOON the Project Entities under terms and conditions acceptable to the World Bank. (Section I.C.2 of Schedule 2 of the Amendment to the Grant Agreement). Guarantee Agreement: To facilitate the carrying out of Part 2.2 of the Project, and prior to the carrying out of any Strategic Subproject, the Recipient through NAFIN, TF-A7021 shall cause FEGA to enter into an agreement with the Not yet due Revised relevant Financial Intermediary under terms and conditions acceptable to the World Bank. (Section I.D.2 (a) of Schedule 2 of the Grant Agreement). Guarantee Agreement: To facilitate the carrying out of Part 2.2 of the Project, and prior to the carrying out of any Strategic Subproject, SEMARNAT shall cause FEGA to enter into an agreement (the Guarantee Agreement) Proposed NYD with the relevant Financial Intermediary under terms and conditions acceptable to the World Bank. (Section I.D.2 (a) of Schedule 2 of the Amendment to the Grant Agreement). The World Bank Mexico: Sustainable Productive Landscapes Project (P159835) Operational Manual: The Recipient, shall carry out the Project and/or cause the Project to be carried out, in TF-A7021 accordance with the provisions of a manual satisfactory Complied with No Change to the World Bank. (Section I.E.1 of Schedule 2 of the Grant Agreement). Anti-Corruption Guidelines complied by the Financial Intermediaries: The Recipient shall ensure that the project is carried out in accordance with the provisions of the Anti-Corruption Guidelines (Section I.F.1 of Schedule 2 of the Grant Agreement). For purposesof carrying out Part 2.2 of the Project, The Recipient, through NAFIN, shall cause FEGA to issue a notice TF-A7021 Not yet due No Change (Oficio) acceptable to the World Bank requiring the Financial Intermediaries to comply with the provisions of the Anti-Corruption Guidelines and stating that once the Financial Intermediaries have entered into an Guarantee Agreement, such action will be interpreted as a tacit acceptance of the Anti-Corruption Guidelines. (Section I.F.2 of Schedule 2 of the Grant Agreement). FEGA Agreement: To facilitate the carrying out of Part 2.2 of the Project, the Recipient, through NAFIN, shall TF-A7021 enter into an agreement with FEGA, under terms and Not yet due Revised conditions acceptable to the World Bank. (Section I.D.1 (a) of Schedule 2 of the Grant Agreement). FEGA Agreement: To facilitate the carrying out of Part 2.2 of the Project, SEMARNAT, shall enter into an agreement with FEGA (“FEGA Agreement”), under Proposed NYD terms and conditions acceptable to the World Bank. (Section I.D.1 (a) of Schedule 2 of the Amendment to the Grant Agreement). PCG Operational Manual: The Recipient, through NAFIN, shall cause FEGA to operate the Partial Credit Guarantee Fund under Part 4 of the Project in TF-A7021 Not yet due Revised accordance with the provisions of a manual satisfactory to the World Bank and adopted by FEGA. (Section I.E.2 of Schedule 2 of the Grant Agreement). Proposed PCG Operational Manual: SEMARNAT shall cause FEGA NYD to operate the Partial Credit Guarantee Fund under Part 2.2 of the Project in accordance with the provisions of a The World Bank Mexico: Sustainable Productive Landscapes Project (P159835) manual (“PCG Operational Manual”) satisfactory to the World Bank and adopted by FEGA. (Section I.E.2 of Schedule 2 of the Amendment to the Grant Agreement). FSN Technical Committee: The Recipient shall maintain throughout the Project implementation the FSN TF-A7021 Expected soon New Technical Committee. (Section I.B.1 of Schedule 2 of the Amendment to the Grant Agreement). The Convenio Especifico shall contain terms and conditions acceptable to the Bank, including clear detailed roles of responsibilities for both entities in TF-A7021 relation to the implementation of Part 3 of the Project, Expected soon New and the amount that NAFIN acting as trustee of the FSN shall receive. (Section I.B.3 of Schedule 2 of the Amendment to the Grant Agreement). NAFIN acting as trustee of the FSN, shall support SEMARNAT with certain services for the management of the Project, including the reception and disbursement TF-A7021 of the GEF Grant funds and all other responsibilities as Expected soon New detailed in the Convenio Específico. (Section I.B.4. of Schedule 2 of the Amendment to the Grant Agreement). SEMARNAT shall have “Entity Financial Statements for the Project” audited in accordance with the provisions TF-A7021 of Section 2.07 (b) of the Standard Conditions. (Section Not yet due New II.B.3. of Schedule 2 of the Amendment to the Grant . Agreement).