Page 1 INTEGRATED SAFEGUARDS DATASHEET APPRAISAL STAGE I. Basic Information Date prepared/updated: 03/02/2006 Report No.: 35418 1. Basic Project Data Country: Mexico Project ID: P087038 Project Name: Environmental Services of the Forest Task Team Leader: Mark A. Austin GEF Focal Area: B-Biodiversity Global Supplemental ID: P089171 Estimated Appraisal Date: December 12, 2005 Estimated Board Date: March 28, 2006 Managing Unit: LCSEN Lending Instrument: Specific Investment Loan Sector: Forestry (90%);General agriculture, fishing and forestry sector (10%) Theme: Biodiversity (P);Other environment and natural resources management (S) IBRD Amount (US$m.): 45.00 IDA Amount (US$m.): 0.00 GEF Amount (US$m.): 15.00 PCF Amount (US$m.): 0.00 Other financing amounts by source: BORROWER/RECIPIENT 80.66 LOCAL SOURCES OF BORROWING COUNTRY 15.90 96.56 Environmental Category: B - Partial Assessment Simplified Processing Simple [] Repeater [] Is this project processed under OP 8.50 (Emergency Recovery) Yes [ ] No [X] 2. Project Objectives The project development objective is to enhance the provision of environmental services of national and global significance and secure their long-term sustainability. This would be done by strengthening and expanding the PSAH and CABSA programs and supporting the establishment of local payments for environmental services (PES) mechanisms in selected pilot areas. The objective will be achieved through the following key outcomes and outputs (i) strengthening the capacity of CONAFOR, community associations, and NGOs to increase flexibility and improve efficiency of existing service provision to support long- term development of the PSAH program in Mexico; (ii) establishing and securing sustainable long-term financing mechanisms; (iii) establishing legal, institutional, and financial arrangements to pilot market-based mechanisms for payment for environmental services, (iv) documenting links between land use changes and water services improvements and biodiversity conservation, and (v) defining good practices to replicate, scale up, and sustain market-based PES programs. Page 2 The global environment objective of the project is to enhance and protect biological diversity and preserve globally significant forest and mountain ecosystems. This objective will be achieved through the following key outcomes and outputs: (i) improving the targeting of the existing PSAH program; (ii) piloting a market-based system to contract environmental services; and (iii) establishing an endowment fund for biodiversity conservation to provide long-term financing for payment for environmental services. The project will ensure that only sites with globally significant biodiversity will receive GEF funds under the national or local programs in the project area. In addition, these sites recognized as part of the national protected areas system. Furthermore, all land management systems with PES support under the project (from any funding source) will be biodiversity-friendly. 3. Project Description Component 1 focuses on developing sustainable financing mechanisms. Component 2 activities support the development and strengthening of PES delivery mechanisms. Component 3 supports environmental service providers. Component 4 manages the actual flow of payments to environmental serrvice providers and for the ongoing operational costs of the program. Finally, Component 5 focuses on project and program management mechanisms, including monitoring and evaluation. 4. Project Location and salient physical characteristics relevant to the safeguard analysis Areas where PES systems would be established, strengthened, or continued include eight pilot sites as well as other PES areas that are expected to be established under this project as a result of local-level initiatives. All eight of the pilot sites were chosen to overlap with at least two of the following high-priority biodiversity conservation designations: (i) existing Natural Protected Areas; (ii) Priority Terrestrial Ecoregions established by the National Commission for Biodiversity Knowledge and Use (CONABIO); (iii) Important Bird Areas (AICAs) that are vital to the survival of endemic species or to protecting key bird breeding, feeding, and migration areas; and (iv) Ramsar Wetlands of International Importance. The eight pilot sites are all within reasonable proximity of urban centers with at least 50,000 inhabitants and a presumed demand for environmental services such as improved water flows and water quality, flood mitigation, and biodiversity and scenic beauty (for ecotourism). In addition, all eight sites have (i) important watersheds in areas classified by the Mexican government as Priority Hydrological Regions (RHPs) where scarcity of fresh water is a significant concern, (ii) globally significant biodiversity in need of improved conservation, (iii) natural vegetation important for carbon storage, (iv) significant risks of deforestation and other loss and degradation of natural habitats, and (v) extensive community and ejido landholdings potentially suitable for PES contracts. Within the project sites, private landowners (ejidos, communites, and possibly individuals) with secure tenure will be eligible for PES contracts, if they choose to Page 3 participate. Some of these landholdings will be within the buffer zones of protected areas (where human occupation is legally permitted). The eight pilot project sites total about 6.1 million hectares. The amount of land actually placed under PES contracts will depend on the availability of funds and demand from potential PES recipients. The pilot areas are: a. Coatepec-Xalapa-Pico de Orizaba. Located in the states of Veracruz and Puebla, this site comprises an important area of remaining cloud forest (much of which has been replaced by shade coffee and other agricultural systems), with humid pine forest at the higher elevations and dry forest in the lower foothills. The cloud forests and adjacent well-shaded coffee plantations harbor many endemic plant and animal species of conservation concern, including the globally threatened Bearded Wood-Partridge Dendrortyx barbatus, for which the Coatepec area is an important stronghold. The project would continue and expand the area of PES payments under a successful ongoing program, which is motivated by water supply concerns for the urban areas of Coatepec and Xalapa. PES payments would maintain the cloud forests and possibly also the shade coffee areas of high watershed and biodiversity conservation value, and reduce the expansion of field crops and pastures to hillside areas. b. Colima-Manantlan-Cerro Grande-Villa de Alvarez. Located in the states of Colima and Jalisco, this site comprises a biologically highly diverse mix of moist and dry pine- oak forests, cloud forests, and tropical dry forests. It encompasses a portion of the Sierra de Manantlan Biosphere Reserve, which is renowned for its biodiversity that includes many endemic bird species (including the globally threatened Mexican Woodnymph Thalurania ridgwayi and Black-capped Vireo Vireo atricapillus) and the wild-growing Perennial Maize Zea diploperennis. It also forms a corridor between the Sierra de Manantlan and the Nevado de Colima National Park, with its high-altitude pine and fir forests and substantial ecotourism potential. Maintaining adequate forest cover is needed for ensuring adequate water supply to Colima city, as well as to reduce the significant soil erosion and landslide problems in the area. PES contracts with the ejidos and communities at this site would serve to prevent further deforestation within areas of high importance for biodiversity conservation, improved watershed management, and carbon sequestration. c. Huatulco-Crucecita-Copalita/Zimatan. Located on the Pacific slope of the State of Oaxaca, this site encompasses a diverse mix of cloud and humid pine-oak forests in the Sierra de Miahuatlan, lowland tropical (humid and dry) forests in the coastal foothills, and mangroves. The moist forests of the Sierra de Miahuatlan harbor numerous plant and animal species of conservation concern, including the endangered Blue-capped Hummingbird Eupherusa cyanophrys (found nowhere else) and globally threatened White-throated Jay Cyanolyca mirabilis. Huatulco is an important beach resort with growing dependence upon fresh water, and the montane forest cover that helps to ensure its reliability. There is also the potential for expanded ecotourism, including on community-owned forest lands. PES contracts would reduce deforestation for agricultural Page 4 expansion, while helping to maintaining water supplies, reduce catastrophic flooding risks, and enhancing the survival prospects of many threatened species. d. Saltillo-Zapaliname. Located in the states of Coahuila and Nuevo Leon, this site includes the Area Natural Sierra Zapaliname, an official protected area with substantial ejido landholdings suitable for PES contracts. The Sierra Zapaliname contains a diverse mix of native pine and oak forests, along with semi-arid scrub at lower elevations. This mountain range is also an AICA because its pine forests are an important feeding area for the threatened endemic Maroon-fronted Parrot Rhynchopsitta terrisi. The pilot site also includes a highly threatened (by agricultural expansion) natural grassland area known as the Pradera de Tokio, which is the main global stronghold for the endangered Mexican Prairie Dog Cynomys mexicanus and Worthen's Sparrow Spizella wortheni, as well as an important wintering area for many North American grassland birds. The city of Saltillo is in a semi-arid zone with over-exploited aquifers and depends upon water originating in the Sierra Zapaliname. e. Valle de Bravo-Amanalco. Located in the states of Mexico, Michoacan, and Guerrero, this site comprises two endangered ecosystems classified as "Highest Priority" in the World Bank-WWF Conservation Assessment of the Terrestrial Ecoregions of Latin America and the Caribbean (Dinerstein et al., 1995): Mexican Trans-Volcanic Pine-Oak Forest in the higher mountains (along with patches of cloud forest) and Balsas Dry Forest in the foothills. The site includes the buffer zone of the Nevado de Toluca National Park. The city of Valle de Bravo and surrounding irrigation districts suffer from overexploited aquifers and rely upon these forests to improve seasonal water flows. PES contracts with ejidos and communities with key forested lands would serve to enhance water flows, protect hydraulic infrastructure from sedimentation, and conserve the habitat of numerous endemic plant and animal species. f. Cancun-Sian Ka'an. Located in the State of Quintana Roo, this site includes the Sian Ka'an Biosphere Reserve and the El Eden Private Reserve. It comprises humid and dry tropical forests, mangroves, and semi-arid scrub in the extreme north. The site contains most of the diverse endemic fauna and flora of the Yucatan Peninsula and is a concentration area for many species of migratory land and water birds. This pilot area is in the general vicinity of Cancun and the booming tourist resorts of the Mayan Riviera, where there is considerable potential to promote eco-tourism as a complement to the well-developed tourism around beach resorts and Mayan ruins. This is an area where PES arrangements based on maintaining natural habitats for biodiversity-based ecotourism shows genuine promise. PES contracts would help to ensure that participating communities maintain the natural forest and other biodiversity-friendly vegetation. g. Oaxaca de Juarez-Sierra San Felipe. Located in the State of Oaxaca, this site comprises the unique dry oak forest and thorn scrub in a portion of Oaxaca's central valley and adjacent slopes, along with the moist pine-oak and cloud forests in the mountain ranges both north and south of Oaxaca city. The cloud forests in the Sierra de Norte are presently the most extensive ones remaining in Mexico, with numerous plant and animal species of conservation interest. The moist pine-oak forests north of Oaxaca Page 5 city are the main stronghold of the globally threatened Dwarf Jay Cyanolyca nana. The remaining thorn scrub and dry oak forests in the foothills harbor many range-restricted species, including near-threatened birds such as Pileated Flycatcher Xenotriccus mexicanus and Oaxaca Sparrow Aimophila notosticta. The hydrological services from the mountain forests (both north and south of Oaxaca city) are especially significant because the aquifers that provide water to the city and nearby irrigated lands are classified as over-exploited by the National Water Commission (CNA). Although Qaxaca city is a popular tourist attraction because of its history and nearby archaeological sites, the adjacent mountains (with their pleasant climate, beautiful forests, and exceptional biodiversity) have significant, underutilized eco-tourism potential. PES contracts with communities holding important lands for biodiversity, hydrological functions, and carbon sequestration would serve to limit the clearing of forests for various types of subsistence and commercial agriculture. h. Monterrey-Cumbres. Located in the states of Nuevo Leon and Coahuila, this site comprises the Sierra de Arteaga, an extensive area of native pine forest, with semi-arid scrub in the lower foothills and moist forest along water courses. It includes the Cumbres de Monterrey National Park and the El Taray Reserve. This site contains a high proportion of the world's nesting cliffs and feeding area for the threatened endemic Maroon-fronted Parrot. The city of Monterrey has overexploited aquifers and relies significantly on surface water originating in the pine forests. Conservation of these forests is also considered important for reducing the intensity and damage from periodic floods and gully erosion. PES contracts with ejido landowners in the Sierra de Arteaga would reduce deforestation, as well as the pine forest degradation that results from excessive burning. 5. Environmental and Social Safeguards Specialists Mr George Campos Ledec (LCSEN) Mr Juan Martinez (LCSEO) Mr Ricardo Hernandez Murillo (LCSEN) 6. Safeguard Policies Triggered Yes No Environmental Assessment (OP/BP 4.01) X Natural Habitats (OP/BP 4.04) X Forests (OP/BP 4.36) X Pest Management (OP 4.09) X Cultural Property (OPN 11.03) X Indigenous Peoples (OP/BP 4.10) X Involuntary Resettlement (OP/BP 4.12) X Safety of Dams (OP/BP 4.37) X Projects on International Waterways (OP/BP 7.50) X Projects in Disputed Areas (OP/BP 7.60) X Page 6 II. Key Safeguard Policy Issues and Their Management A. Summary of Key Safeguard Issues 1. Describe any safeguard issues and impacts associated with the proposed project. Identify and describe any potential large scale, significant and/or irreversible impacts: There are no anticipated large-scale, significant, or irreversible adverse impacts associated with the project. Environmental. The project is expected to be overwhelmingly positive from an environmental standpoint, by using PES to induce rural landowners to maintain the forests or other natural vegetation on their lands, thereby (i) conserving globally significant biodiversity, (ii) maintaining or improving hydrological functions, and (iii) reducing greenhouse gases by storing carbon. No civil works are expected to be procured under the project. The main on-the-ground environmental impacts associated with project expenditures would thus be the maintenance of desired vegetative cover on the rural landholdings of PES recipients. The only possible adverse environmental impacts would be strictly unintended; they could possibly involve (i) tradeoffs between different environmental objectives (such as biodiversity vs. improved water flows); (ii) misallocation of PES funds (such as landowners who have not complied with their contracts, or environmentally inappropriate land uses); or (iii) perverse incentives (such as new people moving onto lands eligible for PES benefits). Social. The project is also expected to have positive impacts on the social side as a result of increasing incomes and improving the quality and sustainability of natural resources in some of the poorest rural communities in the country, with the highest marginalization indexes, and large shares of indigenous people. However, there are risks related to overcoming obstacles to participation for poor communities and the possibility of inequitable distribution of project costs and benefits. 2. Describe any potential indirect and/or long term impacts due to anticipated future activities in the project area: The project is specifically intended to foster future activities in the project area that have favorable long-term social and environmental impacts. Indirect or long-term negative impacts could result from unintended results as described above, or from failure of the PES mechanism to provide long-term incentives to maintain the land uses and conservation practices contracted under the program. 3. Describe any project alternatives (if relevant) considered to help avoid or minimize adverse impacts. Land acquisition to place land under government control and protection could be more effective in conserving environmental services, but would have been considerably more expensive and would not have been feasible in any case because the outright purchase of community and ejido land is not currently permitted under Mexican law and would be controversial from a social and political perspective even if it were allowed. Although eco-labeling or certification schemes may promote adoption of improved land use practices by landholders who seek to access markets in which buyers of forest Page 7 products reward good forest practices or management, eco-labeling alone would not effectively target the priority areas or land uses sought by the project nor increase public awareness of environmental services sufficiently to help create local PES markets that would be appropriately targeted. Since most of the time the direct beneficiaries of environmental services are not themselves the direct buyers of goods from certified forests, the potential of eco-labeling to help develop local markets for environmental services is limited. In addition, eco-labeling fundamentally involves extractive activities, even if well-managed, whereas the project emphasizes conservation. However, eco- labeling could possibly help obtain funds for conservation from people interested in good forest management. 4. Describe measures taken by the borrower to address safeguard policy issues. Provide an assessment of borrower capacity to plan and implement the measures described. The project includes an Environmental Management Plan (EMP) intended to prevent unintended negative impacts by incorporating within the project's operational rules (i) eligibility and prioritization criteria for the types of lands and landowners that could receive PES contracts and (ii) review procedures and specific responsibilities within CONAFOR to ensure that all contracts are awarded, administered, and supervised in accordance with these criteria. The PES eligibility criteria are expected to require, inter alia, (i) no clearing of forests or other natural habitats to establish new agricultural systems; (ii) any reforestation must be with species native to the site; and (iii) all eligible landowners (whether communities, ejidos, or individuals) will need to present evidence of legally secure land tenure and long-term residence in the PES eligible area. Other measures taken by the borrower to address safeguard issues include a detailed action plan that includes community capacity building to help overcome obstacles for participation in the project and avoid problems with inequitable distribution of benefits, as well as participatory community consultation in (i) defining the project and selecting project areas and (ii) incorporation of strong ongoing community consultation mechanisms within the project itself. Borrower capacity to plan and implement these measures is considered moderate to high, based on previous experience with PES through the existing PSAH and CABSA programs, strengthened sectoral capacity in key government agencies and programs due to legal, institutional, and regulatory reform in recent years, and additional capacity building measures incorporated into the project design. 5. Identify the key stakeholders and describe the mechanisms for consultation and disclosure on safeguard policies, with an emphasis on potentially affected people. Key stakeholders include (a) members of the mostly poor rural ejidos and communities that would be paid to provide environmental services and (b) users of environmental services who would receive increased or improved services and/or be protected from degradation of those services. The global community would also benefit through the conservation of biodiversity of global significance and increased carbon sequestration. Page 8 A participatory social consultation was conducted that included (i) interviews with 74 ejido and indigenous community leaders, NGO workers, community/ejido technical field workers, and local managers and staff of protected areas and CONAFOR, and (ii) 20 participatory workshops with 278 participants, including three workshops specifically for women (66 indigenous, 10 nonindigenous). These consultations helped craft a project design that emphasizes strong indigenous community and ejido participation in a detailed action strategy that helps integrate the social and environmental aspects of the project and increase local community capacity to participate in decisionmaking and project management and compliance. The project also has strong, ongoing community liaison and consultation arrangements, including the hiring of "regional promoters" to promote the project, disseminate information and knowledge, provide feedback, and help adapt PES mechanisms to local needs and conditions, as well as stipends and scholarships to "community promoters" selected by the communities themselves to provide further liaison, technical assistance, and facilitation of the project. Mexico already has substantial experience in consulting with environmental service users to identify both the desired services and the willingness to pay. User consultation and assessment is the first step in creating a sustainable, voluntary PES system, and will be a main focus of Component 1 of the project. B. Disclosure Requirements Date Environmental Assessment/Audit/Management Plan/Other: Date of receipt by the Bank 11/28/2005 Date of "in-country" disclosure 11/28/2005 Date of submission to InfoShop 12/09/2005 For category A projects, date of distributing the Executive Summary of the EA to the Executive Directors Indigenous Peoples Plan/Planning Framework: Date of receipt by the Bank 11/28/2005 Date of "in-country" disclosure 11/28/2005 Date of submission to InfoShop 12/09/2005 * If the project triggers the Pest Management and/or Cultural Property, the respective issues are to be addressed and disclosed as part of the Environmental Assessment/Audit/or EMP. If in-country disclosure of any of the above documents is not expected, please explain why: C. Compliance Monitoring Indicators at the Corporate Level (to be filled in when the ISDS is finalized by the project decision meeting) OP/BP/GP 4.01 - Environment Assessment Does the project require a stand-alone EA (including EMP) report? Yes Page 9 If yes, then did the Regional Environment Unit or Sector Manager (SM) review and approve the EA report? N/A Are the cost and the accountabilities for the EMP incorporated in the credit/loan? Yes OP/BP 4.04 - Natural Habitats Would the project result in any significant conversion or degradation of critical natural habitats? No If the project would result in significant conversion or degradation of other (non-critical) natural habitats, does the project include mitigation measures acceptable to the Bank? N/A OP/BP 4.10 - Indigenous Peoples Has a separate Indigenous Peoples Plan/Planning Framework (as appropriate) been prepared in consultation with affected Indigenous Peoples? Yes If yes, then did the Regional unit responsible for safeguards or Sector Manager review the plan? N/A If the whole project is designed to benefit IP, has the design been reviewed and approved by the Regional Social Development Unit or Sector Manager? N/A OP/BP 4.36 - Forests Has the sector-wide analysis of policy and institutional issues and constraints been carried out? N/A Does the project design include satisfactory measures to overcome these constraints? N/A Does the project finance commercial harvesting, and if so, does it include provisions for certification system? No The World Bank Policy on Disclosure of Information Have relevant safeguard policies documents been sent to the World Bank's Infoshop? Yes Have relevant documents been disclosed in-country in a public place in a form and language that are understandable and accessible to project-affected groups and local NGOs? Yes All Safeguard Policies Have satisfactory calendar, budget and clear institutional responsibilities been prepared for the implementation of measures related to safeguard policies? Yes Have costs related to safeguard policy measures been included in the project cost? Yes Does the Monitoring and Evaluation system of the project include the monitoring of safeguard impacts and measures related to safeguard policies? Yes Have satisfactory implementation arrangements been agreed with the borrower and the same been adequately reflected in the project legal documents? Yes Page 10 D. Approvals Signed and submitted by: Name Date Task Team Leader: Mr Mark A. Austin 03/02/2006 Environmental Specialist: Mr George Campos Ledec Social Development Specialist Mr Juan Martinez Additional Environmental and/or Social Development Specialist(s): Mr Ricardo Hernandez Murillo Approved by: Regional Safeguards Coordinator: Mr Reidar Kvam Comments: Sector Manager: Mr Abel Mejia 11/28/2005 Comments: