Document of The World Bank FOR OFFICIAL USE ONLY Report No: 53637-MX INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED FRAMEWORK FOR ADAPTATION TO CLIMATE CHANGE IN THE WATER SECTOR DEVELOPMENT POLICY LOAN IN THE AMOUNT OF US$450 MILLION TO THE UNITED MEXICAN STATES May 6, 2010 Sustainable Development Department Mexico and Colombia Country Management Unit Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective May 6, 2010) Currency Unit = Mexican Peso MX$1.00 = US$0.0766777 US$1 = MX$13.0416 FISCAL YEAR January 1 ­ December 31 ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities ACU Asociaciones de Usuarios (User Associations) AFD French Development Agency ANUR Asociación Nacional de Usuarios de Riego (National Association of Irrigation Users) APAZU Programa de Agua Potable y Alcantarillado en Zonas Urbanas (Drinking Water and Sewerage in Urban Areas Program) BANSEFI Banco de Ahorro Nacional y Servicios Financiero s (National Bank of Savings and Financial Services) RBC River Basin Council (Consejos de cuenca) RBO River Basin Organizations (Organismos de cuenca) C4 Consultative Council on Climate Change CBD Convention on Biological Diversity CCDPL Climate Change Development Policy Loan CEAs Comisiones Estatales de Agua (State Water Commissions) CFAA Country Financial Accountability Assessment CICC Comisión Intersecretarial de Cambio Climático (Inter-Ministerial Commission on Climate Change) CONACyT Consejo Nacional de Ciencia y Tecnología (National Council for Science and Technology) CONEVAL Consejo Nacional de Evaluación de la Política de Desarrollo Social (National Council for the Evaluation of Social Development Policy) CONAGUA Comisión Nacional del Agua (National Water Commission) COTAS Comités Técnicos de Aguas Subterraneas (Aquifer Technical Committee) CPAR Country Procurement Assessment COP 16 Conference of the Parties 16 CTF Clean Technology Fund EIA Environmental Impact Assessment ENACC Estrategia Nacional de Cambio Climático (National Climate Change Strategy) ENAPCi Estrategia Nacional para la Participación Ciudadana en el Sector Ambiental (National Strategy for Citizen Participation in the Environmental Sector) ENVDPL Programmatic Environmental Development Policy Loan ENVSAL Programmatic Environmental Structural Adjustment Loan ERPAs Emission Reductions Percentage Agreements ESW Economic Sector Work FCL Flexible Credit Line (IMF) FONADIN Fondo Nacional de Infraestructura (National Infrastructure Fund) FY Fiscal Year GCM General Circulation Model GDP Gross Domestic Product GEF Global Environment Facility GHG Greenhouse Gases GOM Government of Mexico ha hectares ICR Implementation Completion Report IFI International Financial Institutions IMTA Instituto Mexicano de Tecnología de Agua (Mexican Institute for Water INE Technology) Instituto Nacional de Ecología (National Ecology Institute) IPCC Intergovernmental Panel on Climate Change IWRM Integrated Water Resource Management M&E Monitoring and Evaluation NC National Communication (to the UNFCCC) NGO Nongovernmental Organization OO Organismos Operadores de Agua (Water Utilities) O&M Operation & Maintenance PATME Programa de Asistencia Técnica para el Mejoramiento de la Eficiencia PECC Programa Especial de Cambio Climático (Special Program for Climate Change) PEF Presupuesto de Egresos de la Federación (Federal Expenditure Budget) PER Public Expenditures Review PES Payment for Environmental Services PFM Public Financial Management PMIR Integrated Irrigation Modernization Program PMTUR Program for Modernization and Technology Upgrade of Irrigation Units PND Plan Nacional de Desarrollo (National Development Plan) PNH Programa Nacional Hidrico (National Water Program) PNI Programa Nacional de Infraestructura (National Infrastructure Plan) PRODEP Programa de Desarrollo Parcelario ( Development Program for Land Plots) PROTRAM Programa de Apoyo Federal al Transporte Masivo (Federal Mass Transit Support Program) PSIA Poverty and Social Impact Analysis R&D Research and Development REDD UN Collaborative Programme on Reducing Emissions from Deforestation and Forest Degradation SAGARPA Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentación (Ministry of Agriculture, Livestock, Rural Development, Fisheries and Food) SAL Structural Adjustment Loan SEDESOL Secretaría de Desarrollo Social (Ministry of Social Development) SEMARNAT Secretaría de Medio Ambiente y Recursos Naturales (Ministry of Environment and Natural Resources) SFA Sistema Financiero de Agua (Financial System of Water) SFLAC Spanish Fund for Latin America and the Caribbean SFP Secretaría de la Función Pública (Ministry of Public Administration) SHCP Secretaría de Hacienda y Crédito Público (Ministry of Finance and Public Credit) SINAPROC Sistema Nacional de Protección Civil (National Civil Protection System) SPRMPA Programa Especial para la Restauración de la Microcuencas en Zonas Prioritarias (Special Program for the Restoration of Microwatersheds in Priority Areas) SRLDRs Sociedades de Responsabilidad Limitada de los Distritos de Riego SSA Secretaría de Salud (Ministry of Health) SWAP Sector Wide Approach TAP Technical Assistance Program (Programa de Asistencia Técnica - PAT) TESOFE Tesorería de la Federación (Treasury) UNAM Universidad National Autónoma de México (National Autonomous University of Mexico) UNDP United Nations Development Programme UNECLAC United Nations Economic Commission for Latin America and the Caribbean UNCCD United Nations Convention to Combat Desertification UNFCCC United Nations Framework Convention on Climate Change UREDALES Unidades de riego para el desarrollo rural (Rural Development Irrigation Units) UTTP Urban Transport Transformation Program WTFP Wastewater Treatment Funding Program WWF World Wildlife Fund WWTP Waste Water Treatment Plant Vice President: Pamela Cox Country Director: Gloria M. Grandolini Sector Director: Laura Tuck Sector Manager: Guang Zhe Chen Task Team Leader: Gustavo Saltiel Co-Task Team Leader: Alessandra Campanaro MEXICO FRAMEWORK FOR ADAPTATION TO CLIMATE CHANGE IN THE WATER SECTOR DEVELOPMENT POLICY LOAN TABLE OF CONTENTS LOAN AND PROGRAM SUMMARY ................................................................................. i I. INTRODUCTION .......................................................................................................... 1 II. COUNTRY CONTEXT ................................................................................................. 3 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY .......................... 3 III. THE GOVERNMENT PROGRAM AND PARTICIPATORY PROCESSES ........ 7 WATER SECTOR PROGRAM ...................................................................................... 7 ADAPTATION TO CLIMATE CHANGE IN THE WATER SECTOR ..................... 11 PUBLIC CONSULTATIONS ....................................................................................... 15 IV. BANK'S SUPPORT TO THE GOVERNMENT PROGRAM ................................ 17 SUMMARY UPDATE ON THE IMPLEMENTATION OF THE CPS ....................... 17 LINK TO COUNTRY PARTNERSHIP STRATEGY.................................................. 18 THE VALUE ADDED PROVIDED BY THE BANK ................................................. 19 COLLABORATION WITH THE IMF AND OTHER DONORS ................................ 20 RELATIONSHIP TO OTHER BANK OPERATIONS ................................................ 21 ANALYTICAL UNDERPINNINGS ............................................................................ 26 LESSONS LEARNED................................................................................................... 29 V. THE PROPOSED FRAMEWORK FOR ADAPTATION TO CLIMATE CHANGE IN THE WATER SECTOR DPL................................................................................ 33 OPERATION DESCRIPTION ...................................................................................... 33 KEY POLICY AREAS .................................................................................................. 34 VI. OPERATION IMPLEMENTATION......................................................................... 39 POVERTY AND SOCIAL IMPACT ............................................................................ 39 ENVIRONMENTAL ASPECTS ................................................................................... 45 IMPLEMENTATION, MONITORING AND EVALUATION ................................... 47 FIDUCIARY ASPECTS ................................................................................................ 48 DISBURSEMENT AND AUDITING ........................................................................... 49 RISKS AND RISK MITIGATION ............................................................................... 50 ANNEXES ANNEX 1: LETTER OF DEVELOPMENT POLICY ........................................................... 53 ANNEX 2: POLICY MATRIX ............................................................................................... 57 ANNEX 3: FUND RELATIONS NOTE ................................................................................. 59 ANNEX 4: MACROECONOMIC, FISCAL AND FINANCIAL SECTOR CONTEXT ...... 65 ANNEX 5: PUBLIC CONSULTATIONS AND PARTICIPATION FRAMEWORK ........... 71 ANNEX 6: POLICY INSTRUMENTS FOR ADAPTATION TO CLIMATE CHANGE IN THE WATER SECTOR ........................................................................................................... 74 ANNEX 7: WATER SECTOR INSTITUTIONS..................................................................... 86 ANNEX 8: FEATURES AND RELEVANCE OF KEY FEDERAL PROGRAMS ............... 90 ANNEX 9: PROGRAM FOR WATER SUSTAINABILITY IN THE MEXICO VALLEY .. 97 ANNEX 10: WATER BANKS............................................................................................... 103 ANNEX 11: TAP BETWEEN CONAGUA AND THE BANK (DRAFT) ........................... 106 ANNEX 12: REFERENCES .................................................................................................. 112 ANNEX 13: COUNTRY AT A GLANCE ............................................................................. 118 TABLES TABLE 1: MACROECONOMIC INDICATORS FOR THE BASE CASE SCENARIO ....... 6 TABLE 2: RISKS TO THE SUSTAINABILITY OF THE PROGRAMS SUPPORTED BY THE DPL .................................................................................................................................. 51 FIGURES FIGURE 1: INSTITUTIONAL ARRANGEMENTS FOR INTEGRATED WATER RESOURCES MANAGEMENT (IWRM) IN MEXICO........................................................... 9 FIGURE 2: ONGOING CLIMATE CHANGE AND WATER SECTOR ACTIVITIES SUPPORTED BY THE BANK IN MEXICO .......................................................................... 22 FIGURE 3: THE INTEGRATED WATER RESOURCES MANAGEMENT COMB ........... 28 FIGURE 4: AQUIFER OVEREXPLOITATION AND VERY HIGH TO VERY LOW SOCIAL CONFLICTS, 1990-2005 .......................................................................................... 40 FIGURE 5: EXTREME POVERTY AND SOIL DEGRADATION IN RURAL AND URBAN MUNICIPALITIES.................................................................................................... 42 BOXES BOX 1: THE PES MECHANISM AND THE PES PROGRAM IN MEXICO ....................... 12 BOX 2: MEXICO'S FOUR NATIONAL COMMUNICATIONS TO THE UNFCCC .......... 14 BOX 3: ENVIRONMENTAL AND CLIMATE CHANGE MOU .......................................... 20 BOX 4: DPL GOOD PRACTICES AND THE ADAPTATION TO CLIMATE CHANGE IN THE WATER SECTOR DEVELOPMENT POLICY LOAN ................................................. 32 BOX 5: OVERVIEW OF PROPOSED OPERATION'S COMPONENTS AND PRIOR ACTIONS ................................................................................................................................. 34 The Adaptation to Climate Change in the Water Sector Development Policy Loan was prepared by an IBRD team consisting of Gustavo Saltiel (Task Team Leader, LCSSD), Alessandra Campanaro (co-Task Team Leader, LCSUW), Diego Juan Rodriguez (ETWWA), Todd Crawford (Consultant, LCSSD), Caroline Van den Berg (ETWWA), Javier Zuleta (LCSEN), Rodrigo Serrano-Berthet (LCSSO), Ricardo Hernandez- Murillo (LCSEN), Gisela Campillo (LCC1A), Yerania Sanchez Ramos (LCSSD), Edith Cortes Angeles (LCSPE), Ann Jeanette Glauber (LCSEN), Jozef Draaisma (LCSPE), Xiomara Morel (LCSFM), Daniel Nolasco (Consultant, LCSSD), Luis Poggi (Consultant, LCSSD), Karina Kashiwamoto (LCC1C), David Lopez Viggiano (LCC1C), Mariana Montiel (LEGLA), Ana F. Daza (LCSUW). This operation was undertaken under the general guidance of Gloria Grandolini (Country Director, LCClC), Laura Tuck (Sector Director, LCSSD) and Guang Zhe Chen (Sector Manager, LCSUW). Peer reviewers were Manuel Mariño (ECSS6), Alexander Bakalian (MNSWA), Michael Jacobsen (ETWWA), Marianne Fay (SDNVP), and Erick C. M. Fernandes (LCSAR). LOAN AND PROGRAM SUMMARY The United Mexican States Framework for Adaptation to Climate Change in the Water Sector Development Policy Loan Borrower The United Mexican States Implementing Ministry of Environment and Natural Resources and National Agency Water Commission Financing Data US$450 Million Operation Type Single Tranche Development Policy Loan The proposed operation comprises two policy areas that are detailed below. They are: (a) Strengthening the Institutional Main Policy Framework and Monitoring Capacity in Integrated Water Areas Resources Management; and (b) Mainstreaming Adaptation to Climate Change in Water Programs. CONAGUA has developed 18 plans for aquifers management; River Basin Councils are overseeing the execution of water resources management plans; water Key Outcome availability information for 653 aquifers has been published; Indicators productivity of irrigation districts is increasing2.8 percent annually to reach 1.66 kg per m³; volume of treated wastewater has reached 60 percent. The objective of the proposed operation is to support the government's efforts aimed at strengthening the institutional framework and monitoring capacity in integrated water resources management as well as mainstreaming adaptation to Program climate change in water programs. The proposed DPL supports Development the government's policy commitment to adaptation to climate Objective(s) and change in the water sector, including the allocation of Contribution to institutional and financial resources and strengthening of CPS monitoring and evaluation capacity. Reduced water availability and poor water quality are two of the main factors affecting future growth and development in Mexico. Key to addressing these development challenges is the i enactment of measures to adapt to climate change whose aim is ensuring proper water resources management through appropriate regulations, norms, institutional reforms, and financial mechanisms. The operation will support the GOM's efforts to foster adaptation to climate change in the water sector, contributing to long-term sustainable growth and protecting the most vulnerable populations. A key principle established in the CPS is that the Bank's program should be closely aligned with the government's own development strategy. The proposed operation fits within the GOM's top priorities as reflected in the National Development Plan as well as with the CPS pillars, improving Competitiveness and Developing Infrastructure, and Assuring Environmental Sustainability. In parallel, the Bank and the GOM are expected to reach an agreement on a complementary set of advisory services to support the implementation of this DPL, in line with the streamlined approach set in the CPS. A series of financial, economic, institutional, environmental and social risks are considered in the risk matrix as well as the on-going and proposed actions to mitigate those risks. Among those, none seems to be of high impact to the success of the operation. The persistence of the economic downturn is a low risk to the water sector as so far the GOM has responded by adopting a counter-cyclical fiscal stance, therefore leaving unaffected the water sector. The end of the administration and the related political change is not expected to bring about a Risks and Risk high risk as Mexico's commitment to the water sector has Mitigation spanned political administrations, and the Bank support in this area has a long history of dialogue, technical and financial assistance that would allow for continued stakeholder participation in program implementation. Finally, program implementation is expected to bring about positive social and environmental effects. A series of monitoring procedures already in place will ensure that any unexpected adverse social or environmental consequences will be identified early on so that they can be remediated. Operation ID P120134 ii MEXICO FRAMEWORK FOR ADAPTATION TO CLIMATE CHANGE IN THE WATER SECTOR DEVELOPMENT POLICY LOAN I. INTRODUCTION 1. The Government of Mexico (GOM) has requested an Adaptation to Climate Change in the Water Sector Development Policy Loan (DPL) in the amount of US$450 million to be presented to the Board for its approval by the end of Fiscal Year 2010. The request underlines the GOM's interest in a continued, strong engagement with the Bank as discussed in the Country Partnership Strategy (CPS) FY08- 10 (World Bank 2008) and the recent CPS- progress report (World Bank February 2010). 2. The DPL will support government priorities established in the climate change adaptation and water sector agenda. Mexico has emerged as a global climate change leader and is moving quickly to prepare mitigation and adaptation policies to tackle the most pressing issues that affect the country's main economic sectors. Mexico's role as a leader will be in the spotlight during the Conference of the Parties 16 (COP 16), to be held in Mexico at the end of 2010. The proposed operation represents a further step in the country's engagement in climate change and its impact on the hydrological cycle, a process that is expected to intensify over the course of this century. Through this operation, the World Bank Group will support Mexico, and particularly the National Water Commission (Comisión Nacional del Agua, CONAGUA) and the Ministry of the Environment and Natural Resources (Secretaría de Medio Ambiente y Recursos Naturales, SEMARNAT), to further its position as a prominent international player in the climate change dialogue. 3. Mexico faces an acute water crisis resulting from accelerated population growth and sub-optimal water resources management (including inefficiency, pollution, and overexploitation). Severe regional disparities with regards to water availability persist (Olson and Saltiel 2006) despite steady improvements in access to water over the past few years that reflect the government's efforts to manage water resources in a more sustainable and equitable manner. Overexploitation is an especially significant problem in groundwater resources, and water quality is deteriorating due to the lack of adequate wastewater treatment (Carabias and Landa 2006). Cities like León, Hermosillo, and Saltillo face the risk of severe water shortages in the very near future. In addition, Mexico City's water utility has rationed the supply of water from the Cutzamala system, which provides a fifth of the city's water for several months. Cutbacks have recently doubled, reaching 30 percent of supply. 4. Inaction in this sector will yield economic and social costs that will be further exacerbated by the impacts of climate change. The importance of water to sustainable development in the country is evident, and successive administrations have declared water to be a "strategic matter of national security." There is ample evidence of the costs associated with water problems in Mexico. In Mexico City alone, annual costs resulting 1 from diarrheal diseases caused by water pollution were estimated at US$3.6 billion in the mid-1990s (OECD 2006). In addition, the government has to invest billions of dollars in alternative sources of water (through the Cutzamala system) because the city's aquifer is overexploited. For the country as a whole, the costs of water pollution were estimated to be around US$6 billion annually, and average water losses are around 44 percent (Olson and Saltiel 2006). The implicit electricity subsidy provided to Mexican farmers for pumping groundwater has been estimated to be about US$700 million per year (Guevara- Sangines 2006). Weather-related disasters cost Mexico more than US$10 billion between 1980 and 2005. Over 80 percent of those economic losses occurred in the agricultural sector, increasing the vulnerability of rural households, affecting income generation and resulting in social impacts (Saldaña-Zorrilla 2007). Climate change will increase the frequency and intensity of weather-related extreme events, which have a disproportionate impact on the most vulnerable. There is a pressing need to incorporate climate change impacts in water resources management policy and planning exercises to reverse the negative trends in the sector. 5. Reduced water availability and poor water quality are two of the main factors affecting economic growth and development in Mexico. This operation supports the strengthening of the institutional, normative, regulatory and financial frameworks as a means to foster adaptation to climate change in the water sector. Measures and tools whose aim is to ensure water security through proper regulations, norms, institutional reforms and financial mechanisms are key to addressing this core development challenge and ensuring long-term sustainable growth in Mexico. 6. The proposed DPL is conceived as a single tranche operation in the context of a long-standing dialogue. It will highlight Mexico's achievements in the water sector and in climate change as well as support its policy programs in these areas. The prior actions of the DPL focus on the following two components: i. Strengthening the institutional framework and monitoring capacity in Integrated Water Resources Management (IWRM); and ii. Mainstreaming adaptation to climate change in water programs. 7. The proposed operation is part of the streamlined lending approach outlined in the Mexico 2008 CPS that focuses on supporting the GOM's programs and policies contained in the National Development Plan (Plan Nacional de Desarrollo, PND). The Bank's lending program to Mexico has expanded in both volume and scope since the onset of the global crisis.1 The CPS has included a combination of financial services and knowledge instruments to support Mexico's water sector and climate change program. In particular, the Bank is working closely with SEMARNAT on Mexico's Climate Change program, including an important pilot for Adaptation to Climate Change in the Gulf of Mexico, preparation of Subnational Climate Change Strategies, and the Institutional Development of SEMARNAT, areas that will inform and benefit from this Adaptation to Climate Change in the Water Sector DPL. 1 A CPS Progress Note was provided to the Board on March 25, 2010. 2 II. COUNTRY CONTEXT 8. The global economic crisis has hit Mexico hard. Despite a strong track record of sound macroeconomic management and stable economic conditions over the past several years,2 Mexico stands out as one of the most affected countries in the region. Trade declined by about 23 percent in 2009, hit by the recession in the United States, which is Mexico's primary trading partner and accounts for 80 percent of Mexican exports. Remittances have fallen substantially (by 16 percent in dollar terms), and direct foreign investment declined by more than 50 percent in 2009. Private consumption contracted by about 6 percent and the economy lost almost half a million private formal sector jobs during the year. 9. In response, the government implemented counter-cyclical economic policies. Fiscal stimulus policies included additional public investment in infrastructure, temporary employment programs, control of administrated prices in the energy sector, and an expansion of development bank credit. The independent Bank of Mexico eased monetary policy between January and July of 2009 in order to support efforts to lessen the downturn in economic activity. The government also sought support from both national and international development finance institutions to ensure adequate funding for priority programs and continued flow of credit to the private sector. Several actions have been taken to maintain orderly conditions in foreign exchange and domestic financial markets in view of the unprecedented global financial shocks. The International Monetary Fund (IMF) approved the first Flexible Credit Line (FCL) for Mexico in April, 2009. This loan provides access to approximately US$47 billion as a backstop to Mexico's international reserves. In March 2010, the IMF renewed the FCL for one year (see Annex 3). MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 10. The Mexican economy is starting to recover from a deep contraction of economic activity following the global economic and financial crisis. As a relatively open economy, Mexico was hard hit by the collapse of international trade during the last quarter of 2008 and the first quarter of 2009. As a result, annual economic growth in 2008 was down to 1.3 percent and GDP fell by 6.5 percent in 2009. 11. The Mexican government's fiscal policy during the past decade has been very prudent. It has focused on keeping the public sector deficit under control and reducing the public sector debt-to-GDP ratio within an environment of enhanced price stability. This contributed to a healthy domestic credit expansion and growth of domestic demand. Prior to the onset of the economic crisis, Mexico experienced moderate growth within a framework of macroeconomic stability. GDP growth averaged 3.8 percent annually between 2004 and 2007. 2 GDP growth averaged 3.8 percent during 2004-2007 and the currency was stable. In addition, inflation reached only 3.8 percent in 2007, external indebtedness as a share of GDP was low, public debt ratios were declining and the country's sovereign credit rating was two notches above the lowest investment grade. 3 12. The economic contraction led to a sharp decline in tax revenues that was partially offset by non-recurrent revenue in 2009. Non-oil tax revenues dropped by 11.5 percent in real terms in 2009 while value added tax revenues fell by 15 percent. The government offset lower oil and non-oil revenues with revenue from a successful oil price hedge, an extraordinary transfer of profits from the Central Bank, and by drawing resources from its revenue stabilization funds. These non-recurrent revenues amounted to 2.8 percent of GDP and have allowed the government to limit its borrowing requirements to a modest 3.2 percent of GDP. 13. Public revenue enhancing measures and a temporary budget deficit are part of the 2010 public sector budget. Mexico's fiscal responsibility law requires a balanced budget3 and allows for a budget deficit only under "exceptional circumstances" and with the requirement that the government adopt a medium-term fiscal framework to return to a balanced budget. Lower public sector tax revenues due to the sharp decline and current slack in economic activity are further aggravated by a rapidly falling volume of oil production. This is leading to a more structural challenge to replace diminishing oil revenues with more permanent sources of income. The government has responded by increasing income, value added and excise taxes largely through increased tax rates. At the same time, it has made allowances for an additional budget deficit of 0.7 percent of GDP in 2010, which is expected to be reduced to 0.4 percent by 2011 and should return to a balanced budget by 2012. 14. Monetary policy has been left unchanged after the substantial easing in 2009. The severity of the economic downturn led the authorities to reduce their target for the overnight interbank interest rate by an accumulated 375 basis points between January and July of 2009, from 8.25 to 4.50 percent. The economic recession had reduced inflation to 3.6 percent by the end of 2009. The Central Bank is projecting a temporary, one-time increase in consumer price inflation in 2010, to around 5 percent by year-end, due to tax and public sector price increases included in the 2010 budget. The monetary authorities have left the policy intervention rate unchanged in view of the temporary nature of the price increases as well as the fact that current economic activity remains below potential output. Central Bank projections currently place inflation at 3 percent by the end of 2011. 15. The monetary authorities have expressed their intention to increase the level of international reserves to mitigate the impact of financial shocks. The global financial crisis led to a sell-off of emerging market assets in the last quarter of 2008 and early 2009. The government undertook several actions in order to maintain liquidity, including foreign exchange interventions, the provision of loans and loan guarantees by government development banks, and the repurchase and reduced issue of long-term 3 A modification to the law adopted by Congress in 2008 includes all investments by the public sector oil company in the budget but excludes these investments from the budget balance requirement. Those investments are budgeted at an amount of 2.0 percent in 2010. As a result, the overall budget deficit for 2010 is estimated at 2.7 percent of GDP (2.0 percent oil sector investment and an additional 0.7 percent temporary deficit spending). 4 government bonds. Interventions on the foreign exchange market between October 2008 and December 2009 implied the sale of almost US$35 billion in international reserves. 16. Early in 2009, Mexico entered into a US$30 billion currency swap with the US Federal Reserve and a US$47 billion Flexible Credit Line (FCL) with the IMF to reassure markets the country has access to sufficient foreign exchange liquidity if needed. The FCL has recently been extended for the period of one year (Annex 3). International reserves, which stood at US$91 billion at end of 2009 compared to US$85 billion in September 2008, have been replenished. In addition, the authorities announced measures to increase the level of international reserves in 2010 and 2011 through a rules- based intervention system. While foreign exchange transactions of the federal government and the state-owned oil company (PEMEX) will continue to be channeled through the Central Bank, a mechanism of monthly auctions of put options was reintroduced in February 2010. This will allow the Central Bank to purchase foreign exchange from the markets. 17. Economic activity in Mexico is rebounding in tandem with the global recovery. Economic activity picked up in the second half of 2009 and is off to a strong start in 2010. The recovery is led by a resurgence in the demand for exports. Current projections of economic activity in Mexico take into account the depth of the recent recession and show that output will remain below potential at least until 2012. Assumptions regarding the external environment have a major impact on projections for Mexico's main macroeconomic variables. The base case scenario shown in Table 1 uses the Bank's Global Economic Prospects and the IMF's World Economic Outlook Update (both dated January 2010) assumptions for global economic activity. The scenario shows a modest rebound in economic activity by 2010 and 2011 and a return to potential output by 2012. 18. Due to the crisis, Mexico faces rising fiscal pressures and increasing public debt-to-GDP ratios. Past fiscal discipline, including the establishment of stabilization funds and the purchase of oil price hedges, enabled a counter-cyclical policy response to the crisis in 2009. The public debt-to-GDP ratio posted an important increase at the end of 2008 to 35.8 percent due to reforms in the social security system for public employees. The sharp economic contraction, the depreciation of the currency, and a higher fiscal deficit contributed to an increase in the debt-to-GDP ratio in 2009 39.5 percent despite efforts to increase revenues. Policymakers face a trade-off between increased fiscal discipline which may threaten the economic recovery and continued fiscal stimulus which could worsen Mexico's debt position. 19. Public debt remains within manageable proportions despite a significant increase in the debt-to-GDP ratio that will continue until 2011. In late 2009, several debt rating agencies downgraded Mexico's public debt. While this may raise the cost of borrowing in the short term, it is not likely to have a major impact on public finance or debt sustainability. A debt sustainability analysis based on average levels of economic growth, the primary balance and the real interest rate on public debt observed over the decade prior to the current economic crisis and applied to the debt-to-GDP ratios 5 observed in the base by 2011 (39.7 percent), shows a return to a downward path of the debt-to-GDP as of 2012 (39.6 percent). 20. The macroeconomic policy framework is adequate for the proposed Development Policy Loan. Fiscal and monetary policies have been well-managed in recent years, resulting in a steady decline in public sector deficits and low, stable inflation rates. The government has carefully managed both its external and domestic borrowing to reduce the possibility of crowding out the private sector and to maintain Mexico's external stability. Mexico seems well positioned to move into economic recovery and to manage its debt burden (see annex 4 for more background information on the macroeconomic, fiscal and financial sector context in Mexico). Table 1: Macroeconomic Indicators for the Base Case Scenario Source: Bank staff estimates 6 III. THE GOVERNMENT PROGRAM AND PARTICIPATORY PROCESSES WATER SECTOR PROGRAM 21. In order to deal with its important water sector challenges, Mexico has adopted integrated water resources management (IWRM) principles to govern sector policies and programs (Ley de Aguas Nacionales 2004). IWRM is regarded as critical for sustainable outcomes, and is increasingly viewed as offering the best available framework for creating the resilience needed to adapt to climate change (World Bank 2010b). Integrated water resources management enables: a) the conservation of water through a more efficient allocation of the resource; b) the resolution of conflicts among competing uses and users; c) accounting for the social, economic and environmental value of water; d) the increased participation of communities and the private sector in decision making and financing, and e) the implementation of the principle that water is an economic good. IWRM defines the unit of planning not as a geopolitical boundary but rather as a geophysical one; namely, the water basin. 22. The Mexican Government's policy framework and efforts in the water sector are defined by three main instruments. Two of these, the National Development Plan (Plan Nacional de Desarollo, PND) and the National Infrastructure Program (Programa Nacional de Infraestructura, PNI) are prepared by the Office of the President. The third, the National Water Program (Programa Nacional Hídrico, PNH) is established by the National Water Commission (CONAGUA). These three plans have a strong policy coordination component that makes possible a sector framework in line with the government's development objectives. 23. According to Mexico's 2007-2012 National Development Plan, the reduced availability of water caused by population and economic growth, together with the unsustainable management of this resource, can make water a limiting factor rather than a catalyst for sustainable development. The PND's main objective is the achievement of sustainable human development. To that end, the Plan focuses on five main policy areas that promote: (a) the rule of law and security; (b) a competitive economy, which creates employment; (c) equal opportunities; (d) environmental sustainability; and (e) effective democracy and a responsible foreign policy. The Plan's environmental sustainability section puts forth a series of strategies and actions for the water sector. These include the promotion of efficient and sustainable water use; support for performance improvements at the water utilities as well as the reuse of wastewater; fostering integrated and sustainable water management; and the promotion of the efficient use of water in agricultural activities. In addition, the Plan fosters actions to preserve and strengthen watersheds and coastal ecosystems and to rehabilitate bodies of water so that they can better store water. The PND also incorporates strategies related to water and climate change, including adaptation strategies for vulnerable sectors (social actions). 24. Mexico's National Infrastructure Program (PNI) stems from the National Development Plan (PND) and establishes a number of strategies in several key 7 infrastructure sectors, including water and sanitation, flood control, and agricultural water management. The main areas of focus in water and sanitation revolve around increasing coverage of drinking water and sewerage, with explicit reference to marginalized and vulnerable populations in rural areas, promoting the overall efficiency of water utilities, and increasing wastewater treatment levels. In the area of flood control and water management in agriculture, the PNI's strategies include modernizing and improving irrigation technology; increasing the share of irrigated land in areas where water is available; and maintaining, improving, and expanding flood control infrastructure. In addition, the document sets measurable goals for 2012 in all three areas and establishes a medium-term scenario for an investment plan in the sector. 25. Mexico's 2007-2012 National Water Program (PNH) sets forth the water policy framework for the country. The Plan sets integrated water resources management objectives, strategies and goals aimed at achieving the sustainable use of water, recognizes its strategic value, and promotes environmental protection. The objectives of the PNH are to improve water productivity in the agricultural sector; increase access to water supply and sanitation;4 integrate water resources management in basins and aquifers; mitigate hydro-meteorological and meteorological risks; improve wastewater treatment;5 provide incentives for wastewater reuse; assess the effects of climate change on the hydrological cycle; and strengthen the participation of users and civil society in water management. CONAGUA is in charge of preparing the PNH as well as designing and implementing a series of sector programs that provide the operational foundations of the Plan (see Annex 8 for details about CONAGUA's programs). 26. Consistent with the IWRM approach, the current Administration has been gradually transferring CONAGUA's central level functions and responsibilities to subnational entities; namely, the river basin organizations (RBOs, organismos de cuenca) and river basin councils (RBCs, consejos de cuenca) that are playing an increasing role in the sector. The river basin organizations are conceived as specialized units of CONAGUA with technical and administrative autonomy to exercise the functions assigned to them by law. The National Water Law provides the RBOs sufficient independence and autonomy to manage the assets and resources allocated to them by CONAGUA. The RBOs are responsible for formulating regional policy, designing programs to implement those policies, conducting studies to estimate the value of the resources generated within their boundaries (water user fees), recommending specific rates for water user fees as a result of those studies, and finally, operating the necessary mechanisms for collecting water user fees. 27. The RBCs, as well as other civil society participation instruments, complement the water sector organization. They represent key stakeholders in the sector by means of their integration with state and municipal representatives, users, civil 4 The targeted goal is to increase access to water supply and sewage from the baseline levels of 95 and 87 percent, respectively, in 2006 to 90 and 86 percent by 2012. 5 The targeted goal is to increase treatment from the baseline level of 36 percent in 2006 to 60 percent by 2012. 8 society and nongovernmental organizations. The RBCs serve mainly as advisory councils, giving their members a voice on key issues. To that end, they also help to disseminate information about those key issues, including: priorities for investment, water valuation to estimate contribution amounts, technical assessment of water availability, etc. RBCs have auxiliary nongovernmental organizations that carry out similar functions to theirs in important sub-basins (Basin Commissions) and aquifers (Aquifer Technical Committees ­ COTAS). Figure 1 below shows the water sector's institutional arrangements and the interactions among the different organizations. A more detailed description can be found in Annex 7. Figure 1: Institutional Arrangements for Integrated Water Resources Management (IWRM) in Mexico 28. In order to further the integrated management of water resources, CONAGUA has regulated the role and functions of water banks.6 The legal basis for establishing water banks can be found in the Mexican Constitution, which sanctions the creation of entities to manage regulated operations for water rights exchanges. The strategic relevance of water banks is also highlighted in the PND and in the PNH. Water banks foster the transfer (registry) of water rights, providing economic incentives to water users to allocate rights to areas with the highest economic value. They also serve as a source of information by providing users with data on water use and availability in a given basin. While the PNH established the goal of creating at least two water banks by 6 Subdirección General de Administración del Agua (SGAA) art. 24 and Gerencia de Regulación de Transmisión de Derechos, Bancos del Agua y Control de Información (GRTDBACI) art. 29. 9 2012, two water banks had already been created by December 2009.7 At this point, it is foreseen that a total of 13 water banks will be opened (one per basin) by the end of the current Administration. 29. Most water in Mexico is supplied by public authorities who also set prices. In doing so, they must follow pricing principles that lead to equitable and efficient water use. The National Water Law allows CONAGUA to charge a fee for the right to use water, as well as to charge a fee for discharging pollutants into natural streams or lakes. The current water pricing system in Mexico incorporates two kinds of tariffs: a fixed price per cubic meter of water used (which differs by water supply zone), and an increasing block rate structure. As in many other countries, electricity tariffs for agriculture are subsidized in Mexico, and this may lead to the over-extraction and overuse of water resources, particularly groundwater. Given the sensitive political economy issues associated with reducing those subsidies, the GOM is adopting regulatory, institutional, and participatory approaches for cost recovery and improving incentives for water conservation. This operation supports those efforts. It does so by strengthening the institutional framework through the creation of water banks and the decentralization of responsibility to improve the allocation of water resources, as well as by improving the distribution of responsibilities and promoting the participation of key stakeholders in decisions about water use and cost recovery mechanisms. Additionally, CONAGUA has requested Bank support through the Technical Assistance Program (see Annex 11) for the several activities including the formulation of Vision 2030, the River Basin Plans, and the Financial System in the Water Sector. These programs will provide the government several policy options for cost recovery and water conservation, and eventually, for reducing electricity subsidies. 30. The path to achieving full cost recovery is long and difficult, and Mexico is not alone in attempting this. The World Bank's "World Development Report 2010: Development and Climate Change" notes that water is almost always priced below its true economic and social value, giving users little incentive to use it efficiently. The report also states that charging a tariff that is closer to the actual cost of providing water services (such as irrigation, drinking water, wastewater collection and treatment) can be a useful tool for recovering these costs and raising the necessary revenues to maintain the infrastructure (O&M). However, the report concludes, most countries find it politically unacceptable to charge much more than is required to recover operational costs. Despite the evidence of the contentious and political nature of pricing with regard to the provision of water services, the GOM is committed to moving in the right direction. For example, a new tariff structure was recently approved for Mexico City that effectively raises the price of water services by approximately 28 percent and includes targeted subsidies for the low-income population. 7 In Cuencas Centrales del Norte, Lerma Santiago Pacifico. 10 ADAPTATION TO CLIMATE CHANGE IN THE WATER SECTOR 31. In 2009, the GOM launched the Special Climate Change Program (Programa Especial de Cambio Climático, PECC) as its over-arching strategy for addressing climate change. Like all government programs, the PECC is part of the 2007­2012 National Development Plan. It is termed a "Special Program" because it cuts across all economic sectors and therefore requires cooperation among them. The PECC sets out a four pillar program that includes: (a) a long-term vision for government action; (b) sectoral plans for the mitigation of greenhouse gases (GHG); (c) plans for adaptation; and (d) cross-cutting policy initiatives. In the long term, the PECC's objective is to reduce GHG emissions by 50 percent by 2050 compared to 2000. The Program establishes the period 2008-2012 as the first phase of the long-term approach. During that period the program will focus on carrying out: an evaluation of the country's vulnerability to climate change; and an economic valuation of the priority measures for intervention. 32. The PECC identifies low levels of water availability and poor water quality as the main problems that hamper sustained growth and development. Given the crucial implications of water issues for economic development, public finance, infrastructure investment, environmental sustainability, and social equity and distribution, the Program proposes a shift in development patterns and the management of resources in ways that take into account the potential impacts of climate change. 33. A key policy area in the PECC is adaptation to climate change in the water sector. The Program establishes a series of objectives in the areas of water infrastructure and water resources and also includes concrete actions and goals. The purpose of those measures is to reduce the vulnerability of the water sector to climate change by improving and modernizing the water infrastructure, to using institutional instruments to support the sector's strategic adaptation capacity, and to promoting higher investments in water-related services as well as research and development (R&D). For that purpose, the PECC establishes the following objectives (Annex 6 provides details of the activities considered in these areas, as well as an overview of policy instruments for adaptation to climate change in the water sector): i. Improving the availability and quality of water; ii. Strengthening the sector's capacity to adapt to extreme hydrometeorological events; iii. Reducing the vulnerability of human settlements and of water infrastructure, incorporating integrated risk management actions; iv. Consolidating a national system for meteorological and hydrological information; v. Increasing knowledge about the impacts of climate change on water resources and their vulnerability; and vi. Water conservation and modernization of the irrigation districts. 34. Notably, Mexico is also putting in place programs that tackle water and adaptation to climate change in several other sectors. This includes the Special 11 Program for the Restoration of Microwatersheds in Priority Areas (Programa Especial para la Restauración de las Microcuencas en Zonas Prioritarias, SPRMPA), that was established on July 14, 2009, at President Calderon's request. This special program was designed by the National Forest Commission (Comisión Nacional Forestal, CONAFOR) as an emergency plan to target the Cutzamala watershed (this is Mexico City's major water source and is in the midst of severe water shortages). Specifically, the program's aim is to support activities in degraded watersheds in critical areas that reduce threats to water supplies. The program is expected to last five years through 2013 and has a total cost of MX$2 billion. The design of the SPRMPA followed the Payment for Environmental Services (PES) methodology (see Box 1). Box 1: The PES Mechanism and the PES Program in Mexico The importance of ecosystems and the individual roles that they play in providing environmental services has been largely forgotten. Yet, this is a central issue of sustainability because each ecosystem provides a unique service. The importance of land use management is, therefore, directly related to the sustainability of water services. In this context, the Payment for Environmental Services (PES) is a subsidy mechanism to improve the provision of indirect environmental services (e.g. water, carbon, biodiversity) in which: Those who provide environmental services get paid for doing so (`provider gets'), Those who benefit from environmental services pay for their provision (`user pays'), Payments are conditional, and Participation is voluntary The main characteristics of Mexico's Payment for Environmental Services Program are: It is world's largest PES Program, with an annual budget of US$100m; It is managed by CONAFOR, Mexico's National Forestry Commission; To date, the program has supported the conservation of 2.37 million hectares, providing payments to over 5,000 small land-owners; Payments are differentiated based on the value of forest for environmental services (water and biodiversity), which is a best practice; and New efforts are focused on developing sustainable local financing mechanisms. 35. The policies and programs introduced by the PECC were consolidated through the Fourth National Communication (2010) to the United Nations Framework Convention on Climate Change (UNFCCC). This Communication posits that gathering information about climate variability and climate change is vital in order to put the adaptation strategy into operation. Additionally, the Communication establishes the need to strengthen technical capabilities to understand and make use of hydrometeorological information; to develop decision-making criteria under uncertainty scenarios; to strengthen the institutions, regulatory framework and the market; and to promote civil society participation in the development of programs and strategies. 36. This Communication also proposes the incorporation of risk and adaptation criteria in the development and land planning strategies of municipalities and federal entities, as well as the strengthening of the focus on saving water, especially in the agricultural sector, which is the largest user of water (around 77 percent). This can be achieved by upgrading irrigation technology, introducing conservation practices and 12 encouraging the development of a culture of water saving. In Mexico's most arid areas, the irrigation districts must emphasize adjustments to assigned water volumes as well as improvements in management practices. Regarding Mexico's urban areas, studies undertaken by the National Ecology Institute (Instituto Nacional de Ecología, INE) suggest that sustainability and the ongoing availability of water require operation in closed loops (recycle and reuse of water). 37. Mexico's commitment in responding to the challenges of climate change is evidenced, among other things, by the four communications that the country has submitted to the UNFCCC. Mexico is the first non-Annex I and developing country to do so, demonstrating its firm commitment to addressing climate change in its policies, strategies, programs and projects. These communications, albeit not legally binding documents, have strong relevance as most of the commitments they include have been fully implemented and represent major milestones in the Government's efforts to tackling climate change (see Box 2). The most relevant commitments have been the formulation of the National Climate Change Strategy (Estrategia Nacional de Cambio Climático, ENACC) and the Special Climate Change Program (PECC), both of them established in the Third Communication. The PECC contains an array of activities on mitigation and adaptation that have been incorporated into sector and institutional programs, both at the Federal and State levels. Additional important examples of commitments established in communications to the UNFCCC are the: a) formulation and implementation of the "Water Culture" program; b) preparation and updating of the National Greenhouse Gas Inventory; c) design and implementation of a voluntary program for the reporting of GHG Emissions by private sector companies; d) implementation of a national program for payment for environmental services (PES); e) the development of methodologies for the preparation of climate change scenarios; and f) the formulation of State Climate Change Plans8. 8 The plan for Veracruz has been completed. Those for Michoacan, Nuevo Leon, Chiapas, Tabasco and Yucatan are currently under preparation. 13 Box 2: Mexico's Four National Communications to the UNFCCC First Communication (1997): The first National Communication (NC) described studies and actions adopted by the GOM to address climate change issues at the national level. This also included the execution of qualitative vulnerability assessments that divided the country into three large regions. The First Communication also presented the results of the first national inventory of greenhouse gas emissions, using first order approximations. Second Communication (2001): In 2001, Mexico developed its first climate change scenarios based on information generated through global circulation models. Work also started on the identification of specific mitigation technologies applicable to local conditions. The document incorporated an assessment of local and global benefits of atmospheric air pollution control practices in a large metropolis. Mexico joined Central America and Cuba to report findings on regional vulnerability assessments and establish country priorities, as well as carry out the first analysis of feasible adaptation options. Third Communication (2006): This NC includes important advances on Intergovernmental Panel on Climate Change (IPCC) methods to assess GHG emissions, substantially improving the quality and reliability of the national inventory of greenhouse gases. Previous inventories were updated to incorporate the improved methods. The Third Communication also incorporated improved climate modeling, increasing the resolution (scale) available for conducting vulnerability analyses. The availability of improved information allowed Mexico to conduct new vulnerability assessments for water, forestry, and agriculture. It was also able, for the first time, to include climate change vulnerability assessments for health, energy, tourism, and biodiversity. Mexico also reported vulnerability assessments at the regional and state level and for selected sectors (water in Sonora, tourism in Quintana Roo, the coastal wetland ecosystem in the Gulf of Mexico, etc.). For the first time, public participation was sought at all levels and in all activities. The Third Communication established the commitment to prepare the Special Climate Change Program (PECC), which was approved in 2009. Fourth Communication (2009): Work with the IPCC allowed Mexico to update its National GHG Inventory for 2006 and also introduce the Study of the Economic Impacts of Climate Change. Mexico is the first developing country to publish such a study, with support from the Inter-American Development Bank (IDB), the World Bank, and the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). Following in Mexico's footsteps, other Latin American countries have now started to prepare similar studies, using similar methodologies and with assistance from the Mexican team. The Fourth Communication also includes Voluntary Accounting and GHG Emissions Reporting and a report on the outcome of several projects on the reduction and optimization of methane. Various states, including Veracruz and Mexico City, have formulated or are formulating their State Actions Plans against Climate Change. Mexico is the only non-Annex 1 (Kyoto Protocol) country to have submitted Four Communications to the UNFCCC and plans to submit the Fifth by the end of the current Administration (2012). (See Annex 6). 14 38. Additionally, Mexico has played an important role in the United Nations Convention to Combat Desertification (UNCCD)9 and in the Convention on Biological Diversity (CBD)10. The GOM has submitted three reports to the UNCCD (2000, 2002 and 2006) regarding the implementation of its national strategy to combat desertification and mitigate the effects of droughts. Some thematic issues reported were the sustainable management of natural resources (including rational management of drainage basins and exploitation and efficient use of water resources); rational management and conservation of soil resources; and strengthened information and early warning systems, taking account of climate, meteorological, hydrological, biological, soil, economic and social factors. Mexico has also submitted four reports to the CBD on the implementation of the National Biodiversity Strategy and its Action Plan, as well as several thematic reports including: Technology Transfer and Cooperation, Mountain Ecosystems, Forest Ecosystems, and Natural Protected Areas. 39. Mexico is making steady progress in implementing a series of activities aimed at reaching the targets set forth in the PND, PNI, PNH and PECC. A good example of such progress is the recent Program for Water Sustainability in the Mexico Valley, which will significantly increase the volumes of wastewaters treated; contribute to reducing over-exploitation of aquifers; provide alternative sources of water for irrigation; and reduce the impacts of extreme events and vulnerability to climate change by doubling the capacity to evacuate rainwater from the Zona Metropolitana del Valle de México. (see Annex 9 for details of this program). 40. Mexico's role as a global climate change leader has been recognized by the Climate Performance Index, an independent assessment of the overall climate performance of countries. The assessment ranks countries based on: (a) per capita GHG emission trends in the energy, transport, residential, and industrial sectors; (b) absolute energy-related GHG emissions; and (c) climate policy. In the assessment released at the end of 2009, Mexico ranks 11th among 60 relevant countries, ahead of Portugal (12th), Denmark (17th), The Netherlands (27th), Japan (35th), Italy (44th), China (52nd), the United States (53rd), and Canada (59th).11 PUBLIC CONSULTATIONS 41. Mexico has developed a comprehensive institutional framework for citizen participation that draws from several articles of the Constitution and from a set of laws12 9 The UNCCD was adopted in 1994 and entered into force in 1996. 193 countries were Parties as at August 2009, and Mexico has been part of the Convention since 1994. In conformity with the Convention, and in accordance with their national development policies, affected country Parties shall, as appropriate, prepare and implement national action programs to combat desertification and mitigate the effects of drought as an integral part of their national policies for sustainable development. 10 The CBD entered into force in 1993. It has three main objectives: conservation of biological diversity; sustainable use of the components of biological diversity; and fair and equitable sharing of the benefits arising out of the utilization of genetic resources. The CBD has 193 parties and Mexico has been a member since 1993. 11 See http://www.germanwatch.org/klima/. 12 Constitution of the Mexican States, Articles 1, 3, 4, 6, 8, 9, and 26; Ley de Planeación (Planning Law); Ley Federal de Transparencia y Acceso a la Información Pública Gubernamental (Transparency and Public Information Law) and 15 (including the Planning Law) that mandate that the National Development Plan and other government programs should be developed within a participatory process. This framework applies to both the environmental and the water sectors, which have developed their own specific guidelines and options for citizen participation that draws from several articles of the Constitution and from a set of laws13 (including the Planning Law) that mandate that the National Development Plan and other government programs should be developed within a participatory process. This framework applies to both the environmental and the water sectors, which have developed their own specific guidelines and options for citizen participation. The specific prior actions, policies, norms and programs contemplated under the Adaptation to Climate Change in the Water Sector DPL have been framed within this institutional framework (see details in Annex 5). 42. This institutional framework includes mechanisms for transparency and access to information, consultation and participation, and social monitoring and grievance redress. Norms follow a rulemaking procedure that includes a 60-day notice and comment period that is mandatory for all official legislative and regulatory proposals in Mexico. Government programs and strategies are formulated through a process that involves consultation with civil society organizations. The implementation of most programs includes multi-stakeholder councils or other governance bodies that allow for citizen participation as well as monitoring of program management. In general, participation is concentrated among organizations with technical expertise, both at the national and at the regional level, with citizen participation at the local level varying across place and program. other state and municipal laws on transparency and access to information;; Ley Federal de Fomento a las Actividades Realizadas por Organizaciones de la Sociedad Civil (Law for the Promotion of Activities Carried Out by Civil Society Organizations). 13 Constitution of the Mexican States, Articles 1, 3, 4, 6, 8, 9, and 26; Ley de Planeación (Planning Law); Ley Federal de Transparencia y Acceso a la Información Pública Gubernamental (Transparency and Public Information Law) and other state and municipal laws on transparency and access to information;; Ley Federal de Fomento a las Actividades Realizadas por Organizaciones de la Sociedad Civil (Law for the Promotion of Activities Carried Out by Civil Society Organizations). 16 IV. BANK'S SUPPORT TO THE GOVERNMENT PROGRAM SUMMARY UPDATE ON THE IMPLEMENTATION OF THE CPS 43. Mexico and the World Bank Group have had a longstanding partnership that encompasses the delivery of the full menu of financial, knowledge, and coordination and convening services. The Country Partnership Strategy (CPS) for Mexico,14 which was discussed by the Board in April 2008, built on the Mexican authorities' desire to maintain a strong financial and knowledge-based relationship with the Bank, focusing on flexibility and innovation in responding to the Partner's development challenges and borrowing needs with higher levels of flows dependent upon evolving market conditions. The aim of the CPS is to provide a flexible framework for World Bank Group support to Mexico. The strategy is based on a streamlined approach to lending that is in line with the priorities set in the National Development Plan (PND) 2007-2012. 44. As described in the CPS Progress Report15, the Partnership has evolved along with Mexico's changing needs in the face of the economic downturn. In response to the GOM's latest priorities and thanks to the flexibility embedded in the CPS, the IBRD was able to address the federal government's need for increased financing quickly, while continuing to deliver on a broad knowledge services and policy coordination activities. The framework includes efforts to alleviate the expected consequences of the economic downturn on Mexico's population, as well as establish the foundation for gradually strengthening the financial sector, supporting investment in infrastructure and climate change mitigation and adaptation, and enhancing governance and counter-cyclical measures. The Bank Group will continue deploying its three business lines, with financing taking on a larger role during this counter-cyclical period at least through calendar year 2010. Beyond 2010, the focus of the partnership is likely to remain on promoting knowledge and innovation, but providing a higher level of base financing as compared to pre-global crisis expectations. 45. During the crisis, financing approved by the Bank has significantly exceeded the level anticipated in the CPS of US$800 million annually, reaching US$3.4 billion in FY09 and expected to be around US$6.7 billion in FY10. This level of "rainy day" financing was made possible by Mexico's significant prepayment of IBRD debt in FY07. 46. Developing Infrastructure and Assuring Energy Security and Environmental Sustainability have become a major part of the CPS program for both reactivating the economy and putting it on an environmentally sustainable trajectory. The GOM has accelerated its reform program during the crisis and climate change adaptation is now a major policy objective of Mexico. Beyond lending, the broad range of Bank assistance in this area, including grants, knowledge services and convening activities, is being coordinated through TAPs with the Environment, Transport, Energy and Water sectors. 14 Report No. 42846-MX, March 4, 2008. 15 Provided to the Board on March 25, 2010. 17 47. The International Finance Corporation (IFC) will continue to be a strong partner of Mexico, with a focus on investments and advisory services that complement IBRD efforts to improve economic conditions at the base of the pyramid. Assistance will be provided to broaden and deepen the financial sector, support investment in infrastructure and climate change, and help those competitive industries, such as SMEs, that are an important source of new jobs. In response to the crisis, the International Finance Corporation (IFC) is implementing systemic interventions (such as the housing finance facility for US$150 million) and will embrace a selective approach to new business to ensure high additionality and development impact in the counter-cyclical phase. Additionally, the IFC and IBRD have started to coordinate interventions in climate change and in the water sector. LINK TO COUNTRY PARTNERSHIP STRATEGY 48. A key principle established in the CPS and reiterated in the Progress Report is that the Bank's program should be closely aligned with the government's own development strategy. With the advent of the crisis, the Mexican government's focus shifted from the initial set of priorities established in the PND in order to address more immediate challenges. Those challenges are stabilizing fiscal accounts and revitalizing the economy while, at the same time, accelerating the pace of longer-term reforms as shifts in the political environment provide opportunities to do so. The Bank program has responded in a timely and efficient manner to Mexico's evolving needs, while maintaining a crucial focus on the long-run development challenges identified, such as climate change adaptation. 49. Mexico has taken a major leap forward in integrating climate change considerations into its infrastructure and social programs under the Special Program for Climate Change and the Bank is a critical partner in this effort. IBRD lending activities supporting environmental sustainability have embraced a wide variety of sectors including urban transport, energy, agriculture, water and more broadly natural resource management. Moreover, the Bank is increasingly focusing on poverty and social issues by supporting analytical and advisory activities (AAA) that encourage the establishment of a sustainable development framework for evaluating infrastructure projects targeted to the poorest states and municipalities. 50. The proposed operation, which addresses Adaptation to Climate Change in the Water Sector, is consistent with national priorities. Mexico faces critical and urgent water problems. The unsustainable use of water resources contributes to widening the gap between the wealthy and the poor. Sustainable and integrated water resource management, based on principles of efficiency and conservation, and implemented by a more efficient provision of water services, increased levels of wastewater treatment and reuse, and an improved institutional framework, is expected to have positive effects on poverty and inequality by increasing the affordability and accessibility of services. It will also have a positive impact on the country's competitiveness and infrastructure, particularly in the water sector. These objectives are all aligned with the government's 2007- 2012 National Development Plan (PND), and they fit within the framework outlined in the CPS FY08-FY13 for Mexico. 18 51. Finally, this DPL is fully aligned with the CPS objectives and strategy as up- dated in the recent Progress Report. This up-date stated that the Bank would remain Mexico's primary partner in helping it to advance its climate change agenda, both nationally and on the global stage. The proposed operation fits within the GOM's top priorities as reflected in the PND as well as in the CPS pillars16 Improving Competitiveness and Developing Infrastructure, and Assuring Environmental Sustainability, which remain highly relevant to Mexico's development challenges. In parallel, the Bank and the government of Mexico are expected to reach an agreement on a complementary set of advisory services to support the implementation of this DPL (see next Section). THE VALUE ADDED PROVIDED BY THE BANK 52. The philosophy behind the CPS as reaffirmed in the Progress Report, is to expand the scope of knowledge and policy coordination services. Memoranda of Understanding (MOUs) have been developed during the current CPS period to provide an instrument for coordinating AAA, loans, and grants in programs to address critical development challenges. MOUs represent a departure from an operational or ESW- centric approach to sector dialogue and development solutions, and recognize the need to maintain a long-term level of engagement based on agreed-upon objectives and development challenges that are not subject to unanticipated changes in financing and knowledge product needs in particular sectors. 53. Eight MOUs are currently underway in Mexico and they cover issues such as fiduciary strengthening, competiveness and financing, poverty and social programs, public sector management, integrated water resource management, energy financing and regulation, urban transport, education, health, and environment and climate change. Important progress has been made in the implementation of the MOUs. As an example, the urban transport sector saw progress in several areas, including the development of an integrated Guide for Urban Transport Safeguards for the GOM and the cities participating in the Federal Mass Transit Support Program (Programa de Apoyo Federal al Transporte Masivo, PROTRAM) to comply with national regulations as well as reflect World Bank policies. In addition, a Cost-Benefit Analysis Manual will guide the Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público, SHCP) and the National Infrastructure Fund (Fondo Nacional de Infraestructura, FONADIN) in the process of approving financing for projects. And finally, improvements have been made to the Sustainable Urban Mobility Program, which provides a regulatory framework for the Urban Transport Master Plan. In the energy sector, a series of studies and workshops called for in the MOU have already been completed. In the area of the Environment and Climate Change, the Bank is providing support for a complex program. Box 3 shows the details of this last MOU and progress to date. 16 The priority areas highlighted by the CPS are a) Accelerating growth; b) Improving Competitiveness; c) Promoting Social Inclusion and Reducing Poverty; d) Developing Infrastructure and Assuring Energy Security; e) Strengthening Institutions; f) Assuring Environmental Sustainability. 19 54. The World Bank will support CONAGUA in positioning itself vis-à-vis climate change and placing this issue at the top of its corporate agenda. This support will be provided thorough streamlined IBRD financial support, whereby the design and implementation of the proposed operation will be accompanied by an enhanced package of knowledge and policy coordination services set forth in a MOU. Resources are expected to be available from the Water Partnership Program and the Spanish Trust Fund for Latin America and the Caribbean (SFLAC) for technical assistance and advisory services to support program advancement. SHCP has recently informed the Bank that the new MOUs will be called Technical Assistance Program (TAP) from now on. A preliminary draft TAP is presented in Annex 11. Box 3: Environmental and Climate Change MOU To complement the Climate Change DPL and numerous on-going Bank activities directed toward mainstreaming environmental policies, the GOM and the Bank have signed a MOU to buttress policy dialogue and further strengthen Mexico's capacity to implement its National Climate Change Strategy and Special Climate Change Program. The main lines of support and current progress status are listed below. Assessment of environmental regulations (completed) Sub-national climate change action plans (agreement on scope reached; three workshops have already been held) Social dimensions of climate change (first phase of study completed) Vulnerability to climate change in agricultural systems (study completed; workshop has been held) Adaptation to Climate Change in the Gulf Coast (project negotiated) Climate change mitigation in the forestry sector (Mexico's participation in the United Nations Collaborative Programme on Reducing Emissions from Deforestation and Forest Degradation (REDD) approved) Preparation of the Clean Technology Fund Investment Plan (completed, plan approved by the Clean Technology Fund (CTF) Committee) Low Carbon Economy study (MEDEC) (completed) Institutional strengthening of SEMARNAT (in progress) Design of the Mexico Cap and Trade system (in progress) The activities included in this MOU are financed through a combination of Bank resources, government funds and grants that total approximately US$9 million. COLLABORATION WITH THE IMF AND OTHER DONORS 55. World Bank and IMF staffs meet on a regular basis to share views on the macroeconomic situation and prospects for Mexico. The meetings occur quarterly and also involve the exchange of information and discussions of financial sector issues, as both institutions are actively engaged in policy advice in this area. 20 56. The IMF's Board approved a US$47 billion Flexible Credit Line (FCL) in April 2009 to provide additional precautionary sources of external funds17. Announcement of the FCL greatly reduced the volatility of the peso. This flexible instrument which was recently renamed, can be used at any given time within a one-year timeframe and the disbursements are not staggered. The FCL is only made available to countries with a solid financial system and Mexico is the first to qualify. This type of support is meant to complement World Bank and IDB financing of the government budget. The US Federal Reserve has also arranged a US$30 billion currency swap in response to the financial turmoil that occurred that same month. 57. The IDB has also played an active role in supporting the GOM's climate change agenda. In November 2009, the IDB approved US$200 million for a program to support the ability of state governments to implement plans to reduce their vulnerability to climate change. The IDB has also provided support to the states of Tabasco and Quintana Roo for the development of State Action Plans for Climate Change, with two operations totaling US$200 million each in October 2008 and January 2009. Finally, the IDB approved a US$40 million project to reduce the environmental footprint of one of Mexico's leading commercial banks (BBVA Bancomer) and to support the institution in improving the energy efficiency and environmental sustainability of its buildings. 58. Donor collaboration on issues related to climate change was highlighted during the development of the Investment Plan (IP) for the CTF. The IP was adopted in January 2009 and represents an agreement between the GOM, the IDB, and the World Bank Group (WBG) to provide support for the low carbon objectives contained in Mexico's 2007-2012 PND, the PECC and the overall National Climate Change Strategy (Estrategia Nacional de Cambio Climático, ENACC). The Plan identifies the programs to be co-financed in three main sectors (urban transport, renewable energy and energy efficiency) and is considered a flexible instrument aimed at fostering the climate change agenda. 59. The French Development Agency (AFD) has also been an active player in the climate change arena in Mexico. In February 2010, it approved a US$250 million program to support Mexico's climate change agenda through targeted technical assistance on sectoral and cross-cutting issues. During the preparation process, the AFD and the Bank carried out a series of meetings that created a forum for sharing experiences. Both institutions have benefited from this exchange. RELATIONSHIP TO OTHER BANK OPERATIONS 60. The proposed operation builds on the World Bank's engagement in the water sector and in activities and programs related to climate change. The Bank has made a strong and long-term commitment in both areas in Mexico, and the present operation is the result of a long-standing and comprehensive policy dialogue as well as an operational relationship between the World Bank Group and the GOM (Figure 2). 17 In March 2010, the IMF renewed the FCL for one year (see Annex 3). 21 Figure 2: Ongoing Climate Change and Water Sector Activities Supported by the Bank in Mexico 61. In addition to the experience and lessons derived from previous and ongoing operations, the preparation of this DPL benefitted from--and was informed by--an extensive set of analytical studies covering public expenditure reviews (PERs); global and regional climate change reports; global and regional water sector reports; and specific Mexico studies (see below for a description of analytical underpinnings). It has also benefitted from the results of the Bank's Mid-Cycle Implementation Progress Report of the Water Resources Strategy, which highlights the efforts to position water at the core of the adaptation and mitigation solution (World Bank 2010b). Engagement and Dialogue on Climate Change 62. The commitment of the World Bank on issues related to climate change in Mexico and its support of the government's efforts in this area date back to the mid- 1990s. At present, this commitment comprises 35 initiatives (active or in the pipeline) financed by IBRD loans, GEF grants, carbon finance emission reductions purchase agreements (ERPAs), and other financial instruments. The Programmatic Environmental Structural Adjustment Loans (SALs) approved in 2002 and 200518 were a landmark in mainstreaming the environmental sustainability principle in sectoral policies for tourism, energy, forestry, and water, as prioritized by the government. These were followed by the Environmental Sustainability Development Policy Loan (ENVDPL) and its Supplemental Financing,19 which built upon Mexico's PND and expanded the objectives of previous Environmental Structural Adjustment and Development Policy Loans. 18 Environment Structural Adjustment Loan and Second Programmatic Environment Development Policy Loan (ENVSAL I and ENVDPL II ­ respectively, P074539 and P079748) were approved in August 2002 and September 2005, and closed in December 2003 and January 2006. 19 Environmental Sustainability Development Policy Loan (P095510) approved in September 2008 and Supplemental Financing approved in December 2008. 22 63. The Climate Change DPL (CCDPL)20 was designed to support the GOM's efforts to mainstream climate change and environmental considerations into public policy, fostering national institutional capacities and assisting the GOM by providing knowledge management on adaptation and mitigation activities. Most recently, the Green Growth DPL21 added value by supporting the implementation of key related policies and aligning Bank technical assistance to reduce GHG emissions on a voluntary basis within a framework of medium- to long-term goals for climate change mitigation. The achievements of the CCDPL were consolidated by the Green Growth DPL's focus on low-carbon transport and energy use that provided the framework for a deeper engagement through specific investment operations22 in urban transport23 and energy efficiency24. 64. The GEF grant for Adaptation to the Impacts of Climate Change on the Coastal Wetlands of the Gulf of Mexico25 promotes adaptation in that region through implementation of pilot measures to gather information to ascertain the costs and benefits of different approaches to reduce vulnerability to climate change. This project also seeks to assess the overall impacts of climate change on national water resource planning, including the identification of potential response options, with a focus on coastal wetlands and associated watersheds. Given the relevance of this project for the proposed DPL, a close coordination will be established during the implementation of both operations. 65. The activities described above constitute the foundations of the Adaptation to Climate Change in the Water Sector DPL, whose aim is the consolidation of the Bank's programmatic approach in climate change adaptation and in the water sector. The proposed operation brings to the front continued support to strengthen the GOM's policy, strategy, and governance frameworks to address adaptation issues in the water sector, through the improvement of Integrated Water Resources Management. Overall, the proposed DPL constitutes the bridge and logical next step between climate change policy support and water sector engagement in Mexico. 66. Additional Bank assistance associated with the implementation of the program supported by this DPL will result in the preparation of a Technical Assistance Program to buttress policy dialogue on adaptation to climate change in the water sector. According to preliminary discussions with CONAGUA, this support could include assistance in the formulation of the water sector's new long-term vision ("Vision 2030"), as well as capacity building in matters related to climate change. This TAP would follow the models for the environment (see Annex 11), energy, and transport sectors that are currently being implemented. 20 P110849, approved by the Board in April 2008 and expected to be closed in May 2010. This was the first Climate Change DPL approved by the Bank. 21 P115608, approved by the Board in October 2009 and expected to be closed in December 2010. 22 Co-financed by IBRD and the Clean Technology Fund (CTF). 23 PROTRAM P110474 and UTTP P107159. 24 Efficient Lighting and Appliances project (under preparation). 25 GEF Grant P100438. 23 Engagement and Dialogue in the Water Sector 67. The Bank has a long history of dialogue with Mexico and assistance in the areas of water resources management, irrigation and drainage, and water supply and sanitation. In 1972, the Bank and United Nations Development Programme (UNDP) provided support to Mexico in the development of the first comprehensive national water plan (which was published in 1975). The Bank joined the Food and Agriculture Organization (FAO) in providing support for drafting the modern 1992 water legislation. The 2004 Water Law, which builds on the previous one, was developed with support from the ENVDPL II. 68. Mexico was successful in transferring irrigation systems to water user organizations, with the support of the Bank-financed Irrigation and Drainage Sector Loan26 and the (now closed) On-Farm Irrigation Improvement Project.27 These efforts resulted in operation and maintenance improvements and increased collection of water tariffs from water users. In addition, the Integrated Irrigation Modernization Project (PMIR)28 (now closed) sought to improve the efficiency of irrigation systems and increase the value of production per unit of water consumed. In particular, the PMIR supported the modernization of existing irrigation infrastructure to promote a more efficient use of irrigation water within the framework of integrated irrigation plans, as well as consolidation of the transfer of irrigation infrastructure to water users. 69. Through the Water Resources Management Project (PROMMA29), CONAGUA made strides fostering integrated water resources management to promote conditions for environmentally sustainable, economically efficient and equitably allocated use of water resources; support the comprehensive management of water; and increase the benefits and reduce the risk related to existing hydraulic infrastructure. 70. The Mexico Decentralized Infrastructure Reform and Development Loan Project30 was designed to improve the performance of infrastructure services while operationalizing the decentralization objectives of the national government, thereby enabling and serving as a catalyst for the efficient and sustainable development of selected infrastructure sectors at the subnational level. This project was initially rolled out as a pilot effort in the state of Guanajuato but was not expanded to other states. The project was based on the Sector Wide Approach (SWAp), emphasizing access to services for the poorest, as well as improvements in infrastructure services and efficiency, and strengthening of the environmental and social management capacity at the state level in key sectors. The pilot project in Guanajuato included a component to improve utilities efficiency, wastewater treatment, and water resource management in the water sector. While a formal implementation completion report (ICR) is currently being prepared for 26 P007667, approved by the Board in December 1991 and closed in June 2000. 27 P007701, approved by the Board in February 1994 and closed in March 2002. 28 P035752, approved by the Board in December 2003 and closed in September 2009. 29 P007713, approved by the Board in June 1996 and closed in June 2005. 30 P080149, approved by the Board in June 2004 and closed in December 2009. 24 this project, it is generally agreed that the water component was the most successful. Additionally the project promoted a study on sustainable groundwater management for the stabilization of selected state aquifers through (among other measures) the consolidation of aquifer management organizations (the COTAS). 71. In addition, the Bank has provided technical assistance to CONAGUA for the implementation of its Flagship Local Interventions in the Water Sector Program (Proyectos Emblemáticos). The aim of this support is to promote integrated water resources management in local areas. CONAGUA has identified several projects whose specific objectives vary according to the water problems faced in their particular geographic areas. The National Water Commission has requested Bank support for the planning phase of two of those projects: (a) the Flagship Project in the Comarca Lagunera, which covers the Nazas and Aguanaval River basins in the states of Durango and Coahuila; and (b) the Flagship Project of the Huehuetan River basin in the state of Chiapas. The Flagship Projects represent an excellent opportunity to foster integrated, sustainable, and participatory water resources management at the level of the basin or micro-basin. 72. With funding from the Spanish Fund for Latin America and the Caribbean (SFLAC), the Bank will provide assistance for the preparation of two State Climate Change Action Plans that will establish the state's emissions baseline and inventory; define climate change scenarios; identify priorities for adaptation and, where relevant, mitigation actions; and set forth specific actions to achieve those priorities. Such priorities will be defined using participatory approaches, such as Strategic Environmental Assessment, and involving key stakeholders to improve overall support for the plans. 73. The Modernization of the Water and Sanitation Sector Technical Assistance Project (Programa de Asistencia Técnica para el Mejoramiento de Eficiencias, PATME)31 supports government efforts to develop the tools and instruments to assist local authorities in improving the financial sustainability and efficiency of water supply and sanitation service provision. This project has enabled CONAGUA to develop new regulations that provide incentives for efficiency improvements, including transferring financial resources based on efficiency and service improvements. The project also supports the improvement of commercial and operational efficiency in a group of selected utilities. Local authorities and utilities have had a very positive reaction to this project. Thus, it is likely to yield a follow-up operation continuing and scaling-up the work already done. The proposed operation complements many of the policy triggers that will receive support during PATME's second phase (to be called the Programa de Mejoramiento de Eficiencia [PROME]). 74. The proposed operation builds on the operational experience gained and the progress achieved in water resources management and efficiency in Mexico. These two aspects are fundamental to adaptation and this DPL reinforces such perspective and deepens the policy dialogue with the stakeholders on the matter. 31 P091695, approved by the Board in August 2005 and expected to be closed in 2010. 25 ANALYTICAL UNDERPINNINGS 75. A precondition for the proposed DPL was a strong analytical and policy framework in the water sector, as well as activities related to climate change and a sustained Bank engagement with the GOM. As previously stated, the Bank is relying on a strong and long-term commitment in Mexico and the proposed operation supports a subset of policies within the government's broad policy program on climate change and water adaptation. These policies were selected on the basis of analytical work to determine key policies with strong development impact, and are in line with the Country Partnership Strategy for FY 2008­2013 for Mexico as up-dated in the recent Progress Report. In addition to the experience and lessons derived from previous and ongoing operations, the preparation of this DPL has benefitted from--and was informed by--an extensive set of analytical studies. 76. Strong scientific evidence indicates that climate change is a serious and urgent issue. The Economics of Climate Change: The Stern Review states that climate change is the greatest example of market failure (Stern 2007). The Earth's climate is rapidly changing, mainly as a result of increases in greenhouse gases caused by human activities. Climate change will be the most serious environmental problem that humankind will face in the 21st century. While climate change threatens all countries, developing countries are the most vulnerable. Preliminary estimates suggest that these nations could bear some 75 to 80 percent of the costs of damages caused by the changing climate. Climate change impacts development to its roots and in its many dimensions. It threatens to deepen vulnerabilities, erode hard-won gains, and seriously undermine prospects for development. Unmitigated climate change is incompatible with sustainable development (World Bank 2010a). 77. While mitigation of greenhouse gas emissions is needed to avoid an unmanageable warming of the planet, adaptation is necessary to manage unavoidable negative impacts already taking place. Water managers have always had to cope with the variability of natural conditions. But climate change imposes new challenges by increasing variability and uncertainty of the hydrological cycle. The response to variability is adaptation. In adaptation in the water sector, the three main priorities are to: (a) reduce vulnerability in order to increase protection of people and ecosystems; (b) protect and restore ecosystems that provide critical land and water resources and services; and (c) close the gap between water supply and demand (European Environmental Agency 2007). 78. Vulnerabilities of people and societies to shifts in hydrometeorological trends, increased variability, and extreme events must be reduced. An increase in the occurrence of floods, droughts, and other extreme weather events due to climate change can have severe economic, social, and environmental impacts that can threaten sustainable development. The costs of adaptation for the water sector rank as one of the top three adaptation costs globally. It is also recognized that the clearest opportunities to reduce the costs of adaptation are in water supply and flood protection (Margulis 2010). 26 79. The impacts of climate change on freshwater resources will be substantial. The 2007 IPCC Report on Climate Change Impacts, Adaptation and Vulnerability makes clear the impact of climate change on freshwater systems. The main conclusions of the report are that: a) the impacts of climate change on freshwater systems and their management are mainly due to the observed and projected increases in temperature, sea level and precipitation variability (very high confidence); b) semi-arid and arid areas are particularly exposed to the impacts of climate change on freshwater (high confidence); c) higher water temperatures, increased precipitation intensity, and longer periods of low flows exacerbate many forms of water pollution, with impacts on ecosystems, human health, water system reliability and operating costs (high confidence); d) climate change affects the function and operation of existing water infrastructure and water management practices (very high confidence); and e) the negative impacts of climate change on freshwater systems outweigh its benefits (high confidence). Climate change will cause significant changes in water use or the hydrological cycle, requiring adaptation in the management of water resources. The clearest and probably most rewarding opportunities to reduce adaptation costs lie in the water sector (Stern 2007). 80. Climate change directly affects the water cycle and, through it, the quantity and quality of water resources available to meet human and environmental demands. Climate change can lead to an increase in the frequency and intensity of floods and droughts. Rising sea levels have serious effects on coastal aquifers which are a major source of water supply systems, and higher water temperatures and changes in extremes can exacerbate many forms of water pollution. Water supply reliability, health, agriculture, energy, and aquatic ecosystems will feel the impact of these changes to the water cycle. The demand for water to satisfy such needs will also be affected. The importance of water to sustainable social and economic development is not to be underestimated (UNESCO 2009). The extent to which each water system will be affected by climate change will depend on its degree of vulnerability (World Bank 2010c). 81. The focus of climate change mitigation is primarily on the energy sector, but the way in which we use and manage our water resources should become the focus of adaptation (GWP 2007). There is global consensus that the supply and demand for water resources will be substantially affected by climate change. These impacts will change the way we plan for the resource. Water will have to be used more efficiently. To do that, managers will need to think on a basin-wide scale and devise efficient and flexible ways to allocate water among competing quantity and quality demands for human use (such as energy, agriculture, fisheries, and urban consumption) and healthy ecosystems (World Bank 2010a). At the Fourth World Water Forum held in Mexico City in 2006, there was international consensus on the need for an approach to integrated water resources management that addresses the challenges and uncertainties of climate change (WWC 2006). Better water resources management will be essential if communities are to adapt to the changes in the hydrological cycle. Any strategy must include a combination of infrastructure investments with institutional strengthening that goes beyond the traditional approach in the sector (De la Torre, Fajnzylber, and Nash 2009). The resilience of vulnerable populations must also be incorporated in any planning framework for the sector (World Bank 2009). 27 82. IWRM is regarded as critical for sustainable outcomes, and increasingly viewed as offering the best available framework for building the resilience needed to adapt to climate change. Integrated water resources management enables: a) the conservation of water through a more efficient allocation of the resource, b) the resolution of conflicts among competing uses and users, c) the inclusion of the accounting for social, economic and environmental value of water in decision making; and d) increased participation of communities and the private sector in decision-making and financing. IWRM attempts to break the mold of an engineering approach to water. In the 1990s it became apparent that such an approach had several limitations, as expanding demands on water resources were resulting in increased competition among water uses. Water services could no longer be delivered without taking into account the availability and quality of water resources (World Bank 2010b). Many strategies began to include a broader integrated framework that links water resources with water use (water supply and sanitation, irrigation and drainage, energy and environment) (Figure 3 illustrates this definition and is referred to as the IWRM `comb'). This IWRM framework changed the vision for the sector and provided the basis for moving away from a sector-based investment focus to a multi-sectoral approach to planning (World Bank 2010b). Figure 3: The Integrated Water Resources Management Comb 83. The incorporation of climate change adaptation in IWRM planning efforts will require the strengthening of weather monitoring and forecasting tools. This will provide better information to reduce uncertainty and give economic agents the tools necessary to make informed decisions. Some of the tools that are most valuable to reduce uncertainty include a historical climate database, weather monitoring instruments, systems for analyzing climate data to determine patterns of intra-annual and seasonal variability and extremes, and data on systems vulnerability and adaptation effectiveness (De la Torre, Fajnzylber, and Nash 2009). Unfortunately, hydrometeorological systems in many developing countries have deteriorated in the past few years. Coupled to this is the need to improve capacity and institutional strength to equip the services with the skills to incorporate climate information in the analysis. 28 84. Expected increases in temperature and reductions in rainfall will seriously affect water resources and the hydrological cycle in Mexico. The Center for Atmospheric Science of the Autonomous University of Mexico (UNAM) has constructed the most likely scenarios using General Circulation Models (GCMs) principally from mean temperature and rainfall variables. Practically all the models show an increase in temperature, with highest warming in the north and northwest (arid regions) of Mexico. These scenarios also show a large dispersion of projections of percentage variation in rainfall, with states in the north of Mexico showing a significant percentage reduction in rainfall (SEMARNAT and SHCP 2009). 85. Mexico is particularly vulnerable to climate change because its impact exacerbates the existing severe constraints in water resource management. Both surface and ground water are heavily overexploited and contaminated in Mexico (Olson and Saltiel 2006), because of the inefficient use of water in a context of water scarcity. In 1955, water availability in Mexico was 11,500 cubic meters (m3) per person per year. By 2005, this amount had decreased to 3,822m3 (CONAGUA 2008a). This decrease in availability was caused primarily by reasons unrelated to climate, such as population growth and economic development. Estimates based solely on population growth, show that water availability will decrease further to 3,610m3 per person by 2012, 3,285m3 by 2030, and 3,260m3 by 2050. In addition, the persistence of inefficient agricultural irrigation practices, the overexploitation of aquifers, and the inadequate treatment of municipal and industrial wastewater will increase the vulnerability of water resources (SEMARNAT 2009). Climate change impacts will only worsen current conditions. 86. In Mexico, climate change may push the poor beyond their ability to cope, particularly as a result of their lack of access to water resources. Policies should focus on reducing vulnerability and variability by enhancing good governance and technical capacity at the national level on key issues (World Bank 2010b). 87. Policy and institutional frameworks to address the water crisis must incorporate IWRM principles and the necessary financing instruments and normative frameworks to provide incentives to mainstream adaptation to climate change in the water sector. Mexico faces a number of challenges, including the need to address the overexploitation of water resources, as more than 50 percent of the groundwater used in the country comes from overexploited aquifers, a situation that is not sustainable in the long run. There is a need to review policies and subsidies in terms of their long-term impact and to revise them to support sustainable water resource management (World Bank 2006). Improving coverage, quality and efficiency in the sector requires greater efficiency in expenditures linked to institutional strengthening as well as to maintenance and rehabilitation, better targeted subsidies, and improved transparency and accountability (World Bank 2005). LESSONS LEARNED 88. The proposed Adaptation to Climate Change in the Water Sector DPL builds on and benefits from the Bank's long collaboration with SEMARNAT, CONAGUA, and other federal, state and municipal line ministries and specialized agencies with 29 responsibility for Mexico's environmental sustainability and climate change agendas. In particular, the policy content and priorities reflect relevant findings of the Bank's extensive body of analytical work in Mexico and the broader scientific literature on water sector adaptation to climate change. These analytical underpinnings were described above. The design of the operation incorporates specific lessons learned from the implementation of previous Bank-supported environment and climate change lending operations in Mexico and elsewhere in Latin America and the Caribbean. Chief among these are the Programmatic Environmental Structural Adjustment Loan (P074539), the Second Programmatic Environment Development Policy Loan (P079748), the Climate Change DPL (P110849), and the Environmental Sustainability DPL (P095510). Also informing the design of this operation were the lessons learned about climate change adaptation and water sector issues in Mexico through the implementation of a range of investment operations (see earlier in this section for details of such operations).32 89. Listed below are some of the lessons that result from the Bank's experience: The operation's policy content and prior actions should reflect the Borrower's own program and priorities developed with the benefit of a national policymaking process that involves a process of broad public consultation. This is essential to the Borrower's ownership of the program and stakeholder support for it. Mexico's PECC is a key part of the National Development Plan, which was widely consulted in accordance with participatory processes established in Mexico's Planning, Transparency and Access to Information legislation as well as other laws (see Annex 6 for details). The National Water Program (PNH) sets forth the water policy framework for Mexico and provides the framework for this operation's policy content. The Bank has added value to the program through its extensive collaborative lending and non-lending engagement with the government on water sector and climate change issues, as described above. Prior actions should be limited to a few key policy and institutional reforms. Without such a focus, implementation by the Borrower and supervision by the Bank risk losing sight of the operation's priorities. This operation has seven prior actions distributed between two broad policy and institutional areas: strengthening the institutional framework and monitoring capacity in IWRM, and mainstreaming adaptation to climate change in water programs. The government and the Bank have agreed that these actions are essential to achieving the program's anticipated outcomes. The operation's outcomes should also reflect the Borrower's program objectives and monitoring capacity and, like the prior actions, should be limited to a few key, measurable indicators. This operation's outcomes are laid out in the policy and results matrix in Chapter VI. The outcomes represent the 32 Key investment lending operations include the: (i) Irrigation and Drainage Sector Loan (P007667); (ii) On-Farm Irrigation Improvement Project (P007701; (iii) Integrated Irrigation Modernization Project (P035752); and (iv) Modernization of the Water and Sanitation Sector Technical Assistance Project (P091695). 30 government's own objectives, as specified in the PNH and Fourth Communication to the UNFCCC. In some cases, progress towards and achievement of the outcomes will require subjective judgments, which will be formed in the course of on-going engagement with SEMARNAT, CONAGUA, and CONAFOR. Other outcomes can be objectively measured by comparing them to baseline levels that the government has already established through its own monitoring and evaluation (M&E) system. The Bank's on-going collaboration and engagement with the Borrower through analytical and advisory services are necessary to continue adding value to the program. The TAP between CONAGUA and the Bank will provide the framework for this. The TAP, which is currently being finalized, envisions, among other activities: (a) capacity building for CONAGUA on climate change related topics; (b) strengthening of the water sector financing system (sistema financiero del agua); (c) support to CONAGUA throughout the COP 16 preparation process and during the COP 16; and (d) training activities. For more details on this TAP see Annex 11. Arrangements for intersectoral coordination are important to successful program implementation: SEMARNAT will play the overall coordinating role. It is the Ministry responsible for overseeing the PECC's implementation and for preparing Mexico's Communications to UNFCCC, which describe actions taken and/or to be taken by CONAGUA, CONAFOR, and other ministries and agencies to contribute to climate change adaptation. While CONAGUA and CONAFOR enjoy considerable autonomy, they come under SEMARNAT's overall policy direction. 90. Many of the above lessons also reflect the conclusions and recommendations that emerged from the August 2009 Development Policy Lending Retrospective. This is further illustrated in Box 4. 31 Box 4: DPL Good Practices and the Adaptation to Climate Change in the Water Sector Development Policy Loan Principle 1 ­ Reinforce ownership. The proposed operation is built around the experience gained by the Mexican government through implementation of the water sector program as well as exemplary climate change programs and activities, including a comprehensive National Climate Change Strategy and the related Special Program for the Climate Change (PECC). Much progress has been achieved in these areas since the National Development Plan was prepared. The design of the associated sector programs has benefitted from Mexican as well as international experience. In the PND, PNH, PNI and PECC the government has set ambitious goals for adaptation to climate change in the water sector and it is precisely the achievement of those goals that this DPL will support. The Bank's participation will provide external validation and technical support to the on-going processes. The Bank facilitates continued political support as municipal, state and federal administrations change. The policy matrix will become an instrument to monitor progress. Principle 2 ­ Agree up front with the government and other financial partners on a coordinated accountability framework. The proposed operation builds upon the government's existing water sector program and its climate change policies, focusing on a select number of central actions, impacts and results in the design of the Program. The Bank's support is summarized in a brief and focused policy matrix that was agreed to with the government of Mexico. The matrix provides the accountability framework for the operation and contains a clear basis for measuring progress since its design is based on the targets set by the current Administration. To avoid ambiguity, the quantitative and qualitative dimensions of the policy actions to be completed at each stage of the series are well defined. Principle 3 ­ Customize the accountability framework and modalities of Bank support to country circumstances. The Bank's support is built around the reform's own timetable with a matrix that was developed in close collaboration with the federal government after extensive consultations with stakeholders. The monitoring indicators are drawn directly from those the government is using to assess the success of its interventions. Mexico has strong analytical capacity and the Bank will focus on complementing this capacity in strategic areas. Principle 4 ­ Choose only actions critical for achieving results as conditions for disbursement. The matrix has been limited to the minimum size to maintain the coherence of the policy dialogue, including clear definition of prior actions, outcomes and indicators. The Bank has worked with the government to focus on actions that are central to the main thrust of the reform, including the definitions of standards, assessment, and accountability. Principle 5 ­ Conduct transparent progress reviews conducive to predictable performance based financial support. During the implementation period the Bank will carefully monitor advances and provide technical support, in particular, on the basis of a set of activities included under a TAP agreed upon with CONAGUA. 32 V. THE PROPOSED FRAMEWORK FOR ADAPTATION TO CLIMATE CHANGE IN THE WATER SECTOR DPL OPERATION DESCRIPTION 91. This DPL will support the GOM's efforts to ensure adaptation to climate change in the water sector, contributing to long-term sustainable growth and protecting the most vulnerable populations. Reduced water availability and poor water quality are two of the main factors affecting future growth and development in Mexico. Key to addressing core development challenges is the enactment of measures to adapt to climate change whose aim is ensuring proper water resources management through appropriate regulations, norms, institutional reforms, and financial mechanisms. The proposed operation comprises two policy areas that are detailed below. They are: (a) Strengthening the Institutional Framework and Monitoring Capacity in Integrated Water Resources Management; and (b) Establishing the Normative and Financial Framework to Mainstream Adaptation to Climate Change in Water Programs. 92. The objective of the proposed operation is to support the government's efforts aimed at strengthening the institutional framework and monitoring capacity in integrated water resources management as well as mainstreaming adaptation to climate change in water programs. The proposed DPL supports the government's policy commitment to adaptation to climate change in the water sector, including the allocation of institutional, normative and financial resources and strengthening of monitoring and evaluation capacity. 93. The prior actions established below capture the two-level nature of the government's program and the Adaptation to Climate Change in the Water Sector DPL (see Box 5). This is achieved first by recognizing the importance of the over- arching framework established through the GOM's policy and institutional framework in Integrated Water Resources Management (including its climate change adaptation agenda in the sector), and second by setting up the required norms, operating rules and financial instruments that provide the necessary instrument to ensure the proper implementation of the institutional and policy framework. These prior actions, taken as a whole, put Mexico on the path to achieving its ambitious climate change agenda with regard to adaptation in the water sector. 33 Box 5: Overview of Proposed Operation's Components and Prior Actions The government has agreed upon and implemented the following prior actions: Policy Area 1: Strengthening the Institutional Framework and Monitoring Capacity in Integrated Water Resources Management 1. Mexico has strengthened its commitment to climate change in the water sector by submitting the Fourth Communication to the UNFCCC. 2. CONAGUA has strengthened the institutional framework for IWRM by delegating increased responsibility to 18 River Basin Councils to oversee, plan and manage projects and programs established in Watershed Management Plans. 3. CONAGUA has strengthened the institutional framework for IWRM by setting up two water banks in order to foster the sustainable management and efficient administration of water resources. Policy Area 2: Mainstreaming Adaptation to Climate Change in Water Programs 1. CONAGUA has issued two norms to provide regulatory instruments to promote the conservation of groundwater resources. 2. CONAGUA has incorporated in the Wastewater Treatment Funding Program (Fondos Concursables) criteria promoting the recharge of aquifers and water reuse for conservation of groundwater resources. 3. CONAFOR has issued operating rules for the Special Program for the Conservation and Protection of Microwatersheds in priority areas to promote reduction of soil erosion, reforestation and forest protection. 4. CONAGUA has strengthened the protection of overexploited aquifers by means of its programs to improve the water productivity of irrigation. KEY POLICY AREAS Policy Area 1: Strengthening the Institutional Framework and Monitoring Capacity in Integrated Water Resources Management 94. Objective: Strengthen institutions, regulations and monitoring capacity to foster an integrated and sustainable management of the country's water resources. 95. Context and Policy Area Description. Water issues are both complex and very important in Mexico because they are at the junction of economic development, public finance, infrastructure investment, environmental sustainability, climate change, and social justice. Decisions about water management and investment actions have a lasting physical impact on what happens with water, as well as major social impacts. The scarcity of water in many parts of the country means that sometimes more water for one sector results in less water (and a different development path) in another sector, as well as less water for environmental needs. Strategies with a broad integrated framework linking water resources with water use (water supply and sanitation, irrigation and drainage, energy and the environment) are considered best practice in the sector and provide the basis for moving away from a sector-based investment focus to a multi-sectoral approach to planning (World Bank 2010b). IWRM is regarded as critical for sustainable outcomes, and increasingly viewed as offering the best available framework for building the 34 resilience needed to adapt to climate change (World Bank 2010b). IWRM enables: a) the conservation of water through a more efficient allocation of the resource; b) the resolution of conflicts among competing uses and users; c) the inclusion of the accounting for the social, economic and environmental value of water; and d) the increased participation of communities and the private sector in decision-making and financing. 96. Challenge: There are many challenges associated with promoting sustainable and integrated water resources management. At the institutional level, the management of water resources is very complex because there are several sectors that are users of the resource (water supply and sanitation, irrigation, environment, energy, etc). IWRM principles require a coordinated institutional arrangement that includes federal, state and municipal entities. It also requires the participation of communities, users and the private sector in decision-making and in the implementation of programs and projects. Furthermore, the proper application of IWRM principles implies the decentralization of decision-making and management responsibilities to basin-centered institutions. 97. Prior Actions: Three important prior actions have been completed: (1) Mexico has strengthened its commitment to climate change in the water sector by submitting the Fourth Communication to the UNFCCC. The Communication underlines the importance of adaptation in water resources at the national and local level in order to reduce vulnerability in all areas of people's lives, including economic activities and natural resources. The Communication stresses the GOM's commitment to continue strengthening the technical capacity to analyze and manage meteorological information; develop new tools for decision-making under uncertainty; and promote the participation of civil society in the development and evaluation of strategies and programs for the sector. 98. (2) CONAGUA has strengthened the institutional framework for IWRM by delegating increased responsibility to 18 River Basin Councils to oversee, plan and manage projects and programs defined in the Watershed Management Plans. The main function of the RBCs is to review and provide input to activities to improve water resources management and to develop water infrastructure in their respective basins. RBCs are key stakeholders in the sector because they include state and municipal representatives, users, civil society and nongovernmental organizations. RBCs serve mainly as advisory bodies, providing their members with information and a voice on key issues such as: promoting priorities for investment, water valuation to estimate contribution amounts, and technical assessment of water availability. The Councils advise on annual water allocation, pollution control, water efficiency and basin protection programs as well as the Master Water Plan and its programs. They can also help to resolve conflicts by developing consensus among various parties involved and recommending actions to CONAGUA. 99. (3) CONAGUA has strengthened the institutional framework for IWRM by setting up 2 water banks in order to foster the sustainable management and efficient administration of water resources. The Mexican Constitution sanctions the importance of institutions in charge of managing regulated operations for exchanges of water rights 35 by allowing the creation of water banks (Art. 37 bis). Water banks have proved effective particularly in basins and regions where water has become scarce as a direct consequence of increasing water demand and productivity. CONAGUA further defined the role and functions of water banks through internal regulations33 to foster the sustainable management and efficient administration of water resources. Policy Area 2: Mainstreaming Adaptation to Climate Change in Water Programs 100. Objective: To mainstream adaptation to climate change by reforming financing mechanisms and normative and regulatory frameworks in the water sector. 101. Context and Policy Area Description. Mexico's water policy framework for the period 2007-2012 is set forth in the PNH, which establishes objectives, strategies and goals for the sustainable use of water (including agricultural water management, water supply and sanitation, and water resources management), while at the same time recognizing its strategic value and fostering environmental protection. PNH also addresses climate change in the water sector (objective #7). In this context, Policy Area 2 focuses on the development and adoption of a sectoral normative framework and financial mechanisms supporting adaptation to climate change activities in water resource management; agricultural water management; sustainable use and conservation of water, including wastewater treatment and reuse; and efficiency improvements for water utilities. 102. Challenge: The challenges associated with mainstreaming adaptation to climate change in the water sector in Mexico are many. At the policy level, the main challenge consists in ensuring that sustainable planning frameworks incorporate the climate change impacts and mitigation as well as adaptation measures. This implies a need to strengthen existing federal programs and norms by incorporating a set of financial incentives that explicitly address adaptation in the design and implementation of those programs and norms. 103. Prior Actions: Four policy actions have been completed: (1) CONAGUA has issued two norms to provide regulatory instruments to promote the conservation of groundwater resources. The protection of groundwater resources is one of the main `no regrets'34 activities that can be undertaken. The conservation of aquifers provides an intergenerational mechanism to ensure the sustainability of resources. The first of the two norms (014) regulates requirements for the recharge of aquifers with treated water including required water quality, operation and monitoring of the recharge systems. The second norm (015) regulates artificial recharge from rainwater and drainage in projects with a flow of at least 60 liters/second and includes the technical requirements to execute these activities. Artificial recharge is a technology applied for different purposes, including to mitigate the effects of overexploitation (such as lower water levels and saline 33 Subdirección General de Administración del Agua (SGAA) art. 24 and Gerencia de Regulación de Transmisión de Derechos, Bancos del Agua y Control de Información (GRTDBACI) art. 29. 34 In the Bank's accepted definition, "no regrets"adaptation measures are options that would be justified under all plausible future scenarios, including the absence of man made climate change. 36 intrusion), as a natural treatment in the subsoil, and to manage aquifers as storage areas and natural aqueducts. 104. (2) CONAGUA has incorporated in the Wastewater Treatment Funding Program (Fondos Concursables) criteria promoting the recharge of aquifers and water reuse for the conservation of groundwater resources. CONAGUA's water infrastructure funding programs provide incentives to optimize water resources, while increasing coverage, efficiency, reuse, and the quality of water services (irrigation, drinking water, and sanitation). The Wastewater Treatment Funding Program (Programa Fondos Concursables para Tratamiento de Aguas Residuales) has been chosen because it provides financial incentives to those projects that favor climate change adaptation actions, such as the reuse of treated effluent (the higher the percentage of wastewater reused the higher the amount of funding it provides) and protection for the most vulnerable populations. Operation and maintenance costs are partly funded through payments based on volume of wastewater treated to pre-defined quality standards. 105. (3) CONAFOR has issued operating rules for the Special Program for the Conservation and Protection of Micro-Watersheds (SPRMPA) in priority areas to promote the reduction of soil erosion, reforestation, and forest protection35. IWRM goes beyond the water sector. Activities to promote land use planning, reduced soil erosion, and protection of ecosystems are all part of IWRM. SPRMPA was established to recover degraded areas as a means to mitigate the effects of climate change; recover natural vegetation; control soil erosion and sedimentation from rivers, dams, and canals; and promote the natural recharge of aquifers as well as improvements in water quality. The program promotes soil conservation and reforestation activities. While guidelines for SPRMPA refer to a possible national program, in its preliminary phase it is focused on the Cutzamala watershed, including parts of the states of Mexico, Michoacán and the Federal District, an area that is politically, institutionally and socially complex. The resources allocated in 2009, which totaled approximately MX$120 million, demonstrate the importance and priority that the federal government has placed on this program. The program has several notable elements. First, the emphasis on planning and implementing conservation measures within a specific microwatershed is critical for water resource management. Second, in addition to incorporating most conservation activities included in the national PROARBOL program, SPRMPA includes an innovative payment to offset the opportunity costs associated with forgoing forest conversion. Lastly, the program has the potential to leverage substantial additional resources which could result in important improvements in sustainable watershed management. 106. (4) CONAGUA has strengthened the protection of overexploited aquifers by means of its programs to improve the water productivity of irrigation. The agricultural sector is the main user of water (77 percent). As a result, effective water policy must include measures to reduce the demand for water in agriculture, improve the efficiency of irrigation systems, and increase the adoption of water-saving technologies. CONAGUA has three federal 35 Programa Especial para la Restauracion de las Microcuencas en Zonas Prioritarias; SPRMPA, established in July 2009. 37 programs targeting the agricultural sector, one of which, the Program for Modernization and Technology Upgrade of Irrigation Units (PMTUR), is particularly relevant to this operation. The PMTUR's main objective is to improve water productivity in irrigation systems by funding agricultural producers. In 2009, the operating rules incorporated new criteria prioritizing activities that improve the sustainability of the resource. The main additions are: a) giving priority to those projects in which users give back to CONAGUA more than 20 percent of their concession for water use; b) projects to decrease the use of water from overexploited aquifers; and c) projects that promote agricultural activities with low water consumption. 38 VI. OPERATION IMPLEMENTATION POVERTY AND SOCIAL IMPACT 107. Overall, the Adaptation to Climate Change in the Water Sector DPL is expected to have a significant positive impact on the country's poor and vulnerable communities. During preparation, the Bank reviewed recent poverty and social impact studies in the water sector in Mexico. Those studies helped to identify the expected impacts that the policies supported by this DPL could have on different social groups.36 Further work on a full Poverty and Social Impact Analysis (PSIA) of selected policies will be carried out by Bank staff with government counterparts during program implementation. 108. The policies and reforms supported by this operation encompass adaptation measures aimed at improving water availability and water quality whose social impacts vary across regions. Broadly speaking, poor farmers located in the semi-arid and arid central and northern parts of the country will benefit more from measures aimed at improving water availability through watershed management, aquifer recharge, and water efficiency and savings. Measures aimed at improving water quality are likely to produce larger benefits for (a) poor people in the southern states, where the largest infrastructure gaps remain; (b) persons living in slums that lack piped water or sanitation; and (c) persons living in areas at risk of extreme weather events, such as coastal areas, unstable slopes, and flood plains. The Social Impacts of Water Scarcity 109. Water scarcity and the unsustainable use of water threaten development and poverty reduction in Mexico (World Bank, 2009). Vulnerabilities observed in many sub-regions of the country will be increased by the growing demand for water and irrigation resulting from increasing population, and the drier conditions anticipated in many water basins due to climate change. In addition, the attendant risks of water scarcity are losses in economic livelihoods, migration, and social conflict. When existing and future water problems are further aggravated by climate change and variability, the result will very likely be an increase in these risks, especially affecting the poor. 110. Economic impacts of aquifer depletion on the poor. Fieldwork conducted for the PSIA (WB 2009) showed that groundwater overexploitation affects poor people first because they are most likely to use relatively shallow wells, which are the first to dry up when water tables fall. The study noted that poorer farmers tend to have smaller and weaker pumps that make access difficult and expensive. Farmers in several of the fieldwork locations reported that their pumps had broken when water levels in aquifers 36 Bank studies included the "PSIA for Groundwater Over-exploitation in Mexico" (2009) and the "Climate Change with a Human Face in Mexico" (2010). Non-bank studies included SEMARNAT (2009): The Social Impacts of Climate Change. 39 fell. Typically, these farmers did not have the funds to upgrade or repair their pumps, leaving them without access to groundwater, and the consequent decrease in production. 111. Migration. The PSIA also found that a rise in production costs due to groundwater depletion had forced a number of farmers to abandon or considerably reduce their productive activities, adding to the migration to urban centers in Mexico as well as to the United States. According to a forthcoming World Bank study on the social implications of climate change (2010), migration rates are significantly related to average annual rainfall, being highest in municipalities with very little rain. Most migrants move from degraded areas to main cities, and to provincial, state capitals or national capitals, or go abroad (Morales 2008). In general, it is predicted that climate change will lead to greater migration to urban centers, but will not dramatically alter migration rates from Mexico to the United States (SICC 2010). 112. Social conflicts. Both collapsing aquifers and climate-related migration can be an important source of social conflict. Figure 4 shows that many of the areas with aquifer overexploitation have experienced high levels of water related social conflicts (Becerra- Paez, Saínz-Santamaría, and Muñoz-Piña 2006). Several studies have shown that migration to urban centers, whether caused by water shortages or in the wake of natural disasters due to a changing climate are a stress factor that can contribute to conflict. Increased social conflict in areas receiving migrants results from increased competition for resources and high unemployment as well as from increased criminal activity from people seeking sources of income. In addition, migrants without social networks in place face the risk of social isolation and may be discriminated against. Figure 4: Aquifer Overexploitation and Very High to Very Low Social Conflicts, 1990-2005 40 113. Extreme weather events will compound water scarcity problems, particularly in coastal areas. Both rising sea levels and coastal flooding could dramatically reduce the availability of freshwater for many areas with large coastal populations as saltwater intrudes into aquifers (24 percent of Mexico's population lives in coastal zones, Miller 2006). To the extent that this means bringing in water from elsewhere or desalinating the water available, the cost of water will increase. The cost of water is regressive and affects the poor the most. Those who cannot afford the higher cost of water and have to rely on brackish water will suffer the associated health impacts, such as increased risks of hypertension and miscarriages. The Social Impacts of Water Scarcity Adaptation Measures 114. Both the PECC and the Fourth Communication emphasize the need for water adaptation measures that take into account the situation of the most vulnerable groups. The PECC explicitly states that "an examination from a human rights point-of-view of vulnerability and adaptive capacity highlights the importance of examining the underlying causes of inequality and discrimination and paying special attention to society's marginalized and vulnerable". The Fourth Communication promotes cross-sectoral adaptation measures to combat the adverse impacts of climate change in Mexico, including adequate watershed management, aquifer recharge, and other mechanisms for sustainable water resource management. 115. Reforms aimed at strengthening IWRM are likely to have a positive impact on poor and vulnerable populations, especially if poor producers participate in water governance structures. Integrated approaches to water resource management are needed because both water scarcity and the impacts of climate change and variability on water resources tend to be local. These approaches should be tailored to local circumstances and give water users a voice in decision making, particularly marginalized groups whose livelihoods are affected the hardest by climate change. Empowering RBCs to manage water resources at the river basin level is the type of approach required to enable poor farmers to participate in watershed management. While RBCs have a participatory structure, in practice, overall participation has been low and skewed to wealthier farmers (PSIA 2009). Elections for both the COTAS and the RBCs are not sufficiently advertised in poor communities. In the dialogue with CONAGUA the Bank has stressed the importance of strengthening its communication and awareness campaigns to target poor producers, using structures such as ejidos, community radios and other local media that are more likely to reach poor producers. 116. Water banks are likely to have positive social impacts: Water banks can benefit small and informal water basin resource users by explicitly transferring rights to them so that they can use water efficiently. Because water banks provide a clear definition of water rights in a given basin, social participation of communities and poor people living in the area of the basin could be enhanced. This can improve the environmental quality of the water basin 41 and promote the inclusion of community-based sustainable practices among the population that depend on the basin's resources. Water banks may improve the equitable exploitation of water resources. The valuation of water in many basins and watersheds is quite low. As a result, businesses and households that can more easily afford it have a tendency to overuse or waste water. Thus, economically disadvantaged populations are left without adequate access to water and to bear the brunt of environmental reconversion. The explicit recognition of rights and the dissemination of transparent information for water use can increase equity in the use of the basin's resources. This will establish an unprecedented consensus for water transfer mechanisms and prices in many regions where socioeconomic inequality is high. One of the main social risks is the lack of adequate incentives to include the poor in the water bank. This risk is associated with the design of the program itself. A PSIA of the incentive structure of existing water banks will be carried out during implementation. 117. Efforts to promote the reduction of soil erosion, reforestation and forest protection through SPRMPA are likely to have positive impacts on the poor. As Figure 5 shows, extreme poverty has a positive correlation with soil degradation in rural and urban municipalities. The program will not have an adverse impact on people's ability to earn a livelihood because it will not include land expropriation measures. Moreover, land that is currently subject to informal use will be excluded from the program. Figure 5: Extreme Poverty and Soil Degradation in Rural and Urban Municipalities 118. The norms and program operating rules aimed at recharging or conserving groundwater resources are likely to have a positive impact on the poor. As 42 mentioned earlier, a recent PSIA found that poor farmers are the first to suffer from groundwater overexploitation. This DPL includes multiple prior actions that are likely to alleviate this problem, including: NOM 014 (artificial recharge of aquifers with wastewater) and NOM 015 (artificial recharge of aquifers with rainwater); new criteria in the Wastewater Treatment Funding Program (WTFP) promoting the recharge of aquifers and water re-use for conservation of groundwater resources; and new rules for PMTUR in order to protect overexploited aquifers. 119. The distributional impacts of operational rules not related to adaptation for water infrastructure programs are likely to be mixed. The PMTUR, for instance, is aimed at small farmers and ejidatarios. It has pro-poor ranking criteria that give extra weight to beneficiaries with higher levels of marginality. Within this target group, however, the 2009 PSIA37 found that better-off farmers tended to have easier access to government programs and thus received a disproportionate share of financial resources for irrigation. The most important barrier for poorer farmers was the 50 percent co- financing requirement and the retroactive payment of the government's share. Poorer farmers who lacked the resources and cash flow to finance all or even part of the investment would, therefore, be excluded of this program. In some cases, this was partially mitigated when state entities provided farmers with all or part of their required contribution. 120. Improving water availability and reducing inefficiencies in service provision will have important social benefits at the household level. Large cities suffer permanent water shortages because of poor infrastructure, which translates into unreliable services (Olson and Saltiel, 2006). As a consequence, households pay between US$0.25 and US$0.35 per 1,000 liters of water to the owners of private water pipes to gain access to the resource. Average social lifetime gains from improving water availability are approximately MX$9,382 (US$833).38 These social gains result also from the redistribution of benefits across households, particularly those with a high marginal utility of consumption (poorest and with least access). Water Quality and the Potential Impact of Adaptation Measures 121. Policy reforms aimed at improving water quality and sanitation will strengthen the resilience and adaptive capacity of the poor against increases in water-related infectious diseases, which are expected to take place due to climate change. Increases in temperature and rainfall related to climate change, in turn, will increase vector-borne infectious diseases (malaria and dengue) and waterborne diarrheal diseases. Lack of access to water and sanitation services or poor water quality make the poor more vulnerable to these diseases. Evidence of these impacts and the transmission mechanisms include the following: 37 The PSIA was done before the merger of two programs (uso pleno and uso eficiente) under the PMTUR 38 See Baisa et. al. (2010) The Welfare Costs of Unreliable Water Service. Journal of Development Economics. Vol 92, (1-12) 43 Climate change is likely to expand the geographical range and lengthen the transmission season of malaria and dengue in Mexico, where the number of cases of these illnesses has increased in endemic areas. According to Mexico's Third Communication, it is very probable that heavy rains and the increase in temperatures are partly responsible for this increase (SEMARNAT, 2007). The number of dengue fever cases in Mexico has increased by 600 percent since 2001 (AP, 2007). Diarrheal diseases are also likely to rise as a result of increased temperatures and the chaotic conditions following more extreme natural disasters. In Chiapas and Puebla, an increase in the ambient temperature of one degree Centigrade produces an average increase in morbidity from acute diarrheal illness of 1.07 percent (Inter-Ministerial Commission on Climate Change, 2007). The provision of water and sanitation services is a critical factor in the prevalence of infectious diseases. The mosquitoes carrying the malaria and dengue viruses thrive in the containers that are typically used in slums for storing water, putting slum dwellers at greater risk than people living in areas with piped water. Lack of safe drinking water and sanitation makes good hygiene difficult, increasing the risks of diarrheal diseases. Indigenous peoples are particularly susceptible to infectious diseases because of their relatively poorer nutrition, lack of food and lack of access to water and sanitation infrastructure. Unfamiliar and stronger strains of diseases cannot be cured or prevented with traditional methods, while unpredictable changes in the agricultural calendar caused by climate change and variability create difficulties for elders, shamans, and healers by disrupting their ability to grow the plants needed for medicinal and ceremonial purposes. (World Bank 2010). Finally, reforms aimed at reducing water pollution should also have a positive impact on the health of the poor because they tend be concentrated along water drains and riverbanks, and are therefore more exposed to water pollution. 122. CONAGUA's main programs aim at improving access to water and sanitation for poor people in urban and rural areas (e.g. APAZU, PROSSAPYS, PAL, Wastewater Treatment Funding Program). Since 2009, the Drinking Water and Sewerage in Urban Areas Program (Programa de Agua Potable y Alcantarillado en Zonas Urbanas, APAZU) has introduced pro-poor changes in its operational rules.39 For example, the concept of poor/marginal populations was included by providing 20 percent additional funding to projects that make available sewerage to people not connected to the system (most likely marginal populations). In 2010, assistance to poor/marginal 39 This has come partly in response to evaluations from CONEVAL (See CONEVAL. 2008. Informe de la Evaluación Específica del Desempeño: Programa de Agua Potable, Alcantarillado y Saneamiento en Zonas Urbanas de la CONAGUA.) 44 populations was further increased by providing 10 percent additional funding for those in the high to very high poverty ranges and up to 100 percent funding for populations with the lowest human development index (per the Ministry of Social Development, Secretaría de Desarrollo Social, SEDESOL) in areas where water coverage is less than 40 percent. Furthermore, the co-financing rates were modified to favor smaller localities, which tend to be the poorest. Instead of the previous uniform 20 percent co-financing rate, in 2010 CONAGUA introduced an adjustable rate that provides the highest co- financing to the least populated localities and decreases proportionately as the size of the locality increases. This is likely to have positive equity effects because small communities have lower tax bases and less access to state and municipal funds, and also tend to be the poorest. 123. CONAGUA has developed a comprehensive participatory framework for its water and sanitation programs aiming at fostering users' involvement in the decision- making and monitoring of different aspects of water management (see Annex 5 for a detailed description). The agency has set up various participation mechanisms, including collegial entities such as RBCs at the macro-regional level, basin commissions and committees at the sub-basin and micro-regional level, as well as Technical Groundwater Committees for aquifers and Clean Beach Committees in coastal zones. As previously noted, however participation by poor and vulnerable communities in these structures remains low. The majority of CONAGUA's programs and rules of operation place emphasis on providing services to poor and vulnerable populations. ENVIRONMENTAL ASPECTS 124. The program is likely to have significant positive effects on the environment and natural resources. The project will play an important role in reducing the negative environmental effects of climate change to contribute to the sustainability of water resources management in Mexico. The policy actions that comprise the DPL are expected to have positive impacts, particularly as they relate to the country's environment, natural resources and habitats, by both reducing the current impact of water extraction for human activities and setting the stage for better adaptation to future climate change. The reforms adopted in the water programs and norms will contribute to increasing water use efficiency, promoting water conservation and reducing water pollution, with clear positive environmental impacts. 125. The implementation of the IWRM approach supported by this DPL will foster the integration of environmental and social considerations in the planning and design of water projects and activities. The institutional strengthening activities will enable CONAGUA to achieve the sustainability and adaptation goals established in the PECC, which includes a detailed plan for addressing water issues related to climate change. The program's main objectives are to reduce Mexico's vulnerability to climate change by retrofitting water infrastructure and providing incentives for making it adaptation-friendly, strengthening the capacity of strategic institutions to address adaptation, and improving the quality of services and research and technology. 45 126. The provisions of OP 8.60 on Development Policy Lending apply to the Adaptation to Climate Change in the Water Sector DPL. The program plays an important role in helping to mainstream environmental considerations in a key sector (water) as well as in Mexico's overall approach to development. Since the justification for the operation itself is to provide support to the government in its efforts to mainstream climate change and environmental considerations into the water sector, the operation's design is proactive with respect to internalizing environmental concerns. This occurs at specific levels. At the sectoral level, policy reforms in the water sector support the integration of environmental concerns by helping to increase efficient water use and reduce waste, contributing to the sustainable management of natural resources. Other positive effects on the environment are expected to derive from improved environmental management at the national and local (basin, watersheds) level, on which the program places particular emphasis by promoting improved transparency and community participation. 127. OECD has produced two Environmental Assessments for Mexico (1997, 2003). The major shortcomings identified in the Legal/Institutional Framework relate to two aspects: Reporting and Access to Information. It has been common practice in previous projects to request that the executing agency (CONAGUA) provides a work-program to SEMARNAT in order to cross check that reporting functions are properly executed. With regards to Public Information/Consultation, CONAGUA has already invited the civil society to public meetings in order to present its projects and operations (starting with PMIR in 2005) and their Environment and Social Frameworks. This led, among other things, to an ongoing collaboration of CONAGUA with World Wildlife Fund in the preparation/consultation of the Norm for Ecological Flows. 128. The implementing agencies (SEMARNAT and CONAGUA) have made real strides on indicators of environmental compliance and enforcement, including practical applications, revisions and improvements and currently are deemed to have a good framework in place. Over time CONAGUA has developed specific guidelines and operational manuals to guarantee compliance with federal environmental legislation in Environmental Impact Assessments (EIA) 40. The World Bank has produced Environmental Capacity Assessments during the preparation of previous operations in Mexico (such as for the Natural Disaster Fund project or Fonden and for the PMIR) and results have highlighted that CONAGUA has institutional arrangements with capacity for screening and supervision of potential environmental effects and mitigation measures. The team recommends that environmental standards and procedures are followed for any activity and / or incentive supported by the DPL. Additionally, it will be particularly important to ensure that institutional capacity is strengthened at the de-concentrated level, especially as more monitoring and executing functions are passed on to the river basin organizations. 40 CONAGUA (2002) Manual de Procedimientos en Materia de Impacto Ambiental 46 IMPLEMENTATION, MONITORING AND EVALUATION 129. The proposed program is undertaken to support the GOM's national strategies and plans in water sector and climate change adaptation. Thus, implementation, monitoring and evaluation align with the GOM's own strategy, objectives and processes. The National Development Plan 2007-2012 establishes objectives and strategies (to be fulfilled by the end of the current Administration in 2012), which are implemented by means of a set of Sectoral Programs 2007-2012. The water sector commitments of the PND are thus in line with the Environmental and Natural Resources Sectoral Program (Programa de Medio Ambiente y Recursos Naturales), implemented by SEMARNAT; the PNI implemented by the federal government through CONAGUA in agreement with the Mexican Chamber for Construction;41 the PNH implemented by CONAGUA; and the PECC implemented by the CICC. 130. In an effort to synthesize large amounts of information, this operation proposes a streamlined monitoring and evaluation framework, which will help the GOM and the Bank assess progress towards the successful implementation of the operation within the implementation timeframe, which extends to the end of the current Administration. The evaluation of the program will be facilitated by the overlap with the end of the Administration period, as progress will be assessed at that point to take stock of the results achieved by the current government. CONAGUA will be responsible for the implementation of the proposed components and for reporting progress. SEMARNAT will provide additional information relating to implementation of the PECC. 131. The proposed monitoring framework for this operation includes 17 monitoring indicators and corresponding expected outcomes, which can be considered strategic milestones in assessing progress in implementation of the DPL. The Bank will monitor actions taken to achieve these outcomes and review progress in the implementation of the DPL, as well as subsequent government actions, through the closing of the loan, which is going to be December 31, 2012. In compliance with the Planning Law (Ley de Planeación, Art. 6) the federal government has to produce progress reports on the implementation of the National Development Plan to inform the Congress.42 The PND progress report provides information on the actions undertaken for the completion of the Plan's objectives and strategies within the five basic policy pillars. Thus, it will be the crucial instrument used by this DPL to monitor progress in all policy areas. 41 Agreement celebrated between the Parties on the 26th of June 2007 and ratified the 22nd of January 2009. 42 These reports have to be delivered annually in the month of March while the current Administration is in office. The government agencies in charge of the implementation of the sectoral programs provide the SHCP with inputs for the PND progress report. Afterwards, the document is sent to the President's Office for his signature. The information provided by the government agencies is based on 2007-2012 indicators, as stated in the sectoral programs. The sectoral programs link their own objectives and strategies with those of the PND. 47 132. The Bank will continue to help CONAGUA and SEMARNAT bring forward the adaptation agenda in the water sector by means of a TAP (see section on Value Added in Section IV). During the preparation of this DPL, the Bank has preliminarily agreed with CONAGUA on the scope and contents of a TAP, which would include: (a) development of CONAGUA's long-term planning vision ("Vision 2030"); (b) capacity development on Climate Change; (c) enhancement of the water financing system ("sistema financiero del agua"); (d) positioning the water agenda through the COP 16 process; (e) development of models for adapting irrigated agriculture to climate change in Northern Mexico; (f) strengthening the Mexican water rights administration system and implementation of Water Banks in areas where concessions exceed water availability; and (g) the preparation of a "white paper" on water and climate change (see Annex 11 for a preliminary draft). 133. Implementation of the water sector programs and adaptation policies embedded in the PECC will require a strong inter-institutional coordination capacity. In response to this anticipated need, the Bank will support the government of Mexico to implement its water sector programs through lending instruments and technical assistance programs. A core element of the assistance is helping to build the capacity of the institutions involved and to strengthen the linkages of those institutions in their policy-setting, investment review and financing capacities. A parallel investment and technical assistance project is concurrently being prepared by the Bank with CONAGUA that will help strengthen its institutional capacity (PROME). FIDUCIARY ASPECTS 134. As documented in the 2003 Country Financial Accountability Assessment (CFAA), 2007 Country Procurement Assessment Report (CPAR), and other analytical work, the public financial management(PFM) systems at federal level are adequate to support development policy lending. As envisioned in the CPS, the Bank is collaborating with the Mexican Government at the central and sub national level in strategic areas aimed at modernizing and reforming public finances, and increasing transparency. This has been supported by a number of knowledge services to the SHCP and Secretariat of Public Administration (SFP) through different instruments. Likewise, the Bank has reviewed the PFM systems of the Mexican federal administration in the context of a number of different DPLs approved in 2008 and 2009. 135. In the last decade, the Mexican Government has introduced a number of laws and reforms in public finances aimed at improving fiscal responsibility and transparency by modernizing the budget process and creating a more efficient and transparent fiscal framework in line with international good practices. The funding from this DPL will support the Federal Expenditure Budget (Presupuesto de Egresos Federales, PEF) and, accordingly, will be subject to provisions of the annual PEF Law, the Federal Budget and Fiscal Responsibility Law, the Government Accounting Law, the Manual of Budget Procedures among others. This set of legal and regulatory arrangements, together with the country operating systems, provides for sound budget formulation, execution and control arrangements for public expenditures. Other internal control aspects are ruled by the Federal Public Administration Internal Control Standards. 48 136. Rules and procedures governing the budget, accounting and public expenditure laws are clear and comprehensive, and the budget monitoring and control systems work well, but there remain some areas where the GOM is pursuing further advances. Key priorities are developing a long-term focus for the budget, including performance results in the budget formulation process, and engaging the public sector to focus on results. Currently, the Mexican government is working towards achieving the envisioned reforms in PFM, including harmonized budget and accounting financial reporting, modernization of its treasury operations (including full implementation of the Treasury Single Account), as well as designing an integrated financial management system at federal level. With Bank support, progress has been made towards international standards in different areas of PFM. 137. The Bank is collaborating with the Government in addressing the main recommendations from the CPAR. Those recommendations resulted from close collaboration with the main public sector stakeholders and incorporated the views of representatives from twenty-two Mexican private sector organizations, international development partners, representatives of civil society, and numerous government officials involved in public procurement. The main recommendations from the CPAR were: (i) Mexico's procurement system requires modernization, simplification and more flexibility to respond to rapidly changing market conditions; and (ii) the system should be more open and competitive and less focused on compliance and control. The reforms proposed in the CPAR would better align the procurement system with the government's objectives and generate substantial savings through reduced transaction costs and lower market prices from suppliers. They would also contribute to enhance transparency, predictability, and public trust in the system. 138. The Federal Supreme Audit Institution provides external oversight and conducts a number of regular performance, financial and compliance audits of government programs. The annual public accounts are prepared and sent to Congress within four months of the end of the fiscal year. The external audit of these accounts is undertaken by the Auditor General and presented to the legislature fourteen months after the end of the fiscal year. Audit reports are comprehensive and there is a system in place to follow up on audit findings and recommendations. The results of audits by the Auditor General are made public in the annual audit report on the Federal Public Accounts. DISBURSEMENT AND AUDITING 139. The flow of funds arrangements for this operation will be in line with those generally used in DPLs for Mexico, per long-standing agreements with the government. The SHCP has informed the Bank that BANSEFI will be the financial agent of the Borrower with regard to this DPL.43 Under this arrangement, once the loan becomes effective, the Bank will deposit the single tranche disbursement in US dollars into a designated account of the financial agent for subsequent credit by the financial 43 The use of a financial agent and designated account is a standard procedure of the government of Mexico for its control purposes and not an additional requirement by the Bank. 49 agent to an account of the National Treasury (Tesorería de la Federación, TESOFE) used for budgeted expenditures. Based on the review of the 2008 and 2009 audit reports of BANSEFI and the extensive experience between the Bank and BANSEFI regarding funds flow from bank-financed operations, there is no evidence that the banking control environment into which the DPL proceeds would flow is other than adequate. If requested by the Bank, the SHCP will provide the Bank with a written confirmation of this transaction after funds are disbursed. 140. Based on the assessment of the borrower's current PFM and the conclusion that the fiduciary arrangements for this operation are adequate, the Bank will not require an audit of the designated account and no additional fiduciary arrangements are deemed necessary for the DPL. RISKS AND RISK MITIGATION 141. The operation's main risks arise from the economic and fiscal situation, the political and administrative context and the potential environmental / social risk. Overall, however such risks are deemed to be of low impact and, as such, the proposed loan is subject to low risk. Below is a matrix identifying the main risks assessed for the operation and the related mitigation measures. 50 Table 2: Risks to the Sustainability of the Programs Supported by the DPL Economic and Fiscal Risks Mitigation Measure The Mexican economy has been hard hit by the collapse in international trade and global economic crisis showing a historic Persistence of the economic downturn in contraction in GDP in 2009 by 6.5 percent. Economic activity Mexico's major markets, particularly the picked up again as of the second half of 2009 and is off to a United States, and/or low commodity strong start in 2010, led by external demand. The economic prices could lead to fiscal pressures that downturn has not affected funding for water sector and watershed might undercut the Borrower's capacity management programs. Indeed, Mexico responded to the crisis to implement key aspects of the by adopting initially a counter-cyclical fiscal stance, which has operation, notably its capacity to fund subsequently been complemented by measure to strengthen tax water sector and watershed management collection. Oil price movements as well as falling and programs through which climate change disappointing levels of oil production are a significant source of adaptation is to be mainstreamed. volatility in Mexico's public finances, in view of the country's high oil dependence and low non-oil tax base. Revenue stabilization funds, leveraged by a policy of oil price hedges, have compensated part of the revenue shortfall and allowed Mexico to implement its countercyclical policy response in 2009. Oil price hedges have been contracted and limits on revenue stabilization funds were lifted for 2010 thereby allowing for the replenishment of the funds and the revenue smoothing mechanisms to operate and mitigate future sharp drop in oil revenue. Throughout the crisis Mexico maintained access to domestic, international and multilateral debt markets. Policy measures to mitigate the effect of a waning global risk appetite include a new one-year arrangement for Mexico under the Flexible Credit Line (FCL) of the IMF (approved in March 2010) as well as a rules based intervention mechanism to increase the level of international reserves. Political and Institutional Risks Mitigation Measure Having transmitted its Fourth Communication to the UNFCCC, Mexico (the first non-Annex 1 country to do so) has consolidated its reputation as a global leader on climate change adaptation and is likely to wish to maintain its leadership position, rather than be Presidential elections leading to a seen as retreating. In addition, successive administrations have change in administration in 2012 could declared water a "strategic matter of national security," a view weaken commitment to Mexico's which further deterioration in water supply and quality would climate change agenda and, specifically, only reinforce. Mexico's commitment to climate change to actions in the water sector to adapt to adaptation, both broadly and in the water sector, is embedded in climate change. Stakeholder opposition the 2004 Water Law, which adopted the principles of IWRM, and to the program could emerge as its in a range of national plans and established water sector and effects become clearer with watershed management programs. Stakeholder support is likely implementation. SEMARNAT, to be maintained through participatory and consultative processes CONAGUA, and CONAFOR may and arrangements mandated by national law, such as the prove to lack the capacity to advance the requirement for a 60-day public comment period on proposed program. regulations and the River Basin Councils and other multi- stakeholder councils. The Bank will support implementing capacity through a TAP and other technical assistance (TA) arrangements and through its on-going engagement with the government on water sector/climate change matters. 51 Social and Environmental Risks Mitigation Measure The policies supported by the proposed operation are expected to have significant positive social and environmental effects, including benefits to the poor, agricultural producers, water users in general, and other stakeholders. Some potential negative environmental effects could eventually derive from: i) risks associated to lower institutional capacity at de-concentrated level. ii) possibility of increasing over-exploitation in cases of over- concessions of water; iii) incentives under programs not linked to proper environmental standards. For each of these risks, mitigation measures have been identified as follow: i) CONAGUA has developed a good capacity for screening, assessment and mitigation of environmental effects of its activities (see note on CONAGUA's Environmental Capacity), Program implementation could produce but as delegation of authority to Organismos de Cuenca unexpected adverse social and progresses, it will be essential to strengthen their capacity to apply environmental effects. CONAGUA's standards and procedures, and introduce the proper controls to ensure compliance at all levels; ii) the possibility that some river basins and aquifers are over-concessioned (worsening overexploitation of natural resources) can be mitigated by CONAGUA's efforts to streamline the process of revision and regularization of concessions, implementing Operational Norms and regulations to secure environmental flows, and monitoring water rights transfers through water banks; iii) in terms of federal programs, it will be important that all activities and incentives under this umbrella follow environmental procedures and federal norms, as well as standards and procedures set by CONAGUA, including advice prescribed the Mexican Government, the World Bank and the OECD such as improving information disclosure and consultation. 52 ANNEX 1: LETTER OF DEVELOPMENT POLICY 53 54 Translation Development Policy Letter Robert B. Zoellick President International Bank for Reconstruction and Development Mexico is highly vulnerable to climatic events because of its geographic conditions and ecosystems characteristics, as well as its social and economic development realities. One of the direct consequences of climate change for the water sector is likely to be a decline in rainfall and water run-offs, as well as reductions in the volume of water stored in dams and aquifers. This will have a negative impact on the availability of water for cities, industries, irrigation and the generation of electricity. In addition, increasing temperatures could worsen the quality of water in some rivers, which could promote the proliferation of water-borne microorganisms and aquatic weeds. Climate change can also result in increases in average sea levels through the thermal expansion of the oceans as well as melting of icebergs. This will primarily affect populations, ecosystems and infrastructure in productive zones located in or near coastal areas. Mexico's National Water Program (2009-2010) and the Special Program for Climate Change (2009-2012) were developed to address the impacts of climate change while at the same time complying with the strategies and policy guidelines dealing with sustainable development and conservation of water resources contained in the 2007-2012 National Development Plan and in the Environment and Natural Resources Program. The National Water Program and the Special Program for Climate Change specify the objectives, strategies, policies and goals to recover basins, tributaries and groundwater. Their aim is also to modernize water uses and reduce pressure on water resources in the near term, as well as take a long-term conservation perspective. In addition, the National Water Commission is undertaking a set of actions for the sustainable management of water that place special emphasis on adaptation. The objective it to improve use, increase water treatment and reuse, reduce discharges and their impacts on bodies of water, and slow as much as possible the negative impacts on distribution and availability resulting from global warming. In this context, the National Water Commission, jointly with the World Bank, is putting together a capacity building effort to support the internalization of this issue in our institution, as well as follow-up Vision 2030 in the area of water. The program also entails planning activities to strengthen the measurement of water quantity and quality in our country. Finally, it includes the development of a "concept document" on the adaptation of the water sector to climate change to be presented within the framework of COP 16. 55 The Ministry of the Environment and Natural Resources values World Bank support (through the technical assistance of experts) to improve the institutional framework to develop and implement policies to confront climate change in the water sector and the growing incorporation of the adaptation to climate change approach by operators, users and consumers of water. These actions will be made possible within the framework of the Policy Loan for Adaptation to Climate Change in the Water Sector that the Ministry of Finance and Public Credit is negotiating with the Bank. Best Wishes, Ing. Juan Rafael Elvira Quesada Secretary of Environment and Natural Resources 56 ANNEX 2: POLICY MATRIX Policy Matrix with Prior Actions, Outcomes and Indicators Policy Area Prior Action Short term outcomes (at Indicator Medium-Term DPL ICR date) Outcomes 1- Strengthening Mexico has · CONAGUA is · CONAGUA has established water · CONAGUA is the institutional strengthened its implementing the quality monitoring sites in 13 incorporating the framework and commitment to monitoring system for river basin organizations (baseline effects of climate monitoring climate change in measuring the impact of in 2007 =400, target=1,500) change in water capacity in the water sector by climate change in the · CONAGUA is operating planning IWRM submitting the water cycle piezometric gauges (baseline in Fourth 2007=220, target =370) Communication to · CONAGUA maintains and the UNFCCC operates the hydro climatic CONAGUA has · Water Resources stations (baseline and target strengthened the Management plans have =3,700) institutional been developed in a · CONAGUA has conducted framework for participatory manner for 56,347 radio sounding IWRM by each basin measurements (baseline =3,787 delegating · River Basin Councils are annually) increased participating in the · CONAGUA has developed 18 responsibility to 18 implementation of plans for aquifers management River Basin projects and programs as (baseline in 2007 =0) Councils to defined in the watershed · River Basin Organizations are oversee, plan and management plans implementing 13 water programs manage projects (baseline in 2007=0) · River Basin Councils are · Institutionalization and programs of the process of established in overseeing the execution of water resources management plans planning, watershed programming, management plans (baseline=0, target=26) · Participation of women, youth, budgeting of water CONAGUA has · CONAGUA is indigenous, elderly, people with resources strengthened the improving efficiency in different abilities has increased management at the institutional water rights transmission through their inclusion in the basin level framework for · There is increased Mexican Committee for · Participation at IWRM by setting transparency in demand Sustainable Use of Water community level up 2 water banks and supply of water (baseline in 2007=3, target=5) of all stakeholders to foster the rights · CONAGUA has published and is in management of sustainable implementing regulations on use water resources is management and of water in priority basins leading to more efficient (baseline in 2007 =0, target=4) sustainable use administration of · CONAGUA has formulated water resources regulations on water use in priority aquifers (baseline in 2007=0, target =10) · Water availability information for 718 rivers basins has been published (baseline in 2007=91) · Water banks are performing their role by facilitating the exchange of water rights and increasing transparency 57 Policy Area Prior Action Short term outcomes (at Indicator Medium Term DPL ICR date) Outcomes 2­ CONAGUA has CONAGUA is providing · Water availability · CONAGUA Mainstreaming issued two norms to funding to implement information for 653 aquifers mainstreams aquifers Adaptation to provide regulatory artificial aquifers recharge has been published (baseline re-charge as a long- Climate Change instruments to in 2007 =202) term sustainable in Water promote the · Reach a volume of 60 percent groundwater Programs conservation of of treated water (baseline = conservation policy groundwater 36.1 percent in 2007) by including it in its resources · Irrigated area with treated policies and programs wastewater in irrigation as a key principle CONAGUA has Water utilities are districts / units reaches 5,000 · Mainstreaming the incorporated in the receiving funding from hectares (baseline in 2007 reuse of treated Wastewater CONAGUA to increase =0) wastewater by Treatment Funding and promote water reuse · Hectares of forest restored including such Program (Fondos and aquifers recharge (cumulative baseline up to principle in Concursables) 2009 =3,000 ha) CONAGUA's criteria promoting · Productivity of irrigation policies and programs the recharge of districts has increased 2.8 aquifers and water percent annually to reach 1.66 re-use for kg per m³ ­ (baseline conservation of =1.41kg per m³ in 2007) groundwater resources CONAFOR has · Forest cover is being · The restoration of issued operating restored 60,000 hectares of rules for the Special · Degraded areas of forests by 2015 Program for the microwatersheds in (Cutzamala Special Conservation and priority areas are being Program objective) is Protection of restored protecting watersheds Microwatersheds in and their hydrological priority areas to balance through promote reduction prevention of soil of soil erosion, erosion, flooding, reforestation and silting of dams, rivers, forest protection canals and other water bodies, as well as promotion of infiltration and improved water quality and production CONAGUA has · Irrigation districts are Water use strengthened the receiving funding from productivity protection of CONAGUA to increase increased in the overexploited water efficiency agricultural sector aquifers by means of its programs to improve the water productivity of irrigation 58 ANNEX 3: FUND RELATIONS NOTE IMF Executive Board Concludes 2010 Article IV Consultation with Mexico Public Information Notice (PIN) No. 10/39 March 16, 2010 Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2010 Article IV Consultation with Mexico is also available. On March 10, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Mexico.1 Background Mexico had significantly strengthened policy credibility and public and private sector balance sheets before the onset of the crisis. Strong economic performance, with growth averaging over 3.5 percent in 2003-07, was underpinned by robust macro policy frameworks along with the flexible exchange rate regime. Considerable progress was made in improving debt profiles, and the strong regulatory framework gave rise to a sound banking sector. Nevertheless, Mexico's resilience was severely tested during the global crisis. The surge in risk aversion following the collapse of Lehman Brothers in September 2008 triggered a sharp retrenchment of financial flows from emerging markets, including Mexico, resulting in liquidity strains and marked currency depreciation. Meanwhile, reflecting close U.S. linkages, Mexico experienced a rapid decline in manufacturing exports in the first half of 2009. Unanticipated large losses on corporate foreign exchange derivate positions disclosed in late 2008 further weighed on confidence, while the H1N1 virus outbreak in mid-2009 put an additional drag on activity. Against this background, output contracted by 6½ percent in 2009, while the peso fell 25 percent against the dollar in the nine months to mid-2009. Prompt and effective policy measures were adopted in response to the crisis. Macroeconomic policies were eased significantly, providing a fiscal impulse of 2.5 percent of GDP in 2009 and reducing policy rates by a total of 375 bps, to 4.5 percent, since mid- 59 2008. Targeted assistance was also extended to financial intermediaries to address funding shortages. At the same time, Mexico's Central Bank (Banxico) made substantial interventions (US$31.4 billion in total) to maintain orderly liquidity conditions in the foreign exchange market, and secured contingent financing through the Federal Reserve swap line ($30bn, expired in February 2010) and the Fund Flexible Credit Line ($47bn, effective till mid-April 2010) to further support confidence. On the back of these strong policy measures, growth has resumed since mid-2009, the peso exchange rate has rebounded, while domestic financial stability has been maintained. Building on the recent momentum, activity is expected to accelerate in the near term, leading to projected growth of 4 percent for 2010. Inflation was pushed up to 4½ percent in January 2010 by one-off increases in taxes and administered prices, but is expected to return to the 3 percent target by end-2011 reflecting the considerable economic slack. With domestic demand gradually strengthening, the current account deficit is projected to widen slightly to 1½ percent of GDP in 2010. The authorities have also undertaken a series of measures to further bolster fundamentals and rebuild buffers. The FY2010 budget included a substantive tax reform, designed to offset the revenue losses from lower oil production, while allowing for a temporary easing of the balanced budget rule in response to the cyclical downturn. Requirements on corporate disclosure of derivative exposures has been tightened, while structural reforms to enhance growth potential--most recently reforms of the electricity sector--are being advanced. In addition, the authorities have announced plans to increase foreign exchange reserves gradually through a combination of retaining public sector foreign exchange cash flows and the use of an options-based mechanism. Executive Board Assessment Executive Directors commended the authorities for their sound policy frameworks and progress in strengthening public and private sector balance sheets, which had enabled an effective counter-cyclical policy response and helped preserve stability during the crisis. Their swift action to secure contingency credit lines--from the U.S. Federal Reserve and the Fund--has also helped maintain external confidence. The economy is starting to recover, following the deep output contraction in the first half of 2009. However, the uncertain global outlook could pose downside risks, underscoring the need to increase room for policy maneuver and strengthen efforts to address medium-term fiscal and growth challenges. Directors considered that the 2010 budget is appropriate. The tax package represents an important step toward achieving medium-term fiscal sustainability, while the temporary easing of the balanced budget, in accordance with the exceptional clause of the fiscal rule, would help cushion the impact of the withdrawal of fiscal support. Directors welcomed the progress in fiscal reforms over the past three years. Given the expected structural declines in oil revenues and rising current spending pressures, they welcomed plans to seek expenditure savings and further strengthen tax administration. Further efforts would be needed to advance on oil sector reforms, broaden the tax base, and simplify the tax system. Moving to a structural budget rule would help reduce procyclicality and spending volatility, further strengthening policy credibility. Directors saw the removal of the caps on savings in the oil stabilization funds as a step in the right direction. In light of the still weak demand conditions, Directors agreed that monetary policy should 60 remain supportive until the recovery is firmly established. The central bank's effective communication has helped limit the effects on inflation of the recent changes in taxes and administered prices. Nevertheless, second-round effects would need to be carefully monitored. Directors agreed that the flexible exchange rate has played an important role in the adjustment process, and welcomed the transparent, rules-based intervention mechanisms. Noting persistent market concerns about Mexico's low reserve coverage relative to balance sheet indicators, many Directors saw merit in the authorities' plan to explore options for further strengthening foreign exchange buffers. A number of other Directors pointed to the need to take due account of the costs and externalities of reserve accumulation. Directors noted that the financial system remains resilient, underpinned by strong regulation and supervision. They welcomed the authorities' prompt action to address emerging issues in some small nonbank institutions, and encouraged continued close monitoring of developments in this sector. Directors supported the intentions to broaden the regulatory perimeter, set up a committee for assessing systemic risks, and reform the financial sector resolution framework. Directors emphasized that the challenge of reinvigorating growth has gained new urgency in a weak global environment. They encouraged the authorities to expedite structural reforms to boost growth, building on recent important steps to improve productivity in the electricity sector. Key priorities include advancing on strengthening the competition framework, streamlining the regulatory framework, and enhancing labor market flexibility. Mexico: Selected Economic and Financial Indicators 1/ 2004 2005 2006 2007 2008 2009 (Annual percentage changes, unless otherwise indicated) National accounts and prices Real GDP 4.0 3.2 4.9 3.3 1.5 -6.5 Real GDP per capita 2/ 2.7 3.4 4.2 2.4 0.5 -7.3 Gross domestic investment (in percent of GDP) 24.8 24.4 26.1 25.8 26.4 22.1 Gross national savings (in percent of GDP) 24.1 23.8 25.7 25.0 24.9 21.4 Consumer price index (end period) 5.2 3.3 4.1 3.8 6.5 3.6 External sector Exports, f.o.b. 3/ 14.1 14.0 16.7 8.8 7.2 -21.2 Imports, f.o.b. 4/ 15.4 12.7 15.4 10.1 9.5 -24.0 External current account balance (in percent of GDP) -0.7 -0.5 -0.5 -0.8 -1.5 -0.6 Change in net international reserves (end of period, billions of U.S. dollars) -4.1 -7.2 1.0 -10.3 -7.5 -5.4 Outstanding external debt (in percent of GDP) 21.9 20.4 17.8 18.8 18.5 23.8 Total debt service ratio 5/ 30.8 25.9 30.3 23.0 23.0 28.3 (in percent of exports of goods, services, and transfers) Nonfinancial public sector (in percent of GDP) Augmented overall balance -1.6 -1.4 -1.0 -1.4 -1.5 -4.7 61 Traditional overall balance -0.2 -0.1 0.1 0.0 -0.1 -2.3 Gross augmented public sector debt 41.4 39.8 38.3 38.2 43.3 44.6 Net augmented public sector debt 36.8 35.2 32.4 31.4 35.8 38.8 Money and credit Monetary base 12.0 11.7 18.4 10.0 16.7 9.4 Broad money (M4a) 12.6 15.0 12.8 11.5 17.2 5.9 Treasury bill rate (28-day cetes, in percent, annual average) 6.8 9.2 7.2 7.2 7.5 5.4 Sources: National Institute of Statistics and Geography; Bank of Mexico; and Ministry of Finance and Public Credit; and IMF staff estimates. 1/ Methodological differences mean that the figures in this table may differ from those published by the authorities. 2/ Fund staff estimates. 3/ Exports net of maquila sector imports. 4/ Excludes maquila sector imports. 5/ Public and private sectors. 1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm IMF EXTERNAL RELATIONS DEPARTMENT Public Affairs Media Relations Phone:202-623-7300 Phone: 202-623-7100 Fax: 202-623-6278 Fax: 202-623-6772 IMF Executive Board Renews US$48 Billion Flexible Credit Line Arrangement with Mexico Press Release No. 10/114 March 25, 2010 The Executive Board of the International Monetary Fund (IMF) today approved a successor one-year arrangement for Mexico under the Flexible Credit Line (FCL) in an amount equivalent to SDR 31.528 billion (about US$48 billion). The Mexican 62 authorities stated they intend to treat the arrangement as precautionary and do not intend to draw on the line. The FCL was established on March 24, 2009 as part of a major reform of the Fund's lending framework (see Press Release No. 09/85). The FCL is designed for crisis prevention purposes as it provides the flexibility to draw on the credit line at any time. Disbursements are not phased nor conditioned on compliance with policy targets as in traditional IMF-supported programs. This flexible access is justified by the very strong track records of countries that qualify for the FCL, which gives confidence that their economic policies will remain strong. Following the Executive Board discussion of Mexico, Mr. John Lipsky, First Deputy Managing Director and Acting Chairman of the Board, made the following statement: "Mexico has a sustained record of sound economic policies, and has very strong economic fundamentals and frameworks. Public and private debt levels were reduced and balance sheets strengthened in the years before the global crisis. Well implemented rules-based policy mechanisms, including the balanced budget fiscal rule and inflation targeting framework and flexible exchange rate regime, have anchored stability. This strong policy framework has helped preserve stability during the crisis, and­­for the first time in many decades­­allowed the authorities to deliver a sizable countercyclical fiscal and monetary policy response. Adroit steps have been taken in various financial market segments to maintain orderly conditions. The authorities have continued to demonstrate their commitment and ability to reform in challenging times, including through the passage of important revenue measures in the 2010 budget that will strengthen the medium-term fiscal outlook. Swift action to secure contingent credit lines during the crisis--from the U.S. Federal Reserve and the International Monetary Fund--also helped maintain external confidence. On the back of these strong policy measures and improving global economic conditions, growth has resumed since mid-2009, asset prices have recovered from troughs seen at the height of the crisis, and domestic financial stability has been maintained. Looking forward, policies will continue to be underpinned by the rules-based macroeconomic framework, and the authorities intend to continue to react as needed to any future shocks that may arise. Nonetheless, sizeable downside risks still confront the global economy. It is against this background that, at the authorities' request, the Executive Board today approved a one- year arrangement under the IMF's FCL, which the authorities intend to treat as precautionary. This successor FCL arrangement will continue to play an important role in supporting the authorities' overall macroeconomic strategy and in bolstering confidence until external conditions improve, complementing financing from other multilaterals. Mexico's very strong policy frameworks and economic fundamentals, together with the additional insurance provided by the successor arrangement under the FCL, put Mexico in a very strong position to deal with other potential risks that could arise in the period ahead as the global economy continues to gradually recover from the crisis." To read the staff report and other documents related to the approval of Mexico's Flexible Credit Line, please see: http://www.imf.org/external/pubs/ft/scr/2010/cr1081.pdf 63 IMF EXTERNAL RELATIONS DEPARTMENT Public Affairs Media Relations Phone: 202-623-7300 Phone: 202-623-7100 Fax: 202-623-6278 Fax: 202-623-6772 64 ANNEX 4: MACROECONOMIC, FISCAL AND FINANCIAL SECTOR CONTEXT 1. The Mexican economy is starting to recover from a deep contraction of economic activity following the global economic and financial crisis. As a relatively open economy, Mexico was hard hit by the collapse of international trade during the last quarter of 2008 and the first quarter of 2009. As a result, annual economic growth in 2008 was down to a meager 1.3 percent and GDP actually fell by 6.5 percent in 2009. In line with a global recovery in production and trade, economic activity in Mexico picked up in the second half of 2009 and is off to a strong start this year. 2. The recovery is led by a resurgence in the demand for exports. Manufactured exports were down by 25 percent during the first half of 2009 compared to the same period of the previous year. The decline in manufactured exports ebbed in the second half of the year and exports started to increase again (on a year-on-year basis) during the last two months of the year. 3. Prior to the onset of the global economic downturn, Mexico experienced moderate growth within a framework of enhanced macroeconomic stability. GDP growth averaged 3.8 percent annually between 2004 and 2007. Fiscal policy successfully focused on reducing the public sector deficit and the debt-to-GDP ratio, and enhanced price stability contributed to a healthy domestic credit expansion and growing domestic demand. 4. Counter-cyclical fiscal stimulus policies were implemented during 2009 to mitigate the impact of the external demand shock on the domestic economy. The fiscal stimulus policies included additional public investment in infrastructure, temporary employment programs, a reduction and freeze of public sector administrated prices in the energy sector and an expansion of development bank credit programs. 5. The economic contraction led to a sharp decline in tax revenues that was partially compensated by non-recurrent revenue in 2009. Non-oil tax revenues dropped by 11.5 percent in real terms in 2009, while Value Added Tax revenues fell by 15 percent. The government compensated for lower oil and non-oil revenues with income from a successful oil price hedge, an extraordinary transfer of profits from the Central Bank and by drawing resources from revenue stabilization funds. These non- recurrent revenues amounted to 2.8 percent of GDP and helped maintain the Public Sector Borrowing Requirement at a modest 3.2 percent of GDP. 6. Public revenue enhancing measures and a temporary budget deficit are part of the 2010 public sector budget. The Mexican fiscal responsibility law requires a balanced budget.44 It allows for a budget deficit only under "exceptional circumstances" 44 A modification to the law adopted by Congress in 2008 includes all investments by the public sector oil company in the budget but excludes these investments from the budget balance requirement. Those investments are budgeted at 2.0 percent in 2010. As a result, the overall budget deficit for 2010 is 65 Figure 4-1 a-f: Real Economic Indicators a) The Mexican economy faces the worst recession since the b)... the result of a sharp aggregate demand contraction Tequila crisis... GDP Growth Contribution to Growth 4% 7% 4% 1% 1% 2% 2% 5% Private Consumption 5% qoq% s.a. Private Investment 8% Public Expenditure 8% yoy% 11% Foreign Balance GDP 11% 14% 2007:II 2008:II 2009:II 2007:IV 2008:IV 2009:IV 2007:III 2008:III 2009:III 2007:II 2008:II 2009:II 2007:IV 2008:IV 2009:IV 2007:I 2008:I 2009:I 2007:III 2008:III 2009:III 2007:I 2008:I 2009:I c) Fall in exports, due to weaker external demand, has been d) Manufacturing output is closely correlated to accompanied by a strong reduction in imports significantly weaker activity in the US industrial sector.... Foreign Trade Industrial Production Index (s.a.) 30 118 28 26 114 US$ billion 24 110 22 20 106 18 16 Exports Imports 102 14 Jul07 Jul08 Jul09 Sep07 Sep08 Sep09 Jan07 Jan08 Jan09 Jan10 May07 May08 May09 Nov07 Nov08 Nov09 Mar07 Mar08 Mar09 Nov07 Nov08 Nov09 Jul07 Jul08 Jul09 Sep07 Sep08 Sep09 Mar07 Mar08 Mar09 Jan07 Jan08 Jan09 Jan10 May07 May08 May09 e) ...leading to job losses and higher levels of unemployment, f) which generate a lower wage bill and the contraction of household's consumption Unemployment rate (%) Wage Bill Index 9 (2005=100) 120 8 Total 115 7 Urban 110 6 5 105 4 100 3 95 2 90 Jan07 Sep07 Nov07 Jan08 Sep08 Nov08 Jan09 Sep09 Nov09 Jan10 May07 May08 May09 Jul07 Jul08 Jul09 Mar07 Mar08 Mar09 Dec04 Dec09 Jun07 Oct05 Nov07 Jul09 Apr08 Sep08 Feb09 Mar06 Jan07 Aug06 May05 estimated at 2.7 percent of GDP (i.e. 2.0 percent oil sector investment and an additional 0.7 percent temporary deficit spending). 66 and only under the condition that a medium-term fiscal framework is adopted to return to a balanced budget. Lower public sector tax revenues resulting from the sharp decline and current slack in economic activity are further aggravated by rapidly falling oil production. This is creating a more structural challenge to replace diminishing oil revenues with more permanent sources of income. The policy response has been to increase income, value added and excise tax rates and, at the same time, to allow for an additional budget deficit of 0.7 percent of GDP in 2010. The latter is planned to be reduced to 0.4 percent by 2011 and should return to balance by 2012. 7. Monetary policy has been eased to support efforts to offset the downturn in economic activity. The severity of the economic downturn led the monetary authorities to reduce the target for the overnight interbank interest rate by an accumulated 375 basis points between January and July of 2009, from 8.25 to 4.50 percent. Lower economic activity affected headline inflation, which was down to 3.6 percent by the end of 2009. The Central Bank is projecting a temporary, one-time increase in consumer price inflation in 2010, to a range of 4.75-5.25 percent by year-end, due to tax and public sector price increases included in the 2010 budget. The monetary authorities have so far left the policy intervention rate unchanged because of the perceived temporary nature of the price increases as well as the continued substantial slack in economic activity. The Central Bank currently projects to reach its medium-term inflation target of 3 percent by the end of 2011. 8. The monetary authorities have expressed their intention to increase the level of international reserves to mitigate the impact of any financial shock. The global financial crisis led to an important sell-off of emerging market assets in the last quarter of 2008 and early 2009. In order to maintain and restore liquidity on the foreign exchange and domestic financial markets, the authorities employed several policy actions, including extensive foreign exchange interventions, the provision of loans and loan guarantees to domestic firms by government-owned development banks, and the repurchase and reduced issue of longer-term government bonds. Interventions on the foreign exchange market between October 2008 and the end of 2009 implied the sale of almost US$35 billion of international reserves. In addition, the authorities aligned bilateral and multilateral support through a US$30 billion currency swap arrangement with the US Federal Reserve and a US$47 billion Flexible Credit Line (FCL) with the IMF. Announcement of the FCL in April 2009 greatly reduced the volatility of the peso that, nevertheless, suffered a substantial depreciation. With international reserves at US$91 billion by the end of 2009 compared to US$85 billion in September 2008, reserves have been more than replenished from the recent currency interventions. Even though the authorities remain committed to a flexible exchange rate as the key instrument for adjustment to external shocks, a higher level of international reserves is deemed appropriate to avoid excessive exchange rate volatility and enable a gradual reduction of the FCL, which was renewed for a year in March 2010. 67 Figure 4-2 a-f: Financial Indicators a) Increased risk pricing was reflected in significantly higher b)...and in a sharp depreciation and volatility in the exchange sovereign risk spreads... rate Sovereign Risk Spreads Exchange Rate (pesos/US$) EMBI Global basis points over US Treasury 16 1,000 15 800 14 600 13 LAC 12 400 11 200 10 Mexico 0 9 Feb07 Feb08 Feb09 Feb10 Aug07 Aug08 Aug09 May07 May08 May09 Nov07 Nov08 Nov09 Nov08 Nov09 Jul08 Jul09 Mar08 Sep08 Mar09 Sep09 Mar10 Jan08 Jan09 Jan10 May08 May09 c) Lower economic activity contributed to a downward trend d).. while monetary policy has been eased since January 2009 in inflation ... Inflation Rate Policy Interest Rate 7% 10 9 6% 8 5% 7 4% 6 5 3% 4 2% 3 Aug06 Aug07 Aug08 Aug09 Nov06 Nov07 Nov08 Nov09 Feb06 May06 Feb07 May07 Feb08 May08 Feb09 May09 Feb10 Sep05 Sep06 Sep07 Sep08 Sep09 Jan06 Jan07 Jan08 Jan09 Jan10 May06 May07 May08 May09 e) Private sector credit contracted after a period of sustained f) The stock market also declined sharply,but has recently growth. rebounded. Credit to NonFinancial Private Sector (yoy %) Stock Market Index (IPC) 45% 34000 35% 32000 30000 25% 28000 15% 26000 5% 24000 22000 5% 20000 15% Total Consumption Housing Business 18000 25% 16000 2004:IV 2005:IV 2006:IV 2007:IV 2008:IV 2009:IV 2004:II 2005:II 2006:II 2007:II 2008:II 2009:II Jul08 Jul09 Sep08 Sep09 Jan08 Jan09 Jan10 May08 May09 Nov08 Nov09 Mar08 Mar09 Mar10 68 9. Credit to the nonfinancial private sector has started to contract. Despite a brief period of double digit growth over the past few years, private sector credit in Mexico, which is approximately 30 percent of GDP, remains low compared to other countries in the region or countries at comparable levels of economic development. Growth of credit slowed last year and has actually started to contract in real domestic currency terms. As Figure 4-2e shows, the growth of credit dropped sharply over the past three quarters reaching 1.6 percent in the third quarter of 2009. 10. Households were the hardest hit sector in terms of declining access to credit. After six years of double digit growth in consumer credit (fueled by the credit card business), a significantly increasing non-performing consumer credit loan portfolio led financial intermediaries to cut back on the expansion of consumer credit. This retrenching had already begun when the impact of the global financial crisis was felt in Mexico. Consumer credit started to decline in real terms during the last quarter of 2008 and data for December 2009 show an annual contraction of 20 percent. In addition, credit growth to nonfinancial private sector firms and for housing finance, which account for some 58 and 29 percent, respectively, of total credit to the nonfinancial private sector, is rapidly leveling off. Total housing loans outstanding had barely increased by the end of 2009 and credit to private sector firms is down to a 2 percent growth rate. 11. In line with the global economic recovery, economic activity in Mexico is showing a strong rebound. Recent economic data suggest that economic activity began to recover during the second half of 2009. Due to the depth of the recent recession, as well as the impact of lower medium-term growth in the advanced economies and in Mexico's main trading partner, the Mexican economy is expected to operate below potential for a couple of years. Assumptions regarding the external environment have a major impact on projections of the main indicators of macroeconomic activity. The base case scenario presented in Table 1 in the main text (Chapter 2) adopts assumptions for global economic activity found in the Bank's Global Economic Prospects and in the IMF's World Economic Outlook Update (both dated from January 2010).45 The impact of this external scenario on the Mexican economy results in a modest rebound by 2010 and 2011 and a return to potential output by 2012. 12. Mexico faces rising fiscal pressures resulting from a deteriorating outlook for public sector revenues and increasing public debt-to-GDP ratios. Fiscal discipline and a strong fiscal policy framework, including the establishment of stabilization funds and the acquisition of oil price hedges, enabled a countercyclical policy response for 2009. The public debt-to-GDP ratio posted an important increase at the end of 2008 that can be attributed, in part, to the issue of a recognition bond to public sector workers who opted for the individual savings account in the public sector pension reform. The sharp economic contraction, the depreciation of the currency and a higher fiscal deficit (PSBR) contributed to a further increase of the public debt-to-GDP ratio in 2009. While there 45 World output is projected to fall by 2.1 percent in 2009 and experience a gradual recovery in 2010 when growth is expected to pick up to 3.0 percent. Similarly output in the United States is projected to contract by 2.5 percent in 2009 before rebounding by 2.7 percent in 2010. 69 was some room for increases in the public debt and the debt-to-GDP ratio, the rapid increase and the relatively high rate that the latter indicator is expected to reach by 2010 and 2011 suggest limits to fiscal stimulus options. In this regard, policymakers faced a difficult trade-off between early fiscal consolidation which may aggravate the contraction of the domestic economy and a clear and credible medium-term fiscal strategy of revenue-enhancing measures or sustainable spending cuts to compensate for the lower public sector revenue. 13. Public debt remains manageable despite a significant increase in the debt-to- GDP ratio anticipated in 2010 and 2011. Debt sustainability analyses show that the debt-to-GDP ratio can be expected to trend downward by 201246 (see Figure 4-3). This estimate is based on average levels of economic growth, the primary balance and the real interest rate on public debt observed during the decade before the current economic crisis. Bound tests47 with respect to the key growth and primary balance variables show that the debt-to-GDP ratio will continue to trend upward and additional corrective policies will be needed only in the case of a combined growth and primary balance shock. Figure 4-3: Mexico Fiscal Sustainability Analysis: Public Sector Debt to GDP ratio, 2005-2017 Shock in Growth Rate Shock in Primary Balance Combined shock in 42% Growth Rate & Primary Balance 42% 42% 40% 40% 40% 38% 38% 38% 36% 36% 36% 34% Baseline 34% 34% Baseline Baseline 32% 32% Baseline w. shock 32% Baseline w. shock Baseline w. shock 30% 30% 30% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 14. The external current account deficit is not a cause for concern. The rapid deterioration in the external financing and economic conditions facing the Mexican economy was quickly reflected in the peso's exchange rate. This led to a rapid adjustment in consumption and investment plans by Mexican households and businesses, which, in turn, led to a sharp contraction in imports in line with (or even more pronounced than) the fall in exports. The economic recovery projected for the next three years will lead to a slight increase in the current account deficit 46 Values for the variables used in this exercise include: growth average 3.1 percent, standard deviation 2.07 percent; primary balance (adjusted for off-balance expenditure and excluding non-recurrent revenue) average 0.55 percent, standard deviation 0.69 percent; and real interest rate 3.3 percent. 47 Shocks are permanent one-half standard deviation shocks. 70 ANNEX 5: PUBLIC CONSULTATIONS AND PARTICIPATION FRAMEWORK 1. Mexico has developed a comprehensive institutional framework for citizen participation that draws from several articles of the Constitution and from a set of laws48 (including the Planning Law) that mandate that the National Development Plan and other government programs should be developed within a participatory process. This framework applies to both the environmental and the water sectors, which have developed their own specific guidelines and options for citizen participation. The specific policies, norms and programs contemplated under the Adaptation to Climate Change in the Water Sector DPL have been framed within this institutional framework, which is detailed below. 2. The environmental sector recognizes the right of access to environmental information and the right of citizen participation together with the government's responsibility for promoting and facilitating it through several laws and bylaws.49 At the state level, most environmental laws also include participation provisions, mainly through the creation of consultative councils.50 One of the objectives of the 2007-2012 National Development Plan was to guarantee that Mexicans have effective opportunities to exercise their rights as citizens, and ensure environmental sustainability through responsible participation. Building on this objective, SEMARNAT formulated the National Strategy for Citizen Participation in the Environmental Sector (Estrategia Nacional para la Participación Ciudadana en el Sector Ambiental, ENAPCi), through a participatory process involving civil society. The ENAPCi outlines six strategies aimed at strengthening participation options and mechanisms while fostering the integration of environmental rights and equity criteria in environmental policies and institutions.51 3. SEMARNAT's participation mechanisms are classified under three headings.52 a) Accountability and Environmental Information: provides access to the agency's main reports and contact people. b) Information and Consultation: identifies the agency mechanisms whose aim is to inform and consult with the public about projects and develop official rules. These mechanisms include, for example, environmental impact evaluations. 48 Constitution of the Mexican States, Articles 1, 3, 4, 6, 8, 9, and 26; Ley de Planeación (Planning Law); Ley Federal de Transparencia y Acceso a la Información Pública Gubernamental (Transparency and Public Information Law) and other state and municipal laws on transparency and access to information;; Ley Federal de Fomento a las Actividades Realizadas por Organizaciones de la Sociedad Civil (Law for the Promotion of Activities Carried Out by Civil Society Organizations). 49 Ley General del Equilibrio Ecologico y la Proteccion al Ambiente y Reglamentos (General Law for Ecological Balance, Environmental Protection and Regulation); Ley de Desarrollo Forestal Sustentable (Sustainable Forest Development Law); Ley General de Vida Silvestre y Reglamento (General Wildlife Law and Regulation); Ley General para la Prevencion y Gestión Integral de los Residuos y Reglamento (General Law for Integrated Management and Prevention of Waste and Regulation). 50 For a complete list of environmental consultative councils at the state level see Estrategia Nacional para la Participacion Ciudadana en el Sector Medioambiental, ENAPCi, Unidad Coordinadora de Participacion Social y Transparencia, Ministry of the Environment and Natural Resources, September 2008, p. 50. 51 Ibid, p. 32 52 See http://www.semarnat.gob.mx/participacionsocial/mecanismosdeparticipacion/Paginas/inicio.aspx 71 c) Consultative Bodies: identifies the main councils and working groups across different sub-sectors, including climate change, sustainable development and wildlife conservation. A special unit (Unidad Coordinadora de Participación Social y Transparencia) coordinates social participation and transparency activities, including those of the Consultative Councils for Sustainable Development (Consejos Consultivos para el Desarrollo Sustentable). There are currently 32 "nucleus" councils in each of the states, as well as six regional councils and one national council. Nucleus councils are made up of representatives from academia, the private sector, nongovernmental organizations, youth organizations, indigenous peoples, women and gender groups. 4. For its part, the water sector has also mainstreamed participation mechanisms through provisions defined in the National Water Law (article 14 bis and 15) and its bylaws (articles 21 and 25). According to this legislation, CONAGUA (jointly with state and municipal governments, river basin councils, and the national Water Consultative Council) must convene and facilitate citizen participation in the planning, decision- making, execution, evaluation and monitoring of the national water policy. Specifically, the law establishes the creation of river basin councils as entities representing users and civil society organizations (at least 50 percent of the membership). The river basin councils, in turn, support river basin organizations (organismos de cuenca) which are also supported by basin commissions and committees at the micro-regional level.53 5. In the area of climate change, creation of the Inter-Ministerial Commission on Climate Change led to the establishment of the Consultative Council on Climate Change (C4) as a "permanent CICC consultation body comprised of 23 specialists from the academic, social and private sectors, that follow-up the Commission's work in order to evaluate its performance and present recommendations to improve or strengthen its actions."54 CICC convened two public consultations in 2008 and 2009 to generate comments on the proposed contents of the Special Climate Change Program (PECC).55 Drafting of the Fourth Communication also entailed a consultative process with participation from universities and research centers, professional and private sector associations and nongovernmental organizations.56 6. The normative framework in the water sectors follows a rulemaking procedure that includes a mandatory 60-day notice and comment period.57 The public consultation of Mexican Official Norm 014 (artificial recharge of aquifers with treated wastewater) 53 National Water Law (Ley de Aguas Nacionales), accessed at http://www.conagua.gob.mx/Espaniol/TmpContenido.aspx?Id=Leyes|MARCO percent20NORMATIVO|6|0|0|0|0 54 www.semarnat.gob.mx/ 55 The public consultations took place in June-July 2008 and in March-April 2009. See http://www.semarnat.gob.mx/queessemarnat/consultaspublicas/Pages/programaespecialdecambioclimatico.aspx 56 "México. Cuarta Comunicación Nacional ante la Convención Marco de las Naciones Unidas sobre el Cambio Climático", III. Arreglos Institucionales, p. 119, 2009. Accessed at http://www2.ine.gob.mx/publicaciones/consultaPublicacion.html?id_pub=615 57 Article 47, Ley de Normalizacion 72 and NOM 015 (artificial recharge of aquifers with rain water) took place in June and July 2009, respectively, with comments and responses recorded in the official gazette.58 Moreover, CONAGUA has partnered with the World Wildlife Fund (WWF) to draft the rules to regulate and establish the Environmental Flow. The NOM will be published in 2010, and is currently undergoing expert review. WWF is inviting experts to be part of the working group and discuss the review process. This is the first time that CONAGUA has involved civil society organizations in the design of its norms in such an active form. 7. Although consultation and participation mechanisms in water and sanitation programs vary depending on their particular design features, there are two main mechanisms. First, programs may receive feedback from users (including municipal and inter-municipal water utilities operators) and nongovernmental organizations participating in river basin councils. Second, the Rural and Urban Programs, and the Clean Water Program are subject to CONAGUA's guidelines for the promotion and operation of contralorias sociales (social monitoring), in compliance with the federal government's social monitoring guidelines issued by the Ministry of Public Administration, which apply to all federal social development programs. The contralorias sociales in these water programs involve the participation of beneficiaries in the direct monitoring of works and other activities funded by the program. 8. Overall, the government of Mexico has a broad and highly institutionalized framework of participation in the environmental and water sectors. A quick desk review of civil society organizations dedicated to environmental issues showed that several nongovernmental organizations (including local chapters of international organizations such as Oxfam, Greenpeace and The Nature Conservancy), as well as other national NGOs with environmental expertise participate in the consultation processes, with a majority of them specifically monitoring climate change at the country level. In both the environmental and the water sector, participation is concentrated among organizations with technical expertise (including the mentioned NGOs) and with a heavy representation of universities and research centers, both at the national and at the regional level. Active citizen participation at the local level is still incipient, at least for groundwater management (World Bank 2009). Advice on how to strengthen it will be part of the policy dialogue during implementation of the DPL, particularly with regards to watershed management and river basin councils. Recommendations in this regard are also likely to emerge from the upcoming PSIA on climate change adaptation. 58 Starting on June 3rd. and July 25th, 2009, respectively. 73 ANNEX 6: POLICY INSTRUMENTS FOR ADAPTATION TO CLIMATE CHANGE IN THE WATER SECTOR 1. The PECC recognizes the acute water stress that Mexico suffers and establishes the following objectives to overcome the problem: Improving the availability and quality of water: Mexico has critical and urgent water-related problems including the overexploitation and pollution of surface and groundwater. More than 50 percent of the groundwater used in the country comes from overexploited aquifers, affecting primarily domestic and industrial use. The current situation is not sustainable in the medium and long term, and will be clearly exacerbated by the effects of climate change. If not addressed soon, this issue will become an obstacle to continued economic development and will have serious negative impacts on efforts to reduce poverty. The PECC proposes several measures to improve this situation, such as increasing water access, coverage, and treatment volumes in both urban and rural areas, and setting ambitious coverage goals. Strengthening adaptation capacities to extreme hydrometeorological events: The foreseeable alteration of rain patterns and higher incidence of hurricanes, together with inefficient agricultural practices, the overexploitation of aquifers, and insufficient treatment of urban and industrial waters, will increase the vulnerability of water resources. The PECC sets as a top priority the identification of vulnerable and overexploited water basins and aquifers and the development of sustainable water management plans for watersheds and aquifers. It also describes the actions to be taken in case of an emergency to ensure the safety of the population by protecting, and in extreme cases, resettling, vulnerable communities, and formulating communication plans and outreach campaigns. The key element is the introduction of the concept of ecological planning as a tool to enhance the ability to respond to these emergencies. Important components include the consolidation of a national meteorological and hydrological observatory and further investment in R&D to deepen knowledge about the impacts of climate change on the water cycle. Reducing the vulnerability of human settlements and hydraulic infrastructure and incorporating integrated risk management actions: The goal is to modernize the existing infrastructure and strengthen the planning capacities through the development of ecological planning programs that incorporate elements of protection of human settlements and productive areas in high-risk zones, the rehabilitation of dams, and the reestablishment of water and sanitation services to their full capacity following emergencies. Consolidating a national system for meteorological and hydrological information: There is a well-established platform for meteorological and hydrological observation, composed of several federal and state agencies that form the basis on which to build integrated climate change capacities for the long term. This national system has to be further consolidated by putting more systems and observation sites into operation. 74 Increasing knowledge about the impacts of climate change on water resources and their vulnerability: Adaptation capabilities can only develop if there is more scientific and technological state-of-the-art information on climate modeling and water resources. The objectives include the development of several studies of regional characteristics under different climate change scenarios, the development of modeling tools to evaluate and identify possible impacts, and the performance of cost-risk analyses of adaptation measures in new construction. Another part of the strategy involves training decisionmakers in the use of climatic information and in its application in the prevention of disasters related to climatic risks at the regional, state, and national level. Water conservation and modernization of the irrigation districts: The vulnerability of the agricultural sector varies greatly depending on the region, the crops, and the technologies used, as well as the variability of the hydraulic regime. As a consequence of worsening climate conditions, it is estimated that there will be variations in soil degradation rates, increased salinity in irrigated areas, increased losses due to extreme events, and changes in production patterns. The aim of the PECC is to establish a comprehensive adaptation process in the agricultural sector. The goals are to reduce the vulnerability of the agricultural sector and ensure the conservation of agrobiodiversity in the face of climate change, and to modernize the hydroagricultural infrastructure and increase the productivity of water in the irrigation districts. 2. The PECC follows the phased approach proposed under the Adaptation Policy Framework to Climate Change (UNDP 2005). Thus, the PECC establishes three main stages in the development and implementation of the Adaptation Program (see Table 6- 1). The first stage (2008­2012) includes an evaluation of the country's vulnerability and an economic assessment of the priority measures. The development of the first comprehensive national adaptation proposal is in line with the objectives of this operation. The second stage (2013­2030) comprises the strengthening of national, regional, and sectoral adaptation strategic capabilities. The policies supported by this Adaptation to Climate Change DPL in the water sector coincide with various objectives of the second stage, such as strengthening and reformulating public adaptation policies related to sustainability and introducing sustainability criteria in sectoral programs. The third stage (2031­2050) will consolidate the acquired capabilities. 75 Table 6-1: Stages of the Long-term Adaptation Path in Mexico First Stage Second Stage Third Stage Evaluation of Vulnerability and Consolidation of Assessment of the Strengthening of Specific Capacities Capacities Economic Implications 2008 2012 2013 2030 2031 2050 Special Program on Climate Change, Construction of Indicator and Long-term Goals 2009­2012 Monitoring Systems Indicating the Degree of Adaptation by 2050 Adaptation and Crosscutting adaptation measures. Development planning mitigation cost with a focus on inventory for key Costs of adaptation and mitigation are ecosystem integrity. economic sectors. accounted in the GDP. Long-term vision on First proposal on Sectoral programs integrate mitigation and national environmental sustainability and adaptation comprehensive climatic stability criteria. adaptation. Formulation and evaluation of public Pilot project in National civil high-risk sites. policies on adaptation, and modification of existing policies. protection system First review of deeply restructured. Mitigation and key instruments in Balance between adaptation sectoral economic degradation/deforestation with according to the policy. restoration/reforestation. long-term goals First proposal of National planning system chooses adjustment of the Territorial planning of sustainable development options that national planning human settlements and suit the adaptation objectives. system for Strategic large infrastructure. Adaptation to Regional and national programs in Climate Change. National Civil operation to resettle high-risk human Protection System Proposal to settlements and infrastructure. (SINAPROC) as a strengthen platform for long- SINAPROC Balance in the emissions caused by National coastal term adaptation following an deforestation and carbon capture protection system for Integrated Risk through reforestation. natural and human Management systems. Approach. National Atlas of Vulnerability to CC coordinated by different agencies. 76 Table 6-2: Status of National Communications Submitted to the UNFCCC Initial National Second Third Fourth Fifth Communication Communication Communication Communication Communication Annex 1: G-8 (Except Italy and the US) EU Non-Annex 1: "+5"Group Mexico Brazil China India South Africa Other: Argentina Bolivia Costa Rica Democratic Republic of Congo Dominican Republic Niger Source: UNFCCC (March 2008). Links between the PND, the PECC and the PNH and Progress in These Areas 3. The National Development Plan is being implemented through special and sectoral programs. Special programs promote key cross-cutting initiatives coordinated by several federal ministries, while the sectoral programs develop an array of objectives and strategies from the PND that fall under their purview, in order to promote them at all government levels within the specific sector. Two main programs provide the foundation for the implementation of the National Development Plan with respect to water and adaptation to climate change; namely, the National Water Plan and the Special Program for Climate Change. 77 4. The PND has five pillars: (a) rule of law and security; (b) competitive economy that generates jobs; (c) equal development opportunities; (d) environmental sustainability; and (e) effective democracy and responsible foreign policy. The Adaptation to Climate Change in the Water Sector DPL promotes actions within the fourth PND pillar that have a positive impact on other portions of the Plan, such as enhancing competitiveness and promoting equitable development opportunities. 5. Table 6-3 presents the objectives and strategies of the PND's sustainable development pillar, which are directly related to this DPL. Table 6-4 shows how implementation of the PND relates to the Programs' objectives and strategies, as well as how the program helps achieve the PND's goals. The first column shows the PNH strategy and the matching PECC strategy; the second column identifies the actions taken according to the Programs' indicators, as per the third Governmental Progress Report; the third column shows the PND pillars to which the programs are contributing, as stated in the PNH and PECC. Table 6-3: Objectives and strategies of the National Development Plan (PND) 2007- 2012 strongly related to the Adaptation to climate Change in the Water Sector DPL Pillar - Sustainable Development Linked Objectives Linked Strategies 1.1 Promote the development of infrastructure to meet existing needs for water services and sanitation in the country. Objective 1. Increase coverage of safe 1.2 Encourage a culture that emphasizes water saving and water and sanitation in the country. the rational use of it in the domestic, industrial and agricultural plain fields. 1.3 Promote the development and dissemination of more effective and efficient technologies for drinking water, water use and treatment. 2.1 Strengthening technical and financial self-sufficiency of operating bodies of water. Objective 2. Achieve a 2.2 Expand the capacity of wastewater treatment in the comprehensive and sustainable country and the use of treated water. management of water. 2.3 Promote integrated and sustainable management of water from a watershed perspective 2.4 Promote efficient water use in agricultural activities to reduce fluid consumption while protecting soil salinization. Objective 3. Stop the deterioration of 3.1 Carry out forest restoration programs throughout the forests in Mexico. country as a scheme of conservation of ecosystems. Objective 5. Integrate conservation of 5.1 Promote the implementation of cleaner technologies natural capital with the country's and friendly environment among the country's productive social and economic development. sectors. Objective 6. Ensure that the 6.4 Ensure adequate legal framework for implementation management and implementation of of the authority and ensure strict compliance with environmental law are effective, environmental legal system through inspection activities, efficient, expeditious, transparent and 78 encourage sustainable investments. monitoring and damage repair. Objective 8. Ensure close 8.2 Participate actively in international efforts towards coordination and integration of efforts environmental sustainability. among the agencies of the Federal Government, the three tiers of government and the three branches of government for the development and implementation of policies related to environmental sustainability. 11.2 Develop regional climate scenarios for Mexico. 11.3 Evaluate impacts, vulnerability and adaptation to Objective 11. Promote measures to climate change in different socioeconomic sectors and adapt to climate change impacts. ecological systems. 11.4 Promote the dissemination of information on impacts, vulnerability and adaptation to climate change. Objective 13. Build scientific and 13.2 Enhancing international cooperation in environmental technical information to enable the research, enabling the country to tap existing financing advancement of knowledge on mechanisms that serve to complement national efforts in priority environmental issues to this area. support decision making of the Mexican state and facilitate responsible and aware public participation. Table 6-4: Links between the PNH, the PECC and the National Development Plan. PND PNH (and PECC strategies) Progress (2009) strategies triggered Objective 1: To improve water productivity in the agricultural sector 1.2, 1.3, 2.4, 1.1 Modernize infrastructure 29477 hectares incorporated to irrigation (2007- 5.1 and farmland technology 2009). upgrade in coordination with 39000 new hectares incorporated to the users and local authorities. modernized irrigation program in 2009. (3.3.2 PECC) 442,863 hectares have been upgraded and rehabilitated (2007-2009). 1.5 Encourage the 2.4 In 2009 380 Irrigation Units are organized, development and compared to 144 in 2007. consolidation of agricultural user organizations. 2.4 1.7 Widen the agricultural 1350 hectares incorporated to technified rainfed frontier for irrigation and farming (2007-2009), from a total of 4750 technified rainfed farming in hectares from January 2007 to June 2009 zones with water availability through land-use planning. Objective 2: Increase the access and Quality of Water, Drainage and sanitation Services 79 1.2, 1.2, 1.3, 2.1 Strengthen technical From 2007 to 2009, CONAGUA registered an 2.1 development and financial increase in WUs efficiency according to the self-sufficiency of Water measures taken from 80 Water Utilities (sample Utilities in the country by group) that follow the Program of Evaluation and increasing its overall Monitoring of the Management Indicators for efficiency and better Reaching Global Efficiency. The global services. efficiency in 2007 was 37.25 percent and, in 2009, increased to 39.7 percent. 1.1,1.2, 1.3, 2.2 Treat the generated 90911,6 liters per second of treated water in 2009 1.2, 5.1 wastewater and encourage its 43.5 percent water treatment coverage in 2009, reuse and sharing. (2.4.3 compared to 36.1 percent in 2007. PECC) 1.1 2.4 Increase coverage of 75.2 percent of drinking water coverage in 2009, drinking water and sanitation compared to 74.7 in 2007. in rural communities, 60.8 percent coverage in sanitation in 2009, leading to the sustainability compared to 59.9 in 2007. of services. (3.2.1 PECC) 1.1 2.5 Increase coverage of 95.4 percent of drinking water coverage in urban water and sanitation in urban areas, compared to 94.5 in 2007. communities, leading the 95.0 percent coverage of drilling in urban areas, sustainability of services. compared to 94.2 in 2007. (3.2.1 PECC) 1.1 2.6 Improve the quality of 97.1 percent of disinfected water coverage in 2009 water supplied to compared to 96.2 percent in 2007. populations. (3.2.1 PECC) 318.6 m3/s of disinfected flow Objective 3: Promote the integral and sustainable water management in basins and aquifers 2.2 3.2 Strengthen the quality of For the biological oxygen demand indicator of water in the Comprehensive water quality (DBO5), in 2008 the quality was Water Management. (3.2.1 40.6 percent, (monitored in 528 stations); the PECC) value of 2007 was 38.2 percent. 2.2, 2.4 3.3 Develop incentives and Up to 2010, 6 Water banks are in operation; there economic instruments were no Water Banks operating in 2007. promoting the preservation of the country's rivers, lakes, wetlands, river basins, aquifers, and coasts. (4.3.7 PECC) 2.2, 2.4 3.4 Consolidate a Installation of volumetric flow measurement comprehensive system for instruments in order to improve the calculations of measuring the different the water extracted from every source: for 2009, components of the the government programmed MX$ 49.5 million to hydrological cycle. (3.2.5. purchase 232 flow meters. Up to June 2009, PECC) MX$14.9 millions have been invested in the purchase of 82 flow meters. From 2007 to June 2009, the government has purchased 733 flow meters. 80 1.3 3.5 Develop legislation to Publication in the Diario Oficial of two Official promote aquifer recharge Mexican Norms: NOM 14 and NOM 15, promoting the recharge of aquifers with rain water and with treated wastewater. 3.6 Publish the availability In 2009 the availability of 282 aquifers and 722 of water in aquifers and basins was published. basins of the country (3.2.2 PECC) 1.2, 2.4 3.8 Regulate the use of water 1 Declaration of Groundwater Reserve published, in major river basins and 9 technical studies already elaborated and under aquifers in the country. review. (3.2.2 PECC) 2.3 3.12 Strengthen the In November 2008, the Northern Border Program cooperation schemes which 2008-12 was published in SEMARNAT's will achieve sustainable webpage. Up to date, the main outputs of the water management in trans Program are: increased drilling coverage to 89.9 boundary basins according to percent in urban areas; 82 percent of wastewater their regulations. treated; 2,598 hectares of forest plantations and 17,369.3 hectares with soil restoration; two territorial management programs in Burgos' Basin; the promotion of 28 bilateral projects and actions. 2.3 3.13 Promote the Agreement on internationally relevant wetlands development of national (Ramsar): México has worked intensively in the wetland inventory. (3.3.9, recognition of wetlands for preservation. The 3.4.2 PECC) country has the second world place in number of wetlands registered in the Ramsar List (corresponding to 8 million of hectares). The most recently included wetland is located in Bahía Adair, Sonora. 2.3 3.14 Institutionalize the The River Basin Councils have agreed in the first process of Planning, semester of 2009 on specific actions to promote Programming, Budgeting water quality improvement, strengthen its and the mandatory distribution and efficient use, and foster the application of the water conservation of ecosystems. programs for priority In 2009, 9 Auxiliary Units of the River Basin watersheds. (3.2.2 PECC) Councils have been supported to formulate their own management plans (6 Auxiliary Units completed their plans in 2007 and 25 Auxiliary Units in 2008). During the first semester of 2009, operational support has been given to 5 River Basin Councils and 25 Auxiliary Units for the installation of management agencies and the strengthening of the existing ones. 2.3 3.15 Encourage the Mexican Norm on Ecological Flow under preservation of ecosystems discussion in the working group. in the country trying to keep the channels in the volumes 81 required. (3.4.2, 3.4.3, 3.6.2) Objective 4: Improve the technical, administrative and financial development of the water sector. 1.1, 2.2, 2.4 4.1 Increase budgetary and CONAGUA's budget for operation, conservation financial resources, and and development of water infrastructure increased improve their distribution 11.5 percent from 2008 to 2009 and 6.1 percent and implementation of from 2007 to 2009. investment projects in the water sector. 1.2, 1.3, 2.4, 4.3 Consolidate applied The National Council of Water Sector Science and 5.1 research and technology Technology was created the 28th of March 2008. transfer. (4.5 PECC) The aim of this Council is to coordinate efforts (SEMARNAT-CONAGUA-CONACyT) to achieve the objectives of the PNH and the PECC. By the end of 2008, the IMTA leveraged resources in the amount of 377.3 million to undertake 205 research and technology development projects. These projects are related to integrated water resource management. From the 205 projects, 44 were implemented with federal resources and 161 with self-generated resources. From January to June 2009, 78 additional projects have been initiated; the goal is to complete 190 projects by the end of the year with an approved federal budget of MX$388.8 million. 2.3, 6.4 4.5 Promote compliance From January 2007 to May 2009 8,482 inspection with existing legal visits were paid to verify the compliance to the framework and promote National Water Law and its Rules. development of tools to strengthen the proper use and sustainable water management. 13.2 4.7 Participate in the Mexico is hosting the COP 16 in November 2010 deliberations and actions in and is so far the only Non-Annex 1 Country to relation to water in the have submitted four Communications of the international arena. (4.2.2 UNFCCC PECC) Objective 5: To consolidate the participation of users and organized society in water management and to promote a culture for the proper use of this resource 1.2, 2.1, 5.1 Build awareness among 2 national campaigns in 2009: "Water culture: fair 2.4 the population on the price 4th edition" (these type of campaigns were obligation to pay for water also held in 2007 and 2008); and "Water Culture; and its responsible use. new habits". In 2008, the "Efficient water use" (3.2.5 PECC) campaign was held. 1.2, 2.1, 5.2 Inform the population in Bulletins, information on relevant events, and 2.4 a timely, effective way about other institutional materials are available to the 82 water scarcity, the costs of public through the CONAGUA's webpage. supplying water, how to use it responsibly, and its economic, sanitary, social, and environmental values. 1.2, 2.1, 5.3 Promote educational and In 2009 the Water Culture program supported 31 2.4 communication programs to federative entities, one more State compared to foster water culture. 2007. From 2007 until the end of 2008, 349 Water Culture Spaces were opened (the operation of the 482 already in place was strengthened), 550 events were organized, 596 learning materials were delivered and 312 training workshops on water culture were held. In 2009, there were 1352 Water Culture Spaces; compared to 1120 in 2006 (the goal for 2009 was the opening of 139 water culture spaces). 1.2 5.4 Position the topic of The goal to implement Water Culture Programs in water as a strategic resource the country's 32 states (the Capital District) has upon which national security been reached in 31 States, only Sonora is missing. depends. 2.3 5.5 Consolidate the Currently 26 River Basin Councils are established, managerial autonomy of the most recent one began to operate in 2009 (100 River Basin Councils. percent of the national territory covered). There were 25 River Basin Councils in 2007. During 2009, 18 of the 26 River Basin Councils were supported to execute priority actions as set in their working and action plans. 2.3 5.6 Strengthen the In 2009, 9 Auxiliary Units of the River Basin managerial autonomy of the Councils have been supported to formulate their auxiliary bodies of River own management plans (6 Auxiliary Units Basin Councils. completed their plans in 2007 and 15 Auxiliary Units in 2008). During the first semester of 2009, operational support was provided to 5 River Basin Councils and 25 Auxiliary Units for the installation of management agencies and the strengthening of the existing ones. 1.2, 2.1 5.7 Foster the institutional PATME is supporting water utilities at national development of agencies and level in the implementation of efficiency organizations participating in improvement actions; through PATME, technical water management. assistance and institutional strengthening activities, such as capacity building, are provided. During the second semester of 2009 workshops on billing and water supply network sectorization were held for water utilities; during 2008 WUs attended workshops on commercial systems and electromecanic efficiency. Objective 6: Prevent the risks 83 Contributing 6.1 Promote the relocation of 16 Atlases of Risk and hazard prevention have to strategies human settlements located in been published. of the (i), risk areas. Between January 2007 and June 2009 (ii) and (iii) MX$2,021.7 million from federal sources and PND pillars. MX$ 559.6 million from non-federal sources have been used to support 26908 actions in Baja California Sur, Campeche, Chiapas, Distrito Federal, Hidalgo, Quintana Roo, Sinaloa, Sonora, Tabasco, Tamaulipas y Veracruz. Contributing 6.2 Provide the National Civil 63462 meteorological bulletins have been issued to strategies Protection System and the from September 2008 to August 2009. of the (i), population with timely, During the first semester of 2009, the SMN (ii) and (iii) reliable information on the website had 1,553,646 visits. PND pillars. occurrence and evolution of severe meteorological and hydrometeorological events. Contributing 6.3 Transform, renovate, and The National Meteorological System performs to strategies modernize the National monitoring through 18 observatories, 9 of the (i), Meteorological Service and to meteorological stations, 11 meteorological (ii) and (iii) widen its monitoring radars, 15 radio-sensing stations. 2834 PND pillars. coverage. conventional meteorological stations are under operation, as well as 615 hydrometric stations and 215 hydro climatologic stations. The current capacities in terms of infrastructure and human resources of the different meteorological information and monitoring systems were diagnosed; recommendations were emitted to improve the development and quality of information for climate change research. 2.3, 3.1 6.5 Implement the actions of In the frame of the Coordination Agreement for restoration and preservation the Recovery and Sustainability of Cuenca in the upper reaches of the Lerma Chapala, the following progress has been watersheds to reduce runoff achieved (from September 2008 to august 2009): and possible effects. the Program of Integrated Natural Resource Management in Micro Basins received an investment of $4.2 million in 21 micro basins. Contributing 6.6 Conduct preventive The Program for Prevention and Attention to to strategies actions that make it possible hydrometeoriological events (Programa de of the (i), to be in a better position to Prevención de Inundaciones y Atención de (ii) and (iii) face hydrometeorological Emergencias) promotes the implementation of PND pillars. events. (PECC 3.2.3) prevention and contingency programs in populated as well as productive areas: 6.7 Maintain, conserve, and The program for protection of populated areas expand water infrastructure to (Programa de Control de Avenidas para protect population centers and Protección de Centros de Población) aims at productive areas. diminishing the damages caused by floods. From (PECC 3.2.2) June to January 2009, MX$537.2 million were spent. Taking into account the resources invested from 2007 to June 2009, the total amount is 84 MX$3,102.2 million; 86 percent (MX$2,671.5 million) were provided by the Federal Government and 14 percent (MX$ 430.7 million) by the States. The program for protection of productive areas (Programa de Control de Avenidas para Protección de Áreas Productivas) invested $MX231.7 million in public infrastructure from 2007 to June 2009. The National Program of Dam Security aims at supervising the main hydraulic infrastructure: 844 hydraulic installations were supervised from January 2007 to May 2009. Contributing 6.8 Promote ecological land- 14 ecological planning plans for priority areas (7 to strategies use programs in regions at in 2009) have been elaborated. of the (i), risk due to The Technical Study on the General territorial (ii) and (iii) hydrometeorological events. Ecological Planning has been submitted. PND pillars. Objective 7: To assess the effects of climate change on the hydrological cycle 11.2 7.1 Evaluate the effects of The National Ecology Institute (Instituto Nacional climate change on the de Ecología INE) has elaborated 19 studies from hydrological cycle variables. 2007 to 2009 related to impacts of climate change (3.2.5 PECC) for human health, meteorological prognosis, vulnerability of southeastern states to climate change and adaptation of ecosystems and species to climate change among others. (e.g the "Evaluation of the Frequency and Intensity of Extreme Meteorological Events and Regional Level Hurricanes to Prevent Their Effects in the Future Due to Variability and Climate Change in Mexico" and "Identification and Evaluation of the Impacts of Climate Change in Geographical Distribution of the Ecosystems in Mexico". Climate change scenarios for 2030 and 2050 have been developed, based on general models and the application of statistical techniques. Hydrological processes in the Guayalejo-Tamesí river basin have been studied, as well as the water demand and the hydraulic infrastructure in place. Adaptation measures were identified, emphasizing irrigation technology upgrade and the shift to more sustainable crops. The vulnerability of Mexico's southeastern states in the face of extreme rains and climate change in Tabasco has been assessed. Adaptation and Prevention measures have been proposed. Two regional climatic scenarios for Mexico at a 50X50 scale were elaborated to have data at a higher resolution, to help develop the state level climate change actions plans. 85 ANNEX 7: WATER SECTOR INSTITUTIONS 1. The National Water Law assigns responsibilities to sector institutions at the federal, state and local levels. At the federal level the relevant institution is the National Water Commission (Comisión Nacional del Agua, CONAGUA), while at the regional level there are River Basin Organizations (organismos de Cuenca) and at the state level there are local offices of the CONAGUA, called Direcciones Locales. The state level institutions include also the state water commissions (Comisiones Estatales de Agua, CEAs), responsible in terms of potable water. Finally, at the local level the relevant institutions are the municipalities and water utilities (organismos operadores, OOs), as well as the irrigation districts and units. Federal Institutions 2. Although CONAGUA is a de-concentrated agency of the Ministry of the Environment and Natural Resources (SEMARNAT), it enjoys a considerable degree of autonomy. Its mission is managing and preserving the nation's water and inherent assets to achieve a sustainable use of the resource. The Commission carries out its administrative, normative, technical and consultative duties in coordination with state and local government entities and with the participation of water user associations, operators, academia and institutions representing the private sector and civil society. While SEMARNAT retains jurisdiction over overall policy-making and coordination of water with natural resources management (as well as extraordinary circumstances), CONAGUA is tasked with the design and implementation of the National Water Program (PNH) and the administration and protection of national waterways. The Commission's purview includes water resource management and policy, the administration of water rights, irrigation and drainage issues, and water supply and sanitation. CONAGUA plays a key role in administering financial flows to all sub-sectors, as well as financing, developing and operating water infrastructure (water supply, sewerage and wastewater treatment) and promoting social development (especially through irrigation and the support of agriculture). CONAGUA is also responsible for the prevention and management of water-related and meteorological disasters (floods, droughts, hurricanes, etc.). 3. CONAGUA is both a federal regulator with ample powers and the main bulk water supplier entitled to collect water user fees from national water users and from dischargers of effluent to national bodies of water, as established by the Federal Rights Law. Since its creation in 1989, the Commission has evolved into a remarkable institution with many accomplishments. It is internationally recognized in the areas of policy reform, modernization of water sector and disaster management. However, the CONAGUA still faces important challenges that need urgent attention. These include reducing the over-exploitation of aquifers, pollution and the over-allocation of water rights; promoting decentralization and participation; achieving higher levels of financial sustainability; and adapting the sector to climate change impact.CONAGUA manages a budget of about US$ 2,684 billion (2009) 59. 59 SEMARNAT, Statistics on Water In Mexico-2008 Edition revised August 2009 86 4. CONAGUA represents an important experiment in consolidating most aspects of water resources management into one institution, including: policy, water rights administration, planning, irrigation and drainage development, and water supply and sanitation development, whereas, in other countries, these activities are divided among various institutions. Regional and State Institutions: The River Basin Organizations 5. Reforms to the National Water Law undertaken in 2004, resulted in the gradual transfer of key CONAGUA functions from the federal level to 13 river basin organizations (formerly known as "hydrographic regions"). Depending on the size and complexity of the area, a river basin organization can cover several states (total or partially). It can also be made up of different participatory entities organized such as the river basin councils, the basin commissions (comisiones de cuenca), the basin committees (comités de cuenca) and the COTAS (aquifers level committees) These organizations have started to play an increasing role in the sector since the 2004 reforms. 6. The river basin organizations (RBO) were conceived as specialized units within CONAGUA with technical and administrative autonomy to manage the assets and resources allocated to them by CONAGUA. The RBOs are headed by a Director General (who is appointed by the Director General of CONAGUA) and an Advisory Council (Consejo Consultivo). CONAGUA presides over the Advisory Council, which includes designated representatives from the SHCP, SEDESOL, the Ministry of Economics (Secretaría de Economía SE), SEMARNAT, the Health Ministry (Secretaría de Salud, SSA), Ministry of Agriculture, Livestock, Rural Development, Fisheries and Food (Secretaría de Agricultura, Ganadería, Desarrollo Rural, Pesca y Alimentación), SAGARPA, CONAFOR, a state representative for each state within the RBOs territory (or the Distrito Federal when appropriate) and one representative of the municipal presidents per state. The Director General of the RBOs serves as the Technical Secretary of the Advisory Council. The Council also includes a designated representative from among the user representatives in the basin or from the RBCs in the hydrologic/administrative area. Currently, the user representatives have a voice but not a vote. 7. The RBOs are responsible for formulating regional water policy, designing programs to implement the policies, conducting studies to estimate the value of the resources generated within their boundaries (water user fees), recommending specific rates for the water user fees, and operating the necessary mechanisms for collecting the fees. The RBOs have been vested with enough power to collect information, analyze it and propose priorities as well as how these priorities should be addressed, and estimate the resources likely to be originated within their own hydrographic regions. The River Basin Councils 8. The River Basin Councils' (RBC) main function is to review and provide input to activities to improve water resources management and to develop water infrastructure in their respective basins. . They are intended to serve mainly as advisory councils, making their members aware of relevant issues and giving them a voice on key issues (such as investment priorities, water valuation to estimate contribution amounts, technical 87 assessment of water availability, etc.). River basin councils have auxiliary organizations that carry out similar functions at the sub-basin level (basin commissions) and at the level of specific aquifers (COTAS). The RBCs are fora for the government, water users and representatives of other stakeholders that may 9. More than half of the RBCs' members represent various levels of government, while the remainder represents users and society as a whole. They are fora for their members and offer an instance to present and analyze complaints; propose and suggest solutions; and promote programs, projects and actions, such as pollution control, water efficiency and basin protection programs. The RBCs can help to resolve conflicts by developing consensus among various parties involved and recommending actions to CONAGUA. Basin commissions, basin or water committees and COTAS participate in the RBCs and are expected to provide technical input as well advance their particular interests. Twenty-five established RBCs share basin boundaries with the RBOs. However, in some cases, two or more RBCs are within the area of one RBO. Some states are located entirely within the area of one RBC, while other states may be divided between two or more RBCs. In the latter case, the state participates in all of the RBCs within its territory. 10. Together with CONAGUA, the RBCs are expected to guide the activities of the RBOs. However, decisions made by the RBCs are not binding upon the RBOs. RBOs and RBCs are also expected to play a key role in the administration of the Water Financial System (Sistema Financiero del Agua, SFA) introduced in 2004 with the National Water Law. Under this system, CONAGUA, the RBOs and other administrative service providers are to encourage users to pay the fees for the use of national waters (including those underground) for all purposes (including for the discharge of wastewaters) as established in the Federal Rights Law. Institutions at the State Level 11. Water Sector institutional arrangements and legal frameworks vary substantially among the 31 States. Each State has its own law governing state water policy and management of water resources. Like the Federal Government, States also prepare 6 year development plans which include priorities for the water sector. Most States have created an autonomous State Water Commission (Comisión Estatal del Agua, CEA) to carry out the water sector functions in their jurisdiction 12. These Commissions are autonomous entities that usually operate under the authority of the State Ministry of Public Works. While their attributions differ widely among states, they all have some authority and responsibility in water resources management. Some also have responsibilities in irrigation and in the provision of water supply and sanitation services, such as: (a) the provision of technical assistance to municipalities and irrigation districts and units; and (b) monitoring of the performance of service providers, and the operation of water distribution systems and bulk water supply. 13. In terms of scope and responsibilities, in 20 States the CEAs have an explicit mandate to provide technical assistance to support municipalities in the provision of water services. In some States, the CEAs monitor data on the performance of service providers, but seldom are these data aggregated into a comprehensive information 88 system. The CEAs also have a role in channeling federal and state subsidies to service providers, although their level of discretion in administering federal funds is limited by the detailed operational rules of these funds. 14. In general, the provision of water and sanitation services falls within the purview of municipalities. For that purpose, most municipalities in Mexico have created water utilities (Organismos Operadores). The performance of water utilities in Mexico varies widely among municipalities, with some of them reaching levels similar to the best performers in Latin America and the Caribbean while others yield very poor results. 89 ANNEX 8: FEATURES AND RELEVANCE OF KEY FEDERAL PROGRAMS Overview 1. While Mexico's National Water Commission (CONAGUA) functions as a branch of the Ministry of the Environment and Natural Resources, in practice, it has a good deal of independence and is in charge of the administration of national waters and water infrastructure (water supply, sewerage and wastewater treatment).60 CONAGUA fulfills its mission through the 13 river basin organizations. Additional information on CONAGUA is available in Annex 7. 2. Although mean annual precipitation in Mexico is 773 mm, rainfall varies significantly during the year and among the country's various regions. As a result, water availability is highly variable, a problem that is compounded by Mexico's geography. The availability of water does not correspond to the distribution of the population and of economic activity, creating water stress in several areas of the country. Seventy-seven percent of Mexico's residents live in the arid and semiarid northern, central and northeastern regions, an area that accounts for 87 percent of national GDP but receives only 31 percent of the available water. The discrepancy between the physical supply and economic demand for water has played out in different ways. Figure 8-1 shows the contrast between economic development and water availability across various regions. Figure 8-1: Regional Development and Water Availability in Mexico, 2007 Source: CONAGUA. Deputy Director General's Office for Planning. Produced based on: CONAGUA. Deputy Director General's Office for Technical Affairs, and INEGI. 2004 Economic Censuses. Mexico, 2005. 60 The National Water Law establishes that use of the nation's waters will be made available through a concession granted by the Federal Executive Branch (through the CONAGUA) by means of the river basin councils, or granted directly by CONAGUA when appropriate, according to the rules and conditions established in said law and its by-laws. Similarly, a permit issued by CONAGUA is required to discharge wastewater. Concession and discharge permits are recorded in the Public Registry of Water Rights (REPDA), which was established in 1992 at the same time that the National Water Law was enacted. 90 3. Through CONAGUA, the federal government has developed and implemented a series of funding programs for the water sector. The aim of these programs is to satisfy the demand for irrigation and drinking water, as well as collect and treat wastewater. These programs provide financial incentives to conserve the resource through improved efficiency in agricultural irrigation, increased access to water services (mainly for the poor), optimizing the operation of water utilities (i.e., increasing efficiency), and improving the environmental quality of the nation's rivers. 4. The formulation of a strategy to mitigate the impacts of climate changes and adapt to them must recognize the need to make continuous use of an array of policy options with a view to the long term (SEMARNAT 2009b). In line with this strategic guideline, CONAGUA's water infrastructure funding programs include a set of incentives to adapt to climate change. A selection of CONAGUA's programs is described in the sections below, stressing those programs that are related to the adaptation to climate change. Table 8-1 provides an overview of CONAGUA's budget for these programs during the past three years. Overall, the budget more than doubled between 2006 and 2009. The largest program among these is the Program for Drinking Water, Sewerage and Wastewater Treatment for Urban Areas, which accounts for almost 50 percent of total funds, followed by the Program for Construction and Rehabilitation of Potable Water and Sewerage Systems in Rural Areas. Table 8-1: CONAGUA's Budget by Program 2006-2009 (Actual budget - million pesos) Total CONAGUA Program 2006 2007 2008 2009 2007-09 Program for Drinking Water, Sewerage and Wastewater Treatment in Urban Areas 2,414 4,144 6,082 5,180 15,407 Program for Construction and Rehabilitation of Potable Water and Sewerage Systems in Rural Areas 845 1,971 2,175 2,136 6,281 Wastewater Treatment Funding Program 0 0 600 1,779 2,379 Program for Rehabilitation and Modernization of Irrigation Districts 659 1,163 1,768 1,572 4,503 Program for Modernization and Technology Upgrade of Irrigation Units 448 718 468 620 1,806 Land Lot Development Program 96 119 141 144 404 Clean Water Program 29 39 45 44 128 Total 4,492 8,154 11,279 11,474 30,907 Source: CONAGUA, 2010. I. Irrigation Systems and Institutions 5. There are three types of organizations for irrigation systems in Mexico that are based on the origin of the infrastructure's financing. These are: irrigation districts (distritos de riego), irrigation units (unidades de riego) and private irrigation systems (sistemas particulares). 6. An irrigation district is a system that supplies water infrastructure services in areas of 5,000 ha or more relying on infrastructure that was originally constructed and 91 operated by the federal government. The administration of irrigation districts has been transferred to user associations (Asociaciones Civiles de Usuarios, ACUs) by means of governmental concessions. The Irrigation Management Transfer Program, which is part of the institutional reform of public irrigation districts, began in 1989 and is enforced through the 1992 National Water Law. This program improved the management and conservation of infrastructure by promoting financial autonomy, supervision and efficiency, thus contributing to the sustainability of irrigated agriculture. Practically all of Mexico's 85 districts (representing an area of 3.5 million hectares) have been transferred to 506,000 users organized into 445 water user associations. Federal resources formerly invested in the operation and maintenance of irrigation districts and in programs for the technological upgrade of rainfed infrastructure were substantially decreased as a result of the transference of responsibilities to users. Now, capital investments can be redirected towards the modernization of irrigation systems or the construction of infrastructure in other parts of the country. 7. Irrigation units are smaller-scale irrigation systems wherein each supplies water infrastructure services to communal farmers who work their land independently or as a group. Farmers who belong to irrigation units contribute about 40 percent of water infrastructure (such as wells, diversions, pipes, etc.) and part of the construction costs, mainly in the form of labor. Once the works are completed, they became the owners of these facilities and are responsible for operation and maintenance. Most irrigation units use ground water; the exceptions are the small units that use surface water. Given the size of these irrigation systems, no specific supervision offices have been created; the training and empowerment of users ensures the systems performance and CONAGUA oversees the general operations of the system. There are 39,490 irrigation units covering an area of 3 millions of hectares. 8. Private irrigation systems, which cover about 15 percent of the irrigated area, are counted as irrigation units. These groups incorporate irrigation works developed by the private sector, which they generally manage as one unit (complejo productivo). 9. Mexico has the world's seventh largest irrigated area (6.5 million hectares under irrigation). Water used for agriculture represents around 77 percent of estimated total national water abstraction, which totals 78.9km3 for the country as a whole. Of the 6.5 million hectares with irrigation facilities in Mexico, about 67 percent are irrigated with surface water (40.5 km3), and the remaining hectares are served by groundwater pumping (20.1 km3). 10. In light of the importance of the agriculture sector in total water use, demand management and efficiency improvements in irrigation are key drivers of federal programs. CONAGUA's main programs for water efficiency improvements in the agriculture are described below, stressing characteristics related to adaptation: i. Program for the Rehabilitation and Modernization of Irrigation Districts 11. The aim of the Program for the Rehabilitation and Modernization of Irrigation Districts (Programa de Rehabilitación y Modernización de Distritos de Riego) is to achieve the efficient and sustainable use of water resources through the rehabilitation and modernization of Mexico's hydraulic infrastructure and by improving irrigation 92 technology. Once completed, the infrastructure is transferred to irrigation districts (distritos de riego). This program provides explicit incentives for the conservation and efficient use of the resource by: a. Funding irrigation systems that reduce water usage (e.g., high- or low- pressure systems, or demand-based irrigation) b. Implementing low water consumption agriculture (including macro-metering of surface and groundwater). 12. Funding is provided for infrastructure projects, such as the rehabilitation of canals, the construction of drains, operating roads, water wells and pumping stations for the development of efficient irrigation systems and agriculture of low water consumption. The program also provides funding for works supervision, training, and equipment for water control and metering, as well as for carrying out studies and developing projects. ii. Development Program for Plots of Land 13. The Development Program for Plots of Land (Programa de Desarrollo Parcelario, PRODEP) is geared towards the optimization of service and the operation of hydraulic infrastructure for agriculture. PRODEP provides funding for acquiring machinery and equipment for infrastructure maintenance and for the efficient use of water at the level of individual plots of land by means of improvements in land gradients to increase irrigation efficiency. 14. The beneficiaries of this program are ejidatarios and small land tenants. A total of 584,123 users, organized into 468 civic associations, have concessions to hydraulic infrastructure to irrigate 3.5 million ha in irrigation districts (distritos de riego). The criteria to assign priorities to the various projects and works that apply to this program are: ACUs and SRLDRs (Sociedad de Responsabilidad Limitada de Distritos de Riego) that have resources available and are not indebted with PRODEP, Availability of an assessment of average annual conservation needs and a long-term plan of conservation and land gradient development, Applications where the use of machinery has been optimized have a higher priority, Applications that exceed the annual limit in the allocation of resources are eligible based on special criteria laid out in the rules of operation. 15. From 2007 to 2010, PRODEP operation rules have increased federal support for agricultural units operating hydraulic infrastructure at the level of individual plots and shifted the program's orientation toward the neediest users' organizations. The increase in the maximum federal support per application per year has improved the capacity of the ACUs and SRLs to purchase machinery and equipment for conservation of hydraulic infrastructure and to improve land gradient for irrigation purposes. This improvement contributes to a more efficient use of the water at the level of the individual land plot, and thereby constitutes an adaptation measure. 93 16. Recent changes in eligibility and selection criteria have increased the focus on beneficiaries/applicants with less developed infrastructure and higher technological needs. Priority is now being given to ACUs and SRLs that show the highest need for machinery and equipment. The consideration of applications that exceed the maximum federal support limit are now based on an assessment of the conservation and physical capital needs. 17. Follow-up indicators have been developed to measure the efficiency and coverage at the irrigation district level (e.g., productivity of water used, progress in area covered, and amount of support disbursed). Increased water conservation through improved efficiency in irrigation contributes to climate change adaptation. iii. Program for the Modernization and Technological Upgrade of Irrigation Units 18. The aim of the Program for the Modernization and Technological Upgrade of Irrigation Units (Programa de Modernización y Tecnificación de Unidades de Riego) is to improve water productivity in irrigation systems by providing funding to agricultural producers. Both surface water and groundwater uses are considered in this program. The program started in 2009 as a merger of two previous programs: the Program for the Efficient Use of Water and Electricity (Programa de Uso Eficiente de Agua y Energía Eléctrica) and the Program for Full Use of Agricultural Hydraulic Infrastructure (Programa de Uso Pleno de la Energía Hidroagrícola). 19. The objectives of this program are to construct, rehabilitate, complement, expand, and modernize water infrastructure for water intakes, transportation, and distribution in Rural Development Irrigation Units (Unidades de Riego para el Desarrollo Rural, UREDALES). The program promotes water and energy savings through the rehabilitation of pumping plants, wells, and equipment in these irrigation units, as well as in private wells located in the irrigation districts. The target population is made up of agricultural producers, ejidatarios, small landowners, and associations of producers, as well as producers within the irrigation districts who own their own wells. 20. One of the conditions to receive funding under the Program for the Modernization and Technological Upgrade of Irrigation Units is that the water wells in the irrigation unit must already be overexploited. At the same time, to reduce stress on these wells, producers must commit to leave 50 percent of the recovered water in the aquifer, while using only the volume of water allocated to them by CONAGUA, thereby conserving water. The Program ranks applications for funding based on a set of criteria that gives priority and incentives to climate change adaptation actions. For example, those projects where producers give up water rights are ranked higher than those where they do not do so. II. Water Supply and Sanitation 21. The Mexican constitution establishes that local governments have the primary responsibility for the provision of water supply, sanitation services and drainage. Because of the multitude of municipalities (2,446), villages and hamlets (200,000) in Mexico as well as the different policies and programs, there are a variety of local institutional arrangements for providing services. Most large cities and some smaller towns have 94 created decentralized municipal service providers (organismos operadores) with varying degrees of independence. While service providers have their own legal personality and board, in practice most are closely linked to the municipality, which typically appoints most board members and the service provider's director. Often, there are also close financial links between service providers and municipalities, such as the contracting of debt and the payment of bills by the municipality on behalf of the service provider. In many cases, accounts are held on a cash basis, not on an accrual basis, and are seldom audited. In addition, there are usually no performance targets for the service providers. Nevertheless, there are a few notable exceptions of service providers that operate efficiently on a commercial basis. The best of these service providers that self-finance a substantial proportion of their investments have been rated by credit rating agencies. 22. Generally, in the case of smaller cities and towns water and sanitation services are provided directly by a department of the municipality. The quality and efficiency of services in smaller municipalities tend to be lower than in larger municipalities. Inter- municipal service providers (a common institutional arrangement in some other countries) that benefit from economies of scale by providing service to groups of small towns or large metropolitan areas are almost nonexistent in Mexico. 23. In rural areas, water services are provided directly by the local government or by user groups (which sometimes take the form of cooperatives). In some cases, the state water commission provides services in rural areas at the request of villages or municipalities. 24. The degree of private sector participation in water supply and sanitation in Mexico has been limited, and concentrated mainly on build­operate­transfer (BOT) schemes for wastewater treatment plants. 25. The last decade has witnessed a significant improvement in coverage of water supply, sewerage service and wastewater treatment. Between 2000 and 2008, water supply coverage increased from 87.9 to 90.3 percent, while sewerage service coverage rose from 76.2 to 86.4 percent and wastewater treatment grew from 23 to 40.2 percent. The urban and rural divide in service provision has also been falling during the past 20 years; yet it remains evident for both drinking water and sanitation. According to the 2005 census, drinking water coverage for urban areas is 95 percent (up from 89.4 percent in 1990), while it only reaches 70.7 percent in rural areas (up from 51.2 percent in 1990). Urban coverage in sanitation is 94.5 percent (compared to 79 percent in 1990), while rural areas register a coverage rate of only 57.5 percent (compared to 18.1 percent in 1990). Regions of Guerrero, Oaxaca and Chiapas have the lowest drinking water coverage rates, while Oaxaca and Guerrero, along with the Yucatan also record the lowest levels of sanitation coverage. i. Program for Drinking Water, Sewerage and Wastewater Treatment for Urban Areas (APAZU) 26. The Program for Drinking Water, Sewerage and Wastewater Treatment for Urban Areas (Programa de Agua Potable, Alcantarillado y Saneamiento en Zonas Urbanas) funds the development of drinking water, sewerage, and wastewater treatment systems in urban areas with more than 2,500 residents. APAZU provides financial resources for the 95 construction, expansion, rehabilitation, and improvement of water infrastructure, as well as for efficiency improvement in water utilities and smart water use. 27. From the standpoint of adaptation to climate change, APAZU provides funding to projects that improve efficiency in operations and water use, including reduction of non- revenue water. The program also ranks applications for funding based on a set of criteria that gives priority to climate change adaptation actions such as the implementation of water network improvements, leakage detection and prevention, and commercial/financial efficiency measures by water utilities. 28. In the past two years, CONAGUA has modified APAZU to improve adaptation measures (no-regrets-type), including those listed below. Projects related to the recovery of aquifers became a target for federal funding under the APAZU program. Urban water drainage has been included in APAZU. In 2009, the subsidy for urban drainage was increased from 50 to 60 percent. The concept of poor/marginal populations has been incorporated by providing 20 percent additional funding to projects that provided sewerage to residents who are not connected to the system (most likely marginal populations). Assistance to poor/marginal populations was recently increased. This was achieved by providing 10 percent additional funding to persons with high to very high marginal levels, and up to 100 percent funding to populations with the lowest human development index. In 2010, the subsidy was increased from 60 to 70 percent for wastewater treatment projects and for projects to improve commercial and physical efficiency for communities whose size ranges between 2,500 and 10,000 residents. ii. Wastewater Treatment Funding Program 29. The aim of the Wastewater Treatment Funding Program (Programa de Fondos Concursables para Tratamiento de Aguas Residuales) is to increase wastewater treatment in localities with over 2,500 residents. This program provides funding to cover a percentage of capital expenditures, as well as a subsidy for operation and maintenance (O&M) costs. O&M costs are partly funded through payments based on the volume of wastewater treated to pre-defined quality standards. It provides additional incentives for wastewater reuse activities. 30. This program ranks proposals for funding based on a set of criteria that gives higher priority to climate change adaptation actions. For example, projects leading to the reuse of treated effluent and those that use treated water to substitute for `first-use-water.' Another aspect of this program that fosters adaptation is the provision of support to the most vulnerable populations (vulnerability defined based on the marginalization index). 96 ANNEX 9: PROGRAM FOR WATER SUSTAINABILITY IN THE MEXICO VALLEY Background 1. The Valley of Mexico watershed has been overexploited for a long time.61 Excessive extraction of groundwater for human activities causes the City of Mexico to sink at an average rate of 10 cm/year (max. rate of 40 cm/year).62 Continuous sinking of the terrain has reduced the capacity of drainage systems to evacuate water, thereby making the city and its inhabitants more vulnerable to climate change.63 Recurring flooding events during rainstorms are examples of the vulnerability of the system. 2. Other sources of water from outside the watershed have been incorporated into the system; namely, Sistema Lerma in the 1950s and Sistema Cutzamala in the 1970s. Yet, these additional sources are not sufficient to avoid aquifer overexploitation. 3. Municipal and industrial wastewater generated in the Valley of Mexico is collected in sewers, where it is combined with rainwater. Due to seasonal rain patterns, the quality and quantity of water transported in these sewers are highly variable throughout the year. Most of this wastewater is currently untreated. Figure 9-1 shows the current water situation in the Valley of Mexico. 4. To mitigate the vulnerability of the system and eliminate these water imbalances, the Programa de Sustentabilidad Hídrica del Valle de México was launched in 2008. The specific objectives of the program are to: (a) expand the drainage capacity of the Metropolitan Area of Mexico system through construction of the Túnel Emisor Oriente, and complementary works; (b) reduce the over-exploitation of aquifers for agricultural, industrial, and urban purposes, through wastewater reuse and untapped alternative water sources; and (c) treat all wastewater generated within the valley (approx. 40 m3/s).64 61 The Valley of Mexico is an endorreic watershed, i.e., a watershed where incoming water (through rain or rivers) cannot exit to the ocean. Therefore, the only pathways for water to exit the watershed are through evaporation or infiltration. Examples of other endorreic watersheds are the Caspian Sea and the Dead Sea. 62 In the year 1910, the City of Mexico was, on average, 1.9 meters above Lake Texcoco. Currently, the City is 10 meters below Lake Texcoco (i.e. the City of Mexico has sunk almost 12 meters in 100 years). 63 Sinking of the Gran Canal de Desagüe has reduced its drainage capacity from its original 80 m3/s (by gravity) down to 28 m3/s (with pumping stations). Similarly, the capacity of the Emisor Central, which was built to evacuate wastewater and rainwater, has been reduced from its original 170 m3/s to 120 m3/s. The overall capacity of the City of Mexico drainages is 165 m3/s, but in the rainy season, it actually needs 315 m3/s to avoid flooding. The increase in the population of the city (from 10 million people in 1975 to 19 million people in 2006) has also exacerbated their vulnerability. Under the current situation, a blockage of the Emisor Central during a rainstorm event could cause catastrophic flooding (Instituto de Ingeniería de la UNAM). 64 As of 2002, the Valley of Mexico generates 46 m3/s of wastewater. However, through different reuse projects which are part of the Programa de Sustentabilidad Hídrica del Valle de México, it is estimated that the wastewater generated in the valley by 2013 will be 40 m3/s. 97 Figure 9-1. The current water situation in the Valley of Mexico 5. To meet these objectives, the program has incorporated the following funding sources: federal funds; Fideicomiso 192865; and the National Infrastructure Fund (FONADIN). Total capital expenditures estimated for the 2008-2012 period are MX$36 billion. 6. The Water Sustainability Program for the Valley of Mexico (Programa de Sustentabilidad Hídrica del Valle de México) goes beyond major infrastructure works like the Atotonilco de Tula Wastewater Treatment Plant (WWTP) and drainage systems like Túnel Emisor Oriente. This program establishes an overarching policy of adaptation to climate change and reduction in water vulnerability that includes the protection of recharge areas, rainwater collection, soil conservation, the reclamation of forest areas, and payment for environmental services, among others. A summary of the actions and policies incorporated in this program is presented in Figure 9-2. 65 Fideicomiso 1928 is a Trust Fund the revenues of which are the water rights paid by Mexico State and Mexico City to the Federation. 98 Figure 9-2. Actions and Policy in the Program of Water Sustainability in Mexico Valley The Atotonilco de Tula Wastewater Treatment Plant 7. The Atotonilco de Tula WWTP (also known as El Salto WWTP) will be located in the Valley of Tula, in the state of Hidalgo. Atotonilco, with a dry weather flow nominal capacity of 23 m3/s and a wet weather capacity of 35 m3/s is the largest of six WWTPs that will be constructed to treat the wastewaters generated in the Valley of Mexico. The location of the six WWTPs is shown in Figure 9-3. 99 Figure 9-3: Location of Valley of Mexico's Wastewater Treatment Plants 8. Currently, the Valley of Mexico exports wastewater to the Valley of Tula (where Atotonilco will be located) through the tunnels of Tequixquiac (in the west) and the Emisor Central and the Salto River (in the east). After the construction of the Emisor Oriente is concluded, wastewater carried through this main will be added to the existing sources in the east of the Valley of Tula. The Atotonilco WWTP will treat the wastewater carried at the east of the Valley of Tula (Emisor Central, Rio Salto, and Emisor Oriente). Currently, wastewater carried through these conduits is used without treatment in agricultural activities in the Valley of Tula. 9. Treated wastewater from Atotonilco will be used to irrigate approximately 60 percent of 80,000 hectares in the Valley of Mezquital, state of Hidalgo. As shown in Table 9-1, wastewater reused from three WWTPs, including Atotonilco, will reduce the overexploitation of water sources by approximately 15 m3/s. 100 Table 9-1: WWTPs and Their Influence in Reducing the Overexploitation of Water Sources through Reuse Projects Flow CapEx OpEx Level of treatment m³/s M$Mx M$Mx/yr PTAR Guadalupe 2ry 0.5 230 19 PTAR Berriozábal 2ry 2.0 1,059 78 ry PTAR Nextlalpan 2 9.0 3,030 256 ry 2 1.5 697 48 Wastewater PTARs Zumpango ry Treatment 3 Module (2.5) 503 67 Plants PTAR Atotonilco de T. 2 ry 23.0 7,091 665 ry PTAR Vaso El Cristo 2 4.0 2,255 108 Electricity from biogas 57 MW ---- 1,815 82 Total 40.0 16,680 1,324 Developm't Sustitutes water from Guadalupe Dam 2.0 527 103 of new Closes wells in Valley of Cuautitlán 2.0 ---- potable water Allows use of Tula Aquifer 5.0 3,311 420 sourcess Allows use of Vaso Zumpango 2.5 595 127 and closure Madín Dam Water Treatment Plant 0.5 110 25 of over- exploited Cutzamala System Modernization 3.0 3,571 291 wells Total water not extracted from aquifer 15.0 8,114 966 Total 24,794 2,290 10. Sludge generated from primary and secondary treatment in Atotonilco will be digested anaerobically, generating sludge (biosolids) that could be used as fertilizer in agriculture, and biogas that will be used to generate electricity for the plant.66 The generation of electricity through the use of biogas not only reduces dependency of external sources of electricity, and their related costs, but also reduces the carbon footprint of the facility; that is, it minimizes the emission of greenhouse gases to the atmosphere, thereby contributing to mitigating climate change. The potential for certifying emission reductions (i.e., generating CERs) within a Clean Development Mechanism scheme has been considered as part of this project. 11. In addition to considering climate change mitigation technologies, Atotonilco de Tula, as well as the other WWTPs that are part of the Programa de Sustentabilidad Hídrica del Valle de México, will contribute to adaptation to climate change in Mexico's water sector by reducing the overexploitation of aquifers and providing alternative sources of water for irrigation, thereby reducing the vulnerability of the sector. 66 Biogas generated in anaerobic digestion of sludge is a combination of carbon dioxide (CO2) and methane (CH4) gas. Methane has heat potential and can be used in combustion engines to generate electricity to offset part of the demand from wastewater treatment processes. 101 12. In January 2010, the project was awarded to a consortia made up of national and international firms. The plant is expected to start operation in 2013. Once Atotonilco de Tula WWTP is in full operation, it will increase national wastewater treatment coverage by 14 percent, thereby reaching 54 percent Mexico-wide treatment. 13. In August 2008, construction of Túnel Emisor Oriente kicked-off. It is expected that the works will be operational at the end of 2012. This project will double the capacity to evacuate rainwater from the Metropolitan Area of the Valley of Mexico, benefitting 20 million people who currently suffer from flooding during the rainy season, thereby contributing to reducing the impacts of extreme events and vulnerability to climate change. 102 ANNEX 10: WATER BANKS Introduction 1. Water banks are a management mechanism created to facilitate the transfer of water use entitlements from one location or use to another. They promote a more efficient use and allocation of water, recognize the economic value of the resource, and regulate the market, particularly on the transfer of water rights. 2. The water banks serve an important role by determining which water rights can be exchanged or transferred and the amount of water corresponding to a given water right entitlement. Banks also establish the process and terms of these agreements/transfers. Some banks have assumed a broader role of brokers, centers for the exchange of information or promoters of markets. As brokers, banks connect buyers and sellers to facilitate a transaction; as centers for the exchange of information, they serve as suppliers of information and provide the regulatory requirements for the exchange; as promoters of markets, they provide liquidity by purchasing or selling water at predetermined prices. Thus, banks ensure that transactions are performed even when buyers and sellers are absent. In some other instances, banks do not play an active role in the exchange of rights but rather provide a series of administrative functions that facilitate the transfer and sale. These functions include: a) register of rights or water titles; b) regulate or establish market prices; c) determine which rights can be transferred/exchanged; d) maintain data and records on water availability; e) identify the quantity and location of water that can be transferred; f) specify the buyers and sellers; g) formulate terms of reference for the contracts; h) supply information to regulatory agency; and i) resolve disputes resolution. 3. The establishment of water banks is mostly a function of a specific water source or type of water right/title. In general, there are three major categories of banks (although given the array of legal and institutional frameworks, some banks may fall into more than one category). These three main categories are: institutional banks, banks established in storage areas, and groundwater banks. a) Institutional banks, which provide a legal mechanism for the exchange of water rights and enable the transfer of legal documents supporting the exchange, are usually established where water storage capacity is low or the geographical areas are large. These banks usually function in circumstances where the right is contingent upon hydrological variations. b) Banks established in storage areas are those established near one or multiple water storage areas/facilities where the storage quotas can be accumulated and exchanged. By definition, the exchange is a function of the volume of water stored, providing more certainty than the market defined in institutional banks. Transactions are primarily based on a percentage or volume of the available water. In most cases, exchanges of rights are short term (usually a year). c) Groundwater banks provide a mechanism for the exchange and transfer of water rights abstraction within a confined aquifer. Several of these facilities 103 have been developed to promote the conjunctive use of water. Under conjunctive use programs any surplus supply of freshwater is recharged to the aquifer to be used during periods of low availability of freshwater. These banks also serve as mitigation tools in areas where the abstraction of water has been larger than what is required to maintain a minimum flow of freshwater. 4. The structure of the banks defines the rules and mechanisms by which the participants in the market interact and commit to the transaction. Bank structure also helps determine prices and disseminate information. Banks play a vital role in ensuring the proper functioning of the market. As such, they must ensure that transfers are done efficiently and in a timely manner to reduce the risk, uncertainty and transaction costs of the exchange. It is imperative that these banks operate within the water resources management planning framework (that is, that they not operate in isolation). The legal and environmental considerations and the effects on third parties are also fundamental elements of the development of water banks. 5. Water banks provide a series of benefits as listed below. i. Water banks foster the sustainable management and efficient administration of water resources by providing economic incentives to water users. Water banks constitute a source of information by providing users with data on water use and availability in a given basin. As part of specific policy changes, water banks provide new incentives and water market structures especially in basins and regions where water has become scarce. ii. Water banks can benefit small and informal water users by explicitly transferring rights to them so that they can use water more efficiently. The emphasis on a comprehensive and sustainable use of water could increase water availability in basins by limiting overexploitation and the oversupply of water. iii. Because of the nature of the incentive structure for water access and use provided by water banks, the monopolistic behavior and abuses that characterize many water transactions are limited. Transferring water rights will reduce monopolistic behavior in water access and use, making it possible for small producers to gain access to water through water transfers when facing shortages and through aquifer recharge when facing surpluses. iv. Banks minimize the probability of inadequate use and waste of water. The transfer of rights from low value to high value uses ensures that water is used where it is more productive and where its economic value is higher. v. Water banks facilitate water purchases to store water resources for periods of shortage. Banks can purchase rights from water users, thus removing water from the market during periods of high availability or in areas where it is not being used for activities that have the highest economic value. This water can then be sold in periods of scarcity; hence, banks can control the availability of water. vi. Water banks provide transparency. The explicit recognition of rights and the integration of transparent information for water use promote equity principles in all populations groups and sectors that collectively use the resource. 104 6. The legal framework of several countries (such as Australia, Spain, the United States, Mexico and Chile) includes the establishment of water banks as a management instrument to enable the transfer of water rights and allocate water to its highest economic value. There are significant differences in the way that water banks operate in relation to the market structure, the degree of participation, tariffs and price controls, the regulatory framework, environmental objectives, and other variables, but they all share the main objective of facilitating the transfer of water from low to high value uses through transactions between buyers and sellers. Water Banks in Mexico 7. Water banks in Mexico were conceptualized as management instruments that regulate the transfer of rights in geographic regions that face issues of water availability. These instruments support the regulation of informal practices and the creation of a regulated market of water rights. They also promote the efficient allocation and reallocation of water to the most productive uses, supporting the sustainable and integrated management of water resources. They are established within a basin agency; hence, they are a function of the geographical area that defines a particular basin. 8. The National Water Law of 2004 (Article 37 bis) establishes the creation of water banks in Mexico. The normative framework that followed enactment of the law defines the main objectives of these banks: a) perform regulated transfers of rights between users; b) regulate water rights markets to support the efficient use of water resources; c) reverse the overexploitation of water; d) prevent the monopolization of the resource and excessive economic rents; and e) promote the conservation of rivers, lakes, wetlands, basins, aquifers and coastal areas of the country. 9. The main functions of water banks in Mexico are: a) provide and maintain of information on supply and demand of water rights, b) inform users of the applicable norms and regulations, c) provide advice and guidance to users, d) design and apply measures to avoid the monopolization of water rights, and e) ensure and verify that rights to be transferred are valid legal instruments. 10. As of today, two water banks have been formally established. The first one, in Cuencas Centrales del Norte, was established in December 2008, and the second one, in Lerma Santiago Pacifico, was established on June 24, 2009. 105 ANNEX 11: TAP BETWEEN CONAGUA AND THE BANK (DRAFT) Technical Assistance Program Between The National Water Commission of Mexico (CONAGUA) And The International Bank for Reconstruction and Development, International Development Association For World Bank Support for Mainstreaming Adaptation to Climate Change in the Water Sector Introduction 1. Mexico's PNH defines the water policy framework for the country. The Plan sets objectives, strategies and goals to achieve sustainable use of water, recognizing its strategic value and fostering environmental protection. Among its guiding objectives, the PNH aims at: improving water productivity in the agricultural sector, increasing access to water supply and sanitation, integrating water resources management in basins and aquifers, mitigating hydrometeorological and meteorological risks, improving wastewater treatment, providing incentives for wastewater reuse, assessing the effects of climate change on the hydrological cycle, and consolidating the participation of users and civil society in water management. 2. Mexico's Special Program for Climate Change identifies low water availability and poor water quality as two of the main problems hampering sustained growth and development. Water is a key pillar in Mexico's PECC, and it is considered one of the main issues that must be addressed under almost every climate scenario modeled. The sector is committed to the GOM's mitigation goals through reduced energy consumption resulting from savings and more efficient use (that is, through the regulation of water- saving technologies and appliances), conservation of riparian corridors (through ecological flows regulation), and watershed management (through national and local payment for environmental services). Most important, the PECC advances adaptation measures in water aimed at managing both supply and demand, improving infrastructure, and strengthening integrated water resources management in the face of climate change. 3. The government of Mexico believes that adaptation and mitigation measures to reduce vulnerability to climate change are a priority. Mexico's efforts in climate change not only position the country as a global leader, but also ensure that the country is equipped with the necessary policies, regulations, institutions, and mechanisms to mitigated and adapt to the impacts of climate change in its main economic sectors. The best adaptation measures in the water sector are those that promote integrated water resources management. Actions leading to the efficient use of water resources (for example, reduction of water losses, reuse of treated effluent, optimization of irrigation systems, protection of aquifers, and so forth) will contribute to reducing vulnerability and adapting to climate change in the water sector in Mexico. 4. CONAGUA is responsible for the implementation of the water sector policy framework described in the PNH. This is done through several federal programs in the 106 sector that are geared toward satisfying the demand for water for irrigation and drinking, as well as improving wastewater collection and treatment. These programs provide the financial incentives towards better use of the resource through improved efficiency in agricultural irrigation, increased access to water services, the improved operation of water utilities, enhanced technical and commercial efficiencies, and the improved environmental quality of the nation's rivers. 5. The commitment of the World Bank on issues related to climate change in Mexico and its support of the government's efforts in this area date back to the mid- 1990s. At present, this commitment comprises 35 initiatives (active or in the pipeline) financed by IBRD loans, GEF grants, carbon finance emission reductions purchase agreements, and other financial instruments. The Programmatic Environmental Structural Adjustment Loans (SALs) approved in 2002 and 2005 were a landmark in mainstreaming the environmental sustainability principle in sectoral policies, namely tourism, energy, forestry, and water, as prioritized by the government. These were followed by the Environmental Sustainability Development Policy Loan (ENVDPL) and its Supplemental Financing, building on Mexico's PND and expanding the objectives of the previous Environmental SALs. 6. The Bank has a long history of dialogue with and assistance to Mexico in water resources management, irrigation and drainage, and water supply and sanitation. Beginning in 1972, the Bank and United Nations Development Programme provided support for the development of Mexico's first comprehensive national water plan (published in 1975). Drafting of the modern 1992 water law was supported by the Bank and the Food and Agriculture Organization. The development of the 2004 Water Law, which builds on the previous legislation, was supported by ENVDPL II. 7. The Bank-financed Irrigation and Drainage Sector Loan and the (now closed) On- Farm Irrigation Improvement Project assisted Mexico in transferring irrigation systems to water user organizations. This resulted in operation and maintenance improvements and the increased collection of water tariffs from water users. In addition, the Integrated Irrigation Modernization Project (now closed) sought to improve the efficiency of irrigation systems and increase the value of production per unit of water consumed. The Mexico Decentralized Infrastructure Reform and Development Loan Project is a pioneering project that used country systems safeguards and includes output-based disbursements. One of the project's components deals with improving efficiency, wastewater treatment, and water resource management the state of Guanajuato. 8. The Modernization of the Water and Sanitation Sector Technical Assistance Project supports the GOM's efforts to develop the tools and instruments to support local authorities in improving the financial sustainability and efficiency of water supply and sanitation service provision. This project has enabled CONAGUA to develop new regulations that provide incentives for efficiency improvements, including transferring financial resources based on efficiency and service improvements. The project also supports the improvement of commercial and operational efficiency in a group of selected utilities. 107 9. Most recently, the government of Mexico has requested a new Development Policy Loan to support government priorities in its climate change adaptation and water sector agenda. The request underlines the GOM's interest in a continued, strong engagement with the Bank under the business model deemed most appropriate for a leading emerging market economy like Mexico's, and as defined in the Country Partnership Strategy 2008­2013. 10. To accompany this DPL and other ongoing projects, CONAGUA and the Bank agreed to sign a Technical Assistance Program that would bolster their policy dialogue and further strengthen Mexico's capacity to mainstream adaptation to climate change into the water sector. 11. This Technical Assistance Program provides for priority activities and services (described below) to be executed and/or financed by the World Bank over the period of 2010-2012. These activities are grouped into five main strategic areas: a) support CONAGUA's efforts towards the creation of on a long-term planning vision for the sector (Vision 2030), b) strengthening of the financial system in the water sector, c) water resources management and adaptation to climate change at the Basin level, d) support the National Program for the Modernization of the Meteorological Service, and e) mainstreaming adaptation to Climate Change in the water sector. a. Support CONAGUA's Efforts Towards the Creation of a Long-Term Planning Vision for the Sector ­ Vision 2030: The GOM is embarking in a new long-term vision for the future of water resources in Mexico, surpassing the confines of government administrations. The Vision has four main objectives: clean rivers, balanced river basins, universal coverage, and ensuring that populated areas are safe from flooding events. Type of Support: The Bank team will provide technical advice throughout the process of formulation Vision 2030 for CONAGUA. It will also provide additional support from international consultants on an as-needed basis. Output: Written technical inputs throughout the process. Execution: World Bank. b. Strengthening of the Financial System in the Water Sector. Financial resources are a crucial element to ensure the effective implementation of Vision 2030. The 2004 Water Law states that the creation of a financial system for the water sector is a critical element to support the integrated and sustainable management of the nation's water resources. This system has to ensure that financial sources are diversified. It must also make sure that mechanisms are implemented that promote the decentralization of financial administration functions and strengthen the financial instruments of the different regions. This exercise will include analytical work as inputs to the design and implementation of the National Financial System. The analytical work will: a) determine the financial needs of the sector; b) identify current levels of revenues and all sources of funding being channeled to the sector (ODA, federal, state and local transfers, private sector, other financing instruments); c) identify potential sources of revenue generation for the sector; d) measure the efficiencies in the use of financial instruments; e) monitor and evaluate the impact of financing, and f) propose measures to improve the 108 efficiency of financial resources and increase the funding base. Type of support: Technical assistance with Bank staff, and international and local consultants. Output: technical report. Execution: World Bank with the participation of CONAGUA and the Ministry of Finance. c. Water Resources Management and Adaptation to Climate Change at the Basin Level. The government of Mexico is devoting substantial efforts to understanding the impacts of climate change at the national level. To this end, the National Institute of Ecology, SEMARNAT, and the Center for Atmospheric Sciences of the Autonomous University of Mexico have conducted several modeling exercises. At the same time, adaptation plans are also being formulated at the state level. However, no efforts have been undertaken to understand the potential impacts of climate change at the level of the basin. Thus, the GOM has expressed interest in receiving support from the Bank in the Rio Yaki (state of Sonora) and eventually other basins in the future. This exercise will develop: a) a basin-level screening tool that will determine the level of confidence of existing (hydrological and meteorological; spatial and confidence levels) data and will provide a strategic assessment of the basins; b) an investment planning exercise that will prioritize, based on financial constraints and a cost effective framework, adaptation measures required; and c) once the package of investments has been prioritized, the proposed measures will be analyzed to identify those that maximize net benefits. Type of support: Technical assistance with Bank staff, and international and local consultants. Output: Technical reports. This support will also include the organization and implementation of a series of workshops as part of the exercise. Execution: World Bank. Participation of SEMARNAT, INE, UNAM, and CONAGUA. d. Support the National Program for the Modernization of the Meteorological Service. Climate and meteorological events have a profound incidence on the population and all economic sectors. Meteorological events affect human settlements; interrupt daily activities, and have an impact on health, natural resources and the national economy. In the water sector, hydrometeorological information provides the technical basis under which sound analysis is undertaken to properly manage water resources. This information provides the necessary data to assess the water balance of a basin and to assess extreme events such as floods and droughts. As such, proper hydrometeorological systems, data collection and analysis are a necessary condition to formulate sound policies on integrated water resources management. Climate change provides an additional challenge to meteorological data; namely, the incorporation and analysis of climate information. The GOM recently announced the National Program for the Modernization of Meteorological Services. This program, which will be implemented in the next ten years, provides a strategic framework with a series of activities that require support. In particular, the Bank could provide its support in the following areas: a) develop capacity building programs for the analysis and forecasting of climate models and b) estimate the value of the climate information generated by the service in different economic sectors, c) 109 support the creation of a National Climate Center within SMN, d) provide technical assistance to the preparation of a plan for implementing the modernization of infrastructure of SMN, e) provide technical assistance for the reparation of plan for capacity building and human resources development and training fro SMN and f) technical support to the normalization of meteorological equipment and procedures y Mexico. Type of support: Technical assistance with Bank staff, and international and local consultants. This support will include the organization and implementation of technical workshops for capacity building. Execution: World Bank. Participation of SEMARNAT, WMO, CONAGUA. e. Mainstreaming Adaptation to Climate Change in the Water Sector. Mexico has emerged as a global leader in the climate change arena and is moving quickly to address mitigation and adaptation policy frameworks to tackle the most pressing economic issues. Its growing role will be in the spotlight during the Conference of the Parties 16 (COP 16), to be held in Mexico at the end of 2010. Water resource issues have not been adequately addressed in climate change analyses and the climate change debate. At the same time, climate change problems have not been adequately dealt with in water resources analyses, management and policy formulation. The COP 16 event is CONAGUA's opportunity to present its contributions to climate change risilience and take on a national and global leadership role. The objective of this proposal is to support CONAGUA in its efforts to: a) raise the water issue in the national and global climate change agenda and b) internalize the climate change topic at the technical and management levels of the organization. The support activities are divided into two different components: Component 1: Internal Activities. The main goal of this component is to start activities that explicitly highlight and/or incorporate the climate change topic into CONAGUA programs and projects, and make the staff aware of the issue and provide them with capacity building support. For that purpose, assistance will be given to formulate guidelines for the integration of climate change actions into CONAGUA's programs and, to prepare workshops as well as informational materials. Component 2: Towards the COP 16. The goal of this component is to provide support to CONAGUA in the positioning of the water issue and the institution's relevance in COP 16. The following actions/activities are under consideration: a) formulate a document that summarizes the efforts of the institution in climate change, compiling and analyzing the actions of the existing programs of mitigation and adaptation. This document will integrate actions in the areas of water and climate change with their crosscutting topics and the different actors (GOM, CONAGUA, and SEMARNAT). These actions foster discussions with other local and international actors (governments, NGOs, professional organizations, IFIs, CODIA, etc). It will also form the basis for presenting the long-term vision of the institution on climate change and water, b) define the strategy of CONAGUA for its participation and positioning in the COP 16 and in future related meetings (Water Week in Stockholm, Water Forum, etc) through technical support in the preparation of seminars and presentations (for example Water Day, etc.), and c) prepare a position paper 110 on the relevance of water in the global adaptation to climate change agenda. Type of support: Type of support: Technical assistance with Bank staff, and international and local consultants. This support will include the organization and implementation of technical workshops. Execution: World Bank. Participation of SEMARNAT, WMO, CONAGUA, UN HABITAT, SIWI, and others to be defined in the process. Next Steps: Presentation of the draft proposal to CONAGUA, subsequent review and discussion. 111 ANNEX 12: REFERENCES Agrawal, A. 2008. 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Mexico City. 117 ANNEX 13: COUNTRY AT A GLANCE Mexico at a glance /1 4/21 0 Latin Upper Ke y D e v e lo pm e nt Indic a t o rs A merica middle M exico & Carib. inco me Age distribution, 2008 (2009) Male Female P o pulatio n, mid-year (millio ns) 107.4 565 948 75-79 Surface area (tho usand sq. km) 1,964 20,421 47,176 60-64 P o pulatio n gro wth (%) 1.0 1.1 0.8 Urban po pulatio n (% o f to tal po pulatio n) 77 79 75 45-49 30-34 GNI (A tlas metho d, US$ billio ns) 962.7 3,833 7,472 GNI per capita (A tlas metho d, US$ ) 8,960 6,780 7,878 15-19 GNI per capita (P P P , internatio nal $ ) 14,270 10,309 12,297 0-4 GDP gro wth (%) -6.5 4.4 4.7 6 4percent of total population 4 2 0 2 6 GDP per capita gro wth (%) -7.5 3.2 3.8 ( m o s t re c e nt e s t im a t e , 2 0 0 3 ­ 2 0 0 9 ) .25 P o verty headco unt ratio at $ 1 a day (P P P , %) <2 8 .. Under-5 mortality rate (per 1,000) P o verty headco unt ratio at $ 2.00 a day (P P P , %) 5 17 .. Life expectancy at birth (years) 75 73 71 60 Infant mo rtality (per 1,000 live births) 29 22 21 Child malnutritio n (% o f children under 5) 3 5 .. 50 40 5 A dult literacy, male (% o f ages 1 and o lder) 94 92 95 A dult literacy, female (% o f ages 1 and o lder) 5 91 90 93 30 Gro ss primary enro llment, male (% o f age gro up) 1 14 1 19 121 20 Gro ss primary enro llment, female (% o f age gro up) 1 11 1 15 108 10 A ccess to an impro ved water so urce (% o f po pulatio n) 95 91 94 0 A ccess to impro ved sanitatio n facilities (% o f po pulatio n) 81 78 82 1990 1995 2000 2007 Mexico Latin America & the Caribbean N e t A id F lo ws 19 8 0 19 9 0 2000 2009 a (US$ millio ns) Net ODA and o fficial aid 55 156 -56 121 Growth of GDP and GDP per capita (%) To p 3 do no rs (in 2007): United States 9 23 24 84 8 6 Germany 15 9 15 28 4 France 15 51 -11 16 2 0 A id (% o f GNI) 0.0 0.1 0.0 0.0 -2 A id per capita (US$ ) 1 2 -1 1 -4 -6 -8 Lo ng- T e rm E c o no m ic T re nds -10 95 05 Co nsumer prices (annual % change) 26.3 26.7 9.5 5.3 GDP implicit deflato r (annual % change) 33.4 28.1 12.1 4.3 GDP GDP per capita Exchange rate (annual average, lo cal per US$ ) 0.0 2.8 9.5 13.5 Terms o f trade index (2000 = 100) 194 106 100 1 03 19 8 0 ­ 9 0 19 9 0 ­ 2 0 0 0 2 0 0 0 ­ 0 9 (average annual gro wth %) P o pulatio n, mid-year (millio ns) 67.6 83.2 98.0 107.4 2.1 1.6 1.0 GDP (US$ millio ns) 194,851 262,710 581,428 874,902 1.1 3.1 2.2 (% o f GDP ) A griculture 9.0 7.8 4.2 4.3 0.8 1.5 2.0 Industry 33.6 28.4 28.0 34.8 1.1 3.8 1.3 M anufacturing 22.3 20.8 20.3 17.2 1.5 4.3 1.1 Services 57.4 63.7 67.8 62.8 1.4 2.9 2.6 Ho useho ld final co nsumptio n expenditure 65.1 69.6 67.0 67.4 1.4 2.3 3.2 General go v't final co nsumptio n expenditure 10.0 8.4 1 1 .1 1 .6 1 2.4 1.8 0.8 Gro ss capital fo rmatio n 27.2 23.1 23.9 22.4 -3.3 4.7 0.4 Expo rts o f go o ds and services 10.7 18.6 30.9 27.8 7.0 14.6 4.3 Impo rts o f go o ds and services 13.0 19.7 32.9 29.3 1.0 12.3 4.7 Gro ss savings 22.0 20.3 20.5 23.1 118 Mexico B a la nc e o f P a ym e nt s a nd T ra de 2000 2009 Governance indicators, 2000 and 2008 (US$ millio ns) To tal merchandise expo rts (fo b) 166,121 229,707 To tal merchandise impo rts (cif) 174,458 234,385 Voice and accountability Net trade in go o ds and services -10,661 -12,703 Political stability Current acco unt balance -18,743 -5,238 as a % o f GDP -3.2 -0.6 Regulatory quality Rule of law Wo rkers' remittances and co mpensatio n o f emplo yees (receipts) 7,525 26,304 Control of corruption Reserves, including go ld 35,577 99,870 0 25 50 75 100 2008 Country's percentile rank (0-100) C e nt ra l G o v e rnm e nt F ina nc e higher values imply better ratings 2000 (% o f GDP ) Current revenue (including grants) 21.4 23.8 Source: Kaufmann-Kraay-Mastruzzi, World Bank Tax revenue 10.6 9.5 Current expenditure 21.4 20.6 T e c hno lo gy a nd Inf ra s t ruc t ure 2000 2008 Overall surplus/deficit -3.4 -3.2 P aved ro ads (% o f to tal) 32.8 50.0 Highest marginal tax rate (%) Fixed line and mo bile pho ne Individual 40 28 00 subscribers (per 1 peo ple) 27 90 Co rpo rate 35 28 High techno lo gy expo rts (% o f manufactured expo rts) 22.4 17.1 E xt e rna l D e bt a nd R e s o urc e F lo ws E nv iro nm e nt (US$ millio ns) To tal debt o utstanding and disbursed 150,901 215,375 A gricultural land (% o f land area) 55 55 To tal debt service 58,509 38,643 Fo rest area (% o f land area) 33.7 33.0 Debt relief (HIP C, M DRI) ­ ­ Natio nally pro tected areas (% o f land area) .. 5.3 To tal debt (% o f GDP ) 26.0 24.6 Freshwater reso urces per capita (cu. meters) 4,090 3,885 To tal debt service (% o f expo rts) 30.4 14.2 Freshwater withdrawal (billio n cubic meters) 78.2 .. Fo reign direct investment (net inflo ws) 18,098 1 7 1 ,41 CO2 emissio ns per capita (mt) 3.9 4.1 P o rtfo lio equity (net inflo ws) 447 4,1 69 GDP per unit o f energy use (2005 P P P $ per kg o f o il equivalent) 7.9 7.7 Composition of total external debt, 2009 Energy use per capita (kg o f o il equivalent) 1,533 1,702 Short-term, IDA, 00 Other multi- IMF, 10,142 IBRD, lateral, 7,412 24,427 Bilateral, 1,689 Wo rld B a nk G ro up po rt f o lio 2000 2009 (US$ millio ns) IB RD To tal debt o utstanding and disbursed 1 1 ,444 0,1 1 42 Disbursements 1,748 4,882 Private, P rincipal repayments 1,330 654 171,705 Interest payments 892 204 US$ millions IDA To tal debt o utstanding and disbursed ­ ­ Disbursements ­ ­ P riv a t e S e c t o r D e v e lo pm e nt 2000 2 0 10 To tal debt service ­ ­ Time required to start a business (days) ­ 1 3 IFC (fiscal year) 2000 2007 Co st to start a business (% o f GNI per capita) ­ 1 1 .7 To tal disbursed and o utstanding po rtfo lio 1,234 790 Time required to register pro perty (days) ­ 74 o f which IFC o wn acco unt 723 693 Disbursements fo r IFC o wn acco unt 179 269 Ranked as a majo r co nstraint to business 2000 2008 P o rtfo lio sales, prepayments and (% o f managers surveyed who agreed) repayments fo r IFC o wn acco unt 66 384 A ntico mpetitive o r info rmal practices .. 19.0 Co rruptio n .. 17.8 M IGA Gro ss expo sure ­ ­ Sto ck market capitalizatio n (% o f GDP ) 21.5 21.3 New guarantees ­ ­ B ank capital to asset ratio (%) 9.6 14.4 No te: Figures in italics are fo r years o ther than tho se specified. 2008 data are preliminary. /1 4/21 0 .. indicates data are no t available. ­ indicates o bservatio n is no t applicable. Develo pment Eco no mics, Develo pment Data Gro up (DECDG). 119 Millennium Development Goals Mexico With selected targets to achieve b etween 1990 and 2015 (estimate clo sest to date sho wn, +/- 2 years) M e xic o G o a l 1: ha lv e t he ra t e s f o r e xt re m e po v e rt y a nd m a lnut rit io n 19 9 0 19 9 5 2000 2008 P o verty headco unt ratio at $ 1 .25 a day (P P P , % o f po pulatio n) 7.7 7.0 4.8 <2 P o verty headco unt ratio at natio nal po verty line (% o f po pulatio n) .. .. 24.2 17.6 Share o f inco me o r co nsumptio n to the po o rest qunitile (%) 3.2 4.3 3.9 4.6 P revalence o f malnutritio n (% o f children under 5) 13.9 .. 6.0 3.4 G o a l 2 : e ns ure t ha t c hildre n a re a ble t o c o m ple t e prim a ry s c ho o ling P rimary scho o l enro llment (net, %) 98 .. 97 98 P rimary co mpletio n rate (% o f relevant age gro up) 88 96 99 105 Seco ndary scho o l enro llment (gro ss, %) 55 58 72 89 Yo uth literacy rate (% o f peo ple ages 15-24) 95 96 97 98 G o a l 3 : e lim ina t e ge nde r dis pa rit y in e duc a t io n a nd e m po we r wo m e n Ratio o f girls to bo ys in primary and seco ndary educatio n (%) 97 .. 99 99 Wo men emplo yed in the no nagricultural secto r (% o f no nagricultural emplo yment) 37 36 37 39 P ro po rtio n o f seats held by wo men in natio nal parliament (%) 12 14 18 23 G o a l 4 : re duc e unde r- 5 m o rt a lit y by t wo - t hirds Under-5 mo rtality rate (per 1 ,000) 52 45 38 35 Infant mo rtality rate (per 1,000 live births) 42 36 32 29 M easles immunizatio n (pro po rtio n o f o ne-year o lds immunized, %) 75 90 96 96 G o a l 5 : re duc e m a t e rna l m o rt a lit y by t hre e - f o urt hs M aternal mo rtality ratio (mo deled estimate, per 1 00,000 live births) .. .. .. 60 B irths attended by skilled health staff (% o f to tal) .. 86 .. 93 Co ntraceptive prevalence (% o f wo men ages 1 5-49) .. 67 70 71 G o a l 6 : ha lt a nd be gin t o re v e rs e t he s pre a d o f H IV / A ID S a nd o t he r m a jo r dis e a s e s P revalence o f HIV (% o f po pulatio n ages 1 5-49) 0.2 0.3 0.3 0.3 Incidence o f tuberculo sis (per 100,000 peo ple) 61 44 32 20 Tuberculo sis cases detected under DOTS (%) .. 13 64 99 G o a l 7 : ha lv e t he pro po rt io n o f pe o ple wit ho ut s us t a ina ble a c c e s s t o ba s ic ne e ds A ccess to an impro ved water so urce (% o f po pulatio n) 88 90 93 95 A ccess to impro ved sanitatio n facilities (% o f po pulatio n) 56 66 76 81 Fo rest area (% o f to tal land area) 35.5 34.6 33.7 33.0 Natio nally pro tected areas (% o f to tal land area) .. .. .. 5.3 CO2 emissio ns (metric to ns per capita) 4.5 4.0 3.9 4.1 GDP per unit o f energy use (co nstant 2005 P P P $ per kg o f o il equivalent) 6.8 6.9 7.9 7.7 G o a l 8 : de v e lo p a glo ba l pa rt ne rs hip f o r de v e lo pm e nt 00 Telepho ne mainlines (per 1 peo ple) 6.4 9.7 12.6 19.3 00 M o bile pho ne subscribers (per 1 peo ple) 0.1 0.8 14.4 70.8 00 Internet users (per 1 peo ple) 0.0 0.1 5.2 21 .9 00 P erso nal co mputers (per 1 peo ple) 0.8 2.6 5.8 14.4 Education indicators (%) Measles immunization (% of 1-year ICT indicators (per 100 people) olds) 125 100 100 90 100 80 75 75 70 60 50 50 50 40 25 30 25 0 20 10 2000 2002 2004 2006 2008 0 0 1990 1995 2000 2007 2000 2002 2004 2006 2008 Primary net enrollment ratio Fixed + mobile subscribers Ratio of girls to boys in primary & secondary Mexico Latin America & the Caribbean education Internet users No te: Figures in italics are fo r years o ther than tho se specified. .. indicates data are no t available. /1 4/21 0 Develo pment Eco no mics, Develo pment Data Gro up (DECDG). 120