Attachment 1 Activity Design Paper.pdf

ATTACHMENT 1: ACTIVITY DESIGN PAPER

INTRODUCTION

The Southern Mexico Generating Employment and Sustainability (SURGES) activity will catalyze investment, create jobs, and increase incomes in priority value chains (e.g. coffee, cacao, eco-tourism, sustainable livestock) in southern Mexico. Above all, SURGES will use a market systems approach1 to catalyze private and public sector investments to improve competitiveness and generate employment while promoting sustainable practices. In addition, SURGES will contribute to reducing Greenhouse Gas (GHG) emissions through sustainable land use, selection of value chains, and the promotion of climate smart practices. This five-year initiative will aim to mobilize $250 million of investment and sales, among other outcomes.

ACTIVITY BACKGROUND AND PURPOSE

Mexico faces high poverty and extreme income inequality, especially in its southern states.2 Poverty worsened from 2018 to 2020 and was further exacerbated as COVID restrictions on travel and commerce took an economic toll. By the end of 2020, 44 percent of Mexico’s population was living in poverty.3 Poverty in southern Mexico is even higher. Of the eleven states with the highest poverty in Mexico in 2020, seven are in the south (see Figure 1).

Poverty is one driver (of others) for out-migration from southern Mexico. From 2000–2010, emigration ranged from 17.6 percent of the population in Oaxaca to 5.1 percent in Tabasco. As a result of this focused poverty and migration, the Government of Mexico (GOM) has prioritized economic development of its southern states. The region also hosts a large immigrant population from Central America, most of whom originally set out to cross the border into the United States.

Growth and private investment in southern Mexico lags. A high perception of risk from financial institutions precludes many in southern Mexico from accessing even small loans to start or expand small businesses, especially women and young entrepreneurs. Without sufficient capital to invest in new technologies and quality inputs, agricultural and non-agricultural productivity has stagnated and entrepreneurship opportunities remain limited.

Mexico’s business environment is unattractive for many businesses. Southern Mexico has poor connectivity between its territories and the north of Mexico, due to a rugged topography that hinders the construction of adequate roads and digital infrastructure. Southern Mexico has the highest priced and least reliable energy. Despite growing availability of finance for

1 Downing, Jeanne. “Market Systems Resilience: A Framework for Measurement.” USAID 2018. A market system is a dynamic space—incorporating resources, roles, relationships, rules and results—in which private and public actors collaborate, coordinate, and compete for the production, distribution, and consumption of goods and services.

Structurally, market systems are a part of complex interconnected and nested or hierarchical systems. On the ground, we see such interconnections among value chains (e.g., the linkages and dependencies between maize, animal feed, and dairy).

2 For the purposes of this activity, southern Mexico includes Campeche, Chiapas, Oaxaca, Quintana Roo, Yucatan, Tabasco, and Veracruz.

3 Porcentaje, número de personas y carencias promedio por indicador de pobreza, 2018 – 2020, CONEVAL.

economic investments nationwide, southern Mexico lacks bankable projects for investment.

For these reasons, and others, much of southern Mexico has been excluded from the growth experienced in Mexico’s northern and central states. Furthermore, natural assets are disappearing, and climate change is looming. Southern Mexico is rich in natural resources.

However, the accelerating rates of deforestation have a deleterious impact on its trajectory, and alarms all from indigenous communities, to commodity exporters, to the international community.4 Further, the impact of climate change has become increasingly apparent. A joint report by the Food and Agriculture Organization and the GOM showed that parts of the Yucatan Peninsula, Veracruz and Oaxaca are at risk of complete loss of production by 2099 due to climate change. 5

PURPOSE

The goal of this activity is to strengthen market systems to increase investment in sustainable productive and natural ecosystems, employment, and sales in southern Mexico.

The overarching Theory of Change (TOC) is IF producer households, business owners, and other value chain actors are able to meet market standards in terms of product quality and quantity through sustainable and climate smart practices (supply) WHILE public and private actors (processors, exporters, retailers, etc.) are willing to increase investment, incorporate new suppliers, and increasingly value and promote environmentally sustainable investments (demand), and WHILE barriers are reduced to mobilize investment in selected value chains (enabling environment), THEN employment, sales, and investments can sustainably increase while preserving the environment in southern Mexico.

By the end of SURGES, three to five value chains will have grown and will support the sustainable growth of rural southern Mexico. SURGES will have generated 200 million in sales for 30,000 households and no less than $50 million in investment that will increase the competitiveness of these value chains. No fewer than ten policies - which may be state and local - will be strengthened that will lay the foundation for continued competitiveness and growth of the value chains. Lastly, SURGES will demonstrate that increased economic growth in southern Mexico can be achieved while preserving its environment and adapting and mitigating the impacts of climate change. These changes in the market systems will live beyond the life of the activity and will have a net present value that greatly exceeds the expected five-year results.

Objective 1: Incomes increased through sustainable market systems Work under Objective 1 will focus on building partnerships with the private sector and will result in increased producer and small business knowledge of market standards. For agricultural and non-agricultural value chains, the activity will pursue the adoption of climate smart practices; foster increased productivity by increasing access to quality inputs and improved

4 According to the Forests Global Watch (2020), Mexico has the fifth highest deforestation rate in Latin America and the 10th highest in the world driven mostly by expansion for agriculture and ranching. In 2019, Mexico experienced the highest deforestation rate of the past 20 years, with Campeche leading the list of states with highest forest loss, followed by Chiapas, Quintana Roo, and Yucatan.

5 FAO-SAGARPA, (2014) Mexico: The agricultural sector before the challenge of climate change.

management of soil fertility and water resources; reduce post-harvest losses; facilitate more direct linkages to input and output markets (buyers); and enhance value perceptions of environmental and social sustainability through formative research and social behavior change communications.

Sub-Objective 1.1: Increased employment and sales in priority value chains. This sub- Objective catalyzes employment and greater competitiveness in non-agricultural value chains (e.g., eco-tourism; non-timber forest products).

Sub-Objective 1.2: Increased employment and sales through on-farm and agribusiness support in priority value chains while scaling up climate smart practices. Tied to market demand, SURGES will catalyze increased income and sales from sustainable farming activities by increasing the adoption of climate smart agricultural practices. These climate smart practices will foster increased productivity (yield), reduce post-harvest losses and improve management of soil fertility and water resources. Additionally, SURGES will facilitate increased domestic and international trade of value-added agricultural products and agricultural commodities through market analyses, improving traceability and marketing systems.

Sub-Objective 1.3: Increased value of ecosystem services and natural ecosystem integrity.

Work under this Sub-Objective aims to increase demand, particularly domestic, for sustainably produced goods and services and adoption of best practices by enhancing value perceptions of environmental and social sustainability through formative research and social behavior change communications, and increased value chain transparency.

Objective 2: Investment in sustainable productive and natural ecosystems catalyzed.

Work under this Objective aims to facilitate linkages with current and planned investment funds and credit facilities to unlock investments in sustainable value chains in southern Mexico.

Stakeholder consultations conducted by the design team indicate a potential capital imbalance with too few bankable opportunities chasing an abundant supply of investment capital and debt finance. The activity will build local capacity to develop and implement bankable projects in priority value chains, and scale green finance mechanisms to incentivize efforts to prevent deforestation and reduce greenhouse gas emissions.

Sub-Objective 2.1: Capacity to secure and implement investment improved. SURGES will use technical assistance, focusing on most limiting factors to investment and growth and on the most significant investment bottlenecks in priority value chains. SURGES will also facilitate more direct linkages to input and output markets (buyers) and catalyze increased access to debt finance and investment capital.

Sub-Objective 2.2: Green finance and investment used and scaled to support value chain competitiveness. SURGES will facilitate technical assistance to domestic and international financial institutions to identify, develop, test and scale innovative green finance mechanisms such as carbon credits and voluntary carbon market offsets, payment for environmental services, and special purpose bonds (social impact bonds, climate bonds, etc.) to incentivize reduced GHG emissions.

Objective 3: Improved policy and regulatory environment for sustainable public and private investments in productive and natural ecosystems. SURGES will promote stakeholder coordination and dialogue to promote a policy and regulatory environment that is conducive to investment and innovation. To build collective action, SURGES will facilitate multi-stakeholder dialogues between policy makers, private sector, and local communities to generate and implement a common agenda to address challenges related to entrepreneurship, opening a business, agribusiness development, and trade. To the extent possible, SURGES will leverage existing policy dialogue and information sharing mechanisms.

Sub-Objective 3.1: Enabling business environment for targeted value chains improved.

SURGES will aim to streamline policies, regulations and procedures to key to value chain growth. SURGES will form a stakeholders group of private sector, non-governmental, and governmental champions for each value chain. The group will identify the binding regulatory barriers to value chain growth. These barriers can be the informal nature of small business and access to credit, local tax policies that discourage investment, state and municipal capacity to attract domestic and foreign investment, municipal planning for eco-tourism, hotel and restaurant licensing, export bottlenecks with customs, etc. The policies and regulations to be targeted will be determined during the work planning process and will be dynamic during implementation.

Illustrative Outcomes, Indicators, and Targets With this activity, USAID/ Mexico aims to mobilize USD 250 million of sales and investment, while promoting climate smart practices.

Other illustrative outcomes and indicators include:

Illustrative Outcome Illustrative indicator Baseline End of Activity Target

Household incomes increased

% of increase in average households income increased as a result of USG assistance

EG. 3.2-2619. Value of annual sales of farms and firms receiving USG assistance

Value of investment facilitated

EG.13.8 Number of hectares under

N/A

40 percent

$200 million

$50 million

30,000 improved management

Number of beneficiaries (PS, SME’s, SHF) that report improved perception of benefits from adopting climate smart agriculture

Reduction in GHG emissions

Number of direct and indirect jobs (full time equivalents) created as a result of USG assistance

20,000

1.8 million tons of CO2 equivalent

30,000

Improved policy and regulatory environment for sustainable public and private investments in productive and natural ecosystems.

Number of laws, policies or regulations that address biodiversity conservation and/or other environmental themes or promote investment and entrepreneurship proposed as a result of multi stakeholder dialogues.

N/A 10

Greenhouse Gas (GHG) Emissions reduction The Activity will support the reduction of approximately 1.8 million tons of CO2 equivalent emissions from productive activities in approximately 30,000 hectares of sustainably managed lands, through capacity building to work collectively and increase profit margins, accessing new buyers and financing and investment.

GEOGRAPHIC, VALUE CHAIN, AND POPULATION TARGETING

This activity will be implemented in three to five states in southern Mexico. The activity will be implemented in Chiapas and Oaxaca and offerors will be able to propose additional states from the following list: Campeche, Quintana Roo, Yucatan, Tabasco, and Veracruz. Offerrors will propose additional states based on where they see the highest potential to achieve the activity’s goals including increased employment, sales, investment and environmental impact. In Chiapas and Oaxaca, the activity will collaborate closely with new USAID activities Sustainable Landscapes Ventures (SLV) and Sustainable Prosperous Communities (SPC). Examples of this collaboration could be to identify infrastructure needs and support investment mobilization, support increased access to markets, and connect their initiatives to additional sources of finance.

The specific geographic areas and targeted value chains will be selected based on the potential to generate positive impacts on employment and income generation (livelihoods); potential to mobilize sustainable increased public and private investment; ability to achieve increased productivity and value; and climate and environmental benefits.

END OF ACTIVITY DESIGN PAPER