BAA-MEX-PCM-2020 Amendment 1 Final.pdf

AMENDMENT OF SOLICITATION/MODIFICATION OF CONTRACT

1. CONTRACT ID CODE PAGE OF PAGES

1 7

2. AMENDMENT/MODIFICATION NO.

3. EFFECTIVE DATE

03/25/2020

4. REQUISITION/PURCHASE REQ. NO

N/A

5. PROJECT NO. (If applicable)

6. ISSUED BY CODE 720520 7. ADMINISTERED BY (IF OTHER THAN ITEM 6) CODE N/A

USAID MEXICO

ACQUISITION AND ASSISTANCE OFFICE (OAA)

Paseo de la Reforma 305, Cuauhtémoc, Mexico City, Mexico 06500

Not Applicable

8. NAME AND ADDRESS OF CONTRACTOR (No., Street, County, State, and Zip Code)

N/A

X

9A. AMENDMENT OF SOLICITATION NO.

BAA-MEX-PCM-2020

9B. DATED (SEE ITEM 11)

10A. MODIFICATION OF CONTRACT/ORDER NO.

CODE:

FACILITY CODE:

10B. DATED (SEE ITEM 13)

11. THIS ITEM ONLY APPLIES TO AMENDMENTS OF SOLICITATIONS

X The above numbered, solicitation is amended as set forth in item 14. The hour and date specified for receipt of Offers: X is extended is not extended.

Offers must acknowledge receipt of this amendment prior to the hour and date specified in the solicitation or as amended by one of the following methods:

(a) By completing Items 8 and 15, and returning copies of the amendment; (b) By acknowledging receipt of this amendment on each copy of the offer submitted; or (c) By separate letter or telegram which includes a reference to the solicitation and amendment numbers, FAILURE OF YOUR ACKNOWLEDGMENT TO BE RECEIVED AT THE PLACE DESIGNATED FOR THE RECEIPT OF OFFERS PRIOR TO THE HOUR AND DATE SPECIFIED MAY

RESULT IN REJECTION OF YOUR OFFER. If by virtue of this amendment you desire to change an offer already submitted, such change may be made by telegram or letter, provided each telegram or letter makes reference to the solicitation and this amendment, and is received prior to the opening hour and date specified.

12. ACCOUNTING AND APPROPRIATION DATA (If Required)

13. THIS ITEM APPLIES ONLY TO MODIFICATIONS OF CONTRACTS/ORDERS,

IT MODIFIES THE CONTRACT/ORDER NO., AS DESCRIBED IN ITEM 14

A. THIS CHANGE ORDER IS ISSUED PURSUANT TO: (Specify Authority) THE CHANGES SET FORTH IN ITEM 14 ARE MADE IN THE CONTRACT

ORDER NO. IN ITEM 10A.

B. THE ABOVE NUMBERED CONTRACT/ORDER IS MODIFIED TO REFLECT THE ADMINISTRATIVE CHANGES (such as changes in paying office, appropriation date, etc.) SET FORTH IN ITEM 14, PURSUANT TO THE AUTHORITY OF FAR 43,103 (b).

C. THIS SUPPLEMENTAL AGREEMENT IS ENTERED INTO PURSUANT TO AUTHORITY OF:

D. OTHER (Specify type of modification and authority)

E. IMPORTANT: Contractor is NOT is required to sign this document and return copy to the issuing office.

14. DESCRIPTION OF AMENDMENT/MODIFICATION (Organized by UCF section headings, including solicitation/contract subject matter where feasible.

This Amendment No. 1 is hereby issued to (1) Extend the due date for submission of EOI from “18:00 hours Mexico City

Time on March 27, 2020” to “18:00 hours Mexico City Time on March 31, 2020”, (2) Update the “in person Workshop” to read “virtual co-creation workshop” and dates “April 28-29” to “late April” throughout the document and (3) Insert

Attachment 1 called “Financing Sustainable Landscapes through Small Producers in Mexico” at the end of the document.

Therefore, the Broad Agency Announcement is being deleted in its entirety and replaced as follows:

- See next page for details --

15A. NAME AND TITLE OF SIGNER 16A. NAME AND TITLE OF CONTRACTING OFFICER

Jennifer L. Crow-Yang

15B. CONTRACTOR/OFFEROR

(Signature of person authorized to sign)

15C. DATE

SIGNED

16B. UNITED STATES OF AMERICA

(Signature of Contracting Officer)

16C. DATE

SIGNED

NSN 7540-01-152-8070 STANDARD FORM 30 (REV. 10-83)

Previous Edition Unusable Prescribed by GSA FAR (48 CFR) 53.2

Amendment 1 Continued

USAID Call for Expressions of Interest in Support of Blended Finance Approaches to Promote Sustainable Landscapes and Reduce Deforestation in Mexico

Process and Deadlines

Through this Call for Expressions of Interest (EOI), USAID/Mexico seeks partners to research, develop, test and evaluate innovative approaches to increase access to finance and catalyze investments to reduce deforestation and forest degradation in Mexico by improving land management practices and reducing the drivers of land-use change.

I. Submission of Questions: Questions must be submitted no later than 18h00 (6:00 p.m.) Mexico City Time on March 6, 2020 via email to SAM@USAID.gov.

II. Submission of EOIs: EOIs must be submitted no later than 18h00 (6:00 p.m.) Mexico

City Time on March 31, 2020 via email to SAM@USAID.gov. The subject line of the email should be your organization name, followed by “Submission under BAA-

MEX-PCM-2020” Please limit file submissions to 10 megabytes or less.

Introduction

Blended finance is the strategic use of development funds, such as those from government aid and philanthropic sources, to mobilize private capital for social and environment results, such as improving infrastructure, education, agriculture, healthcare, and more. Blended finance strategies are designed to encourage members of the private sector, such as companies and investors, to invest in activities and projects that can achieve both financial returns and positive social and environmental outcomes. Through this Addendum to the Broad Agency

Announcement (BAA- MEX-PCM-2020), USAID/Mexico seeks partners to research, develop, test and evaluate innovative approaches to increase access to finance and catalyze investments to reduce deforestation and forest degradation in Mexico by improving land management practices and reducing the drivers of land-use change, especially in the States of Campeche, Chiapas, Jalisco, Oaxaca, and Quintana Roo. While multiple factors help to improve land use and management practices, this initiative will focus on employing blended finance approaches that enable small producers (both men and women), ejidos, and communities to apply socio-economically sustainable land use practices, resulting in reduced deforestation and forest degradation.

Through its sustainable landscapes (SL) programs, USAID partners with countries to achieve their sustainable natural resources management goals, which typically include protecting forests, mangroves, and peatlands, improving management of forests and grazing lands, and restoring ecosystems. In addition, these programs aim to help governments, civil society, and the private sector become more self-reliant by increasing land productivity while avoiding expansion into lands that provide valuable ecosystem services; strengthening resilience to natural hazards; creating new economic opportunities; protecting water and land resources;

among other benefits.

Through its SL programming and this Expression of Interest (EOI), USAID/Mexico aims to co- create innovative research and development-based solutions that employ a blended finance approach to positively influence the socio-economic development and well-being of rural mailto:SAM@USAID.gov mailto:SAM@USAID.gov mailto:SAM@USAID.gov communities, while simultaneously protecting productive forests and soils rich in organic matter. In particular, USAID seeks to promote new forms of collaboration with the investment and business community to catalyze investment in high-impact areas important to USAID such as sustainable agriculture1, forestry and other land uses, and the environment. Among other possible solutions, this could include innovative ways to strengthen value chains that protect rather than degrade natural resources or involve poor labor practices; improve market linkages for deforestation-free products; influence consumer preferences for sustainably produced goods; increase processing capabilities to add value; or promote access to finance.

Background

Mexico’s natural landscapes are increasingly coming under pressure. In the past three years, the country has lost an average of over 250,000 hectares of forest cover annually, driven in part by conversion to commercial agriculture and extensive livestock production. The environmental consequences of this loss may harm the country’s short- and long-term social, cultural and economic well-being.

Financing for smallholder farmers, small and medium enterprises (SMEs), and community and forestry enterprises (CFEs)—herein referred to as “small producers”—is critical to reversing this trend. Small producers manage the majority of Mexico’s natural resources and therefore play a critical role in sustainable land management. These activities include the management and protection of forests, reforestation and afforestation, and sustainable agricultural and livestock practices. However, scaling these activities requires (1) financing for agricultural inputs, productive assets, labor, initial opportunity costs to change production practices, (2) technical assistance, and (3) increasing market demand for “sustainably-produced” products.

Preliminary findings from an analysis2 commissioned by USAID/Mexico identified four key barriers to financing sustainable landscapes in Mexico: (1) lack of capacity and experience of small producers to access investments; (2) weak market conditions in the agriculture, forestry and other land use (AFOLU) sector; (3) lack of financing options suitable to small producers; and (4) insufficient support to drive change. Specific barriers identified that impact small producers include:

Demand-side

• Limited economic incentives to invest in sustainable land activities (such as livestock production that integrates forests and pastoral lands) because the market does not pay higher prices for related products.

• Limited demand for credit to support sustainable land management activities given government support to the AFOLU sector, previous negative experiences with the financial sector, high interest rates, and general aversion to credit risks.

• A lack of technical, financial, management and organizational capacities to attract financing.

For the purpose of this BAA, “sustainable agriculture” is defined as an integrated system of plant and animal production practices that will over the long term: (i) enhance environmental quality and the natural resource base, for example by building soil organic matter, supporting diverse pollinator communities, strictly limiting use of synthetic pesticides and herbicides, and reducing losses of nitrogen and phosphorous to surface water and groundwater; (ii) make the most efficient use of on-farm resources and integrate natural biological cycles and controls; and (iii) sustain the economic viability of farm operations.

The full analysis will be completed in March 2020.

Supply-side

• Producers are not currently incentivized to seek other financing options.

• Many financial institutions and investors do not finance sustainable production given small transaction size and risk.

• Financial products that exist have low penetration in rural areas and/or are not adapted to the needs of producers implementing sustainable land activities (e.g., longer time horizon to see profits in forestry, different growing seasons).

Enabling environment

• Limited support services to help mobilize and deploy financing to sustainable land use management activities, including a lack of professional talent

(financial advisors, accountants, lawyers) to support small producers.

• Limited (or non-existent) long-term technical assistance to simultaneously help producers change their production practices while strengthening their financial and business management skills, or “incubation” programs tailored to the unique needs of rural producers who want to understand and employ more sustainable business activities.

• Weak monitoring and certification systems that recognize and value sustainable production, especially for beef.

• Need for additional policies and incentives to promote sustainable production and/or prevent overproduction writ large.

• Limited demand for sustainably-produced products.

While some barriers are cross-cutting, many manifest differently across value chains, regions, and genders. Women face greater barriers than men in accessing finance to transition to sustainable practices; in many cases, women are less likely to be ejiditarias, and therefore have less ability to make decisions about land use or financing. However, some ejidos do have more equal participation of women in terms of land ownership, participation in programs, and decision-making responsibilities, and represent an opportunity for learning and replication.

Over the past decade, the Government of Mexico, bilateral donors, development finance institutions, and other actors have supported a range of programming for sustainable landscapes, primarily through grants and subsidies, with some loans and credit. Some programs have achieved important results in terms of coordination and demonstration of viable smallholder financing models. Nevertheless, there is a need to increase the sustainability and scale of promising programs. Many programs have limited scale and lack market-based models or “exit” strategies to mobilize follow-on investment from the private sector. Some public programs are ending and the budgets of key government agencies have decreased. Achieving transformative and systemic change requires a multi-stakeholder approach that links financing, technical assistance, market access and public policy; builds trust with actors across productive value chains; increases demand for sustainable products;

and incentivizes investment in sustainable land use.

Solutions Sought

Through this Call for Expressions of Interest (EOIs) and subsequent co-creation process, USAID/Mexico seeks to identify partners who can successfully research, develop, test and evaluate innovative approaches to increase access to finance and catalyze investments to reduce deforestation and forest degradation in Mexico by improving land management practices and reducing the drivers of land-use change. The innovative solutions USAID seeks should focus on how to catalyze investment in smallholder farmers, small and medium enterprises (SME), community and forestry enterprises (CFE), ejidos, and communities.

In employing a blended finance approach, USAID hopes to achieve the following objectives:

1. Mobilize private capital to finance activities that reduce deforestation and improve land management practices.

2. Enable smallholder farmers, small and medium enterprises (SME), community and forestry enterprises (CFE), ejidos, and communities to adopt economically-viable and sustainable land use practices.

3. Develop systemic approaches that can have a transformational impact on deforestation and sustainable land use in Mexico.

This co-creation process should build on the momentum of “green financing”3 as a platform for impact investors and the broader public and private financial sectors’ participation in blended finance approaches. USAID seeks creative approaches and new partners, and looks to organizations submitting EOIs to bring new thinking and genuine interest in collectively designing solutions that will leverage USAID resources to advance the key development objectives above.

Who May Apply

EOIs may come from organizations in the natural resources management and financial sectors, including technical assistance providers, civil society and non-governmental organizations, investors, asset managers, intermediaries, businesses buying and selling sustainably-sourced products, community forest and smallholder producer organizations, academia, thought leaders, and other entities that have experience and capabilities in line with the objectives of this solicitation. Applicants should be willing to meaningfully discuss challenges and to collectively construct potential market-based solutions to reduce deforestation and promote sustainable landscapes, taking into account challenges and opportunities that include access to finance, market failures or distortions, capacity to implement sustainable agriculture, livestock and forestry practices, policy and regulatory barriers, and consumer demand, among others.

EOI applicants selected to advance in the co-creation process should be available to participate in a co-creation workshop to take place virtually in late April.

Green finance increases the levels of financial flows (from banking, micro-credit, insurance and investment) from the public, private and not-for-profit sectors to sustainable development priorities. A key part of this is to better manage environmental and social risks, take up opportunities that bring both a decent rate of return and environmental benefit and deliver greater accountability. https://www.unenvironment.org/regions/asia-and-pacific/regional-initiatives/supporting-resource- efficiency/green-financing https://www.unenvironment.org/regions/asia-and-pacific/regional-initiatives/supporting-resource-efficiency/green-financing https://www.unenvironment.org/regions/asia-and-pacific/regional-initiatives/supporting-resource-efficiency/green-financing https://www.unenvironment.org/regions/asia-and-pacific/regional-initiatives/supporting-resource-efficiency/green-financing

Expressions of Interest Submission Guidelines

EOIs should illustrate the submitting organization’s (and/or consortium’s) interest, capabilities, and experience in sustainable land management, green finance, blended finance, community forestry, enhancing economic opportunities and capacity building with smallholder farmers, land use policy, and/or other areas relevant to the objectives and challenges outlined in this solicitation. Previous experience with USAID is not required.

EOIs must be submitted no later than 18h00 (6:00 p.m.) Central Standard Time on March

31, 2020. Submissions should:

• Be in English or Spanish.

• Be no more than three (3) pages in length, with text no smaller than 12 point font with 1-inch margins.

• Be submitted electronically to the following e-mail address: SAM@USAID.gov

• Include a cover page (not counted against page limit) with the following information: Respondent Name/Group; Contact Information; and Response

Title.

• Include two submission attachments in email, one in .doc and one in .pdf format.

In your EOI, please describe your ideas of how to support sustainable landscapes and reduced deforestation in Mexico, with a focus on innovative approaches to increasing access to finance and catalyzing investments to smallholders, communities and/or ejidos in, including:

• Background of your organization (and/or consortium members).

• Experience relevant to the objectives, context, and challenges outlined in this solicitation.

• If applicable, results achieved through implementing creative or innovative approaches to novel problems through other activities/initiatives carried out by your organization. Examples relevant to the general topical area of this call for EOIs would be particular informative for USAID, including, but not limited, to activities related to mobilization or leveraging of capital from diverse sources; work with smallholder farmers or similarly situated groups, and work related to preservation or reforestation efforts.

• Your organization’s (or consortium’s) principal target population and/or stakeholders.

• Preliminary ideas on how private sector investment can be mobilized to work with small producers, communities and/or ejidos in support of sustainable landscapes and reduced deforestation in Mexico.

• Resources you and/or your consortium could bring to a USAID partnership (capital, products or services, existing programs, etc.)

EOI Selection Criteria

The following criteria will be applied to all Expressions of Interest. Submissions are not evaluated against other submissions, but solely against the evaluation criteria outlined below:

1. Idea(s) for partnering with USAID: Creative, informed, and realistic thinking based on experience with green finance, blended finance, and market-driven solutions that engage the financial sector, government, private enterprise, small holders, ejidos and community forest enterprises to increase access to finance and catalyze investment for sustainable landscapes.

2. Impact: Potentially transformative ideas that have a high potential to significantly increase private capital for sustainable land use that results in reduced deforestation and more sustainable landscapes in Mexico in a way that also benefits small holders, ejidos and communities, among others.

3. Qualifications and Experience: Strengths of your organization (or consortium) as a USAID partner, including the ability to make a unique contribution to achieving the goals of this activity; willingness to collaborate with other stakeholders; and contribution to strategic solutions.

4. Diversity of Perspectives and Capabilities: Brings together a diverse set of participants from the natural resources and investment sectors, as well as resources that can contribute to reaching the objectives.

EOI Selection and Co-Creation Process

USAID will review and select Expressions of Interest in accordance with the criteria set forth in this solicitation. USAID reserves the right not to review any EOIs that do not meet the criteria or submission guidelines. Please note that due to the expected number of EOIs, USAID is unable to provide feedback on those EOIs that are not selected to move forward.

Organizations selected to move forward will continue on to the following stages of the co- creation process:

Stage 1: Selected groups will be invited to join a virtual co-creation workshop in late April

2020. USAID and participants will gather to collaboratively build on initial ideas and collectively begin to develop concept papers that will achieve the objectives of this solicitation. Up to two experienced technical experts from submitting organizations must be available to participate in the virtual workshop.

Please note that costs associated with participating in the virtual co-creation workshop, including labor, will not be paid for by USAID.

Stage 2: Organizations invited to participate in the virtual co-creation workshop are eligible to take the lead in developing a concept paper after the workshop. Organizations are also free to join the coalitions of other invitees as partners. Third parties, i.e., those not invited to co-creation, may also be invited to join coalitions as partners. The concept paper should outline a programmatic plan, management plan, focus areas, goals, timeline, the different roles of consortium members, and draft budget, as applicable.

Concept papers will be due in late May 2020 and will be reviewed by USAID for final selection. Concept papers may be further refined and/or co-designed with USAID before final selection and award. More information on this stage, including concept paper submission guidelines, will be provided at the end of the virtual co-creation workshop only to those organizations whose concepts are selected.

Stage 3: A Peer and Scientific Review Board will review concept papers and identify those that are in line with the objectives and criteria laid out in the BAA Addendum. Those concept papers that are successful following the review process will be recommended for a research and development-based award that will further test and develop the concepts defined during the co-creation phase. This may involve additional in-person or virtual co-creation with selected parties.

USAID is not obligated to issue a financial instrument or award as a result of this

Addendum.

The reputation of an organization (or consortium), its past performance, the managerial and technical ability of the proposed team are always significant considerations in assessing the potential and risks associated with each award. USAID reserves the right to check the past performance, references, and other pertinent offeror information in making award decisions. Additionally, the organization selected for funding will need to confirm eligibility based on USAID rules and regulations, including the submission and acceptance of a Non-U.S. Organization Pre-Award Survey (NUPAS). Should the selected proposal not qualify for award, USAID may consider other technically feasible proposals.

Protection of Information

USAID’s goal is to facilitate research and development that will lead to innovative, and potentially commercially viable solutions. Understanding the sensitive nature of submitters’ information, USAID will work with organizations to protect intellectual property.

Expressions of Interest should be free of any intellectual property that applicants wish to protect, as EOIs may be shared with USAID partners as part of the selection process.

However, once applicants have been invited to engage in further co-creation discussions, USAID will work with each to identify proprietary information that requires protection.

By submitting an EOI to this request, applicants agree to grant to USAID a royalty-free, non-exclusive, and irrevocable right to use, disclose, reproduce, and prepare derivative works, and to have or permit others to do so to any information contained in the EOI. If USAID engages with an organization regarding its submission, the parties can negotiate further intellectual property protection.

Organizations are responsible for ensuring that any submission under this solicitation is free of any third-party proprietary data rights that would impact the license granted to USAID herein.

USAID is not obligated to issue a financial instrument or award as a result of this solicitation. Approved EOIs and subsequent proposals may potentially lead to an award or other instrument, as appropriate, to be determined by USAID.

Attachment 1

Financing Sustainable Landscape through Small Producers in Mexico

FINANCING SUSTAINABLE

LANDSCAPES THROUGH SMALL

PRODUCERS IN MEXICO

Analysis of barriers and opportunities

This document was produced for review by the United States Agency for International Development. It was prepared by Environmental Incentives for the LAC Environment Services Support Contract.

CURT CARNEMARK / WORLD BANK

Acknowledgements This report is made possible by the support of the American People through the United States Agency for

International Development (USAID). The contents of this report are the sole responsibility of

Environmental Incentives, LLC, and do not necessarily reflect the views of USAID or the United States

Government.

The U.S. Agency for International Development leads the U.S. Government's international development and disaster assistance through partnerships and investments that save lives, reduce poverty, strengthen democratic governance, and help people emerge from humanitarian crises and progress beyond assistance.

Environmental Incentives (EI) believes healthy environments are the foundation of resilient communities.

Working with international partners and governments, EI takes a performance-driven approach to maximize investments in the environment and unlock new opportunities to improve outcomes for both people and nature.

Dalberg is a global group working to build a more inclusive and sustainable world where all people everywhere can reach their fullest potential. Dalberg partners with and serves communities, governments, philanthropic institutions, and companies throughout the world, providing an innovative mix of advisory, investment, research, analytics, and design services. A Dalberg team from the Mexico City office supported the development of this report.

We would like to thank the many producers, associations, financial institutions and intermediaries, companies, non-governmental organizations (NGOs), donors, and other experts who helped create this report. These individuals are listed in Annex E. Given the limited timeframe of the study, we recognize we were not able to speak with everyone working on sustainable landscapes in Mexico. Going forward, we look forward to hearing additional perspectives from other partners.

CONTENTS

ACRONYMS I

METHODOLOGY II

EXECUTIVE SUMMARY II

SECTION 1: SUSTAINABLE LANDSCAPES IN MEXICO 6

LAND MANAGEMENT TODAY 6

THE ROLE OF SMALL PRODUCERS 7

THE NEED FOR FINANCING 8

SECTION 2: FINANCING GAPS AND BARRIERS 11

DEMAND-SIDE BARRIERS 11

SUPPLY-SIDE BARRIERS 13

ECOSYSTEM BARRIERS 14

SEGMENT-SPECIFIC BARRIERS 16

LESSONS FROM PAST EFFORTS 17

SECTION 3: RECOMMENDATIONS AND NEXT STEPS 19

GUIDING PRINCIPLES 19

DEMAND-SIDE RECOMMENDATIONS 20

SUPPLY-SIDE RECOMMENDATIONS 23

ECOSYSTEM RECOMMENDATIONS 26

THE PATH FORWARD 29

ANNEXES 31

ANNEX A: AFOLU REGIONAL ANALYSIS 31

ANNEX B: FINANCIAL INSTRUMENTS TO SUPPORT SUSTAINABLE LANDSCAPES 33

ANNEX C: FINANCING GAPS AND BARRIERS 37

ANNEX D: RECOMMENDATIONS AND NEXT STEPS 41

ANNEX E: STAKEHOLDERS INTERVIEWED 43

i | FINANCING SUSTAINABLE LANDSCAPES THROUGH SMALL PRODUCERS IN MEXICO USAID.GOV

Acronyms

AFD Agence Française de Développement

AFOLU Agriculture, Forestry, and Other Land Use

AMUCSS Asociación Mexicana de Uniones de Crédito del Sector Social

CEPCO Coordinadora Estatal de Productores de Café de Oaxaca

CFE Community Forest Enterprises

CO2 Carbon dioxide

CONABIO Comisión Nacional para el Conocimiento y Uso de la Biodiversidad

CONAFOR Comisión Nacional Forestal

CONANP Comisión Nacional de Áreas Naturales Protegidas

CSR Corporate Social Responsibility

DFI Development Finance Institution

EI Environmental Incentives

FEGA Fondo Especial de Asistencia Técnica y Garantía para Créditos

Agropecuarios

FINAGRO Financiera Nacional Agropecuaria

FINDECA Financiando el Desarrollo del Campo

FIP Forest Investment Program

FIRA Fideicomisos Instituidos en Relación con la Agricultura

FMCN Fondo Mexicano para la Conservación de la Naturaleza

FND Financiera Nacional de Desarrollo

FOMIN Fondo Multilateral de Inversiones

FSC Forest Stewardship Council

GHG Greenhouse Gas Emissions

GIZ Gesellschaft für Internationale Zusammenarbeit

IDB Inter-American Development Bank

IDH Sustainable Trade Initiative

IFAD International Fund for Agricultural Development

IKI International Climate Initiative

MSME Micro, Small, and Medium-sized Enterprise

NGO Non-governmental Organization

PES Payment for Ecosystem Services

PROGAN Programa Producción pecuaria sustentable y ordenamiento ganadero y apícola

SADER Secretariat of Agriculture and Rural Development

SEMARNAT Secretariat of Environment and Natural Resources

SME Small and Medium-sized Enterprise

USAID United States Agency for International Development ii | FINANCING SUSTAINABLE LANDSCAPES THROUGH SMALL PRODUCERS IN MEXICO USAID.GOV

Methodology This study aimed to identify barriers to financing sustainable landscapes through small producers in

Mexico and to propose recommendations to overcome these barriers. This included three sub-objectives: (i) understand past, present, and planned financial instruments and initiatives focused on sustainable land activities in Mexico, (ii) identify the barriers to financing for sustainable land activities that small producers face, and (iii) develop recommendations to overcome these barriers. While financing was the primary focus, the study took into account other conditions (e.g., market access, public policy) that underpin sustainable land activities. The study also aimed to understand barriers and develop recommendations at the landscape level—looking across a matrix of productive systems—rather than focusing too narrowly on one value chain. This systems-based, landscape approach is critical to understanding the complex dynamics that drive land use change and how to change them.

The study focused on small producers within three regions: Selva Maya in the Yucatán Peninsula, Selva Lacandona in Chiapas, and La Mascota in Jalisco. These three areas were selected given their large contribution to Mexico’s natural capital and the predominance of small producers in the agriculture, forestry, and other land use (AFOLU) sector. Geospatial analysis has shown that these areas are particularly important given their deforestation rates, greenhouse gas (GHG) capture and emissions, and national biodiversity conservation priorities. Within these regions, the study focused on small producers working in three areas within the AFOLU sector: (i) forestry, (ii) livestock, and (iii) agroforestry. These priority segments were selected based on their potential to help reduce net GHG emissions in the focus regions, within a broader approach to landscape management.

USAID, Environmental Incentives, and Dalberg conducted this study throughout January and

February of 2020. This included several analytical pieces of work:

• Desk review of 60+ past, present, and planned financial instruments and initiatives focused on sustainable land activities in Mexico

• 50+ interviews with producers, financial institutions and intermediaries, private sector companies, civil society and NGOs, funders, donors, and government (please see full list in Annex E)

• Field research in Selva Maya and Selva Lacandona

• Presentation and discussion of preliminary findings at the Foro Latinoamericano de Inversión de

Impacto (FLII) in Mérida, Yucatán (February 18-20, 2020)

The study proactively took into account the gendered dimensions of financing for sustainable landscapes in Mexico. This gender lens was applied through:

• The understanding of the context. This study used sex-disaggregated analysis and data (where available) to understand participation in sustainable land activities and access to financing.

• The analytical approach and methodologies. The study analyzed the extent to which relevant financial instruments and initiatives have (i) reached small producers across genders (i.e., men and women), and

(ii) tailored their approaches accordingly. The interview program aimed to balance perspectives across genders: nearly 40% of interviewees were women, although fewer were at the producer level given men disproportionately oversee production activities in the focus regions. Each interview included questions to explore how and why gender gaps exist and persist.

• The design and delivery of recommendations. Lastly, the recommendations considered the needs and realities of people across genders and put a primacy on enabling the agency of women, men, and youth.

To do so, the study considered opportunities broader than production.

Overall, the study aims to catalyze financing to support sustainable landscapes in Mexico. The findings are a starting point for further discussion, refinement, and collaboration across partners.

Executive summary Mexico’s natural landscapes are disappearing. In the past three years, Mexico has lost an average of iii | FINANCING SUSTAINABLE LANDSCAPES THROUGH SMALL PRODUCERS IN MEXICO USAID.GOV over 280,000 hectares of forest cover—an area larger than Mexico City—each year, driven in part by agricultural expansion and extensive livestock production. This loss has environmental consequences that also harm social and economic well-being, including: an increase in greenhouse gas emissions (GHG), the loss of water regulation, and the loss of economic opportunities for communities and companies alike.

Reversing this trend requires working with small producers who manage a large share of these natural landscapes. For example, 61% of forests fall under communal land ownership arrangements (e.g., ejidos). As a result, smallholder farmers; micro, small, and medium-sized enterprises (MSME); and community and forestry enterprises (CFE)—herein referred to as “small producers”—play a critical role in implementing sustainable land activities. These activities include the management and protection of forests, afforestation and reforestation, and more sustainable agricultural and livestock practices. Today, men disproportionately oversee these activities.

For small producers, transitioning to and scaling sustainable land activities requires a range of conditions. For example, small producers need training and consistent support to transition from extensive livestock farming to a silvopastoral system. They also need access to markets that recognize and value sustainable products and environmental services—which are growing but still nascent. Further, in Mexico specifically, there is a need for strong social structures and cohesion to coordinate and change productive activities within ejidos and communities. Enabling public policies and coordination of actors is equally important. These conditions must come together to drive sustainable change; each condition alone is necessary but not sufficient.

Financing plays a particularly critical role in altering the economic incentives that drive land use change. Small producers need upfront and ongoing resources to manage their land sustainably. Without financing, producers cannot realize revenues from sustainable land activities. Without revenues, natural landscapes are under-valued. And without value, there is a strong economic incentive to convert land to more productive uses (e.g., agriculture and extensive livestock). Given these market failures and gaps, protecting natural landscapes requires market-based solutions to catalyze investment.

Yet many barriers impede financing today: small producers not only face barriers to access any type of financing, but also additional hurdles specific to financing for sustainable land activities. Specific barriers include:

● Demand-side: First, producers perceive few economic incentives to invest in sustainable land activities

(e.g., sustainable forestry, silvopastoral livestock production) given lack of near-term benefits.

Specifically, cost savings take several years to realize, and markets give limited preference and/or premium to sustainable products. Second, there is little demand for credit to support sustainable land activities given the reliance on government agriculture and forestry subsidies, previous bad experiences with the financial sector (e.g., confiscation of sawmills from ejidos due to default), and cultural aversion to the risk of credit. Third, even when appetite for financing exists, producers often lack the requisite technical, financial, management, and organizational capacities. This includes a lack of strong social structures and cohesion—or social capital—to coordinate, change, and scale productive activities within ejidos and communities. Moreover, there is a limited support system (e.g., “incubators” and company development programs) tailored to the unique needs of rural producers who want to implement more sustainable business activities.

● Supply-side: The dominance of subsidies distorts the market by discouraging producers from seeking other financing options. Outside of subsidies, many financial institutions and investors do not finance sustainable production given the small transaction size, risk (perceived or real), and longer time horizons to realize returns. Moreover, financial products that exist have low penetration in rural areas

(e.g., commercial banks are over three hours away from some rural areas) and/or are not adapted to the needs of producers implementing sustainable land activities (e.g., longer time horizon to see profits in forestry, different growing seasons and rotations in agroforestry). And perhaps most importantly, even iv | FINANCING SUSTAINABLE LANDSCAPES THROUGH SMALL PRODUCERS IN MEXICO USAID.GOV perfectly designed financial products cannot succeed in isolation. Producers need support to develop

“investable” businesses and projects, and access to markets is critical.

● Ecosystem: There are gaps in the enabling conditions needed to mobilize and deploy financing for sustainable land activities. This includes low access to inclusive markets, gaps in public policies, lack of incentives that promote sustainable production over production in general; and weak data and information systems needed to identify, monitor, and quantify sustainable land activities and their impacts. Lastly, coordination between actors working on sustainable landscapes is insufficient, which has resulted in duplication of efforts and failure to mobilize follow-on investment (e.g., from the private sector).

These barriers are common across many small producers but manifest themselves differently across value chains, regions, and genders. Across value chains, there are differing levels of producer capabilities, government support, and access to inclusive markets. For example, sustainable cocoa producers are able to organize and sell their output at a premium, whereas sustainable wood and cattle (i.e., with Forestry

Stewardship Council certification or using silvopastoral systems, respectively) receive a standard price.

Across regions, there are differences in terms of strength of local governance and coordination and presence of financial intermediaries working with rural producers. Across genders, women face additional barriers to accessing finance to transition to sustainable practices. Specifically, women are less likely to be

“ejidatarias” with land titles, less involved in production activities, and under-represented in communal leadership structures. Youth also have fewer assets, given that many ejido rights belong to older generations. Overall, these nuances highlight the importance of tailored interventions.

While past and ongoing efforts have identified promising models to address these barriers, there is a need for increased scale and sustainability. The government of Mexico, development funders, and development finance institutions (DFIs) have supported a range of financing initiatives that primarily use grants and subsidies, with some loans and credit. These programs have achieved important results in terms of coordination (e.g., via Reducing Emissions from Deforestation and Forest Degradation, REDD+) and demonstrating viable models. These models include extending credit to small producers (e.g., EmFoCo y

Desarrollo, Forest Investment Program, Proinfor); local micro-finance schemes (e.g., Asociación Mexicana de Uniones de Crédito del Sector Social); and end-to-end intermediaries supporting capacity building, aggregation, market access, and fundraising (e.g., Ejido Verde).1 Over the next decade, it is critical to build on these models while simultaneously increasing sustainability and scale.

Looking forward, improving financing for sustainable landscapes requires holistic action. This includes demand-side, supply-side, and ecosystem-level interventions. Different recommendations will be relevant for different small producers—based on value chain, region, gender, and in particular, their level of business maturity. Therefore, recommendations will require further tailoring at the regional and local levels. The key recommendations include:

● Demand-side: Improve the “investability” of sustainable land activities by increasing small producers’ demand for, access to, and ability to manage appropriate financing—beyond grants and subsidies. To date, a large share of financing has gone to a minority of producers with mature production and business capacities. Therefore, increasing support for more small producers is critical in order to mobilize and deploy financing at scale. Key recommendations include (i) improving and scaling end-to-end support for small producers and (ii) investing in project development to build a stronger pipeline of investable opportunities.

● Supply-side: Increase the availability and reach of appropriate, tailored financial products that help small producers invest in sustainable land activities. Financing needs to be more commercial

(e.g., non-grant products), more patient, better-adapted to producer needs, and “bundled” with other

1 Please see Annex B for more information on these efforts.

v | FINANCING SUSTAINABLE LANDSCAPES THROUGH SMALL PRODUCERS IN MEXICO USAID.GOV types of interventions. There is also an untapped potential to scale up financing from private sector buyers through strong market agreements and commercialization processes that recognize the value of sustainable products (e.g., wood certified by Forest Stewardship Council, beef from silvopastoral systems, coffee and cocoa from agroforestry systems). Key recommendations include: (i) scale-up financing for sustainable land activities via financial intermediaries and (ii) crowd in more sustainability-focused private sector buyers to finance small producers. For both, there is potential to use development finance to catalyze private investment via blended arrangements.

● Ecosystem: Create enabling conditions to better mobilize and deploy financing to small producers working on sustainable land activities. A lot more than financial mechanisms is required to attract and maintain long-term investment in sustainable land activities. Key recommendations include: (i) support income-generating activities higher up in value chains and outside of production,

(ii) develop and implement enabling public policies, (iii) strengthen data and monitoring for sustainable land activities, and (iv) dedicate time and resources to improve coordination. Many of these recommendations relate to strengthening access to inclusive markets.

Across these recommendations, it is critical to take a landscape approach; to leverage local expertise, partners, and past lessons; and to take market-based approaches that engage producers and the private sector. Moreover, the recommendations must be implemented together: a successful financing scheme will require demand-side interventions to support producers and the design of investable projects, supply-side interventions to mobilize appropriate financing from intermediaries and off-takers, and ecosystem interventions to connect these pieces together.

Moreover, taking these ideas forward requires a change in mindset. While the recommendations build on learnings and successful models from previous decades, they also highlight the need for new solutions and ways of working. In particular, the findings highlight the need for a “step change” in four critical areas:

• How to support. Shift from a narrower focus on capacity development to models that provide long-term, continuous support to producers.

• How to finance. Focus on financial products outside of grants and subsidies in order to promote long-term financial access and health.

• How to scale. Focus on developing companies, cooperatives, and projects with greater scale that can receive financing and serve traditional markets.

• How to partner. Better connect producers and communities to sustainability-focused private sector companies and investors

Overall, this report aims to synthesize barriers to inform USAID and other partners’ strategies to finance sustainable landscapes. This report takes stock of progress to date, the current situation, and priorities for the future. In some areas—such as capacity development and loan intermediation—there is a need to focus on replicating and scaling models that have shown promise. In other areas—including support services for producers, project development, and private sector off-take and financing agreements—there is a need to create new models to fill gaps. By promoting these market-based solutions, it is possible to catalyze investment needed to protect natural landscapes over the long term.

6 | FINANCING SUSTAINABLE LANDSCAPES THROUGH SMALL PRODUCERS IN MEXICO USAID.GOV

Section 1: Sustainable landscapes in Mexico

Land management today Natural landscapes in Mexico are at risk. Today, the agriculture, forestry, and other land use (AFOLU) sector has a net capture2 of greenhouse gas (GHG) emissions equivalent to 22% of Mexico’s total emissions.3

However, this net capture is decreasing due to current land management practices. Since 2000, Mexico has lost between 150,000 and 300,000 hectares of forest cover each year, driven primarily by agricultural and livestock expansion, illegal logging, and urbanization, among other factors.4 In the same period, over 15 million hectares—an area equivalent to the state of Coahuila—have undergone degradation (i.e., a loss of tree cover less than the threshold for deforestation). Deforestation and degradation are particularly rampant in the tropical forests of south and southeastern Mexico, in states such as Campeche, Yucatán, Quintana Roo, and

Chiapas.5 Beyond GHG emissions, these land use changes also threaten biodiversity and have negative health and economic impacts— ranging from the loss of water regulation to the loss of livelihoods and profits for communities, companies, and society as a whole.

Figure 1: Net GHG emissions from AFOLU sector6

Better protecting natural landscapes requires scaling sustainable land activities. These activities fall into three categories of “natural climate solutions,” which increase carbon storage or reduce GHG emissions in landscapes. 7 First, activities related to the management and protection of forests aim to conserve and sustainably manage timber and non-timber products from forests and to reduce the causes of deforestation and degradation—including the expansion of livestock and agricultural lands. Second, reforestation and afforestation activities aim to restore vegetation to deforested and non-forest areas, respectively.8 Lastly, sustainable agricultural and livestock practices aim to reduce emissions that come from agricultural and

2 Carbon capture—or sequestration—is the process by which atmospheric carbon dioxide is taken up by trees, grasses, and other plants through photosynthesis and stored as carbon in biomass (trunks, branches, foliage, and roots) and soils. United States

Department of Agriculture Forest Service, “Carbon Sequestration,” accessed 2020

3 Gobierno de México, “Inventario Nacional de Emisiones de Gases y Compuestos de Efecto Invernadero,” 2015

4 Hansen et al., “Tree Cover Loss and Gain Area,” 2013

5 El País, “México Perdió 250.000 Hectáreas de Bosques en 2016,” 2017

6 Gobierno de México, “Inventario Nacional de Emisiones de Gases y Compuestos de Efecto Invernadero,” 2015

7 The Nature Conservancy, “Natural Solutions to Climate Change,” 2017 8 Reforestation is the process of planting native trees in a forest area that has been depleted. Afforestation is the process of planting trees in an area without trees to create a forest.

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Emissions and capture of greenhouse gases

Millions of tons of carbon dioxide equivalent, 2015

Emissions increasing

At risk, due to land use changes Forests LivestockAgriculture https://www.fs.fed.us/ecosystemservices/carbon.shtml…