Document of The World Bank FOR OFFICIAL USEONLY ReportNo: 32223 - PE PROJECTAPPRAISAL DOCUMENT ON A PROPOSEDLOAN INTHEAMOUNT OFUS$50MILLION TO THE REPUBLIC OFPERU FORA REGIONALTRANSPORT DECENTRALIZATIONPROJECT JUNE 15,2005 Finance,PrivateSector andInfrastructureDepartment CountryManagementUnit -LCC6C LatinAmericaand the CaribbeanRegion 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. CURRENCYEQUIVALENTS (Exchange Rate Effective June 1,2005) Currency Unit = PeruvianNuevo Sol 3.25PEN = US$1 US$ = SDR1 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS AADT Average Annual Daily Traffic MTC Ministerio de Transportey Comunicaciones (Ministryof Transport and Communication) CAF Corporacidn Andina de Foment0 NMT Non-MotorizedTransport (AndeanCoorporationfor Development) CAS Country AssistanceStrategy NPV Net PresentValue CND ConsejoNacional de Descentralizacidn PCDR Plan de Concertacidn para el Desarrollo Regional (NationalDecentralization Council) (Participatory RegionalDevelopmentPlan) CTAR Consejos Transitorios de Administracidn Regional PNCAT Plan Nacional de Capacitacidn y Asistencia Te'cnica (TransitionCouncils of Regional Administration) (Technical AssistancePlan and Training for Local and RegionalGovernments) DGASA Direccidn General de Asuntos Socialesy Ambientales PRI ProvincialRoads' Institute (GeneralDirectorate for Environmentaland Social Affairs) ERR EconomicRateof Retum PRRP Participatory RegionalRoads Plan FIDA Fondo de Inversidn deAncash (Ancash Investment Fund) QAT Quality Assurance Team FIDE Fondo Intergubemamentalde Descentralizacidn RED RoadsEconomic Decision(model) (IntergovemmentalFundfor Decentralization) RIMU RegionalInfrastructureManagementUnit FMR FinancialMonitoringReport RRD RegionalRoadDirectorate FONCOR Fondo de CompensacidnRegional SIAF Sistema Integral de Administracidn Financiera (RegionalCompensationFund) (FinanceAdministration IntegralSystem) GDP Gross Domestic Product SIL. Sector InvestmentLoan GoP Govemment of Peru SNIP Sistema Nacional de Inversidn Pu'blica HDM HighwayDevelopmentand Management(model) (NationalSystemof Public Investment) IDB Inter-AmericanDevelopmentBank TORS Terms of Reference VPd Vehicles per day Vice President: Pamela Cox Country ManagerDirector: Marcel0 Giugale Sector Director: MakhtarDiop Sector Manager: Jose Luis Irigoyen Task Team Leader: Aurelio Menindez/NicolBs Peltier-Thiberge FOROFFICIAL USEONLY PERU REGIONALTRANSPORTDECENTRALIZATION PROJECTAPPRAISAL DOCUMENT LATINAMERICA AND CARIBBEAN LCSFT Date: June 7, 2005 Team Leader:Aurelio Menendez/Nicolas Peltier-Thiberge CountryDirector: Marcel0 Giugale Sectors: Roads and highways(50%); General Sector Director:Makhtar Diop public administrationsector (30%); General Sector Managermirector:Jose-LuisIrigoyen transportationsector (20%) Themes: Decentralization(P);Rural services and infrastructure (S);Other trade and integration(S) 1 ProjectID:PO78813 Environmentalscreeningcategory:B Lending:Instrument:SPecific InvestmentLoan Safeguard screening;category: Limitedimpact I " " I I - Project FinancingData [XILoan 13 Credit 1] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: TotalBankfinancing(US$m.): 50.00 I RECONSTRUCTIONAND I I I DEVELOPMENT INTER-AMERICANDEVELOPMENT 30.00 20.00 50.00 BANK Total: 160.00 40.00 200.00 Borrower: Republic of Peru Responsible Agency: PROVIASDepartamental,Ministeriode Transportesy Comunicaciones Angel Escobar Guardia,Gerentede Promoci6ny Transferencia Av. Bolivia 120-Torre de Lima 12"Piso Lima 1, Peni Tel. (511) 332-5112 aescobar@mtc.aob.pe This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed lwithout World Bank authorization. Innual 8.5 I 12.5 I 16 I 13 hmulative) 8.5 I 21 I 37 1 50 Project implementationperiod: Start June 1,2005 End: December 31,2009 Expected effectiveness date: December 1, 2005 Expected closing date: June 30,2010 Does the project depart from the CAS in content or other significant respects? [ ]Yes [XI No Does the project require any exceptions from Bank policies? [ ]Yes [XINo Have these been approved by Bank management? [ ]Yes [ 1No I s approval for any policy exception sought from the Board? [ ]Yes [XINo Does the project include any critical risks rated "substantial" or "high"? [XIYes [ ] No Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ] No Project development objective The project development objective i s to improve - through decentralization at the regional level -theprioritization,efficiencyandeffectiveness ofregionaltransportinterventionsand,hence, their contribution to regional development and policy reduction inPeru. Project description 1.Preparation of participatory regionalroadplans: This component will support the preparation of participatory regional road plans - aligned with the existing regional development plans- and elaborate a diagnosis of the sector in a particular region, analyze the supply and demand for transport infrastructure, and prioritize and evaluate road investment options. The component will also finance the various feasibility and technical studies for the road segments prioritized through participatory planning. 2. Upgrading o f regional roads: This component will finance the rehabilitation of about 2,200 km of regional roads prioritized through participatory planning under the previous component and the periodic maintenance of about 2,700 kmof regional roads rehabilitatedby Provias Rural and transferred to regional governments, as well as the related supervision. 3. Routine maintenance o f regional roads: This component will finance the routine maintenance and the related supervision of the 4,906 kmof regional roads receiving rehabilitation or periodic maintenance under the previous component. Maintenance will be performedby micro- enterprises with the exception of some mechanizedmaintenance activities (perfilados). 4. Institutional capacity building: This component -to be managed centrally by Provias Departamental (PVD) - i s aiming at providing the technical assistanceneeded to upgrade regional governments' institutional capacity, and to help the restructuring of PVD inthe new context of decentralization. Which safeguard policies are triggered, if any? Environmental Assessment Cultural property Involuntary resettlement Indigenouspeoples .. 11 Boardpresentation: None Loadcredit effectiveness: Preparation and endorsement of the operational manual interms and scope acceptable to the Bank. Covenants applicable to project implementation: Covenants: (a) PVD should furnish to the Bank no later than 6 months after the effective date, the contract appointing the independent auditors under TORSand with qualifications and experience satisfactory to the Bank. (b) PVD should furnishto the Bank, no later than 6 months after the effective date, a Ministerial resolution, in form and substance satisfactory to the Bank, for the creation of the Multi-Sector Advisory Committee. (c) PVD should furnish to the Bank, no later than 18 months after the effective date, the .relevant and applicable legal framework for hierarchy of roads and the technical norms for the rehabilitation of gravel roads. Conditions of disbursements for allocation to participating regions: For disbursement in one region, PVD shall furnish to the Bank a report confirming that the respective Framework Agreement, Financing Agreement, Annual Operation Plan, Participatory Regional Roads Plan(PRRP) and Institutional Agreement have been prepared and approved. ... 111 PERU Regional Transport Decentralization CONTENTS A. STRATEGIC CONTEXT AND RATIONALE ......................................................................Page1 1. Country and Sector Issues ................................................................................................... 1 2. Rationale for BankInvolvement.......................................................................................... 5 5 B.3.PROJECT DESCRIPTION ........................................................ Higher Level Objectives to which the Project Contributes ................................................. :............................................ 6 1. Lending Instrument.............................................................................................................. 6 2. Project Development Objective and Key Indicators ........................................................... 6 3. Project Components............................................................................................................. 7 4. Lessons Learned and Reflected in the Project Design......................................................... 9 C.5 IMPLEMENTATION............................................................................................................ . Alternatives ConsideredandReasonsfor Rejection ......................................................... 10 11 1. Institutional and Implementation Arrangements ............................................................... 11 2. Monitoring andEvaluation of OutcomesResults.............................................................. 15 3. Sustainability ..................................................................................................................... 16 4. Critical Risks and Possible Controversial Aspects............................................................ 18 D.5 APPRAISAL SUMMARY.................................................................................................... . Loadcredit Conditions andCovenants............................................................................. 18 19 1. Economic andFinancial Analyses..................................................................................... 19 2. Technical............................................................................................................................ 21 3. Fiduciary ............................................................................................................................ 21 4. Social ................................................................................................................................. 22 5. Environment ...................................................................................................................... 22 6. SafeguardPolicies ............................................................................................................. 24 7. Policy Exceptions and Readiness...................................................................................... 24 Annex 1: Country and Sector or ProgramBackground................................................................. 25 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies .......................... 44 49 Annex 4: DetailedProject Description.......................................................................................... Annex 3: ResultsFramework and Monitoring .............................................................................. 52 Annex 6: ImplementationArrangements....................................................................................... 64 Annex 5: Project Costs .................................................................................................................. 63 iv Annex 7: Financial ManagementandDisbursementArrangements ............................................. 69 Annex 9: Economic and Financial Analysis.................................................................................. Annex 8: Procurement Arrangements ........................................................................................... 82 89 Annex 10: SafeguardPolicy Issues ............................................................................................... 96 Annex 11: Project Preparationand Supervision.......................................................................... 105 Annex 13: Statement of Loans and Credits................................................................................. 107 Annex 12: Documents inthe Project File.................................................................................... 106 Annex 15: Map IBRD 34055....................................................................................................... 111 Annex 14: Country at a Glance ................................................................................................... 109 V A. STRATEGIC CONTEXTAND RATIONALE 1. Country and SectorIssues ThePeruvian Decentralization Reforms For the last three years, the Government of Peru (GoP) has brought forward an ambitious decentralization agenda, with the effective transfer of responsibilitiesat both the regional and local levels, along with an increaseinbudgetary resources and ininstitutional capacity. Since 2002, major laws-the "Ley de Bases de la Descentralizacidn" and the "Ley Orgdnica de 10s Gobiemos Regionales" are two of the most salient-have been enacted. At the regional level, regional governments have been elected through democratic suffrage, consolidating a "three tier" governmental structure with the municipalities (called districts in rural areas and provinces in urban areas) at the local level, the regions at the regional level and the central government. Through decentralization at the regional level, the GoP aims more particularly at strengthening the competitiveness of Peru's regions (see Box). Accordingly, an increasing amount of responsibilities have been transferred to regional governments and municipalities. The health and the road sectors have received particular attention from the Peruvian Government to implement its decentralization agenda, although other social and infrastructures sectors (waterhanitation, electricity) are also high in this agenda. The choice of roads i s justified by significant international evidence showing that roads constitute one of the sectors where the benefits of decentralization are the most obvious in the short term (with, therefore, possible demonstrative effects). Inparallel to the political decentralization process, progress has also been achieved inthe area of fiscal decentralization. Transfers to regional governments increased dramatically in 2003, amounting to about 14% of overall public expenditures that same year. They increased to 16% of overall public expenditures in the executed budget for 2004 and they remain stable at that level, with about US$2.2 billion, in the approved budget for 2005. However, about two thirds of these resources are tied to the payment of public employees and related social obligations, reducing significantly the capacity of the regions to invest in capital expenditures: resources for capital investment only amounted to US$131 million in 2003 though they have been raised to US$249 million in the 2005 budget. About a quarter of these capital expenditures (US$32 million in 2003) were spent inroad investments (rehabilitation or improvement). Box: Decentralization and the Competitiveness of the PeruvianRegions The ultimate goal of regional governments i s the sustainable development of the regions through the promotion of public and private investments, as well as job creations; and ensuring full rights and access to equal opportunities for regional populations, in agreement with national, regional and local development plans (art. 4). The objective of each regional government is to ensure a strategic management of the region's competitiveness. To this end, regional governments promote innovation and partnerships between the public and the private sectors; they encourage cooperation initiatives between firms, social institutions and organizations, as well as the development o f productive activities; and they facilitate the emergence of opportunities to create economic development corridors, marketexpansion and exports (art. 8). Source: Regional Governments Basic Law (Ley orgdnica de gobiernos regionales), 2002. 1 Positive results have already been obtained with a better participation of local and regional stakeholders in the management of larger share of public resources. This participation is particularly formalized through the preparation of participatory plans and budgets. Within its decentralization agenda, the Government's strategy seeks to instill the appropriate participatory approach for the selection of public investment at the local and regional level. The planning process involves local and regional stakeholders in the definition of a development strategy which i s then used to prioritize among possible alternatives for public investment. Participatory Regional Development Plans (PCDRs) and their equivalent for the local level are detailing these strategies. In the PCDRs, infrastructureprojects-and in particular roads- are seen as mechanisms for increasing the opportunities of the various regions to advance their competitiveness and integrate markets across neighboring departments. To date, 26 PCDRs have been approved- though not all of them are of the same quality and scope. However, while the legal framework is now largely in place, significant institutional and fiscal challenges still need to be addressed. The decentralization laws that have been in place since 2002 have clarified the respective responsibilities of the various levels of government. Nevertheless, the institutional and budgetary consequences have not been fully drawn yet: a significant part o f the budgetary transfer to local or regional governments remain tied to commitments decided by the central governments (salaries in particular), some central agencies still intervene directly in sectors that are now the responsibility of regional governments, and, in many sectors like regional roads, education or agriculture, the old deconcentrated public agencies are not yet fully integrated in the organization o f the corresponding sub-national government (although the decentralization laws give these sub-national governments that authority). Institutional restructuring and a comprehensive capacity building program are therefore needed at all levels of government in order for the decentralization process to bring its full benefits in terms o f efficiency and effectiveness. Decentralization in the Road Sector Peru presents a major "road gap": the low availability and poor quality of transport infrastructure is constraining mobility, increasing logistic costs and ultimately constitutesa bottleneck to competitivenessand broad-based economic growth. The road density (2.9 km per 1,000 people or 0.06 km per km2)i s among the lowest in South America and, according to the 2002 Global Competitiveness Report, firms rank Peru 54 out of 75 countries (10 out of 17 in Latin America) for road quality. Major funding i s required to bring the Peruvian transport infrastructure to the level of regional and income comparator countries. Capital investments required to restore Peru's road network, at all1 levels, to conditions aligned with traffic levels have been estimated at around US$4.2 billion. The regional road network (about 14,300 km, o f which less than 3,000 km are considered in good or regular shape) constitute the connection between and across the rural road network (47,000 km) and the national roads (17,000 km). As such, it plays a critical role to develop ' Sources: Guerra-Garcia, G. (2000) - Hacia una Politica de Financiamento para el Sector Transportes en Per6 Mimeopreparedfor the Inter-AmericanDevelopmentBank (IDB); and Banco Central de Peru (2004) - Desarrollo de la Infraestructura de Transporte con Utilizacidn Intensiva de Mano de Obra, study directed by Mr.Silva Ruete, publishedby the Per6World Bank Office. 2 regional markets and to link small and mid-size cities to larger economic centers. Capital investments required to restore Peru's regional road network to conditions aligned with traffic levels have been estimated at US$1.3 billion, with about 80% of the network needing rehabilitation or improvement. In addition, current needs for regional roads' maintenance amount to US$31 million annually but they could reach US$60 million if the entire secondary network were rehabilitated. In comparison, existing resources to improve and maintain regional roads amount to about US$85 million for capital expenditures and US$8 millionfor maintenance. Road network Corresponding roads Length (km) Levels of government incharge primary National roads 16,980 Central Government (MTC) secondary I Regional roads 14,250 24 Regional Governments (departamentales in Spanish) I (one for eachdepartamento) tertiarv I Rural roads 46,970 I Municipalities (1,812 districts and 194 (caminos rurales in Spanish) I provinces) The decentralization reforms are already well advanced for rural roads whose management is now successfully handled at the provincial level inat least 12departamentos. Since 2002, major progress has been achieved in the 12 poorest Peruvian departumentos interms of building capacity for an efficient management at the provincial level of the rural road network. The on-going Second Rural Road Program has helped to build a sustainable institutional capacity at the provincial level, with the creation of an increasing number of Provincial Road Institutes (38 PRIs had been created as of March 2005). These fully decentralized entities are placed, in each province, under the authority of a "Board" (whose members are the mayors of the provincial and district municipalities) and are responsible for the maintenance of the rural roads rehabilitated with the support of the central government (through its agency Provias Rural). Routine maintenance i s performed by micro-enterprises, allowing to create an entrepreneurial capacity among poor rural communities. After two years of experience (the first pilot was created in Arequipa), the PRIs have proved to constitute a sustainable institutional framework, ensuring both true ownership and accountability at the local level, and an effective and efficient management of rural road infrastructures. In the short term, a major challenge will be to strengthen the capacity of the regions to efficiently manage the secondary road network, while building on existing successful experiences from the rural roads program and the modernization reforms being pursued by the central government. The disappearance of the former deconcentrated regional entities and the transfer of the responsibility for the regional road networks from the central Ministry of Transport and Communications (MTC) to the regional governments has led to a confused institutional framework. Currently, responsibilities on transport matters-regulation, traffic safety, road asset management-at the regional level are split between the (smaller) Regional Infrastructure Management Units (RIMUs) and the (larger) Regional Road Directorates (RRDs), * Peru counts with 194 provinces (provincial municipalities, mostly urban) and 1,8 12 districts (district municipalities, mostly rural). In each province, there are several districts but the provincial mayor has no authority over district mayors. 3 with the latter often still reporting and functioning as a dependent unit of the MTC. At the same time, MTC's Provias Departamental (PVD) continues undertaking activities-largely b y force account-on the regional road network (with about 2,400 workers and 500 pieces of heavy equipment-of which only half i s operational). The transfer of expertise and the capacity- building of regional governments offer a unique opportunity to re-think the force account approach and rationalize roadmanagement activities. In sum, the strategy will need to properly address the following key issues: (1) the poor conditions of the secondary road network which constrain mobility and ultimately the regions' competitiveness and their ability to reduce poverty; (2) insufficient financial capacity of the regional governments to finance the rehabilitation and maintenance of the secondary road network (although it falls under their responsibility since 2002); (3) the low institutional capacity of these regional governments to perform these rehabilitation and maintenance activities in an efficient manner; and (4) the need to clarify and restructure the institutional framework and the responsibilities at both the regional and central levels in the new context of decentralization. While the existing legal framework i s generally clear enough to describe the respective responsibilities of the various levels of government, a few specific issues (eg. regulation of transport services and road safety) still need clarification. The proposed project will contribute to address these issues through a combination of investments, which would not take place in its absence, and a comprehensive technical assistance program be design to help regional governments strengthen their capacities, reengineer their organizations, and develop their normative and administrative procedures, lest the decentralization process will prove fruitless in achieving higher efficiencies and better levels of economic development and poverty reduction. The decentralization process is an opportunity to revamp the way road investments are planned, implemented and maintained, thus ultimately contributing to a better performance of the public sector. Participatory planning - with the preparation o f participatory regional and provincial road plans closely coordinated with the PCDRs and the local development plans - can help prioritize among road investments andbetter align them with local needs. In addition, the transfer of responsibilities from the central to the regional and local levels, along with the corresponding institutional restructuring, is an opportunity to rethink the way road management activities are performed. This means in particular, a greater participation o f the private sector and a phasing out of the old "force account" model in which certain road management tasks like maintenance are performed inhouse ina very inefficient way. Finally, the transfer of responsibilities and corresponding budgetary resources is an occasion to reassess the needs for an efficient and effective road assets' management and compare them with the level of the intergovernmental transfers and of the financial capacity of the lower levels of governments which become incharge. A successful decentralization of regional road responsibilities to regional governments would strengthen the whole decentralization process and prepare the ground for similar approaches in other sectors. The process will strengthen the regional institutional capacity and help demonstrate that regions can successfully handle new responsibilities in the infrastructure Due to the recent creation of the regional governments, similar duplication of responsibilities between the new decentralized institutions and the old deconcentrated ones may well exist for other sectors. Including those related to the regulation of transport services and to road safety. 4 sectors. This could for example benefit to the on-going process to transfer rural electrification responsibilities at the regional level, which has been planned for the coming two years. Similarly, progress achieved for rural roads at the municipal level create a favorable environment to implement a decentralized rural infrastructure strategy, integrating the various infrastructure sectors (waterhanitation, roads, rural electrification, rural telecommunication). 2. Rationalefor Bank Involvement To confront these issues, the GoP i s very interested in finding new approaches to transport management at the regional level. For this purpose, the Government has established a Multisector Commission, consisting of representatives of institutions competent either in transport or in decentralization policies (including the Ministry of Economy and Finance (MEF), the National Commission of Decentralization (CND), the Ministry of Transport and Communications (MTC), and the current entity in charge of regional roads (the PVD)), and the delineation in a coordinated fashion of the action plan to transition away from the centralized approach to regional road management and investment decision-making. The MEF, the CND and the M T C see the Bank (and the IDB) as a source of analytical knowledge to contribute at the sectoral level with the reform process and to further increase regional government managerial and technical capacity inthe road sector. As independent external financiers with a reputation for insisting on sound asset management, the Bank and the IDB can help introduce good management practices on the regional road network. In this endeavor, the Government also sees the Bank as a third partythat can bringtogether the key actors at the national and regional levels. In this effort, as building in the successful experience of the Rural Roads Program and Lima Transport Project, the Government has requested ajoint operation with the IDB. 3. Higher Level Objectives to which the Project Contributes The project i s aligned with the Country Assistance Strategy (CAS) objectives and would build on past or on-going Bank interventions in decentralization and transport. One of the main priorities of Peru's Country Assistance Strategy for 2003-2006 i s public sector management and decentralization. While cautioning against the possible risks associated with decentralization, the CAS stresses that a well-conceived decentralization policy could make a significant contribution to improving public sector performance, if accompanied with clear transfers of responsibilities and development of local management capacity. The latest CAS progress report, discussed by the Board of Executive Directors on December 7, 2004, cautioned that "inadequate physical infrastructure" was a significant bottleneck which "could hold back growth in the medium term" and supported the Government's plan to "consolidate the far-reaching reforms in fiscal decentralization and social service delivery by building capacity in sub-national governments". Inthis respect, this project buildsextensively on the decentralization reforms implementedunder the Programmatic Decentralization and Competitiveness Structural Adjustment Loan. The proposed project aims at ensuring a sustainable and successful transfer o f expertise to the newly-created regional governments to efficiently manage the regional road network. To do so, it will build on the technical and methodological experience gained in implementing rural road management (First and Second Rural Roads Projects) and transferring it to the municipal levels. A draft of such a strategy has beenproposedby the World Bank to the GoP. 5 The project will also strengthen the decentralization process and increase its impact on public sector management and on local development. As demonstrated at the municipal level by the Second Rural Roads Project, the road sector i s a good starting point to operationalize the decentralization process and empower regional and local governments. The proposed project could prepare the ground for increased involvement of regional governments in other infrastructure sectors as envisioned inthe decentralization agenda of the Government of Peru. B. PROJECTDESCRIPTION 1. LendingInstrument The proposed lending instrument i s a Specific Investment Loan (SIL). Despite a learning focus of the project, a Learning and Innovation Loan (LIL)i s not considered an appropriate instrument because of its small size and limited potential impact. An Adaptable Program Loan (APL) has not been deemed appropriate at this time due to our recent engagement in the regional transport sub-sector in Peru and the need to build up its knowledge and institutional base. 2. ProjectDevelopmentObjectiveand Key Indicators The project development objective i s to improve-through decentralization at the regional level-the prioritization, efficiency and effectiveness of regional transport interventions and, hence, their contribution to regional development and poverty reduction in Peru. These features refer to: 0 prioritization: better aligning transport investments to local needs as identified by participatory regional development plans and appropriate planning and evaluation tools; 0 efliciency: strengthening the institutional framework in order to achieve the appropriate management of transport interventions at the regional level, with due consideration to environmental and social issues, including issues related to the Indigenous Peoples of Peru; and 0 eflectiveness: upgrading the quality of regional transport infrastructures and developing sustainable maintenance mechanisms to improve regional mobility which can ultimately foster growth and reduce poverty. The project's design takes place in the context o f the decentralization agenda in Peru. In this respect, one of the key policy reforms to be pursued i s the establishment of institutional frameworks in the participating regions to make a clearer link between investment and maintenance interventions and the related resource needs, encouraging incentives through the contributions from the central level (including those from the project) towards better resource mobilization and appropriate road asset management practices. Project outcomes will be measured by the increase in the use and quality of regional transport infrastructure (see Annex 3 for indicators). The institutional outcomes will be measured b y the 6 mainstreaming of the decentralized approach to regional road management, namely (a) the preparation of the participatory regional road plans; (b) a more efficient regional road asset management with a greater participation of the private sector; (c) the restructuring of the existing institutional framework (in particular with the suppression of duplication between the Regional Infrastructure Management Unit, RIMUs and the Regional Road Directorate, RRDs); and (d) the downsizing of the central agency Provias Departamental and its evolution towards a regulatory body, supervising and facilitating the implementationof the decentralization process. 3. Project Components The project will include five components, each moving at a different pace depending on the participating region. Component 1: Preparation of participatory regional road planning (estimated cost US$lO.9 million of which US$5.45 million would befinanced by the Bank Loan). This component will finance the preparation of participatory regional road plans-aligned with the existing regional development plans-and elaborate a diagnosis of the sector in a particular region, analyze the supply and demand for transport services and infrastructure, and prioritize and evaluate road investment options, towards identifying the sub-project priorities that could be funded under the project (sub-component 1-A). A prioritizing methodology, including a combination of both economic potential and poverty level criteria, has been prepared as part of project preparation, with due attention to environmental and social issues. The preparation of these plans will be handled by the planning units of the regional governments, with the technical assistance of consultants. Provias Departamental will facilitate the process (eg. organize coordination event) and monitor the preparation of the plans. Ultimately, plans have to be formally approved by the regional council or by a competent commission of the regional government. Thirteen participatory regional road plans have been initiated and - in certain cases - finalized, as part of project preparation. This component will help finalize these plans in every eligible region, by financing the related costs (organization of participatory planning, training of the planning units, dissemination and coordination costs, updating or revision of certain plans). As part of project preparation, a significant number of these plans have been either completed (6 of them as of March 2005) or shouldbe completedb y August 2005 (at least 7 additional ones). The component will finance the completion of all the plans and the updating of, at least, the first ones (plans are expected to be revised every 4 to 5 years). It will also finance the various feasibility and technical studies for the road segments prioritized through participatory planning (sub- component 1-B). Component 2: Upgrading of regional roads (estimated cost US$138.83 million of which US$34.71million would befinanced by the Bank Loan). The objective of this component is to rehabilitate about 2,200 km of regional roads prioritized through participatory planning (under component 1) and to perform the periodic maintenance of 2,706 km of regional roads rehabilitated by another agency of MTC (Provias Rural) and transferred to regional governments. Some regional roads which have been rehabilitated early on may also need periodic maintenance before the end of the project and such activities would also be eligible under this component. About a third of the secondary network would be upgraded as a result of Metodologia para laformulacidn, evaluacidn y actualizacidn de 10s planes viales participativos. 7 this component and the ultimate development impact is expected to be high since the road segments to be upgraded would be selected according to their relevance for regional development. Regional governments would contract private enterprises to perform the rehabilitation works and engineering consultants to carry out the relevant supervision, with the technical support and oversight of the PVD. The related upgrading tasks will contribute to skilled and unskilled employment generation in the regions. None of the works to be undertaken under this component will require resettlement or imply major impacts to the natural environment. As part of project preparation, 8 road segments (532 km) have been identified and feasibility and technical studies have been prepared. The rehabilitation of these 8 roads as well as some periodic maintenance activities will therefore be able to start shortly after the expected date of Board approval. A clause for retroactive financing has been introduced in the Loan Agreement so that these expenditures can be taken into account. Component 3: Routine maintenance of regional roads (estimated cost US$26.12 million of which US$3.39 million would befinanced by the Bank Loan). This component would finance the routine maintenance - and the related supervision - of the 4,900 km of regional roads rehabilitated (or having. received periodic maintenance) under the previous component. In addition, it would finance specific road maintenance interventions (annual mechanized maintenance also calledperjZado in Spanish) performed once a year right after the rainy season. Buildingon the successful experience of the Rural Roads projects Iand 11, maintenance would be performed by mechanisms similar to the micro-enterprise model. The perjiilados could be performed under force-account but the amount to be reimbursed by the project would be fixed per kilometer (about US$600 per km and per year plus inflation) and subject to a maximum of US$8.8 million. These activities are expected to generate unskilled employment opportunities that could benefit to the rural poor. Particular attention will be paid to ensuring the sustainability of the model (i.e., that sufficient funding i s dedicated by regional governments to maintenance and that micro-enterprises are adequately contracted to perform such maintenance). These activities will follow environmentally sensitive approaches, following current practices in Peru and other Latin American countries. This component will benefit from the experience of the 2,706 km of roads transferred by Provias Rural (all of them are currently maintained by micro- enterprises). Component 4: Institutional capacity building (estimated cost US$l7.14 million of which US$5.95 million would be financed by the Bank Loan). This component-to be managed centrally by PVD-is aiming at providing the technical assistance needed to upgrade regional governments' institutional capacity and will be built upon comprehensive institutional assessments performed during project preparation (as part of project preparation, comprehensive institutional assessments have been prepared in 8 "fast track" regions.). Activities under this component include: (a) the rationalization o f the current institutional framework and in particular the restructuring (possibly merging) of the RRDs (formerly with the Ministry of Transportation and Communication) and the RIMUs, newly-created as part o f the organizational structure of the regional governments; (b) supporting a transition from direct administration of road maintenancehehabilitation to contracting it to the private sector; (c) training in safeguards management; (d) clarification and assignment of regulatory responsibilities (for instance those related to the regulation of transport services and to road safety); (e) actions for the restructuring 8 o f the PVD; and (f) monitoring, auditing and evaluation. Resources (up to a total o f US$200,000) have been allocated as well for possible studies related to the management of the regional road network in the context of national transport policies and programs, complementing other existing resources that focus on overall transport policy formulation. Eligible expenditures for this component will include technical assistance, studies and evaluations, as well as training, dissemination and coordination costs. This component will include two different types of activities: sub-component 4-A (institutional strengthening of regional governments) and sub-component 4-B (institutional strengthening of PVD). Component 5: Project administration (estimated cost US$6 million to befinanced exclusively from national counterpartfunds). The costs related to project administration by PVD would fall under this component. 4. LessonsLearnedand Reflectedinthe Project Design The design o f the proposed program builds on the following lessons from other initiatives in Peru or other countries: a) Participatory planning allows identifyingthe investment which is the best tailored to local needs - the preparation of the regional road plans will ensure that local stakeholders' needs are fully reflected in the prioritization of investment alternatives. There i s large international evidence supporting a decentralized approach to road planning and showing that local users know better than central agencies what infrastructure need to be improved in order to fit their needs and complement in the most efficient way other existing or planned development programs. b) Road infrastructure investment are key to the competitiveness agenda and, therefore, they should be prioritized in order to develop economic opportunities - improvement of tertiary roads' conditions under Peru's second rural road program has halved transport time and reduced transport costs by a third. In addition to improving access to basic services (education, health), this has had a tremendous impact on the productivity of rural economies and on enhancing access to local markets. Peru's development plans and strategies lo as well as the local participatory development plans give a significant importance to transport infrastructure as a key instrument to foster a more balanced economic growth and improve the competitiveness of the Peruvian regions and territories. For that reason, the methodology proposed by this project to prioritize among territories and investment alternatives emphasizes economic potential criteria (e.g. agricultural or miningproduction, tourism frequentation). 'The component will help design and implement the restructuring process of PVD which has been agreed upon at negotiations. For example, IDBresources within its Third National Road Project. In particular the Programmatic Decentralization and Competitiveness Structural Adjustment Loan (SAL), the Second Rural Roads Project and the Rural Infrastructure Strategy. "SuchastheNational Strategyfor Poverty Reduction and theDevelopment of Economic Opportunitiesfor the Poor, the National Plan for Territorial Development, the Sierra Rural Development Strategy and the Plan for the Sustainable Development of the Amazonian Region. 9 c) Decentralization works when it is gradually implemented along with the transfer of sufficient technical and management expertise as well as budgetary resources - experience from the decentralization reforms in other countries and from Peru with the rural roads' project have shown that the transfer of new responsibilities to sub-national governments i s successful when it i s performed on a timely basis along with the transfer of corresponding budgetary resources and the building of institutional capacity. For that reason, the proposed project includes (1) eligibility conditions establishing the commitment of the regions to the project's objectives; (2) securing sufficient funding for road maintenance in regional governments' budgets; and (3) institutional building of the regions with the restructuringof the RRDs and RIMUs and the reform o f the new unit. d) Road construction, rehabilitation and maintenance is more efficiently performed by private operators than by public agencies - international experience shows that a more efficient framework for road management can be created when transport ministries and public agencies evolve towards a regulatory role in which they set up the overall framework for road management (ie. planning, regulation, standards, etc.) while the actual implementation i s contracted to private operators. In Peru, the tertiary road network i s managed in such a way while the primary and secondary networks are still largely managed under a "force account" model. The proposed project aims at taking advantage of the transfer of responsibilities to the regions for secondary network management, to change the existing model, with outsourcing of rehabilitation and maintenance activities to private operators. e) The use `of micro-enterprises for road maintenance has proved to be successful in creating an entrepreneurial capacity in rural Peru - the second rural road project (but also similar initiatives in other countries such as Colombia, Bolivia or Honduras) has shown that micro-enterprises can perform routine road maintenance in an efficient way, while creating employment opportunities for the rural poor (men and women). The proposed project aims at scaling up this model, building on the successful piloting experience of Provias Rural with 2,706 kmof regional roads. 5. Alternatives Considered and Reasons for Rejection Alternative interventions and approaches that have been considered for the project include: a) National implementation with consultations at the regional level. This alternative would have implied the strengthening o f the central PVD for the implementation of the project, weakening the main thrust of the project of developing the capacity at the regional level. From a risk analysis point of view, this alternative would have been less risky and would have included a more controlled strategy. The selected alternative would retain from this alternative the oversight capacity o f the central entity but would delegate project implementation to the regional governments. To further minimize the risks, the selected alternative requires a major effort during the preparation process of defining for the starting regions the appropriate organization framework and the transition to that framework. The Multi-sector Commission has expressed its full support of this strategy. 10 b) Other transport investments (e.g., airports, ports). Although these were at times mentioned as important components of regional infrastructure, increasing the menu of transport sub-sectors (and afortiori other infrastructure sectors) would make the project very complex while increasing the resources needed to achieve an effective impact. Consideration will be given however to river transport facilities (wharfs) when waterways are the main mode of transport. Indeed, river-based transport, in particular in the "Selva", constitutes often a more "eco-efficient" solution than land-based alternatives. c) Intervention in a limited number of regions. This alternative would have implied selecting a few regions, based on socio-economic criteria or institutional readiness. It would have facilitated implementation but would have weakened the overall decentralization process by refusing a priori access to certain regions. In addition, the relatively limited number of departamentos (24 of which 21 have a significant secondary road network) remains manageable (compared to the 114 provinces and 488 districts where Provias Rural has been active). C. IMPLEMENTATION 1. InstitutionalandImplementationArrangements At the national level, the overall responsibility for project implementation and coordination will rest within Provias Departamental (PVD). Duringpreparation, an agreement was reached on the number and qualifications of staff that PVD should have to efficiently manage the program. Regional governments will be in charge of the preparation o f the participatory regional road plans (component 1) and the implementation of the eligible investments under components 2 and 3, with technical assistance which the PVD will be responsible for carrying out (component 4). In addition, this unit within PVD will be responsible for the project's overall monitoring and evaluation and for promoting coordination across regions. The decentralization process implies that Provias Departamental evolves from an executing agency to a regulatory/promoting/supervisingbody. Within the institutional capacity building component, resources are allocated in order to support this strategic evolution (sub-component 4- B). The initial steps are well underway, with the expected downsizing of the unidades zonales and the phasing out of construction or rehabilitation activities as specified in the restructuring plan agreedupon at negotiations and signed by the Transport Vice-Minister. This evolution will be gradually carried out to ensure adequate project implementation, and reports will be furnished every six months to the Bank and to the IDB untilfull implementation of the restructuring plan. The Multisector Commission which has been set to supervise the preparation o f the project and ensure coordination between the various relevant ministries and agencies has proved to be an efficient coordination mechanism. During implementation, this Multisector Commission will be replaced by a Multisector Advisory Committee which will act as a high level coordination body and supervise project's implementation. This Committee will include one or two members representing the regional governments. A dated covenant has been introduced to ensure that this Committee will be created in the 6 months following effectiveness. Strong coordination will be ensured with the MEF: first, through participation in the Multisector Advisory Committee, second, through participation in most - if not all - of preparation and supervision missions, and, third, through the overall economic analysis of the project, performed under the framework of the National System of Public Investment (SNIP in Spanish). Coordination will also be ensured between PVD and the other relevant departments of the MTC. Inparticular, PVD will closely interact with Provias Rural inorder to benefit from its extensive experience in decentralization of rural roads at the municipal level. PVD will also coordinate with Provias Nacional to ensure that the strategies developed for the primary and the secondary road network i s consistent. Finally will also closely interact with other M T C departments on specific issues such as road classification and hierarchy (Office o f Planning and Budgeting), heavy equipments' stock (General Directorate of Roads and Railways) and social and environmental policies (General Directorate for Environmental and Social Affairs or DGASA in Spanish). Within each region, the overall responsibility for project implementation will rest with the regional government. For component 1, the preparation of the participatory regional road plans will be performed by the planning unit of the regional government with the technical assistance of PVD. For components 2 and 3, a specific unit will be'designated within the regional government's organizational structure to handle project implementation. In most of the regions, it i s expected that this unit will be the RIMU or a unit within the RIMU. The designation of this unit and the commitment to rationalize the institutional structure in order to avoid duplication between RIMUs and RRDs, i s part of the requirement for regional governments in order to be eligible to components 2 and 3. This unit will receive technical assistance and institutional capacity building support from PVD as part o f component 4. Table: ProposedInstitutionalandImplementationArrangements Component Responsibilities of PVD Responsibilities of Regional Governments 1. Participatory planning Coordinate, monitor and provide technical The planning units of the regional assistanceto planning process governments prepare the participatory regional road plans, according to agreed standards and methodologies. Feasibility and technical studies are contracted by regional governments with guidance from PVD 2. Road upgrading Monitor implementation progress and A unit to be designated by eachregional consistency with agreed standards and government implement (contracting, methodologies supervision) the participatory regional 3. Road maintenance Facilitate coordination across regions road plans, according to agreed standards and methodologies 4. Institutional Coordinate and implement the institutional Express needs and make best use of the strengthening strengthening package designed to build technical assistancereceived capacity at the regional level Commit to implement the related Commit to implement the institutional institutional strategies (restructuring, restructuring plan agreed upon at phasing out of "force account" negotiations. Make best use of technical approaches) assistancereceived for that purpose. 12 Eligibility of the regions and conditions for disbursement. All the regions with a regional road network in need of rehabilitation and which have signed with PVD a framework agreement (convenio marco) describing the overall project's principles will be eligible to component 1-A. For expenditures related to the upgrading or maintenance of a particular road segment (ie. technical or feasibility studies under component 1-B, rehabilitation or periodic maintenance activities under component 2 or routine maintenance under component 3), a framework agreement, a financing agreement (convenio de financiamento) must have been signed between PVD and the regional government. In addition, an annual operation plan (plan operativo annual) and a participatory regional road plan including the corresponding road segment must have been approved by the regional government. For expenditures related to the institutional strengthening component (sub-component 4-A), a framework agreement and an institutional framework (convenio institucional) must have been signed between PVD and the regional government. When initiating disbursement in a particular region, PVD will furnish to the Bank a report confirming that the respective agreements have been prepared and approved. Allocation of budget resources. Project's resources for road rehabilitation are pre-assigned between the regions based on a methodology developed during project preparation (see Box). I Box: Methodology to Allocate Budgetary Resources Across Regions. I Budgetary resources to rehabilitate about 1,900 km of secondary roads will be pre-assigned between regions based on good conditions' regional road density per capita, on road conditions and on the financial capacity of the regions to bring counterpart funds. The resources corresponding to the remaining 300 km and the allocation o f the regions which would not comply with project's requirements will be put in a "competitive fund" (fondo concursable) to be allocated in priority to the regions which have been the most efficient in implementing the program and the related institutional reforms. This methodology for allocating resources has been designed with the objectives of (1) improving the availability of good conditions' transport infrastructure as measured by the density o f roads relative to the population; (2) ensuring an efficient management of the secondary network as measured but the proportion of the regional network in good conditions ineach region; and (3) taking into account the financial capacity of regional governments. In addition, the "competitive fund" provides an additional incentive for regional governments to implement the necessary institutional reforms and the investment program, according to the project's principles. Schedule of project implementation. The project will require a significant start-up period to fully develop in each eligible region, including (a) the preparation of the participatory regional road plans; (b) the fulfillment by regional governments of the conditions required to receive funding from components 2 and 3; (c) the building of minimal institutional capacity at the regional level; (d) rehabilitation works' identification, design, approval and procurement with due consideration to safeguards; and (e) the creation of sufficient micro-enterprises to perform the routine maintenance activities. The implementation schedule and disbursement profile reflect this expected longer startup period. Partnership arrangements. The most important coordination takes place across the different regional governments, and with municipalities and other local stakeholder groups. Within regional government's the participatory regional road plans - will be closely coordinated with other planning instruments such as the regional development plans. The project also seeks coordination mechanisms with other related government programs, such as the Program for the Modernization of the State. Based on the successful experience o f the Multi-Sector Commission during project preparation, a coordinating framework will be structured and facilitated through 13 the multi-sector Advisory Committee, consisting of representatives from the MEF, the CND, the M T C and the regions. The project coordinates closely with the Bank-funded Programmatic Reform Loans Iand I1 (Decentralization and Competitiveness SAL, see Box below). While the project will help achieve the objectives of "improving the efficiency and quality of public expenditures" as well as "reducing logistics costs and improving public services in infrastructure", the Decentralization and Competitiveness SAL will help improve the fiscal framework in which regional governments operates. In addition, the policy matrix of the SAL has reported in 2004, the creation of "a multi-sector commission to delineate a plan for the gradual transfer of road assets from the central government to the regions" and i s requiring by December 2005 that "Government clearly defines the competencies of the national, regional and local governments on infrastructure management and regulation, and strengthens regional and local infrastructure agencies with an emphasis on private sector participation, as means to raise the impact of interventions and ensure a smooth transfer of responsibilities as part o f the decentralization process". Box: Peru Programmatic Decentralization and Competitiveness Structural Adjustment Loan - The decentralizationof key functions and the increased policy making and fiscal capacity of regional govemments are critical steps in improving the competitivenessof poorregions.To complementandreinforcethe decentralizationprogram, and to secure economic and social objectives, the GoP in 2002 also set up an ambitious competitiveness program with a clear emphasis on reaching and assisting regions in increasing their competitiveness. The program focused mainly on institution-building for competitiveness, improving productivity and the mix and quality of Peruvian products, reducing logistic costs, upgrading infrastructureservices,enhancingthe investmentclimateand facilitating exports. (. ..) Peru's model of decentralizationgives regional (and macro-regional if ever constituted) govemments a mandate to stimulate investment, competitivenessandgrowth. Fulfillment of this broadmandatehas two essentialprerequisites: (i) strengthenedfiscal and financial management capacity; and (ii) an adequate legal framework supported by proper signals from the central govemment. For instance, regional and local govemments committed to competitiveness enhancement must improve the efficiency and quality of public expenditures. Excessive payroll or, more broadly, operational costs, create rigidities and inefficiencies that reduce the quality of service and threaten fiscal sustainability.Poor investmentplanning and misallocationof capitalexpenditureswill reduceopportunitiesfor investment. Lack of modem accountingand good asset management leadto the unproductive use of public resources that would otherwise benefit from altemative management arrangements involving partnershipswith the privatesector. (. ..) In light of the significant progress achieved under the first loan, this second proposed loan continues to support the ongoing efforts of the GoP with three specific objectives: (i) to protect fiscal sustainabilityduring Peru's transitionto a moredecentralized state; (ii) to assist in strengthening management and fiscal capacity at sub-national levels for progressive assumptionof service es; and (iii) to support the creation of a better regulatory and investment environment for increasing Peru's competitiveness, with a strong regional focus. (. ..) The proposed loan will achieve these competitiveness objectives by (i) institutionalize the Competitiveness Agenda and implement its regional components; (ii) promote itation; (iii) improve productivity and the mix and quality of Peruvianproducts; (iv) reduce logisticscosts andimprovepublic services ininfrastructure;and (v) improvethe investmentclimateby reducingthe cost of doingbusiness.(...) The high cost of transportation- and its large share within logistics costs - reflects the poor state of the country's transport infrastructure and services. (...) The main challenge consists of increasing capital investment in the road sector at both the national and regional levels without sacrificing the maintenance of existing infrastructure assets. To face this challenge, it i s recommendedthat the GoP deepens reformsin the sector by: (i) strengtheningroad maintenance;(ii) creatinga solid framework for the decentralized management of road assets; and (iii) strengtheningits environmentaland social evaluationsafeguards. (...) The Bank is currently preparinga projectto assist the GoP inthe executionof its roaddecentralizationprocess. 1Source: ProjectAppraisalDocument, World Bank, November 2004. Coordination will also be ensured with two World Bank-funded technical assistance loans (TALs) which are focusing on the administrative mechanisms of the decentralization process and on decentralization in the social sectors (see Box). Inparticular, the proposed project - under its 14 participatory road plans component - will complement the reforms supported b y the first TAL to improve participatory budgeting processes and the accreditation of regions. The institutional strengthening program supported by the proposed project will also be closely related to the TAL'Sobjective to improve the efficiency of public expenditures, with emphasis on managing and planning resources assigned for transport. Finally, the proposed project complements the IDB-funded support to the CND. I Box: Other on-going Reforms inthe Area of Decentralization and Institutional Strengthening. To support the on-going decentralization process in Peru, a set of initiatives have been launched with the support of two World Bank-financed technical Assistance Loans (TALs). The first set of initiatives focuses on the social sectors, with the larger part of the Bank project being channeled through the Ministry o f Women and Social development (MIMDES) for establishing monitoring indicators and systems for the decentralization of activities in the social sectors. The second set of initiatives focuses on the administrative mechanisms of the decentralization process. The Peru Accountability for Decentralization in the Social Sectors' project is aiming at strengthening results- oriented and participatory planning, monitoring and evaluation in the social sectors, with an emphasis on decentralized social programs of the MIMDES. Specific objectives include: (i) improve the quality of social policies and programs in the context of decentralization; (ii) implement the performance agreements and accreditation systems for social programs in order to improve service delivery outcomes; and (iii) improve the M&E system in a decentralized context. The Peru Institutional Capacity for Sustainable Fiscal Decentralization's project is aiming at strengthening public sector capacity for implementing a sustainable fiscal decentralization and improving institutional effectiveness for adequate service delivery by sub-national governments. Specific objectives include: (i) reinforce the fiscal and financial planning, accounting, budgeting, reporting and overall management capacity of sub-national governments. At the same time, it strengthens the capacity of the national government to monitor and evaluation fiscal and financial performance in accordance with the ceilings and targets already established in legislation; (ii) support the initial steps towards incentives and evaluation of quality of expenditure at sub-national levels; and (iii) provide technical assistance to reduce transaction costs, enhance operational efficiency and mobilize idle resources at sub-national levels. These two operations will strengthen the overall budgeting, administrative and financial management capacity o f the regional governments as well as the performance monitoring function from the central government. The Regional Transport Infrastructure Decentralization project will complement these initiatives, with a focus on the transport sector. I t will help develop the regions' planning function in the transport sector as well as their sectoral units, with the ultimate objective of improving the prioritization, efficiency and effectiveness of public expenditures in this sector. Through the elaboration of the regional Road Plans and the agreement on a time-bound program of institutional reform, it will also contribute to the accreditation of the regions, a condition for them to be transferred more resources. 2. Monitoringand Evaluation of Outcomes/Results The monitoring of project implementation encompasses two levels. One level consists o f the review of project performance and annual plans that will be undertaken by PVD on a continuous basis; the other consists o f periodic performance audits, participatory evaluation exercises (involving in particular regional governments) and impact assessment studies that would be carried out by independent firms and specialized NGOs. The application of the project information and monitoring system would allow PVD, IDB and the Bank to ascertain the progress of the implementation of each sub-project and the degree of achievement of the project development objectives. At least every twelve months or as necessary, auditors acceptable to IDB and the Bank - and financed under component 4 - will conduct a performance audit of the 15 implementation o f the project by examining a sample of sub-projects under execution. The exact scope of these audits will be determined each year during a supervision mission (at least two supervision missions will be organized every year). The audits could particularly focus on the execution of the project physical components (quality and cost of works), procurement procedures and compliance with the guidelines of the Project Operational Manual, performance indicators agreed between PVD and each regional government and other implementation procedures (eg. social, environmental practices, participatory process). Through the audit, cost comparisons could be made available and reviewed to identify procurement problems or other factors contributing to variations among the different regions; the scope of the sample of work sites included in the audit will be adjusted to these findings. The project will also undertake an assessment o f intermediate socio-economic impact indicators related to the contribution of regional roads to productive activities and the socio-economic well- being of participating families. These evaluations may also use control cases, by comparing similar territories that were not subject to project interventions. The information annually generated under the household survey, ENAHO, will be used, for cross-checking the results of the evaluation. The costs of these evaluations have been included in component 4. PVD will contract an external consulting firm to carry out these analyses. Results will be disseminated, in particular to the regional governments. A participatory monitoring process will be also incorporated into the overall M&E system to include a beneficiary assessment of the decentralization process and adherence to project rules, progress and results of implementation. This will, in particular, be implemented through the organization of participatory events involving high level representatives from regional governments (presidents of regional councils or gerentes generales). Similar consultations of regional governments were organized during project preparation and they provided valuable inputsto project design. 3. Sustainability Sustainability i s a cornerstone of the overall project strategy to ensure the quality, continuity and reliability of the regional transport interventions, within the broader decentralization agenda. For this reason, the project includes a significant number of dispositions within each of its four components inorder to ensure a better sustainability. A major condition for sustainability is that sufficient institutional capacity has been built at the regional level by the end of the project. To this end, a minimum set of institutional pre- conditions for regional governments to participate in the project has been determined and a customized and comprehensive institutional strengthening program will be implemented as part of component 4. It will help provide tailored training and expertise to each regional government in all aspects of planning, road asset management and safeguards. Inaddition, the restructuring of PVD should refocus the mission of the central agency on providing institutional support to the regions, thus contributing to the overall sustainability of the decentralized framework. Finally, the "competitive fund" has been introduced with the ultimate objective of providing additional incentive for greater sustainability by rewarding the regional governments that have implemented institutional reforms in a sustainable fashion. 16 A second major condition to the sustainability of the improvement in secondary road conditions i s that adequate levels of maintenance are performed. To this end, component 3 will support the scaling up of the micro-enterprises model which has already been successfully experimented by Provias Rural, including for 2,706 kmof regional roads transferred to regional governments. To make institutional reforms associated to the decentralization process on an efficient and effective path, phasing out strategies have been included in the project design. In particular, the appropriate downsizing and refocus of Provias Departamental will be a substantial contribution to the sustainability of the decentralization process in the road sector. The decision to downsize the unidudes zonules has been taken by the Peruvian authorities and this process, already underway, has been well explained and understood - although sometimes with certain initial resistance - by the various stakeholders involved. A plan for the restructuring o f PVD has been elaborated during negotiations and signed by the Transport Vice-Minister. Technical assistance, provided under component 4, should help design and implement the phasing out process. Employees of PVD, hired under fixed-term contracts that expire by mid-2005, have been encouraged to create or join micro-enterprises or SMEs that could then be contracted by regional governments to perform road improvement activities. Similarly, the strategies that will be prepared by regional governments in order to phase out the old "force account" approach to road rehabilitation and maintenance are an additional effort towards the sustainability of the new, more efficient, model based on the contracting out of these activities. The project i s also trying to promote a sustainable approach to participatory regional road planning. Planning units within each regional government will be trained and receive the necessary technical assistance to fully prepare these plans and disseminate their results. In addition, some resources will also be made available if it becomes necessary to revise or update these plans, thus ensuring the sustainability of the planning process. Finally, a critical issue to ensure sustainability i s that sufficient flows of funding are made available to regional road asset management. Duringproject preparation, a fiscal framework has been discussed and agreed with MEF to ensure that disbursements would not be constrained by indebtedness ceilings (see paragraphs C4 and C5 of Annex 1). An assessment of the financial capacity o f regional governments within the fiscal decentralization context has also been performed, ensuring that regional counterpart funding would be made available (see paragraph C3 of Annex 1). It should also be noted that, in the past, revenues from road users' charges and fees have been exceeding significantly road expenditures. Therefore, the sector is in theory self-sustainable, provided that sufficient resources generated by the sector are earmarked to improve transport conditions and maintain roads at an acceptable level. According to an analysis undertaken in 2000, l1 these revenues amounted to an annual average of about US$570 to US$600 million in the period 1997-1999 (see paragraph C2 of Annex 1). I'Guerra-Garcia, 2000. 17 4. Critical Risksand Possible ControversialAspects The possible risks refer to the decentralization process (political momentum, existence of counterpart funds and institutional capacity at the regional level, downsizing and strategic evolution of PVD) and to the methodologies to be followed during project implementation, especially those that involve: participatory processes for the selection of investments, transition from "force account" to contracting out of rehabilitation and maintenance activities. The successful results obtained with the decentralization of rural roads' management responsibilities at the municipal level provide a powerful benchmark for project implementation and constitute an additional incentive for the Peruvian authorities to overcome these risks. Nonetheless, the relationship between central and regional governments has been often charged with political pressures and this might affect project implementation in those regions affected by these pressures. The overall risk for the project i s rated as Modest/Substantial. Risk The momentum to advance decentralization policies weakens, threatening the sustainable implementation of and secure resources at the regional level. the program (insufficient intergovernmental transfers Assess financial capacity of regional governments for and/or lack of interest in internalizing technical the short and medium-terms. assistanceactivities). (Modest) Proper allocation of counterpart funds does not Early agreement on schedule of counterpart materialize or debt ceilings are lowered to an extent that requirements and proper assignment of debt to regional loan disbursements are reduced, affecting project governments and/or Ministry of Transport. implementation. (Substantial) Restructuringof the PVD is resisted and continues to Early agreement on PVD's restructuring and regular perform current activities in conflict with gradual monitoring of implementation through legal covenant. devolution o f responsibilities to the regional Technical assistanceresources have been included in governments. project design to help design and implement a timetable (Modest/Substantial) of follow-up activities supporting the institutional objectives of the project. Tasks related to the management of the departmental Scale up the micro-enterprises' model road network continued to be largely performed by force Use positive results obtained in existing programs (e.g. account of the regional governments instead of being Rural Roads Iand 11)to convince regional governments contracted to the private sector. of the model's efficiency and effectiveness (Modest) The institutional capacity of regional governments Ensurethat transfer of responsibilitiesis performed in a remains insufficient when the substantial devolution of timely manner. departmental road management takes place. Phaseinappropriately project resources for institutional (Substantial) capacity buildingand organizational reform. 5. Loadcredit Conditions and Covenants Effectiveness conditions: 0 The PVD has prepared and adopted the Project Operational Manual in terms and scope acceptable to the Bank. 18 Covenants: PVD should furnish to the Bank no later than 6 months after the effective date, the contract appointing the independent auditors under TORS and with qualifications and experience satisfactory to the Bank. PVD should furnish to the Bank, no later than 6 months after the effective date, a Ministerial resolution, in form and substance satisfactory to the Bank, for the creation of the Multi-Sector Advisory Committee. PVD should furnish to the Bank, no later than 18 months after the effective date, the relevant and applicable legal framework for hierarchy of roads and the technical norms for the rehabilitationof gravel roads. Conditions of disbursements for allocation to participatingregions: For disbursement in one region, PVD shall furnish to the Bank a report confirming that the respective Framework Agreement, Financing Agreement, Annual Operation Plan, PRRP and Institutional Agreement have been prepared and approved. D. APPRAISAL SUMMARY 1. EconomicandFinancialAnalyses A cost-benefit analysis has been done using the Road Economic decision Model (RED) developed by the World Bank for the economic evaluation of investments and maintenance alternatives for low-volume roads. The RED model adopts the consumer surplus approach to estimate project benefits that are comprised o f road user costs (vehicle operating costs, passenger time costs and accident costs) savings, which are estimated using road user costs relationships from the Highway Development and Management Model (HDM-4). The evaluation was done for an analysis period of 15 years and adopting a discount rate o f 14 percent, which i s the standard discount rate adopted in Peru since 2000. Since the exact investment program i s not known at the time of appraisal (it should come out from the participatory planning exercise), two approaches have been considered inorder to estimate the economic rate of return (ERR) of the project: (i) firstevaluationconsidered51tentativeroadsections,totaling2,230 km,withtraffic The ranging from 50 to 317 AADT l2and an average percentage of trucks and buses of 40 percent. Based on the economic comparison of the project alternatives, one of them was selected for each road that yields a reasonable rate of return. The evaluation shows that the representative rehabilitationprogram would have an ERR of 26 percent with a global NPV of US$63.4 million. The ERR would fall to 22 percent with a 20 percent increase in investment costs, and to 21 percent if benefits were 20 percent lower than estimate. The switching value analysis shows that for the ERR to fall to 14 percent, investment costs would need to be 1.7 times higher, or benefits 41 percent lower than estimated. Overall, the representative rehabilitation program will provide some 1,312,000 rural inhabitants with access to an all- '' AverageAnnual Daily Traffic. 19 weather road. The results of the analysis indicate a satisfactory economic justification of the representative rehabilitation program. (ii) secondevaluation was performedfor the eight roadsegments which havebeen The selected in order to be rehabilitated during the first year o f the project. These roads have completed technical and economic studies, and, therefore, more up-to-date and detailed information are available. The combined length of these roads amounts to 251.1 kilometers and their total rehabilitation cost to US$ 11.7 million. The evaluation shows that the overall ERR for these roads is 25 percent, and that all the roads have an ERRhigher than 14 percent. The combined NPV of the first year rehabilitation program is US$ 5.58 million and 338,000 ruralinhabitants would be provided access to an all-weather road. The results of the analysis indicate a satisfactory economic justification of the first year rehabilitation program. On the fiscal side, the project is not expected to bringadditional resources to the transport sector as a whole but, rather, to produce reallocation across sub-sectors, resulting in a clear additionality of funds for the regional roads. Indeed, due to fiscal constraints and the government's priorities, the overall funding for the transport sector from external resources i s planned to decrease in the coming years with a reallocation o f those resources within the sector. MEFsimulations for 2004-2009 (Table 2) show a decrease of external resources (i.e., loans from multilateral institutions) for the transport sector, even though disbursements of foreign loans are expected to increase from US$450 million in 2004 to US$500 million from 2005 and beyond. These simulations show a significant reallocation of external funding between the three networks. In particular, secondary roads are expected to attract an increasing number of external resources from the proposed project-up to US$36 million in 2008-to strengthen the competitiveness position of the regions and support the institutional development of regional governments in managing the road networks under their jurisdiction. The additional funds for regional roads are justified by the very poor condition of the network. Inaddition, these funds will provide an additional incentive for regional governments to participate in the program and, thus, contribute to increasing the chances of a successful transfer of responsibilities at the regional level. Table 3: Projection of ExternalResources Available for the Road Sector. US$ million 2004 2005 2006 2007 2008 I2009 National roads II73 1I 62 II 54 II 40 II 30 I 30 Regional roads 0 11 22 28 36 8 Rural roads 26 26 11 6 24 24 Total external resources for transport 101 99 87 74 90 62 Total external resources for all sectors 450 500 500 500 500 500 Share of total resources for transport 22% 20% 17% 15% 18% 12% In addition, the program has been globally approved by the National System of Public Investment (SNIP). The SNIP performs a cost-benefit analysis for all public investment project inPeru (with adiscount rate of 14percent). 20 2. Technical The characteristics of the rehabilitation and maintenance activities to be identified through the PVDPs do not impose major technical difficulties. The technical characteristics will involve improvements to existing surfaces, drainage systems and retaining walls to ensure a level o f mobility tailored to the specific transport needs of the regional populations as identified by them inthe PVDPs.The design of rehabilitation and maintenance works will follow technologies and standards, specified b y national norms (applicable to gravel roads). A clarification of these technical norms i s needed in order to ensure that the proper specifications are applicable for roads with traffic volumes between 200 and 400 vpd. A covenant securing the clarification of applicable norms has been introducedinthe legal agreement. 3. Fiduciary Financial management. A financial management assessment has been undertaken in accordance with OPBP 10.02and the Guidelines for Assessment o f Financial Management Arrangements in World Bank Financed Projects. This assessment covered, so far, PVD's financial management structure, organizational structure and staffing, accounting policies and procedures, treasury, information systems, internal controls and internal audit and found them adequate to carry out the present project. The financial management capacity of the regional governments has been considered relatively weak. The Bank's financial management team, in accordance with the proposed action plan, has made significant achievements in the areas of flow of funds, disbursement arrangements, staffing, auditing TORSand reporting, donors and Government requirements harmonization, and the use of national financial information systems (SIAF) to improve the flow of funds, disbursements and reporting, financial accountability of PVD and management of inter-institutional arrangements (see Annex 7). However, some weaknesses were identified and still need to be handled. The major capacity constraints relate to: 1) the lack of experience of PVD with other Bank projects; 2) the inability to produce Financial Monitoring Reports (FMRs) to support project management; 3) the lack o f technical experience and financial management capacity of the involved regional governments in managing challenging projects, 4) the lack o f experience o f PVD in satisfying donors' requirements especially in the areas of reporting; 5) the new decentralized environment of the current project, with centralized coordination and reporting from PVD, and 6) possible resistance of PVD's and regional governments' staff to accept the new way of doing public works. In order to correct the above weaknesses that could compromise project's performance, the Bank's financial management team will review on an ongoing basis the implementation of a proposed action plan (see Annex 7). At the time o f negotiations, all requirements from this action plan had been fulfilled. The action plan has been designed in such a way that adequacy o f the system to satisfy Bank minimum financial management requirements will be reached at the estimated date for effectiveness. Procurement. An assessment of the capacity of the agencies that would implement procurement actions for the project has been carried out. The assessment reviewed the organizational structure for implementing the project and the interactionbetween Provias Departamental and the regional 21 governments. Procurement activities will be carried out by Provias Departamental (for technical assistance) and participating regional governments (for the works and related supervision) under close coordination and supervision of the former. Annex 8 details the procurement processes that will be followed as well as the agreed institutional strengthening requirements for PVD and the regional governments. The Overall Procurement Risk i s assessed as average. 4. Social The project might trigger the policies OP 4.12 (Involuntary Resettlement) and O D 4.20 (Indigenous Peoples). Following policy requirements, the Borrower has prepared the relevant frameworks, one for Involuntary Resettlement and another one for Indigenous Peoples Development Plans. These frameworks are acceptable to the Bank. The frameworks describe the roles o f the institutions responsible for the design and implementation of resettlement plans and Indigenous Peoples development plans in case these policies are triggered by specific sub projects. Specific plans cannot be prepared before appraisal because of the nature of this project which i s to support decentralization at the national level and to transfer responsibilities to the regional governments, and it i s not known at appraisal whether the works for rehabilitation would entail resettlement or would affect indigenous peoples lands. Besides these policy requirements, the Borrower i s preparing two detailed methodological guidelines to address resettlement and indigenous people's issues. The guidelines will be used as inputs for the capacity building component of the project and to strengthen regional skills regarding these subjects. 5. Environment During project preparation, a number of measures, activities and instruments related to environmental management has been discussed and agreed between PVD and the two Banks. The implementation of these measures i s needed in order to ensure compliance with the national environmental legislation and with the Bank safeguards' policies. The project will only finance rehabilitation or maintenance activities for existing regional road segments. No significant environmental impacts are expected that could threaten, in a direct or indirect manner, the natural environmental in the project's areas of intervention. Therefore, the project has been categorized as "category B", according to the Bank Operational Procedure [OP 4.011. This categorization i s justified by the fact that the project's activities are not expected to have major environmental impact and that related prevention; mitigation or compensation measures can be easily identified and implemented with an adequate environmental management system in place during the various phases of the project cycle. The most significant environmental impact actually happened in the past, when these roads were built. At appraisal, five major environmental issues were considered, in agreement with the Bank's Quality Assurance Team (QAT): a) review o f the Bank's safeguards policies that are applicable to the project; b) preparation of a conceptual framework for the project's environmental management; c) environmental assessment of the first 8 road segments to be rehabilitated during 22 the first year of operation; d) preparation of a strategic environmental evaluation for the sub- sector of regional roads; and e) compliance with the national legislation. As part of the appraisal preparation process, PVD, with the support of the DGASA unit of the MTC, has prepared simplified environment assessments for the 8 regional road segments that will be rehabilitated during the first year of operation. These assessments follow a methodology developed as part of the conceptual framework for the project's environmental management, and which i s consistent with the Bank's QAT guidelines. The results from these assessments were validated by the Bank duringfield visits organized duringthe month of March 2005. The environmental evaluation allowed to determine that 4 sub-projects have a moderate social and environmental risk (level 2), according to the classification elaborated in the Conceptual Framework for Social and Environmental Management. In addition, 4 sub-projects have a low social and environmental risk (level 1).The results are presented inAnnex 10. Duringproject preparation, it was also decided that a Strategic Environmental Assessment would be prepared for the sub-sector of regional roads. The objective of this evaluation is to ensure that environmental issues will be properly addressed in the Government's policies, plans and programs for the sub-sector, and that sufficient capacity will be built to include environmental management inthe design, execution and monitoring of individual sub-projects. An evaluation of the existing institutional capacity to deal with environmental matters of each of the actors involved has been prepared. Based on this diagnosis, an institutional strengthening plan has been prepared, which identifies actors, requirements and resources available for environmental management. Takinginto account the fact that regional governments are going to assume the largest responsibility for project implementation, particular attention has been paid to the strengthening of their capacity. Within their current organization, regional governments include an environmental unit but most of them have a very low capacity or are not operational. For that reason, the largest part of the institutional strengthening plan i s targeted toward regional governments. Finally, an estimation of the project's environmental expenditures has been performed. They cover infact three categories of expenditures: the investment related to the prevention, mitigation and compensation o f environmental impacts, and the costs related to the implementation of the institutional strengthening plan. Total costs have been estimated to US$ 500,000, of which US$ 380,000 for prevention, mitigation and compensation investments, and US$ 120,000 for institutional strengthening expenditures. This amount represents 4% of the amount assigned for the rehabilitation of the 8 initial regional road segments. Taking into account the results obtained at appraisal and the various measures and activities that have been performed duringproject preparation, it can be concluded that the project has properly addressed the environmental requirements and that it complies with the Bank environmental safeguards policies. 23 6. Safeguard Policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OPBP/GP 4.01) [XI [I Natural Habitats (OPBP 4.04) [I [XI Pest Management (OP 4.09) [I [XI CulturalProperty (OPN 11.03, being revised as OP 4.11) [XI [I Involuntary Resettlement (OPBP 4.12) [XI [ I Indigenous Peoples (OD 4.20, being revised as OP 4.10) [XI [I Forests (OPBP 4.36) [I [XI Safety of Dams (OPBP 4.37) [I [XI Projects inDisputedAreas (OPBP/GP 7.60)' [I [XI Projects on International Waterways (OP/BP/GP 7.50) [I [XI Social safeguards, including the involuntary resettlement policy framework, and the environmental policies and procedures are described above. The safeguard policy on cultural property has also been included as required by recent Bank policies. In the event that chance findings of goods or sites that might appear of cultural significance are encountered during the project implementation, works will be stopped and the relevant authorities called upon to investigate the site. If these goods and sites are found of cultural significance, the subproject will be redesigned to avoid any harmful effects to such goods or sites, or otherwise cancelled altogether. These requirements and those related to environmental policies will be incorporated into the Project Operational Manual. 7. Policy Exceptions and Readiness There are no policy exceptionsby PVD and the corresponding regional government. * By supporting theproposedproject, the Bank does not intend toprejudice thefinal determinationofthe parties' claims on the disputed areas 24 Annex 1: Country and Sector or ProgramBackground PERU:RegionalTransport Decentralization A -Background on the Decentralization Reforms: Decentralization to local and regional governments constitutes one of the key elements of the development agenda in Peru. If well implemented, decentralization reforms could improve public sector performance by better involving local stakeholders in the design, implementation and monitoring of local development strategies, and making public agencies more accountable. Decentralization can also contribute to a sound investment climate (Box). Box: Decentralization and the Investment Climate Decentralization can contribute to a sound investment climate in several ways. Decentralization of regulatory responsibilities can help locales adapt approaches to their conditions and preferences and facilitate the involvement of stakeholders. Fiscal decentralization can assure local authorities that taxes raised locally will not be appropriated by the central government, giving local authorities incentives to develop their local tax base. Decentralization also permits a degree of international competition between centers of authority that can stimulate policy innovation and reduce the riskthat governments will expropriate wealth. But there are tradeoffs. Subnational authorities are not well placed to deal with issues that involve spillovers between jurisdictions. They may also face more severe capacity constraints and be unable to exploit economies of scale with particular functions. And subnational governments are not immune from governance problems-and in some contexts may be more vulnerable to them than national authorities. Reflecting these tradeoffs, the optimal location of particular policy and administrative responsibilities will depend on the country and policy issue concerned. Small countries present fewer opportunities for decentralization than larger ones. But even in large countries, some matters will be best handled centrally, some subnationally, and others may require some form of shared responsibility. A clear delineation of responsibilitiesbetween tiers of governments reduces uncertainty and risk for firms and improves accountability. Source: World Development Report 2005: A better investment climate for everyone. Peru initiated a decentralization process at the regional level about 20 years ago. In 1984, a national regionalization plan was approved by the Congress but its implementation has been pending until 1987 when the regionalization basic law l3was promulgated. Eleven regions were then created, whose regional governments were elected for the first time in 1989 and 1990. However, in April 1992, the regionalization process was terminated and regional governments were replaced b y deconcentrated bodies (the CTARs 14), whose heads were designated by the central government. In 1993, the new constitution introduced a legal framework for decentralization, with the division of the country in regions, departments, provinces and districts (Art. 188). According to the constitution, the regions are autonomous and headed by the Presidents of the Regional Coordination Councils, elected for 5 years. A decentralization law l5 was then passed, but it had in fact little impact to promote the decentralization process, particularly at the regional level. l3 Ley de Bases de Regionulizacidn, no. 24650, promulgated on March 19th, 1987 and amended on February loth, 1987. l4 Consejos Transitorios de Administracidn Regional. 15Ley Murco de la Descentrulizacidn, no. 26922. 25 Finally, in 2002, major legislations were passed, which constitute the existing legal framework for decentralization at both local and regional levels. l6 Specific laws were also passed, allowing the transfer of the secondary and tertiary road networks to sub-national levels of government. In addition, several legislations were promulgated to ensure an efficient use of fiscal resources by regional and local governments. l7According to the law, regional governments have the exclusive responsibility for (1) planning the integrated development of their region and implementing the corresponding socio-economic programs; (2) formulating and approving regional development plans, after consulting with the municipalities and civil society; (3) approving their internal organization and their budget; (4) promoting and executing public investments - with a regional scope - for roads, electricity, communications and basic services, aligned with objectives of sustainability, competitiveness, private sector participation, market enhancement and profitable activities' development; and (5) developing tourism. Box: Decentralization and the Competitiveness of the Peruvian Regions. The decentralization of key functions and the increased policy making and fiscal capacity of regional governments are critical steps in improving the competitiveness of poor regions. To complement and reinforce the decentralization program, and to secure economic and social objectives, the GoP in 2002 also set up an ambitious competitiveness program with a clear emphasis on reaching and assisting regions in increasing their competitiveness. The program focused mainly on institution-building for competitiveness, improving productivity and the mix and quality of Peruvian products, reducing logistics costs, upgrading infrastructure services, enhancing the investment climate and facilitating exports. (...) Decentralization can indeed be a powerful instrument to secure social, political and economic objectives. The decentralization system will only be sustainable if based on economic realities, with regions and municipalities building up their own growth potential through focused private sector development strategies. The ultimate success of decentralization in Peru will be measured not as much by laws, procedures and processesbut rather by the extent to which regional economic growth and employment are catalyzed. Regions must improve their competitiveness position to attract private investment and increase economic activity. Enhanced competitiveness requires: adequate and well-maintained infrastructure; low production and logistic costs; better access for regional products to domestic and foreign markets; improved productivity in regional firms; a better mix of regional products; the adoption of quality standards; greater technological capabilities and innovation; enhanced export assistance and trade facilitation; and improved overall regional investment climates. (...) Peru's model of decentralization gives regional (and macro-regional if ever constituted) governments a mandate to stimulate investment, competitiveness and growth. Fulfillment of this broad mandate has two essential prerequisites: (i) strengthenedfiscal and financial management capacity; and (ii) an adequate legal framework supported by proper signals from the central government. For instance, regional and local governments committed to competitiveness enhancement must improve the efficiency and quality of public expenditure. Excessive payroll or, more broadly, operational costs, create rigidities and inefficiencies that reduce the quality of service and threaten fiscal sustainability. Poor investment planning and misallocation of capital expenditures will result in reduced opportunities for investment. Lack of modern accounting and good asset management lead to the unproductive use of public resources that would otherwise benefit from alternative management arrangements involving partnerships with the private sector. Source: Second Programmatic Decentralization and Competitiveness Structural Adjustment Loan - Project Appraisal Document, World Bank, November 2004. In the road sector, regional governments are competent to plan, administer and execute the development of regional road infrastructure (ie. excluding national and rural roads) according to 16 Reforma Constitucional sobre Descentralizacidn (Ley No. 27680), Ley de bases de la descentrulizacidn (Ley no. 27783), Ley Orga`nica de 10s Gobiernos regionales (Ley No. 27867 amended by Ley No. 27902). Ley de Prudencia y Transparenciu Fiscal (Ley no. 27245), Ley del Sistema de Inversidn Pliblica (Ley no. 27293). 26 the prioritization performed inthe regional development plans. They should also promote private investment (domestic or foreign) in transport infrastructure projects and supervise the management of regional roads. Inparallel to the political decentralization process, some progress has been achieved in the area of fiscal decentralization. Transfers to regional governments increased dramatically in 2003, amounting to about 14% of overall public investment that same year. They increased to 16% of overall public investment in the approved 2004. However, about two thirds of these resources are tied to the payment o f public employees and related social obligations, l8 reducing significantly the capacity of the regions to invest in capital expenditures: resources for capital investment only amounted to US$131 million in 2003. A little bit less than a quarter of these capital expenditures (US$32 million in 2003) were spent in road investments (rehabilitation or improvement). Transport-related expenditures represented in 2002-2004 only between 2 and 3% of regional governments' total expenditures (see table). Table: Evolution of Regional Government's Expenditures (2002-2004). US$ million 2002 2003 2004 (as of September) Total Transport Total Transport Total Transport Capital expenditures 78 17.5 131 31.8 107 26.1 Current expenditures 572 3.2 1,160 8.6 1,417 6.6 Total expenditures 651 20.7 1,291 40.4 1,524 32.7 Share of transport 3.2% 3.1% 2.1% I Share of transport 22.4% I I I I 24.3% I I I I 24.4% IncaDital exDenditures I II I Source: MTC. Inspite ofthe progress achieved, regional governments do not currently haverevenue-generating capacity and they rely exclusively on central governments' transfers. In theory, they are allowed to borrow but only for investment and borrowing without the government's guarantee has a ceiling which i s established in the Law of Fiscal Transparency Responsibility and in the Law of Fiscal decentralization. In practice, given the lack of creditworthiness history and the lack of capacity to generate their own resources, the ability of regional governments to borrow remains extremely limited. The Peruvian model for decentralization i s progressive inorder to ensure that responsibilities are handed over to institutions with sufficient technical expertise and managing capacity. An '* Resources come from shares of cannon receipts and ordinary resources as well as from proceeds from the privatization of specific assets (though these proceeds did not materialized in 2003). For the latter purpose, a fund- the so-called FONCOR, or Regional Compensation Fund-has been created to allocate resources to the development of regional infrastructure projects (with allocations related to fiscal effort, poverty, and proximity to the country's frontiers). Another fund-the FIDE, or Intergovernmental Fundfor Decentralization-would be used for funding interregional infrastructure initiatives and will also make use of a part of the resources obtained through privatizations, but it did not have any resources in 2003 and none have been considered in the 2004 budget. Cannon receipts are assigned to regional and local governments according to a poverty formula. They are not assigned by sector but they can only be used for infrastructure investment. The use of these resources is currently not monitored by MEF,but there i s some evidence that up to 20% are being used for current expenditures (salaries). 27 accreditation methodology (National Accreditation System Lawj has been designed to verify l9 that local and regional government did actually reached sufficient capacity. As envisaged, the accreditation system i s too broad to be used as an entry requirement for the proposed program; instead, the institutional capacity building component of the proposed program i s expected to contribute to the future accreditation of the regions by helping set up a minimum institutional capacity for the road management sector (but this capacity could also benefit to other sectors). Finally, the creation of "macro-regions" constituted from the mergingof existing departumentos has been proposed in order to benefit from possible economies of scale. In 2005, two merging have been proposed: (1) between Lambayeque, Piura y Tumbes; and (2) between Ayacucho, Huancavelica y Ica. However, the institutional consequencesof such merging are still unknown. B Backgroundon the Transport Sector: - B1-Description of the RoadNetwork and InternationalComparisons. In2003, the Peruvianroad network included78,200 kmof classified roads of which 8% were in good conditions, 14% in average conditions and 78% in bad conditions. This network was comprised of 16,980 km of national roads, 14,250 km of regional roads and 46,970 km of rural roads. The classification of roads into national, departmental and rural roads has been set by legislation. 2o Ina number of cases, this classification appears to be outdated andsome segments should be moved to a different category. In addition, the technical characteristics of the departmental and rural roads ought to be revised. The revision of the existing classification is underway, undera consultancy paidby the IDB. Table 1:Conditionsof the PeruvianRoadNetwork. Source: Ministerio de Transportes y Comunicaciones (MTC), 2003. The proportion of roads in good or average conditions ranges from63% for the primary network, to 20% for the secondary network and only 9% for the tertiary network. It i s estimated that about 14% of the total network i s paved. 21 In addition to the 78,200 kmclassified network, there could be up to 50,000 kmof unclassified roads (mostly rural roads inbad conditions). '9 Ley del Sistema de Acreditacidn de 10s Gobiernos regionales y Locales (Ley No. 28273) and its reglamento approved through Supreme Decree No. 080-2004-PCM. *'The 2o Decreto Supremo No. 009-95-MTC. paved road network includes 9,000 km of national roads (52% of the total national network), 1,100 km of regionalroads (8% of the regional network) and 950 kmof rural roads (2% of the rural network). 28 Figure: RoadDensityand Level of Developmentin2000. 0 2,000 4,000 6,000 8,000 10,030 12,000 0 2000 4000 6000 8oGo 10000 12000 GDP per capita PPP GDP per capita PPP Source: World DevelopmentIndicators. Whichever criterion i s used (compared to a country's geographic area or to its population), road density in Peru i s lower than what would be expected given the level of development. Infact the density per capita would need to be doubled inorder to be aligned with the average inthe income group, while the density relative to the area would need to be multiplied by five. In Latin America, the Peruvian road density per capita i s lower than most other countries (including Bolivia, Nicaragua, Ecuador, Panama, Brazil, Costa Rica and Chile). The road density per area is only lower inBolivia (0.05 km/km2 compared to 0.06 inPeru). Due to under-investment and poor management of resources, the stock of transport infrastructure has seriously deteriorated over the past decade. For certain segments (eg. paved national roads), the lack of adequate maintenance i s a critical factor for road degradation. Indeed, while the conditions of the national road paved network had improved over the period 1990-1995, the length of paved primary roads in poor conditions increased from 787 to 1,259 km from 1995 to 2002. Figure: Conditionsof the Primary Road PavedNetwork (1990-2002). ____ bad W regular ___ good I 1990 1995 1999 2002 ~ Source: FernindezOrdMez, 0.(2004). 29 B2-The GoP Long-term Strategy for the Transport Sector. The following principles are guidingthe GoP's long term strategy for the transport sector: Alignment of public investment in transport infrastructure with the country's competitiveness needs (primary and secondary networks); 0 Contribute to expanding the assets of the rural poor and tackling inequalities through the improvement of transport conditions in rural areas and coordination with other infrastructure sectors; 0 Fulldecentralization at the regional and local levels for the management of the secondary and tertiary road networks (ie. empowering local stakeholders through the promotion of participatory planning, implementing the corresponding institutional reforms and buildingcapacity); Promotion of private sector participation in transport infrastructure (construction, rehabilitation, operation, maintenance); develop roadconcessions whenever feasible; Refocus of public agencies on regulation and strategic planning and phasing out of their direct involvement inphysical works. Ultimately, the vision for the sector in 2010 i s to have fully put in place the institutional framework needed for a decentralized management of the secondary and tertiary networks; to have improved the efficiency of road assets' management with active participation of the private sector (eg. through concessions within the new Guarantee Facility); and to have improved the effectiveness of road interventions through the scaling up of participatory planning and the alignment of interventions on the primary work with the national competitiveness agenda. Figure: Situationof Road ManagementPracticesin2005. 30 Figure:Vision of RoadManagementPracticesin2010. National Government Governments (provinces and districts) MTC exclusivelyfocuseson I the managementofthe Network primary pvD and exclusiilygovernments IMunicipalities-through Re ProinciaJRod focus onthe 1 responsibilities pvRhavebeendownszed Institutes exdusvely foeus - andthey exclusib focus on managementofthe I onthe managementofthe providingassistanceto local smndary network I secondarynetwork andregionalgovernments I Nationaltransportplan Participatory RegionalRoadI PztrticipabryPrw'ncial R Planning alignedwiththe cwnQ`s Planshavebeenprepared Plans havebeen prepared Competitivenessagenda or updatedin all regions I1 orupdatedinallprovinces Rehabilitation 7 AImaintenanceactivitiesare AImaintenanceactivitiesar$ AI^ maintenanceactivitiesad contractedout; rotffine contractedout;routine 1 contracted out; routine Maintenance maintenanceis petformedby maintenanceis performedb maintenanceis perfomted micro-enterprisesunder micro-enterprises under competitive contracting competitive contracting Y1 micmenterprises under q e M i v e contracting B3 -Description of the Regional Roads' Network. The regional road network i s not evenly distributed across the various departaments. Cusco has the largest stock of regional roads (1,730 km) while there are none in Ucayali and only 46 kmin Madre de Dios. There might be good reasons for such an uneven distribution (low population density, geographical characteristics, distributionof productive activities and markets). However, the sharp differences that exist across regions suggest to adopt a customized approach to regional road decentralization. Indeed, the institutional capacity needed to handle a 1,000 km network will not be the same as for 50 km of regional roads. In such cases, strong cooperation between regions may bejustified by the potential economies of scale. This has also consequences interms of prioritization methodology (in Madre de Dios, the contribution of regional roads to local development may not be as important as the contribution o f rural roads or river-based transport modes). 31 Table: RegionalRoads' Network inthe PeruvianDepartamentos. Departamento I Length of regional roads'I Departamento ILength of regional roads'1 I Apurimac 544 0 Source: MTC - Proviasdepartamental. Traffic volumes differs significantly across regional roads segments. 48% of the secondary network has traffic volumes of less than 50 vehicles per day (vpd) and 91% of the network has traffic volumes of less than 200 vpd. In fact, only two regional road segments have traffic volumes exceeding 1000 vpd (a 18 km segment: Puente Gruu - Los Molinos and a 13 km segment Puente Fruncos - Sun Jucinto -Empate). This has important consequences for the cost- effectiveness of paving additional segments of the network. Indeed, paving i s usually justified for traffic volumes exceeding 200 vpd. As the quasi totality of the regional road network i s already paved (see table below), no upgrading from gravel to paved road seems to be justified economically. In most cases, a well-maintained gravel road constitutes a better use of public resources than a pavedroad. Table: Daily Traffic Observed on Regional Roads. Traffic volume Share of the total Source: FernQndezOrdbiiez, 0.(2004). B4-Institutional Framework. Provias Departamental (PVD) i s the central agency which used to be in charge of managing the secondary network before the effective transfer to regional governments. As explained earlier, since the decentralization law was passed in 2002, the management o f the secondary network i s now the responsibility of the regions and PVD needs to refocus its mission on helping regional governments develop their institutional capacity in order to be able to manage these roads effectively and efficiently. PVD includes a staff of 175 in its headquarters in Lima and 16 regional offices (unidudes zonules) with a total deconcentrated staff of 64 administrative and 32 1,000 workers and occasional operators. Early 2005, a decision was taken to close the unidudes zonales and during negotiations, a plan for the restructuring of PVD was approved by the Transport Vice-Minister. In 2003, PVD had a S280 million budget ($80 million) and S250 million ($71 million) in 2004. Resources come from the national budget (fiscal revenues) and from the FDA (Fondo de Inversiones de Ancash). A decision was also taken early 2005 to stop initiating new construction or rehabilitation activities so that PVD can start evolving towards a regulatory/promoting/supervisingagency inthe new decentralized environment. Provias Rural (PVR) i s the central agency in charge of managing the transfer o f the tertiary network to local govemments. Inaddition, PVR has been in charge of a small proportion of the secondary network (around 2,700 km) and transferred that responsibility to 12 regional governments in 2004, 22 along with technical assistance. Historically, the reason for PVR to be involved in secondary network management has been the need for continuity between some rural road segments to be rehabilitated under the Rural Roads Program. The successful results obtained suggest that the new decentralized approach to road management implemented under the Rural Roads Program (see Box) can actually be replicated for the secondary network. PVR has used the same micro-enterprise model to maintain the departmental roads as it did for rural roads. To maintain the 2,700 km of roads, 108 micro-enterprises were created and the responsibility for their contracting has been transferred to the twelve regional govemments. Box: Peru: A Decade of SuccessfulRural Roads' Management Three quarters of Peru's rural population live in poverty, about half of the total in extreme poverty. Inthe rural parts 3f the Andean mountains, the isolation of the poor caused by non-existent or very inefficient transport infrastructure limits access to local markets, schools and health centers. Since 1995, the Peruvian authorities have successfully designed and implemented an innovative approach to road management in the poorest areas of rural Peru, with the help of the World Bank and the Inter-American Development Bank. The approach developed over a decade by the First and Second Rural Road Projects has firstly aimed at empowering the rural poor in the process of selecting those rural roads that should be rehabilitated. About one hundred provincial participatory road plans have been prepared through the organization of community workshops. These plans prioritize among road segments to identify the ones that are most critical to the needs of the poor and most likely to help spur productive activities. The project has been considering all the main transport modes of the rural poor: rural roads as well as pedestrian paths for the extreme poor and even fluvial transport for the communities living in the Amazonian regions. A "local development window" was also created to help identify productive activities that became feasible, thanks to the improvement of transport conditions. Building on the on going decentralization reforms in Peru, the management of rural roads has been progressively handed over to provincial municipalities, along with the corresponding budgetary resources and technical expertise. Provincial road institutes have been created, under the authority of provincial road boards which include all the mayors from the province. These institutes, of which there are 38 so far, contract out the maintenance o f the roads that have been created to micro-enterprises, created by men and women from the poorest rural communities. This approach has improved the efficiency of maintenance activities and also contributed to developing entrepreneurial capacity in rural areas, as well as reducing poverty. More than 500 micro-enterprises have been created, representing 5,700 employment opportunities for poor menand women. (30% of the workers are women). As of 2005, 13,000 kmof rural roads have been rehabilitated under the projects and were receiving adequate routine maintenance contracted out to micro-enterprises. The technology used for road rehabilitation (gravel roads) was about a quarter of the cost of other alternatives like paved roads. Before the projects, low cost alternatives, like 22 Ancash, Apurimac, Ayacucho, Cusco, Cajamarca, Huancavelica, Huanuco, Ica, Junin, Pasco, Puno and San Martin. 33 gravel roads, were discarded because communities knew they were not going to last. After a decade of experience, communities have now learnt that gravel roads are a sustainable option, provided adequate maintenance i s performed, as well as a cost-effective alternative, given the traffic observed on Peruvianrural roads. In 2005, a thorough evaluation of the Second Rural Road Project was performed, illustrating the improvement in transport conditions (a 68% reduction in travel time) as well as its impact on access to schools (a 8% increase in enrollment) and health centers (a 55% increase in visits), agricultural productivity (a 16% increase in land destined to agriculture) and rural income (a 20% increase in men's agricultural salaries). A better trend in poverty and extreme poverty indicators was also observed in the project's areas, compared to the other areas not covered. This effect on poverty is expected to become stronger over time. The World Bank has lent US$90million to Peru for the First Rural Road Project and US$50 million for the Second Rural Road Project. Source: World Bank (2005). At the regional level, part of departmental road management is handled by the deconcentrated units (the RRDs). 23 The RRDs have an average staff of 100to 120 people (about 2,000 people for the whole country). Their positioning remains ambiguous since, according to the Regional Government Law, they are placed under the administrative authority of the regional governments but under the functional authority of the MTC. In addition, the current organization of the regional governments includes a regional infrastructure managing unit (RIMU). 24 In most regions, the RRDs and the RIMUs are working on the same kind o f issues, in a non-coordinated manner. The restructuring of these institutions i s a key institutional challenge for the decentralization process. Ultimately, they should be restructured (possibly merge in a single institution, placed under the full authority of the regional governments). A Supreme Decree (Decreto Supremo) i s under preparation to validate the plan de transferencia that will help clarify the responsibilities of the RRDs and the RIMUs. Between the RRDs and the RIMUs, regional governments have a significant staff involved in road management: in Cuzco, the two institutions added count with 484 people, in Junin 367 people, in Arequipa 225 people and in Huancavelica 195 people. Untilnow, PVD has been handling departmental roads' rehabilitation and maintenance directly, with its own employees and equipment ("force account" model). As a consequence, the former deconcentrated units (the RRDs) still own significant stocks of mechanical equipments that could be used for road construction or maintenance. In 2004, PVD still administers 767 mechanical equipments, including 279 heavy equipments (see table). Because o f obsolescence or the lack of proper maintenance, a large proportion of these equipments are out-of-order (only 58% are operational). About 80% o f these equipments are over 8 years o f age and their yield range between 40% and 60% of specifications. 23 Regional RoadsDirectorate (Direcciones Regionales de Transportes y Comunicaciones in Spanish). 24 Gerencia Regional de lnfraestructura in Spanish. 34 Table: Stock of HeavyEquipmentand Conditions of this Equipment. 1 Departamento 1 Amountof 1 % operational IDepartamento I Amount of 1 Q operational I Source: MTC/ ProviasDepartamental. Inthe context of the on-going decentralization process, 290 pieces of equipments have already been transferred to the regional governments under "cession agreements". B y the end of 2004, 390 additional pieces were to be transferred. Ensuringthat these equipments will not be used to support "force account" management models i s a critical issue for the successful transfer of responsibilities to the regional governments. Instead, the proposed project aims at outsourcing a majority - if not all - of the regional road tasks to private construction firms or to micro- enterprises in the case of road maintenance. Based on the experience of many countries (Colombia, Bolivia), this has proved to be a more efficient approach to road management, including for dealing with emergency situations. Under this model, the RIMUs should not need any mechanical equipment at all. If this i s not possible, a progressive phasing out of this equipment stock should be elaborated as well as a strong limitation to the situations when these equipment could be used (eg. some emergency cases). Finally, the specific case of the equipment that could be used to pave roads should be considered with particular attention since this may lead to wrong technology choices. Indeed, given the traffic statistics observed in most of the secondary network, only a few of the regional roads would require paving. For most of the secondary network, gravel roads with adequate maintenance would be the most cost-effective technology solution. Therefore, paving equipments are in most cases unjustified and they may provide an incentive for wrong technology choices. In addition, they may become a liability for the RIMUs since they require very costly maintenance. B5-Regulatory Framework and Technical Norms. The revision of the existing legislation for road classification i s under way. This reclassification was becoming necessary since there are significant inconsistencies between the level o f government in charge of certain portions o f the primary, secondary and tertiary networks and the functions served by certain road segments. As a result, some regional governments have been spending resources to improve the conditions of some primary roads which mostly have a regional function while they are financing the improvement of some rural roads which should be the responsibility of the local governments. A Supreme Decree (Decreto Supremo) 25 has been 25 Reglamentariode laLey de Transportey Trcinsito,respecto de lajerarquizacidn de las redes viales. 35 drafted to make reclassification more agile and less bureaucratic. A dated covenant has been introduced to ensure such clarification of the regulatory framework. The technical norms that are applicable to roads with low traffic volume are currently unfavorable to the development of gravel roads. More specifically, the geometric design norm (DG-2005) 26 which i s consistent with gravel road technologies i s valid until traffic volumes of 200 vpd. Over 200 vpd, another norm (DG-2001) 27becomes applicable, which i s mostly based under paved roads specifications. To improve the existing situation and put in place a normative framework favorable to the development of gravel roads, a dated covenant has been introduced inthe loan agreement. As a result, it is expected that the DG-2001 should become only valid for paved roads while the DG-2005 would be applicable to gravel roads with traffic volumes lower or equal to 400 vpd. C-Background on the Fiscal Situation: C1 - InvestmentNeeds and Levels of Capital and Recurrent Expenditures. The fiscal situation is a significant constraint to public investment in infrastructure as shown by recent research in the region. 28 InPeru, public investment inall infrastructure sectors (ie. not only roads) has halved in value from around 2% of GDP inthe 1980s to less than 1%of GDP in the 1990s. 29 In 2004, public investment in roads amounted to about 0.5% of GDP. In comparison, recent research calibrated for a sample of Latin America countries estimated that the optimum macro-economic spending levels in infrastructure were 4.0% of GDP for new public investment and 2.0% o f GDP for maintenance. 30 Other works estimated that reaching an infrastructure endowment comparable31to the Latin American leader (Costa Rica) would increase GDPgrowth by 3 percentage points. Capital investments required to restore Peru's road network to conditions aligned with traffic levels have been estimated at around US$4.2 billion. 32More than half o f the needs concern the primary network (national roads) where 70% of the network needs rehabilitation or improvement. For the secondary network (regional roads), capital investment needs have been estimated at US$1.3 billion, with 83% o f the network needing rehabilitation or improvement. Finally, for rural roads, rehabilitation costs have been estimated to cost US$0.6 billion, with 76% of the registered network needing rehabilitation. The latter figure does not take into account the needs of Non-Motorized Transport (NMT) roads, non-registered rural roads (that could exceed 60,000 km), and urbanroads (needs in capital investment for urban roads in Lima only have been estimated to US$0.8 billion). 26 Norma de diseiio geome`tricopara caminos de bajo volumen de trdnsito. 27 ** Norma para caminos de tercera clase. Source: Calderon, C. and Serven, L.-The output cost of Latin America's infrastructure gap (2004). 29 Source: Foster,V. - Peru's Infrastructurein International Perspective (2004). 30 Source: Rioja, F. - Filling Potholes: macroeconomic effects of maintenance versus new investment in public infrastructure (2003). 31 Source: Foster,V. Ibid. 32 Source: Guerra-Garcia, G. (2000) - Hacia una Politica de Financiamiento para el Sector Transportes en Perk, Mimeo prepared for the Inter-American Development Bank (IDB). 36 Table: CapitalInvestmentRequiredto Fully UpgradePeru'sRoadNetworks. Length (km) Cost (US$ million) National roads Total network :18,081 Total needs :2,277 paved roads needing rehabilitation 3,646 739 construction of new paved roads 821 534 affirmed roads needing rehabilitation 4,995 393 affirmed roads needing to be paved 879 264 non-affirmed roads needing to be affirmed 1,800 207 other capital investment 430 140 no;-affirmed roads needing to be affirmed 7,130 948 affirmed roads needing rehabilitation 4,492 333 paved roads needing rehabilitation 228 49 Rural roads Total network :46,909 Total needs :598 rural roads needing rehabilitation 35,826 598 Existing levels of public capital expenditures for roads are insufficient to cover these needs, particularly for regional roads. In 2004, the resources of the Ministry of Transport and Communications (including those assigned to the so-called Provias Nacional, Provias Departamental and Provias Rural) remain the main source of funding for capital investment in the road sector. These resources amount US$234 million, with US$147 million for the national network, US$45 million to regional roads, and US$20 to rural roads. Based on these current funding levels, it will take 16 years to fully upgrade the primary network, 30 years for the secondary network and 28 years for tertiary roads. It should be noted that these figures are infact underestimated since roads-under proper maintenance-requires rehabilitation every 10 to 15 years and that therefore, some of the early rehabilitated segments would have to be rehabilitated again (as well as the roads which are currently in good conditions). Budget resources for-road maintenance are also insufficient to prevent network deterioration, which increases the cost o f rehabilitation. Given the existing conditions of the network, current expenditures' needs are only partially covered by budget resources, particularly for regional roads and rural roads for which less than half of the needs are covered. Insufficient maintenance accelerates roads' degradation, making rehabilitation more costly. When roads are rehabilitated or improved, the cost of maintenance increases but the frequency o f rehabilitation requirements decreases (a road which i s not maintained will need to be rehabilitated every 4 to 7 years compared to 10 to 15 years for a road well maintained). In 2004, some routine maintenance activities on the secondary and tertiary networks have been transferred to regional and local governments. 37 Table: CurrentExpendituresNeededfor RoadMaintenanceand Comparisonwith ActualResources. US$million National roads Regional roads Rural roads Maintenanceneeds givenpresent conditions of network 103 31 41 assumingfull rehabilitationand improvement 136 60 129 M'TC maintenancebudget (2004) 61 6 RegionalAocalgovemmentsbudget (2004) I 10 Current expenditures' needs coveredby resources givenpresentconditions of network 65% 42% 24% assumingfull rehabilitationandimprovement 49% 22% 8% C2 - Sector-generated Resources Revenues generated through road users' charges and fees have exceeded road expenditures. According to an analysis undertaken in2000, 33these revenues amounted to an annual average of about US$570 to US$600 million in the period 1997-1999. No estimation i s yet available for subsequent years but the amounts should be at a similar level or higher if a normal increase in mobility (number of vehicles, average distance per vehicle) has taken place. Table 3 shows that, in the period 1997-1999, revenues exceeded road expenditures by 71%, 25% and 82% in those three years. If an overall value-added tax (IGV in Spanish) of 14% i s discounted from all the revenue sources, these percentages become 47%, 7% and 56%. However, it should be noted that urban roads are not included inthese estimations for road expenditures. MTC budget 316 420 305 Total road expenditures(does not include expenditureson urbanroads) 345 459 331 C3 -Financial Capacity of the Regional Governments. An assessment of the financial capacity of regional governments has been performed by Provias Departamental on the basis of expenditures observed during the period 2002-2004. Over the last three years, regional governments' expenditures intransport represented about US$28 million in capital investment (mostly road rehabilitation) and US$6.9 million in current expenditures 33Guerra-Garcia, 2000. 38 (mostly road maintenance). Based on this assessment, it can be estimated that, globally, the regions could bring about US$120-130 million of counterpart funding for road rehabilitation over the next 4 years, just by sustaining past levels of investment. For road maintenance, regional counterpart funding could reach about US$28-30 million for the next 4 years. These levels could even be greater assuming that the overall budget of the regions will grow over the coming years along with the gradual implementation of the decentralization process, and the possible (though limited) re-allocation of more funding to the road sector (during the period 2002-2004, the regions have spent only 2 to 3% of their overall budget inroadrehabilitation or maintenance). In comparison, the proposed project has a total cost of US$160 million for road rehabilitation and US$15 million for road maintenance for 4 years, of which 50% would be brought by counterpart funding (ie. US$80 million for road rehabilitation and US$7.5 million for road maintenance). Globally, the assumption of 50% of regional counterpart funding shouldtherefore be compatible with the financial capacity of the regional governments. Table: RegionalGovernments'ExpendituresinTransport(2002-2004,US$ thousand). Source: MTC. Nevertheless, there exist significant disparities across the various regions. Therefore, a critical issue for the project design i s to ensure that the methodology used to set the length of the secondary network to be rehabilitated and maintained under the project in each region i s compatible with the financial capacity of regional governments. Based on the average 39 rehabilitation cost of US$50,000 per km, the table below shows the maximum length of regional roads that could be rehabilitated under the project in each region, based on a 50% regional counterpart funding (and no constraint on external borrowing). Based on these assumptions, some regions (Loreto, Madre de Dios, San Martin) have sufficient counterpart funding to rehabilitate their entire secondary network. On the other hand, other regions have a much more limited financing capacity: L a Libertad could only finance the rehabilitation of 50 kmof regional road (6% of total secondary network), Tumbes the rehabilitation of 31 km (10% of the network) and Icathe rehabilitation of 37 km(11% of the network). Tacna 1,090 483 174 36 Tumbes 194 318 31 10 Ucayali 1,492 0 239 TOTAL 28,010 14,270 4485 31 C4 -ExternalBorrowing Scenario. Inthe last 15 years, external borrowing has brought at least US$1.2 billion to the sector (about US$SOO millions from IDB, 140 from the World Bank and at least 250 from the CAF). These loans have been focusing on particular segments and/or policy reforms for one of the three road networks (primary/secondary/tertiary). Some years, external resources have brought up to 60% of total resources for certain road programs (e.g. rural roads in 2004). Other years, they represented less than 5% of total resources (e.g. departmental roads in 2004). On the other hand, allocation of ordinary budgetary resources to the various roadprograms has been largely volatile. Thus, while cost recovery in the sector does not appear to be an issue (revenues exceed expenditures), actual funding for the various road programs is highly dependent on budgetary decisions and external borrowing, with marked volatility inthe case o f maintenance. Due to fiscal constraints and the government's priorities, the overall funding for the transport sector from external resources i s planned to decrease in the coming years with a reallocation of 40 those resources within the sector. MEF simulations for 2004-2009 (Table 4) show a decrease of external resources (i.e., loans from multilateral institutions) for the transport sector, even though disbursements of foreign loans are expected to increase from US$450 million in 2004 to US$500 million from 2005 and beyond. These simulations show a significant reallocation of external fundingbetween the three networks, as follows: a. external resources for national roads are expected to decrease gradually (from US$73 million in 2004 to US$30 million in 2008-2009), with the difference to be taken over by tapping private sector resources (through concessions); b. secondary roads are expected to attract an increasing number of external resources from the now under preparation Regional Transport Decentralization Project-up to US$36 million in 2008-to strengthen the competitiveness position of the regions and support the institutional development of regional governments in managing the road networks under their jurisdiction; C. funding for rural roads would decrease in 2006-2007, upon the completion of the on-going WB-IDB co-financed Rural Roads Program, before regaining previous levels by 2008 (with the expectation that another program supported with external resources would be under implementation-this time within a fully decentralized framework and provincial and district municipalities bringingincreased levels of counterpart funding). Table: Projection of External Resources Available for the Road Sector. US$ million 2004 2005 2006 2007 2008 2009 National roads 73 62 54 40 30 30 Regional roads 0 11 22 28 36 8 Rural roads 26 26 11 6 24 24 Total external resources for transport 101 99 87 74 90 62 Total external resources for all sectors 450 500 500 500 500 500 Share of total resources for transport 22% 20% 17% 15% 18% 12% This fiscal framework for external resources could be significantly modified if major transport infrastructure projects (eg. Transoceanica project with possible CAF funding) were to be launched. No fiscal impact on MTC budget i s currently expected from the newly-approved Guarantee Facility although this could change if the subsidies related to some road concession projects were to be affected to the MTC budget. C5 - Fiscal Framework for the Regional Transport Decentralization Project Conversations with the MEF (Office of Public Sector Multi-Annual Programming), based on a policy of internal fiscal neutrality, ordinary budget resources are not expected to compensate for the decrease of external resources. Moreover, the decentralization process to local and regional governments (with the corresponding transfer of budgetary resources) may ultimately produce a reallocation of internal funding across sectors but it i s unlikely to lead to a major increase o f resources for transport. This scenario means that the external resources from the possible WB- 41 IDB loans to support the regional transport decentralization initiative are not additional to the budget, but rather they would be reallocated to other sectors. Within the sector, therefore, the proposed jointly-financed WB-IDB Regional Transport Decentralization Project would benefit from the current allocation o f external resources for 2005- 2009, resulting in a clear additionality of funds to the sub-sector. The loan resources from the World Bank and the IDB amount to US$lOO million, with a similar amount of counterpart funding. The debt would be assigned to the Ministry of Transport and Communications (MTC)-making the loan resources a grant to the regions-while the regional governments would have to take up the counterpart funding in line with the interventions within their corresponding jurisdictions. If these external funds did not materialized the regions would be left to themselves to address the needs of their networks and the incentive scheme for institutional strengthening and efficient road management that the blendmechanism (of debt and counterpart funding) wouldbringabout could not be implemented. C6 -Long TermFiscal Vision for the Sector There i s currently a significant resource gap for the road sector in Peru. The fiscal pressure, the insufficient attractiveness for private sector participation and, in certain cases, the low efficiency of transport-related public expenditures are major reasons behind this gap. Compared to a scenario aiming at efficiently upgrading the entire Peruvian road network over a 10 year period, there is, in2005, an estimated gap o f US$176 million. Table: Needsand Resourcesfor the RoadSector in2005. ***assumingfullrehabilitation ofthe Peruvianroad network over a 10year period. estimated In2010, a realistic objective for the Peruvian authorities shouldbe to close the resources' gap by attracting more private capital in the road sector (for the primary and secondary networks, the Guarantee Facility i s expected to help promote such a participation and for the tertiary network, some industries - mining in particular - have already expressed their interest in contributing to the upgrading of some ruralroads that are critical to their activities). In addition, the success of the decentralization process (and some additional deepening of fiscal decentralization) should help convince local and regional governments to bring more resources in road assets' management, particularly in maintenance. All resources for maintenance activities available in the national government's budget should be transferred to the relevant sub-national level of government b y that time. The MTC budget should only be used to channel external resources that can be transferred to the lower levels of governments to co-finance capital expenditures in road improvement. 42 Table: FiscalVisionfor the RoadSector in2010. I TOTAL I 671 I 177 I 274 I 110 I 110 1 671 I 0 ***assumingfullrehabilitationof the Peruvianroadnetworkover a 10vear Deriod(half comuletionin2010). estimacd, with the help of the GuaranteeFacility for the primaryand secondaj networis and with privateparticipationinfinancing of rural I I roads' upgrading(mining industriesinparticular). 43 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies PERU:RegionalTransport Decentralization Sector Issue 'roject .atest Supervision (PSR) World Bank-financed IP) (DO) :mprove the access of rural poor to basic social VB/IDB: Second Rural ; S ;ervices, market integrating infrastructure and Load Project ncome-generating activities with gender equity, to ielp alleviate rural poverty and raise the living ;tandards of rural communities Provide a well integrated and reliable rural road YB/IDB: Rural Road )EDratings: Outcome: HS system through rehabilitation and maintenance of Lehabilitation and 3ank perf.: HS auralroads and key connecting linksto the primary daintenance Project 3orrow. Perf.: HS road system. (1)rehabilitate essential transport infrastructure; rransport Rehabilitation CR ratings: Outcome: S (2) assist Government inimplementing 'roject Bank perf.: S institutional reforms in the road and railway Borrow. Perf.: S subsectors, aiming at improved resource use and sustainabledevelopment; and (3) lay the ground work for future projects focusing on strengthened road management, increased private participation in the transport sector, and improved mobility of the poor. Assist the Municipality of Metropolitan Lima WB/IDB: Lima Urban Implementation hasjust started (MML)inenhancing the economic productivity rransport Project indno rating is available yet) and the quality of life within the Lima Metropolitan area through improving mobility and accessibility for the metropolitan population, especially in the peri-urban poor neighborhoods by establishing an efficient, reliable, cleaner and safer mass rapid transit system. Assist the GOP to: (i) establish a more Trade Facilitation and s s streamlined, integrated and effective institutional Productivity Improvement and policy framework to increase nontraditional Technical Assistance exports, and (ii) develop and implementinitiatives Project designed to foster the entrance of new export market participants, especially small and medium producers. Pioneer public private partnerships inPeru for Guarantee Facility Project Approved by the Bank inApril infrastructure projects. The GOP has identified 2005 enormous infrastructure investments, required to bring average coverage levels to adequate standards, decreasecoverage gaps and inequity, and improve the country's competitiveness by reducing logistical costs. 44 Other Development Agencies (i)develop an extensive region of the Peruvian IDB:Highway highlands by improving its road infrastructure and Rehabilitation and linking it to the more dynamic economy of the Improvement Project - coast; (ii)improve the programming of road PhaseI11 investments; (iii)encourage private involvement through the promotion of highway concessions; and (iv) boost MTC's institutional capacity. Support investment program for a major toll road concession in the Lima metropolitan area. IDB:Hanc6n-Huacho- Pativilca Toll Road Project Second RuralRoadProject(WBDDB) [PO446011(approved in 2001; on-going) The objective o f the Second Rural Roads Project in Peru, i s to increase access to basic social services, and to economic, and income-generating activities, to help alleviate rural poverty. The components consist o f 1)finance roads rehabilitation, to improve accessibility to rural areas, and restore operating conditions along regional economic corridors. Unpaved primary, and secondary roads were selected for rehabilitation, to be integrated into the consolidated road network; 2) routine, and periodic maintenance o f rural roads, and connecting primary, and secondary roads were strengthened, based on a co-financing arrangement between the central government, and benefited local governments; 3) improve the non-motorized rural transport, by providing technical assistance for village-level infrastructure management, to include community participation in the planning, and implementation of works; 4) pilot an institutional model for managing the rural road network at the provincial level, whose municipal authorities jointly assume responsibility over the development of a core provincial road network. This allowed to avoid current institutional, and financial segmentation, that could have prevented municipalities from undertaking integrated initiatives, or responsibilities; 5) pilot the development of strategic frameworks for improving rural accessibility in the Selva region. The pilot ascertained technical, institutional, environmental, and economic guidelines to set an inter-modal transportation system along rivers; and, 6) further develop the institutional building program, already underway, to improve rural transport policy, and strategies; to improve planning, and management of rural roads; and, to develop community-based micro-enterprises for road maintenance. RuralRoadRehabilitationand MaintenanceProject (WBDDB) [PO370471(approved in 1995;closed in 2000) The overall purpose of the Rural Road Rehabilitation and Maintenance Project was to provide a well-integrated and reliable rural road system through rehabilitation and maintenance o f rural roads and key links connecting to the primary road system. This has helped alleviate rural poverty and raise living standards o f rural communities through increased access to basic social and economic and income-generating activities. The specific objectives were to: 1) reduce transport costs and raise the reliability of vehicular access to expand markets for agricultural and non-farm products; 2) integrate poorly accessible zones with regional economic centers; 3) improve transport conditions inrural villages; 4) generate employment through the rehabilitation and maintenance of rural roads to mitigate rural poverty; and 5) buildup institutional capacity at local government levels and develop small and medium enterprises to manage and carry out, on a sustainable basis, the maintenance and upgrading of rural roads. The project consisted of the 45 following six components: 1) rehabilitation of rural roads; 2) rehabilitation of connecting primary and secondary roads; 3) routine maintenance of rural roads; 4) improvement of village streets; 5) improvement of non-motorized rural transport; and 6) institutional development which includes: a) technical assistance to improve planning and management of rural roads; b) studies on local road management practices and rural road financing; c) technical assistance to develop micro-enterprises formed by groups of beneficiaries for road maintenance; and d) technical assistance and training services to strengthen the local road construction industry. TransportRehabilitationProject (WB) [POOSO45] (approvedin 1994; dosed in 2000) The Transport Sector Rehabilitation Project's main objectives were to: (i) rehabilitate essential transport infrastructure; (ii) assist Government in implementing institutional reform in road and railway subsectors; and (iii) lay the ground work for future projects focusing on strengthened road management, increased private participation in the transport sector, and improved mobility of the poor. The project consisted of five components, the most important concerning road rehabilitation. Six roads totaling 725 km were rehabilitated under the project. In addition, this component included: (i) bridge program involving the acquisition and recovery of Bailey a bridges and the reconstruction of derelict old bridges; (ii) a pilot maintenance program focusing on 620 km of road in a specified corridor; and (iii) a traffic safety program. In parallel, the project supported government efforts to rebuild an institutional structure capable of maintaining the road system. The second component helped to privatize and rehabilitate the railway, by: (i) reducing staff redundancy; (ii)rationalizing railway debt; (iii)closing down or receiving budgetary transfers from the Government for unprofitable services; and (iv) rehabilitating track, telecommunications and locomotives to keep the railway in operating condition while the privatization process i s underway. The third component concerned the rehabilitation of Lima's airport runway which was in urgent need of repair, before it becomes in danger to aviation. The fourth component was a pilot project for non-motorized transport in Lima to test methods of promoting the use o f bicycles by low-income residents. The fifth component, technical assistance and training, aimed at; (i) strengthening the institutional capacity for managing roads and bridges, and supporting the creation and fostering o f an autonomous agency responsible for planning, operating, financing, and administering the highway network; (ii) capacity to building manage environmental issues; and (iii) assisting the railway inits privatization and improving its management. LimaUrbanTransport Project (WBDDB) [PO357401(approvedin 2003; on-going) The main objective of the project i s to assist the Municipality of Metropolitan Lima (MML) in enhancing the economic productivity and the quality o f life within the Lima Metropolitan area through improving mobility and accessibility for the metropolitan population. The project has the following six components: Component 1) comprises primarily infrastructure works to implement the busways along existing road corridors: (i) construction of 28.6 km of segregated busways; (ii)repaving of mixed-traffic lanes adjacent to the new busways; (iii)traffic signal improvements, signposting and road markings along the corridors; (iv) bus stations and terminals; (v) bus depots and workshops; (vi) control center; (vii) paving and other improvement of feeder roads to the two bus terminals; (viii) road safety measures along the corridors, its feeder roads, and the streets in its area of direct influence; and (ix) improvements to pedestrian and vehicular corridors, pedestrians and busway users. Component 2) comprises three activity areas: (i) community consultation and education; (ii) mitigation o f the negative impacts on some 46 current bus operators; and (iii) financial support during the initial months of busway operations. Component 3) addresses the regulatory, monitoring, and control functions of urban public transport and supports: (i) the development and implementation of a public transport policy, including its regulatory and policy-setting framework, as well as its administration, operation, monitoring and control; (ii)the formal creation, technical assistance and training of PROTRANSPORTE, the entity responsible for implementing the busway operations; (iii) technical assistance and training of EMAPE,the entity responsible for implementing the physical works under the Project; (iii) technical assistance and training of DMTU and the national police; and (iv) monitoring and evaluation of the busway operation and the Project. Component 4) this includes (i) supervision of the physical works described above; and (ii) economic feasibility and environmental studies as well as the preparation final engineering designs to expand the busway network beyond the 28.6 km funded by the Project. Component 5) this component, entirely to be financed from counterpart funds, includes the operational expenses of the institutions responsible for administering the Project and for implementing the busway operations. Component 6) later in 2003, MMLwill initiate the re-construction at the Plaza Grau, one of Lima's busiest intersections and a key node of the busway to be financed under the Project. Trade Facilitation and Productivity Improvement Technical Assistance Project (WB) [PO777881 (approved in 2003; on-going) The Trade Facilitation andProductivity Improvement Technical Assistance Project development objectives are to assist the GOP in: (a) establishing a more streamlined, integrated, and effective institutional, and policy framework to increase nontraditional exports; and (b) developing, and implementing initiatives designed to foster the entrance of new export market participants, especially small and medium producers. The project would achieve these objectives by providing technical assistance to: (1) elaborate and implement a national plan to improve Peru's competitiveness drawing from locally-generated regional strategies, and partnerships with the private sector; (2) strengthening mechanisms of interaction, and cooperation between private, and public parties at regional, national, and local levels; (3) disseminating information, and training to the private sector, and selected public sector institutions; (4) conducting pilot and small scale initiatives to test alternative schemes to improve quality, and productivity; (5) analyzing new market opportunities, instruments for trade facilitation, inefficiencies in the distribution chain, and export processing, and, preparing design, and feasibility studies for infrastructure bottlenecks in transport logistics; and (6) refocusing, and overhauling key, public sector entities to achieve their institutional objectives, and boost Peru'scompetitiveness. Guarantee Facility Project (WB) [PO889231(approved in 2005; on-going) Peru faces strong challenges in all its infrastructure sectors, including (i) insufficient productive infrastructure; (ii) low and inequitable infrastructure coverage; and (iii) inadequate quality o f service. To eliminate identified infrastructure shortages, huge investments are needed in all sectors: to date, the Government of Peru (GOP) has identified investment needs of over $18 billion in projects in the transport, energy, water and sanitation and telecommunication sectors. The GOP plans, whenever possible, to implement and fund future infrastructure investments via Public-Private Partnerships (PPPs) combining the benefits of private sector management and fundingwit public sector contributions. Prolnversi6n, the Peruvian private investment promotion agency, has identified a first phase o f about 15 projects requiring over $1.5 billion of investments in the transport, energy, water and sanitation and telecommunication sectors over the next three 47 years that could be developed under PPP arrangements. The Guarantee Facility project aims at maximizingthe attractivenessof Peru's future infrastructure projects to private investors so as to make them suitable for PPP development, maximize private sector funding and minimize the requiredpublic contributions. This will be achieved by providing IBRD Partial Risk Guarantees (PRGs) to protect private project debt against various risks, including political risks and backstopping government obligations under the projects. HighwayRehabilitation and Improvement Project PhaseI11(IDB) (approved in 1998; on- - going) The program will finance: (i) investments in the highland departments of Junin, Cusco, road Huancavelica and Ayacucho, specifically rehabilitation of the sections Cusco-Combapata and Huancayo-Imperial-Izcuchaca, improvement and rehabilitation of the Ayacucho-Imperial road, and construction of bypasses at La Oroya and Urcos; (ii)preinvestment studies and works supervision; (iii)government investment in a highway concession project; and (iv) support for the MTC's sector planning and policy-making capacity and revision of the organization and operations of its differenthighway agencies. Anc6n-Huacho-Pativilca Toll Road Project (IDB) (approved in 2003; on-going) The Anc6n-Huacho-Pativilca system is the only access to greater metropolitan Lima from the north of Peru. The vast majority of traffic is associated with movements of goods to-and-from production in the north to metropolitan Lima and the nearby Port of Callao, the largest port facility in Peru. IDB has been approached by Norvial S.A. pursuant to its successful bid to expand and improve the Anc6n-Huacho-Pativilca Highway System previously known as Red Vial 5. The 182.7 km System will be developed under the terms and conditions of a 25-year Build-Operate-Transfer (BOT) concession by the Ministerio de Transportes y Comunicaciones (MTC) and administered by the independent oversight commission, Organismo Supervisor de la Inversio'n en Infraestructura de Transporte de Us0 Ptiblico (OSITRAN). The concession was awarded to the Company in May 2002 and signed by the Company on January 15, 2003. The Project to be supported by the Bank will consist of the first of two phases of investment to take place during the 25-year Concession. "Phase I," to be financed by the Bank, i s to be completed in the first three years of the Concession and involves the construction of bypass roads, additional local lanes in critical points and the addition of accesses and intersections to improve traffic safety. 48 Annex 3: ResultsFrameworkandMonitoring PERU:RegionalTransportDecentralization ResultsFramework PDO OutcomeIndicators Useof OutcomeInformation Improve-through decentralization Increase in the use and quality of 4ssess impact of improved regional at the regional level-the regional transport infrastructure, as aoad infrastructure on users' prioritization, efficiency and measured by: 3ehaviors and on regional mobility effectiveness of regional transport decreasedtransport tariffs along interventions and, hence, their upgraded regional roads Assess impact of improved regional contribution to regional development % of the secondary network in road infrastructure on the and poverty reduction in Peru. good condition iffordability of transport services and, therefore, on improving access to social services and economic :enters ResultsIndicatorsfor Each Component ComponentOne: ComponentOne: ComponentOne: Participatory regional road Number of participatory regional Test the actual interest and capacity planning: participatory regional road road plans approved by the regional of regional governments to identify plans are finalized and approved in council or the competent the regional road segments which each eligible region following commission of the regional council , are the most relevant to regional agreed methodology and eligibility in line with agreed standards, development criteria including (1) prioritization of regional roads which are the most Ensure consistency between regional relevant to regional development; road planning and the various (2) alignment with other relevant existing planning instruments at the planning instruments (such as the regional level (inparticular the PCDRs); (3) evidence of PCDRs) participatory approach; and (4) comprehensiveness of plans (design Verify quality and studies, road construction, road comprehensiveness of the proposed maintenance, road upgrading, road plans safety, environmental protection, monitoring and information). Assess strengthening of planning capacity at the regional level, which would be a substantial contribution to the overall decentralization agenda ComponentTwo: ComponentTwo : ComponentTwo: Road upgrading:rehabilitation of Number of kmof regional roads Verify implementation of proposed 2,200 km of regional roads prioritized through participatory regional road improvement program prioritized through participatory planning and rehabilitated according planning and periodic maintenance to agreed standards (in particular Verify that upgraded infrastructure of 2,706 kmof regional roads through contracting of private firms, have been prioritized according to rehabilitated by Provias Rural and and by choosing a cost-effective agreed methodology (eg. transferred to regional governments rehabilitation technology) participatory planning) Number of km of regional roads Ensure that cost-effective rehabilitated by Provias Rural and technologies are used (inparticular transferred to regional governments, gravel roads vs. paved roads) undergoing periodic maintenance 49 according to agreed standards (in Verify contracting out of particular through contracting of rehabilitation and periodic private firms and by choosing a cost- maintenance works effective maintenance technology) ComponentThree: Component Three: Component Three: Road maintenance: routine Number of kmof regional roads Verify that the outsourcing of the maintenance of 2,200 km of regional receiving routine maintenance maintenance activities actually roads rehabilitated under component according to agreed standards replaces the traditional "force two, plus 2,706 km of regional roads (outsourcing to micro-enterprises or account" approach undergoing periodic maintenance small firms) under component two Detect possible difficulties with the sustainability of the financing dedicated to routine maintenance of regional roads Number of micro-enterprises created Assess impact of the project on employment generation and Numberof unskilledjobs created entrepreneurial capacity ComponentFour: Component Four: ComponentFour: Institutional strengthening: Proportion of regional governments Ensure that sufficient technical and implement a sound, sustainable and which have successfully management capacity is developed agile institutional framework in each implemented the reforms described at the regional level, which would be of the eligible region intheir institutional agreements. a substantial contribution to the overall decentralization agenda Verify restructuring of the existing institutional framework which should be replaced by a clarified, truly decentralized, framework. Detect possible difficulties regarding the transition from a "force account" 50 n n n n ....ste t c cC c cu s r etc v, 3 4. +G 0O 0 8 !Ei 3 r-" ol E E N d - 0 0 Y !t :* 8 0 3000 ICB All 3000> Contract NCB Contracts = > $2.0 >250 mill,andthe first 2 contracts and annual review of procurement plan. Post-review: Random sample of contracts Contract < = 250 First2 contractsand annual review of procurement plan. Contract < 50 Direct Contracting Post-review: sample of (Routine contracts Maintenance) Contract < 100 ForceAccount Post-review of sample of contracts 2. Goods andNon-Consulting Contract = > 250 ICB All Services 250 > Contract > NCB Contracts => 200 and 50 the first two contracts Contract <= 50 National Shopping First2 contractsand, annualreview of procurementplan. Post-review: Random 85 sample of contracts 3. Consulting Services and Training 3.1 Firms Contract = > 100 QCBS All contracts costing $200,000 or more, including TOR, RFT, shortlist of firms, full review of technical and final evaluation reports, and final negotiated contract. Contract < 100 QCBS, LCS, CQS, Annual review of the SBPF and SSS selection plan. Post-review: Random sample of contracts 3.2 Individuals Contract => 100 IC All contracts estimated to cost $50,000 or more, including TOR, CVs, andFormof Contract Contract < 100 IC, and SSS Annual review of the selection plan Post review: Random sample of contracts *Thresholdsgenerally differ by countryandproject.Consult Operational Directive (OD) 11.04, "Review of Procurement Documentation," andcontactthe RegionalProcurementAdviser for guidance. Total value of contracts subject to prior review: $27.90 million E.Detailsof the Procurement Arrangements Involving InternationalCompetition 1.Goods,Works, and NonConsultingServices (a) List of contract packagesto be procured following ICB and direct contracting: 1 2 3 4 5 6 7 8 9 Ref. Contract Estimated Procurement P-Q Domestic Review Expected Comments No. (Description) Cost Method Preference by Bank Bid- (yedno) (Prior / Post) Opening Date None 86 (b) ICB contracts estimated to cost above $3.0 million for works per contract; $250,000 for goods per contract and all direct contracting will be subject to prior review by the Bank. 2. ConsultingServices (a) List of consulting assignmentswith short-list of international firms. 1 2 3 4 5 6 7 Ref. No. Descriptionof Estimated Selection Review Expected Comments Assignment - I II cost Method II byBank Proposals ($) II (Priori Submission Date Works 212,000 6m-p-Prior 0312006 Supervision- Review RoadPaimas - Ayabaca Works 224,000 0212007 Supervisidn Review Road Pte. Pallar -ElMolino Works 238,000 QCBS Prior 0512007 Supervision Review Road Cumba- ElTriunfo Works 1228,000 QCBS Prior 0612007 Supervision Review 7- Road San Gregorio - San QCBS Prior 0612006 Design Road Review Puente Pallar - I ElMolino Engineering 232,000 QCBS Prior --I--- 0712007 Design Road Review Sausal- Dv Cascas Engineering 238,000 0912006 Design Road Review Cumba-El Triunfo Engineering 228,000 Prior 1012006 DesignRoad Review ----I San Gregorio - ---I- San Miguel Engineering 208.000 Prior 0812006 Design Road Review Aricapampa-Dv Chillia I Engineering 200,000 QCBS IPrior 0812006 87 I Design Road Cuiiumbuque- San Jose de Sisa Engineering 240,000 QCBS Design Road Corral Quemado -El Triunfo Engineering 236,000 QCBS Prior 0612007 Design- Review Carretera Candarave- Binacional (b) Consultancy services estimated to cost above $200,000 per contract and single source selection of consultants firms will be subject to prior review by the Bank. (c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than $350,000 equivalent per contract, may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 88 Annex 9: Economic and Financial Analysis PERU:RegionalTransport Decentralization A. Beneficiaries The main beneficiaries of the project will be the population living in the vicinity of the roads to be improved and the long-distance traffic. The populations currently being served by poor condition roads will gain reliable access through improved roads to social services and markets. They will also benefit from new services likely to spring up near the improved roads, which will result in lower costs of basic necessities. The improved roads carry long distance travel, and those road users will also be beneficiaries, substantially reducing their vehicle operating cost and time of travel. B.Economic Analysis Methodology The roads to be included in the program will consist of low-volume roads at least in relative terms, typically with daily traffic higher than 40 Average Annual Daily Traffic (AADT), which will produce benefits not only in alleviating isolation but also in reducing transport costs to the long-distance traffic they would normally carry. To define the proper level of investments o f each project road and ensure economic feasibility a Cost Benefits Analysis (CBA) will be done for all road works and the corresponding economic indicators will be determined, such as the Economic Rate of Return (ERR) and Net Present Value (NPV). A Cost EfSiciency Analysis (CEA)will be done for very-low volume roads, generally with a daily traffic less than 40 AADT and selected on the basis of their contribution to accessibility, assessingthe minimuminvestment cost needed to provide basic all-weather access per beneficiary population. The cost-benefit analysis will be done using the Road Economic Decision Model (RED) developed by the World Bank for the economic evaluation of investments and maintenance alternatives for low-volume roads. The RED model adopts the consumer surplus approach to estimate project benefits that are comprised of road user costs (vehicle operating costs, passenger time costs, and accident cost) savings, which are estimated using road user costs relationships from the Highway Development and Management Model (HDM-4). The RED Model i s customized to the characteristics and needs of low-volume roads, such as the highuncertainty o f the assessment of the model inputs, the importance of speeds for model validation, and the need for a comprehensive analysis of generated and induced traffic. The investment on each project road should yield an ERR higher than 14 percent to be considered acceptable, which i s the standard discount rate adopted in Peru since 2000. For all roads, the beneficiary population will also be computed in order to be able to determine the overall impact of the project on the rural population. C. Selection of Road Investments Regional Governments with the preparation of a Participatory Regional Road Plan are doing the selection of the road investments to be included in the project. The Road Plan, aligned with existing regional development plans, elaborates a diagnostic of the road sector in a particular region, analyzes the supply and demand for transport services and infrastructure, and prioritizes 89 the road investment options, towards identifying the sub-project priorities that could be funded under the project. At appraisal time, the preparation of a Participatory Regional Road Plan i s in progress on thirteen Regional Governments and the remainder Regional Governments are expected to start the process soon. The methodology of the preparation of a Road Plan considers: (a) compilation of primary and secondary information characterizing the Regional Governments in general, physical, social and economic terms; (b) evaluation of population trends, resources and economic opportunities; (c) definition of development nodes and their area of influence; (d) diagnostic of the road network in terns of condition, accessibility, traffic, and flow o f commercial products; (e) identification of the corridors of economic and territorial regional integration, and the definition and prioritization of road sectors strategic road axes; (f) prioritization and stratification of the road sections (sub- projects) located inthe Regional Governments; and (g) evaluation of the financial capacity of the Regional Government and other institutional aspects. A Participatory Regional Road Plan utilizes a multi-criteria priority index to rank the road sections and define priorities. The index i s being computed for each road section using the following social, economic and technical criteria: a Population: measuresthe beneficiary population living along the road, independent of the poverty level, divided by the road section length; a Poverty: measures the poverty index of the District divided by the poverty index of the Department; a Connectivity: measures the sum of length of feeder roads that connect to the road section divided by the road section length; a Transitability: measures the number of days per year when the road i s not open to traffic; a Traffic: measures the daily traffic projected to year 10; a Transport Service: assigns 1 if there are many road transport services per day, 0.9 if the frequency i s daily, and 0.8 if the frequency i s maximum one week, and 0 for the other cases; a Loading: measures the trucks cargo loading; a Transport CostKommodity Price: measures the transport cost of a typical commodity divided by the cost of the commodity; a Production: measures the gross production value of the agricultural, mining and industrial sectors divided by the gross domestic product of the Department; and a Tourism: assigns 1 for first class tourism centers; 0.8 for second class, 0.6 for third class, and 0 for the rest. To produce unit values comparable among different road sections, the variables are normalized to unit value by dividing the value assigned to each road by the maximum value established for 90 the corresponding value. B y ordering the road sections in descending order of the multi-criteria priority index it is possible to establish an initial prioritization of the roads to be rehabilitated. Other factors, such as connectivity and equity, are used to complement the index to obtain a final ranking and work program. D.RehabilitationProgramCost-BenefitEvaluation The rehabilitation program to be implemented by a Regional Government will be defined by the Participatory Regional Road Plan that i s beingprepared b y the Regional Government. Therefore, MTC's Provias Departamental will perform the economic evaluation of the rehabilitation program when the Participatory Regional Road Plans are being completed. Inthe interim, on the basis of the currently available data on Departmental roads and average road works costs, a global economic evaluation was done for a representative road rehabilitation program considering Departmental roads with high traffic in each Regional Government, with the objective of broadly judge the economic justification of the program. The evaluation was done with the RED model for analysis period of 15 years and adopting a discount rate of 14 percent. The evaluation considered 51 tentative road sections, totaling 2,230 km, with traffic ranging from 50 to 317 AADT and an average percentage of trucks and buses of 40 percent. Table 9.1 presents the length of the Departmental roads network and the representative rehabilitation program. Table 9.1 Depa iental Roadsand RepresentativeReh ilitation ProgramLength I Departmental Roads Representative 'aved Gravel Earth Track Total RehabilitationProgram oun) 78 42 328 521 176 1,067 0 224 249 72 544 222 762 323 111 1,417 167 0 258 196 437 891 80 0 304 330 105 739 153 154 1,25 1 215 109 1,730 77 0 302 355 80 737 195 7 71 164 172 414 200 74 124 95 44 336 58 34 482 67 7 590 233 70 255 442 102 870 278 80 24 0 0 104 157 57 86 158 458 88 13 269 26 80 387 0 46 0 0 46 0 0 188 0 188 0 231 329 61 621 190 125 179 68 206 578 53 55 313 377 411 1,155 119 0 147 0 25 173 71 31 241 171 40 483 84 36 28 20 234 318 107 0 0 0 0 0 [,lo6 6,015 4,291 2,839 14,251 I 2231 For the purpose of the economic evaluation, rehabilitation costs were estimated for five possible rehabilitation alternatives, representing alternative levels of service for an unpaved road, and for the alternative of paving a road. Table 9.2 presents the corresponding investment costs, annualized maintenance costs and average roughness over the evaluation period. The without project alternative consists of keeping a road in poor condition (roughness = 17 IRI) with 91 minimumroutine maintenance. The annualized maintenance costs include routine maintenance, gradings and gravel resurfacing. Roaduser costs were estimated for five vehicle types comprising passenger car, four-wheel drive vehicle, bus, and medium and heavy trucks. Table 9.3 presents the average vehicle fleet characteristics and economic unit costs. This information is updated yearly by the MTC Direccicjn General de Planificacih y Presupuesto to be used on all economic evaluations in Peru. The value of time for car passengerswas estimated to be US$ 1.20 per hour considering an average income o f 900 Soles per month, 176 working hours per month, non-working time being 25 percent of working time, and 70 percent of work related trips. For bus passengers an average income of 450 Soles per month was considered. Table 9.3 Vehicle Fleet CharacteristicsandUnitCosts 4 Wheel-drive Medium Heavy Utility Bus Truck Truck ew Vehicle Cost (US$/vehicle) 11,855 18,579 89,700 86,250 103,500 uel Cost (US$/liter) 0.43 0.44 0.44 0.44 2.32 2.32 2.32 2.32 37.40 63.80 274.10 274.10 346.40 aintenanceLabor Cost (USShour) 2.04 2.35 2.35 2.35 rew Cost (US$/hour) 0.78 2.74 2.12 2.27 assengerTime (US$/passenger) 1.2 0.6 0.6 0.6 terest Rate (%) 14.00 14.00 14.00 14.00 14.00 kilization andLoading lometersDnven per Year (km) I 25,000 40,000 120,000 90,000 100,000 HoursDriven per Year (hr) 480 960 2496 2400 2400 ServiceLife (years) 10 8 10 10 10 Percent of Time for PrivateUse (%) 100 0 0 0 0 Gross Vehicle Weight (tons) 1.4 2.2 13.6 15.4 23.1 Number of Passengers 3 3 4 1 1 Table 9.4 presents typical vehicle operating costs, in US$ per vehicle-km, for different vehicle types and roughness level. Table9.4 ypical RoadUser Costs per RoughnessLevel (US$/vehicle-!an) Roughness 4 Wheel-drive Medium Heavy I Car Utility Bus Truck Truck 0.17 0.19 0.84 0.56 0.73 0.17 0.20 0.90 0.60 0.79 0.19 0.22 0.99 0.67 0.88 0.20 0.24 1.09 0.75 0.97 0.23 0.28 1.21 0.83 1.07 0.25 0.31 1.33 0.90 1.17 14 0.28 0.35 1.45 0.98 1.28 0.31 0.38 1.58 1.06 1.39 0.34 0.42 1.71 1.14 1.50 20 0.36 0.45 1.84 1.22 1.61 92 Table 9.5 presents the typical traffic composition per traffic range. The average annual traffic growth rate was estimated to be 2 percent per year for passenger vehicles and 4 percent for trucks based on past trends of population growth for passenger vehicles and economic growth for trucks. The generated traffic was estimated assuming a price elasticity of demand equal to 0.5. This is a conservative assumption of the generated traffic based on empirical evidence in developing countries. Traffic 4 Wheel-drive Medium Heavy Utilit 35% 23% 6% 33% 12% 26% 2% Based on the economic comparison of the project-alternatives, a project-alternative was selected for each road that yields a reasonable rate of return. The evaluation shows that the representative rehabilitationprogram would have an ERR of 26 percent with a global NPV of US$63.4 million. The ERR would fall to 22 percent with a 20 percent increase in investment costs, and to 21 percent if benefits were 20 lower than estimated. The switching value analysis shows that for the ERR to fall to 14 percent, investment costs would need to be 1.7 times higher, or benefits 41 percent lower than estimated. Tables 9.6 and 9.7 summarize the results that indicate a satisfactory economic justification for the representative program. Overall, the representative rehabilitation program will provide some 1,312,000 rural inhabitants with access to an all- weather road. Length Traffic Investment perkm ERR NPV (W (AADT) (Million US$) (USUkm) (76) (Million USS) Total 2,231 113.2 26% 63.4 Average 115 50,759 Table 9.7 Representative RehabilitationProgram Sensitivity Economic Rate of Retum (ERR) Base I A: Cost +20% B:Benefits -20% Cost increasefor ERR to fall to 14%= 1.70times Benefit decreasefor ERR to fall to 14% =0.59 times E.FirstYear Rehabilitation ProgramCost-Benefit Evaluation MTC's Provias Departamental selected eight roads to be rehabilitated during the first year o f the project. These roads have completed technical and economic studies. Their combined length i s 251.1 kilometers and their total cost is US$ 11.7 million. One road was selected on each of the eight Regional Governments that initially participate in the project (Junin, Pasco, Ica, Cajamarca, Piura, Cusco, San Martin, and Ayacucho). The eight Regional Governments were selected with support from a multi-criteria analysis that considered the following criteria: (a) length of Departmental roads; (b) index on economic potential; (c) average traffic; (d) index of lower human development; (e) beneficiary population; (f) resources assigned to transport sector; and (g) index of predisposition to participate in the program. Table 9.8 presents the multi-criteria results that show the eight Regional Governments being among the thirteen with highest priority. 93 Tab1 1.8 Priori ation of Regional Gover ienrs Departmental conomic Average I Human Beneficiarv I TransDort tParticiDatiod 1 Roads Length 'otential Km % 8 I 3 !Ancash 1,067 0.07 1,417 0 10 104 001 9 I 11 Pun0 F 1.155 0.08 318 002 0.01 15 mazonas 408 0.03 0 02 75 0.03 0.491 0.05 20,229 0.01 10,873 0.03 5 0.08 0.034 16 Libertad 886 0.06 0.03 110 0.05 0.447 0.04 60,112 0.02 8,828 0.02 0 0.00 0.033 17 uancavelica 737 0.05 0.02 87 0.04 0.550 0.05 83,556 0.03 14,661 0.04 0 0.00 0.033 19 oquegua 188 0.01 0.06 76 0.03 0.352 0.03 39,857 0.01 14,880 0.04 0 0.00 0.033 18 reto 387 0.03 0 03 0 0.00 0.483 0.04 55,692 0.02 32,358 0.09 3 0.05 0.032 20 uanuco 414 0.03 0.02 80 0.03 0.521 0.05 69,102 0.02 20,758 0.06 0 0.00 0.032 21 acna 483 0.03 004 51 0.02 0.373 0.03 18,195 0.01 12,365 0.03 0 0.00 0.027 22 purimac 544 0.04 0 01 38 0.02 0.563 0.05 53,434 0.02 7,244 0.02 0 0.00 0.024 23 adre de Dios 46 0.00 0 01 13 0.01 0.431 0.04 3,577 0.00 33,987 0.09 0 0.00 0.021 24 bcayali I n n.nn 0.02 0 0.001 0.511 0.05 0 0.001 20,346 0.061 0 0.0010.018 I -- Departmentalroads otal I 14,268 1.00 1 1.00 1 1.001 1.00(3,183,309 1.001 1.001 1.oo 1.000 Economic potential, average traffic and human development have a weight equal to 0.20 length, beneficiary population, transport resourcesand participationindex have a weight equal to 0.10 The eight roads to be rehabilitated were selected considered the following criteria: (a) traffic higher than 70 AADT; (b) average length of 25 kilometers; (c) connection to important locations, such as Departmental or District Capitals; (d) no negative impact on the environment; and (e) approved pre-feasibility study. Table 9.9 presents the basic road characteristics, considering that the roads in Junin and Pasco were subdivided into two homogeneous road sections. The beneficiary population is defined as the rural population living along the road up to 5 kilometers on each side o f the road. iabilita? Program E sic Characi ristics Motorized Trucks & Beneficiary Beneficiary Road Length1 Terrain Traffic Buses % Population Population Department Section (AADT) (%) (persons) Junin Palian- Vilcacoto %%E- 148 14% 10,095 2,588 Junh Vilcacoto - Abra Huaytapallana 80 26% 62,385 2,557 Pasco Pasco - Desvio Gollariquizga 188 23% 31,589 2,179 Pasco Desvio Gollariquizga - Tambopampa 183 11% 40,522 2,179 Ica Chincha- Huancho 128 54% 69,897 3,170 Cajamarca Chilete Contumaza 40.2 Mountainous 74 30% 17,825 Piura Paima - Ayabaca 53.4 Mountainous 130 36% 41,203 Cusco Huambutio- Huancarani 28.0 Mountainous 119 57% 30,722 1,097 San Martin Sacanche- Saposoa Hilly 71 17% 15,352 706 Ayacucho Cangallo - Huancapi 24.3 Mountainous 103 37% 18,520 762 Total 251.1 338,110 Average I 122 I 31% 1,645 Table 9.10 presents the economic evaluation results that indicate that the first year rehabilitation program has a solid economic return. The overall ERR for these roads i s 25 percent, and all the roads have an ERR higher than 14 percent. The combined NPV o f the first year rehabilitation program i s US$ 5.58 million. Overall, the first year rehabilitation investments will provide some 338,000 rural inhabitants with access to an all-weather road. 94 Table 9.10 First Year Rehabilitation Progra Economic Evaluation 1 l I Total Investment I I I Investment 1 Road I Investment NPV per Population Section (Million US$) (Million US$) (US$/person) Palian- Vilcacoto 0.1 0.12 12.1 unin Vilcacoto - Abra Huaytapallana 0.8 31.3 20% 0.20 12.2 Pasco - Desvio Gollariquizga 1.2 82.8 30% 0.89 38.0 Desvio Gollariquizga - Tambopampa 1.8 96.5 16% 0.15 44.3 Chincha- Huancho 0.5 21.5 68% 1.28 6.8 ajamarca Chilete Contumaza 1.3 32.3 17% 0.20 72.8 iura Paima - Ayabaca 2.6 49.4 26% 1.41 64.0 usco Huambutio- Huancarani 2.0 71.7 !21% 0.57 65.3 San Martin Sacanche- Saposoa 0.4 20.4 121% 0.14 28.9 yacucho Cangallo - Humcapi 1.o 39.3 28% 0.63 51.6 25% 5.58 pverage I 47.1 39.6 Table 9.11 presents the sensitivity analysis for each road. The ERR would fall to 20 percent with a 20 percent increase in investment costs, and to 19 percent if benefits were 20 lower than estimated. The switching value analysis shows that for the ERR to fall to 14 percent, investment costs would need to be 1.6 times higher, or benefits 37 percent lower than estimated. The results indicate a satisfactory economic justification of the first year rehabilitationprogram. r Analysis Economic Rate c Retum (ERR) Road Base Cost +20% I Benefits -20% Switching Value Department Section (%) Cost Benefits Junin Palian - Vilcacoto 27% 2.20 0.45 Junin Vilcacoto - Abra Huaytapallana 15% 1.33 0.75 Pasco Pasco - Desvio Gollariquizga 30% 25% 24% 1.93 0.52 Pasco Desvio Gollariquizga - Tambopampa 16% 13% 12% 1.10 0.91 Ica Chincha- Huancho 68% 57% 55% 4.42 0.23 Cajamarca Chilete Contumaza 17% 14% 13% 1.20 0.83 Piura Paima - Ayabaca 26% 21% 20% 1.67 0.60 cusco Huambutio - Huancarani 21% 17% 16% 1.36 0.74 San Martin Sacanche - Saposoa 21% 17% 16% 1.39 0.72 yacucho Cangallo - Huancapi 128%1 23% 22% 1.83 0.55 125%1 20% 11 19% 1.60 0.63 95 Annex 10: SafeguardPolicyIssues PERU: RegionalTransportDecentralization I.INTRODUCTION As part of the preparation and appraisal of the Regional Transport Decentralization Project (RTDP), a number of socio-environmental activities and instruments have been performed or applied, with the objective of ensuring the social and environmental sustainability of the project and complying with both the Peruvian socio-environmental legislation and the Bank safeguard policies. One of the instruments that have been applied in this case i s the Conceptual Framework for Project's Socio-environmental Management. This framework describes the procedures and responsibilities for socio-environmental management during the project cycle. This instrument is inspired from the Bank's Guidebook on Quick Social and Environmental Evaluation for Road Projects developed by the Bank's Quality Assurance Team (QAT), with the purpose of ensuring compliance with the Bank's safeguards policies. Inthis case, the framework has been applied to a sample of subprojects to be financed duringthe first year of project's implementation. An evaluation of the institutional capacity of the various actors involved inthe project has been performed, and a socio-environmental institutional strengthening plan has also been prepared. In addition, during project preparation, it was agreed that a Strategic Environmental Assessment would be prepared for regional roads' management, with the objective of ensuring the inclusion of the social and environmental dimension in policies, plans and procedures. Ultimately, this i s expected to strengthen the social and environmental management of the design, implementation and supervision of subprojects. These activities and instruments have been agreed with the QAT team, as a Bank requirement for project's approval. 11. IMPACT EVALUATION The project aims at rehabilitating or improving existing roads. No new construction has been considered that could affect the social and natural environment. Below are listed the main activities that are susceptible to generate socio-environmental impacts during project implementation, along with the actions or measures that are proposed in order to prevent, mitigate or compensate these impacts. Activities Susceptible to GenerateEnvironmentalImpact During the phase previous to rehabilitation or periodic maintenance works, two main activities have been identified that could have a social or environmental impact: 96 Selection of areas to store or park heavy roadrehabilitation equipments Transport of gasoline and lubricants Duringthe phase of execution of the rehabilitation or periodic maintenance works, the following main activities have been identified that could have a social or environmental impact: Transport of equipments and gasoline; Management of lubricants and gasoline inthe areas'of intervention; Construction activities which can generate dangerous traffic conditions by interfering with the regular flow of vehicles; Transport of materials untilfinal storage; Solid waste elimination in construction areas and work places; Ground excavation in zones with high archeologicalpotential Finally, during the phase of closing; or finalization of the works, the following main activities have been identified that could have a social or environmental impact: 0 Recuperation of areas used, when it i sjustified Management of sites that have been used to deposit used or broken equipments 0 Replanting of the areas Identificationof Possible Social and Environmental Impacts: Air pollution: A few construction activities may generate the emission of particles into the atmosphere that could affect the natural environmental and the workers. These activities include: a) operation of equipments with the emission of gases produced by the combustion of petroleum derivates; b) exploitation of constructionmaterials; c) transport of construction materials, among others. Solid wastes: The pollutants that will be produced during the phase of execution of the works include material residues and equipments' residues such as filters, tires, lubricants, garbage, among others. Noise and vibrations: The use of equipments during the phase of execution of the works, exploitation of construction materials and road improvement can generate noise levels affecting workers and local population (particularly in the case of urban roads). Visual pollution: The lack of environmental consideration during the execution of the works, such as for example the final disposal of used materials inthe right of way, can affect the existing landscape. Protected areas: The execution of projects in areas declared under an environmental protection regimes or in zones of high sensitivity of the environment requires an integrated management. The project does not plan to intervene in protected areas. It will not modify existing rights of way that 97 present certain characteristics that promote the development of natural habitats (since they can act as biological corridors). Modification of the physical characteristics of the areas: Project resources will contribute to improving the physical and environmental characteristics of areas that are currently affected by problems of erosion and stabilization, which can impact the transitability of the road. Impact on the cultural and physical patrimony: An inadequate moving of ground in zones with a high potential of cultural and physical patrimony may result in irreversible damages. Therefore, it i s necessary to develop a specific strategy inorder to prevent duringthe constructionphase these types of impacts. 111. SOCIALAND ENVIRONMENTALASSESSMENT The Project only aims at rehabilitating and improving existing departmental road segments. No significant social or environmental impacts are therefore expected that could put at risk, in a direct or indirect manner, the natural environment or the population located in the areas where the project will intervene. As a result, the project has been categorized "B" according to the World Bank operational procedure [OP 4.011. This categorization i s justified by the fact that the works envisaged within the project will not cause significant environmental impacts and that prevention, mitigation and/or compensation measures can be easily identified and implemented with an adequate social and environmental management during the various phases of a subproject's cycle. It should be noted that the main social and environmental impacts that have been observed in the past when the roads were built resulted in fact in an improvement of the social and environmental conditions (such as through the recuperation of environmental liabilities). The Bank's environmental evaluation has been focusing on five main areas: a) revision of the Bank safeguards policies applicable to the project; b) preparationof a conceptual framework for the project's social and environmental management; c) social and environmental evaluation of the first sets of subprojects; d) preparation of the strategic environmental evaluation for the sub- sector of departmental roads; and e) compliance with the national legislation. a) BankSafeguardsPoliciesApplicableto the Praiect EnvironmentalEvaluationPolicy [OP4.011: Regarding environmental issues, the Bank's Environmental Evaluation Policy i s applicable although no significant environmental impact i s expected. It i s therefore necessary to develop the environmental management procedures needed to ensure the social and environmental sustainability of the sub-projects. 98 In order to ensure the application of this policy, it was agreed with the QAT that a conceptual framework for the project's social and environmental management will need to be elaborated, along with the environmental evaluation of the first set of rehabilitation works and a strategic environmental evaluation for the departmental roads' sub-sector. In addition, as part of the Conceptual Framework, a training plan will be developed in order to strengthen the institutional capacity of the various actors involved in the social and environmental aspects of project implementation. Involuntary ResettlementPolicy [OP 4.121: The works for rehabilitation and maintenance of roads, which will be implemented within the project, are not expected to trigger this policy. However, in order to be prepared in case the policy i s triggered by any subproject Resettlement Framework has been prepared by the borrower that depicts the legal framework and the process and principles for the design and implementation of resettlement plans. . Indigenous Peoples Policy [OD4.121: Peru has a large population of indigenous peoples (around 30 percent o f the total population) dispersed over its whole territory, but particularly located in the upper areas of the highlands or sierra and the Amazon basin. To prevent potential impacts and to ensure adequate participation in benefits, the borrower has prepared an Indigenous Peoples development framework. The framework provides information on the Indigenous Peoples of the country, discuss issues related to their participation in subprojects and describe the principles and the process for the design and implementation of IndigenousPeoples development plans incase the policy i s triggered.. b) ConceptualFrameworkfor the Pro-iect'sSocio-environmental Management In order to ensure an adequate socio-environmental management during project implementation and to comply both with the Peruvian national legislation and the Bank's Safeguards' Policies, it was agreed with PVDthat a conceptual framework for the social andenvironmental management (MCMAS 40 in Spanish) wouldbe developed. This framework will allow to define on the basis of a legal and institutional diagnostic, the social and environmental procedures both regardinginternal and external management, the instruments that are necessary to ensure the inclusion of socio-environmental variables in project cycle, and the preparation of a institutional strengthening plan for social and environmental management. Among others, the specific objectives of this instrument include: Proposing an instrument capable of quickly identifying the social and environmental aspects related to each individual project, and detecting the environmental risks; Including social and environmental evaluation procedures from the very beginning of project cycle. 40Marc0 Conceptualpara el Manejo Ambiental y Social. 99 Identifying the social and environmental risks, and on that basis, highlight the content of the studies that should be performed, in order to comply with the national legislation and the Bank's safeguards' policies; Including in procurement documents mitigation, prevention andor compensation measures needed to address the social and environmental impacts; Proposing processes that comply with the requirements of the environmental authorities, the existing norms and the Bank's safeguards' policies; Identifying people responsible for social and environmental management during each of the various project phases Proposing procedures that strengthen the institutional capacity to address social and environmental issues. This conceptual framework has been designed for the internal use of the environmental units of the regional governments, PVD and DGASA, with the purpose of facilitating the inclusion of social and environmental variables in the activities the institutionis planningto contract. Regarding the content itself of the instrument, the document includes a legal and institutional diagnostic of social and environmental issues, as a model for future interventions. Then, taking into account the conclusions from this diagnostic, the framework describes the procedures of social and environmental evaluation and monitoring, as well as the instruments that the institution will have to develop during each of the phases o f the project cycle. Regardingthese procedures, the document proposes a methodology for the social and environmental categorization, the studies required depending on each category, criteria to evaluate compliance with the environmental legislation and issues related to the monitoring and supervision of subprojects. In addition, the document also presents issues related to the internal processes and the institutional responsibilities, taking into account the project cycle, in order to ensure an adequate social and environmental management. It shouldbe noted that this instrument mustbe sufficiently flexible inorder to be able to adapt to the work necessities of PVD, with the ultimate objective of improving the quality of projects and of facilitating the processes of promotion of an operation. c) Strategic Environmental Assessment for the Sub-sector of Department Roads One of the Bank requirements as part of project preparation was to develop a strategic environmental assessment for the sub-sector of department roads, with the objective of revising policies, plans and programs, and of defining on that basis a social and environmental strategy for the sub-sector. The consultancy for the elaboration of this evaluation was initiated during the month of April 2005 and should be finalized inAugust 2005. d) Environmental Evaluationof the FirstPackage of Sub-projects As part of project preparation and appraisal, the first set of rehabilitation subprojects for the first year of implementation has been reviewed. This set includes 8 regional road segments. It i s worth noting that the initial selection of these 8 road segments has been performed by PVD in a 100 participatory manner (in close coordination with the regional governments and the communities involved). The 8 initial road segments to be rehabilitated under the program are: Table: Road SegmentsPrioritizedby PVDand for which Feasibilityand Design Studieshave been Prepared or are On-going. Length (Km.) Depart. Road segment Feasibility Design rehabilitation Type of studies studies Emp.R3S (Huancay0)-Acopalca-Pariahuanca 94.74 94.74 Junin Tramo:Palian-Vilcacoto- Acopalca- Abra 28.30 Gravel Source: ProviasDepartamental(PVD). Inorder to perform the social and environmental evaluation of the first set of subprojects, the format of the quick social and environmental evaluation of road projects has been used (Checklist). This format was developed as part o f the preparation of the social and environmental management conceptual framework and it takes into account the guidelines of the QAT. Through a quick analysis of a particular project, this assessment allows to determine the social and environmental risk level and to identify the requirements for studies (environmental or social) which have to be prepared before the physical works start. The preparation of these quick assessments for the first set of activities was performed by PVD, with the support of the DGASA. The results from these assessments were validated by the two banks, duringfield visits which took place as part o f project preparation. The environmental evaluation allowed to determine that 4 sub-projects have a moderate social and environmental risk (level 2), according to the classification elaborated in the Conceptual Framework for Social and Environmental Management. In addition, 4 sub-projects have a low social and environmental risk (level 1). 101 Table: Resultsof the Quick Risk LevelAssessment for the First Set of Sub-projects. Sub-projects Based on the level of social and environmental risk for each one o f the sub-projects, the requirements in terms of due diligence have been determined, in order to ensure the environmental and social sustainability of the projects, and their compliance with both the national legislation and the Bank safeguards' policies. It i s worth noting that these studies are part of the standard technical studies which are required duringthe various phases of the project cycle. More precisely, for the sub-projects whose environmental risk has been categorized as 1 (low risk), an environmental impact declaration (DIA in Spanish) has to be performed, while for the category 2 projects (moderate risk) a semi-detailed environmental impact assessment (EM-sdin Spanish) has to be prepared. No category 3 project (highrisk) has been identified. Table: Due Diligence Requirements Based on the Social and EnvironmentalRisk. Sub-projects Due diligence No Description ~ Risklevel requirements 1 Carretera Emp.R1S Chincha - Level 1 DIA Huanchos 2 Carretera Huancayo -Acopalca - Level 1 DIA Pariahuanca 3 Carretera Cerro de Pasco - Yanahuanca Level 2 EIA-sd 4 Carretera Huambutio - Paucartambo Level 1 DIA 5 Carretera Chilete - ContumazB - Cascas Level 2 EIA-sd -PuenteOchape 6 Carretera Cangallo - Huancapi Level 2 EIA-sd 7 Carretera Sajinos - Ayabaca Level 1 DIA 8 Carretera Sacanche - SaDosoa Level 2 EIA-sd Resulting from this assessment, the budget required for the prevention, mitigation and compensation of the social and environmental risks for the first set o f sub-projects has been estimated to US$ 380.742, about 3,01% o f the total amount for the first set of activities US$ 12.616.480. Inthis context, once revised the quick social and environmental assessments and performed the respective field visits as part o f the appraisal process from the two banks, it was concluded that 102 the initial sample of projects identified for the first year of operation of the program, i s acceptable from the social and environmental point of view. It i s worth noting that all project activities involve the rehabilitation or maintenance of existing roads and that no new constructions are planned. Nevertheless, particular attention should be paid to the direct impacts of these activities, so that adequate prevention, mitigation and/or compensation measures can be ensured. The main impacts for this type of projects will be temporary during the execution of activities. f) Compliance with the environmentallegislation. PVD has initiated the respective environmental evaluations in the initial phases of design and pre-feasibility, with the ultimate objective of complying with the requirements of the competent environmental authority (inthis case the DGASA of MTC). The elaboration of the Conceptual Framework for the Project's Social and Environmental Management has been performed in close partnership with the DGASA in order to verify its compliance with the national legislation and to review the instruments developed for each social and environmental risk category. This exercise has been very positive since it will allow complying with the environmental legislation in an agile and efficient manner, thus contributing to Peru's social and environmental management. IV. ENVIRONMENTALBUDGET The project's environmental budget i s divided in three components: the investments required mitigating the environmental impact of subprojects and the investments required to strengthen the institutional capacity of the regional governments, PVD and the DGASA. The amount estimated for the environmental management i s US$ 500.742, of which US$ 380.742 are include in amount of projects for the prevention, mitigation and compensation of environmental impacts and US$ 120.000 for the implementation of the institutional strengthening plan. The amount assigned for environmental issues represents 3,96% of the total amount assigned for the first set of sub-projects. Table: EnvironmentalBudget Activities Amount US$ - Prevention,mitigation and compensationof environmental I 380.742 - impact (first set of sub-projects) Institutional strengtheningplanfor environmental 120.000 management Total 500.742 103 V. SOCIAL AND ENVIRONMENTALSUSTAINABILITY Once finalized the project's social and environmental evaluation, and taking into account that a number of measures aiming at including the social and environmental dimension in an integrated fashion in project's design has been developed during project preparation, it was concluded that the project i s acceptable from an environmental point of view and that it complies with the Bank's safeguards policies. Finally, a permanent monitoring and evaluation system must be developed to evaluate the actual implementation of the measures identified duringproject appraisal, with the ultimate objective of ensuring its successful implementation, including from the social and environmental point of view. 104 Annex 11:Project Preparation and Supervision PERU:RegionalTransport Decentralization Planned Actual PCNreview 14 April 2004 14 April 2004 Initial PID to PIC 15 April 2004 15 April 2004 Initial ISDS to PIC 15 April 2004 15 April 2004 Appraisal 25 April 2005 Negotiations 9 May 2005 BoardRVP approval 28 June 2005 Planned date of effectiveness 1 December 2005 Planned date of mid-term review 30 June 2007 Planned closing date 30June2010 Key institutions responsible for preparation of the project: - Provias Departamental / Ministry of Transport and Communications - Ministry of Finance - Multi-sector Commission for the Preparation of the Regional Transport Decentralization Project Bank staff and consultants who worked on the project included: Name Title Unit Aurelio Menendez Lead Transport Specialist (co-Team Lead) LCSFTEASTR Nicolas Peltier-Thiberge InfrastructireEcbnomist (co-Team Lead) LCSFT Maria Emilia Freire Regional Advisor LCSFP Juan Quintero Senior Environmental Specialist LCSEN Alonso Zarzar Senior Social Scientist LCSEO Patricia M c Kenzie Senior Financial Management Specialist LCOAA Keisgner Alfaro Senior Procurement Specialist LCOPR IsabellaMicali-Drossos Senior Council LEGLA Xiomara Morel Senior Finance Officer LOAG3LOAGl JosephPaul Formoso LeadFinance Officer LOAG1 Sally Burningham Senior Transport Specialist (peer reviewer) SASE1 Fernando Rojas Lead Public Sector Management Specialist (peer LCSPS reviewer) Mohammed Feghoul LeadMunicipal Engineer (peer reviewer) MNSIF Kathrin Plangemann Senior Public Sector Specialist (peer reviewer) LCSPS Nicolas Drossos Consultant LCOAA Bank funds expended to date on project preparation: 1. Bank resources: US$244,962.27 2. Trust funds: US$410,000 (PHRDGrant JPN 53335) 3. Total: US$654,862.27 EstimatedApproval and Supervision costs: 1. Remaining costs to approval: US$35,000 2. Estimated annual supervision cost: US$89,000 105 Annex 12: Documents in the Project File PERU:RegionalTransport Decentralization Diseiio del Modelo de Gestidn Vial Departamental Descentralizada del Peru - Ing. Hernhn Otoniel Fernindez Ordofiez, Lima-July 2004 Programa de Caminos Departamentales - Informe Situacional del Programa a Noviembre del 2003 -ProviasDepartamental,November 2004. Manual de Procedimientos para la formulacidn de 10s Planes Viales Departamentales Participativos - Provias Departamental, November 2003. Metodologia para la Formulacidn, Evaluacidn y Actualizacidn de 10s Planes Viales Departamentales Participativos -ProviasDepartamental,September 2003. Guia e Instructivos para la Formulacidn de 10s Planes Viales Departamentales Participativos - ProviasDepartamental,September2003. Marc0 Tedrico para la Planificacidn Vial Departamental - Provias Departamental, November 2003. Plan de Evolucidn Institucional de Provias Departamental en el Context0 del Programa de CaminosDepartamentales -PCD - ProviasDepartamental,June 2005. 106 Annex 13: Statement of Loans and Credits PERU:RegionalTransportInfrastructureDecentralization ~~~~ ~ ~~~ ~ Differencebetween expected and actual Original Amount inUS$ Millions disbursements Project ID FY Purpose E3RD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd PO78953 2005 PE-(CRL)ACCOUNT. F/ DECENT. 7.80 0.00 0.00 0.00 0.00 7.80 0.00 0.00 s0c.scTR PO88809 2005 PE Inst. Capacity for Decent.TAL 8.80 0.00 0.00 0.00 0.00 8.80 0.00 0.00 PO73438 2004 PEJustice Services Improvement 12.00 0.00 0.00 0.00 0.00 12.00 4.60 0.00 PO35740 2004 PELIMA TRANSPORT PROJECT 45.00 0.00 0.00 0.00 0.00 45.00 36.06 0.00 PO74021 2004 LIMA TRANSPORT PROJECT 0.00 0.00 0.00 7.93 0.00 7.93 7.84 0.00 PO68250 2003 GEF PE PARTICIPATORY MGMT PROT 0.00 0.00 0.00 14.80 0.00 11.43 2.14 0.00 AREAS PO77788 2003 PETrade Facil.andProd.Improv.T. A. 20.00 0.00 0.00 0.00 0.00 19.80 6.13 0.00 PO81834 2003 Lima Water Rehab Addl Financing 20.00 0.00 0.00 0.00 0.00 20.00 5.13 0.00 PO55232 2003 PE-RuralEducation 52.50 0.00 0.00 0.00 0.00 50.13 3.13 0.00 PO65256 2003 PENATIONAL RURALWATER 50.00 0.00 0.00 0.00 0.00 48.41 11.91 0.00 SUPPLY AND PO44601 2001 PESECONDRURALROADS PROJECT 50.00 0.00 0.00 0.00 0.00 23.58 8.68 0.00 PO65200 2001 GEFPE IndigenousManagementProt. 0.00 0.00 0.00 10.00 0.00 7.36 1.70 0.00 Areas PO47690 2000 PERES. & EXTENSION 9.60 0.00 0.00 0.00 0.00 1.58 -8.02 1.58 PO62932 2000 PE-HEALTHREFORMPROGRAM 80.00 0.00 0.00 0.00 0.00 15.73 -11.27 -11.27 Total: 355.70 0.00 0.00 32.73 0.00 279.55 68.03 - 9.69 107 Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2000 Agrokasa 4.20 0.00 0.00 0.00 4.20 0.00 0.00 0.00 1999 Alicorp 14.67 0.00 20.00 8.57 14.67 0.00 20.00 8.57 2004 EDYFICAR 3.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 FTSA 7.50 0.00 1S O 0.00 7.50 0.00 1.50 0.00 2003 GlobalMEF 0.00 0.00 4.00 0.00 0.00 0.00 0.00 0.00 2002 Gloria 25.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002/03 ISA Peru, SA 0.20 0.00 0.00 0.00 0.12 0.00 0.00 0.00 2001 Inka Terra 5.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 2004 InterbankPeru 40.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002/03 Interseguro 0.00 0.59 0.00 0.00 0.00 0.59 0.00 0.00 2000 Laredo 7.14 0.00 5.00 0.00 7.14 0.00 5.00 0.00 2002 MIBANCO 1.67 0.00 0.00 0.00 1.67 0.00 0.00 0.00 1999 Milkito 5.50 0.00 3.50 0.00 3.50 0.00 3.50 0.00 2003 NorvialS.A. 18.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 Paramonga 13.01 0.00 0.00 10.98 13.01 0.00 0.00 10.98 2001 Peru OEH 9.70 0.00 0.00 0.00 5.70 0.00 0.00 0.00 1994 PeruPrvtznFund 0.00 7.90 0.00 0.00 0.00 7.90 0.00 0.00 1993/96/00/01 Quellaveco 0.00 0.75 0.00 0.00 0.00 0.72 0.00 0.00 1999 RANSA 6.88 0.00 0.00 0.00 6.88 0.00 0.00 0.00 2003 TIM Peru 70.00 0.00 0.00 0.00 70.00 0.00 0.00 0.00 2001 Tecnofil S.A. 4.95 2.00 0.00 0.00 4.95 2.00 0.00 0.00 2001 UPC 6.00 0.00 0.00 0.00 6.00 0.00 0.00 0.00 1993/99 Yanacocha 20.00 0.00 0.00 25.00 10.00 0.00 0.00 25.00 Total portfolio: 262.42 11.24 34.00 44.55 160.34 11.21 30.00 44.55 PERU STATEMENT OF IFC's HeldandDisbursedPortfolio InMillionsof US Dollars Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. 2004 CMAC Arequipa 0.01 0.00 0.00 0.00 2004 EDYFICAR 0.00 0.00 0.00 0.00 2002 InkaTerra Swap 0.00 0.00 0.00 0.00 2004 UPC Il 0.00 0.00 0.00 0.00 Total pending commitment: 0.01 0.00 0.00 0.00 108 Annex 14: Country at a Glance PERU:RegionalTransport InfrastructureDecentralization Latin Lower- POVERTY and SOCIAL America middle- Peru &Carib. income )evelopment diamond' 2002 Population,mid-year (millions) 26 7 527 2,4n Lifeexpectancy GNIpercapita (Atlas method, US$) 2,060 3,280 1,390 GNI(Atlas method, US$billions) 55.1 1,727 3,352 T Average annual growth, 1996-02 Population ('A) 16 15 1.0 Laborforce (%) 2 8 2 2 12 ;NI Gross fer Most recent estimate (latest year available, 1996-02) primary apita nrollment Poverty (%of populationbelownationalpovertyline) 49 Urbanpopulation(%of totalpopulation) 73 76 49 Life expectancyat birth (years) 70 71 69 I Infant mortality (per lOOOhvebirths) 30 27 30 ChildmalnutntionpAofchildrenunder5) 7 9 n Access to imDrovedwatersource Access to animprovedmtersource (%ofpopulation) 80 86 81 Hliteracy(%of populationage 6) 9 n 13 Gross pnmaryenrollment (%of scbol-age population) P8 BO in -Peru Male P 8 B1 in Lowr-middle-incomegroup Female e 7 P8 16 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992 2001 2002 1 Economic ratios' GDP (US$ billions) 24.8 361 542 56.9 Gross domestic investmentiGDP 336 173 18.3 Exportsof goods andservtceslGDP 165 P5 158 Trade Gross domestic savings/GDP 305 144 16.9 Gross nationalsavings/GDP 264 P 4 16.5 T Current account balancelGDP -65 -52 -2 0 interestpaymentslGDP 2 4 0 9 2.1 2 2 Total debt/GDP 432 564 510 49.0 Total debt servlce/exports 486 203 22.0 28.7 Presentvalue of debt/GDP 519 Presentvalue of debtlexports 282.7 j indebtedness 1982-92 1992-02 2001 2002 2002-06 (averageannualgrowth) GDP -08 4 0 0 6 5 2 4.O -Peru GDP DercaDita -29 2 2 -10 3.7 2.4 Lomr-middle-ncomegroup STRUCTURE of the ECONOMY 1982 1992 2001 2002 1 of investment and GDP (%) (%of GDP) Agriculture 62 8.5 8.5 i ZGrowth o r Industry 42.0 27.9 29.7 Manufacturing 362 77.7 15.3 Services 47.8 63.6 61.7 Private consumption 58.4 77.7 72.0 Generalgovernment consumption 11.0 7.9 11.1 Importsof goods andservices 19.5 15.5 17.2 I -GDI &GDP 1 1982-92 1992-02 2001 2002 (averageannualgrowth) Growth of exports and imports ( O h ) Agriculture 1.7 6.4 -0.6 20 Industry -0.1 4.8 0.7 Manufacturing 10 -0.3 3.4 -11 Services -1.5 3.7 0.1 0 Privateconsumption -0.5 3.7 1.3 .lo Generalgovernment consumption -2.1 5.1 -0.5 -20 Gross domestic investment -11 4.2 -8.0 Importsof goods and services 0 .o 6.1 1.6 ----Exports -Impom 109 Peru PRICES andGOVERNMENT FINANCE I 1982 1992 2001 2002 Domestic prices Inflation ( O h ) ("hchange) l5 T Consumerprices 64.8 73.5 2.0 0.4 ol Implicit GDP deflator 652 69.2 12 0.0 Government finance (%of GDP.includescurrentgrants) Current revenue t3.5 14.1 u.7 i;5j 97 98 99 00 01 Current budget balance -0.8 -0.6 -0.5 Overallsurplusideficit -3.9 -2.8 -2.3 -GDPdeflator -CPI TRADE 1982 1992 2001 2002 (US$ millions) Export and import levels (US$ mill.) Totalexpotis (fob) 3,661 7 , m 7,751 Copper 11o.wo 756 987 1,173 I Fishmeal 427 835 939 7 500 Manufactures 966 2 , w 2,209 Total imports (cif) 4,001 7,88 7,374 5 000 Food 480 530 543 Fuelandenergy 396 907 929 2 500 Capital goods 1,063 1911 1,962 I I 0 Exportprice index(S95=WO) 85 79 80 96 97 98 99 w 01 Import price index (?395=WO) 89 98 99 Exports Imports Terms of trade (895=M0) 96 80 81 O2 BALANCE o f PAYMENTS 1982 1992 2001 2002 (US$ millions) Current account balance to GDP ( O h ) Exports of goods andservices 4,077 4,497 8,597 9,308 0 Imports of goods andservices 4,436 5,4e 9,487 9,8B Resourcebalance -359 -915 -890 -512 -2 Net income -989 -1,635 -1203 -1,506 Net currenttransfers 0 460 999 907 -4 Current account balance -1,609 -1,886 -1,098 -6 Financingitems (net) 1,525 2,455 1,548 Changesin net reserves 84 -569 -448 -340 -8 Memo: Reserves includinggold (US5 millions) 3,365 8,930 9,732 Conversion rate (DEC,local/US$) 6.98E-7 12 3.5 3.5 I EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ millions) 1Composition of 2002 debt (US$ mill.) Total debt outstanding anddisbursed 73,709 20,343 27,645 27,867 I IBRD 478 956 2,626 2,609 IDA 0 0 0 0 G: 2.335 A:2.609 Total debt service 2,036 1,004 2,BO 2,755 IBRD 56 8 4 300 304 IDA 0 0 0 0 Compositionof net resourceflows Official grants 53 238 201 Official creditors 150 306 744 297 Privatecreditors IT78 -97 294 1,436 Foreign direct investment 48 -79 1,064 Portfolio equity 0 0 42 World Bank program Commitments 378 1,150 230 r)O Disbursements 85 0 149 146 A . IBRD E- Bilateral D Other mullilleral - F- Private Principal repayments B .IDA 22 94 114 163 C - I M F G - Short-ter 110 80° 78° 76° 74° 72° 0° 0° Rio Caqueta Rio Putumayo E C U A D O R C O L O M B I A Rio Napo 2° 2° Zarumilla TUMBES Rio IQUITOS Cancas TUMBES Santiago Rio Pastaza 4° Mancora Amazonas 4° El Alto La Tina Rio L O R E T O RioYavari Talara Ayabaca San Ignacio Rio P I U R A Oracuzar A Marañon Sultana Paita Chulucanas M Huancabamba ROAD SEGMENTS REHABILITATED BY PIURA A PVR AND TRANSFERRED TO THE Z REGIONAL GOVERNMENT Bagua Ucayali Jaen O INITIAL ROAD SEGMENTS TO BE Bayovar N Jumbilla REHABILITATED UNDER THE FIRST Rio MOYOBAMBA Yurimaguas Rio YEAR OF THE PROGRAM 6° Olmos Chacha- A 6° S Marañon poyas LAMBAYEQUE Cutervo Mendoza Tarapoto NATIONAL REGIONAL Chongoyape ROADS ROADS CHICLAYO CAJAMARCA San Miguel de S A N ASPHALT Pimentel Pallaques Saposoa GRAVEL CAJAMARCA Sacanche Juanjui Magdalena Bolivar OTHER M A R T I N Pacasmayo Contumaza Sitacocha Huall oiR Chicama Otuzco Cajabamba RAILROADS L A L I B E R TA D aga AIRPORTS 8° Tocache 8° Nuevo TRUJILLO Santiago PORTS de Chuco Pucallpa RIVERS DEPARTMENT CAPITALS San Caraz Luis DEPARTMENT BOUNDARIES A N C A S H Monzon INTERNATIONAL BOUNDARIES Tantamayo Tingo Casma HUARAZ Tingo María Recuay Chico HUÁNUCO Chaglla U C A Y A L Í HUÁNUCO 10° Huarmey Bandero 10° Puquio B R A Z I L P A S C O Goyllarisquizga Oxapampa Pativilca CERRO DE PASCO Mayan Villa Rica Rio La Merced Huacho Satipo L I M A La Palca Apurimac Chancay Oroya J U N I N Rio Urubamba P A C I F I C Yangas Yauli Cubantia Matucana Comas Callao M A D R E D E D I O S 12° LIMA HUANCAYO Langa 12° Chupuro Colcabamba Rio Madre Yauyos PUERTO O C E A N de Quillabamba Dios MALDONADO HUANCAVELICA Lachoj Allccomachay Cerro Azul Lirca Tambo C U S C O San Vicente de Cañete HUANCAVELICA AYACUCHO Santa Teresa Rio Pillcopata Castrovirreyna Ollantaytambo Chincha Alta Paucartambo Inam Puente CUSCO San Juan Andahuaylas Huancarani bari Pisco Tambo Cangallo Ranraccasa San Martin Huancapi ABANCAY ICA 14° Querobamba A P U RTambobambaI M A C Japuque 14° I C A A Y A C U C H O ChalhuancaHaquira Chamaca BOLIVIA Ocaña Antabamba Palpa Santo Sina Tomas Puquio Accocunca P U N O Nazca Yauri Ayaviri Azángaro Coracora Incuyo Huancane P E R U San Juan Moho Acari Juliaca Lake REGIONAL TRANSPORT Titicaca Chala A R E Q U I PA PUNO 16° 16° DECENTRALIZATION PROJECT Pta. Colorada Yura AREQUIPA Mazo Camaná MOQUEGUA Cruz Matarani Desaguadero 0 50 100 150 200 250 Mollendo Rio MOQUEGUA KILOMETERS Tarata This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown Ilo T A C N A on this map do not imply, on the part of The World Bank Group, any Miculla MA judgment on the legal status of any territory, or any endorsement or 18° 18° DRBI Y acceptance of such boundaries. Boca del Rio TACNA 2005 80° 78° 76° 74° 72° Arica 70° C H I L E 55043