OFFICIAL USE ONLY R2006-0216/1 November 28, 2006 Streamlined Procedure For meeting of Board: Tuesday, December 19, 2006 FROM: Vice President and Corporate Secretary Peru - Decentralized Rural Transport Project Project Appraisal Document Attached is the Project Appraisal Document regarding a proposed loan to the Republic of Peru for a Decentralized Rural Transport Project (R2006-0216). This project will be taken up at a meeting of the Executive Directors on Tuesday, December 19, 2006 under the Streamlined Procedure. Distribution: Executive Directors and Alternates President Bank Group Senior Management Vice Presidents, Bank, IFC and MIGA Directors and Department Heads, Bank, IFC and MIGA 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 Group authorization. Document of The World Bank FOR OFFICIAL USE ONLY Report No: 36484-PE PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$50 MILLION TO THE REPUBLIC OF PERU FOR A DECENTRALIZED RURAL TRANSPORT PROJECT November 15, 2006 Finance, Private Sector Development and Infrastructure Department Bolivia, Ecuador, Perú, República Bolivariana de Venezuela Country Management Unit Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective November, 2006) Currency Unit = Peruvian Soles Nuevos = US$1 US$ = SDR 1 FISCAL YEAR January 1 ­ December 31 ABBREVIATIONS AND ACRONYMS AADT Average Annual Daily Traffic LDW Local Development Window APRA American Popular Revolutionary Alliance MEF Ministry of Economy and Finance CAS Country Assistance Strategy MoU Memorandum of Understanding CND Consejo Nacional de Descentralización (National MTC Ministerio de Transporte y Comunicaciones Decentralization Council) (Ministry of Transport and Communications) DEP Departamento Especial de Proyectos (Special NGO Non-Governmental Organization Projects Department) DGASA Dirección General de Asuntos Sociales y NMT Non-Motorized Transport Ambientales (General Directorate for Environmental and Social Affairs DPL Development Policy Loan OED Operations Evaluation Department ESAR Environmental and Social Assessment Report PCM Presidencia del Consejo de Ministros (Ministers' Counsil Presidence) ESMF Environmental and Social Management PII Provincial Infrastructure Institute Framework FITEL Fondo de Desarrollo de las Telecomunicaciones PIU Project Implementation Unit (Telecommunications Development Fund) GDP Gross Domestic Product PPP Public-Private Partnership GoP Government of Peru PRI Provincial Road Institute HDM Highway Development and Management (model) PRONASAR Programa Nacional de Agua y Saneamiento Rural (Nacional Rural Water/Sanitation Program IBRD International Bank for Reconstruction and RED Roads Economic Decision (model) Development ICR Implementation Completion Report RPF Resettlement Policy Framework ICT Information Communication Technology SIAF Sistema Integral de Administración Financiera (Nacional System of Public Investment) IDB Inter-American Development Bank SIL Specific Investment Loan IFR Interim un-audited Financial Report TAL Technical Assistance Loan INDEPA Instituto Nacional de Desarrollo de Pueblos TORs Terms of Reference Andinos, Amazónicos y Afroperuano (Nacional Institute for the Development of Indigenous Peoples) IPE Instituto Peruano de Economía (Peruvian UPP Unión por el Perú Economics Institute) IPPF Indigenous Peoples Planning Framework vpd Vehicles per day Vice President: Pamela Cox Country Director: Marcelo Giugale Country Manager John Newman Sector Manager: Jose-Luis Irigoyen Task Team Leader: Nicolas Peltier-Thiberge PERU Peru Decentralized Rural Transport CONTENTS Page I. STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 A. Country and sector issues.................................................................................................... 1 B. Rationale for Bank involvement......................................................................................... 7 C. Higher level objectives to which the project contributes.................................................. 10 II. PROJECT DESCRIPTION........................................................................................... 10 A. Lending instrument........................................................................................................... 10 B. Project development objective and key indicators............................................................ 10 C. Project components........................................................................................................... 11 D. Lessons learned and reflected in the project design.......................................................... 14 E. Alternatives considered and reasons for rejection ............................................................ 16 III. IMPLEMENTATION .................................................................................................... 18 A. Partnership arrangements.................................................................................................. 18 B. Institutional and implementation arrangements................................................................ 19 C. Monitoring and evaluation of outcomes/results................................................................ 22 D. Sustainability..................................................................................................................... 23 E. Critical risks and possible controversial aspects............................................................... 24 F. Loan/credit conditions and covenants............................................................................... 26 IV. APPRAISAL SUMMARY ............................................................................................. 27 A. Economic and financial analyses...................................................................................... 27 B. Technical........................................................................................................................... 28 C. Fiduciary ........................................................................................................................... 28 D. Social................................................................................................................................. 30 E. Environment...................................................................................................................... 32 F. Safeguard policies............................................................................................................. 34 G. Policy Exceptions and Readiness...................................................................................... 34 Annex 1: Country and Sector Background .............................................................................. 35 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies................. 46 Annex 3a: Results Framework .................................................................................................. 57 Annex 3b: Monitoring and Evaluation..................................................................................... 61 Annex 4: Detailed Project Description...................................................................................... 66 Annex 5: Project Costs ............................................................................................................... 81 Annex 6: Implementation Arrangements................................................................................. 83 Annex 7: Financial Management and Disbursement Arrangements..................................... 89 Annex 8: Procurement Arrangements.................................................................................... 105 Annex 9: Economic and Financial Analysis ........................................................................... 111 Annex 10: Safeguard Policy Issues.......................................................................................... 119 Annex 11: Project Preparation and Supervision ................................................................... 137 Annex 12: Documents in the Project File ............................................................................... 139 Annex 13: Statement of Loans and Credits............................................................................ 140 Annex 14: Country at a Glance ............................................................................................... 142 Annex 15: Maps IBRD 34989, IBRD 35059, IBRD 35060..................................................... 144 PERU PERU DECENTRALIZED RURAL TRANSPORT PROJECT APPRAISAL DOCUMENT LATIN AMERICA AND CARIBBEAN LCSFT Date: November 15, 2006 Team Leader: Nicolas Peltier-Thiberge Country Director: Marcelo Giugale Sectors: Roads and highways (50%); General Sector Director: Makhtar Diop public administration sector (30%); General Sector Manager: Jose-Luis Irigoyen transportation sector (20%) Themes: Rural services and infrastructure (P); Decentralization (S) Project ID: P095570 Environmental screening category: B (Partial Assessment) Lending Instrument: Specific Investment Loan Project Financing Data [X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 50.00 Proposed terms: FSL Financing Plan (US$m) Source Local Foreign Total BORROWER 41 9 50 INTERNATIONAL BANK FOR 39.7 10.3 50 RECONSTRUCTION AND DEVELOPMENT INTER-AMERICAN DEVELOPMENT 39.7 10.3 50 BANK Total: 120.4 29.6 150 Borrower: Republic of Peru Responsible Agency: PROVIAS DECENTRALIZADO (former PROVIAS RURAL) Raul Torres, Director Ejecutivo Av. Garcillazo de la Vega No. 1351-3er Piso - Centro Cívico Lima 1, Perú Tel: (51-1) 330-3465 Fax: (51-1) 330-8554 rtorres@proviasdes.gob.pe http://www.proviasdes.gob.pe Estimated disbursements (Bank FY/US$m) FY FY07 FY08 FY09 FY10 FY11 FY12 Annual 5.0 10.0 10.0 10.0 10.0 5.0 Cumulative 5.0 15.0 25.0 35.0 45.0 50.0 Project implementation period: Start: January 1, 2007 End: December 31, 2011 Expected effectiveness date: March 1, 2007 Expected closing date: March 31, 2012 Does the project depart from the CAS in content or other significant respects? [ ]Yes [X] No Does the project require any exceptions from Bank policies? [ ]Yes [X] No Have these been approved by Bank management? [ ]Yes [ ] No Is approval for any policy exception sought from the Board? [ ]Yes [X] No Does the project include any critical risks rated "substantial" or "high"? [X ]Yes [] No Does the project meet the Regional criteria for readiness for implementation? [X]Yes [ ] No Project development objective. The objective of the project is to contribute to territorial development and to the fight against rural poverty in the Borrower's territory by improving access of rural households and entrepreneurs to goods, social services and income generating opportunities through reduced transport costs and better rural transport infrastructure. Project description 1. Improvement of Rural Transport Infrastructure: This component will scale up to the entire country the decentralized rural roads policies that have been successfully developed during the first two rural roads projects (rehabilitation or improvement of rural roads prioritized through participatory planning, improvement and re-construction of bridges that are critical to ensure connectivity on rehabilitated rural roads, periodic maintenance of rural roads, improvement of non-motorized transport (NMT) tracks, improvement of other types of rural transport infrastructure and a pilot initiative for the stabilization of slopes and the protection of rural roads against river-based erosion). 2. Institutional Development. This component will provide a comprehensive institutional strengthening package at the local and central levels, in the broader context of the decentralization reforms. The main objective is to strengthen the regulatory capacity of the national level while empowering municipalities in the definition and implementation of their rural transport policies. At the local level, the main actors targeted will be the provinces which have been identified as the right level to both get the benefits of economies of scale and ensure accountability to key stakeholders. 3. Transport for Territorial Development. The objective of this component is to increase the impact that improved transport conditions can make on rural development by enhancing complementarities with other types of investments and by promoting productive activities. This component will: (1) scale up the Local Development Window (LDW) model developed during the second Rural Roads Project; and (2) experiment in 15 Peruvian provinces a Rural Infrastructure Pilot that will include specific incentives to promote greater complementarities across rural infrastructure investments. 4. Project Management. This component will cover project administration costs, as well as monitoring, evaluation and audits. The Project will be administered by PROVIAS DECENTRALIZADO in close coordination with other ministries. Which safeguard policies are triggered, if any? ii Environmental Assessment Cultural Property Involuntary Resettlement Indigenous Peoples Significant, non-standard conditions, if any, for: Board presentation: None Loan/credit effectiveness: Preparation and endorsement of the operational manual in terms and scope acceptable to the Bank Covenants applicable to project implementation: a) Provias Descentralizado will, no later than six months after the effective date, appoint the independent auditors under terms of reference and with qualifications and experience satisfactory to the Bank. b) Provias Descentralizado will, no later than twelve months after the effective date, hire the procurement auditors under terms of reference and with qualifications and experience satisfactory to the Bank. c) Provias Descentralizado will, no later than twelve months after the effective date, submit to the Bank for its review and comments a plan describing the proposed organization of Provias Descentralizado by 2011 and its action plan for 2007-2011. This plan will have to be consistent with the legal obligations incurred by the former Provias Departamental under the Regional Transport Decentralization project. d) Provias Descentalizado will, no later than twelve months after the effective date, submit to the Bank for its review and comments a copy of the minutes of the Coordination Group in which the output for the first nine rural infrastructure plans will be discussed. e) Provias Descentralizado will, no later than twenty four months after the effective date, submit to the Bank for its review and comments a report on the situation, efficiency and sustainability of routine road maintenance activities with micro-enterprises on the roads rehabilitated under the First and Second Rural Roads projects. f) Provias Descentralizado will, no later than thirty six months after the effective date, submit to the Bank for its review and comments a copy of the minutes of the coordination group in which the rural infrastructure pilot is evaluated and options for scaling up are discussed. iii I. STRATEGIC CONTEXT AND RATIONALE A. Country and sector issues 1. Reducing rural poverty remains a major challenge for Peru. According to the latest available poverty assessment (2004), more than half of the Peruvian population is poor and 20 percent extremely poor. Poverty levels are much higher in rural areas, particularly in the Sierra: In 2002, 9.4 million Peruvians were living in rural areas, of which 78 percent were poor and 51 percent extremely poor. Extreme poverty remains, by and large, a rural phenomenon (only 10 percent of the urban population is considered extremely poor). The impressive sustained economic growth of the past five years (with an average growth of 4 percent) has produced a decrease in extreme poverty levels at the national level (from 24.1 percent in 2001 to 19.2 percent in 2004) although overall poverty has not yet evolved significantly. Nevertheless, the good economic performance has stopped the worsening trend that began during the recession of the late 1990s: between 1985 and 2000, the number of poor people had increased by 71 percent, a large proportion of these in rural areas. 2. Peru's infrastructure gap is one of the key determinants of rural poverty. Peru's well documented infrastructure gap is particularly acute in rural areas1. In rural Peru, in 1999, access to electricity services reached only 30 percent. Today, 6 million Peruvians still lack access to electricity. In 1999, only 28 percent of rural households had access to a road in good condition. In 2003, only 9 percent of small urban centers had a public phone and access to a telephone was marginal in villages of less than 500 inhabitants (where 2.7 million Peruvians live). In 2000, only 49 percent of the population had access to sanitation services (62 percent for water services). For all these services, except water, coverage in Peru is less than the South American average and what is generally observed in countries with a similar level of development. The price of services in rural transport and rural electricity is higher than in benchmark countries. Moreover, for all these sectors, except telecommunications, the quality of these services is less than of comparators'. 3. Limited access, poor quality and, sometimes, high prices have dramatic consequences for the rural poor. By limiting productivity gains and affecting the ability to diversify outside subsistence agriculture (eg. poor transport limits access to fertilizers) limits rural growth, which could raise poor households' income. In addition, the rural infrastructure gap makes the poor more vulnerable and limits empowerment. Indeed, there is ample evidence of the contribution of infrastructure to poverty alleviation and welfare enhancement:2 For example, better transport means easier access to social services (health, education), safer water improves health, electricity gives children more time to study, cleaner fuels mean less respiratory diseases and telecommunications bring access to knowledge and information. 1 See for instance: IPE (Instituto Peruano de Economía): "La Brecha en Infraestructura, Servicios Públicos, productividad y Crecimiento en el Perú", 2003. 2 An extensive literature review is presented in Brenneman, A. and Kerf, M., "Infrastructure and Poverty Linkages: A Literature Review", 2002. 4. The Peruvian Government has engaged in a large scale decentralization process to improve both the coverage of rural infrastructure and the quality of public expenditures. The 1993 constitution mandated decentralization, but regional elections were only held in 2003, following the adoption of a constitutional amendment in 2002 that required the creation of regional governments. Today there are 26 regions and 1,832 municipalities. In the latter category, 194 are provincial municipalities, the rest are district municipalities. Peru's decentralization agenda was designed to support the following objectives: economic development and competitiveness; modernization and simplification of administrative systems and processes; assigning responsibility for public services to levels closest to the users; and citizen participation in governance. 5. Decentralization offers the opportunity to improve the provision of public goods by tailoring them to local preferences. Furthermore, an advantage of decentralization is that competition, proximity, and transparency provide a strong motivation for local governments to be more responsive to the needs of the public. Decentralization has led to a change in budget allocations: sub-national governments account for 35 percent of non-financial government expenditures in 2006, up from 28 percent in 2003. Similarly, sub-national governments are playing a more important role in public investment; they are responsible for more than half of public investment in 2006, compared to only 20 percent in 20033. In order to preserve fiscal neutrality during the decentralization process, all responsibilities transferred are accompanied by the corresponding allocation of resources. The design of the Peruvian intergovernmental system does not provide for control over rates and bases for local governments and the Peruvian Constitution does not authorize regional level taxation. Consequently, the discretion over own- revenues resources is very limited or non-existent, leaving regional governments with little flexibility in the use of their budget resources. 6. In July 2006, a new Peruvian administration led by President Alan García of the Partido Aprista Peruano (APRA) came into power. Despite a clear victory in the second round runoff with 54 percent of the vote, results revealed a marked split across the country with APRA winning Lima and the Northern region, and losing in the Highlands and in the Amazon region. The vote in the highlands and the Amazon region is widely perceived to reflect a feeling of exclusion and dissatisfaction with the way in which the political system responds to these much poorer regions. To respond to this dissatisfaction, the García administration emphasized in its Government's Plan for 2006-2011, that the development of rural areas (with, in particular, the Sierra Exportadora Program) would be a priority. The expansion of infrastructure services (roads, electricity and water with the Agua Para Todos Program) and the continuation of the decentralization reforms are also a top priority on the new administration's agenda. 7. Decentralization has been the most successful in the rural roads sectors. Since 1995, the Peruvian authorities have successfully designed and implemented an innovative approach to rural road management, with the help of the World Bank and the Inter-American Development Bank. The World Bank has lent US$90 million to Peru for the First Rural Road Project and US$50 million for the Second project. The approach, which is currently applied in half of the 3World Bank, 2006. Policy Note on Decentralization. 2 country,4 has aimed at empowering the rural poor in the process of selecting those roads that should be rehabilitated. Then, building on the decentralization reforms, the management of rural roads has been progressively handed over to municipalities. As of April 2006, 14,000 km of rural roads had been rehabilitated and were receiving adequate maintenance. Contracts were let to 612 micro-enterprises, representing 7,000 employment opportunities for poor men and women. In 2005, an evaluation revealed the improvements in transport (a 68 percent reduction in travel time), as well as its impact on access to schools (an 8 percent increase in enrollment), health centers (a 55 percent increase in visits), agricultural productivity (a 16 percent increase in land destined to agriculture) and rural income (a 20 percent increase in men's agricultural salaries). An improved trend in poverty and extreme poverty indicators was also observed.5 8. The learning process contributed to the strengthening of decentralization reforms. In addition to their positive impact on rural welfare, the first and second rural roads projects have constituted a learning process, which has led to the development of innovative instruments and new rural transport approaches, through the design and implementation of several pilots. There are several examples. The first experimental decentralized "provincial road institute" was in Arequipa: there are now 108 of them with basic or fully-established operational capacity. A "regional road management pilot" has also proved that the rural road management model could be successfully replicated for secondary roads (an experience that is now been scaled up by the Regional Transport Decentralization project).6 A "gender action plan" has demonstrated that women could participate actively in the road maintenance micro-enterprises (24 percent of micro-entrepreneurs are now women). A "Local Development Window" in 12 provinces made a major contribution to the preparation of sound "local development plans" that became one of the cornerstones of Peru's decentralization policy.7 Finally, a "Plan Piloto Selva" has explored ways to customize rural transport solutions (including river-based) to the Peruvian Selva. Box 1: Contribution of decentralized rural roads policies to Peru's decentralization agenda The decentralization reforms in Peru gained a particular momentum in 2002 when a number of key pieces of legislation were adopted. This coincided with the design and launching of revamped rural roads policies which could therefore be customized to the new decentralized environment. While the national decentralization process (with in particular the transfer of additional resources to municipalities) helped the reforms in the rural roads sector (eg. through allowing the establishment of sustainable financing mechanisms for road maintenance), the new rural roads policies also had positive effects in return on the strengthening of the decentralization reforms. These positive effects include in particular: The demonstration that the devolution of public investment responsibilities to municipalities can be successfully and efficiently implemented provided that it is gradual and accompanied with adequate levels of technical assistance; The design of specific institutions (provincial roads institutes) that proved to be both capable of implementing sound road assets management policies and be governed by empowered local authorities; 4 In the 12 departamentos that were the poorest when the Project was designed: Ancash, Apurimac, Ayacucho, Cajamarca, Cusco, Hunacavelica, Huanuco, Junín, Madre de Dios, Pasco, Puno and San Martin. 5Second Rural Roads Project ­ Mid-term evaluation, Instituto Cuanto, 2005. 6Financed by the World Bank and the IDB. Approved by the World Bank Board on July 12, 2005. 7 One of the conditions for accreditation of municipalities by the National Decentralization Council is a prepared local development plans. 3 The establishment of specific partnerships at the provincial level that were able to overcome the high fragmentation of the Peruvian municipal sector and establish a common territorial policy for the management of road assets; The development of a participatory planning capacity for roads assets and for LDW activities, envisaged in the broader context of territorial development plans helped local governments formalize their territorial development strategies. The preparation of territorial development plans was a condition for municipalities to be accredited by the CND and be eligible to increased intergovernmental transfers. More recently, the preparation of the first rural infrastructure plans in the provinces of Arequipa, La Convención and Cotabambas show promising results in terms of strengthening the planning capacity of municipalities and alignment of rural infrastructure investments with territorial development strategies. Source: Provias Descentralizado. 9. Despite the progress already achieved, there remain a number of barriers before the decentralization of rural infrastructure management can have the greatest impact on rural poverty reduction. Reasons include, in particular: The fiscal situation limits financing for rural infrastructure. Between 1998 and 2002, total average funding for rural infrastructure amounted to US$97 million (97 percent from public sources) or 0.18 percent of GDP.8 This is significantly lower than other Latin American countries: Chile spent about 0.28 percent of GDP of rural infrastructure and Guatemala 0.31 percent over the past 5 years. In order for Peru to close its rural infrastructure gap in 10 years with the South American average (and with the average of countries with a similar level of development), total expenditures should be doubled. However, the fiscal situation (indebtedness ceilings, lack of counterpart funds) and rigidities of sub-national governments in the use of their budget resources have been so far a binding constraint to such an increase. Institutional capacity at the sub-national level remains limited. In 2003, a survey9 showed that only 2 percent of the municipalities estimated that they had both the technical skills and the financial resources to manage rural infrastructure projects (compared to 42 percent for some social programs). The extreme fragmentation of the municipal sector in Peru reduces dramatically the institutional capacity below the provincial level.10 The absence of coordination across infrastructure sectors reduces effectiveness. Planning and prioritization of infrastructure investments remains a sector-by-sector exercise although the decentralization process has brought some alignment with territorial development strategies (particularly for rural roads and rural water/sanitation). Still, less than a quarter of the rural population has access to two or more infrastructure services, 8Rodriguez, M., 2004. "Análisis de Gastos de Inversiones y en Provisión de Servicios de Infraestructura Rural y su Comparación con la Evolución de los Indicadores Socio-Económicos de las Áreas Rurales en Perú". 9Azcueta, M., 2003. "Análisis de Capacidades en los Gobiernos Locales del Perú". 10The average size of rural municipalities (districts) in Peru is about 8,000 inhabitants, compared to about 20,000 in Argentina and Bolivia or 26,000 in Brazil or Chile. 4 although there is evidence that bundling increases impact on rural household incomes. 11 No central government agency is currently promoting greater coordination across sectors. The quality of public expenditures can still be improved. The reforms engaged in certain sectors to promote greater private sector participation have produced significant efficiency gains (in telecommunications in particular). These reforms still need to be deepened with the use of low-cost technologies, more targeted subsidies and/or pricing reform, improved regulatory environment and the use of incentives to bring the private sector on-board (like minimum subsidy concessions). With the decentralization process, the challenge of improving the quality of public expenditures is particularly acute for sub-national governments, especially the ones that receive significant transfers (eg. from canon minero). 10. The experience gained over a decade in the rural roads sector could help tackle these weaknesses. With the first and second rural roads programs, a number of instruments have been successfully developed that allowed the strengthening of the decentralization process and the improvement of the quality of public expenditures: with the "Provincial Road Institutes" (PRIs), under the authority of the mayors in the province, municipalities have reached sufficient institutional capacity to manage effectively their rural roads assets. The "Participatory Provincial Road Plans," prepared by the key rural provincial stakeholders, have resulted in better aligned rural roads investments with the territorial development strategy of the province. Another planning mechanism, the "Local Development Window", has been facilitating the identification and implementation of productive initiatives that became feasible as a result of improved transport conditions. Finally, the quality of public expenditures in roads has been improved with the use of low cost rehabilitation technologies ("gravel roads") and of a routine road maintenance program with micro-enterprises that have enhanced sustainability. All these experiences are not directly applicable to other infrastructure sectors, but they can provide the basis for the design of an integrated decentralized rural infrastructure approach. In order to increase impact on rural poverty, this approach should promote, in particular, the bundling of rural infrastructure services through the use of common planning instruments ("provincial rural infrastructure plans").12 11Escobal, J. and Torero, M., 2004. "Análisis de los servicios de infraestructura rural y las condiciones de vida en las zonas rurales de Perú". 12While economies of scale and accountability to rural users' considerations may explain why each sector could have a different preferred territorial level for implementation (eg. regions for electricity, districts for water/sanitation), the provincial level appears to be the right compromise for such a common planning approach. Indeed, in Peru, provinces are both sufficiently large in order to have a basic institutional capacity and sufficiently close to rural stakeholders to ensure accountability. 5 Figure 1: A decade of learning through impact evaluation of rural roads policies 11. The rural transport sector itself requires further reforms. Only about 14,500 km of a registered total rural roads network of 47,000 km has been rehabilitated over the past decade, and only half of the country (the 12 departamentos where poverty was the most acute) benefited from the decentralized rural road management model (provincial road institutes, micro- enterprises) developed by Provias Rural. Lack of access and constrained mobility remains a major obstacle to growth and poverty reduction in many poor areas of rural Peru. In the context of the decentralization reforms, the PRI model should be generalized to the entire country, which implies creating new PRIs in the provinces where the program has not been intervening and strengthening the ones that have been created but have not yet reach full operational capacity. While municipalities have greater control on greater amount of budget resources (especially the ones that have access to cañón minero), the generalization of the cost effective and efficient model that combines participatory road planning, contracting out of road works to the private sector, low cost road rehabilitation technologies and micro-enterprises for road maintenance, is an important measure to improve the quality of decentralized public expenditures. Finally, reforms are also needed at both central and sub-national levels to strengthen the regulation of rural transport, beyond just the sound management of road assets. 12. A gradual approach is needed. Decentralization is a long-term process and international experience suggests that, to be successful, it has to be gradual. In Peru, the experience of the rural roads projects illustrates the time required to build sufficient institutional capacity at the provincial level. All the innovative instruments developed under these projects have been developed on a pilot basis, to test and refine the proposed approach and monitor benefits. In a second phase, scaling up was facilitated by the demonstration effects of several success stories (like the Provincial Road Institute of Arequipa). But scaling up itself takes time: about one year is needed to prepare a participatory provincial road plan and one to two years are needed to create a fully operational provincial road institute. 13. The full integration of rural infrastructure into territorial development strategies will also take some time. No institution in Peru is today capable of handling a full-scale rural infrastructure strategy that would imply identifying and financing combinations of rural infrastructure investments, and merging all the existing sector-specific instruments. The National 6 Decentralization Council (CND in Spanish) has a political and strategic function which is not compatible with the responsibility of implementing an actual investment program and the only multi-sector funding instrument (FONCODES) has failed to implement cost-effective and sustainable investments in a decentralized manner. In fact, with the decentralization process, that responsibility should be progressively taken over by sub-national governments themselves since they are the best positioned to identify and assess complementarities between investments and their relevance for territorial development. Because of its experience in strengthening the institutional capacity of municipalities and in designing and implementing cost-effective solutions for rural roads, Provias Descentralizado can coordinate the efforts of the various existing actors to design and implement on a pilot basis a set of incentives that could improve the coordination between the various rural infrastructure sectors and promote their bundling. In the future, a possible champion for an integrated planning of rural infrastructure investments could emerge with the actual creation of a National Planning Institute (Centro Nacional de Planeamiento Estratégico) 13as envisaged by the new Peruvian administration. 14. Proposed strategy. The proposed strategy is, first, to consolidate the progress achieved in the rural road sector to improve the quality of decentralized public expenditures and, second, to experiment with a set of incentives that could enhance the effectiveness of rural infrastructure investments through greater coordination and the promotion of bundling. B. Rationale for Bank involvement 15. The proposed project is aligned with the Bank strategy in Peru. One of the main priorities of the Peru CAS for 2003-2006 was public sector management and decentralization. Since 2003, many World Bank operations are or have been supporting the GoP agenda to promote rural growth through enhanced decentralization. These range from sector-specific approaches (infrastructure, social sectors, rural development) to operations that helped put in place a sound institutional and fiscal framework for decentralization. The scope of these operations has either been territorialized (poorest regions, Sierra macro-region, Vilcanota) or with a national coverage (at either the municipal or the regional level). 16. The current mapping of these operations is presented in Figure 2 below. With the exception of the programmatic decentralization and competitiveness DPLs which served as an integrator at a broader policy level, most operations have been addressing a single specific sector or territorial issue. In a context where decentralization was still in a beginning stage, such selectivity was justified by the need to customize policy reforms to the specificities of sectors or territories. Nevertheless, in the rural roads sector where decentralization produced concrete results and reached a more mature stage early on, some degree of greater integration was introduced in the design of the second rural roads project. In particular, through the creation of the provincial roads institutes, the project made a significant contribution to the institutional strengthening of municipalities; through the local development window, it fostered greater complementarities between rural roads and rural development initiatives; and, through the "plan piloto selva", the project tried to address the specific transport needs of the Selva macro-region. 13The creation of the CEPLAN was decided by the Supreme Decree No. 054-2005-PCM but did not yet materialize. 7 Figure 2: Current mapping of World Bank operations in decentralization and rural growth 17. In this context, the proposed project proposes to go one step further towards a greater integration (see Figure 3 below). In particular, the scope would move to a national coverage (including the Selva macro-region based on the lessons learnt from the "Plan Piloto Selva") while the "local development window" would be scaled up to a larger number of poor provinces. Finally, while remaining anchored in the rural roads sector, the project would promote greater complementarities with other rural infrastructure sectors through the "rural infrastructure pilot". Figure 3: Mapping of the proposed project in the context of other World Bank interventions 8 18. At the time of negotiations, the new CAS for 2007-2011 is under preparation and is expected to be presented to the Board together with the proposed project. As envisaged, the new CAS should include three pillars: (i) an economy that generates jobs fast and in a sustainable way; (ii) a new social contract among all the social players; and (iii) a State of which Peruvians can feel proud because it delivers the services they care for. These pillars coincide with the axis of the GoP plan. The proposed project is aligned with the first and third pillars of the Peru CAS. Infrastructure has been identified as a key determinant for a growth strategy aiming at promoting employment in a sustainable way. In rural areas where poverty is the most acute, more money is needed to bring rural infrastructure services to a level where local populations can meaningfully participate in the country's economy. In addition, the CAS stresses the need to enhance the impact of each public dollar through (i) leveraging private sector participation in the construction, operation and maintenance of rural infrastructure; (ii) leveraging local public resources; (iii) leveraging economies of scale; and (iv) leveraging local potentialities through territorial approaches to public investment. The model developed under the proposed project fully integrates these priorities for rural roads investment but also, through the rural infrastructure pilot, for other categories of rural infrastructure. Under the third pillar of the CAS, attention is paid to decentralization and access to public services. The proposed project will complement the fiscal decentralization policies envisaged under the CAS by strengthening the effective institutional and planning capacity of local governments and by fostering cooperation between district municipalities at the level of the province. Finally, the CAS draw upon a comprehensive set of policy notes that have been prepared over the last year for the benefit of the incoming administration. The proposed project draws on the recommendations of one of these policy notes entitled "Decentralization and Rural Infrastructure". The project is also aligned with the Government's priorities to develop rural areas, particularly in the Highlands, and to strengthen the decentralization process. 19. Project design follows the recommendations of the Peru Rural Infrastructure Strategy. The Government of Peru is very interested in finding new approaches to rural infrastructure delivery within the broader context of the decentralization reforms. To this end, the Government began working with the Bank in 2003 on the design of a Rural Infrastructure Strategy to identify areas where existing strategies could be improved. A number of background studies were prepared, including a diagnostic of the selected rural infrastructure sectors (water/sanitation, transport, electricity and telecommunications) and several pieces of analytical work on other cross-sector topics. In particular, an econometric analysis found evidence of the benefits of bundling infrastructure services.14 Based on the results from these background studies and in particular the need to foster complementarities between the various infrastructure sectors, the rural infrastructure strategy recommended that provincial rural infrastructure plans be prepared and to explore institutional arrangements such as the creation of "provincial infrastructure institutes" (PII) that could facilitate coordinatio at the provincial level. To enhance efficiency, most tasks related to rural infrastructure management would have to be contracted out to private operators. Finally, the strategy estimated that in order to bridge Peru's rural infrastructure gap in the next ten years, total funding for rural infrastructure would have to be doubled compared to the average level observed in 1998-2002 and sustained at that level during the same period. 14Escobal, J. and Torero, M., 2004. "Análisis de los servicios de infraestructura rural y las condiciones de vida en las zonas rurales de Perú". 9 C. Higher level objectives to which the project contributes 20. The project is aligned with the 2003-2006 CAS objectives of strengthening public sector management and decentralization. The project is also aligned with the priorities of the new CAS for 2007-2011, particularly its first and third pillars: (i) an economy that generates jobs fast and in a sustainable way; and (iii) a State of which Peruvians can feel proud because it delivers the services they care for. 21. The proposed project aims to improve livelihoods of rural communities by (i) expanding to the entire country the rural transport policies that have been successfully designed over the past decade; (ii) increasing the developmental impact of rural infrastructure interventions through piloting greater coordination and promotion of bundling; and (iii) enhancing the efficiency, sustainability and effectiveness of investments in rural transport through strengthening the decentralization framework and building up institutional capacity at the provincial level. II. PROJECT DESCRIPTION A. Lending instrument 22. The proposed lending instrument is a Specific Investment Loan (SIL). The Borrower selected a Fixed Spread Loan, repayable in 11.5 years with a grace period of 10 years. 23. Despite the learning focus of the project, a LIL is not considered an appropriate instrument because of its small size and limited potential impact. A SWAP was explored but discarded since an agreement was found between the Peruvian MEF and the Bank so that this instrument ­ which has never been used in Peru so far - be piloted through another project. An APL has not been deemed appropriate at this time due to our recent engagement in this type of project in Peru and the innovative nature of this operation. Nevertheless, an APL could be explored for the follow up operation (scaling up of the rural infrastructure pilot). B. Project development objective and key indicators 24. Project development objective. The objective of the project is to contribute to territorial development and to the fight against rural poverty in the Borrower's territory by improving access of rural households and entrepreneurs to goods, social services and income generating opportunities through reduced transport costs and better rural transport infrastructure. Key indicators OUTPUT: - km of rural roads rehabilitated by the program - km of rural roads periodically maintained at project standards - km of NMT rehabilitated by the program - number of bridges rehabilitated and maintained by the program 10 - number of productive activities financed and implemented through the LDW/number of said activities identified and assessed - number of rural infrastructure plans prepared and approved - number of provincial infrastructure institutes - number of provinces where rural infrastructure investments prioritized by rural infrastructure plans have been implemented - total number of decentralized institutions created (provincial infrastructure institutes and provincial road institutes) - number of participatory provincial road plans approved OUTCOME: - decreased travel time - decreased transport cost - decreased number of days with road closure - number of qualified micro-enterprises delivering quality maintenance - number of one-year equivalent permanent unskilled jobs generated by micro-enterprises - amount of resources dedicated by municipalities to efficient rural transport activities IMPACT: - increased number of school registered children - increased number of health consultations - increased number of people having access to at least two basic infrastructure services Baseline data are expected to be available by December 2006. This data will come out from the third impact evaluation survey of the Second Rural Roads project (under way). C. Project components 25. The project would include the following four components (a detailed description of each component is provided in Annex 4): 26. Component 1: Improvement of Rural Transport Infrastructure (estimated cost: US$99.6 million of which US$35.7 million would be financed by the Bank loan). This component will scale up to the entire country the decentralized rural roads policies that have been successfully developed during the first two rural roads projects (whose scope was limited to the 12 poorest departamentos). Activities to be financed include: (1) rehabilitation or improvement of rural roads prioritized through participatory planning; (2) improvement and re- construction of bridges that are critical to ensure connectivity on rehabilitated rural roads; (3) periodic maintenance of rural roads; (4) improvement of non-motorized transport (NMT) tracks; (5) improvement of other types of rural transport infrastructure (including river-based equipment such as small wharfs that may be more adapted to "Selva" region); and (6) a pilot initiative for the stabilization of slopes and the protection of rural roads against river-based erosion. For each activity, the project will finance feasibility and technical studies, technical assistance (eg. pilot for the stabilization of slopes), safeguards-related studies (eg. environmental impact assessments), works and supervision. All activities will be executed in compliance with social and environmental safeguards as described in Annex 10. Activities will be procured by 11 Provincial Road Institutes (PRIs) whenever they have reached sufficient capacity or, in their absence and on a transitory basis, by Provias Descentralizado. 27. Component 2: Institutional Development (estimated cost: US$14.7 million of which US$6.2 million would be financed by the Bank loan). This component would provide a comprehensive institutional strengthening package at the local and central levels, in the broader context of the decentralization reforms. The main objective is to strengthen the regulatory capacity of the national level while empowering municipalities in the definition and implementation of their rural transport policies. At the local level, the main actors targeted will be the provinces which have been identified as the right level to both get the benefits of economies of scale and ensure accountability to key stakeholders. Nevertheless, coordination with other levels of sub-national governments (districts, regions) will also be promoted. At the local level, this component will finance the following activities: (1) preparation or updating of participatory provincial road plans; (2) strengthening of the existing routine maintenance system with micro-enterprises; (3) strengthening local capacity to handle safeguards; (4) mobilizing municipal financing for rural transport; (5) promoting private financing for rural transport; (6) scaling up the Geographic Information Systems experience; and (7) other technical assistance activities for municipalities and PRIs (including the promotion of social inclusion). At the central level, this component will finance the following activities: (1) regulation and definition of policies for rural transport; (2) promotion of research and innovation in rural transport (including the development of new rehabilitation technologies); (3) fiscal revenues and road development pilot; and (4) other technical assistance activities or specific analytical works for MTC agencies. 28. Component 3: Transport for Territorial Development (estimated cost: US$11.1 million of which US$4.0 million would be financed by the Bank loan). The objective of this component would be to enhance the impact that improved transport conditions can make on rural development by enhancing complementarities with other types of investments and by promoting productive activities. This component would: (1) scale up the Local Development Window (LDW) model developed during the second Rural Roads Project; and (2) experiment in 15 Peruvian provinces a Rural Infrastructure Pilot that will include specific incentives to promote greater complementarities across rural infrastructure investments. 29. Sub-component 3.1: Local Development Window (LDW) (estimated cost: US$1.3 million of which US$0.5 million would be financed by the Bank loan) ­ The LDW is an instrument which has been developed during the Second Rural Roads project, with the purpose of accelerating the emergence of productive activities in the areas where transport conditions have been improved. For the purpose of the proposed project, the executing agency of the LDW will be selected on a competitive basis, among private operators and NGOs. Eligible activities include productive activities such as the development of agricultural niches (eg. fair trade coffee) or the promotion of eco-tourism. The productive activities identified under the LDW would not be financed under the proposed project, since the LDW would only act as an intermediary to reduce transaction costs for potential sponsors. The LDW will also count on a US$1.5 million Japanese Trust Fund mobilized by the IaDB and administered by Provias Descentralizado. The LDW would intervene in about 50 provinces (chosen from among the poorest ones). 12 30. Sub-component 3.2: Rural Infrastructure Pilot (estimated cost: US$9.8 million of which US$3.5 million would be financed by the Bank loan) ­ The Rural Infrastructure Pilot aims at developing, in a representative and manageable sample of 15 Peruvian provinces and in the context of the decentralization reforms, specific planning and institutional arrangements, with the ultimate objective of increasing the efficiency and effectiveness of rural infrastructure investments through enhanced coordination and the promotion of greater complementarities. Provinces have been selected in order to cover a diversity of situations with regards to (1) availability of budgetary resources; (2) presence of infrastructure sector agencies; and (3) strategic considerations (coca-producing areas, provinces affected by terrorism). Table 1: Provinces selected for the rural infrastructure pilot Limited budget resources Average budget resources Significant budget resources Limited Huacaybamba (Huanuco) San Marcos (Cajamarca) Huancabamba (Piura) presence of Luya (Amazonas) Sánchez Carrion (La infrastructure Libertad) sectors Oxapampa (Pasco) Significant Sihuas (Ancash) Cotabambas (Apurimac) La Convención (Cusco) presence of Leoncio Prado Huanta (Ayacucho) Arequipa (Arequipa) infrastructure (Huanuco) Tayacaja (Huancavelica) sectors Vilcashuaman Azangaro (Puno) (Ayacucho) NB: Provinces in bold are producing coca and were severely affected by terrorism. Provinces in italics have a Provincial Road Institute. 31. Activities eligible for financing include: (1) preparation of rural infrastructure plans (see Box 2); (2) leveraging financing to implement these plans; (3) building institutional capacity at the provincial level to manage rural infrastructure interventions; (4) monitoring and evaluation of benefits as well as transaction costs involved; (5) exploring the design of additional incentives for greater coordination and effectiveness of rural infrastructure interventions. This sub- component will also finance transport infrastructure works identified in the rural infrastructure plans, as well as related studies and supervision. These resources for rural transport improvement investments that come out of the rural infrastructure plans (enough to rehabilitate about 40 km of rural roads) will be additional to the usual methodology designed to allocate project resources among provinces (see III.B). Thus, they are expected to become a strong incentive ("bundling premium") so that municipalities accept to spend the additional institutional effort needed for effective multi-sector coordination. Specific institutional arrangements are applicable to the rural infrastructure pilot and are described in paragraph III.B and in Annex 6. A thorough evaluation of the pilot will be performed in 2009 and will help determine what follow up should be given. In particular, the opportunity for scaling up will be assessed. Such timing is expected to coincide with the reform agenda of the new Peruvian administration with regards to the setting up of a new institutional framework (eg. with the creation of a National Planning Institute) that could take over the responsibility for scaling up the rural infrastructure pilot. 13 Box 2: Participatory planning of rural infrastructure in the province of Cotabambas The province of Cotabambas, located in the Apurimac region, has a population of about 44,000 inhabitants, of which 80% live in rural areas, 78% are poor and 47% live in extreme poverty. In October 2005, the provincial municipality of Cotabambas started to prepare a rural infrastructure plan (plan de infrastructure economica multisectorial), with the technical assistance provided by Provias Descentralizado and in coordination with the various central agencies competent for rural infrastructure. The planning process was organized in a participatory manner, with the consultation of key local stakeholders. It first aimed at identifying economic potential opportunities (mostly in the agriculture and mining sectors) and at mapping existing rural infrastructure. Then, constraints to the development of these economic opportunities were identified and prioritized. While the final plan showed that poor transport conditions were a major bottleneck to growth, insufficient access to water and sanitation services also ranked high in the list of priorities. On the other hand, it appeared that the situation of telecommunications and rural electrification was significantly better than in the rest of the country (the coverage of rural electricity services in Cotabambas is, with 87% of the population, one of highest in Peru). The preparation of this first rural infrastructure plan helped Provias and the other competent central agencies, test in real conditions, a multi-sector planning methodology and identify possible areas of improvement (eg. regarding the ranking of economic potential opportunities). Source: Provias Descentralizado. 32. Component 4: Project Management (estimated cost: US$17.4 million of which US$1.0 million would be financed by the Bank loan). This component will cover project administration costs, as well as monitoring, evaluation and audits. The Project will be administered by Provias Descentralizado in close coordination with other ministries. 33. Monitoring, evaluation and audits (estimated cost: US$2.4 million of which US$1.0 million would be financed by the Bank loan) ­.This sub-component will finance monitoring activities, in particular related to the updating or expansion of Provias' monitoring system (SIGAT) or related training activities such as the ones aiming at strengthening the monitoring capabilities of the PRIs. Eligible expenditures will also include mid-term and final impact evaluation studies. A comprehensive description of the project's monitoring and evaluation system is provided in Annex 3b. Finally, this sub-component will finance the external financial audits, as well as the technical, operational, environmental and social auditing activities to be performed during implementation. 34. Administrative costs (estimated cost: US$15.0 million, entirely financed by the GoP) ­ This sub-component will include administrative costs incurred by Provias Descentralizado to administer the proposed project. These administrative costs will be exclusively financed by national counterpart funds (ie. from the MTC budget and not from the proposed loan). Operating costs incurred by PRIs and municipalities would not be eligible. D. Lessons learned and reflected in the project design 35. The design of the proposed project builds on the following lessons from other initiatives in Peru or other countries: 14 a) The improvement of transport conditions' on rural roads translates into better access to social services (health, education) and to income-generating opportunities ­ The 2005 impact evaluation of the rural roads program illustrated the benefits of rural roads interventions on school attendance, visits to health centers but also access to markets and agricultural productivity. These results are a strong advocate for investing in rural roads as part of a poverty reduction and growth strategy for rural areas. b) The developmental impact of rural infrastructure interventions can be enhanced with the bundling of infrastructure services ­ The econometric analysis performed by Escobar and Torero demonstrated the potential benefits on rural households' income that can arise when several infrastructure services become available. This conclusion provides the theoretical ground for designing and implementing specific incentives that could promote greater coordination and bundling of rural infrastructure services. One of these incentives is the preparation of rural infrastructure plans. c) Participatory planning at the provincial level allows identifying the investments which are the best tailored to rural needs ­ the preparation of participatory plans to identify key rural roads and NMT paths (or other rural infrastructure in the case of the Participatory Provincial Infrastructure Plans) will ensure that local stakeholders' needs are fully reflected in the prioritization of investment alternatives. For the purpose of implementing the Second Rural Roads project, a methodology has been developed so that local stakeholders can solve key tradeoffs between investment alternatives while limiting the risks of capture of the decision-making process by individual interests. The provincial level has been found the right compromise between the necessity to work at a territorial level that is consistent with the promotion of economies of scale while ensuring proper accountability to rural stakeholders. The methodology to be used for the Participatory Provincial Infrastructure Plans is both inspired by the rural roads' plans and by other international experiences such as the Chile's framework plans for territorial development (see Box 3). Box 3: participatory planning for rural infrastructure in Chile The Rural Infrastructure for Territorial Development project became effective in August 2005 and aims at increasing the effective and productive use of sustainable infrastructure services in selected territories of the regions of Coquimbo, Maule, BíoBío, Araucania and Los Lagos. The infrastructure services include water supply, sanitation, roads, Information Communications Infrastructure technology (ICT) and electricity. In a country where the coverage of rural infrastructure services is already high (eg. 86% in electricity and 90% in water supply), the objective is to design and implement a methodology that will allow expanding coverage in the most efficient way, through the active involvement of local stakeholders. Towards this end, priority investments are identified through a participatory process involving poor rural communities which is formalized through the preparation of "Framework Plans for territorial Development" (Planes Marcos de Desarrollo Territorial ­ PMDTs in Spanish). In these plans, local stakeholders assess the productive potential of their territories (eg. tourism, fishing, agriculture) and prioritize individual rural infrastructure investments ­ or combination of these ­ that could have the greatest impact on rural growth. Plans are ultimately approved by the Regional Councils (COREs on Spanish) to ensure consistency with the territorial planning policies defined and implemented at the regional level, and empower regional governments. Source: World Bank project files (2006). 15 d) Provincial Road Institutes (PRIs) have proved to be an efficient decentralized model for the management of rural roads, provided they receive adequate technical and management assistance to start them up ­ The "PRI model" was successfully tried out under the 2nd Rural Roads project. This model proved that municipalities can efficiently manage rural roads assets, provided that the transfer of responsibilities is gradually implemented along with the transfer of sufficient technical and management expertise as well as budgetary resources. The rural infrastructure pilot builds on this experience by proposing to expand the "PRI model" to other infrastructure sectors. The PRIs are acknowledged as a major contribution to Peru's decentralization process. e) Gravel roads routinely maintained by micro-enterprises can be a sustainable and cost-effective technical solution to improve rural transport infrastructure ­ There exists a large evidence both internationally and in Peru that paving roads is not the most cost- effective solution to address transport needs on low-traffic roads (ie. below 200 vpd). Most rural roads have traffic levels not exceeding 50 vpd and, therefore, gravel roads constitute by far the most adequate technical solution in rural Peru. A decade of experience under the First and Second Rural Roads project provides large evidence that, under the proper maintenance arrangements, gravel roads are both a cost-effective and sustainable option. In Peru, as well as in other countries such as Colombia, Bolivia or Honduras, routine maintenance is performed by micro-enterprises which both ensure the efficient routine maintenance of rehabilitated roads, while creating employment opportunities for the rural poor (men and women). f) Specific incentives such as the "Local Development Window" can accelerate the emergence of productive initiatives in areas where transport infrastructure have been improved ­ Past impact evaluation have shown that the rehabilitation of transport infrastructures is followed immediately after by significant improvement of transport conditions (reduction of travel times and travel costs, greater availability and reliability of transport services) but that impact of poverty is a much longer-term effect (see Annex 3b). To accelerate the emergence of income-generating initiatives and, hence, the impact on poverty, a specific instrument ("Local Development Window" ­ LDW) was developed and piloted under the Second Rural Roads project. The LDW acts as an intermediary to identify and prioritize productive initiatives in areas where roads have been rehabilitated, and reduce the transaction costs for potential sponsors. Based on the success of the LDW, the proposed project includes a scaling up of that instrument in the poorest provinces. E. Alternatives considered and reasons for rejection 36. Alternative interventions and approaches that have been considered for the project include: a) Planning and financing of all rural infrastructure in selected territories. This alternative would have implied reducing project scope to a few provinces where not only rural infrastructure plans would have been prepared but also all resulting priority investments (not just transport) would have been financed with project resources. This option was discarded because other sector-based programs (PRONASAR, Rural Electrification Program, FITEL) have been designed that could finance the investments resulting from the rural infrastructure plans. In this context, the creation of an additional centrally-managed financing mechanism 16 for rural infrastructure was found less relevant than promoting bundling through the preparation of rural infrastructure plans that would be financed from the various existing sector-based financing instruments. In addition, the coordination process that will be established between the various agencies through the pilot is expected to benefit not only the few provinces where the pilot will be active but, more broadly, their interventions in the whole country. b) Using (or creating) a "multi-sector" central agency to handle the rural infrastructure pilot. This alternative was discarded because no such agency exists today in Peru. The CND ­ which could have been a natural candidate ­ is assuming a coordinating but not an implementing role. In this context, it was found preferable, to use Provias Descentralizado, given the experience it has developed in participatory planning at the provincial level, at building capacity and handling institutional reforms working with municipalities, and in impact evaluation. Under the proposed model, Provias Descentralizado does not take over the full responsibility for rural infrastructure development; instead, its role is to assist provincial municipalities to: (i) identify and prioritize their needs through the preparation of the rural infrastructure plans; (ii) help strengthen their institutional capacity through the provincial (road or infrastructure) institutes; (iii) help implementing and financing their rural transport policies in a sustainable and efficient manner: and (iv) facilitate coordination with the other central agencies that are in charge in the other infrastructure sectors. Regarding this last issue, a memorandum of understanding has already been signed between Provias Descentralizado and the other agencies. c) National coverage. One alternative could have been to focus on part of the country as the Second Rural Roads project did with the twelve poorest regions. This could have increased the amount of resources available for each province and overcome possible threshold effects so that the improvement of rural transport conditions bring the critical mass needed to overcome key bottlenecks to rural growth. This option was discarded for the following reasons: (1) in the context of the decentralization reforms in Peru, one key objective becomes the generalization to the entire country of the decentralized institutional model that has been successfully developed through in particular the creation of provincial road institutes; and (2) other sources of financing for rural transport now exists at the local level (eg. canon minero) so that the key issue becomes how to leverage these sources of financing and improve their management in the most effective manner. d) Use of regional level to provide technical assistance to municipalities. Another alternative to strengthen the institutional capacity of the fragmented Peruvian municipal sector could have been to use the regional governments as a resource for technical assistance. This model has been successfully used in other countries (eg. Brazil) where states (which constitute the first sub-national level) have the responsibility of strengthening the institutional capacity of municipalities with regard to transport and road assets management policies. This model is not appropriate in the case of Peru where the decentralization of transport policies at the regional level is less advanced, in most cases, than at the municipal level. Nevertheless, the merging of Provias Rural and Provias Departamental into Provias Descentralizado is expected to lead to a greater harmonization of the technical assistance received by the two levels of governments and to improved coordination among them. 17 III. IMPLEMENTATION A. Partnership arrangements 37. The project is expected to coordinate closely with the Bank-funded Peru Rural Electrification project and the National Rural Water Supply and Sanitation project, particularly regarding the design and implementation of the rural infrastructure pilot. The project would also coordinate with the other Bank-funding projects and initiatives in the area of decentralization (particularly the Institutional Capacity for Sustainable Fiscal Decentralization Technical Assistance Loan). Finally, coordination would also be ensured with the Sierra Rural Development Project (under preparation). 38. Figure 4 below describes the timing of the various Bank-financed programs in the infrastructure sectors. The proposed project is scheduled to become effective early 2007 in order to ensure the right transition with the Second Rural Roads project. Through the rural infrastructure pilot, coordination will be ensured with the National Rural Water Supply and Sanitation project (PRONASAR) which is scheduled to close in 2009. This will coincide with a thorough evaluation of the pilot which will help assess opportunities for scaling up and possibly tightening institutional coordination between the two sectors. The pilot will also require coordination with the Rural Electrification project which is scheduled to close in 2012, at the same time as the proposed project. It is expected that the pilot will have provided at that time sufficient evidence of bundling benefits as well as successful institutional arrangements so that a nation-wide and fully-integrated rural infrastructure program can be implemented after that date. Figure 4: timing of Bank-supported programs in the infrastructure sectors in Peru 39. Another key partner is the Inter-american Development Bank (IDB) which co-finances the proposed operation. Over the past decade, close cooperation between the Bank and the IDB 18 in the transport sector in Peru15 has brought important benefits to both the GoP and the two development banks, among which: (1) reduction of transaction costs for the client through harmonization of operational and reporting procedures; (2) improved coherence of policy dialogue for policy reforms in the transport sector; (3) coherence of decentralized transport strategies implemented in the country (before, the two banks had "divided" the country in two geographical areas of interventions); and (4) increased frequency and quality of supervision. In the specific case of the proposed project, the two banks and the GoP have agreed to use harmonized procurement and disbursement documents and to supervise implementation through joint supervision missions. 40. At the national level, coordination between the various agencies in charge of managing rural infrastructure policies or programs regarding the implementation of the rural infrastructure pilot will be ensured through the creation of an ad-hoc committee ("Coordination Group"). The committee would be constituted from Vice-Ministers (or their representants) of key ministries in charge of rural infrastructure programs. During preparation, an agreement (declaración de intención) was signed between the various competent agencies in which such agencies committed to the implementation of the rural infrastructure pilot. While the Committee could not be formally constituted at the time of negotiations due to the political transition in Peru, a legal covenant was introduced in the legal agreement so that this committee is established at the time when the outputs of the rural infrastructure plans will be known (ie. at the latest after about one year of implementation). Provias Descentralizado will act as a Secretariat for this committee which is expected to meet at least every 6 months. Members of the committee should also include other key institutional actors dealing with decentralization such as the Ministry of Economy and Finance (MEF), the Minister's Council Presidency (PCM) or the National Decentralization Council (CND). 41. The creation of a National Planning Institute (Centro Nacional de Planeamiento Estratégico) has been discussed in the past and is one of the measures envisaged by the new Peruvian administration to rationalize public interventions at the various territorial levels and align them with territorial development strategies. Should it be created, this entity could become a natural champion to handle rural infrastructure policies in the broader context of the decentralization reforms. This entity would therefore be proposed to be represented in the Committee and it would be closely associated to the evaluation of the rural infrastructure pilot scheduled for 2009. B. Institutional and implementation arrangements 42. At the national level, the overall responsibility for project implementation and coordination will rest with Provias Descentralizado. Provias Descentralizado was created in August 2006 by Supreme Decree No. 029-2006-MTC. Despite its recent creation at the time of project preparation, this unit is not completely new since it comes from the merging of two existing entities: Provias Rural and Provias Departamental. This evolution is expected to be a positive step towards greater recognition of the decentralization process in the transport sector. In addition, Provias Rural was the agency that implemented the First and Second Rural Roads 15The Second Rural Roads project, the Lima Transport project and the Regional Transport Decentralization project are all co-financed by the World Bank and the IDB. 19 project while Provias Departamental was implementing the Regional Transport Decentralization project. These two entities are therefore familiar with Bank and IDB procedures so that Provias Descentralizado is likely to become quickly operational. Nevertheless, the merging process created some uncertainties regarding what will be the final organization and it was therefore agreed that the final organizational structure will have to be finalized before effectiveness. 43. The decentralization process implies that Provias Descentralizado evolves from an executing agency to a regulatory/promoting/supervising body. This evolution is already taking place with the creation of PRIs in provincial municipalities and the transfer of fiduciary responsibilities to them. Consequently, the activities performed by Provias Descentralizado have evolved from directly managing road rehabilitation and maintenance activities to providing targeted technical assistance to municipalities to help them design and implement their rural transport policies. 44. This evolution has important consequences for Provias Descentralizado: it requires in certain cases downsizing the institution, while strengthening other competences (such as experts in decentralization and territorial planning). In order to formalize the process, a legal covenant has been introduced in the legal agreement so that the management of Provias Descentralizado prepares, by the end of the first year of operation, an institutional plan describing the "Vision" of Provias Descentralizado for 2010 and a timing of actions to ensure the proper implementation of this plan. 45. At the provincial level, the overall responsibility for project implementation will rest with the Provincial Road Institutes (PRIs), in accordance with the new decentralized environment. The PRIs are embedded in the provincial municipalities and would therefore benefit from the support of other municipal departments (planning, finances, general services). They include a limited number of staff (generally a manager ­ gerente ­ , a technical assistant and a support staff). In order to ensure that PRIs have reached sufficient capacity at the time of transfer of fiduciary responsibilities, specific arrangements have been established. In particular, a preliminary pilot group of PRIs will be selected based on the adequacy of their financial management capacity, their experience in the effective execution of similar projects and their institutional capacity. The selection criteria should ensure that these pilot PRIs have sufficient capacity to implement the proposed project. In the other provinces, a similar assessment of the capacity of PRIs will be performed. This assessment should help determine if these provinces can join the pilot or if they should first meet a number of conditions. In such case, they would receive customized technical assistance under component 2 of the proposed project in order to meet these requirements (see Annex 7). Finally, in at least the 15 provinces where the rural infrastructure pilot will be implemented, PRIs are expected to involve into Provincial Infrastructure Institutes (PII). 46. To provide technical assistance to the PRIs and ensure second-level monitoring, Provias Descentralizado will count on its regional bureaus (unidades zonales). In the regions where the program has been active, the 11 regional bureaus have evolved from traditional engineering and technical competences towards becoming centers of expertise in rural transport policies and institutional issues related to the decentralization process. This evolution is more advanced in the regions where PRIs are more developed. The institutional plan describing the "Vision" of 20 Provias Descentralizado in 2011 will have to pursue this evolution and, ultimately, envisage the closing of these regional bureaus in the regions where PRIs have become completely self- sustainable. In the short term, additional regional bureaus will be opened to ensure presence in the regions where the program has not been active until now. In the context of the merging of Provias Rural and Provias Departamental, these local offices (possibly renamed oficinas de coordinación regional) will also monitor the implementation of the Regional Transport Decentralization project and ensure greater coordination between the regional and local levels with regard to transport policies. 47. Specific arrangements associated to the rural infrastructure pilot At the local level: The provincial level has been acknowledged by all sectors as the most appropriate level to plan rural infrastructure investments. Provincial municipalities will therefore play a key role to implement the pilot. In each provincial municipality, a "technical secretariat" will be designated to prepare the rural infrastructure plan with the help of a consultant contracted and trained by Provias Descentralizado. A broader forum (comité de coordinación) will allow involving key local stakeholders (eg. the chambers of commerce) in the planning process. Agreements (convenios) will be signed with the district municipalities as well as with the various sector-specific agencies. Further arrangements will also be implemented to ensure coordination with the regional level (in particular with the Consejos de Coordinación Regional). At the national level: A specific agreement (declaración de intención) has been signed between all the various sector-specific agencies and a committee gathering all the Executive Directors of these agencies has been constituted. A higher-level institutional arrangement (Coordination group at the level of Vice-Ministros or their acting) will be installed as well as coordination arrangements with other relevant actors (eg. MEF, PCM, CND). While the exact status of this Coordination Group (eg. Commission chaired by PCM) is still to be decided due to the government's transition, it was agreed that it would meet at important moments during the implementation of the pilot (in particular to review the outputs from the first rural infrastructure plans and to review the evaluation to be performed in 2009 and decide upon possible scaling up). These meetings of the Coordination group will be secured through covenants in the legal agreements (see III.F). On monitoring and evaluation: a Task Force has been constituted by Provias Descentralizado with the participation of selected economists (eg. Javier Escobal) and experts in game theory to design the evaluation methodology. 48. Allocation of budget resources between provinces. A methodology was developed to pre-allocate resources across the various provinces. Underlying objectives for the design of this methodology are: (1) maintaining a "poverty focus" so that the additional resources brought by the project would benefit the poorest provinces; (2) ensuring efficiency by avoiding that resources are not spread too thin; and (3) providing incentives to leverage additional funding for efficient rural transport policies. Regarding this last objective, participation and financing agreements will be signed between Provias Descentralizado and beneficiary municipalities before any rehabilitation works be launched. In these agreements, municipalities will confirm their intention to implement sound rural transport policies and detail how many resources have been budgeted for rural transport activities. Provias Descentralizado will verify that these 21 activities will be performed in order to ensure efficiency and effectiveness (prioritization through participatory planning, low-cost rehabilitation technologies, maintenance with micro-enterprises, outsourcing to private operators, etc.). Given the current level of decentralized public expenditures, it is expected that the financial capacity of local governments could reach about US$15 million per year (assuming that 2 percent of total budget resources are dedicated to rural transport related activities). A specific indicator has been introduced in the results framework to measure the performance of Provias Descentralizado in leveraging funding efficiently spent by municipalities in rural transport (see Annex 3a). 49. Schedule of project implementation. The speed of implementation will differ significantly between provinces with established institutional capacity to handle rural transport policies (ie. those with an experienced PRI) and provinces where the program has not yet been active. Building on the experienced provinces with active PRI and on participatory road plans prepared or updated during preparation, a pipeline of works is expected to be ready for implementation at the time scheduled for effectiveness. These new participatory road plans are being prepared in priority in the poorest provinces16 so that positive impact on transport conditions is first achieved where they are the mostly needed. The implementation schedule and disbursement profile reflect the potential of the proposed project to quickly implement activities and achieve results in the ground. C. Monitoring and evaluation of outcomes/results 50. For the first two roads projects, two impact evaluation studies had been conducted in order to assess their impacts on rural life conditions (transport, access to social services, poverty, etc.). The first study had been conducted ex-post in 2001 without any previous baseline, while the second one, conducted in 2004, had used the first study as a baseline. This second study aimed at assessing the impact of the first two years of the second project, and had been used as a baseline for the future. Main results of these studies were similar: impacts were found to be greater for transport conditions than for all other aspects, impacts on access to social services such as health and education were found to be noticeable, while effects on employment and poverty alleviation were found to be limited. These results are consistent with the general theory stating that when a program is implemented, its effects on the outcomes (transport conditions) are higher during the first years, while over time, impacts on other indirect aspects (access to social services) become higher and impact on poverty alleviation becomes noticeable after at least the first eight years of implementation. This theory will be tested again by the third impact evaluation study which is being conducted in August-November 2006 and whose results will be released in early 2007. 51. This future study will have two components: (i) assess the effect of the first two roads programs in each impact area (such as transport, access to social services, environment or poverty) in the 12 departments of intervention of these two programs; and (ii) produce a baseline which will be useful to assess the impact of the third program (whose area of intervention is the whole country) in the future. Moreover, the results of this impact evaluation study will be used for the fine tuning of the implementation of the project over time. Indeed, previous studies have 1635 new participatory provincial road plans are expected to be completed in the first year of implementation in provinces chosen among the three poorest quintiles. 22 constituted a real learning process which had been useful to design the current project: most of the effects on each impact area can now be forecast before the implementation of the program. Hence, the design of the current program takes into account the results of the previous impact evaluation studies. 52. The methodology used for the next impact evaluation study will be mainly quantitative but will also include qualitative techniques aiming at knowing how the project is perceived by the rural population. As with the second impact evaluation study, the methodology used for the quantitative part will be the double difference technique. Primary units of the studies will be rural roads or non-motorized transport (NMT) already rehabilitated by the previous programs or which will be rehabilitated by the current one, while secondary units will be villages and households will constitute the tertiary units. Each unit that have its control counterpart, whose main criteria is not to be located in the intervention area (for other criteria, see Annex 3b). Information will come from various sources and will be collected in the whole country. 53. Lastly, two other impact evaluation studies will be conducted during the life of the project: one at mid-term and another one at the end. Each study will use the previous one as a baseline, so that the whole process can be seen as a living process aiming at correcting previous mistakes over time. These impact evaluation surveys will be performed by specialized consulting firms, universities or think tanks, under the supervision of Provias Descentralizado and building on the methodology developed for the Second Rural Roads project. Some adaptations or complements will be made to this methodology to account for differences in project's scope and design. A specific evaluation will be performed for the rural infrastructure pilot. The annual monitoring of intermediate indicators will be done by Provias Descentralizado using data collected from its regional offices (unidades zonales) and by PRIs/PIIs. Most of this information will be channeled through the SIGAT, soon to be made accessible to decentralized units (see Box A4-10). Intermediate outcome indicators will be presented in the Quaterly Progress Reports to be sent to the Bank, as well as in Provias Descentralizado's Annual Operational Reports. D. Sustainability 54. Sustainability is a cornerstone of the overall project strategy to ensure the quality, continuity and reliability of the rural transport interventions, within the broader decentralization agenda. For this reason, the project includes a significant number of dispositions within each of its components in order to ensure a better sustainability. In particular, since one of the greatest risks to the project's sustainability is that public sector financing for rural roads (national counterpart funds) be insufficient, various scenarios were discussed with MEF and MTC to ensure that the required level of counterpart funds be compatible with the projected fiscal constraint in which MTC will operate. In addition, various advocacy activities will be conducted under component 2 to ensure adequate levels of funding for rural transport at both central and local levels. 55. One of the main dispositions is the fact that PRIs are designed to be permanent and perennial structures. Indeed, as Provias Decentralizado will turn into a regulatory body, they will become the only entity in charge of rural transport within the provinces. Moreover, provinces will need to have fully operational PRIs in order to have the rehabilitation and the periodic 23 maintenance of their road network financed by the national level (except on a transitory basis corresponding to the institutional building of PRIs). Sustainability of the project will also be ensured by permanent financial transfers from the MEF to PRIs. These transfers will be specifically dedicated to routine maintenance, an activity which has to be entirely financed by provinces. This disposition is important, because routine maintenance constitutes by nature the core of the sustainability of the rural transport network. 56. Other sustainable dispositions include the adoption of road assets management practices (programming of maintenance activities) that matches the optimal life cycle of roads, but also the financing of studies and activities aiming at mobilizing municipal financing for rural transport (and for rural infrastructure in provinces where the infrastructure pilot will be implemented). Leveraging local financing is very important to ensure the continuity of the current interventions in the long term. Project's sustainability will also be ensured by the updating of participatory provincial road plans and of rural infrastructure plans. This updating is fundamental because these plans are living instruments and need to be regularly updated in order to be efficient and to constitute powerful planning tools. 57. The impact evaluation studies conducted at mid-term and at the end of the project will constitute an efficient way to check the sustainability of the project, by assessing the quality, continuity and reliability of the rural road network. Other good sustainability indicators, which can be monitored on a more regular basis, are: the number of PRIs with full capacity, the number of transport activities other than routine maintenance co-financed by provinces, the number of plans which have been updated or the number of infrastructure activities co-financed by municipalities. E. Critical risks and possible controversial aspects Risk Mitigation Risk Rating with Mitigation The momentum to advance Maintain active dialogue with GoP on decentralization policies weakens, decentralization reforms through Bank threatening the sustainable lending and non-lending activities. Modest implementation of the program (insufficient intergovernmental transfers and/or lack of sufficient technical assistance). Proper allocation of counterpart funds Level of counterpart funds were does not materialize or debt ceilings determined using conservative are lowered to an extent that loan estimates of MTC's fiscal environment Substantial disbursements are reduced, affecting taking into account that debt for project implementation. proposed project will be fully assigned to MTC. 24 Risk Mitigation Risk Rating with Mitigation The rural infrastructure pilot PROVIAS is just a facilitator; priorities coordinated by Provias for investment come from the Descentralizado is resisted by other participatory planning process handled Modest central agencies in charge of rural by the municipalities. A MoU has been infrastructure. signed between PROVIAS and the other competent agencies. A high level Coordination group will be created to ensure proper coordination as well as specific local and regional institutional arrangements. The institutional capacity of Proper dissemination of successful municipalities remains insufficient results achieved with Provincial Road and/or they reject the model developed Institutes and micro-enterprises. Substantial by Provias Descentralizado for rural Comprehensive institutional road management (gravel roads, strengthening package designed under routine maintenance outsourced to component 3. micro-enterprises, participatory planning) Scaling up to the entire country and A plan will be prepared (see covenant) dealing with implementation in 192 to describe the institutional evolution provinces exceeds the institutional of Provias Descentralizado from an Low capacity of Provias Descentralizado. executing body to a regulatory entity. Local presence will be strengthened (with the objective of reaching one regional bureau per region) in order to be closer to PRIs/PIIs. Scaling up to entire country will be gradual. Overall Procurement Risk (1) comprehensive institutional Modest/ strengthening strategy for PRIs and Substantial PIIs to be designed and implemented by Provias Descentralizado; (2) evaluation committee with the participation of a member from Provias Descentralizado; (4) design and implementation of a comprehensive training plan as a pre- requisite to the launching of procurement processed at the local level; (5) promotion and dissemination of bidding opportunities, agreement on criteria/requirements to participate; as well as simplification of bidding documents in agreement with the Bank; (6) decentralization of the SIGAT; and (7) design of adequate reporting procedures for the archiving of procurement documents 25 Risk Mitigation Risk Rating with Mitigation Overall Financial Management Risk (1) agreement on national counterpart Low funds from MEF; (2) financing agreements signed between municipalities and Provias; (3) accreditation system to ensure that PRI/PII have reached sufficient capacity when they receive resources; (4) monitoring and technical assistance to PRIs/PIIs by Provias; (5) adequate staffing of Provias, and (6) monthly reconciliation of accounting data between SIAF and SIGAT Overall Risk Rating Modest F. Loan/credit conditions and covenants Effectiveness Condition: Project Operational Manual is approved through Directoral Resolution in terms and scope acceptable to the Bank. Covenants: Provias Descentralizado will, no later than six months after the effective date, appoint the independent auditors under terms of reference and with qualifications and experience satisfactory to the Bank. Provias Descentralizado will, no later than twelve months after the effective date, hire the procurement auditors under terms of reference and with qualifications and experience satisfactory to the Bank. Provias Descentralizado will, no later than twelve months after the effective date, submit to the Bank for its review and comments a plan describing the proposed organization of Provias Descentralizado by 2011 and its action plan for 2007-2011. This plan will have to be consistent with the legal obligations incurred by the former Provias Departamental under the Regional Transport Decentralization project. Provias Descentalizado will, no later than twelve months after the effective date, submit to the Bank for its review and comments a copy of the minutes of the Coordination Group in which the output for the first nine rural infrastructure plans will be discussed. Provias Descentralizado will, no later than twenty four months after the effective date, submit to the Bank for its review and comments a report on the situation, efficiency and sustainability of routine road maintenance activities with micro-enterprises on the roads rehabilitated under the First and Second Rural Roads projects. Provias Descentralizado will, no later than thirty six months after the effective date, submit to the Bank for its review and comments a copy of the minutes of the coordination 26 group in which the rural infrastructure pilot is evaluated and options for scaling up are discussed. IV. APPRAISAL SUMMARY A. Economic and financial analyses Cost benefit NPV=US$ 13.91 million; ERR = 29.2 % (see Annex 9) 58. In the context of the project's participatory framework, the economic evaluation represents a step within the eligibility criteria that is applied to corroborate the feasibility of the sub-projects in achieving the objectives of the project. A Cost Efficiency Analysis (CEA) will be done for low volume rural roads, selected on the basis of their contribution to accessibility to social and economic centers. For a low-volume rural road sub-project to be considered feasible, the Cost Effectiveness Indicator should be less than US$ 100 of project costs per beneficiary person. A Cost Benefits Analysis (CBA) will be done for medium-volume and high-volume rural roads, which will produce economic benefits not only in alleviating isolation but also in reducing transport costs to the long-distance traffic they would normally carry and increasing regional economic development, and the corresponding economic indicators will be determined, such as the Economic Rate of Return (ERR) and Net Present Value (NPV). The investments on medium- volume and high-volume rural road projects should yield an ERR higher than 14 percent to be considered feasible, which is the standard discount rate adopted in Peru since 2000. 59. Provinces are preparing Participatory Provincial Road Plans to be able to select road investments to be included in the project. The Road Plan elaborates a diagnostic of the road sector in a particular Province, analyzes the supply and demand for transport services and infrastructure, and prioritizes the road investment options, towards identifying the sub-project priorities that could be funded under the project. A Participatory Provincial Road Plan utilizes a multi-criteria priority index to rank roads and define priorities that evaluates geographical, social, economic, natural resources and technical criteria. Once the sub-projects are identified, they undergo final engineering design and economic evaluation. 60. The representative economic evaluation of the rehabilitation and periodic maintenance works indicates that the project economic benefits are satisfactory. The Net Present Value is estimated at US$ 13.91 million at a 14% discount rate over a ten year evaluation period. The Economic Rate of Return is estimated at 29.2%. Compared with the without project scenario, the road works economic expenditures will increase by US$ 22.25 million, in present value terms over the evaluation period, while road users will save US$ 36.16 million over the same period, which means that every dollar spent results in around US$ 1.62 saved by road users. 61. The results are satisfactory relative to the main risks considered in the economic analysis, namely, higher investment costs and lower future benefits due mainly due to lower traffic. Under a worst-case scenario of benefits dropping to 80 of the current level and 20% increase in investment costs, the project yields a satisfactory rate of return of 16.2%. The analysis of switching values of critical items indicates that to yield an overall project NPV equal to zero, investment costs need to be multiplied by 1.60 or benefits multiplied by 0.63. 27 B. Technical 62. The characteristics of the rehabilitation and maintenance activities to be identified through the proposed project do not entail major technical difficulties. The technical characteristics will involve improvements to existing surfaces, drainage systems and retaining walls to ensure a level of mobility tailored to the specific transport needs of the rural populations as identified by them in the Provincial Participatory Road Plans and Provincial Participatory Rural Infrastructure Plans. The design of rehabilitation and maintenance works will follow technologies and standards, specified by national norms (applicable to gravel roads). Key technical norms applicable to low-traffic unpaved roads were developed and approved in 2005 and 2006. As needed, component 3 will finance research and innovation activities to develop 17 rehabilitation technology alternatives applicable to rural transport. C. Fiduciary Financial Management 63. The responsibility for implementing the proposed project is the Project Implementation Unit of the Ministry of Transport and Communications (called by new regulations in place Provias Descentralizado), as well as participating provincial roads institutes (PRIs) and provincial infrastructure institutes (PIIs). Provias Descentralizado (from now on called as Provias) is an autonomous administrative and economic financial unit of the MTC, which by Executive regulations is now responsible for implementing both Bank financed projects: the Second Rural Roads project and the Regional Transport Decentralization project. Its staff is responsible for budgeting, accounting and treasury processes and procedures and will be assigned full time to provide support to project execution. Provias will provide separate fiduciary support to both projects under implementation and to this project under preparation, including separate chart of accounts, separate financial statements, and external audit review. Provias will implement the components related to institutional strengthening and project management at the central and provincial level. 64. Since, Provias staff has prior experience with Bank Financed Operations the inherent risk is modest and control risks profile has been rated as Low. The major issues relate to the risk of poor implementation capacity of Participating Provincial Road Institutes - PRIs; project monitoring and supervision at PRIs will be performed by the central level; minimum risk of untimely counterpart contributions. 65. On the basis of proposed project design the financial management team considers that the project requires additional financial management arrangements, therefore a minimum set of mitigations actions needed to ensure proper financial management arrangements has been identified. These actions should be in place for project implementation. 17Manual para el Diseño de Caminos no-Pavimentados de Bajo Volumen de Transito approved on Nov. 16, 2005 through Directoral Resolution No. 084-2005-MTC/14 and Manual de Especificaciones Técnicas Generales para Construcción de Caminos de Bajo Volumen de Transito approved on May 30, 2006 through Directoral Resolution No. 026-2006-MTC/14. 28 66. The PRI's staff will co-execute the project at the provincial level but monitored by Provias. The PRIs will be responsible for executing road rehabilitation sub projects, as well as the related road maintenance through the existing and/or new created micro-enterprises. In addition, in some cases the PRIs will be in charge of the preparation of Participatory Provincial Road Plan, hiring and execution of economic feasibility studies, designs of engineering, environmental viability, works, control and maintenance. 67. The PRIs will assist in the day-to-day supervision of road maintenance and improvement works, based on the compliance with Bank fiduciary procedures. Compliance of these requirements at the central and provincial level is essential to ensure project success. 68. Implementation will be characterized by the selection of a preliminary pilot group of PRIs by Provias Descentralizado in accordance with the Bank. The pilot PRIs will be selected by the adequacy of their financial management capacity, experience in the efficient execution of similar projects, and their institutional capacity. Procurement 69. An assessment of the capacity of the Implementing Agency to implement procurement actions for the project has been carried out by Aldo Ortiz, Consultant, under the supervision of Evelyn Villatoro, Senior Procurement Specialist, on August 29, 2006. At appraisal, the Bank, the IDB and Provias Descentralizado agreed on the methods and documents to be used as presented in Box below. Key issues and risks concerning procurement for implementation of the project have been identified and include: (1) coming local elections and change of local authorities and loss of institutional capacity already established for existing PRIs; (2) the decentralization of procurement responsibilities at the municipal level may not be compatible with the actual institutional capacity of the PRIs or PIIs; (3) limited competition given the availability of providers in the private sector, as well as limited numbers of NGOs; (4) absence of an overall management information system (MIS) to link municipalities and central office for proper coordination; (5) absence of an agreed system for the archiving of procurement documents; and (6) the involvement of five or more different departments within Provias (Project Management, Planning, Promotion, Maintenance y Procurement and Legal for clearances of contracts) for procurement activities to be implemented. Corrective measures which have been agreed are: (1) overall project design responsibility with Provias Decentralizado and its regional offices being in charge of providing technical assistance to PRIs and PIIs; (2) definition of a comprehensive institutional strengthening strategy for decentralized procurement to be implemented under Component 2 of the proposed project; (3) the constitution of the evaluation committee with the participation of a member from Provias Decentralizado central or regional office if it exists; (4) the design and implementation of a comprehensive training plan as a pre-requisite to the launching of procurement processed at the local level; (5) promotion and dissemination of bidding opportunities, agreement on criteria/requirements to participate; as well as simplification of bidding documents in agreement with the Bank; (6) decentralization of the SIGAT; and (7) design of adequate reporting procedures for the archiving of procurement documents, as described in the project's operational manual. The residual overall project risk for procurement is Modest/Substantial. 29 D. Social 70. Overall context. In the last five years, the National Congress of Peru approved a set of laws that enhanced civic engagement and participation to improve transparency, social accountability and equal opportunities. Relevant laws that are relevant to the proposed project include: (i) Participatory Budgeting Law (Presupuesto Participativo); (ii) Civil Participation Law (Ley de Participación Ciudadana); (iii) National Plan for the Youth (Plan Nacional de la Juventud); (iv) Equal Opportunities Law (Ley de Igualdad de Oportunidades de Mujeres y Hombres); (v) Municipality Law and the creation of the Council for Local Coordination (Consejo de Coordinación Local); (vi) Decentralization Law and the creation of the Regional Councils; and (vii) Access to Information Law. This set of laws provides a framework for enhanced civil society participation, social inclusion and increased transparency for more inclusive governance. 71. The new Peruvian administration is planning to give particular attention to six regions: Apurimac, Ayacucho, Arequipa, Cusco, Huancavelica and Pasco. These six regions concentrate about 38% of the indigenous communities (ie. 2,309 out of 6,000 rural communities at the national level). These indigenous communities are mostly small farmers, living 3,000 meters above sea level on a territory of about 5 million hectares. They have been historically discriminated and excluded, with severe restrictions in terms of access to public services and private markets, poor road conditions, no access to electricity services, and limited assets. Indigenous people have kept their mother tongue (Quechua) and their traditions based on their cultural heritage, the practice of values with an Andean vision based on the traditional and ancestral patterns of (i) Ayni (reciprocity); (ii) Minka (solidarity); and (iii) Faenas (community works). Six main ethnic groups can be distinguished: the Chancas, Chopras, Huancas, Quechuas and Aymaras. Historical confrontations between the Chancas and the Huancas or between the Huancas and the Quechuas are still affecting the daily life of these communities and constitute a significant constraint to social and economic development. 72. Indigenous Peoples. Because this is a national project subject to coordination with the provincial municipalities, we do not know before appraisal the specific sites where the project will be implemented and therefore cannot anticipate if Indigenous Peoples will be affected by project activities. For this reason, the Borrower, with guidance from the social specialist in the team, has prepared an Indigenous Peoples Planning Framework (IPPF) in compliance with OP/BP 4.10, acceptable to the Bank. The IPPF clearly identifies the potential adverse and positive project impacts, defines the process and principles by which the consultation process will be carried out, as well as the institutional responsibilities for the design and implementation of Indigenous Peoples Plans (IPP). The preparation and implementation of the IPPs is the responsibility of the Provincial Municipalities with supervision from the project unit in Provias Descentralizado and made in coordination with INDEPA. The IPPs will be reviewed and approved by DGASA before they are sent to the Bank for review and clearance. 73. Involuntary resettlement. Since the project only involves the rehabilitation of the existing road infrastructure, no significant resettlement is expected. However, not knowing before appraisal the specific sites of intervention, the Borrower, with support from the social specialist in the team, has prepared a Resettlement Policy Framework (RPF) in compliance with 30 OP/BP 4.12 to address potential cases. The RPF addresses the assessment's requirements according to the level of impacts subprojects might entail and differentiates between three different levels; it also provides instructions to be followed for consultation with the affected people and relates the process of resettlement to the process of project implementation. The RPF describes the content of each of the studies required for designing RAPs, as well as the various alternatives projects might face regarding displacement, land acquisition, compensation, resettlement, etc. The preparation and implementation of the RAPs is the responsibility of the Provincial Municipalities with supervision from the project unit in Provias Descentralizado. The RAPs will be reviewed and approved by DGASA before they are sent to the Bank for review and clearance. 74. Both Frameworks will be critical inputs for Component 3 (Institutional Development), for the training of the PRI in the Provincial Municipalities and for strengthening local capacity for handling safeguard policies, and to ensure proper design and implementation of Indigenous Peoples Plans and Resettlement Action Plans if needed. 75. Social Inclusion and Gender. Poor rural women deal with a triple struggle: about 70 percent of illiterate people are indigenous, monolingual women, women's income is lower than men's; and women are particularly affected by violence. The Second Rural Roads project has been aiming at increasing access to basic social services and economic and income-generating activities with gender equity, to help alleviate rural poverty and raise the living standards of rural communities. Accordingly, the project has promoted an enhanced participation of women in its activities, particularly regarding: (i) the maintenance of rural roads with the participation of women in the staff of the micro-enterprises for road maintenance; (ii) the identification and implementation of income-generating activities in the context of the Local Development Window (LDW); and (iii) piloting a training module to mainstream gender in the project cycle. Example of gender-related activities that were done during the Second Rural Roads project and that will be streamlined under the proposed operation include: (i) organizing gender training for managers and field staff (particularly staff of PRIs); (ii) evaluation of social barriers limiting women's involvement in micro-enterprises and implementation of corrective actions; and (iii) definition of impact indicators and monitoring of gender performance through project implementation. 76. The Second Rural Roads project provided Provias Descentralizado with a set of lessons learned and good practices to promote an inclusive society in the dimension of local development. These include significant contributions toward gender inclusive, stakeholder's participation, and civic engagement. The proposed project will build on these good practices of inclusion, participation and gender equity (see Annex 10). 77. Disclosure. The IPPF and the RPF have been both disclosed in the country (on August 23, 2006) and in the Infoshop (on August 21, 2006). 31 E. Environment 78. A number of activities and instruments have been developed and agreed during preparation, with the objective of ensuring the project socio-economic sustainability and compliance with both Peruvian legislation and the Bank's safeguard policies. 79. The proposed project aims at financing road improvement works and road maintenance activities on the existing road network. No construction works of new roads are envisaged and therefore, no significant social and environmental impact is expected that could affect the natural environment or the population living in the project's areas of influence. 80. The project has been categorized as "Category B" as defined by the Bank operational policy [OP 4.01]. This categorization is justified by the fact that the works envisaged under the proposed project will not generate significant environmental impacts and because prevention, mitigation and/or compensation measures can be easily identified and implemented with adequate management of social and environmental issues during the project cycle. It is also important to note that the most significant social and environmental impacts have already taken place in the past when the roads were built. 81. The project's social and environmental assessment has been focusing on the following aspects: a) Ensuring compliance with applicable Bank's safeguards policies: These includes Environmental Assessment [OP/BP 4.01]; Cultural Property [OPN 11.03, being revised as OP 4.11], Involuntary resettlement [OP/BP 4.12]; and Indigenous Peoples [OP/BP 4.10]; b) Preparing the frameworks for social and environmental management required by applicable Bank safeguards policies: The following instruments were prepared: Environmental and Social Management Framework (ESMF); Resettlement Policy Framework (RPF); and Indigenous Peoples Planning Framework (IPPF). These instruments are expected to improve the social and environmental management practices used by Provias Descentralizado; c) Environmental and Social Assessment Report: Provias Descentralizado has prepared an Environmental and Social Assessment Report (ESAR), which present a summary of the social and environmental issues that have been assessed during preparation, among which, the social and environmental evaluation of a sample of works that are planned for the first year of project's implementation. The ESAR was disclosed in the country (on August 23, 2006) and in the Infoshop (on August 22, 2006). The ESMF was disclosed in the country (on September 1, 2006) and in the Infoshop (on September 4, 2006); d) Assessing the social and environmental impact of a sample of subprojects: A specific assessment tool (social and environmental screening) from the ESMF was used to perform this assessment. The screening was applied to a sample of 6 road investments which are likely to be financed by the proposed project. None of these investments reached the highest social and environmental risk level ("Level 1"). Three investments were classified as "Level 2" (moderate social and environmental risk) while the three remaining were classified as "Level 3" (lowest social and environmental risk). It should 32 be noted that sample investments were selected among projects for which there were suspicion of potentially high social and environmental impact. Therefore, it is expected that the huge majority of road investments to be financed under the proposed project will in fact present lower social and environmental risk levels; e) Evaluating the institutional capacity for social and environmental management: Provias Descentralizado already includes an environmental specialist who is in charge of verifying compliance with the national environmental legislation. This person maintains a close coordination with the MTC's General Directorate for Social and Environmental Affairs (DGASA), particularly during the environmental impact assessment process and during the preparation of the complementary studies that are required in order to obtain the required environmental authorizations. One of the key aspects of the proposed project is the participation of other actors in the context of the decentralization reforms, particularly the Provincial Road Institutes (PRIs) which will progressively be in charge of handling the social and environmental management during implementation. To support this process, specific technical assistance teams (equipos volantes) will be constituted with an environmental and a social specialist, and will intervene in the field with the objective of ensuring an adequate environmental and social management during project implementation; f) Verifying compliance with national legislation: The GoP has designed and implemented various environmental regulations, which will be used for social and environmental management during the implementation of the proposed project. In compliance with these regulations, Provias Descentralizado has sent for clearance to DGASA the various environmental assessments to be performed during the various stages of implementation of road investments. It should be noted that the implementation of the SEMCF, which has been prepared in coordination with DGASA, will help ensure the actual application of the national environmental legislation; and g) Strengthening social and environmental management: During preparation, key weaknesses and opportunities for improving social and environmental management were identified. This assessment was then used to prepare a plan for the strengthening of social and environmental management, which includes in particular specific training and institutional building activities. The estimated amount for the implementation of this plan is US$153,000. 82. With all the instruments described above, the proposed project should be considered sustainable from a social and environmental point of view and in compliance with both the Peruvian environmental legislation and the Bank safeguards policies. The key issue to ensuring such sustainability and compliance is the actual use of the EMSF as the project's main social and environmental instrument by both Provias Descentralizado and the PRIs, during all the various phases of road improvement activities to be financed under the proposed project. 33 F. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [X] [ ] Natural Habitats (OP/BP 4.04) [ ] [X] Pest Management (OP 4.09) [ ] [X] Cultural Property (OPN 11.03, being revised as OP 4.11) [X] [ ] Involuntary Resettlement (OP/BP 4.12) [X] [ ] Indigenous Peoples (OP/BP 4.10) [X] [ ] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [ ] [X] Projects in Disputed Areas (OP/BP 7.60)* [ ] [X] Projects on International Waterways (OP/BP 7.50) [ ] [X] G. Policy Exceptions and Readiness 83. There are no policy exceptions and the project is ready to be implemented. *By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas 34 Annex 1: Country and Sector Background PERU: Decentralized Rural Transport 1. Rural Poverty remains a major challenge for Peru. In 2004, more than half of the Peruvian population was poor and 20 percent extremely poor. The intensity of poverty and extreme poverty was much higher in rural areas: Lima had the lowest poverty rate, and the Sierra regions, the highest. In 2002, 9.4 million Peruvians were living in rural areas, of which 78 percent were poor and 51 percent extremely poor. Extreme poverty remains, by and large, a rural phenomenon (only 10 percent of the urban population is considered extremely poor). In Huancavelica, in 2004, poverty and extreme poverty levels reached, respectively, 88 percent and 74 percent. 18Inequality is also elevated compared to international standards (though less than the average observed for Latin America), with a Gini coefficient of 0.43 in 2004. 2. The economic growth of the past 5 years has improved the situation of extreme poverty and stabilized overall poverty The impressive sustained economic growth of the past five years (with an average annual GDP growth of almost 4 percent or 2.3 percent in per capita terms) has produced a decrease in extreme poverty levels at the national level (from 24.1 percent in 2001 to 19.2 percent in 2004) and an improvement of inequality (the Gini coefficient decreased from 0.45 to 0.43). However, overall poverty has not yet evolved significantly (52 percent in 2004), although the good economic performance has at least stopped the worsening trend that began during the recession of the late 1990s. 19 Sustained economic growth remains the best strategy for Peru, in order to improve its poverty situation: it is estimated that maintaining a 5 percent average annual growth during a decade could bring overall poverty levels down to 37%, while a 7 percent growth could more than halve the poverty rate (down to 24%). 20 3. Peru's infrastructure gap is one of the key determinants of rural poverty. This well documented infrastructure gap is particularly acute in rural areas21. In rural Peru, in 1999, access to electricity services reached only 30 percent. Today, 6 million Peruvians still lack access to electricity. In 1999, only 28 percent of rural households had access to a road in good condition. In 2003, only 9 percent of small urban centers had a public phone and access to a telephone was marginal in villages of less than 500 inhabitants (where 2.7 million Peruvians live). In 2000, only 49 percent of the population had access to sanitation services (62 percent for water services). For all these services, except water, coverage in Peru is less than the South American average and what is generally observed in countries with a similar level of development. The price of services in rural transport and rural electricity is higher than in benchmark countries. Moreover, for all these sectors, except telecommunications, the quality of these services is less than of comparators'. 18Source: Peru Poverty Assessment, World Bank (2005). 19Between 1985 and 2000, the number of poor people had increased by 71 percent, a large proportion of these in rural areas. 20Source: La Importancia del Crecimiento para una Sociedad Próspera, Fretes-Cibils, Humphrey and Polastri ­ World Bank Peru Policy Notes (2006). 21See for instance: IPE (Instituto Peruano de Economía): "La Brecha en Infraestructura, Servicios Públicos, productividad y Crecimiento en el Perú", 2003. 35 Table A1-1: Access to rural infrastructure services in Peru and other countries Peru South America Countries with similar level of development incl. China w/o China WATER (2000) % rural population with access 62 60 67 73 SANITATION (2000) % rural population with access 49 52 29 71 RURAL ROADS (1999) % rural households with access to paved road 13 NA NA % rural households with access to good condition gravel road 28 ELECTRICITY (1999) % rural population with access 30 60 NA TELECOMMUNICATIONS (2003) % villages with public phone 9.3 NA NA Source: Rural Infrastructure in Peru ­ Effectively Underpinning Local Development and Fostering Complementarities ­ World Bank (2006). 4. Limited access, poor quality and, in certain cases, high prices of rural infrastructure services have dramatic consequences for the rural poor. Isolation and vulnerability are one of the major constraints faced by the rural poor in the Andes regions. At the same time, there is ample evidence of the contribution of infrastructure to poverty alleviation and welfare enhancement:22 This contribution encompasses four categories: (i) the infrastructure stimulates growth and access to income-generating opportunities: In rural areas, access to infrastructure services can increase households' income through three different effects: (1) by promoting the diversification of productive activities (in particular outside subsistence agriculture, see Figure A1-1); (2) by increasing the amount of time dedicated to productive activities, see Figure A1-1); and (3) by facilitating access to modern technologies such as fertilizers. In the case of Peru where the productivity of the agricultural sector is lower than in other countries in the region, this last effect is of particular importance (see Figure A1-1). (ii) the infrastructure stimulates human capital: Access to infrastructure services has important consequences for the health and education of the poorest. Access to drinkable water reduces illnesses and mortality caused by diarrhea. Better transport conditions imply better access to schools and health centers and therefore higher attendance of students, patients but also teachers and medical staff. (iii) the infrastructure empowers the poor: By connecting the poor to the rest of the world, infrastructure services allows poor communities having a greater influence on political decisions and local decision-making processes. The process of selection of infrastructure to be developed or improved can also generate collective initiatives and strengthen the social organization of communities involved. (iv) the infrastructure reduces vulnerability: By reducing the risk of natural disasters, facilitating access to emergency responses and to critical information, infrastructure services 22An extensive literature review is presented in Brenneman, A. and Kerf, M., "Infrastructure and Poverty Linkages: A Literature Review", 2002. 36 can make the poor less vulnerable. This is of particular relevance in the case of Peru due to the high vulnerability of the rural poor to natural events, as well as demographic or economic crisis. Figure A1-1: Infrastructure stimulates growth and access to income-generating opportunities 5. In spite of the progress achieved over the past decade, poor transport conditions remain a significant obstacle to growth in rural areas. According to a 2004 survey (see Box), most trips in rural areas have an economic motivation (access to local markets or trading centers). Poor and unreliable transport conditions caused by deteriorated infrastructure constitute a major bottleneck to rural growth. Peru's registered road network consists of about 78,000 km, classified in three levels: national, regional and rural roads, with lengths of about 17,000 km, 14,000 km and 47,000 km, respectively. For the most remote rural places, the only available transport infrastructure is "non-motorized tracks" (NMT), of which there exists more than 100,000 km in Peru. In addition, there are a large, unknown number of unclassified tracks that connect the dispersed population to the rural road network. As of 2005, 14,500 km of rural roads had been rehabilitated and were receiving adequate levels of maintenance under the Rural Roads program managed by Provias Rural, a specialized unit in the Ministry of Transport and Communications (MTC). Although this program has been very successful in promoting a cost- effective and decentralized model to rural roads' management, its funding levels over a decade only allowed improving 31% of the total rural roads' network. Since the 2001 decentralization reforms, the management of secondary and tertiary roads is the responsibility of sub-national governments (municipalities and regions), with the technical assistance of respectively Provias Rural and Provias Departamental (now merged into Provias Descentralizado). 37 Table A1-2: The Peruvian Road Network Category of roads Total length (km) % good conditions Responsibility Annual funding (US$m) Primary 16,980 23 MTC (PROVIAS National) Secondary 14,250 15 Regional Governments (with Technical Assistance of Provias descentralizadol) Tertiary Municipalities (with - registered 46,970 31 Technical Assistance ~ 36 (MTC only) - non-registered ~ 50,000 Unknown of Provias descentralizadol) Total registered 78,200 NMT - registered > 100,000 <5 - non-registered 300,000 ­ 500,000 Unknown Source: MTC. Box A1-1: Transport services in rural Peru ­ results from a 2004 survey The survey was performed in a sample of villages in the three regions of Peru--Costa, Sierra and Selva and concluded that: In rural Peru, transport services are mostly used to trade goods and services locally. More than 60% of trips performed in rural areas aim at going to local markets or shops. Other motivations include access to public and social services. The most frequent length for rural trips ranges from 15 to 35 km which is a typical distance in Peru to access an urban center (e.g. district municipality23) from rural areas. Indeed, this type of trips is characteristic of rural-urban linkages. Transport is also key to access other infrastructure services. For example, the motivation of 15% of the people traveling by bus in rural areas is to go to a public phone (10% for minibus and 11% for automobile). This is a concrete illustration of the complementarities existing in the use of infrastructure services. Availability of transport services is often low or non-predictable, particularly for freight. For 60% of rural households, freight transport services are either available 1-3 times of week or not predictable (29%). The lack of predictability of transport services is a major source of inefficiency for the rural economy because it increases transaction/waiting times and threatens the quality of perishable goods. It can also be a major impediment to the development of non-agricultural economic activities (e.g. tourism). Transport services are expensive. The poor density/quality of transport infrastructure translates into expensive transport services. The largest item that enters the operating costs of vehicles (aside from the cost of gasoline) is the replacement of tires (with 34% incidence in those costs). In addition, transporters tend to manage their fleet in order to use older, less reliable vehicles in rural areas with poor infrastructure. As a result, 51% of freight transport service users think that service is expensive or very expensive (44% for passenger transport services). While in rural areas, about half of the people live with less than one US$ per day, the typical cost for a "round- trip-25 km-one-way-passenger-with-50 kg-merchandise" can be estimated to US$2-3, i.e., between a third and half of their weekly income. Source: Jose Luna, Situacion de los Servicios de Transporte en Zonas Rurales del Peru, World Bank (2004). 23The average size for a district municipality in Peru is 640 km2, i.e. a square of 25 km. 38 6. The Peruvian Government has engaged in a large scale decentralization process to improve both the coverage of rural infrastructure and the quality of public expenditures. The 1993 constitution mandated decentralization, but regional elections were only held in 2003, following the adoption of a constitutional amendment in 2002 that required the creation of regional governments. Today there are 26 regions and 1,832 municipalities. In the latter category, 194 are provincial municipalities, the rest are district municipalities. Peru's decentralization agenda has been designed to support the following objectives: economic development and competitiveness; modernization and simplification of administrative systems and processes; assigning responsibility for public services to levels closest to the users; and citizen participation in governance. 7. Decentralization offers the opportunity to improve the provision of public goods by tailoring them to local preferences. Furthermore, an advantage of decentralization is that competition, proximity, and transparency provide a strong motivation for local governments to be more responsive to the needs of the public. Decentralization has led to a change in budget allocations: sub-national governments account for 35 percent of non-financial government expenditures in 2006, up from 28 percent in 2003. Similarly, sub-national governments are playing a more important role in public investment. Royalties and corporate income tax of natural resources constitute 30 percent of their revenues. These resources can only be used for investment projects and they come from five different canons: mining (18 percent), petroleum (8 percent), hydrocarbon (2 percent), fishing (1 percent) and forest (0.2 percent). Canon and royalty resources are earmarked to investment, including project design and project maintenance. Subnational governments are responsible for more than half of public investment in 2006, compared to only 20 percent in 200324. In order to preserve fiscal neutrality during the decentralization process all responsibilities transferred are accompanied by the corresponding allocation of resources. The design of the Peruvian intergovernmental system does not provide for control over rates and bases for local governments and the Peruvian Constitution does not authorize regional level taxation. Consequently, the discretion over own-revenues resources is very limited or inexistent, leaving regional government with little flexibility in the use of their budget resources. 8. In July 2006, a new Peruvian administration led by President Alan Garcia of the Partido Aprista Peruano (APRA) came into power. Despite a clear victory in the second round runoff with 54% of the vote, results revealed a marked split across the country with APRA winning Lima and the Northern region and Union Por el Perú (UPP) ­ a new party constructed for Ollanta Humala's candidacy - winning the Highlands and the Amazon region. The vote in the highlands and the Amazon region is widely perceived to reflect a feeling of exclusion and dissatisfaction with the way in which the political system responds to these much poorer regions. To respond to this dissatisfaction, the Garcia administration emphasized in its Government's Plan for 2006-2011, that the development of rural areas (with, in particular, the Sierra Exportadora Program) would be a priority. The expansion of infrastructure services (roads, electricity and water with the Agua Para Todos Program) and the continuation of the decentralization reforms were also listed high in the new administration's agenda. 24World Bank, 2006. Policy Note on Decentralization. 39 9. Decentralization has been the most successful in the rural roads sector. Since 1995, the Peruvian authorities have successfully designed and implemented an innovative approach to rural road management, with the help of the World Bank and the Inter-American Development Bank (the World Bank has lent US$90 million to Peru for the First Rural Road Project and US$50 million for the second project). The approach, which is currently applied in half of the country,25 has aimed at empowering the rural poor in the process of selecting those roads that should be rehabilitated. Then, building on the decentralization reforms, the management of rural roads has been progressively handed over to municipalities. To this end, a specific institutional model has been developed, named "Provincial Road Institutes" (PRIs). These PRIs are fully- decentralized entities since they are hosted in each provincial municipality and are placed under the authority of a "provincial road board" constituted from all the mayors of the province (see Box). As of July 2006, with the technical assistance of Provias Rural, 38 PRIs had been fully established and were successfully handling the routine maintenance of rehabilitated roads, as well as procurement processes related to some rehabilitation works. At the same date, 14,500 km of rural roads had been rehabilitated and were receiving adequate maintenance. Contracts were let to 426 micro-enterprises, representing almost 5,000 employment opportunities for poor men and women. In 2005, an evaluation revealed the improvements in transport (a 68 percent reduction in travel time) as well as its impact on access to schools (a 8 percent increase in enrollment) and health centers (a 55 percent increase in visits), agricultural productivity (a 16 percent increase in land destined to agriculture) and rural income (a 20 percent increase in men's agricultural revenues). An improved trend in poverty and extreme poverty indicators was also observed in the areas where the program has been active.26 In 2005, the program received a prize awarded by a civil society initiative as "best Government practice". In addition, due to decentralization, municipalities were subject to adopting responsibilities in the road maintenance program managed by Provias Rural for which 40 out of 194 provincial municipalities were accredited, representing 98 percent of this program's total expenditures. 27 In the case of regional governments functions devolved only relate to the management of a few projects of rural electrification and maintenance of rural roads. 28 In June 2006, a major step towards ensuring the sustainability of the routine maintenance mechanism with micro-enterprises was achieved with the publication of the Supreme Decree no. 017-2006-MTC which transfers on a permanent basis to municipalities specific budget resources in order to finance the routine maintenance (and related administrative costs) of rehabilitated rural roads. 25In the 12 poorest departamentos: Ancash, Apurimac, Ayacucho, Cajamarca, Cusco, Hunacavelica, Huanuco, Junín, Madre de Dios, Pasco, Puno and San Martin. 26Second Rural Roads Project ­ Mid-term evaluation, Instituto Cuanto, 2005. 27The newly transferred expenditure responsibilities represent just a small fraction of total municipal expenditures, about 15 percent. 28World Bank, 2006. Policy Note on Decentralization. 40 Box A1-2: Arequipa's Provincial Road Institute The first Provincial Road Institute (PRI or IVP in Spanish) was created in 2000 in Arequipa, the second largest city in Peru, through a municipal decree (ordenanza municipal). Participating municipalities adopted statutes that (i) define the objectives and missions of the PRI, (ii) acknowledge that the provincial level is the appropriate territorial level to handle rural transport policies, , (iii) describe the organization of the PRI, (iv) place the PRI under the authority of a provincial road board in which all the mayors in the province participate, and (v) define how participating municipalities finance the operation of the PRI. The Arequipa PRI is today the PRI that has received the most resources transferred by Provias Descentralizado to finance the rehabilitation and maintenance of rural roads as well as technical assistance. It is now widely recognized as the competent, fully decentralized institution to manage the rural transport policies in the province. This recognition allowed it to obtain funding for rural transport investments from other financing sources. Source: Provias Descentralizado. 10. The learning process contributed to the strengthening of the decentralization reforms. In addition to their positive impact on rural welfare, the first and second rural roads projects have constituted a learning process, which has led to the development of innovative instruments and new rural transport approaches, through the design and implementation of several pilots. There are several examples. The first experimental decentralized "provincial road institute" was in Arequipa: there are now 108 of them with basic or fully-established capacity versus 38 fully established PRI's. A "regional road management pilot" has also proved that the rural road management model could be successfully replicated for secondary roads (an experience that is now been scaled up by the Regional Transport Decentralization project).29 A "gender action plan" has demonstrated that women could participate actively in the road maintenance micro-enterprises (24 percent of micro-entrepreneurs are now women). A "Local Development Window" in 12 provinces made a major contribution to the preparation of sound "local development plans" that became one of the cornerstones of Peru's decentralization policy.30 Finally, a "Plan Piloto Selva" has explored ways to customize rural transport solutions (including river-based) to the Peruvian Selva. 11. Despite the progress already achieved, there remain a number of barriers before the decentralization of rural infrastructure management can have the greatest impact in rural poverty reduction. The fiscal situation limits financing for rural infrastructure. Between 1998 and 2002, total average funding for rural infrastructure amounted to US$97 million (97 percent from public sources) or 0.18 percent of GDP.31 This is significantly lower than other Latin America countries: Chile spent about 0.28 percent of GDP in rural infrastructure and Guatemala, 0.31 percent over the past 5 years. In order for Peru to close in 10 years its rural infrastructure gap with the South America average (and with the average of 29Financed by the World Bank and the IDB. Approved by the World Bank Board on July 12, 2005. 30One of the conditions for accreditation of municipalities by the National Decentralization Council is a prepared local development plans. 31Rodriguez, M., 2004. "Análisis de Gastos de Inversiones y en Provisión de Servicios de Infraestructura Rural y su Comparación con la Evolución de los Indicadores Socio-Económicos de las Áreas Rurales en Perú". 41 countries with a similar level of development), total expenditures should be doubled. However, the fiscal situation (indebtedness ceilings, lack of counterpart funds) and rigidities for sub-national governments in the use of their budget resources, have been so far a binding constraint to such an increase. In the specific case of the rural roads' sector, Central Government's funding amounted to an average of US$ 36 million per year over the period 1998-2002. Should funding levels remain at that level and with the growing stock of rehabilitated roads, it should be noted that most of these resources will have to be dedicated to routine and periodic maintenance (i.e. since current project will raise rehabilitated roads to more than 18,000 km it is not sustainable without increase in public funding for routine and periodic maintenance, see Figure A1-2). In order to be able to continue ensuring a cost-effective management of road assets (ie. while providing adequate levels of maintenance), a US$ 36 million budget allocation allows ensuring the management of a road network not exceeding 18,000 km, or 38% of the Peruvian registered network. It is estimated that efficiently attending the totality of the Peruvian registered rural roads network would require sustaining an annual budget allocation of US$ 94 million. In order to expand coverage, it is therefore crucial to increase funding levels, possibly with counterpart funding from municipalities provided these have the required flexibility in the use of their resources or with contribution from the private sector. It is even more important to secure funding given the foreseeable evolution of MTC fiscal situation, with a number of large-scale road investments (mostly on the national network), such as the Costa Sierra projects, under implementation or planned for the next future. A positive step has been the permanent transfer of budget resources to municipalities to co-finance routine maintenance activities. Figure A1-2: Evolution of expenditures with growing stock of rehabilitated roads (assuming sustained annual budget of US$36 million and initial stock of 11,500 km) 4 0 3 5 3 0 2 5 n 2 0 illio m $ 1 5 US 1 0 5 0 00 01 02 03 04 05 20 20 20 20 20 20 20 06 07 08 20 20 20 09 10 11 12 13 20 20 20 20 r o u t in e m a i n t e n a n c e p e r io d ic m a in t e n a n c e r e h a b ili t a t io n Institutional capacity at the sub-national level remains limited. In 2003, a survey32 showed that only 2 percent of municipalities estimated that they had both the technical skills and the financial resources to manage rural infrastructure projects (compared to 42 percent for some social programs). The extreme fragmentation of the municipal sector in 32Azcueta, M., 2003. "Análisis de Capacidades en los Gobiernos Locales del Perú". 42 Peru reduces dramatically the institutional capacity below the provincial level. Indeed, the average size of rural municipalities (districts) in Peru is about 8,000 inhabitants, compared to about 20,000 in Argentina and Bolivia or 26,000 in Brazil or Chile (see Table A1-3). To overcome that difficulty, the Rural Roads program has deliberately chosen to work at the provincial level which appears to be the right compromise between efficiency (due to economies of scale) and accountability to rural users. Table A1-3: size of municipalities in Peru and other Latin America countries Peru Argentina Bolivia Brazil Chile Mexico Venezuela Number of municipalities 2,006 1,100 308 5,500 335 2,397 282 Total population not living capital 15.8 23.3 6.0 148.0 8.8 73.5 20.5 city ­ million Average population per municipality 7,910 21,210 19,470 26,910 26,300 30,650 72,850 (except capital) Source: Rural Infrastructure in Peru ­ World Bank (2006). The absence of coordination across infrastructure sectors reduces effectiveness. Planning and prioritization of infrastructure investments remains a sector-by-sector exercise although the decentralization process has brought some alignment with territorial development strategies (particularly for rural roads and rural water/sanitation). In particular, each infrastructure sectors has its own methodology and its own criteria to allocate resources and prioritize investments. As a result, availability of combined services occurs more by casualty rather than by a deliberate effort to align a combination of investments with a territorial development strategy. Indeed, less than a quarter of the rural population has access to two or more infrastructure services. This lack of coordination has a cost in terms of the effectiveness of infrastructure interventions: According to a recent econometric analysis performed by Escobar and Torero for the World Bank, the effect of availability of several infrastructure services increases the impact of these interventions on rural household incomes. 33 For certain combinations of services, these "complementarity effects" have been found to quadruple the effects on households' income (see Figure A1-3). Figure A1-3: Impact of availability of infrastructure services on rural households' income. ' ds 30 hole 25 20 houslarur e moc 15 10 of in 5 ngeahc 0 water + electricity water + electricity + water + electricity + % telephone telephone + all- weather road with interactions without interactions Source: Escobal and Torero (2004). 33 Escobal, J. and Torero, M., 2004. "Análisis de los servicios de infraestructura rural y las condiciones de vida en las zonas rurales de Perú". 43 The quality of public expenditures can still be improved. The reforms engaged in certain sectors to promote greater private sector participation, has produced significant efficiency gains (in telecommunications in particular). These reforms still need to be deepened with the use of low-cost technologies, more targeted subsidies and/or pricing reform, improved regulatory environment and the use of incentives to bring the private sector on- board (like minimum subsidy concessions). With the decentralization process, the challenge of improving the quality of public expenditures is particularly acute for sub- national governments, especially the ones that receive significant transfers (eg. from canon minero). 12. The experience gained over a decade in the rural roads sector could help tackle these weaknesses. With the first and second rural roads programs, a number of instruments have been successfully developed that allowed the strengthening of the decentralization process and the improvement of the quality of public expenditures: With the "Provincial Road Institutes," under the authority of the mayors in the province, municipalities have reached sufficient institutional capacity to manage effectively their rural roads assets. The "Participatory Provincial Road Plans," prepared by the key rural provincial stakeholders, have resulted in better aligned rural roads investments with the territorial development strategy of the province. Another planning mechanism, the "Local Development Window", has been facilitating the identification and implementation of productive initiatives that became feasible as a result of improved transport conditions. Finally, the quality of public expenditures in roads has been improved with the use of low cost rehabilitation technologies ("gravel roads") and of a routine road maintenance program with micro-enterprises that have enhanced sustainability. All these experiences are not directly applicable to other infrastructure sectors, but they can provide the basis for the design of an integrated decentralized rural infrastructure approach. In order to increase impact on rural poverty, this approach should promote. in particular. the bundling of rural infrastructure services through the use of common planning instruments ("provincial rural infrastructure plans").34 13. The rural transport sector itself requires further reforms. Only about 14,500 km of a registered total rural roads network of 47,000 km has been rehabilitated over the past decade, and only half of the country (the 12 departamentos where poverty was the most acute) benefited from the decentralized rural road management model (provincial road institutes, micro- enterprises) developed by Provias Rural. Lack of access and constrained mobility remains a major obstacle to growth and poverty reduction in many poor areas of rural Peru. In the context of the decentralization reforms, the PRI model should be generalized to the entire country, which implies creating new PRIs in the provinces where the program has not been intervening and strengthening the ones that have been created but did not yet reach full operational capacity. While municipalities have greater control on greater amount of budget resources (especially the ones that have access to canon minero), the generalization of the cost effective and efficient model that combines participatory road planning, contracting out of road works to the private sector, low cost road rehabilitation technologies and micro-enterprises for road maintenance, is 34While economies of scale and accountability to rural users' considerations may explain why each sector could have a different preferred territorial level for implementation (eg. regions for electricity, districts for water/sanitation), the provincial level appears to be the right compromise for such a common planning approach. Indeed, in Peru, provinces are both sufficiently large in order to have a basic institutional capacity and sufficiently close to rural stakeholders to ensure accountability. 44 an important measure to improve the quality of decentralized public expenditures. Finally, reforms are also needed at both central and sub-national levels to strengthen the regulation of rural transport, beyond just the sound management of road assets. 14. A gradual approach is needed. Decentralization is a long-term process and international experience suggests that, to be successful, it has to be gradual. In Peru, the experience of the rural roads projects illustrates the time required to build sufficient institutional capacity at the provincial level. All the innovative instruments developed under these projects have been developed on a pilot basis, to test and refine the proposed approach and monitor benefits. In a second phase, scaling up was facilitated by the demonstration effects of several success stories (like the Provincial Road Institute of Arequipa). But scaling up itself takes time: about one year is needed to prepare a participatory provincial road plan and one to two years are needed to create a fully operational provincial road institute. 15. The full integration of rural infrastructure into territorial development strategies will also take some time. No institution in Peru is today capable of handling a full-scale rural infrastructure strategy that would imply identifying and financing combinations of rural infrastructure investments, and merging all the existing sector-specific instruments. The National Decentralization Council (CND in Spanish) has a political and strategic function which is not compatible with the responsibility of implementing an actual investment program and the only multi-sector funding instrument (FONCODES) has failed to implement cost-effective and sustainable investments in a decentralized manner. In fact, with the decentralization process, that responsibility should be progressively taken over by sub-national governments themselves since they are the best positioned to identify and assess complementarities between investments and their relevance for territorial development. Because of its experience in strengthening the institutional capacity of municipalities and in designing and implementing cost-effective solutions for rural roads, Provias Descentralizado can coordinate the efforts of the various existing actors to design and implement on a pilot basis a set of incentives that could improve the coordination between the various rural infrastructure sectors and promote their bundling. In the future, a possible champion for an integrated planning of rural infrastructure investments could emerge with the possible creation of a National Planning Institute (Oficina Nacional de Planificación) as envisaged by the new Peruvian administration. 16. Proposed strategy. The proposed strategy is, firstly, to consolidate the progress achieved in the rural road sector to improve the quality of decentralized public expenditures and, second, to experiment a set of incentives that could enhance the effectiveness of rural infrastructure investments through greater coordination and the promotion of bundling. 45 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies PERU: Decentralized Rural Transport 1. A significant number of World Bank operations have been supporting the GoP agenda to promote rural growth through enhanced decentralization. These range from sector-specific approaches (infrastructure, social sectors, rural development) to operations that helped put in place a sound institutional and fiscal framework for decentralization. The scope of these operations has either been territorialized (poorest regions, Sierra macro-region, Vilcanota) or with a national coverage (at either the municipal or the regional level). 2. The current mapping of these operations is presented in the Figure A2-1 below. With the exception of the programmatic decentralization and competitiveness DPLs which served as an integrator at a broader policy level, most operations have been addressing a single specific sector or territorial issue. In a context where decentralization was still in a beginning stage, such selectivity was justified by the need to customize policy reforms to the specificities of sectors or territories. Nevertheless, in the rural roads sector where decentralization produced concrete results and reached a more mature stage early on, some degree of greater integration was introduced in the design of the second rural roads project. In particular, through the creation of the provincial roads institutes, the project made a significant contribution to the institutional strengthening of municipalities; through the local development window, it fostered greater complementarities between rural roads and rural development initiatives; and, through the "plan piloto selva", the project tried to address the specific transport needs of the Selva macro-region. Figure A2-1: Current mapping of World Bank operations in decentralization and rural growth 46 3. In this context, the proposed project proposes to go one step further towards a greater integration (see Figure A2-2 below). In particular, the scope would move to a national coverage (including the Selva macro-region based on the lessons learnt from the "Plan Piloto Selva") while the "local development window" would be scaled to a larger number of poor provinces. Finally, while remaining anchored in the rural roads sector, the project would promote greater complementarities with other rural infrastructure sectors through the "rural infrastructure pilot". Figure A2-2: mapping of the proposed project in the context of other World Bank interventions 4. A list of operations related to the proposed project and financed by the World Bank or by other agencies is presented in the overleaf: 47 Sector Issue Project Latest Supervision (ISR) World Bank-financed (IP) (DO) Improve the access of rural poor to basic social WB/IDB: Second Rural S S services, market integrating infrastructure and Road Project income-generating activities with gender equity, to help alleviate rural poverty and raise the living standards of rural communities Increase coverage and sustainable use of water and National Rural Water S S sanitation services in rural areas and small towns Supply and Sanitation while adopting improved hygiene practices and Project training in operation and maintenance The objective of the proposed Project is to Rural Electrification Approved in March 2006; increase access to efficient and sustainable Project became effective August 10, electricity services in rural areas of Peru. 2006 Improve ­ through decentralization at the regional WB/IDB: Regional level ­ the prioritization, efficiency and Transport Decentralization S S effectiveness of regional transport interventions Project and, hence, their contribution to regional development and policy reduction in Peru. Assist the Municipality of Metropolitan Lima WB/IDB: Lima Urban (MML) in enhancing the economic productivity Transport Project S S 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. Strengthen public sector capacity for Institutional Capacity for implementing a sustainable fiscal decentralization Sustainable Fiscal MS MS and improve institutional effectiveness for Decentralization TAL adequate service delivery by sub-national governments. Assist the GOP to: (i) establish a more Trade Facilitation and streamlined, integrated and effective institutional Productivity Improvement S S and policy framework to increase nontraditional Technical Assistance exports, and (ii) develop and implement initiatives Project designed to foster the entrance of new export market participants, especially small and medium producers. Pioneer public private partnerships in Peru for Guarantee Facility Project infrastructure projects. The GOP has identified Approved in April 2005; not enormous infrastructure investments, required to effective yet bring average coverage levels to adequate standards, decrease coverage gaps and inequity, and improve the country's competitiveness by reducing logistical costs. 48 Support the Government of Peru's efforts to Vilcanota Valley enhance the environmental and socio-economic Rehabilitation and MS MS sustainability of historical, cultural and ecological Management Project assets in the Vilcanota Vallley including the Historic Sacntuary of Machu Picchu (HSMP) and the Sacred Valley of the Incas. Help alleviate the poverty of rural Sierra people Sierra Natural Resources through assisting the poor: (a) to improve Management and Poverty ICR ratings: Outcome: S sustainable management of natural resources; (b) Alleviation Project Bank perf.: S to increase rural production and productivity Borrow. Perf.: S through the introduction of irrigation and improved agricultural practices; and (c) to strengthen their rural organizations. Provide a well integrated and reliable rural road WB/IDB: Rural Road system through rehabilitation and maintenance of Rehabilitation and IEG ratings: Outcome: HS rural roads and key connecting links to the primary Maintenance Project Bank perf.: HS road system. Borrow. Perf.: HS 1) Rehabilitate essential transport infrastructure; Transport Rehabilitation (2) assist Government in implementing Project ICR ratings: Outcome: S institutional reforms in the road and railway sub- Bank perf.: S sectors, aiming at improved resource use and Borrow. Perf.: S sustainable development; 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. 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 Phase III 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 IDB: Hancón-Huacho- concession in the Lima metropolitan area. Pativilca Toll Road Project Second Rural Road Project (WB/IDB) [P044601] (approved in 2001; scheduled to close on November 30, 2006) 5. The objective of the Second Rural Roads Project is to increase access to basic social services, and to economic, and income-generating activities, to help alleviate rural poverty. The components consist of: 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) 49 routine, and periodic maintenance of 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. National Rural Water Supply and Sanitation Project [P065256] (approved in August 2002; on-going) 6. The objective of the National Rural Water Supply and Sanitation Project (PRONASAR) is to increase the sustainable use of new and rehabilitated water supply and sanitation facilities in rural areas and small towns while emphasizing improvement in hygienic practices and training in operation and maintenance. There are four project components. The first implements demand- responsive and sustainable basic water and/or sanitation services for rural communities through constructing and rehabilitating water points, piped systems, and sanitation facilities as well as training in operation and management of water and sanitation facilities and extensive hygienic education. The second component strengthens local communities' capacity to manage services by 1) supporting an effective community participation process during the entire project cycle; 2) introducing sound financial and economic principles to value water and sanitation services; and 3) forming and training community-based water committees. The third component strengthens municipal-district and provincial-level capacity to plan and oversee water and sanitation services to rural communities in a sustainable and cost-effective way, including the use of private sector participation. The fourth component strengthens central government capacity, specifically the Rural Water Department in the Vice Ministry of Water and Sanitation to develop sector policies, legislation, and information databases for planning and oversight. Rural Electrification Project [P090116] (approved in March 2006; on-going) 7. The objective of the Rural Electrification Project is to: (a) develop and demonstrate a framework for public-private electricity provision in rural areas of Peru that would attract investment from the private sector as well as national, regional and local governments; (b) provide electricity services to about 100,000 households (half a million people) and about 1000 public facilities, such as schools and health clinics, using both conventional grid extension and renewable energy sources to serve remote populations; and (c) pilot a program to increase productive uses of electricity that would increase opportunities for income generation in rural areas. 50 Regional Transport Decentralization Project (WB/IDB) [P078813] (approved in July 2005; on-going) 8. The objective of the Regional Transport Decentralization Project objective is to improve, through decentralization at the regional level, the prioritization, efficiency and effectiveness of regional transport interventions in Peru. The project consists of four components. The first, preparation of participatory regional road plans, will support the regional road plan preparation, elaborate regional sector diagnoses, analyze the supply and demand for transport infrastructure, and prioritize and evaluate road investment options. It will also finance feasibility and technical studies for the road segments. The second component, upgrading of regional roads, will finance the rehabilitation of about 2,200 km of regional roads and the periodic maintenance of about 2,700 km of regional roads, as well as the related supervision. The third component, routine maintenance of regional roads, will finance the routine maintenance and related supervision of the 4,906 km of regional roads - maintenance will be mainly performed by micro-enterprises. The fourth component, institutional capacity building, will provide the technical assistance needed to upgrade regional governments' institutional capacity, and to help restructuring in the new context of decentralization. Lima Urban Transport Project (WB/IDB) [P035740] (approved in 2003; on-going) 9. The main objective of the project is to assist the Municipality of Metropolitan Lima (MML) in enhancing the economic productivity and the quality of 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 of the negative impacts on some 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 51 2003, MML will 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. Institutional Capacity for Sustainable Fiscal Decentralization TAL [P088809] (approved in 2004; on-going) 10. The objectives of the TAL are in particular: (i) to reinforce the fiscal and financial planning, accounting, budgeting, reporting and overall management capacity of subnational governments. At the same time, it strengthens the capacity of the national government to monitor and evaluate fiscal and financial performance in accordance with the ceilings and targets already established in legislation; (ii) to support the initial steps towards incentives for and evaluation of quality of expenditure at subnational levels, and (iii) to provide technical assistance to reduce transaction costs, enhance operational efficiency and mobilize idle resources at subnational levels. The project has the following five components: Component 1) will focus on providing the tools needed to support the Government of Peru's (GOP's) guiding principle of a fiscally neutral decentralization process and to manage any possible deviations from its medium-term goals. Component 2) will support the government's move toward greater performance orientation. It will support the goal of gradually constructing the basis for programmatic and multiannual budgeting, result indicators, and result-informed fiscal budget and financial medium-term indicators. Component 3) will build on existing systems and processes for public investment planning and public assets management and aims to upgrade them to meet the demands that decentralization has triggered. Component 4) will support government efforts to expand the coverage of its financial management system and upgrade it to provide tools for performance monitoring. Specifically, this fourth component will be geared to support: (i) expeditious adoption of Integrated Financial System (SIAF) by local governments, (ii) the creation of a SIAF debt module, and (iii) virtual registering of the national and regional governments' payroll control system in SIAF. Component 5) will support project implementation, monitoring and evaluation. It will also provide assistance in the area of communication strategy. Trade Facilitation and Productivity Improvement Technical Assistance Project (WB) [P077788] (approved in 2003; on-going) 11. The Trade Facilitation and Productivity 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 52 infrastructure bottlenecks in transport logistics; and (6) refocusing, and overhauling key, public sector entities to achieve their institutional objectives, and boost Peru's competitiveness. Guarantee Facility Project (WB) [P088923] (approved in 2005; on-going) 12. Peru faces strong challenges in all its infrastructure sectors, including (i) insufficient productive infrastructure; (ii) low and inequitable infrastructure coverage; and (iii) inadequate quality of 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 funding wit public sector contributions. Prolnversión, the Peruvian private investment promotion agency, has identified a first phase of about 15 projects requiring over $1.5 billion of investments in the transport, energy, water and sanitation and telecommunication sectors over the next three years that could be developed under PPP arrangements. The Guarantee Facility project aims at maximizing the attractiveness of Peru's future infrastructure projects to private investors so as to make them suitable for PPP development, maximize private sector funding and minimize the required public 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. Vilcanota Valley Rehabilitation and Management Project [P082625] (approved in 2004; on- going) 13. The Vilcanota Valley Rehabilitation and Management Project supports the sustainable management of historical, cultural and ecological assets in the Vilcanota Valley, through investments in tourism management and services, urban environment infrastructure, the rehabilitation of historical and cultural sites, and, municipal capacity building. It comprises four inter-related components: 1) tourism capacity building and infrastructure development, will support sustainable tourism sector development, through investments in visitor services, historic preservation and cultural education for local residents, and tourists. Specific activities include the development of a network of visitor/ interpretation centers, equipped with state-of-the-art facilities in Machu Picchu Pueblo, Pisaq, Ollantaytambo and Winaywayna, and, support as well to improvements in basic sanitation and solid waste collection services, at specific campsites along the Inca Trail using green technologies; 2) urban services and infrastructure rehabilitation will support the development of a regional solid waste management system, using eco-industrial technologies that minimize adverse environmental impact. A regional solid waste assessment will be conducted under the project to identify an appropriate strategy and design, for a regional solid waste management system. Resettlement of vulnerable households in Machu Picchu Pueblo includes options for cash compensation, relocation within the city limits, or resettlement to a new community. The Project will support detailed engineering studies, environmental impact assessments, and physical investments in environmentally, sustainable storm water drainage systems for urban areas in the Valley; 3) local economic development will support community- driven development, by enhancing the capacity of local tourism service providers, constructing community tele-centers, and promoting local economic initiatives, through the development of a 53 marketplace facility; 4) strategic planning and municipal capacity building will enhance the capacity of municipalities, through investments that include: a regional strategic environmental assessment, and development of a cultural assets plan; and, urban and rural land use plans, including programs in participatory planning, tourism management, municipal finance, management of urban services and disaster prevention. Sierra Natural Resources Management and Poverty Alleviation Project [P042442] (approved in 1997; closed in 2004) 14. The objective of the Sierra-Natural Resources Management and Poverty Alleviation Project is to help alleviate the poverty of rural Sierra people. Specific project objectives are to assist the poor to: (1) improve sustainable management of natural resources through soil conservation measures and reforestation at the micro-catchment level; (2) increase rural production and productivity through introduction of irrigation and improved agricultural practices; and (3) strengthen their rural organizations so that they can become autonomous and sustainable entities. The project has four components: (1) participative identification and formulation of rural investments in micro-catchments; (2) rural investments; (3) strengthening of rural community institutions; and (4) logistical support and training to the implementing agency (PRONAMACHCS). Rural Road Rehabilitation and Maintenance Project (WB/IDB) [P037047] (approved in 1995; closed in 2000) 15. 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 of rural roads and key links connecting to the primary road system. This has helped alleviate rural poverty and raise living standards of 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 in rural villages; 4) generate employment through the rehabilitation and maintenance of rural roads to mitigate rural poverty; and 5) build up 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 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. Transport Rehabilitation Project (WB) [P008045] (approved in 1994; closed in 2000) 16. The Transport Sector Rehabilitation Project's main objectives were to: (i) rehabilitate essential transport infrastructure; (ii) assist Government in implementing institutional reform in 54 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) a bridge program involving the acquisition and recovery of Bailey 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 is 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 of 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 of an autonomous agency responsible for planning, operating, financing, and administering the highway network; (ii) building capacity to manage environmental issues; and (iii) assisting the railway in its privatization and improving its management. Highway Rehabilitation and Improvement Project ­ Phase III (IDB) (approved in 1998; on- going) 17. The program will finance: (i) road investments in the highland departments of Junín, Cusco, 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 different highway agencies. Ancón-Huacho-Pativilca Toll Road Project (IDB) (approved in 2003; on-going) 18. The Ancón-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 Ancón-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 Inversión en Infraestructura de Transporte de Uso Público (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 55 place during the 25-year Concession. "Phase I," to be financed by the Bank, is 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. 19. Besides the World Bank's and the IDB's operations, CAF also constitutes one of the major multi-lateral financing source for Peru. In 2005, the agency's portfolio amounted US$ 1,724 million, with a particular emphasis on infrastructure (70% of total approvals in 2005) and on maintenance and road improvement. Main projects approved in 2005 were: - The construction of the first stage of the Southern Peru-Brazil Interoceanic Corridor, and the Northern Amazonas Corridor, which, within the framework of the Initiative for the Integration of the Regional Infrastructure of South America (IIRSA), totaled US$ 260 million. The construction of these corridors is expected to have a very positive impact both at the local, national and international levels, given the improvement in passenger and cargo transportation services, the integration of isolated regions for sustainable development of agriculture and cattle breeding, and the development of a physical link between the Pacific and Atlantic Oceans, thus contributing to South American union. - In the area of competitiveness, productive sectors and SMEs and Microfinance, the Corporation approved resources for Peru's private sector, either in the form of direct loans or through the financial sector. In this regard, US$ 103 million in credit lines were approved for diverse banking institutions to finance investment projects, working capital and trade lines, mainly for SMEs and Microfinance. Similarly, corporate loans amounting to US$ 5 million were earmarked to support financing of investments in capital goods in the country's private sector. - Operations financed by from the Technical Assistance Fund, the Human Development Fund and the Spanish Cooperation Fund attended requirements both in the public and the private sectors, and included programs in the areas of competitiveness, governance, community development and culture. - CAF also launched the Leadership for Transformation Program in alliance with Universidad San Martín de Porres and other institutions, with the objective of training leaders in civic-democratic values. - In the area of competitiveness, two new initiatives were undertaken: a project related to facilitate "Access of Peruvian Citrus products to the United States" and a contest to promote "Innovative Projects by producers' associations", as part of a public-private association effort to promote entrepreneurial development - Finally, support was given to cultural and community development projects aimed at capacity-building and strengthening of social capital and responsibility. Specifically, the Musical Education Program which supports orchestras, choruses and lutherie activities gave rise to the first Youth Orchestra of Peru. 56 Annex 3a: Results Framework PERU: Decentralized Rural Transport Results Framework PDO Project Outcome Indicators Use of Project Outcome Information Contribute to territorial Decreased travel time development and to the fight Decreased transport cost against rural poverty in the Number of days with road Assess impact of interventions Borrower's territory by closure on transport users and improving access of rural Increased number of transport conditions households and entrepreneurs beneficiaries of the to goods, social services and program income generating Increased number of school opportunities through reduced registered children Assess impact of improved transport costs and better rural Increased number of health transport conditions on the transport infrastructure. consultations access to basic social services Number of people having access to at least two basic Assess impact of bundling on infrastructure services in access to basic infrastructure provinces where the services infrastructure pilot has been implemented Intermediate Outcomes Intermediate Outcome Use of Intermediate Indicators Outcome Monitoring Component 1 Km of rural roads Verify implementation of Improvement of rural rehabilitated by the proposed project transport infrastructure program Km of rural roads Verify sustainability of periodically maintained at proposed project project standards Km of non-motorized Verify implementation of tracks rehabilitated by the proposed project program Km of non-motorized Verify sustainability of tracks routinely maintained proposed project at project standards Number of bridges Verify implementation and rehabilitated and sustainability of proposed maintained by the program project Component 2 Amount of resources Assess the impact of the Institutional development dedicated by municipalities program on municipal 57 to efficient rural transport financing leverage activities35 Number of Provincial Road Assess the impact of the Institutes fully operational program on the decentralization process Number of Participatory Measure the effect on the Provincial Road Plans local institutional approved strengthening Number of qualified micro- Measure the impact on the enterprises delivering entrepreneurial capacity of quality maintenance micro-enterprises Number of one-year Measure the effect on local equivalent permanent employment opportunities unskilled jobs generated by micro-enterprises Component 3 Local Development Window: Transport for Territorial Number of valid and Verify implementation of Development executed provincial proposed project development plans Number of productive Measure effect of the LDW activities financed and on the viability of implemented through the productive initiatives LDW / number of said activities identified and assessed Verify implementation of Rural infrastructure pilot: proposed project Number of rural infrastructure plans Verify implementation of prepared and approved proposed project Number of provincial Measure impact of rural infrastructure institutes infrastructure plans on Number of provinces where infrastructure investment rural infrastructure planning investments prioritized by rural infrastructure plans have been implemented Baseline data are expected to be available by December 2006. They will come out from the third impact evaluation survey of the Second Rural Roads project (under way). 35Efficient rural transport activities include: pre-feasibility and feasibility studies, rehabilitation, periodic maintenance, routine maintenance, emergency maintenance, supervision, monitoring and evaluation and related administrative costs (costs induced by PRIs or PIIs and supported by the provincial municipality). Force account and works on non-gravel roads are excluded from these efficient rural transport activities. 58 gn ataD no rmfi rmfi alizador regional es ) rtio for its Collecti idad Responsibility Specialized consulting Specialized consulting PROVIAS Decent and offices Un( Zonales Rep and no ta Da rveysus rveysus ede )o Collecti rmfo Instruments Field Field Progress Report In( Progres Collection y st and and Data por Re Frequenc termdi ofd ogram termdi ofd ester ogram and M en pr M en pr Each Trim after terfa 5 r years bilitation) YR (afte years bilitation) (3 bilitation) illionm years (3 (3 bilitation) reha 0 0 0 3.5 -20% reha -5% reha -20% + +5% reha +10% after +20% 003, 11,200 652, 156, 50 4 0 0 0 luesaV YR 402, 10,000 002, 505, 35 59 et rg 3 0 0 0 0 Ta YR +10% 801, 507, 401, 904, 20 2 0 0 0 YR 201, 005, 0 80 304, 14 1 0 0 YR 0 50 502, 0 33 833, 7 0 itoring Baseline 0 0 0 0 0 0 0 0 0 0 503, 0 mon in rso la y torsa rur ect ks ks gram results e stoc ador hool two proj bilitated sc health people rvices been bilitated Indicat odicall standards trac trac at Indic tim of program of of of least se has oftnem reha peri program for ome withs the the rehas the ber of ber ner ber ber atot ture proethyb pilot ove project ineda dge Outct avelrtd ansportrtd day ild ruc ch tcomeuO roads adsor otorized otorized where ure at by ed of numd numd de intam bri erb ed numd numd access ent prmI1: infrast nt infrastructure rural program ralur of non-m non-m rds rease rease Projec Decrease Decrease Num closure Inc beneficiaries Inc steriger rease rease ng empl of the of of bilitated of erb Inc consultations Inc havi basic provinces infrastruct im Arrangements Intermediate ponemoC taininamd Km by Km maintained Km reha Km routinely standa Num an transport units ialcn ralizado ralizado d units ralizado d units ralizado d ralizado ergency MEF zone zone zone em, ovirp PROVIAS Decent and PROVIAS Decent and ("Unida Zonales") PROVIAS Decent and ("Unida Zonales") PROVIAS Decent and ("Unida Zonales") PROVIAS Decent the by dna intenanceam ed pportus SIAF Progress Report Progress Report Progress Report Progress Report Progress Report Progress Report Progress Report Progress Report outiner nda and Is PI Year nance, ester ester ester termdi ofd ester ester ester ester ester or ogram Each Each Trim Each Trim Each Trim M en pr Each Trim Each Trim Each Trim Each Trim Each Trim inteam IsRP by activities. d periodic duceni transport 0 0 0 0 0 75 15 15 12 401, 20 40 50/ 15 15 osts(c rural rehabilitation, cient 0 0 costs ffie 5 5 0 60 14 14 10 201, 16 32 40/ 12 12 studies, these 60 0 0 0 0 12 ilityb 45 13 13 75 90 24 24/ 15 8 8 feasi nistrativeimda from d excluded 0 0 0 80 an related 30 10 10 50 60 16 12/ 12 3 6 are ilityb and roads 0 15 70 70 25 30 8 044/ 9 1 4 pre-feasi: uation eval non-gravel 0 36 0 0 0 0 0 0 0 0 include dna on S$ (U dev nt ess d fo rural itiesiv works ute ure ed act and dicated : onitoringm 36 pro vale plans assessed ov ented de efficient fully ap cro-im prir quality quie activities jobs rof ent inputs ented erbm struct where ntse to urceso anlP ng and frastructureni plem port nu/ pilot: infra apprd stm ision,v account activities Is/PIIs ad Institutional res PR Participatory Ro lifiedauq veri year- killed cro-enteim Window execdnad LDW velopm plemmi an transport institutes inve rural imn deli one uns by Trans vali de super Force 2: of of of of of 3: with productive cture rural edar provincial ure provinces ure by bee rural nt tn opment of of and identified of ep of of development LDWeth ve ount unicipalitiesm transport ponemoC Am by rural on)illim erb rational erb cialin erb erb anent rated nt erb erb nced ugh erb prs erb erb struct ha Num ope Num ovrP Num enterprises maintenance Num perm gene developme ponemoC Devella ovincial Num pr provedmi Num fina roth infrastru activities Num anlp ritizedo Num infrastruct Num infra pri plans Efficient territorial Loc Rural 36 intenance,am unicipality).m Annex 3b: Monitoring and Evaluation PERU: Decentralized Rural Transport 1. Evaluating the impacts of the current project on rural living conditions is one of the essential components of its implementation, like it had been for the previous ones. Based on the experience gained during the first two impact evaluation studies, one study is being conducted in August-November 2006 (which will evaluate the effects of the first two roads projects and serve as a baseline for the future) and two others will be conducted during the project's life (one at mid-term and one at the end). Previous studies 2. Impacts of the previous IBRD-financed rural roads projects in Peru (Rural Roads Project and Second Rural Roads Project) had been evaluated through two impact evaluation studies. The first had been conducted at the end of the first project (2001) and the second at mid-term of the second project (2004). 3. The first impact evaluation study had been conducted ex-post, without any previous baseline. One of the main results was that maintaining rural roads through microenterprises just after the rehabilitation of said roads is a cost-effective way to integrate the rural poor and to restore their accessibility to basic social services and to markets. It also reduces the transaction costs which otherwise prevent productive initiatives coming from the poor to be better integrated with dynamic regional markets. The study also showed that effects induced by the first program were more important for transport related aspects (like transport time and cost, traffic) than for the other ones. Effects on the access to basic social services and to markets were also found noticeable while they were low or non-existent for employment, migration and poverty alleviation1. Negative effects were found marginal. Lastly, impacts on rural roads were higher than for non-motorized tracks, which can either be explained by the quality of the rehabilitation or by their respective hierarchy in the rural transport network. 4. The second impact evaluation study which was conducted in 2004 was aiming at assessing the impact of the first two years of the second project based on the information collected in 2001. It also served as a baseline study for the future. Like for the first study, impacts were found to be greater for transport conditions (reduced transport time2, increased traffic, reduced passenger and freight transport costs) than for all other aspects. Impacts on access to social services like health and education (effects on access to health services were found particularly high for rural roads as well as for NMT) were still noticeable. The study also showed that the projects had a positive impact (increase) on the surface of agricultural activities, agricultural wages, land value and the share of secondary economic activities. Lastly, impacts on employment and poverty alleviation were found limited. 1For example, in the Sierra region, transport costs were reduced by 59% for freight and by 29% for passengers. Similarly, 67% of interviewed persons declared that the project had increased their access to basic social services and 82% that it had increased their access to markets. 2For example, transport time was 68% lower that it would have been without the intervention of the program. 61 5. This second impact evaluation study was based on the double difference methodology, a commonly used quasi-experimental technique which compares roads with and without the intervention of the programs, both before and after the end of the project. The difference between the differences (before and after) is then the impact of the project. Hence, the first impact evaluation study was used as a baseline to assess the impact of the projects in 2004. Similarly, the study/baseline conducted in 2004 will serve as baseline for the next impact evaluation study, whose results are scheduled for December 2006 and whose methodology is also double difference. Figure A3b-1: Double Difference Methodology Next impact evaluation/baseline study 6. The results found by the previous impact evaluation studies are consistent with the idea that when a program is implemented, its effects on the outcomes are at first higher than on other aspects (in the first 3 years); the main outcome here being the improvement of rural transport conditions. Over time (mainly between 5 and 8 years after the implementation date), impacts on other indirect aspects (e.g. access to social basic services and to markets) are becoming higher. Lastly, a project starts to have a noticeable positive effect on poverty only after approximately the first eight years of a project. This general theory, which so far has applied to the previous projects (results being consistent), has to be verified again for the current project, as the first positive results on poverty alleviation should start to be visible. 7. The methodology used for this next impact evaluation study will be mainly quantitative but will also include qualitative techniques aiming at determining how the project is perceived by the rural population and what people's expectations are. Like for the second impact evaluation study, the quantitative part will use the double difference methodology, which appears to be, in this case, the best one for assessing the impacts of the intervention of the program. Indeed, the ideal way to calculate a project's impact is an experimental, randomized design in which interventions are applied to random groups, and withheld from the rest (or the control group). Any difference in the post-program treatment and control groups is then attributable to the project intervention. Since the project target areas have already been selected ex-ante on the basis of their potential, an experimental design would be biased and therefore not possible. 62 Figure A3b-2: Impact of an intervention over time 8. Information to be collected will come from various sources: most of the primary information will come from interviews of households, local authorities, notables, transporters and local traders, while secondary information will come from public registers collected by the various social services administrations (health, education, police and justice). This collection of information must be carried out in all the departments covered by the project. Moreover, the impact evaluation will be divided by departments. Rural roads and the NMT which have been rehabilitated and maintained by both previous programs or which will be rehabilitated by the next program will be classified as follows: small, medium and long rural roads and small and long NMT. The primary units of the study will then be randomly selected amongst these sub- groups. Secondary units will be villages, while households will constitute the tertiary units. For each road, two to three villages (depending of the length of the road) will be selected (one at both end of the road and one at the middle for long roads3) and in each village, 6 households will be randomly selected. 9. In a study based on the double difference methodology, the choice of the control group is crucial. Each studied road must have its own control road which has to be selected very carefully. Indeed, both roads must be very similar. So, control roads cannot be randomly selected and they will have to be selected, by desk work, through a process based on the three following conditions: They must not be located in the area where any of the programs have or will be intervening; 3Roads are considered long as soon as their length exceeds 30 km. 63 If the studied primary unit is a rural road, so must be the control road. Similarly, if the studied primary unit is a NMT, so must be the control track; Control roads must not have any relationship with the studied roads (they must not cross or be physically linked). 10. Moreover, both studied and control roads must have similar characteristics: Length; Similarity of the villages located on both roads (size, population, same number of schools or medical centers); Agricultural (type of culture,...) and climatic conditions (humidity, ...); Distance to economic centers; Size and socio-economic characteristics of the population located on the roads; Same public-investment programs intervening on both roads. 11. To be sure that these conditions will be fulfilled, control roads will have to be selected on the field, amongst a group of roads previously identified, by desk work, with secondary information (maps, statistics...). Once identified, secondary and tertiary units (respectively villages and households) will be selected with the same methodology than for the corresponding secondary and tertiary units of the studied roads. Lastly, an additional econometric control will be made to detect the possible differences between households located on studied roads and households located on control roads, as some factors are not directly observable on the field by the persons who are conducting the interviews. 12. This third impact evaluation study will have 4 components: (i) Assess the effect in each impact area (transport, access to social public services and to productive activities, employment, migration, gender, institutional development, environment and poverty) of the two previous programs in the 12 departments of intervention. For this component, all the studied roads will be roads rehabilitated by one of the former programs. Related control roads will be located in the same 12 provinces. (ii) Produce a baseline for the third program, whose area of intervention is the whole country (24 departments). This baseline will include roads and NMT of the first component and new roads and NMT where the program will intervene and their corresponding control group (in the "new" 12 departments); so as next impact evaluation study will be able to assess the effect of the program in each impact area. (iii) Produce a specific baseline which will be conducted in 9 of the 15 provinces which have been selected to implement the rural infrastructure pilot. This baseline will not only include the same information than for other provinces of the other baseline, but also information on other rural infrastructure (water, electricity...). Hence, the scope of persons interviewed will be enlarged to fit this concern. This baseline will be concentrated on the infrastructure investments which will be prioritized through the 64 infrastructure participatory plans. As of today, the exact methodology for selecting the control group for non-road infrastructure is not known yet, and Provias Descentralizado is waiting for some proposition coming from the winning consulting firm. 13. Finally, a specific evaluation will be launched to evaluate the impact of the LDW micro- projects implemented by the previous program. This evaluation will be done ex-post, as no baseline is available for this component. Indeed, these small projects were implemented during the life of the project and the LDW was continuously adjusted to fit to local and punctual needs. Hence, it was almost impossible to produce a baseline for the LDW, as it is now very difficult to produce a baseline to assess the future impact of the projects which will be implemented by the LDW during the current operation. Moreover, this concern is enhanced by the fact that provinces which will benefit from the LDW are not exactly known yet. The methodology used to assess the impacts ex-post will consist of auditing all documents (accounts, tax statement...) produced by the micro-firms for the 5 last years. 65 Annex 4: Detailed Project Description PERU: Decentralized Rural Transport 1. The project will include the following four components: 2. Component 1: Improvement of Rural Transport Infrastructure (estimated cost: US$99.6 million of which US$35.7 million would be financed by the Bank loan). 3. This component would finance rural transport investments that would be implemented according to the decentralized rural roads policies that have been successfully developed during the first two rural roads projects. The scope would be extended to the entire country (while the scope of the Second Rural Roads project was limited to the 12 poorest departamentos). 4. Activities to be financed would include: a) Rehabilitation or improvement of rural roads prioritized through participatory planning ­ The proposed project aims at rehabilitating 2,500 km of rural roads from Peru's 24 regions (departamentos). These roads would be selected based on the priorities identified by local stakeholders in the participatory provincial road plans. Allocation of resources between provinces will be based on a methodology taking into consideration poverty criteria, the stock of road assets as well as the financial capacity of local governments to bring counterpart funds (see Annex 6 for a detailed description of this methodology). Rehabilitation standards will be based exclusively on gravel roads, which have been proven to be the most cost-effective solution to restore transitability on low-traffic roads. Technical standards are described by MTC's norms. 4 Rehabilitation works will be contracted out to the private sector (local or national construction firms). b) Improvement and re-construction of bridges ­ The proposed project will finance the improvement of about 50 bridges that are critical to ensure connectivity on the rural roads that have been rehabilitated. The typical length of bridge eligible for this component is 15 to 20 meters. c) Periodic maintenance of rural roads ­ The proposed project will finance the periodic maintenance of 11,200 km of roads that have been rehabilitated under the first and second Rural Road projects. Under a normal life cycle (ie. with adequate levels of routine maintenance), gravel roads need to receive periodic maintenance every 4 to 6 years. A road assets' management system is being developed (and will be improved during project implementation) in Provias Descentralizado to optimize the programming of these periodic maintenance activities based on the monitoring of roads' conditions, traffic levels, climatic conditions and time since rehabilitation. This system will be progressively decentralized to the PRIs. Periodic maintenance works will be generally 4Manual para el Diseño de Caminos no-Pavimentados de Bajo Volumen de Transito approved on Nov. 16, 2005 through Directoral Resolution No. 084-2005-MTC/14 and Manual de Especificaciones Técnicas Generales para Construcción de Caminos de Bajo Volumen de Transito approved on May 30, 2006 through Directoral Resolution No. 026-2006-MTC/14. 66 contracted out to the private sector. On an exceptional basis and with several restrictions (see Box A4-1), periodic maintenance activities could be implemented by municipal authorities, under force account. Box A4-1: use of force account International evidence shows that road improvement activities are more efficiently performed by private operators than by public agencies (force account). The proposed project aims at strengthening the current policy pursued by the MTC regarding the outsourcing of works to the private sector and the promotion of such outsourcing among regional and local governments. Nevertheless, under exceptional circumstances (such as reduced availability of contractors, urgency, small size of works) some activities limited to the periodic maintenance of rural roads could be eligible. In such case, Bank no-objection will be required prior to initiating the work, based on a justification explaining why out-sourcing is not deemed possible. In addition, the amount of force account works will not exceed US$50,000 per individual works and US$8 million cumulatively for all force account works financed under the proposed project. Finally, a specific agreement would have to be signed between Provias Descentralizado and the municipality willing to use force account to perform periodic maintenance. This agreement will specify the method of accounting for labor, material and equipment and ensure that works will be properly monitored and evaluated, and that payment will be based on results. The purpose of this separate accounting for force account activities is to both ensure quality and collect evidence about the relative performance of force account versus outsourcing. Such evidence would then be disseminated to promote the phasing out of force account practices. d) Improvement of NMT tracks ­ The proposed project will finance the improvement of 2,000 km of NMT tracks from Peru's 24 regions. Tracks would be prioritized by local stakeholders in the participatory provincial road plans and allocation of resources between regions will be based on the same methodology as for rural roads (see Annex 6). Works will be performed by Rural Road Committees (Comites Viales Rurales), based on existing implementation arrangements (see Box A4-2). The proposed project will finance 70% of the costs of the works, the remaining 30% being brought by beneficiary communities as labor force. If prioritized by local stakeholders, some NMT tracks of tourism significance5 could be financed under this component. In such case, works would be contracted out to the private sector and the project would finance 100% of the related works (including some related tourism equipments). Box A4-2: Rural Road Committees The previous project has rehabilitated 3,324 km of NMT using an organization model involving three actors: the beneficiary population, gathered through rural road committees in partnership with local authorities; local NGOs specialized in rural development, and more particularly in sustainable and participatory processes; and national government through Provias Descentralizado. Each actor brings its own resources and capacity in order to rehabilitate NMT the best way possible. Indeed, while Provias 5A NMT track of tourism significance was financed in 2005 by Provias Rural in the regions of Cuzco and Apurimac, with funding from the French aid agency. The 32 km track connects Cachora to the Inca ruins of Choquequirao which have a cultural importance (and therefore a tourism potential) comparable to Machu Picchu. The Choquequirao NMT track is progressively becoming a popular alternative to the "Inca hiking trail" that brings access to Machu Picchu. Discussions are being held so that maintenance of the Choquequirao NMT track is ensured by a micro-enterprise, financed from a fee paid by tourists. 67 Descentralizado is financing 70% of the cost of the works (US$ 1,750 per km) and is involving its human and logistical resources, NGOs are responsible for: financing and conducting preliminary studies and socio-economic evaluation of the area which will be impacted by the rehabilitated NMT (these studies cost US$ 400 per km); promoting, organizing and constituting rural road committees; and making a technical and operational manual, including a cost analysis. Rural Road committees are then responsible for the execution of the works. As juridical entities, they are linked by contract to Provias Decentralizado and they represent the beneficiary population. This labor force represents 30% of the cost of the works, e.g. US$ 750 per km. Hence, rehabilitating one km of NMT costs US$ 2,900. Moreover, rural road committees can require technical assistance from NGOs during the building period which takes 4 to 6 months. The previous program has proved the efficiency of this system. Indeed, in five years, 31 NGOs have been involved, and 247 rural road committees have been created, beneficiating more than 500 rural communities. These committees have brought the equivalent of US$ 3.9 million in labor force. Source: Provias Decentralizado. e) Improvement of other types of rural transport infrastructure ­ On a case-by-case basis, and provided these investments comes as priorities in the participatory provincial road plans, other kinds of rural transport investments, such as the construction of small wharfs or the rehabilitation of small airports, could be eligible under this component. These investment alternatives may be of particular relevance in the Selva macro-region, due to the lower population density and the importance of non-land-based transport. During the implementation of the Second Rural project, these alternatives were explored, on a pilot basis, within the Plan Piloto Selva (see Box A4-3). This pilot allowed customizing rural transport solutions to the specific needs of the Selva. Due to the particular social and environmental sensitivity of the Selva macro-region, any investment to be financed under this category would have to receive the Bank's no-objection prior to implementation, and to comply with particular safeguards' arrangements (see Annex 10). Box A4-3: The "Plan Piloto Selva" The Plan Pilot Selva (PPS) was part of the Second Rural Roads project. This was the first time ever that Provias Rural was to intervene in the Amazon region of Peru with an inter-modal transport model. The PPS had a special institutional arrangement by which Provias Rural work hand in hand with the Instituto de Investigaciones de la Amazonia Peruana (IIAP) which provided technical and social supervision to the project. The PPS was carried out following best practices standards, including the preparation of a Socio-Environmental Study (ESS) and Action Plans by consortia compounded by an environmental and a social firm. The ESS included a socio-economic assessment as well as a physical and biological evaluation, while the Action Plans included Indigenous Peoples Plans, an environmental protection plan and a monitoring and evaluation plan. The studies included an intense participatory approach with the local communities, Indigenous and settlers, as well as the involved municipalities and the regional and local authorities. The PPS was implemented in the Districts of Masisea and Iparia, located in the Departamento of Ucayali in the south central Peruvian Amazon and benefited communities from two Indigenous groups, the Ashaninka and the Shipibo-Conibo, as well as the small towns in the area. Its objectives were to develop, test and asses methodologies, technical, environmental, social, economic and institutional procedures that could be later on replicated in others parts of the Selva region. Its results are expected to be useful to expand the program in other areas of extreme poverty in the Amazon. The PPS included: 68 Implementation of small inter-modal transport projects to allow access to river and terrestrial transport, including the construction of wharfs Rehabilitation of rural roads that link towns to river access and productive areas Improvement of caminos vecinales and caminos de herradura that allow villages access to the rural roads and to the wharfs The methodology implemented in the PPS allowed for the inclusion of activities beyond transport improvement, such as the promotion of strategic partnerships to strengthen local organizations and provide technical and financial assistance for developing productive projects, as well as to facilitate technical assistance for the preparation of development projects in the area of influence of the PPS. In total eight road projects were identified through participatory workshops for both districts, totaling around 5 million dollars. As part of the expected synergies these works were to have, 8 development projects were identified to be implemented in the area of influence of the PPS as well as 4 various evaluations. The PPS is still underway and is expected to be completed by the end of this calendar year. The overall evaluation of the PPS is pending and so far the intended evaluation plan has been prepared. Until April this year a total of 47.63 km of NMT tracks were finalized. The rural roads were at the stage of technical studies. The technical studies for the wharfs were to be finished by June. All these works will continue until December this year. Out of the 8 productive projects, five are being discussed between the local municipalities and the Regional Government. These include: Aquaculture projects for Paiche, Community Forestry Management, Use and Conservation of Medicinal Plants, Reactivation of the Camu-Camu Production, and Promotion of Handicraft Technologies. The most important lessons learned are related to the relationships between climate seasonal variations and local topography, as well as with the local participation and local and regional government commitment. On the first issue, the PPS has found out that the development of civil works for road rehabilitation and wharf construction have to be made in two stages. The first stage is for the recollection of construction materials and depending on the topography and location of materials it had to be made either in the dry season or in the rainy season, while actual construction had to wait for the dry season. So in some instances to finalize one of the road projects it could take around a year, while in other cases it could be done in two seasons. This had cost implications as well as the requirement of a flexible schedule. Overall it clearly showed that working in the Selva region requires much more time than in the Sierra. And the number of small bridges require to complete a road cannot be underestimated due to the prone to flood terrain. Secondly, the PPS showed that local Indigenous communities as well as settler's towns and municipalities were eager to participate and to have the road projects completed. They set up committees to overlook the civil works, ensure security of the materials and safety of the civil works, and avoid the transit of trucks that work in wood extraction as to protect their forest. Regarding the expected productive projects there has been less financial commitment on the part of the regional authorities than previously expected. An unexpected outcome has been the increase of private investment in the area. Masisea has become the largest papaya producer in the region with around 2,000 has of this crop, due to land access provided by the road improvement. Source: Provias Descentralizado. f) Pilot for stabilization of slopes and protection against erosion ­ This pilot aims at developing technical solutions to prevent and mitigate erosion that could threaten rural 69 roads. Of particular relevance is the reforestation of slopes and the protection from erosion caused by rivers. These technical solutions will be developed in close coordination with the relevant environmental agencies (eg. PRONAMACHC) and with specialized academic institutions (eg. the Agrarian University and the National University of Engineering). It is expected that works would be performed by "reforestation micro-enterprises" that would created and trained under this pilot. 5. For each activity, the project would finance feasibility and technical studies, technical assistance (eg. pilot for stabilization of slopes), safeguards-related studies (eg. environmental impact assessment), works and supervision. 6. All activities will be executed in compliance with social and environmental safeguards arrangements described in Annex 10. 7. Activities will be procured by Provincial Road Institutes (PRIs) whenever they have reached sufficient institutional capacity or, in their absence and a transitory basis, by Provias Descentralizado. 8. Component 2: Institutional Development (estimated cost: US$14.7 million of which US$6.2 million would be financed by the Bank loan). 9. This component would provide a comprehensive institutional strengthening package at the local and central levels, in the broader context of the decentralization reforms. The main objective is to strengthen the regulatory capacity of the national level while empowering municipalities in the definition and implementation of their rural transport policies. At the local level, the main actors targeted will be the provinces which have been identified as the right level to both get the benefits of economies of scale and ensure accountability to key stakeholders. Nevertheless, coordination with other levels of sub-national governments (districts, regions) will also be promoted. 10. Activities to be financed include: 11. At the local level: Preparation or updating of participatory provincial road plans: This component will finance the preparation of Participatory Provincial Road Plans in the provinces where the program has not been active yet, and the updating of those plans in the other provinces. It is estimated that Participatory Provincial Road Plans needs to be updated at least every 5 years to account for the evolution of the socio-economic situation in the associated territories. The methodology for participatory planning is being revised in order to include new criteria for prioritization of rural roads and harmonize the format of road inventories (see Box A4-4). 70 Box A4-4: Methodology for participatory planning of rural transport investments Participatory provincial road plans are carried out by individual consultants who work in partnership with the provincial local coordination council. This council is headed by the provincial mayor and gathers distrital mayors and representatives of different communities, associations, enterprises or professions. The goal of the participatory plan is to strengthen the road planning capacity of local authorities in a way that favors the decentralization process by prioritizing all road investments which have to be made in the province in accordance with the provincial council, The process to achieve this plan is divided in seven steps. First two steps are preparatory activities (such as the organization of workshops with municipalities or associations, or the preparation of a work schedule) and collection of information. Third step is a provincial diagnostic which analyses different aspects of the current situation of the province such as its demography, its economy, its social aspects or its road environment. Fourth step is the prioritization of investments through a matrix which constitutes the first main output of the plan. This matrix ranks the different rural roads (there is another matrix for NMT) through a process which takes into account several criteria divided in five groups: spatial, economical, social, technical and natural resources. Each criteria has a given weigh approved in advance by the local council so that to avoid any further protest. Fifth step is the planning of objectives and the carrying out of a strategy for the road network management. Sixth step is the establishment of the provincial investment plan for road infrastructure which ranks all investments by road, type of road (rural or NMT) and type of investment (rehabilitation, periodic or routine maintenance). This investment plan constitutes the second main output of the participatory provincial road plan: this ranking sets the order of all investments which are to be made in the province. Moreover, suggestions for financing the proposed investments have to be included in the plan. Last and seventh step is the monitoring and evaluation of the participatory plan, with a proposed list of monitoring and evaluation indicators. Source: Provias Descentralizado. Strengthening of the routine maintenance system with micro-enterprises: The definition and implementation of a routine maintenance system for rural roads is one of the main achievements of the First and Second Rural Roads programs (see Box A4-5). The proposed project will continue strengthening this system in particular through financing the constitution of new micro-enterprises, improving the monitoring of maintenance activities (eg. financing of monitores viales) and promoting a transition towards the competitive contracting of micro-enterprises in areas where such competition can take place. On the other hand, the proposed project does not aim at directly financing routine maintenance activities since funding is now available to municipalities for that purpose under a specific inter-governmental transfer. Box A4-5: Routine maintenance of rural roads performed by micro-enterprises Although it is often disregarded or neglected, routine maintenance is at the same time the cheapest and the most cost-effective investment in the road sector. An efficient routine maintenance system is key to a cost effective management of road assets, particular for gravel roads which otherwise tend to deteriorate rapidly. Routine maintenance is more efficiently performed when it is done by local entrepreneurs who can see the benefit of keeping a road in good conditions and receive peer pressure from other users of rural transport. Finally, routine maintenance is labor-intensive and does not require advanced skills. Thus, it can generate employment opportunities for the rural poor, including women. In 1995, taking these considerations into account, the GoP started to experiment a new model to perform routine maintenance on rural roads, based on the constitution of micro-enterprises. A micro-enterprise includes 10 to 25 "partners" (socios) chosen among and by poor rural communities, and is responsible for the maintenance of a 10 to 25 km road segment. In many cases, seasonal workers (rotantes) - often chosen among the poorest people, are added by the community to the staff of the micro-enterprise so that they can be given an opportunity to earn some income. However, unlike other labor-intensive initiatives, the primary objective of micro-enterprises is not to act as 71 a safety net (although it allowed many rural people living in extreme poverty an opportunity to earn an income) but rather to develop an entrepreneurial capacity for the efficient maintenance of road assets. In order to do so, a result- based contract is signed by Provias Descentralizado or by a given municipality with each micro-enterprise, actual results and impact on road conditions is regularly monitored by road engineers while technical assistance is provided to micro-enterprises by young civil engineers or social workers (monitores viales). The model proved to be very successful and became widely adopted in Peru: as of April 2006, 612 micro- enterprises employing almost 7,000 workers (including a significant proportion of women) had been created and were performing routine maintenance on the Peruvian rural roads. With the decentralization reforms since 2002, the responsibility for the maintenance of rural roads was transferred to municipalities and Provincial Roads Institutes were set up to contract the micro-enterprises. In 2006, funding for routine maintenance was permanently transferred by MEF to municipalities. The model was also successfully experimented by Provias Departamental and Provias Nacional on the secondary and even primary paved road network. Since 2005, there were a sufficiently large number of micro-enterprises created so that Provias Rural could start to experiment a competitive management of rural road maintenance contracts. As of today, several micro-enterprises have reached a very high level of entrepreneurship and started to diversify outside road maintenance (eg. in tourism). Although few have reached the level of advancement of Peru, many other Latin American countries have adopted the micro-enterprise model to maintain their rural roads (eg. Brazil, Colombia, Ecuador, Guatemala, Nicaragua). Source: World Bank, Provias Descentralizado. Strengthening local capacity to handle safeguards: The decentralization of road management activities to the PRIs requires that an adequate capacity be developed at the local level to handle the related safeguards issues that may be raised. Annex 10 provides a comprehensive description of the safeguards arrangements that have been agreed for the purpose of this project. This component will finance any activity such as training events needed to strengthen the capacity of the PRIs in this regards, in close coordination with the relevant Peruvian institutions. Mobilizing municipal financing for rural transport: Activities aiming at assessing and optimizing the use of municipal budget resources for rural roads would also be eligible under this component. This may be of particular relevance in the case of municipalities with large amount of resources (from canon minero in particular) but the opposite cases of poor municipalities with scarce resources would also be eligible. The proposed project also aims at leveraging additional municipal funding for rural transport through the financing agreements to be signed with municipalities. Promotion of private financing of rural transport: During the 2nd Rural Roads project, various ad'hoc arrangements were found in which the private sector - such as mining companies, decided to co-finance the maintenance of rural roads (see example in Box A4-6). This component could help promoting, disseminating and systematizing such types of arrangements. 72 Box A4-6: An example of private financing for rural roads The road between the municipalities of San Jose and Buenos Aires in the Chanchamayo province constitutes a good example of what can be achieved in terms of involvement of the private sector in road infrastructure financing. Indeed, 40% of routine and periodic maintenance (which annually amounts to 92,000 soles) of this 28 km road is financed by an agricultural cooperative which comprises all coffee producers located near the road. The rest is financed by the district and provincial municipalities (respectively 40% and 20%). This public-private financing has allowed to maintain the road at high-level standards and to provide producers with a good all-year-round access to La Merced, the nearest coffee market (after the rehabilitation, freight costs have decreased by 70% and transport costs by 46%). So far, this cooperative has gathered 2,000 coffee producers, operates 4 small firms and produces 710,000 coffee bags a year. As each producer gives 0.5% of its revenues to the cooperative, its overall budget amounts to 2 million a year. Building on this success, Provias Descentralizado is promoting the replication of this experience in places experiencing similar economic conditions. Source: Provias Descentralizado. Scaling up the Geographic Information Systems (GIS) experience: This component will finance the scaling up of the GIS experience, which has so far been conducted in only two provinces (see Box A4-7), to the whole country. This scaling up will allow the pilot to become really efficient and sustainable, as the full usefulness of such a geographic system is reached only when all provinces are targeted (many rural roads cross two provinces). Moreover, the system will be combined with information collected by PRPPs in order to create a road database, with a common framework for all provinces, and to provide every province with a powerful planning instrument. It will also enhance the coordination between all levels of the MTC, as information will be easily shared (this consideration becomes even more relevant with the merging of Provias Rural and Provias Departemental into a single entity). Finally, actualization of this geographic system will be conducted by PRIs on a regular basis (at least every 5 years) in order to ensure the sustainability of this instrument. Box A4-7: Geographic Information Systems pilot While conducting Participatory Provincial Road Plans, many consultants have noticed that most of rural roads are not registered at the national or local level, so that Provias Decentralizado estimates the current length of the total rural road network being 100,000 km, while official figures are of 47,000 km. This situation is due to the fact that a huge number of roads have been built by various entities (communities, municipalities, firms...), that reporting these new constructions to an official entity is not required by law and that the no road census has been conducted for years. In order to tackle this problem of roads registration and to provide provinces with a powerful planning tool, as well as to give a useful regulation tool to the MTC, Provias Decentralizado has decided to implement a Geographic Information Systems (GIS) pilot in two Peruvian provinces: Yauyos and Huaral. This technology has been chosen because it had been proved to be the cheapest and most rapid one to implement. Indeed, once equipment has been bought (US$ 8,000, mostly for GPS system), such a study costs 20,000 soles and takes one month and half to be conducted (including two weeks on the field). Moreover, the methodology retained is divided in six successive steps: 1) meeting with local authorities and coordinating with them; 2) analysis of the rural road network based on the local contributions gathered in step 1; 3) constitution and preparation of the team; 4) field visits (conducted by consultants) 73 where each road is ridden with GPS and information is collected and computed; 5) results evaluation; 6) disclosure of information. The final product is an interactive map (accessible through a special mapping software) where, for each road, the following details are available: national ID number (if registered, this number is provided by the MTC), condition, surfacing type, length, width and the type of land the road is crossing. In addition to that, pictures and characteristics of bridges, as well as distances between villages are also available. Other features can be added further if needed. It is also worth noticeable that NMT are not registered by this system, because of their huge number and of their temporary and changing nature. Source: Provias Decentralizado Other technical assistance for municipalities and PRIs: The technical and regulatory capacity of provincial road institutes could also be developed under this component, with emphasis on the sustainability and efficiency of road interventions, and on the regulation of transport activities. Eligible expenditures would include training activities, consultancies and, under certain circumstances, the acquisition of computers and/or software. 12. At the central level: Regulation and definition of policies for rural transport: The evolution of Provias Descentralizado towards a regulatory agency of decentralized rural transport policies requires the strengthening of expertise in decentralization, second-level monitoring, regulation of transport services, road safety and definition of technical standards for rehabilitation and maintenance. Provias Descentralizado and its regional bureaus (unidades zonales) will have to re-orient their priorities towards providing sound technical support to the PRIs. This component will finance consultancies and technical assistance related to the building of this new competence. Of particular importance will be the drafting of a "rural transport law" that will translate in the Peruvian legal corpus the policies that have been successfully developed over the past decade. Promotion of research and innovation in rural transport: Peruvian universities, engineering schools and research centers still have a limited involvement in rural transport. The experience of the First and Second Rural Roads projects has shown that the management of rural transport policies require multi-disciplinary competences combining technical (road works), legal and institutional (decentralization), economics (prioritization of investments, evaluation of impacts), environmental (Selva) and social (gender, community participation). Provias Descentralizado has started to develop partnerships with academic and research institutions with, for instance, the financing of research projects and thesis. This component will finance consultancies, research project and other activities related to the promotion of research and innovation in rural transport. These activities are also expected to contribute to the strengthening of the local market of small contractors and consultants capable of intervene on the issues and tasks related to rural transport. Fiscal revenues and road development pilot: This pilot aims at evaluating the effect of improved transport conditions on fiscal revenues of municipalities. These effects can come from an increase of the value of land and properties located near rehabilitated roads 74 (which will generate higher property taxes) or from the growth or creation of economic activities (higher income or turnover-linked taxes). The objective of the proposed pilot is to compare the cost of road investments with generated revenues for municipalities and central government. Results could be used to make the case for higher investments in rural transport and/or simulate the effect of greater fiscal decentralization. For the purpose of the pilot, a few provinces will be selected and specific monitoring instruments be established. The component will finance consultancies and the establishment of the monitoring system as well as dissemination costs. Other technical assistance for MTC: This component will also finance activities related to the institutional evolution of MTC agencies that are dealing with the decentralization of transport policies (such as the creation of a "Decentralized Transport Institute" and the preparation of a "Vision of Provias Descentralizado for 2010" to be prepared in the first year of operation in compliance to a legal covenant). Other eligible activities include the definition of a sustainable fiscal framework for rural transport and rural infrastructure at the national and decentralized levels (eg. use of transfers, possible mobilization of private financing, indirect impact of transport investments on national and local tax revenues). 13. Component 3: Territorial Development (estimated cost: US$11.1 million of which US$4.0 million would be financed by the Bank loan). 14. The objective of this component is to enhance the impact that improved transport conditions can make on rural development by enhancing complementarities with other types of rural infrastructure investments and by promoting productive activities in the areas where transport conditions have been improved. 15. The component will include two distinct sub-components: 16. Sub-component 3.1: Local Development Window (LDW) (estimated cost: US$1.3 million of which US$0.5 million would be financed by the Bank loan) ­ The LDW is an instrument which has been developed during the 2nd Rural Roads project, with the purpose of accelerating the emergence of productive activities in the areas where transport conditions have been improved. This instrument has proved to be successful in both helping municipalities and local stakeholders define a territorial development strategy formalized through the preparation of local development plans, and in helping communities identify potential for productive activities and find a sponsor (see Box A4-8). During the 2nd Rural Roads project, the LDW was implemented by CARITAS-Peru. For the purpose of the proposed project, the executing entity of the LDW will be selected on a competitive basis, among private operators and NGOs activities eligible under the proposed project would include productive activities such as the development of agricultutal niches (eg. fair trade coffee) or the promotion of eco-tourism. The productive potential investments identified under the LDW would not be financed under the proposed project, since LDW would only act as an intermediary to reduce transaction costs for potential sponsors that could finance these investments. The LDW will also have access to a US$1.5 million Japanese Trust Fund mobilized by the IaDB and administered by Provias Descentralizado. The LDW would intervene in around 50 provinces (chosen from among the poorest ones). 75 Box A4-8: Results achieved by the Local Development Window Since 2002, the Local Development Window (LDW) has intervened in 85 districts in 12 provinces chosen among the poorest in Peru. The ultimate objective was to put in place a specific intermediary instrument that could accelerate the emergence of productive activities in areas where rural transport conditions are improved. The LDW identifies the best productive initiative and reduces transaction costs for potential sponsors. Selected initiatives are presented during "project fairs" (ferias). Between October 2001 and September 2006, the LDW, under the active management of CARITAS, has identified 850 initiatives at pre-feasibility stage, of which 167 reached feasibility stage and 72 found a sponsor. Eight regional fairs and one national one were organized, allowing to leverage SDR 7,2 million of financing from various sponsors. Remarkable initiatives that were supported include for example the construction of a fish farm in the district of Sauce (San Martin region) or the cultivation of a traditional root called yacon in the district of Orcotuna (Junin region). In both cases, these initiatives became viable because the improvement of transport conditions made access to local markets easier and more reliable. In addition to promoting the spurring of productive activities, the LDW has worked with municipalities to help them prepare a district development plan that are describing a strategy for the development of their territories. These plans were then used by municipalities to rationalize their public expenditures and to comply with the accreditation requirements put in place by the National Decentralization Council (CND in Spanish). More recently, the LDW started to move its planning methodology at the regional level, with the preparation, to the date, of three provincial development plans. Thus, the LDW proved both to be a relevant instrument to promote rural growth and to strengthen at the same time community participation and municipalities' institutional capacity. An illustrative sample of projects supported by the LDW is presented on the Internet (http://www.proviasrural.gob.pe/). Source: CARITAS. 17. Sub-component 3.2: Rural Infrastructure Pilot (estimated cost: US$9.8 million of which US$3.5 million would be financed by the Bank loan) ­ The pilot aims at experimenting, in a representative and manageable sample of Peruvian provinces and in the context of the decentralization reforms, specific planning and institutional arrangements, with the ultimate objective of increasing the efficiency and effectiveness of rural infrastructure investments through enhanced coordination and the promotion of greater complementarities. 18. The pilot will intervene in 15 Peruvian provinces that have been selected in order to cover a diversity of situations with regards to: Availability of budgetary resources (limited, average, significant) including the availability of cañón minero Presence of infrastructure sector agencies (limited, significant) Strategic considerations (provinces producing coca and affected by terrorism) 76 Limited budget resources Average budget resources Significant budget resources Limited presence Huacaybamba (Huanuco) San Marcos (Cajamarca) Huancabamba (Piura) of infrastructure Luya (Amazonas) Sánchez Carrion (La Libertad) sectors Oxapampa (Pasco) Significant Sihuas (Ancash) Cotabambas (Apurimac) La Convención (Cusco) presence of Leoncio Prado (Huanuco) Huanta (Ayacucho) Arequipa (Arequipa) infrastructure Vilcashuaman (Ayacucho) Tayacaja (Huancavelica) sectors Azangaro (Puno) NB: Provinces in bold are producing coca and were severely affected by terrorism. Provinces in italics have a Provincial Road Institute. 19. The pilot will cover the following activities: Preparation of rural infrastructure plans: These plans will follow, in each province, a methodology ­ in the process of being developed, based on the identification and prioritization of potentialities as well as of key bottlenecks to rural growth. This planning process will be facilitated by local consultants - that have been specifically trained, and it will be performed in a participatory and decentralized manner (all the mayors in the province will approve both the methodology and the plans). A key outcome should be a prioritized list of rural infrastructure investments (or combination of these) that is critically needed to develop rural growth potentialities in said provinces. During preparation, 3 provincial rural infrastructure plans were prepared on an experimental basis to identify examples of synergies across rural infrastructure that could arise from participatory planning at the provincial levels. The 3 provinces that were targeted include Arequipa, La Convención and Cotabambas (see Box A4-9). Moreover, in 6 provinces, rural infrastructure plans will be complemented by Geographic Information Systems technology (see Box in component 3). Box A4-9: Participatory planning of rural infrastructure in the province of Cotabambas The province of Cotabambas, located in the Apurimac region, has a population of about 44,000 inhabitants, of which 80% live in rural areas, 78% are poor and 47% live in extreme poverty. In October 2005, the provincial municipality of Cotabambas started to prepare a rural infrastructure plan (plan de infrastructure economica multisectorial), with the technical assistance provided by Provias Descentralizado and in coordination with the various central agencies competent for rural infrastructure. The planning process was organized in a participatory manner, with the consultation of key local stakeholders. It first aimed at identifying economic potential opportunities (mostly in the agriculture and mining sectors) and at mapping existing rural infrastructure. Then, constraints to the development of these economic opportunities were identified and prioritized. While the final plan showed that poor transport conditions were a major bottleneck to growth, insufficient access to water and sanitation services also ranked high in the list of priorities. On the other hand, it appeared that the situation of telecommunications and rural electrification was significantly better than in the rest of the country (the coverage of rural electricity services in Cotabambas is, with 87% of the population, one of highest in Peru). The preparation of this first rural infrastructure plan helped Provias and the other competent central agencies, test in real conditions, a multi-sector planning methodology and identify possible areas of improvement (eg. regarding the ranking of economic potential opportunities). Source: Provias Descentralizado. 77 Leveraging financing to implement these plans and "bundling premium": The financing of rural infrastructure interventions that have been prioritized will come from centrally- managed financing instruments (eg. FITEL), sub-national counterpart funds (municipal and regional) and, in certain cases, private funds (eg. contribution from mining enterprises or coffee cooperatives), according to the rules of each sector. In the case of rural roads, a specific amount will be earmarked to finance the priorities that will come from these plans (such earmarking will allow distinguishing these investments from those that will come from the traditional road planning process and it will give an additional incentive for municipalities to participate in the pilot). Indeed, these resources for rural transport improvement investments that come out of the rural infrastructure plans (enough to rehabilitate about 40 km of rural roads) will be additional to the usual methodology designed to allocate project resources among provinces (see III.B). Thus, they are expected to become a strong incentive ("bundling premium") so that municipalities accept to spend the additional institutional effort needed for effective multi-sector coordination. Similarly, implementation will be performed by each relevant sector agency (eg. Provias Descentralizado for rural roads, DEP for rural electrification, PRONASAR for water/sanitation), according to the procedures of each sector (most of which having been defined within the framework of a specific Bank project). Building institutional capacity at the provincial level to manage rural infrastructure interventions: Specific technical assistance and training will be provided to provincial municipalities to develop their capacity to plan and ensure coordination between sector- specific agencies but also to contribute to an efficient management of rural infrastructure interventions. The evolution of provincial road institutes (PRI) towards provincial infrastructure institutes (PII) will be experimented in a number of provinces where PRI have reached significant institutional capacity so that they could progressively take over new responsibilities without leaving behind their rural roads' ones (eg. the PRI of Arequipa which already started to be involved in other sectors). Monitoring and evaluating benefits as well as transaction costs involved: A specific monitoring and evaluation methodology will be developed to assess outputs (identified rural growth potentialities and associated coordinated investment program), outcomes (effective implementation of coordinated investments aligned with rural growth needs) and impacts (enhanced effect on rural growth). Regarding impact evaluation, the methodology will build on the work performed by Escobal and Torero which provided evidence of "bundling benefits" in rural Peru. The evaluation should also determine if there are some differences between simultaneous and sequential rural infrastructure interventions (a game theory model might be needed). Transaction costs associated to multi-sector institutional coordination will also be monitored so that the net benefit of the pilot can be assessed. Exploring the design of additional incentives for greater coordination and effectiveness of rural infrastructure interventions: Targeted technical assistance will be provided, as needed, to develop such additional incentives, once evidenced the net benefits that could arise from coordinated rural infrastructure interventions. Two possibilities have been identified in coordination with MEF: (1) adapting SNIP methodology to handle bundled 78 rural infrastructure interventions; and (2) revising distribution and/or eligibility criteria for certain intergovernmental transfers (eg. FONCOMUN or canon minero) in order to promote a greater efficiency of rural infrastructure investments and/or bundling. Such technical assistance will be customized based on other Bank-supported initiatives (eg. Decentralization TAL, IFC program on municipal finance) and on the new Peruvian administration's reform agenda (eg. possible creation of a National Planning Institute). 20. The specific institutional arrangements applicable to the rural infrastructure pilot at both the national and local levels are described in Annex 6. 21. A thorough evaluation of the pilot will be performed in 2008 and will help determine what follow up should be given. In particular, the opportunity for scaling up will be assessed. Such timing is expected to coincide with the reform agenda of the new Peruvian administration with regards to the setting up of a new institutional framework (eg. creation of an oficina nacional de planificación that could merge in particular the SNIP and the CND) that could take over the responsibility for scaling up the rural infrastructure pilot. 22. Total budget for the pilot is US$9,900,000, including: Preparation of rural infrastructure plans (US$400,000), technical assistance to municipalities to build capacity for rural infrastructure planning and management ($300,000), monitoring and evaluation ($200,000), technical assistance for greater incentives ($100,000), earmarked financing for rural roads prioritized in rural infrastructure plans ($8,900,000). 23. Component 4: Project Management (estimated cost: US$17.4 million of which US$1.0 million would be financed by the Bank loan). 24. This component will cover project administration costs, and monitoring and evaluation. The Project will be administered by Provias Descentralizado in close coordination with other ministries. 25. Monitoring, evaluation and audits (estimated cost: US$2.4 million of which US$1.0 million would be financed by the Bank loan) ­ This sub-component will finance monitoring activities, in particular related to the updating or expansion of the SIGAT (see Box) or related training activities such as the ones aiming at strengthening the monitoring capabilities of the PRIs. Eligible expenditures will also include the mid-term and impact evaluation surveys to be performed to evaluate project's impacts on rural welfare and compare them to the baseline survey performed during preparation. A comprehensive description of the project's monitoring and evaluation system is provided in Annex 3b. Finally, this sub-component will finance the external financial audits, as well as the technical, operational, environmental and social auditing activities to be performed during implementation. 79 Box A4-10: the SIGAT The Integrated System for Technical and Administrative Management (SIGAT in Spanish) integrates all the various computerized information systems used by Provias Descentralizado to manage logistics, staffing, accounting, finances, disbursement, budget, assets management control and contracts. The information is sorted by financing institution (World Bank, IDB, Italy-Peru Fund, France-Peru Fund, etc.). The SIGAT is also connected to the information systems used by other Peruvian institutions such as MEF (SIAF), SUNAT (PDT and COA) and with the Peruvian Banco de Credito (Tele crédito). The SIGAT was developed using the programming language "Visual Fox Pro" and the database manager "SQL". Several modules are now accessible to Provias' regional offices (unidades zonales) so that they can access information and report about operational activities and payments to contractors. Several modules related to the technical characterization of road rehabilitation and maintenance works are being developed. As of November 2006, a pilot was being launched with the PRI of Arequipa so that decentralized entities can not only consult information from the SIGAT, but also enter new information in its databases. This evolution is expected to facilitate the monitoring of PRI/PII activities by Provias Descentralizado. Source: Provias Descentralizado. 26. Administrative costs (estimated cost: US$15.0 million entirely financed by the GoP) ­ This sub-component will include administrative costs incurred by Provias Descentralizado to administer the proposed project. These administrative costs will be exclusively financed by national counterpart funds (ie. from the MTC budget and not from the proceeds of the loan). Operating costs incurred by PRIs and municipalities would not be eligible. 80 Annex 5: Project Costs PERU: Decentralized Rural Transport A simplified table summing up project costs is presented below: Local Foreign Total Project Cost By Component and/or Activity US$ US$ US$ million million million Component 1: Improvement of Rural Transport 79.7 19.9 99.6 Infrastructure Component 2: Institutional Development 12.2 2.5 14.7 Component 3: Territorial Development 10.1 1.0 11.1 Component 3.1: Local Development Window 1.3 0.0 1.3 Component 3.2: Rural Infrastructure Pilot 8.8 1.0 9.8 Component 4: Project Management 13.4 4.0 17.4 Monitoring, evaluation and audits 1.4 1.0 2.4 Administrative costs 12.0 3.0 15.0 Total Baseline Cost 115.4 27.4 142.8 Contingencies 5.0 2.2 7.2 Total Project Costs1 120.4 29.6 150.0 Front-end Fee 0.0 0.0 0.0 Total Financing Required 120.4 29.6 150.0 1Identifiable taxes and duties are US$25.6 million, and the total project cost, net of taxes, is US$124.4 million. Therefore, the share of project cost net of taxes is 82.9%. 81 A more detailed estimation of project costs was also elaborated by Provias Descentralizado: 82 Annex 6: Implementation Arrangements PERU: Decentralized Rural Transport 1. The project will be implemented in a decentralized manner at the provincial level, with involvement of the central level to monitor implementation progress, facilitate coordination and provide the necessary technical assistance in order to build sufficient institutional capacity in the Provincial Road Institutes (PRIs). Over the project's lifetime, PRIs should grow in institutional capacity and effective ability to manage rural road assets in an efficient manner, while the central agency Provias Descentralizado should refocus its core activities on monitoring, regulation, coordination, supervision and policy design. Implementation arrangements illustrate the overall ultimate objective of the project to make a substantial contribution to the decentralization process in the rural transport sector, with positive spillovers in other sectors (rural infrastructure in particular). A comprehensive institutional strengthening program has been design under component 3. 2. At the national level, the overall responsibility for project implementation and coordination will rest with Provias Descentralizado. Provias Descentralizado was created in August 2006 by Supreme Decree No. 029-2006-MTC. Despite its recent creation at the time of project preparation, this unit is not completely new since it comes from the merging of two existing entities: Provias Rural and Provias Departamental. This evolution is expected to be a positive step towards greater recognition of the decentralization process in the transport sector. In addition, Provias Rural is the agency that implemented the First and Second Rural Roads project while Provias Departamental is currently implementing the Regional Transport Decentralization project. These two entities are therefore familiar with Bank and IDB procedures so that Provias Descentralizado is likely to become quickly operational. Nevertheless, the merging process created some uncertainties regarding what will be the final organization and it was therefore agreed that the final organizational structure will have to be finalized before effectiveness and that it would be annexed to the operational manual. Figure A6-1: former organization of Provias Rural 83 3. The decentralization process implies that Provias Descentralizado evolves from an executing agency to a regulatory/promoting/supervising body. This evolution is already taking place with the creation of PRIs in provincial municipalities and the transfer of fiduciary responsibilities to them. Consequently, the activities performed by Provias Descentralizado have evolved from directly managing road rehabilitation and maintenance activities to providing targeted technical assistance to municipalities to help them design and implement their rural transport policies. 4. This evolution has important consequences for Provias Descentralizado: it requires in certain cases downsizing the institution, while strengthening other competences (such as experts in decentralization and territorial planning). In order to formalize the process, a legal covenant has been introduced in the legal agreement so that the management of Provias Descentralizado prepares, by the end of the first year of operation, an institutional plan describing the "Vision" of Provias Descentralizado for 2010 and a timing of actions to ensure the proper implementation of this plan. Provias Descentralizado will have to work with other departments in MTC (see Figure A6-2). Figure A6-2: Relations between Provias Descentralizado and other MTC departments 5. Specific institutional arrangements have been designed for the management of safeguards-related issues (social and environmental). Those are described in Annex 10. 84 6. At the provincial level, the overall responsibility for project implementation will rest with the Provincial Road Institutes (PRIs), in accordance with the new decentralized environment. The PRIs are embedded in the provincial municipalities (see Figure) and would therefore benefit from the support of other municipal departments (planning, finances, general services). They include a limited number of staff (generally a manager ­ gerente ­ , a technical assistant and a support staff). Figure A6-3: Organization of PRIs inside provincial municipalities ­ The Chachapoyas province 7. In order to ensure that PRIs have reached sufficient capacity at the time of transfer of fiduciary responsibilities, specific arrangements have been established. In particular, a preliminary pilot group of PRIs will be selected based on the adequacy of their financial management capacity, their experience in the effective execution of similar projects and their institutional capacity. The selection criteria should ensure that these pilot PRIs have sufficient capacity to implement the proposed project. In the other provinces, a similar assessment of the capacity of PRIs will be performed. This assessment should help determine if these provinces can join the pilot or if they should first meet a number of conditions. In such case, they would receive customized technical assistance under component 2 of the proposed project in order to meet these requirements (see Annex 7). 85 8. PRIs are governed by Provincial Road Board which includes all the mayors (district and provincial) in the province. PRIs operating expenditures are covered by contributions from municipalities, based on distribution criteria decided by the Provincial Infrastructure Board, based generally on the level of intervention in the respective territories. 9. In certain cases where the stock of road assets is too small to justify the creation of a PRI and when synergies and/or economies of scale could be generated by operating in territories greater than the province, "multi-provincial road institutes" (MPRIs) will be envisaged. 10. Based on the experience of the Second Rural Road project, it is estimated that a minimum of seven months are needed before a PRI can start operations (one month to have the statutes approved by the municipalities and six months to designate staff, allocate budget and adopt the key operational, financing and accounting instruments) and more than a year before a PRI becomes fully operational. As of November 2006, 36 PRIs have reached full institutional capacity of which 26 are the most advanced, 72 have reached basic institutional capacity and 13 are in creation (see Table A6-1). Table A6-1: situation of PRIs as of November 2006 PRIs in creation PRIs with basic capacity PRIs with full capacity Most advanced PRIs established established Luya (Amazonas), Carhuaz, 14 provinces in Ancash, Huari (Ancash), Grau Yuangay, Silhuas (Ancash), Pallasca (Ancash), Antabamba 3 provinces in Apurimac, (Apurimac), Vilcashuaman Abancay, Chincheros (Apurimac), Chubilvicas, La 8 provinces in Ayacucho, (Ayacucho), Cajamarca (Apurimac), Lucanas, Convencion, Quispicanchis, 8 provinces in Cajamarca, (Cajamarca), Cusco, Huamanga (Ayacucho), Urubamba (Cusco), Puerto Inca 5 provinces in Cusco, Paucartambo (Cusco), Jaen, San Miguel, (Huanuco), Sandia (Puno), 4 provinces in Huancavelica, Castrovirreyna (Huancavelica), Cajabamba (Cajamarca), M. Caceres (San Martin), 7 provinces in Huanuco, Huanuco (Huanuco), Oxapampa Paruro, Canas (Cusco), Portillo, Atalaya (Ucayali) 6 provinces in Junin, (Pasco), Mariscal Nieto (other Tayacaja, Huancavelica 2 provinces in Madre de Dios, regions) (Huancavelica), Huamalies, 1 province in Pasco Leoncio Prado (Huanuco), 8 provinces in Puno, Chanchamayo, Huancayo 6 provinces in San Martin, (Junin), Tambopata (Madre de Dios), D.A. Carrion (Pasco), Chucuito (Puno), San Martin (San Martin), Arequipa, Chachapoyas, Huancabamba, Sanches Carrion, Yauyos, Mariscal Nieto (other regions) Source: Provias Descentralizado. 11. For the monitoring of expenditures, municipalities, and hence PRIs, can count on a budgetary monitoring instrument implemented by MEF (SIAF). The SIAF is currently active in 182 out of the 194 Peruvian provinces6 and it allows the tracking of all public expenditures processed at the sub-national level. For transport-specific monitoring, the project will also progressively be able to count on the decentralization of the SIGAT system (see Annex 4) at the provincial level. Detailed financial management and procurement arrangements for the purpose of the proposed project are described in, respectively, Annex 7 and 8. 6As of August 2006, the only twelve provinces without an activated SIAF were Bongara, A. Raymondi, Ocros, Castrovirreyna, Churcampa, Huacaybamba, Marañon and Lauricocha (Source: Provias Rural). 86 12. To provide technical assistance to the PRIs and ensure second-level monitoring, Provias Descentralizado will depend on its regional bureaus (unidades zonales). In the regions where the program has been active, the 11 regional bureaus have evolved from traditional engineering and technical competences towards becoming centers of expertise in rural transport policies and institutional issues related to the decentralization process. This evolution is more advanced in the regions where PRIs are more developed. The institutional plan describing the "Vision" of Provias Descentralizado in 2011 will have to pursue this evolution and, ultimately, envisage the closing of these regional bureaus in the regions where PRIs have become completely self- sustainable. Indeed, the role of the unidades zonales is expected to differ between the 12 departamentos where the program has been active until now and the departamentos where the rural transport policies will be applied for the first time. More resources should be transferred to the latest. 13. Relations with the regional level. The division of responsibilities between the regional and the municipal level with regards to the management of transport policies is relatively well defined: municipalities are in charge of managing the tertiary road network (rural roads) while regional governments are in charge of managing the secondary road network (regional roads). Nevertheless, tight coordination is needed between the two levels, particularly with regards to road planning in order to ensure the continuity of the rehabilitated networks. The proposed project includes a modification of the planning methodology for rural roads so that it includes the outputs from the 21 Participatory Regional Road Plans (PRRP) that have been prepared since 2005 in the context of the Regional Transport Decentralization project. 7 Further coordination mechanisms will be explored during implementation with ­ if needed ­ financing from Component 3. At the central level, the merging of Provias Rural and Provias Departamental is a very positive step so that the same policies are promoted for decentralized transport and coordination is promoted between the various levels. 14. Specific arrangements associated to the rural infrastructure pilot. At the local level: The provincial level has been acknowledged by all sectors as the most appropriate level to plan rural infrastructure investments. Provincial municipalities will therefore play a key role to implement the pilot. In each provincial municipality, a "technical secretariat" will be designated to prepare the rural infrastructure plan with the help of a consultant contracted and trained by Provias Descentralizado. A broader forum (comité de coordinación) will allow involving key local stakeholders (eg. the chambers of commerce) in the planning process. Agreements (convenios) will be signed with the district municipalities as well as with the various sector-specific agencies. At the national level: A specific agreement (declaración de intención) has been signed between all the various sector-specific agencies and a committee gathering all the Executive Directors of these agencies has been constituted. A higher-level institutional arrangement (Coordination Group at the level of Vice-Ministros) will be installed as well as coordination arrangements with other relevant actors (eg. MEF, PCM, CND). While the exact status of this Coordination Group (eg. Commission chaired by PCM) is still to be decided due to the government's transition, it was agreed that it would meet at important moments during the implementation of the pilot (in particular to review the 7Proyecto de Caminos Departamentales (PCD) in Spanish. 87 outputs from the first rural infrastructure plans and to review the evaluation to be performed in 2009 and decide upon possible scaling up). These meetings of the Coordination group have been secured through covenants in the legal agreements (see III.F). On monitoring and evaluation: a Task Force has been constituted by Provias Descentralizado with the participation of selected economists (eg. Javier Escobal) and experts in game theory to design the evaluation methodology. 15. Allocation of budget resources between provinces. A methodology was developed to pre-allocate resources across the various provinces. Underlying objectives for the design of this methodology are: (1) maintaining a "poverty focus" so that the additional resources brought by the project would benefit the poorest provinces (key criteria used to allocate resources include: population, length of road assets and poverty, the latest being given a weight of twice as much as the other two); (2) ensuring efficiency by avoiding that resources are not spread too thin (rehabilitation works will be focused in provinces where no more than 50 kilometers of rural roads have been rehabilitated under the First and Second Rural Roads projects); and (3) providing incentives to leverage additional funding for efficient rural transport policies. Regarding this last objective, financing agreements will be signed between Provias Descentralizado and beneficiary municipalities before any rehabilitation works be launched. In these agreements, municipalities will detail how many resources have been budgeted for rural transport activities. Provias Descentralizado will verify that these activities will be performed in order to ensure efficiency and effectiveness (prioritization through participatory planning, low- cost rehabilitation technologies, maintenance with micro-enterprises, outsourcing to private operators, etc.). Given the current level of decentralized public expenditures, it is expected that the financial capacity of local governments could reach about US$15 million per year (assuming that 2 percent of total budget resources are dedicated to rural transport related activities). A specific indicator has been introduced in the results framework to measure the performance of Provias Descentralizado in leveraging funding efficiently spent by municipalities in rural transport (see Annex 3a). 16. Schedule of project implementation. The speed of implementation will differ significantly between provinces with established institutional capacity to handle rural transport policies (ie. those with an experienced PRI) and provinces where the program has not yet been active. As of November 2006, building on the experienced provinces with active PRI and on participatory road plans prepared or updated during preparation, a pipeline of works is ready for implementation. These new participatory road plans are being prepared in priority in the poorest provinces8 so that positive impact on transport conditions is first achieved where they are the mostly needed. The implementation schedule and disbursement profile reflect the potential of the proposed project to quickly implement activities and achieve results in the ground. 835 new participatory provincial road plans are expected to be completed in the first year of implementation in provinces chosen among the three poorest quintiles. 88 Annex 7: Financial Management and Disbursement Arrangements PERU: Decentralized Rural Transport 1. A Financial Management Assessment (FMA) of the Ministry of Transportation and Communication (MTC), Project Implementation Unit (Provias Descentralizado) was performed in May 2006 by the Financial Management Team for Peru in coordination with the staff of the Implementing Entity. This assessment was conducted in accordance with OP/BP 10.02 and the Guidelines for Assessment of Financial Management Arrangements in World Bank Projects. As a co-financed operation, the assessment is being conducted jointly with the Financial Specialists of the Inter-American Bank (IDB), in order to synchronize the needs of both donors as well as the country authorities. Executive Summary and Conclusions 2. Overall, Peru's fiduciary environment is considered weak by the financial management team. The project focuses on a decentralized operation with a significant participation at the provincial level where institutional capacity remains weak. At the central level, the Project Implementation Unit created within the Ministry of Transportation and Communication (Provias Descentralizado) has prior experience with Bank Financed Operations. In this scenario, so far the inherent risk and control risks profile is rated as modest, but after the mitigating measures would be successfully implemented the residual rating risk could be considered as Low. The major issues relate to the risk of poor implementation capacity of participating Provincial Rural Institutes (PRIs) that are considered weak, expenditure tracking systems are inadequate, and procurement processes presents delays followed by cost increases; project monitoring and supervision will be demanding that Provias Descentralizado at the central level, will provide support where currently there is not enough personal assigned or hired for project implementation; personal lacks of experience in prior Bank Financed Operations; risk of untimely counterpart contributions; and possibility of political influence in the procurement processes. 3. On the basis of proposed project design the financial management team considers the project requires additional financial management arrangements, therefore has identified a minimum set of mitigations actions needed to ensure proper financial management arrangements are in place for project implementation, which includes: 1) Implementation of detailed minimum arrangements that PRIs should fulfill before having access to funds from the Designated Account (they include: Provincial and District Participatory Road Plan updated and approved by Provias Descentralizado); Annual Provincial Road Program, and Procurement Plan ready for Project execution; appointment of an organized field technical team, with defined responsibilities; and definition of the accounting system and reports to be used for project execution; 2) Capacity building at central and provincial level in Bank disbursement, procurement and financial management procedures in managing Bank-financed investment project; 3) Financial team at the central level requires additional technical assistance to carry out permanent supervision and monitoring project implementation at the provincial level; 4) Creation of sound internal controls that would limit political influence in procurement processes; 5) Development of a robust Operational Manual which encompasses proper financial management arrangements (constitutes 89 a condition of effectiveness); and 6) Project activities include strengthening of PRIs institutional capacity especially in road planning and management. 4. The PRI's staff will co-execute the project at the provincial level but monitored by Provias Descentralizado. The PRIs will be responsible for executing road rehabilitation sub projects, as well as the related road maintenance through the existing and/or new created micro- enterprises. In addition, in some cases the PRIs will be in charge of the preparation of Provincial and District Participatory Road Plan, hiring and execution of economic feasibility studies, designs of engineering, environmental viability, works, control and maintenance. 5. The PRIs will assist in the day-to-day supervision of road maintenance and improvement works, based on the compliance with Bank fiduciary procedures. Compliance of these requirements at the central and provincial level is essential to ensure project success. 6. Project implementation will start after the selection of a preliminary pilot group of PRIs by Provias Descentralizado in accordance with the Bank. The pilot PRIs will be selected by the adequacy of their financial management capacity, experience in the efficient execution of similar projects, and their institutional capacity. Country Issues 7. No Country Financial Accountability Assessment (CFAA) for Peru was carried out recently. Nevertheless, a general reviewed of practices and systems of the Central Government Administration related to Bank portfolio execution concludes that fiduciary risk in Peru is currently substantial. Of particular importance in arriving at this conclusion are the following weaknesses that undermine efficiency, transparency and accountability: An outdated budget classification budget needs to be improved to provide more realism and promote government's ability to plan, control and direct expenditures. Timely and comprehensive information needs to be in place to improve decision-making, control, management and reporting purposes. Budget transparency and accountability needs to be improved. A weak internal control environment contributes to operational inefficiency and a lack of accountability and stewardship in the use of public funds; Arrangements for external transparency and scrutiny of public finances by the legislature and civil society are in place but needs to be strengthened. 8. The Public Sector Financial Management Project will include the design and implementation to improve the financial management IT system. Both the MEF and the Controller General Office are required to introduce more transparency mechanisms in the design of a new system that will positively affect project implementation throughout the country portfolio. 90 Implementing Entity, Organization Structure and Staffing 9. Provias Descentralizado is the implementing unit of the proposed project under the new Executive regulations. Provias Descentralizado, as an autonomous administrative and economic financial unit of the MTC, will be the responsible for implementing all MTC including both Bank finance projects, Regional Transport Decentralization project, and Decentralized Rural Transport project. Its staff is responsible for budgeting, accounting and treasury processes and procedures and will be assigned full time to provide support to project execution. Provias Descentralizado will provide separate fiduciary support to both projects under implementation and to this project under preparation, including separate chart of accounts, separate financial statements, and external audit review. Provias Descentralizado will implement the components related to institutional strengthening and project management at the central and provincial level. 10. Since, Provias Descentralizado staff has prior experience with Bank Financed Operations the inherent risk is modest and control risks profile has been rated as low. The major issues relate to the risk of poor implementation capacity of Participating Provincial Road Institutes - PRIs; project monitoring and supervision at PRIs will be performed by the central level; minimum risk of untimely counterpart contributions. 11. Provias Descentralizado will implement the components related to institutional strengthening and project management at the central and provincial level. Significant experience was gained with the first and second rural roads programs, a number of financial management and fiduciary instruments have been successfully developed that allowed both to strengthen the decentralization process and to improve the quality of public expenditures. 12. Provias Descentralizado is staffed with experienced and trained professionals including three public accountants. The financial management unit has 22 members, 8 for the accounting, treasury and ex-ante control functions, and accountants-reviewers for ex-post control and follow- up with issues related to the PRIs. The scope and coverage of the overall internal control plan will be expanded to cover project activities. 13. On the basis of proposed project design the financial management team considers the project requires additional financial management arrangements, therefore a minimum set of mitigations actions needed to ensure proper financial management arrangements have been identified and should be in place for project implementation. 14. The PRIs' technical team will execute the project at the provincial level. The PRI's staff will co-execute the project at the provincial level but will be monitored by Provias Descentralizado staff. The PRIs will be responsible for executing road rehabilitation sub- projects, as well as the related road maintenance through the creation of micro-enterprises. In addition, the PRIs will be in charge of the Provincial and District Participatory Road Plan, hiring and execution of economic feasibility studies, designs of engineering, environmental viability, works, control and maintenance. 15. The PRIs will assist in the day-to-day supervision of road maintenance and improvement works, and will focus also on project compliance with Bank fiduciary aspects, including a 91 technical, procurement and financial management specialist. At this time, appointment of the PRIs personal and determination of duties and responsibilities for the project execution are still under definition. Compliance of these requirements at the central and provincial level is essential to ensure project success. 16. Implementation will be characterized by the selection of a preliminary pilot group of PRIs by Provias Descentralizado in accordance with the Bank. The pilot PRIs will be selected by the adequacy of their financial management capacity, experience in the efficient execution of similar projects, and their institutional capacity. The number of PRIs may increase gradually during the second year based on the completion of a number of conditionalities that would demonstrate the appropriate level of financial management and institutional capacity. 17. The conditionalities for the selection of PRIs are the following: 1. An adequate financial management information system, 2. An experience financial management, procurement (one or more professional may be required to comply with this requirement), are available full-time to manage the project arrangements, 3. An adequate internal control environment 18. In summary, the eligibility methodology will be based on the financial management assessment procedures follow by the Bank, using a simplified financial management questionnaire to be completed within one month after effectiveness. The assessment will then translate in a qualification table, with possible results from A to D, accordingly to the appropriateness of the fiduciary arrangements, as follows: Result "A" represents the province has - Very Good Fiduciary Arrangements, no improvements are required; Result "B" represents the province has - Good Fiduciary Arrangements and minimum improvements need to be implemented; Result "C" represents the province does not have ­ Adequate Fiduciary Arrangements and several improvements need to be implemented; Result "D" represents the province does not have ­ Reliable Fiduciary Arrangements and important improvements need to be implemented; 19. Provinces qualified as A and B could participate in the pilot immediately after the assessment is completed. In the case, of a province qualified as B, it will require starting the implementation of the recommended improvements, in parallel to project implementation. 20. Provinces qualified as C and D will require implementing the recommended improvements, before to be eligible to participate in the project. A new fiduciary assessment will be required after the improvements will be completed. 21. A detailed eligibility methodology for the selection of provinces to participate in the project will be described in the operational manual. The Banks' financial management and 92 procurement specialist will work jointly with Provias Descentralizado to assess PRIs capacity and successful completion of these conditionalities, and provide the no objection to be incorporated as part of the project. Table A7-1: Fiduciary Eligibility Provincial Road Fiduciary Arrangement Qualification Institutional Capacity Building Institute Criteria (A, B, C or D) Improvements Required Name Adequate FM information system Experience FM, procurement and disbursement specialist Adequate internal control environment Final Result Disbursement Methods and Documentation 22. The following Disbursement Methods may be used under the Loan: (i) advance; and (ii) reimbursement. 23. The advance method for disbursement is expected to be used for all disbursements under the loan, and the reimbursement method will be available to reimburse Provias Descentralizado for any pre-financed eligible expenditures. Under the Advance method, loan proceeds will be disbursed and deposited into a Designated Account in US$ to be opened and maintained in the Banco de la Nación, which would be used only to deposit advances for the project. Advances will be made initially on the basis of a six month forecast of project expenditures for two reporting period (i.e. two quarters), and the ceiling for the advance account will be adjusted accordingly on the basis of the forecast reported in the quarterly Interim un-audited financial reports (IFRs). Similarly, reporting on the use of advances will be supported by IFRs, including a reconciliation of the Designated Account and a customized summary detail of disbursement by categories for the reporting period. Provias Descentralizado should submit the first withdrawal application to the World Bank requesting funds as needed for initial implementation to be deposited to the Designated Account. Partial advances will be made up to the ceiling determine at beginning of the reporting period in accordance with the forecast submitted to the Bank at such time. 24. In the case of the reimbursement method, supporting documentation will also be on the basis of IFRs. All withdrawal applications will be supported by appropriate supporting documentation (withdrawal form and adequate IFR). All supporting documentation of expenditures and records will be retained by Provias Descentralizado and made available to Bank staff during supervision missions and to external auditors. The supporting documentation should be maintained for at least one year after the Bank has received the final audit for the project. The minimum value of application for reimbursements would be USD $ 250,000. 25. Retroactive financing in the aggregate amount not to exceed USD 2,500,000 equivalent for Categories 1, 2, and 3 may be made for eligible expenditures paid within 12 months of signing of the loan but not before June 1, 2006. 93 Flow of Funds 26. Operational Procedures to Open and Manage Funds from Multilateral Institutions in Peru - According to dispositions of MEF and the National Bank of Peru, funds from multilateral institutions will be managed U.S. Dollars, separately from local counterpart funds. For this purpose separate bank accounts will be created to differentiate financing resources. 27. Provias Descentralizado and PRIs are responsible for opening the necessary operative bank accounts at the National Bank of Peru, (including the Designated Accounts for IBRD financing), and local counterpart sources allocated for project implementation under project's name in accordance to local requirements9 and in local currency named "Soles". At the Provincial Level 28. Loan proceeds are characterized by two different modalities. The proceeds would be based on reimbursements of eligible expenditures already paid by the participating province, at the initial stages of project implementation. No advances to PRIs are required for this project. 29. A designated project technical supervisor or "fiscalizador", in coordination with the project financial management specialist at the MTC/PIU, will certify the accuracy of the information included in the report before sending it to Provias Descentralizado. All supporting documentation will remain in the PRIs and a scan copy will be attached and sent electronically to Provias Descentralizado for Bank's supervision and auditing purposes at any time. Since the institutional capacity of these institutions remains weak10, the decentralized nature of the project requires the PRIs to comply with minimum financial management arrangements, in order to ensure funds will be used for the intended purposes in an adequate financial management environment. 30. These requirements are the following: An adequate financial management information system, An experienced financial management, procurement and disbursement specialist (one or more professional may be required to comply with this requirement), are available full time to manage the project arrangements, An adequate internal control environment is in place A Provincial and District Participatory Road Plan updated and approved by Provias Descentralizado. An IOP and Procurement Plan for Project execution. 31. Provias Descentralizado has access to Bank's Client Connection System which is a secure website that would offer the project implementing agencies with useful information in a quicker access about their portfolio, disbursements status, withdrawal applications formats and guidelines. 9Operational Procedures to Open and Manage Funds from Multilateral Institutions in Peru. 10 Institutional Analyses Sturdy of Provincial Governments. 94 Figure A7-1: Flow of funds diagram and disbursement process IDB and World Bank Figure A7-2: Procedures for justification of expenditures 95 Table A7-2: Loan Proceeds: Category Amount of the Loan Percentage of Expenditures to be financed Allocated (expressed in US$M) (1) Goods, works and consultants' services for 35.7 85% Component 1 of the Project (2) Goods and consultants' services for 6.2 85% Component 2 of the Project (3) Goods, works and consultants' services for 4.0 85% Component 3 of the Project (4) Goods and consultants' services for 1.0 85% Component 4 of the Project (5) Unallocated 3.1 85% (6) Front-end Fee 0.0 Amount payable pursuant to Section 2.04 of this Agreement in accordance with Section 2.07 (b) of the General Conditions TOTAL AMOUNT 50 Accounting Policies and Procedures 32. The project will be implemented in accordance with the 1) National Control System, which is regulated by the Supreme Audit Institution and 2) the National Accounting System, regulated by the Accountant General. The chart of accounts would be based on the Plan Contable Gubernamental del Sistema Nacional de Contabilidad and adequately adapted to reflect the new project design, i.e. components, disbursement categories and financing sources; accounts will be prepared on a cash basis. 33. Planning and Budgeting will be in line with the general government procedures regulated by the Annual Budget Law for 2007-Ley the Presupuesto 2007 and the Budget Management Law-Ley de Gestion Presupuestaria del Estado operated under the Sistema Integrado de Administracion Financiera (SIAF). The operating and capital budget will be prepared and submitted to Congress on an annual basis on or before October 31, each year. The draft budget for the first year of the project will be presented to the Congress in November this year and will be based on planned expenditures by component, disbursement category and financing source. 34. Provias Descentralizado will operate, maintain all the central level accounts for the project and have the PRIs to maintain and operate all the regional sub-accounts. Payment request will be generated by the PRIs or Provias Descentralizado. Prior to the request for payment the internal control mechanism will evaluate the extent to which the work performed is in accordance with the legal and inter-institutional agreements and submit a request for payment along with the invoice and required supporting documentation. Provias Descentralizado will then complete the cycle (invoice approval, payment authorization, check signing, check issuance and wire transfers, monthly operative bank and designated account reconciliations. 35. The Financial Management Action Plan includes the finalization of the project's Operations Manual, which will be prepared by Provias Descentralizado and reviewed internally, prior to submission to the Bank for review and non-objection. Due care will be exercised to ensure that the project accounting system will have the capacity to record assets, liabilities, and 96 financial transactions of the project and produce financial statements, which are useful to project management, external audits, and satisfy the IBRD's fiduciary standards. Internal Control Environment 36. Current project transactions undertaken by Provias Descentralizado will be subject to the Internal Audit Department of the MTC and Provias Descentralizado own internal audit staff. The function is independent and reports to the country's supreme audit institution (Contraloría General de la Republica) the findings of its ex-post control. 37. The internal audit department entity should prepare semi-annual reports evaluating the corrective actions taken in response to Internal Control findings. Archiving would need some improvements and better organization in the new special location lastly attributed to it, before project effectiveness. Special attention should be given to the internal control function in the PRIs, during project preparation. Information System 38. Integrated Financial Management System. Planning and Budgeting will be in line with general government procedures regulated by the Annual Budget Law operated under the Sistema Integrado de Adminsitracion Financiera (SIAF). The budgetary control will consist of 1) timely preparation and approval of annual programs and budgets, at the two levels, i.e Provias Descentralizado, and Decentralized PRIs; and 2) verification that budget information is entered and it is available in the accounting system to allow timely recording of commitments, payments and accruals. SIGAT. 39. The SIGAT is a suitable and efficient financial management integrated information system parallel to the SIAF, used by Provias Descentralizado. This system covers the financial and administrative areas not covered by the SIAF, such as: personnel, travel logistics, financial accounting, financial reports required by the Bank, inventories, municipal co-financing, legal contract management and procurement. The system is compatible with and enables an automatic transfer of information to the SIAF. Operational Manual 40. Project financial procedures regarding financial management, disbursement and procurement arrangements will be documented within an operational manual customized for project purposes. Provias Descentralizado has been working on a draft of the operational manual, based on the existing version for the Second Rural Roads Project. The financial management and procurement team has reviewed previous versions and submitted suggestions to be incorporated in the manual. A draft of this manual will be a condition of effectiveness and should include: accounting policies and procedures, chart of accounts, format of project financial statements, Intermediary Financial Reports (IFRs) format, internal controls, administrative procedures for processing payments to beneficiaries, accounting system description, 97 disbursement mechanisms, flow of funds details and audit arrangements. IFRs formats were agreed at negotiations. Financial Reporting and Monitoring 41. Provias Descentralizado is responsible for preparing all the financial statements and reports required for ensuring that all the necessary information are available for decisions making, audits and supervision missions. PRIs will be responsible for submitting all the necessary information required by Provias Descentralizado including a statement of sources and uses of funds, bank account reconciliations, reports of payments by contracts, etc. 42. Provias Descentralizado will be also responsible of the consolidation process of the project financial statements and furnish to the Bank not later than 45 days after the end of each quarter interim un-audited financial reports for the project covering the quarter. The interim un- audited financial reports required by the Bank would include: a) Financial Reports (Statement of Sources and Uses of Funds; Statement of Cumulative Investments); b) Physical Progress Reports and c) Procurement Reports. The financial statements would include all sources and uses of funds of the whole project and would be available by categories and components. They should be prepared in the local currency in accordance with the accounting principles used in Peru, which are compatible with the IASC's accounting standards. The financial statements should include accounting policy adopted and explanatory notes to the financial statements and any other useful additional information. Most of the accounting, disbursing and recording arrangements will be set out in the participating agreements (or subsidiary agreement) between MTC and each PRI. Financial Management Performance and Compliance 43. Three main indicators were identified to monitor and evaluate project performance: 1. Financial Planning versus Disbursements Quality, 2. Opportunity of Intermediary Financial Reports, and 3. Physical and Financial Monitoring. Indicator 1 ­ Financial Planning vs Disbursements Quality 44. Project manages to disburse available resources accordingly to the procurement plan and IFRs as follows: A. High Satisfactory: Project execution represents between 91 to 100% of all resources planned to be disbursed accordingly to the IFRs. B. Satisfactory: Project execution represents between 86 to 90% of all resources planned to be disbursed accordingly to the IFRs. C. Moderate Satisfactory: Project execution represents between 81 to 85% of all resources planned to be disbursed accordingly to the IFRs. D. Unsatisfactory: Project execution represents less 80% of all resources planned to be disbursed accordingly to the IFRs. 98 Indicator 2 ­ Opportunity of Intermediary Financial Reports Presentation 45. Provias Descentralizado manages to report IFRs and disbursement requests accordingly to the following standards: A. High Satisfactory: a. IFRs - Before 30 calendar days after the quarter is closed b. 1903B ­ Before 20 calendar days prior to the disbursement transfer request B. Satisfactory: a. IFRs - Before 30 calendar days after the quarter is closed b. 1903B ­ Before 15 calendar days prior to the disbursement transfer request C. Moderate Satisfactory: a. IFRs - Before 45 calendar days after the quarter is closed b. 1903B ­ Before 15 calendar days prior to the disbursement transfer request D. Unsatisfactory: a. IFRs ­ More than 45 calendar days after the quarter is closed b. 1903B ­ Before 5 calendar days prior to the disbursement transfer request Indicator 3 ­ Physical and Financial Monitoring 46. Project physical and financial execution should be compatible with the procurement plan and the IFRs financial planning, accordingly with the following standards: A. High Satisfactory: A difference lower than 5% in each contract is achieved between what was planned in the procurement plan and the IFRs financial planning. B. Satisfactory: A difference lower than 10% in each contract is achieved between what was planned in the procurement plan and the IFRs financial planning. C. Moderate Satisfactory: A difference lower than 15% in each contract is achieved between what was planned in the procurement plan and the IFRs financial planning. D. Unsatisfactory: A difference lower than 20% in each contract is achieved between what was planned in the procurement plan and the IFRs financial planning. Indicators External Audit 47. In accordance with the arrangements agreed with the Controller General of the Republic would be responsible for hiring independent private financial auditors acceptable to the Bank under a multi-year contract. Provias Descentralizado will prepare terms of reference for hiring an audit firm acceptable to the Bank in Peru and submit it for the World Bank's approval. 48. Annual project financial statements will be audited in accordance with International Standards on Auditing (ISAs) issued by the International Federation of Accountants (IFAC). The 99 audited financial statements should reflect all project activities, financing and expenditures, including the part financed by the Bank and local counterpart funds. Acceptable audit reports should be submitted to the Bank within the six months of the end of the Borrower's fiscal year. Audit costs would be covered by loan proceeds. 49. Auditors would submit an opinion on: a) project financial statements; b) an additional opinion on the Statement of expenditures; and c) a Management Letter. The Management Letter should include weaknesses in the internal controls systems, inappropriate accounting policies or practices; non-compliance with covenants and any other matter consider significant for the auditor. 50. Auditors are expected To have a good understanding of project execution, close follow-up on internal control, accounting and budgeting processes and procedures. It is expected that this understanding would not affect their independence and objectivity. External auditors would have the opportunity to assist or guide the project in correcting any deviations from the procedures to avoid any possible problems during the fiscal year. There is no need to wait until the end of the fiscal year to perform the audit review; therefore auditors should carry out two visits before the end of the closing year. Financial Management Action Plan 51. The financial management team has identified a set of actions needed to ensure proper financial management arrangements. Most of them were in place or very advanced at the time of negotiations in order to mitigate the control risks. # Action Product/Indicator Responsible Status 1 Submission of Project Chart of Draft reviewed by the Bank PROVIAS Completed Accounts, IFRs format and provincial funds advance request 2 Submission of final Project Final Operational Manual/ PROVIAS Effectiveness condition ­ FM Operational Manual Reviewed by the Bank and disbursement arrangements have been drafted before negotiations 3 Definition of institutional and Criteria agreed PROVIAS December 15, 2006 FM conditionalities criteria 4 Preparation of Terms of Audit Terms be part of the PROVIAS December 15, 2006 Reference for external audits Operations Manual and (financial and technical) reviewed by the Bank 5 Selection of Participating Pilot Participating Provinces PROVIAS December 30, 2006 Provinces selected 6 Appointment or assignment of New staff starts working, two PROVIAS January 31, 2007 additional staff for the accountants and one PROVIAS economist 7 Assigned PRI's financial A financial management PROVIAS January 31, 2007 management staff specialist or accountant starts working 8 Appointment of External Signed contract for provision PROVIAS March 31, 2007 Auditors of external financial audit. 100 se operational onaliti tf approvedlau Conditi No Dra man g al Ratin uress Residu Risk Modest Modest Mea g Ratin Original Modest Risk Substantial Mitigation reu sh ve as ev ca the ha ithw ngi Riskd ens ude quiredre at an resu to Institutes and project Letters unicationm budget incl Operati respective (PROVIAS), has a the the ntse Meas e Road the ent Com oT . in Unit that ngem nanc budget cial itmm dna nual.am ude place arra 101 Fi in Assessment tigation of Com incl project Instititutional Mi of Provin the of ensure nte ryt participatel ntem rational entationm put Risk sedo will levels wil ge Transport for ple h Minis naa of which opeeht Im bot in approval nagemam Prop ehT that Participating Md xes Project otro (IOPs), has a) adequate availability. b) (PRIs) signe Ministry (MTC), certification anne c) pri Plans PRI program Management ru Pe adna is of the of the dingn and oject on. in specific internal ent dgetinguB at lack lack by analysis project pr control spe to or the the targets. for Financial nmo and ocedures and policies executi pr nd/a ntseme ot adequate threaten ndsuf envir ent plan ursb with resources of hcuS project ry undos to dis on related artp rnm nvironment.e Slow established of response cash lack pact actually the Factor : is duciafi d are gove ized ability discussi sectors. counter im sound. ount of of or with ely Risk Risk ry ered nt'se d am level There yam would untoc d consi nistrativei decentral ury. kindyna tim liancep of Possible Inherent The is weaknesses adm weak governm considere expecte portfolio availability Treas or nistriesim practices com Risk activities se operational operational operational onaliti tf approvedlau tf approvedlau approvedlau Conditi Dra man Dra man Draft man g al Ratin Residu Risk Low Low Modest g Ratin Original Modest Modest Risk Substantial local . ntem the of to al la al IFRs and ng cen and of MTC ents project duri of order require eligible entation resu the IOP its nageam portingre and level. nancifi review m in to ncial tea atht assistance provinci close the g,n assista provinci and to on disbursem and out plem Meas for PROVIAS and ments es ovi level ial hnical imt budgeted edd at and state uniti onitorm nancfi ationsu tec objectives. central stance objectives. nte technical central rrying ecjo 102 tigation nee and acepl preht ca pr at sit ersd at training assi at of Mi financial provincial project as urem capacity-buildi project res sedo urceso inera accounting opport ntlya at actions. consi the ll oc to ng financial n ularc ve pr providest the level res more tionsar building of we . building requi level. ntse d OVIAS's technical of de ope PR const parti bute Prop quateedA Centralized isev entatiom Project part nt,e life as Projec part onitorim ngem provi The capacity as Provide The capacity as provincial counterpart d) arra MTC. consolidate will super e) will plemi correctiyle ehT identify tim f) and level g) PRIs, nagemam contri PROVIAS tants provincial to project's h) and level i) con at be ncial Bank Project rations ot with ope Fina with lypm and needs co Transport s.d rience telya nee decentralized capacity equ level. Factor centralized udes De ncial nistrativeimdA expe ad to prior Risk incl ed plementation raluR provi IAS has Operations.d stitutionalni enth im the oject Possible The (Project) at PROV Unit Finance PRIs streng pr se operational operational operational onaliti tf approvedlau tf approvedlau tf approvedlau Conditi Dra man Dra man Dra man g al Ratin Residu w Risk Low Low Low Low Low Lo Low g Ratin sted Original Modest Modest Modest Low Modest Mo Risk es tionani ents and key tsn of d. the a s ation. resu ord reem cludingni ove project ntse activiti be in ounta between term co Ag ect will acc eht prpa Meas ncye PRIs, proj Is Is. two andd between SIGAT.dna inform enting arrangem of PR recorded tigation ter-agni PRdna 103 and plem and including viewere SIAF accounting Mi Im forsVC ng of ist, ation reconciliation sedo stro IASVO of PRIs OVIAS coordination n reconciliation ofsmet PR Institutional onom inform sys and Prop PRn ginn PROVIAS issio ec Bank'srof crease In Sig Effective )j betwee k) between detailed responsibilities. l) between factor. Subm)m one rence Monthly Quarterly and refe o) financial accounting p) PROVIAS to l ect. ne tuo for ation unication proj onrs project needs OVIAS pe comm thetnem inform carried PR ture essential for is lified is plemi rucst of quao e TAG between basis effective to twa tim SId Risk an Rating Factor with full n. nt : AF process ylemti Riskl Risk organization k reconciliation SI basis. a Risk essential nt ntro rced FM be IAS fo d entatiom Inhere all Rislo byd on que operation. Coll PRIs rein Possible Inter-institutional would PROV be dedicate plemi duceo frea Over Contr Quarterly pr on Reconciliation and project Overa Residual Supervision Plan 52. The Financial Management team would conduct a combination of off-site and on-site supervision. Off-site supervision would consist of quarterly desk reviews of the interim financial statements and IFRs and annual reviews of the external audit reports. Given the residual risk profile, two on-site supervision missions would be conducted during the first year of implementation and once a year thereafter. Thereafter ongoing supervision should be performed through at least one mission per year. Type Timing Mechanism Objective Visit (on site Twice a year Integrating supervision missions Review FM system. supervision) for first year as much as possible. Supervise Designated account reconciliation. Use of funds. Follow up on external auditors recommendations/ raised issues. Review staffing. IFR Review Quarterly The IFR submitted to the Bank. Review IFR information consistency. Raise issues disclosed in IFR. Audit Review Once a Year The audit report submitted to the Review audit report. Bank Raise issues disclosed in audit report 104 Annex 8: Procurement Arrangements PERU: Decentralized Rural Transport A. General 1. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for pre- qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 2. Procurement of Works: Civil Works procured under this project would include: road rehabilitation, rehabilitation of small bridges, improvement of other types of rural transport infrastructure (eg. small wharfs for river-based transport), periodic road maintenance and rehabilitation of Non Motorized (NMT) tracks as well as small works on rural transport infrastructure (eg. to be performed under the pilot for the stabilization of slopes by reforestation). Procurement of works through International Competitive Bidding (ICB) are not envisioned. To the extent possible works packages will be procured by National Competitive Bidding (NCB), but given the degree/extent of decentralization to Municipalities, capacity of Institutes and availability of contractors, other methods for procuring civil works may be carried out through shopping, direct contracting, force account as well as community participation procurement as detailed in the Procurement Plan and described in the Operational Manual, Shopping/ Small Works contracts below US$. 250, 000 equivalent will be procured on the basis of comparing at least three quotations, received from qualified contractors in response to a written invitation, which will include a detailed scope of work, specifications and relevant drawings as well as a form of agreement acceptable to the Bank. Bidding documents developed for the Regional Transport Decentralization project reviewed by the Bank and the IDB will be adapted/adopted in order to increase harmonization among projects in the transport sector. 3. Procurement of Goods: Goods procured under this project would include vehicles, and office furniture and equipment, computer hardware and software, as well as technological systems. Goods contracts will be grouped into bidding packages of more than US$250,000 equivalent and procured following ICB procedures; contracts below US$250,000 will follow NCB procedures and contract below US$ 50,000 will be procured under shopping procedures. The procurement will be done using the Bank's SBD for all ICB and harmonized SBD agreed with or satisfactory to the Bank. Proprietary software may be procured by direct contracting in agreement with the Bank. 4. Procurement of non-consulting services: will consist of printing/promotion, as well as specific technical services related to maintenance of computerized equipment and databases, internet services, security services as well as archiving and courier services. 105 5. Selection of Consultants: Consulting services procured under this project include: technical design studies for rehabilitation and maintenance works, supervision of works, assistance to preparation of participatory provincial road plans, impact evaluation and baseline studies/surveys, technical assistance to set up provincial road institutes and provincial infrastructure institutes, implementation of the Local development Window, institutional strengthening activities (training), strategic assessments, safeguard-related studies, operational, procurement and financial audits, design and implementation of regulatory policies for rural transport, institutional assessments. 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. Higher education institutions (eg. engineering schools, universities), NGOs, think tanks that have the status of private entities under the Peruvian law, would be able to compete to perform activities financed under the proposed project. The procurement will be done using the Banks SRFP (for large consulting assignment with short-list of international firms) and harmonized RFPs/TORs formats (firms and individual consultants) agreed with or satisfactory to the Bank. The Operational Manual will be updated to include an Annex with the sample documents. 6. Training: Skills training will be made available to targeted communities. Provias Descentralizado will prepare specific training programs for PRIs, PIIs, in coordination with municipalities for the transfer of responsibilities at the decentralized level. Annual training programs will be reviewed by the Banks, based on an institutional strengthening strategy to be prepared by Provias Descentralizado, financed under Component 2. 7. Operational Costs: will include staff salaries, office supplies, utilities, etc, which will be financed by GoP B. Assessment of the agency's capacity to implement procurement 8. Procurement activities will be carried out by Provias Descentralizado, Provincial Road Institutes (PRIs) and Provincial Infrastructure Institutes (PIIs). Within the new decentralization framework, the responsibility for the management of rural roads has been gradually handed over to municipalities and one key objective of the project is to ensure that they have sufficient institutional capacity to handle these responsibilities (including the procurement of transport- related activities). In the case of Provias Descentralizado, a procurement unit exists, headed by a Chief of Procurement assisted by four professionals. This unit will monitor procurement activities performed by PRIs and PIIs already established, carry out procurement activities for the newly formed institutes and provide technical assistance to them. In addition, this procurement unit will be in charge of preparing and updating the project procurement plans prepared with information sent by the PRIs and PIIs (eg. through the SEACE) and ensuring consistency with other information systems. Finally, the unit will be responsible for training and overall monitoring and for preparing and managing the procurements audits (in particular preparation of TORs for such audits) to be performed. 9. Provias Decentralizado is a new institution, created on August 12, 2006 by Supreme Decree No. 029-2006-MTC, by merging Provias Rural and Provias Departamental. Provias Rural will count on its eleven regional offices (unidades zonales, possibly to be transformed into eighteen Unidades Regionales de Coordinación). These offices will provide daily technical 106 assistance to the PRIs and PIIs. For instance, the evaluation committees in charge of all procurement processes to be performed at the local level will be comprised of one official representing the municipality, one official from the PRI or PII and one member from the regional/ office of Provias Decentralizado. The PRIs consist of three professionals (one manager, one engineer and one assistant). In order for PRIs to be handled procurement responsibilities to implement the proposed project in a decentralized manner, municipalities will have to show that the future PRI is fully staffed and that staff have received the required training. A comprehensive training program for PRIs and PIIs will be designed by the procurement unit in coordination with the other departments of Provias Descentralizado (in particular the department in charge of assisting the decentralization process ) and implemented accordingly. In the near 47 future, local entities (PRI, PII, regional offices) are also expected to have access to the information system put in place by Provias Decentralizado (SIGAT). As of September 2006, a pilot was about to be launched with the PRI of Arequipa so that decentralized entities can not only consult information from the SIGAT, but also enter new information in its database. Costs related to such decentralization of the SIGAT will be financed under components 2 and 4. 10. An assessment of the capacity of the Implementing Agency to implement procurement actions for the project has been carried out by Aldo Ortiz, Consultant, under the supervision of Evelyn Villatoro, Senior Procurement Specialist, on August 29, 2006. At appraisal, the Bank, the IDB and Provias Descentralizado agreed on the methods and documents to be used as presented in Box below. 11. Key issues and risks concerning procurement for implementation of the project have been identified and include: (1) coming local elections and change of local authorities and loss of institutional capacity already established for existing PRIs; (2) the decentralization of procurement responsibilities at the municipal level may not be compatible with the actual institutional capacity of the PRIs or PIIs; (3) limited competition given the availability of providers in the private sector, as well as limited numbers of NGOs; (4) absence of an overall management information system (MIS) to link municipalities and central office for proper coordination; (5) absence of an agreed system for the archiving of procurement documents; and (6) the involvement of five or more different departments within Provias (Project Management, Planning, Promotion, Maintenance y Procurement and Legal for clearances of contracts) for procurement activities to be implemented. Corrective measures which have been agreed are: (1) overall project design responsibility with Provias Decentralizado and its regional offices being in charge of providing technical assistance to PRIs and PIIs; (2) definition of a comprehensive institutional strengthening strategy for decentralized procurement to be implemented under Component 2 of the proposed project; (3) the constitution of the evaluation committee with the participation of a member from Provias Decentralizado central or regional office if it exists; (4) the design and implementation of a comprehensive training plan as a pre-requisite to the launching of procurement processed at the local level; (5) promotion and dissemination of bidding opportunities, agreement on criteria/requirements to participate; as well as simplification of bidding documents in agreement with the Bank; (6) decentralization of the SIGAT; and (7) design of adequate reporting procedures for the archiving of procurement documents, as described in the project's operational manual. 47Gerencia de Transferencia. 107 12. The overall project risk for procurement is Modest/Substantial. C. Procurement Plan 13. At appraisal, the Borrower developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team during negotiations on November 2, 2006 and will be available on Provias Descentralizado's website (http://www.proviasdes.gob.pe/). It will also be available in the project's database and in the Bank's external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. D. Frequency of Procurement Supervision 14. The capacity assessment of the Implementing Agencies has recommended one supervision mission, every twelve months to carry out post review of procurement actions. E. Details of the Procurement Arrangements Involving International Competition 1. Goods, Works, and Non Consulting Services (a) List of contract packages to 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-Opening (yes/no) (Prior / Post) Date Purchase of $750,000 ICB N/A Prior 2007 motorcycles for PRIs Purchase of $1,210,000 ICB N/A Prior 2008 computers for PRIs and PROVIAS Descentralizad o Purchase of $540,000 ICB N/A Prior 2008 SUVs for PROVIAS Descentralizad o Improvement $1,000,000 Direct N/A Prior 2009 of other types Contracting of rural infrastructure48 48Given the particular circumstances (this pilot will be implemented in the selva region), this activity may be procured to a single company. 108 (b) ICB contracts for goods estimated to cost above $250,000 per contract and all direct contracting as well as force account proposals will be subject to prior review by the Bank. 2. Consulting Services (a) List of consulting assignments with short-list of international firms. 1 2 3 4 5 6 7 Ref. Description of Assignment Estimated Selection Review Expected Comments No. Cost Method by Bank Proposals (Prior / Submission Post) Date 1st baseline and impact evaluation study $650,000 QCBS Prior 2009 2nd baseline and impact evaluation study $650,000 QCBS Prior 2011 (b) Consultancy services estimated to cost above $200,000 per contract, and all single source selection of consultants (firms) will be subject to prior review by the Bank. TORs for different types of assignements for individual consultants will be reviewed by the TTL, as well as annual training programs. (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. 15. It was agreed that the predominant method to hire consulting firms for the design of rehabilitation of roads, given that TORs are precisely defined and there are estimated budgets assigned by department, may be done by Selection under a Fixed Budget (SFB). The small studies for minor roads may be procured by Selection Based on Consultants Qualifications, this will foster development of small firms. 109 Thresholds for Procurement Methods and Prior Review Expenditure Contract Value Procurement Contracts Subject to Category (Threshold) Method Prior Review US $ thousands 1. Works >3,000 ICB All 250-3,000 NCB First contract <250 Shopping :3 First contract Quotations 2. Goods >250 ICB Refer to Proc. Plan 50-250 NCB First contract <50 Shopping None Regardless of value Direct Contracting All 3. Consulting All TORs and TRG. Services Programs to be reviewed by Bank's TTL For design studies and supervision of road works, standard TORs will be used and prior reviewed for first contracts only -3.A Firms >200 QCBS, LCS,FBS, Refer to Proc. Plan <200 FBS, CQ, LCS None Regardless of value Single Source All -3.B Individuals Regardless of value Comparison of 3 CVs None in accordance with Chapter V of the Guidelines Note: QCBS = Quality- and Cost-Based Selection QBS = Quality-Based Selection FBS = Fixed Budget Selection LCS = Least-Cost Selection CQS = Selection Based on Consultants' Qualifications TOR = Terms of Reference 110 Annex 9: Economic and Financial Analysis PERU: Decentralized Rural Transport A. Beneficiaries 1. The government of Peru under the Rural Roads Program, since 1995, has been taking a series of actions to improve the transitability of rural roads in Peru and ensure sustainability with the development of mechanisms and financial and institutional instruments that take into account the important role of local governments by means of its Provincial Road Institutes, not only on the management of rural roads but also on the compromise for financing routine maintenance. The first two phases of the Rural Roads Project were implemented on 12 poorest Departments of Peru achieving the objectives of rehabilitating 15,000 km of rural roads and 7,000 km of non- motorized tracks, representing 30% of the estimated rehabilitation needs of rural roads in Peru. The Decentralization Rural Infrastructure Project will be implemented within all the Departments of Peru and has the objective of ensuring all-weather transitability to around 23,000 km of rural roads by 2011, covering approximately 49% of the rural roads network of 49,677 km that serves 7.4 million persons. Table A9-1 shows the rural population and the length of the rural roads network in Peru by Department. Table A9-1: Peru Rural Roads Network Rural Rural Number of Population Roads Department Provinces (persons) (km) Amazonas 7 0.26 617 Ancash 20 0.43 2,688 Apurimac 7 0.27 2,310 Arequipa 8 0.16 3,916 Ayacucho 11 0.31 3,250 Cajamarca 13 1.02 3,785 Cusco 13 0.61 3,555 Huancavelica 7 0.33 2,819 Huanuco 11 0.45 2,098 Ica 5 0.11 1,214 Junin 9 0.40 4,976 La Libertad 12 0.43 2,726 Lambayeque 3 0.25 1,243 Lima 9 0.22 2,871 Loreto 6 0.38 205 Madre De Dios 3 0.04 483 Moquegua 3 0.05 1,005 Pasco 3 0.11 1,332 Piura 8 0.45 2,854 Puno 13 0.73 2,924 San Martin 10 0.26 1,127 Tacna 4 0.02 877 Tumbes 3 0.02 364 Ucayali 4 0.14 437 Total 192 7.44 49,677 2. The rural infrastructure of Peru is composed of rural roads and non-motorized tracks. Rural roads have an average an average daily traffic of 15 vehicles per day composed of cars, pickups and light and medium trucks. The rural roads that are not part of the program are currently in fair to bad condition and have inadequate design standards and drainage. Non- motorized tracks are characterized by an average traffic of 30 persons per day and 90 animals per day and are used by the rural population to connect small town permitting exchange of 111 commercial and social activities. The project will finance the rehabilitation of 3,000 km rural roads and 2,167 km non-motorized tracks, and will ensure periodic maintenance works on a network of 11,200 km. Table A9-2 shows the estimated scope of the project civil works. Table A9-2: Civil Works Project Components Unit Total Cost Cost Component (US$) Unit Quantity (M US$) Rehabilitation of Rural Roads 15,900 km 3,000 47.7 Periodic Maintenance 2,800 km 11,200 31.4 Rehabilitation of NMT Tracks 2,310 km 2,167 5.0 Bridge Rehabilitation 80,000 bridge 50 4.0 Stabilization Works 1.3 Total 89.4 3. The main beneficiaries of the project will be the population living in the vicinity of the roads to be improved. The populations currently being served by poor condition rural 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. 4. In the context of the project's participatory framework, the economic evaluation represents a step within the eligibility criteria that is applied to corroborate the feasibility of the sub-projects in achieving the objectives of the project. The eligibility criteria consists of a process of steps that will ensure that the projects selected enjoy the agreement and ownership of the affected communities, are technically sound, and respond to certain levels of attention of poor areas and/or reasonable expected economic benefits. In all, this process responds to a bottom-up approach in its identification and a top-down approach in checking its compliance with selected criteria. B. Economic Analysis Methodology 5. The roads that are part of the program consist of: (i) low-volume rural roads, typically with daily traffic lower than 15 Average Annual Daily Traffic (AADT); (ii) medium-volume rural roads, typically with daily traffic between 15 and 50 AADT; (iii) high-volume rural roads, typically with daily traffic higher than 50 AADT; and (iv) tracks or paths that carry non- motorized traffic (NMT tracks). A Cost Efficiency Analysis (CEA) will be done for low volume rural roads selected on the basis of their contribution to accessibility to social and economic centers, assessing the minimum investment cost needed to provide basic all-weather access per beneficiary population. For a low-volume rural road project to be considered feasible, the Cost Effectiveness Indicator, which is the ratio between the project cost and beneficiary population, should be less than US$ 100 per person. A Cost Benefits Analysis (CBA) will be done for medium-volume and high-volume rural roads, which will produce economic benefits not only in alleviating isolation but also in reducing transport costs to the long-distance traffic they would normally carry and increasing regional economic development, and the corresponding economic indicators will be determined, such as the Economic Rate of Return (ERR) and Net Present Value (NPV). The investments on medium-volume and high-volume rural road projects should yield an ERR higher than 14 percent to be considered feasible, which is the standard discount 112 rate adopted in Peru since 2000. The medium-volume and high-volume rural roads that do not meet the CBA threshold of 14 percent will not be subject to a CEA to determinate their feasibility. 6. For low-volume rural roads, the cost-effectiveness analysis will consider the beneficiary population to be the persons living on the direct area of influence of the project and would include communities around a 5 km band along the road right-of-way ­ 2.5 km to each side. The project cost calculated on the Cost Effectiveness Indicator is defined as the present value of the economic investment, supervision, environmental mitigation, and maintenance cots over a 10 year evaluation period. The Cost Effectiveness Indicator threshold of US$ 100 per person was set on the basis of the experience of the sub-projects of the first two phases of the Rural Roads Project. The threshold ensures that sub-projects in poor communities that attempt to enhance at low cost their accessibility to social services are approved on the basis of access improvement regardless of the ultimate impact on the potential increase in agricultural, pecuniary, or economic production. When the minimum threshold is not met, the sub-projects had then to be analyzed performing a cost-benefit analysis. 7. For high-volume rural roads with more enhanced stage of development, the cost-benefit analysis will be done computing savings in road user costs, following the "consumer-surplus" approach, by 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, or similar model. 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 is customized to the characteristics and needs of low-volume roads, such as the high uncertainty of 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. 8. For medium-volume rural roads, with intermediate stage of development, the cost-benefit analysis will be done computing savings in road user costs, following the consumers' surplus approach, similar to high-volume rural roads, or by accounting for benefits in agricultural and livestock production, following the producers' surplus. This approach relates the rehabilitation and maintenance costs of a sub-project with the benefits that the sub-projects will bring in terms of increases in net agricultural and livestock production (net of local consumption and production costs). The selection of the method to use depends on the nature of the investments that could have a regional economic development focus or improvement of accessibility focus. C. Selection of Road Investments 9. The project will be implemented initially on 142 Provinces that were selected considering the following multi-criteria indicators: (i) rural population; (ii) length of rural roads network; and (iii) poverty index that was characterized by the inverse of the Human Development Index defined by the United Nations. The selection of the Provinces will be subject to institutional and financial arrangements to be established with local governments and will be complemented with an evaluation of the management, technical and management capacity of local governments. The main tasks to be followed by the candidate Provinces are: (i) verify the investment assigned to 113 the Province; (ii) establish institutional arrangements with local governments; (iii) formulate a Participatory Provincial Road Plan; (iv) define an investment plan; and (v) execute the investment plan on a decentralized manner. Table A9-3 shows an indicative allocation of road work expenditures by Department based on the multi-criteria indicators, normalizing the indicators in such a manner that the sum of the normalized indicators equals 1 and assigning a weight of 0.50 to poverty index and 0.25 to rural population and length of rural roads. Table A9-3: Indicative Departmental Allocation of Resources 0.25 0.25 0.50 Multi Indicative Rural Rural Criteria Distribution Number of Population Roads Poverty Distribution of Resources Department Provinces (persons) (km) Index Index (M US$) Amazonas 7 0.26 617 14.2 4.2% 3.72 Ancash 13 0.29 1638 25.0 7.0% 6.25 Apurimac 2 0.05 583 3.9 1.3% 1.20 Arequipa 8 0.16 3916 13.5 5.8% 5.22 Ayacucho 6 0.23 1639 12.7 4.5% 4.01 Cajamarca 8 0.77 2780 16.9 8.4% 7.48 Cusco 10 0.53 2953 21.3 8.3% 7.39 Huancavelica 2 0.06 742 4.4 1.6% 1.40 Huanuco 7 0.29 1177 15.9 5.0% 4.48 Ica 5 0.11 1214 7.8 2.7% 2.45 Junin 7 0.33 4201 12.2 6.6% 5.86 La Libertad 12 0.43 2726 22.6 7.9% 7.08 Lambayeque 3 0.25 1243 5.2 2.9% 2.58 Lima 9 0.22 2871 13.8 5.5% 4.88 Loreto 6 0.38 205 12.1 4.0% 3.62 Moquegua 3 0.05 1005 4.8 1.8% 1.60 Pasco 1 0.05 431 1.8 0.9% 0.76 Piura 8 0.45 2854 15.1 6.7% 5.99 Puno 10 0.58 2399 19.1 7.7% 6.90 San Martin 5 0.12 320 10.1 2.6% 2.36 Tacna 4 0.02 877 6.5 1.9% 1.70 Tumbes 3 0.02 364 5.1 1.3% 1.15 Ucayali 3 0.05 142 6.1 1.5% 1.31 Total 142 5.71 36898 270.0 100.0% 89.40 Poverty index defined as sum of the inverse of the HDI of the provinces HDI is the Human Development Index defined by the United Nations 10. Provinces are preparing Participatory Provincial Road Plans to be able to select road investments to be included in the project. The Road Plan elaborates a diagnostic of the road sector in a particular Province, analyzes the supply and demand for transport services and infrastructure, and prioritizes the road investment options, towards identifying the sub-project priorities that could be funded under the project. At appraisal time, 71 Provinces completed the preparation of Participatory Provincial Road Plans and 35 Provinces are preparing their plans. 11. The methodology of the preparation of a Participatory Provincial Road Plan considers: (i) compilation of primary and secondary information characterizing the Province in general, physical, social and economic terms; (ii) evaluation of population trends, resources and economic opportunities; (iii) definition of development nodes and their area of influence; (iv) diagnostic of the road network in terns of condition, accessibility, traffic, and flow of commercial products; (v) prioritization and stratification of the road sections (sub-projects) located in the Provinces; and (vi) evaluation of the financial capacity of the Province and other institutional aspects. 114 12. A Participatory Provincial Road Plan utilizes a multi-criteria priority index to rank roads and define priorities, and outlines some project eligibility criteria. The priority index is being computed for each road using the following criteria, assigning a weight of 0.70 to geographical, economic and social criteria: Geographical: measures the linkage of a road to (a) population centers, (b) province and districts capitals, and (c) economic markets; Economic: measures (a) economic productivity at the area of influence of the road, (b) road transitability (all-weather or seasonal), (c) length of the road, (d) presence of transport services, (e) service to mining industry, (f) service to forestry industry, and (g) service to tourism industry; Social: measures (a) poverty level, (b) population, (c) access to health and education services, and (d) annual population growth rate; Natural Resources: measures if the road connects to areas with agricultural, tourism, forestry or mining potential ; and Technical: measures (a) quality of engineering design and (b) linkage with regional development plans. 13. By 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 proposed road works program. Once the sub-projects are selected, the engineering design is elaborated and the economic feasibility of the sub-project is corroborated. D. Rehabilitation and Periodic Maintenance Program Cost-Benefit Evaluation 14. The Cost-Benefit evaluation was done for the rehabilitation and periodic maintenance of rural roads and NMT tracks that represent 94 percent of the civil works costs. The economic evaluation of the bridge rehabilitation and road stabilization programs were not included because the locations of these works are not yet defined. The economic evaluation of the institutional support activities is irrelevant. The rehabilitation and periodic maintenance programs to be executed by a Province will be defined by the Participatory Provincial Road Plan and the economic justification of the each sub-project road will be corroborated after the engineering designs are done. Because these processes are under way, at the moment, one can not present a comprehensive economic evaluation of the rehabilitation and periodic maintenance programs based on project level economic evaluations. One has to rely on a representative economic evaluation based on an evaluation of typical road classes. On the basis of the currently available data on rural roads and the results of the impact evaluation studies of the Second Rural Roads Project, an economic evaluation was done for a representative road rehabilitation and periodic maintenance program, with the objective of broadly judge the economic justification of the program. The evaluation was done with the RED model for analysis period of 10 years and adopting a discount rate of 14 percent. 115 15. Road user costs were estimated for five motorized vehicle types comprising passenger car, four-wheel drive vehicle, bus, and light and medium trucks. Table A9-4 presents the average vehicle fleet characteristics and economic unit costs. This information is updated yearly by the MTC Dirección General de Planificación y Presupuesto to be used on all economic evaluations in Peru. The value of time for car passengers was defined to be US$ 1.21 per hour considering an average income of 900 Soles per month, 176 working hours per month, non-working time being 25 percent of working time and considering 70 percent of work related trips. For bus passengers an average income of 450 Soles per month was considered with the same assumptions. To evaluate the economic benefits of rehabilitating NMT tracks, only the saving on travel times for pedestrians were considered. The value of time for pedestrians for this study was defined to be US$ 0.31 per hour considering an average income of 15 Soles per day, 176 working hours per month, non-working time being zero and considering 50 percent of work related trips. Table A9-4 ­ Vehicle Fleet Characteristics and Economic Unit Costs 4 Wheel Light Medium Car Drive Bus Truck Truck Economic Unit Costs New Vehicle Cost (US$/vehicle) 11,855 18,579 89,700 69,000 86,250 New Tire Cost (US$/tire) 37.40 63.80 274.10 110.90 274.10 Fuel Cost (US$/liter) 0.49 0.49 0.53 0.53 0.53 Lubricant Cost (US$/liter) 2.66 2.66 2.66 2.66 2.66 Maintenance Labor Cost (US$/hour) 2.07 2.07 2.39 2.39 2.39 Crew Cost (US$/hour) 0.00 0.80 2.79 1.68 2.15 Interest Rate (%) 14 14 14 14 14 Passenger Time (US$/hour) 1.22 1.22 0.61 0.61 0.61 Cargo Delay (US$/hour) 0.00 0.09 0.09 0.09 0.09 Utilization and Loading Kilometers Driven per Year (km) 25,000 40,000 120,000 60,000 90,000 Hours Driven per Year (hr) 480 960 2,496 1,440 2,400 Service Life (years) 10 8 10 8 10 Percent of Time for Private Use (%) 100 0 0 0 0 Number of Passengers 3 3 40 1 1 Gross Vehicle Weight (tons) 1.37 2.18 13.63 6.86 15.4 Traffic Composition Average Traffic Composition (%) 46% 24% 2% 12% 16% 16. The average annual traffic growth rate was defined to be 2.5 percent per year for passenger cars and four-wheel drive vehicle vehicles and 3.5 percent for trucks and buses based on past trends of population growth for passenger vehicles and economic growth for trucks. The impact evaluation study of the Second Rural Roads Project done in 2004 assessed the impact of the rehabilitation works of the project by performing 4,460 user surveys on households located at the area of influence of selected project roads and other control roads with similar characteristics but not being part of the project. The evaluation shows that road users decreased their travel times substantially after the rehabilitation works. On rural roads, the reduction observed on travel times is around 49%, and on NMT track the reduction observed is around 33%. The impact evaluation also shows that: (i) traffic levels increased after the rehabilitation works by around 42%, with cars traffic increasing by around 68%; (ii) the number of public transport vehicles serving towns under the influence of the project roads increased by around 75% on rural roads and by around 50% on NMT tracks; and (iii) with the rehabilitation works, accident rates decreased by around 52% on rural roads and 61% on NMT tracks. Table A9-5 presents typical vehicle operating costs, in US$ per vehicle-km, for the with-project and without-project scenarios for rural roads. The average road condition with-project and without-project and the 116 generated traffic were defined in a way to match the observed travel times and increase in traffic found at the impact evaluation study. Table A9-5: Unit Road User Costs, (US$ per vehicle-km) 4 Wheel Light Medium Car Drive Bus Truck Truck Rural Roads Without-Protect 0.28 0.37 1.13 1.04 1.35 Rural Roads With-Protect 0.19 0.25 0.81 0.73 0.97 17. The evaluation considered two representative road classes for rural roads (medium- volume roads and high-volume roads) and one road class for NMT tracks. The rehabilitation of low-volume roads was not considered on the cost-benefit evaluation because these roads will be subject to a Cost Effectiveness analysis. Table A9-6 present the basic characteristics of the representative road classes, considering that it is estimated that 54% of the rural roads to be rehabilitated are very-low volume roads, 40% are medium-volume roads and 6% are high- volume roads. The without project alternative consists of keeping a road in poor condition, with minimum routine maintenance, and the with-project alternative considers proper routine maintenance (US$ 900 per km-year) and periodic maintenance (US$ 2,800 per km) scheduled every 3 years. Table A9-6: Rehabilitation Program Road Classes MT NMT Road Length Traffic Traffic Investment Investment NPV ERR Class (km) (AADT) (persons) (M US$) (US$/km) (M US$) (%) Rural Road with AADT < 15 1,610 NA NA 25.6 15,900 NA NA Rural Road with 15 < AADT < 50 1,207 20 30 19.2 15,900 7.71 26.5% Rural Road with AADT > 50 183 65 2.9 15,900 2.72 40.0% NMT Tracks 2,167 30 5.0 2,310 3.48 32.0% Total 5,167 52.7 13.91 29.2% Rural roads with low-volume (AADT < 15) are subject to a Cost Effectiveness Evaluation 18. The economic evaluation of the rehabilitation and periodic maintenance works indicates that the project economic benefits are satisfactory. The Net Present Value (NPV) is estimated at US$ 13.91 million at a 14% discount rate over a ten year evaluation period. The Economic Rate of Return (ERR) is estimated at 29.2%. Compared with the without project scenario, the road works economic expenditures will increase by US$ 22.25 million, in present value terms over the evaluation period, while road users will save US$ 36.16 million over the same period, which means that every dollar spent results in around 1.62 dollars saved by road users. 19. The results are satisfactory relative to the main risks considered in the economic analysis, namely, higher investment costs and lower future benefits due mainly due to lower traffic. Under a worst-case scenario of benefits dropping to 80 of the current level and 20% increase in investment costs, the project yields a satisfactory rate of return of 16.2%. Table A9-7 presents the sensitivity analysis results. 117 Table A9-7: Sensitivity Analysis Results Road Base ERR ERR Sensitivity Analysis (%) Class (%) A-Costs+20% B-Benefits-20% A + B Rural Road with AADT < 15 NA NA NA NA Rural Road with 15 < AADT < 50 26.5% 20.6% 19.3% 14.1% Rural Road with AADT > 50 40.0% 32.7% 31.1% 24.8% NMT Tracks 32.00 25.3% 23.8% 18.0% Total 29.2% 22.9% 21.6% 16.2% 20. The analysis of switching values of critical items indicates that to yield an overall program NPV equal to zero, investment costs need to be multiplied by 1.60 or benefits multiplied by 0.63. For the NMT tracks, the pedestrian traffic can be reduced to 24 pedestrians per day to yield a NPV equal to zero. E. First-Year Program Economic Evaluation 21. Table A9-8 presents the results of the economic evaluation of a sample of 11 sub-projects to be executed during the first year of the project. The results show that the Cost Effectiveness Indicator for the low-volume sub-project is less than US$ 100 per person and the ERR for medium volume sub-projects is higher than 14%. The average cost of the rehabilitation works is US$ 16,570 per km. Table A9-8: Sample First-Year Program Sub-Projects Economic Evaluation Population Cost Rate Investment Length Traffic Served Effectiveness Return NPV Road Section Province (US$) (km) (AADT) (persons) (US$/person) (%) (M US$) Chavin - Rahua Huari 185,216 15.5 4 3,120 73.2 Llanlla- Pacarisca Yungay 37,657 3.0 4 8,341 96.6 Shillcop- Huarca Yungay 143,657 10.6 4 1,908 96.6 Balsa- Río Mantaro Yauli 58,531 3.4 8 4,300 15.7 Pachachaca-Sharco Huari 40,321 2.4 12 2,590 23.1 El Porvenir- Lag. Azul-Nar. - La San Palma Ignacio 305,162 23.7 14 3,910 88.0 Santa Elena- Hutatas Huamanga 93,192 2.2 15 31,089 10.5 Total Low Volume Roads 863,736 60.9 9 55,258 57.7 Ayapata -Camatani y Ayap. ­ Pumachaca Carabaja 310,000 21.1 16 1,710 25% 0.10 Molino-Quinque-Huascapampa Pachitea 216,864 18.0 17 3,719 33% 0.14 Limmbani ­ Phara Carabaja 110,000 7.8 17 3,303 27% 0.05 Huarichaca-Desvio Pucajaga- Shihuap. Pachitea 128,734 9.0 25 2,228 36% 0.10 Total Medium Volume Roads 765,598 55.9 19 10,960 29% 0.38 118 Annex 10: Safeguard Policy Issues PERU: Decentralized Rural Transport Introduction 1. During preparation, various activities and instruments were developed with the objective of ensuring the project's environmental and social sustainability and of complying with both the national and sector-specific environmental legislation and Bank safeguard policies. 2. These social and environmental management instruments were requested by the Bank Safeguards Advisory Team (SAT) at concept stage, and the preparation process for these instruments was agreed with Provias Descentralizado. These instruments include the Environmental and Social Management Framework (ESMF), the Resettlement Policy Framework (RPF); and Indigenous Peoples Planning Framework (IPPF). These instruments provide methodologies, processes and management tools which will ensure an adequate management of social and environmental issues during project implementation. 3. As part of the preparation process for the ESMF, an institutional capacity assessment was performed for Provias Descentralizado as well as for all the actors that will intervene during project implementation, with the purpose of designing a plan for the strengthening of social and environmental management, aiming at improving institutional capacity in this area. 4. In addition, Provias Descentralizado prepared an environmental and social assessment report (ESAR) in which key results from the social and environmental impact evaluation of a sample of infrastructure investments to be financed by the project are presented. The selection of this sample was agreed between Provias Descentralizado and the Bank. 5. All these documents were published in the Infoshop in compliance with the Bank's disclosure policy applicable to Category B projects (ie. 60 days before Board approval). 6. Hereafter, key issues are presented related to the project's social and environmental appraisal, which justify its social and environmental viability. Environmental categorization and applicable safeguards policies 7. The project aims at improving, rehabilitating and maintaining the existing road network. The construction of new roads is not envisaged and therefore no significant social and environmental modification of the project's areas of influence is expected. Consequently, the project has been classified as "Category B" in agreement with the Bank operational policy [OP 4.01]. 8. This categorization is justified by the fact that the works envisaged under the proposed project are not expected to generate any significant environmental impact and that prevention, mitigation ad/or compensation measures can be easily identified and implemented, with an adequate social and environmental management during the various phases of the project cycle. 119 The key social and environmental impacts that have been observed in the past when rural roads were built or improved, include in various cases positive effects on the existing social and environmental conditions, for example through the stabilization of slopes and the correction of past environmental liabilities. 9. In sum, the project's social and environmental evaluation has been focusing on the following issues: a) review of the Bank safeguards policies that are applicable to the proposed project; b) preparation of the social and environmental management frameworks (ESMF, RPF and IPPF); c) social and environmental evaluation of a sample of works that are likely to be executed during the first year of implementation; d) evaluation of the institutional capacity for social and environmental management; and e) compliance with the national environmental legislation. 10. Applicable Bank safeguards policies are: 11. Environmental Assessment [OP 4.01]: The Bank's environmental assessment policy is activated although no significant environmental impacts are expected. This policy requires that several environmental management instruments be developed in order to ensure the social and environmental sustainability of the proposed investments. 12. In accordance with this policy and as recommended by the SAT, it was agreed with Provias Descentralizado that an Environmental and Social Management Framework (ESMF) be prepared. In addition, an environmental and social assessment report (ESAR) was prepared, in which are presented a summary of the social and environmental issues that have been assessed during preparation, among which, the social and environmental evaluation of a sample of works that are planned for the first year of project's implementation. 13. It is important to note that the ESMF also includes a plan for the strengthening of the social and environmental management, with the objective of improving the management of those issues both internally within Provias Descentralizado, as well as within other actors involved in the implementation of the proposed project. 14. Natural habitats [OP-4.04]: This policy is not formally activated under the proposed project. Nevertheless, if the area of the project's direct or indirect influence would happen to be located in a zone where a natural habitats' regulation is applicable, this policy would be activated and applicable measures would be implemented. 15. Indigenous Peoples [OD 4.12]: Peru has deep indigenous roots that are dispersed in the entire national territory. Therefore, the Bank indigenous peoples' policy was activated so that, in cases where a road investment would benefit or affect an indigenous community, specific measures are taken to protect these vulnerable populations. To this end, an Indigenous People's Planning Framework (IPPF) was prepared. 16. Involuntary Resettlement [OD 4.30]: Although little impact is expected on people or housing from the works envisaged under the proposed project, the involuntary resettlement 120 policy was activated in preventive form, in cases where such cases would occur, so that well defined instruments and procedures could ensure an adequate treatment of those cases. 17. Cultural Property [OPN 11.03, being revised as OP 4.11]: Also preventively, this policy was activated, taking into consideration Peru's high historical and cultural value and the fact that some activities envisaged under the proposed project could affect directly or indirectly those sites. In this regards, the national legislation is very strict and it requires for all road works that a Certificate of Inexistence of Archeological Remains (CIAR) be prepared. This requirement ensures compliance with the Bank policy. In addition, the ESMF includes specific procedures related to the protection of physical and cultural heritage, as required by the Bank policy. Instruments developed for the project's social and environmental management: 18. Environmental and Social Management Conceptual Framework (ESMF): This instrument was developed, as agreed with Provias Descentralizado, so that an adequate environmental and social management be ensured during implementation, in accordance with both the national environmental legislation and the Bank safeguards policies. The ESMF defines, based on a legal and institutional diagnostic, the social and environmental management procedures and the tools that are needed to ensure the inclusion of social and environmental variables in the project cycle. The ESMF also includes a plan for the strengthening of social and environmental management. 19. Specific objectives of the ESMF also include: - Presenting the legal and institutional environment in which the proposed project will have to operate in order to ensure compliance with the national legislation; - Defining methodologies, procedures and instruments that will streamline social and environmental management and make it more agile all over the project's cycle; - Designing a methodology for the classification of road investments according to the corresponding social and environmental risk; - Listing the social and environmental studies required based on the risk level of a particular road investment, in order to be able to comply with both the national legislation and the Bank safeguards policies; - Identifying the procedures required in order to comply with the environmental legislation and the Bank safeguards' policies; - Identifying the persons that are responsible for social and environmental management and defining what should be their role during each one of the various phases of the project; - Proposing activities aiming at strengthening the social and environmental management capacity of Provias Descentralizado and of other institutions involved in project implementation. 20. The ESMF has been designed for the internal use of Provias Descentralizado, as well as for decentralized entities (PRIs) which will be responsible for project implementation. The ESMF should become a dynamic instrument, flexible enough in order to be able to adapt itself to the specificities of the activities to be implemented under the proposed project, so that social and environmental practices can evolve and be improved all over project implementation. The ESMF 121 was developed in coordination con DGASA which is the competent regulatory institution for the transport sector. 21. Indigenous Peoples Planning Framework (IPPF): The IPPF was developed taking into consideration the importance of indigenous peoples in Peru and the need to comply with the corresponding Bank policy. The IPPF presents a list of activities that will ensure that adequate attention is paid to vulnerable populations living nearby road investments financed under the proposed project. The IPPF is annexed to the ESMF. 22. The IPPF has been developed, taking into account the national legislation as well as the corresponding Bank and IaDB safeguards policies, for the internal use of Provias Descentralizado and of the PRIs. This instrument should be dynamic and flexible enough in order to adapt to the specificities of the various road investments to be financed under the proposed project. 23. Resettlement Policy Framework (RPF): This instrument has been developed with the objective of taking into account the requirements of the national legislation and of the corresponding Bank policy, in case involuntary resettlements would be caused by a road investment to be financed under the proposed project. The RPF will ensure restoring the socio- economic conditions of peoples affected by an activity of road rehabilitation or maintenance. 24. The objective of the RPF is to define the methodology and procedures applicable in order to prepare a resettlement plan aiming at mitigating and/or compensating the negative effects associated to a particular road investment, in case it is necessary to displace people. 25. Specific objectives of a resettlement plan include: - Quantifying the losses incurred by the peoples that have been displaced; - Restoring the socio-economic conditions of the displaced population; - Helping displaced peoples during the relocation process, including ­ when needed, during eventual periods of transition or adaptation; - Contributing to the improvement of territorial organization. 26. It is important to note that during preparation, it was agreed with DGSA ­ as the relevant environmental authority for the transport sector, that when a road investment affects more than 10 houses or families, a resettlement plan will be prepared, while when less than 10 houses or families are affected, only an action plan will be prepared within the related environmental management plan. Environmental safeguards Impact evaluation 27. The proposed project will finance the improvement, rehabilitation and maintenance of existing rural roads. The construction of new roads ­ which would have a more significant impact from a social and environmental point of view ­ is not envisaged. 122 Key activities that are likely to have social and environmental impacts during the design, implementation, operation and maintenance stages are listed below (see Box A10-1). This listing was prepared with the objective of identifying potential social and environmental risks so that they can be prevented and/or mitigated. Box A10-1: activities that are likely to generate environmental impacts Before the execution of road improvement works: - selection of areas for the stocking of equipment and materials and of living areas for workers - identification of works in areas that are sensitive from an environmental point of view During the execution of road improvement works: - transport of materials and gasoline - management of used oils and gasoline in equipment areas and in asphalt processing plants - operation of air-polluting equipment - construction activities that could generate dangerous traffic conditions by interfering with the regular flow of vehicles - transport of inadequate materials until final disposal areas - elimination of solid waste in construction and working areas - displacement of materials in zones of archeological, cultural or historical significance After the execution of road improvement works: - restoration of areas - management of areas used for the disposal of materials - reforestation of areas Identification of potential social and environmental impacts 28. Air pollution: Several activities during the execution of road improvement works will generate the emission of particles into the atmosphere that could affect the natural environment and/or increase occupational risks. These activities include in particular: a) the operation of equipment that generate gases that result from the combustion of petroleum derivatives; b) the extraction of construction materials; and c) the transport of materials. 29. Solid waste: The various pollutants that could be produced during the execution of road improvement works include: unused materials and waste resulting from the operation of equipment such as filters, used pieces and tires, used oils and garbage. 30. Noise and/or vibrations: The use of equipment during the execution of road improvement works and during the extraction of materials can generate levels of noise affecting workers or people living in the areas nearby, particularly when urban roads are concerned. 31. Visual pollution: The lack of environmental concern during the execution of road improvement works, such as the disposal of unused materials in the road's right of way can affect the landscape and the scenic views. 123 32. Protected areas: The execution of works in areas declared under an environmental protection regulation or in areas with high sensitivity of the environment may generate high social and environmental impacts. These types of impacts should be taken into consideration not only in areas that are declared but also in those areas that have been identified by various entities in charge of the protection of natural habitats. 33. Stabilization of slopes and of zones affected by erosion: The execution of works, especially those related to the increasing of the width of a road, may affect the environment through making slopes less stable, which could generate a high risk for structural stability of said road and affect road safety. 34. Physical and cultural heritage: The inadequate displacement of materials in areas of cultural or archeological significance can generate irreversible impacts. In such areas, a specific strategy should be developed during the design and construction phases so that these types of impacts can be prevented. Environmental assessment of a sample of potentially eligible works 35. During preparation, a sample of road investments potentially eligible for financing under the proposed project was assessed. For the purpose of this assessment, a social and environmental categorization scorecard was used. This scorecard was developed in the context of the preparation of the ESMF and in accordance with the SAT guidelines (Road Investment's Quick Social and Environmental Assessment Guidebook). It allows categorizing road investment projects according to the social and environmental risk level, in order to comply with both national legislation and the Bank safeguards policies. 36. A field visit for the social and environmental assessment of the sample was performed in February 2006 with the participation of technicians from Provias Descentralizado and the Bank. 37. It was found that none of the individual investments listed in the sample reached the highest level of social and environmental risk ("level 1" according to the ESMF categories). Three investments were categorized with a moderate risk ("level 2") and the remaining three with the lowest risk level ("level 3"). It should be noted that sample investments were selected among projects for which there were suspicion of potentially high social and environmental impact. Therefore, it is expected that the huge majority of road investments to be financed under the proposed project will in fact present the lowest social and environmental risk levels. 124 Table A10-1: Social and environmental assessment of the selected sample works Province District Road Environmental sensitivity Risk level Yauyos Yauyos Emp. RN 022 (Magdalena)- Yauyos Low Level 3 Carhuaz Pariahuanca Tarica-Pariahuanca-Aco High Level 2 Yungay Yungay Shillcop-Huarca Moderate Level 2 Yauli Huayhuay Suitucancha-Huayhuay- Andaychagua Low Level 3 Chanchamayo San Ramón Bella Vista-Villa Sol-Santa Maria Low Level 3 Satipo Coviriali Huacara-Catarata Caracol High Level 2 38. A brief description of the six selected rural road segments is provided hereafter: a) Yauyos province: rural road "Emp. RN 022 (Magdalena)-Yauyos": The road connects the towns of Magdalena and Yauyos and has a length of 8.77 km and a width of 3.0 m. The road has a critical importance so that the inhabitants of Magdalena can access social services and income- generating opportunities in Yauyos. From an environmental point of view, the envisaged work does not include widening the roads and so the expected impact on the environment would be very limited. Nevertheless, special attention will have to be paid to the localization of equipment and disposal of materials since there are various cultivated areas. The scorecard result is "level 3" (lowest social and environmental risk). Picture No. 1 Picture No. 2 Cultivated areas on the side of the road Steep slopes on the side of the road b) Carhuaz province: rural road "Tarica-Pariahuanca-Aco": The road is being rehabilitated by Provias Descentralizado (60% of the works are completed) and has a length of 21 km and a width of 4.0 m. From an environmental point of view, unused materials were disposed on the side of the roads which affected nearby cultivated areas. An archeological zone ("Honkopamba") is also located in the area of influence and this could have been better taken into consideration during execution. The scorecard result is "level 2" (moderate social and environmental risk). This road is under rehabilitation and was selected for illustrative purpose since it will not be financed under the proposed project. 125 Picture No. 3 Picture No. 4 Inadequate disposal of materials in the Cultivated areas that are affected by the road archeological zone rehabilitation works c) Yungay province: rural road "Shillcop-Huarca": This 11 km poor condition road provides access to a number of dispersed rural households from the districts of Shillcop and Huarca. The itinerary includes many curves and a few (4) houses are located in the road's right of way, requiring in some cases the resettlement of the inhabitants. Since less than 10 houses or families would be affected, it was agreed with DGASA that resettlement issues would be addressed through a specific action plan annexed to the environmental management plan. From the environmental point of view, the road is located in the buffer zone of the Huscarán national park. The scorecard result is "level 2" (moderate social and environmental risk). Picture No. 5 Picture No. 6 One of the few houses located in the right of Example of topography of the zone way and requiring resettlement d) Yauli province: rural road "Suitucancha-Huayhuay-Andaychagua": This 25 km road includes two segments: the Andaychagua-Huayhuay segment is in good conditions since it is maintained by a mining enterprise, and no social or environmental issues could be identified. On the other hand, the segment Suitucancha-Huayhuay is in poor conditions and includes steep slopes, requiring that special attention be paid to the disposal of materials on the side of the road. Nevertheless, no negative social or environmental impacts are expected. The scorecard result is "Level 3" (lowest social and environmental risk). 126 Picture No. 7 Picture No. 8 Segment Andaychagua ­ Huayhuay is in Steep lateral slopes on the segment good conditions Suitucancha - Huayhuay e) Satipo province: rural road "Bella Vista-Villa Sol-Santa Maria: The 6 km road is in poor conditions and the last part of it is not accessible to vehicles. The road provides access to small farmers (production of lemon, plantains, avocadoes, pineapple). No significant social or environmental negative impact is expected in this relatively highly populated area. The scorecard result is "Level 3" (lowest social and environmental risk). Picture No. 9 Picture No. 10 Difficulties of access for small farmers to sell Very deteriorated road conditions in the last their products part of the segment f) Chanchamayo province: rural road "Huacara-Catarata Caracol": The 4 km road is in poor conditions. The road crosses the village of Huacara where a house in located in the right of ways and resettlement will have to be envisaged and addressed through a specific action plan. No significant environmental impact is expected in a zone mostly constituted from agricultural areas. Nevertheless, due to the resettlement issue, the scorecard result is "Level 2" (moderate social and environmental risk). 127 Picture No. 11 Picture No. 12 The road crosses a house, possibly requiring Poor condition road with cutivated areas on the resettlement of inhabitants the side Assessment of the institutional capacity for social and environmental management 39. With the objective of identifying the measures that are required in order to strengthen the social and environmental management capacity, an assessment of the institutional capacity of Provias Descentralizado and of its Unidades Zonales was performed. A plan for the strengthening of the management capacity of those issues was then prepared and is annexed to the ESMF (see below). Key issues related to the institutional capacity to manage those issues are: a) Provias Descentralizado has a specialist in charge of social and environmental management, which is in charge of ensuring compliance with the national legislation. This person maintains a close coordination with the DGASA, particularly regarding the assessment of environmental impacts and for the follow up of studies that may be required to obtain environmental authorization in cases those are needed. b) During the First and Second Rural Roads projects, various social and environmental management practices were developed and implemented. However, these practices were not fully systematized and streamlined within the complete project cycle. The ESMF provides a more systematic use of these environmental and social practices. c) One of the key issues of the proposed project is the involvement of the Provincial Road Institutes (PRIs) in the broader context of the decentralization reforms. PRIs can count on the support of the 11 unidades zonales (the regional bureaus of Provias Descentralizado) whose role is to build institutional capacity at the decentralized local level. For this purpose, the unidades zonales include specialists in both road management and social development. d) Provias Descentralizado should ensure that the social and environmental instruments that have been developed for the purpose of the proposed project are actually implemented at the local level. For this purpose, specific monitoring and coordination instruments will be developed as well as number of training activities. 128 e) The unidades zonales include specialists trained in social and environmental management but this capacity needs to be strengthened and transferred to the PRIs in the broader context of the decentralization reforms. The ESMF should become the reference guidebook for the implementation of the project at the local level. Compliance with the national environmental legislation 40. The GoP has put in place various environmental legislations, which will be used for the implementation of the proposed project. On the other hand, the decentralization laws (see Annex 1) will provide the legal basis for the repartition of social and environmental management responsibilities between the central and local levels. 41. From an environmental point of view, the reference national legislation is the Environmental Impact Assessment National System Law (Ley del Sistema Nacional de Evaluación del Impacto Ambiental) which sets requirements to ensure social welfare, the preservation of biodiversity and a sustainable use of natural resources. In addition, the law regulates issues related to citizens' participation to ensure the social and environmental sustainability of transport projects. 42. On the other hand, the Environment General Law (Ley General del Ambiente) and the Law No. 28245 which created the Environmental Management National System49 streamlines social and environmental management practices in central government's agencies, as well as in decentralized entities and in other public institutions. The overarching responsibility of regulating the national environmental policies is given to the Environment National Council. 50 43. Peru has also adopted a number of international legal instruments, particularly regarding the preservation of indigenous and cultural heritage. These instruments include commitments to preserve the rights of autonomous peoples, such as the International Labor Organization's Agreement No. 169. Strengthening of social and environmental management capacity 44. Once identified key weaknesses and opportunities for improving the social and environmental management, a plan for the strengthening of social and environmental management capacity was prepared. The plan includes measures related to overall management, training and equipment. A summary of the proposed activities is presented in the table below. 49Sistema Nacional de Gestión Ambiental (SNGA). 50Consejo Nacional del Ambiente (CONAM). 129 Table A10-2: Summary of activities listed in the plan for the strengthening of social and environmental management Activities Amount (US$) Overall management 1. GIS for the technical, social and environmental management of roads 5,000 2. Updating, editing and publication of technical, social and environmental 20,000 management instruments 3. Social and Environmental management system 3,000 Training 4. Training activities for Provias Descentralizado's environmental unit 5,000 5. Workshops for the dissemination, training and implementation of the project's 30,000 social and environmental instruments for field-based staff (in particular for PRIs) 6. Workshops specifically aiming at strengthening the environmental management 25,000 capacity of PRIs 7. Annual event to promote the exchange of experience across PRIs 50,000 Equipment 8. Hardware and software related to the implementation of the GIS mentioned above 10,000 9. Equipment and instruments to monitor environmental and social effects of 5,000 activities financed under the proposed project TOTAL 153,000 Social safeguards 45. Two frameworks were prepared to comply with both the national environmental legislation and the Bank safeguards policies. These are: the Resettlement Policy Framework (RPF) and the Indigenous Peoples Planning Framework (IPPF). 46. Both Frameworks will be critical inputs for Component 3 (Institutional Development), for the training of the PRI in the Provincial Municipalities and for strengthening local capacity for handling safeguard policies, and to ensure proper design and implementation of Indigenous Peoples Plans and Resettlement Action Plans if needed. 47. The technical training and institutional strengthening of the Provincial Municipalities, which are activities to be financed under Component 3, is of critical importance in the case of the application of the social safeguards. Provias Descentralizado will ensure during project implementation that there is capacity to prepare and adequately implement the mandates of these policies at the Provincial level, and for which budget will be allocated at an early stage of project implementation. 48. Both Frameworks will be disclosed in country and in the Infoshop prior to appraisal. The full versions of both Frameworks are available in the project files in Spanish. 130 49. Involuntary resettlements. Since the project only involves the rehabilitation of the existing road infrastructure, no significant resettlement is expected. However, and not knowing before appraisal the specific sites of intervention, the borrower, with support from the social specialist in the team, has prepared a Resettlement Policy Framework (RPF) in compliance with OP/BP 4.12 to address potential cases. The RPF addresses the assessment's requirements according to the level of impacts subprojects might entail and differentiates between three different levels; it also provides instructions to be followed for consultation with the affected people and relates the process of resettlement to the process of project implementation. The RPF describes the content of each of the studies require for designing RAPs as well as the various alternatives projects might face regarding displacement, land acquisition, compensation, resettlement, etc. The preparation and implementation of the RAPs is the responsibility of the Provincial Municipalities with supervision from the project unit in Provias Descentralizado. The RAPs will be reviewed and approved by DGASA before they are sent to the Bank for review and clearance. 50. Indigenous peoples safeguards. Six Peruvian regions located in the Southern Sierra concentrate the larger indigenous communities (Apurimac, Ayacucho, Arequipa, Huancavelica, Cuzco and Puno). In these six regions, 2,300 small farmers' communities (comunidades campesinas) are registered at the Ministry of Agriculture. Indigenous communities have been particularly affected by violence and civil unrest during the terrorism era of the 1990s. The areas where they are living also concentrate the highest number of social conflicts such as: (a) rebellions against central government's authority; (b) expulsion of local authorities (revocatorias); (c) conflicts and social mobilization (strikes and roads blocked); (d) demagogical local leadership. In the highlands, in particular in the territories of the Southern Sierra, indigenous communities live 3000 m above sea level on a territory of about 5 million hectares, which is characterized by high levels of poverty and a heavy dependence on agriculture. In this context, rural roads are critical so that these communities can access social and income- generating opportunities. The lack of adequate land titling is another critical issue affecting most communities in Apurimac, Ayacucho and Huancavelica. Finally, cultural practices in the highlands are characterized by rituals, celebrations and cultural events which are influenced by the traditional Andean vision. Their identity is not only territorial but, rather, cultural and ethnical. This identity is particularly characterized by the concepts of Ayni (reciprocity), Minka (solidarity), and Faenas (community works).Their vision of the cosmos is practiced through dialogue with a nature animated by divine beings, and through healing with coca leaves. 51. Because this is a national project subject to coordination with the provincial municipalities, we do not know before appraisal the specific sites where the project will be implemented and therefore cannot anticipate if Indigenous Peoples will be affected by project activities. For this reason, the borrower, with guidance from the social specialist in the team, has prepared an Indigenous Peoples Planning Framework (IPPF) in compliance with OP/BP 4.10, acceptable to the Bank. The IPPF clearly identifies the potential adverse and positive project impacts, defines the process and principles by which the consultation process will be carried out, as well as the institutional responsibilities for the design and implementation of Indigenous Peoples Plans (IPP). The preparation and implementation of the IPPs is the responsibility of the Provincial Municipalities with supervision from the project unit in Provias Descentralizado and 131 made in coordination with INDEPA. The IPPs will be reviewed and approved by DGASA before they are sent to the Bank for review and clearance. 52. The IPPF provides demographic data on the indigenous population of Peru which will be very useful for the planning of subprojects. Thus for instance, the Provincial Municipalities in the Andean South will most likely trigger this policy since, as the table below taken from the IPPF shows, a large number of indigenous people inhabits these regions. The IPPF also provides an explanation on Indigenous Peoples self-identification which varies in the country in relation to distance to urban centers, geographical isolation, etc. In Peru not all Indigenous Peoples that one can identify as such following objective indicators necessarily identify themselves as Indigenous Peoples. This issue needs to be taken into account before deciding on the application of the Bank policy. Table A10-3: Population 5 years old and above according to native language at the Departmental Level population Population DEPARTAMENTO (>5 year-old) Ditribution by mother tongue Total Spanish % Others % APURÍMAC 321,157 72,070 22.4 246,880 76.9 AYACUCHO 421,849 120,139 28.5 298,378 70.7 CUSCO 885,828 307,920 34.8 569,723 64.3 HUANCAVELICA 324,864 105,446 32.5 216,705 66.7 PUNO 938,275 218,991 23.3 711,547 75.8 Source: A. Chirinos R. Atlas Lingüístico del Perú. Ministerio de Educación y Centro Bartolomé de las Casas, 2001. 53. Gender. In rural Peru, women have to deal with a triple struggle: illiteracy as illustrated by the fact that 70% of the Peruvian illiterate population is constitutes of indigenous and monolingual women; economic discrimination with women earning lower income than men; and vulnerability and exposure to violence. Taking these issues into account, the Second Rural Roads project's objective was to increase access to basic social services and economic and income generating activities with gender equity, to help alleviate rural poverty and raise the living standards of rural communities. Towards this end, the project included proactive measures in order to increase women's participation through, in particular, (i) promoting the involvement of women in road maintenance as workers of the micro-enterprises; (ii) promoting the participation of women in the Local Development Window (LDW) processes to identify and implement income-generating initiatives; and (iii) providing training to mainstream gender in project cycle. 54. Provias Descentralizado created a specific unit to handle gender issues. This unit developed in particular a large training program for managers and field staffs; evaluated social barriers that limited women's involvement in the micro-enterprises for road maintenance; and defined gender-related indicators, and monitored them throughout the project cycle. 132 55. Female participation in road maintenance was at first resisted. The most common argument was that women do not have the physical strength required to perform maintenance activities. Such activities were at first perceived to be too exhausting with long distance to travel and dangerous due to the vehicles traffic. However, after five years of active female participation in the micro-enterprises, women proved to be efficient in this area and were able to overcome the initial stereotypes (see Box). Box A10-2: Gender-related stereotypes in rural Peru Stereotypes between men and women refer to social perceptions in society that are learnt since childhood in the family, the school and the church. As a consequence, the respective social roles for men and women are often predetermined. In rural Peru, social stereotypes are usually influenced by cultural patterns and tradition. Stereotypes are an obstacle to social inclusion, equal participation, and opportunities for women and men, and this limits the way women can contribute to local development. The following examples are taken from gender workshops that have been organized in rural Peru: a woman is "someone beautiful who is helpful to human beings" (Junín), a man is "one who is always able to take decisions" (Ancash), a woman "complements the man's actions" (Cusco), men are "irresponsible and harasser" (Apurimac). Thus, local knowledge tends to create a deep divide between men and women. However, there is also an emerging new perception in rural Peru of a more inclusive community that indicates other roles for women. For example, "women are valiant, ledare, fighter, hard worker, entrepreneur, honest, not corrupted, head of her house, and someone that takes decisions" (Cajamarca). Source: Provias Descentralizado ­ Training modules on gender. 56. As a result of the gender action plan adopted by Provias Rural, significant progress could be achieved in terms of women participation. A survey of 261 Rural Roads Committees (Comités Viales Rurales) has shown that 24% of the members of these committees were women. In these organizations, female leadership was strong with 52% of the facilitators (vocal) and 42% of the treasurers being women. Picture No. 13 Picture No. 14 Women performing road maintenance in Picture from road maintenance manual used by Huancavelica micro-entrepreneurs 133 Picture No. 15 Picture No. 16 In Ayacucho, men and women participate to a In San Martin, men and women work in a fish gender workshop farm supported by the LDW 57. In the proposed project, the gender action plan developed during the second rural roads project will be streamlined with the help of the gender focal points in the field offices and the active involvement of the PRIs. The gender action plans included the following: (a) Equal opportunities for the selection of micro-enterprises' workers: this includes call for candidates with equal conditions for men and women; the promotion of job opportunities and adequate information about the characteristics of road maintenance assignment at the community level; the promotion of women's participation; and the adoption of selection criteria that avoid the exclusion of women. (b) Promoting gender equity in operational procedures: the operational handbook for road maintenance micro-enterprises was modified to integrate more inclusive selection criteria that offer opportunities for both men and women. This required the modification of the following criteria: (a) "experience in similar activities" so that women who are experienced in handling agricultural tasks can also apply; (b) "economic status" in order to also consider single mothers; (c) "education level" in order to take into account that many women living in rural areas are illiterate; (d) "community leadership" taking into account the experience in women's organizations. (c) Creation of rural committees: In the process of informing communities, women's inclusion will be promoted by inviting mothers' associations, "glass of milk" groups and other female organizations. (d) Definition and monitoring of gender indicators: the gender team has prepared a set of indicators such as (i) number of women involved in the maintenance of rural roads (24% of micro-entrepreneurs are women as of mid 2006); (ii) number of women attending community meetings related to rural transport; (iii) percentage of women attending training workshops on transport and gender. (e) Gender focal points: field staffs were trained on gender issues so that they could implement the gender action in all stages of the project cycle. Training covered gender and rural development, gender and rural roads, stereotypes and gender roles, access to resources and 134 assets, gender in project cycle, monitoring indicators, planning and training methodologies. In the proposed project, the dissemination of the gender agenda will have to be promoted among the staffs of PRIs since they will have the primary responsibility for project implementation. (f) Training: Workshop on gender have been an efficient instrument to make a characterization of the target population and to better understand the types of relationships between stakeholders as well as the levels of difficulty and stereotypes relating to the participation of women in road maintenance. Comprehensive training materials are now available and will be used to continue pushing the gender agenda, particular among decentralized entities (PRIs). 58. From gender to social inclusion and participatory democracy. The Second Rural Roads project provided Provias Descentralizado with a set of lessons learned and good practices to promote an inclusive society in the dimension of local development. These include significant contributions toward gender inclusive, stakeholder's participation, and civic engagement. The proposed project will build on these good practices of inclusion, participation and gender equity. 59. In Peru during the last five years, a revamped legal framework was established on which the proposed project will build. This framework promotes social inclusion, civic engagement, participatory democracy, social accountability and gender equity. In sum, these laws are: (i) Law to improve access to public information, (ii) Law for Municipalities; (iii) Law for civic participation and engagement; (iv) Gender and equal opportunities; and, (v) Participatory Budgeting. These legal standards provide mechanisms for enhancing community participation and social accountability. 60. The proposed project will more particularly target social inclusion; civic engagement and participatory democracy. Social inclusion aims at enhancing the investment climate, providing economic opportunities (eg. through the LDW), accessing to services with equal opportunities without any discrimination on gender, sex, age, ethnic, legal status (undocumented people), or language. The civic engagement and participatory democracy allows citizenship participation in the public sphere (local government, participatory budgeting, and social accountability) and promotes transparency and good governance. In order to improve civic engagement, transparency and access to public information is needed. 61. The project will develop a social inclusion -civic engagement- participatory democracy national strategy, for mainstreaming inclusion and participation in the project cycle and at the municipal level. 62. The social inclusion and participation approach will be implemented through the following steps: (i) Systematization of lessons learned and good practice in gender, community participation, and inclusion of the first and second rural roads projects. (ii) Preparation of a strategy to promote inclusion and participation adapted to the national social context. The strategy will consider the inclusion and participation of indigenous peoples, afro descendents, rural and peri-urban communities, men, youth, 135 women, and key social stakeholders at the local level. The strategy will be tested in a sample of municipalities. (iii) Structuring an information mechanism for public access on project implementation. This will require the identification of selected information to be use by municipalities, communities, and stakeholders. (iv) Structuring a training process on transport planning, participatory budgeting, transparency and social accountability, social inclusion and gender equity, for local authorities, communities, and stakeholders. (v) Designing a communication plan for the dissemination of projects results and performance of the inclusion and participation approach. (vi) Identification of indicators capturing project's impacts on social inclusion and participation. Project's social and environmental sustainability 63. Based on the project's social and environmental assessment and taking into account the practices developed by Provias Rural in the past to ensure the compliance of activities performed on rural roads with national legislations and Bank safeguards, the proposed project should be considered sustainable from a social and environmental point of view, and in compliance with national legislations and with Bank's applicable safeguards policies. 64. One important element to justify such sustainability is the actual implementation of the SEMCF, which should progressively become the main social and environmental management instrument for the project, to be used at both the central and the local levels during the entire project cycle (in particular with the active involvement of the PRIs which constitute the relevant decentralized entities for project implementation). Another important element is the actual implementation of the plan for the strengthening of social and environmental management so that an adequate technical capacity can be developed in order to attend social and environmental aspects. 65. Finally, it is essential to underline the necessity of an adequate monitoring and follow up during supervision in order to ensure compliance with the procedures described in the SEMCF and with the Bank safeguards' policies all over project implementation. 136 Annex 11: Project Preparation and Supervision PERU: Decentralized Rural Transport Planned Actual PCN review April 11, 2006 April 11, 2006 Initial PID to PIC June 10, 2006 May 31, 2006 Initial ISDS to PIC June 10, 2006 June 5, 2006 Appraisal September 1, 2006 September 11, 2006 Negotiations October 26, 2006 November 2, 2006 Board approval December 12, 2006 December 19, 2006 Planned date of effectiveness March 1, 2007 Planned date of mid-term review March 31, 2010 Planned closing date March 31, 2012 Key institutions responsible for preparation of the project: - Provias Descentralizado / Ministry of Transport and Communications - Ministry of Finance Bank staff and consultants who worked on the project included: Name Title Unit Nicolas Peltier-Thiberge Infrastructure Economist (Team Lead) LCSFT Keisgner Alfaro Senior Procurement Specialist LCOPR Rodrigo Archondo-Callao Highway Engineer TUDTR Susan Bogach Senior Energy Economist LCSFE Stephen Brushett Lead Transport Specialist (peer reviewer) LCSFT Elizabeth Dasso Senior Social Development and Civil Society Specialist LCCPE Nicolas Drossos Consultant ­ Financial Management Specialist LCSFM Mohammed Feghoul Lead Municipal Engineer (peer reviewer) MNSIF Maria Emilia Freire Regional Advisor (peer reviewer) LCSFP Melanie Glass Junior Professional Associate LCSFT John Hine Senior Rural Transport Specialist (peer reviewer) TUDTR Rafael Letts E.T. Consultant LCSFR Maria Constancia Mallo E.T. Temporary LCSFT Aurelio Menendez Lead Transport Specialist (peer reviewer) EASTR Isabella Micali-Drossos Senior Counsel LEGLA Xiomara Morel Senior Finance Officer LOAG1 Demetrios Papathanasiou Energy Economist LCSFE Kathrin Plangemann Senior Public Sector Specialist (peer reviewer) LCSPS Rossana Polastri Senior Country Economist LCSPE Juan Quintero Senior Environmental Specialist LCSEN Luis Schwarz Senior Financial Management Specialist LCSFM Nicolas Serrie Junior Professional Associate LCSFT Maria Angelica Sotomayor Senior Economist LCSFW Evelyn Villatoro Senior Procurement Specialist LCOPR Marco Zambrano Consultant ­ Environmental Specialist LCSFT Alonso Zarzar Senior Social Scientist LCSEO 137 Bank funds expended to date on project preparation: 1. Bank resources: US$173,320 (US$74,352 in FY06 and US$97,968 in FY07) 2. Trust funds:US$760,000 (PHRD Grant JPN 056582) 3. Total: US$933,320 Estimated Approval and Supervision costs: 1. Remaining costs to approval: US$10,000 2. Estimated annual supervision cost: US$89,000 138 Annex 12: Documents in the Project File PERU: Decentralized Rural Transport APRA. 2006. Plan de Gobierno 2006-2011 [Resumen Ejecutivo] Aragon, Ismael. 2004. "Análisis de la Provisión de Servicios de Electrificación en las Zonas Rurales del Peru" Azcueta, Michel. 2003. "Análisis de Capacidades en los Gobiernos Locales del Perú" World Bank. 2006. "Rural Infrastructure in Peru: Effectively Underpinning Local Development and Fostering Complementarities" Dianderas, Augusta. 2004. "Estudio para la Definición de Criterios de Priorización de las Inversiones y de Medición de la Eficiencia de la Provisión de Servicios de Agua Potable y Saneamiento Rural" Escobal, Javier and Torero, Máximo. 2004. "Análisis de los Servicios de Infraestructura Rural y las Condiciones de Vida en las Zonas Rurales de Peru" IPE (Instituto Peruano de Economía). 2003 "La Brecha en Infraestructura, Servicios Públicos, Productividad y Crecimiento en el Perú". Luna, José. 2004. "Situación de los Servicios de Transporte en Zonas Rurales del Peru" Rodriguez, Miguel. 2004. "Análisis de Gastos de Inversiones y en Provisión de Servicios de Infraestructura Rural y su Comparación con la Evolución de los Indicadores Socio-Económicos de las Areas Rurales en Perú" Tavara, Jose. 2004. "Estudio para la Definición de una Estrategia de Fortalecimiento y Expansión del Programa de Telecomunicaciones e Info-centros en las Zonas Rurales del Peru" 139 Annex 13: Statement of Loans and Credits PERU: Decentralized Rural Transport Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd P078894 2006 PE Real Property Rights II 25.00 0.00 0.00 0.00 0.00 25.00 1.67 0.00 P078813 2006 PE Regional Transport Decentralization 50.00 0.00 0.00 0.00 0.00 49.88 -0.04 0.00 P090116 2006 PE Rural Electrification 50.00 0.00 0.00 0.00 0.00 50.00 0.00 0.00 P078953 2005 PE-(CRL1) ACCOUNT. F/ DECENT. 7.80 0.00 0.00 0.00 0.00 5.55 1.45 0.00 SOC.SCTR P082588 2005 PE (APL2)Agric Research and Extension 25.00 0.00 0.00 0.00 0.00 23.52 0.17 0.00 P082625 2005 PE Vilcanota Valley Rehab & Mgmt 4.98 0.00 0.00 0.00 0.00 4.81 0.66 0.00 Project P088809 2005 PE Inst. Capacity for Decent. TAL 8.80 0.00 0.00 0.00 0.00 7.90 4.07 0.00 P073438 2004 PE Justice Services Improvement 12.00 0.00 0.00 0.00 0.00 11.61 10.64 0.00 P074021 2004 PE LIMA TRANSPORT PROJECT 0.00 0.00 0.00 7.93 0.00 6.15 8.23 0.00 P035740 2004 PE LIMA TRANSPORT PROJECT 45.00 0.00 0.00 0.00 0.00 43.19 24.13 0.00 P081834 2003 PE Lima Water Rehab Add'l Financing 20.00 0.00 0.00 0.00 0.00 17.84 15.37 0.00 P077788 2003 PE Trade Facil. and Prod. Improv. T. A. 20.00 0.00 0.00 0.00 0.00 15.97 15.39 0.00 P068250 2003 GEF PE PARTICIPATORY MGMT PROT 0.00 0.00 0.00 14.80 0.00 8.67 3.85 0.00 AREAS P065256 2003 PE NATIONAL RURAL WATER 50.00 0.00 0.00 0.00 0.00 42.62 30.12 0.69 SUPPLY AND P055232 2003 PE- Rural Education 52.50 0.00 0.00 0.00 0.00 37.83 16.33 1.60 P065200 2001 GEF PE Indigenous Management Prot. 0.00 0.00 0.00 10.00 0.00 1.58 0.78 0.00 Areas P044601 2001 PE SECOND RURAL ROADS PROJECT 50.00 0.00 0.00 0.00 0.00 6.09 6.71 0.00 P008037 1997 PE IRRIGATION SUBSECTOR 85.00 0.00 0.00 0.00 0.50 7.53 -2.23 0.80 PROJECT Total: 506.08 0.00 0.00 32.73 0.50 365.74 137.30 3.09 140 PERU STATEMENT OF IFC's Held and Disbursed Portfolio In Millions of US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1999 Alicorp 0.00 0.00 20.00 0.00 0.00 0.00 20.00 0.00 2005 Corp. Drokasa 6.69 0.00 0.00 0.00 6.69 0.00 0.00 0.00 2004 EDYFICAR 2.30 0.00 1.00 0.00 2.30 0.00 0.00 0.00 2002 FTSA 6.43 0.00 1.50 0.00 6.43 0.00 1.50 0.00 2002 Gloria 25.00 0.00 0.00 0.00 19.00 0.00 0.00 0.00 2002 ISA Peru, SA 15.28 0.00 0.00 5.59 15.28 0.00 0.00 5.59 2003 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 Interbank-Peru 40.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 Interseguro 0.00 4.00 0.00 0.00 0.00 4.00 0.00 0.00 2003 Interseguro 0.00 0.59 0.00 0.00 0.00 0.59 0.00 0.00 2005 Interseguro 0.00 0.60 0.00 0.00 0.00 0.00 0.00 0.00 2000 Laredo 5.00 0.00 5.00 0.00 5.00 0.00 5.00 0.00 2004 Laredo 0.30 0.00 0.00 0.00 0.08 0.00 0.00 0.00 1998 Latino Leasing 1.41 0.00 0.00 0.00 1.41 0.00 0.00 0.00 2002 MIBANCO 0.67 0.00 0.00 0.00 0.67 0.00 0.00 0.00 1999 Milkito 5.50 0.00 0.00 0.00 3.50 0.00 0.00 0.00 2005 Miraflores 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 2003 Norvial S.A. 18.00 0.00 0.00 0.00 5.90 0.00 0.00 0.00 1998 Paramonga 11.05 0.00 0.00 9.33 11.05 0.00 0.00 9.33 2001 Peru OEH 5.60 0.00 3.20 0.00 1.60 0.00 3.20 0.00 1993 Quellaveco 0.00 4.67 0.00 0.00 0.00 4.67 0.00 0.00 1996 Quellaveco 0.00 3.98 0.00 0.00 0.00 3.98 0.00 0.00 2000 Quellaveco 0.00 0.45 0.00 0.00 0.00 0.45 0.00 0.00 2001 Quellaveco 0.00 0.57 0.00 0.00 0.00 0.54 0.00 0.00 1999 RANSA 4.38 0.00 0.00 0.00 4.38 0.00 0.00 0.00 2005 RANSA 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 2001 Tecnofil S.A. 3.15 2.00 0.00 0.00 3.15 2.00 0.00 0.00 2005 USMP 9.00 0.00 0.00 0.00 4.50 0.00 0.00 0.00 1993 Yanacocha 0.00 0.33 0.00 0.00 0.00 0.33 0.00 0.00 Total portfolio: 184.96 17.19 30.70 14.92 116.06 16.56 29.70 14.92 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. 2004 UPC II 0.00 0.00 0.00 0.00 2005 Drokasa PCG 0.00 0.00 0.00 0.00 2006 Agrokasa Exp 0.02 0.00 0.00 0.00 2004 CMAC Arequipa 0.01 0.00 0.00 0.00 Total pending commitment: 0.03 0.00 0.00 0.00 141 Annex 14: Country at a Glance PERU: Decentralized Rural Transport Latin Lower- P OVERTY and SOCIAL America middle- Development diamond* P eru & Carib. income 2005 Population, mid-year (millions) 28.0 551 2,475 Life expectancy GNI per capita (Atlas method, US$) 2,610 4,008 1,918 GNI (Atlas method, US$ billions) 73.0 2,210 4,747 Average annual growth, 1999-05 Population (%) 1.5 1.4 1.0 Labor force (%) 2.9 2.2 1.4 GNI Gross per primary M ost recent estimate (latest year available, 1999-05) capita enrollment Poverty (%of population below national poverty line) .. .. .. Urban population (%of total population) 73 77 50 Life expectancy at birth (years) 70 72 70 Infant mortality (per 1,000 live births) 24 27 33 Child malnutrition (%of children under 5) 7 7 12 Access to improved water source Access to an improved water source (%of population) 83 91 82 Literacy (%of population age 15+) 88 90 89 Gross primary enrollment (%of school-age population) 114 119 114 Peru M ale 114 121 115 Lower-middle-income group Female 114 117 113 KEY ECONOM IC RATIOS and LONG-TERM TRENDS 1985 1995 2004 2005 Economic ratios* GDP (US$ billions) 18.8 53.6 68.7 78.4 Gross capital formation/GDP 18.4 24.8 18.5 18.5 Trade Exports of goods and services/GDP 23.0 12.5 20.9 24.6 Gross domestic savings/GDP 24.9 19.1 21.1 23.7 Gross national savings/GDP 18.7 17.4 18.3 19.6 Current account balance/GDP -0.2 -8.6 0.0 1.3 Domestic Capital Interest payments/GDP 1.9 0.9 2.0 .. savings formation Total debt/GDP 68.4 57.5 45.6 .. Total debt service/exports 28.0 15.9 17.1 .. Present value of debt/GDP .. .. 49.2 .. Present value of debt/exports .. .. 211.2 .. Indebtedness 1985-95 1995-05 2004 2005 2005-09 (average annual growth) GDP -0.1 2.9 4.8 6.7 .. Peru GDP per capita -2.1 1.2 3.3 5.1 .. Lower-middle-income group Exports of goods and services 3.7 8.5 14.7 14.5 .. STRUCTURE of the ECONOM Y 1985 1995 2004 2005 Growth of capital and GDP (%) (%of GDP) Agriculture .. 8.8 10.1 9.4 10 Industry .. 31.0 29.9 32.8 0 M anufacturing .. 16.8 16.0 15.4 00 01 02 03 04 05 Services .. 60.2 60.0 57.8 -10 Household final consumption expenditure 65.6 71.1 68.7 66.1 -20 General gov't final consumption expenditure 9.5 9.8 10.1 10.2 Imports of goods and services 16.5 18.2 18.3 19.4 GCF GDP 1985-95 1995-05 2004 2005 Growth of exports and imports (%) (average annual growth) Agriculture 1.5 4.1 2.0 3.2 20 Industry 0.9 2.3 6.2 7.7 10 M anufacturing -0.5 2.2 3.0 7.0 Services -1.0 2.9 3.5 6.8 0 00 01 02 03 04 05 Household final consumption expenditure -0.6 2.4 3.4 4.4 -10 General gov't final consumption expenditure -0.1 3.0 4.0 9.3 -20 Gross capital formation 4.7 -0.8 5.8 8.8 Exports Imports Imports of goods and services 7.0 1.9 10.4 10.2 Note: 2005 data are preliminary estimates. This table was produced from the Development Economics LDB database. * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. 142 Peru P RICES and GOVERNM ENT FINANCE 1985 1995 2004 2005 Inflation (%) Do mestic prices (%change) 6 Consumer prices 163.4 11.1 3.7 1.6 4 Implicit GDP deflator 166.3 12.9 5.7 3.4 Go vernment finance 2 (%of GDP, includes current grants) 0 Current revenue .. 15.3 15.1 15.4 00 01 02 03 04 05 Current budget balance .. 0.6 0.5 1.1 Overall surplus/deficit .. -3.4 -1.2 -0.7 GDP deflator CPI TRADE 1985 1995 2004 2005 Export and import levels (US$ mill.) (US$ millions) Total exports (fob) .. 5,589 12,617 15,311 20,000 Copper .. 1,200 2,446 .. Fishmeal .. 711 955 .. 15,000 M anufactures .. 1,438 3,476 3,760 Total imports (cif) .. 7,754 9,824 11,700 10,000 Food .. 633 722 .. 5,000 Fuel and energy .. 594 1,754 .. Capital goods .. 2,393 2,365 2,615 0 Export price index (2000=100) .. 120 130 140 99 00 01 02 03 04 05 Import price index (2000=100) .. 98 116 129 Exports Imports Terms of trade (2000=100) .. 122 112 108 BALANCE of P AYM ENTS 1985 1995 2004 2005 Current account balance to GDP (%) (US$ millions) Exports of goods and services 3,792 6,622 14,531 .. 2 Imports of goods and services 2,790 9,648 12,580 .. Resource balance 1,002 -2,974 1,950 4,250 0 Net income -1,044 -2,482 -3,421 -5,011 99 00 01 02 03 04 05 Net current transfers 0 832 1,461 1,791 Current account balance -42 -4,625 -10 1,030 -2 Financing items (net) 513 5,546 2,362 -359 Changes in net reserves -471 -921 -2,352 -671 -4 M emo : Reserves including gold (US$ millions) .. 8,588 12,665 13,790 Conversion rate (DEC, local/US$) 1.00E-5 2.3 3.4 3.3 EXTERNAL DEBT and RESOURCE FLOWS 1985 1995 2004 2005 Composition of 2004 debt (US$ mill.) (US$ millions) Total debt outstanding and disbursed 12,884 30,833 31,296 .. IBRD 723 1,729 2,834 2,816 A: 2,834 IDA 0 0 0 0 G: 2,513 C: 104 Total debt service 1,098 1,242 2,732 .. IBRD 89 205 281 315 IDA 0 0 0 0 D: 4,911 Composition of net resource flows Official grants 90 279 180 .. F: 12,283 Official creditors 178 316 130 .. Private creditors 81 43 1,276 .. Foreign direct investment (net inflows) 1 2,557 1,816 .. E: 8,651 Portfolio equity (net inflows) 0 171 -47 .. World Bank program Commitments 110 386 294 .. A - IBRD E - Bilateral Disbursements 131 203 234 192 B - IDA D - Other multilateral F - Private Principal repayments 40 86 189 210 C - IM F G - Short-term Net flows 91 116 45 -17 Interest payments 49 118 92 105 Net transfers 43 -2 -47 -122 Note: This table was produced from the Development Economics LDB database. 8/13/06 143 Annex 15: Maps IBRD 34989, IBRD 35059, IBRD 35060 PERU: Decentralized Rural Transport 144 IBRD 34989 80°W 7575°W 70°W 70 0° 0° 0 100 200 300 Kilometers 0 100 200 Miles ArcadiaArcadia COLOMBIA COLOMBIA ECUADORECUADOR Napo Corrientes Putumayo Puerto Curaray Puerto Curaray Tigre To To MachalaMachala Tumbes Amazonas TUMBESTUMBES Santiago To To A CaballocochaCaballococha LojaLoja MA Pastaza IquitosIquitos L O R E T O BRAZIL BRAZIL Talara alara Ayar Manco ar Manco Yavari SullanaSullana ZO 5°S P I U R A SanSan C 5°S IgnacioIgnacio N Marañon PiuraPiura Ucayali A 7% JA AS M Yurimaguas urimaguas Tamánco amánco ChachapoyasChachapoyas LAMBA- ChiclayoChiclayo 29% YEQUE ARCA MoyobambaMoyobamba Tarapoto arapoto 9% S A N PERU M A R T I N 22% CajamarcaCajamarca To To CruzeiroCruzeiro 49%49% do Sul do Sul 5% Trujillo SantaSanta LA LIBE LA LIBERTARTAD LIBERTAD LuciaLucia PucallpaPucallpa Sihuas Sihuas Hualaga Chimbote 60%60% ANCASHANCASH 32%32% Tingo María ngo María HuarazHuaraz HUANUCOHUANUCO Ucayali Huánuco Huánuco 10°S 1010°S 38%38% 30% 30% U C A Y A L Í PACIFIC GoyllarisquizgaGoyllarisquizga P A S C O Purús Cerro de Cerro de Pasco Pasco OCEAN Huacho SayánSayán AtalayaAtalaya L I M A SatipoSatipo LaLa C A L L A O OroyaOroyaJ U N I N Apurimac M A D R E HuancayoHuancayo Callao LIMALIMA 11% Urubamba Madre D E D I O S 18% de PuertoPuerto AynaAy Huancavelica Huancavelica C U S C O Dios 64% 64% SintuyaSintuya MaldonadoMaldonado 7% QuillabambaQuillabamba HUANCA- HUANCA- PERU Ayacucho acucho LanlacuniLanlacuni AstilleroAstillero NATIONAL COVERAGE VELICA VELICA AP CuscoCusco BajoBajo BY THE FIRST TWO RURAL Pisco AbancayAbancay 27% Inambari ROADS PROJECT IcaIca P U N O AND THE NEW ONE 6% I C A To San San 25% BuenaventuraBuenaventura PERCENTAGE OF ROAD NETWORK Puquio Puquio x% REHABILITATED BY THE PREVIOUS PROGRAMS 20% Caballas NazcaNazcaAYACUCHO U25% RIMAC 1515°S REGIONS WHERE THE FIRST TWO RURAL AlcaAlca CaillomaCailloma ROADS PROJECT HAVE BEEN IMPLEMENTED To To San Juan JuliacaJuliaca CarabucoCarabuco NEW PROJECT REGIONS Lago Antiquipa Titicaca SELECTED CITIES AND TOWNS A R E Q U I P A PunoPuno To To REGIONAL CAPITALS Atico ArequipaArequipa 21% La Paz La Paz NATIONAL CAPITAL DesaguaderoDesaguadero RIVERS 11% Mollendo MoqueguaMoquegua MAIN ROADS T A C N A RAILROADS MOQUEGUA To To BOLIVIA BOLIVIA PROVINCIAL BOUNDARIES Tacna acna Visviri isviri REGIONAL BOUNDARIES To Belén Belén INTERNATIONAL BOUNDARIES 75°W To Iquique CHILE CHILE SEPTEMBER 2006 IBRD 35059 80°W 7575°W 70°W 70 0° 0° 0 100 200 300 Kilometers 0 100 200 Miles ArcadiaArcadia COLOMBIA COLOMBIA ECUADORECUADOR Napo Corrientes Putumayo Puerto Curaray Puerto Curaray Tigre To Machala Tumbes Santiago Amazonas To Loja Pastaza IquitosIquitos CaballocochaCaballococha BRAZIL BRAZIL Talara alara Ayar Manco ar Manco Yavari SullanaSullana 5°S SanSan 5°S IgnacioIgnacio Marañon PiuraPiura Ucayali Yurimaguas urimaguas Tamánco amánco ChachapoyasChachapoyas MoyobambaMoyobamba Tarapoto arapoto ChiclayoChiclayo PERU CajamarcaCajamarca To Cruzeiro do Sul Trujillo SantaSanta LuciaLucia PucallpaPucallpa Sihuas Sihuas Hualaga Chimbote Tingo María ngo María HuarazHuaraz Ucayali Huánuco Huánuco 10°S 1010°S PACIFIC GoyllarisquizgaGoyllarisquizga Purús Cerro de Cerro de Pasco Pasco OCEAN Huacho SayánSayán SatipoSatipo AtalayaAtalaya LaLa OroyaOroya Apurimac HuancayoHuancayo Callao LIMALIMA Urubamba Madrede PuertoPuerto AynaAy Dios Huancavelica Huancavelica SintuyaSintuya MaldonadoMaldonado QuillabambaQuillabamba Ayacucho acucho LanlacuniLanlacuni AstilleroAstillero PERU CuscoCusco BajoBajo SITUATION AND Pisco AbancayAbancay Inambari IcaIca LOCATION OF PRIs To San AS OF JULY 2006 Buenaventura Puquio Puquio MOST ADVANCED PRIs Caballas NazcaNazca AlcaAlca CaillomaCailloma 1515°S PRIs WITH FULL CAPACITY ESTABLISHED To San Juan JuliacaJuliaca Carabuco PRIs WITH BASIC CAPACITY ESTABLISHED Lago PRIs IN CREATION Antiquipa PunoPuno Titicaca NO PRI Atico ArequipaArequipa To La Paz SELECTED CITIES AND TOWNS DesaguaderoDesaguadero REGIONAL CAPITALS Mollendo NATIONAL CAPITAL MoqueguaMoquegua RIVERS PROVINCIAL BOUNDARIES To BOLIVIA BOLIVIA Tacna acna Visviri REGIONAL BOUNDARIES To Belén INTERNATIONAL BOUNDARIES 75°W To Iquique CHILE CHILE SEPTEMBER 2006 IBRD 35060 80°W 7575°W 70°W 70 0° 0° 0 100 200 300 Kilometers 0 100 200 Miles ArcadiaArcadia COLOMBIA COLOMBIA ECUADORECUADOR Napo Corrientes Putumayo Puerto Curaray Puerto Curaray Tigre To To MachalaMachala Tumbes Amazonas TUMBESTUMBES Santiago To To A CaballocochaCaballococha LojaLoja MA Pastaza IquitosIquitos L O R E T O BRAZIL BRAZIL Talara alara Ayar Manco ar Manco Yavari SullanaSullana ZO 5°S P I U R A SanSan C 5°S IgnacioIgnacio N Marañon PiuraPiura Ucayali A JA AS M Yurimaguas urimaguas Tamánco amánco ChachapoyasChachapoyas LAMBA- ChiclayoChiclayo YEQUE ARCA MoyobambaMoyobamba Tarapoto arapoto S A N PERU M A R T I N CajamarcaCajamarca To To CruzeiroCruzeiro do Sul do Sul Trujillo SantaSanta LA LIBE LA LIBERTARTAD LIBERTAD LuciaLucia PucallpaPucallpa Sihuas Sihuas Hualaga Chimbote ANCASHANCASH Tingo María ngo María HuarazHuaraz HUANUCOHUANUCO Ucayali Huánuco Huánuco 10°S 1010°S U C A Y A L Í GoyllarisquizgaGoyllarisquizga P A S C O Purús Cerro de Cerro de Huacho SayánSayán Pasco Pasco SatipoSatipo AtalayaAtalaya PACIFIC L I M A LaLa C A L L A O OroyaOroyaJ U N I N M A D R E OCEAN Apurimac HuancayoHuancayo Callao LIMALIMA Urubamba Madre D E D I O S de PuertoPuerto AynaAy Huancavelica Huancavelica C U S C O Dios SintuyaSintuya MaldonadoMaldonado QuillabambaQuillabamba HUANCA- HUANCA- Ayacucho acucho LanlacuniLanlacuni AstilleroAstillero PERU VELICA VELICA LOCATION OF RURAL Pisco I C A AYACUCHO URIMAlcaAlca AP CuscoCusco BajoBajo AbancayAbancay Inambari INFRASTRUCTURE PILOT IcaIca AC P U N O To San San RURAL INFRASTRUCTURE PLANS ABOUT TO BuenaventuraBuenaventura BE COMPLETED Puquio Puquio PREPARATION OF RURAL INFRASTRUCTURE Caballas NazcaNazca CaillomaCailloma 1515°S PLANS IN PROCESS JuliacaJuliaca To To PREPARATION OF RURAL INFRASTRUCTURE San Juan CarabucoCarabuco PLANS NOT YET STARTED Lago Antiquipa PunoPuno Titicaca SELECTED CITIES AND TOWNS A R E Q U I P A To To REGIONAL CAPITALS Atico ArequipaArequipa La Paz La Paz DesaguaderoDesaguadero NATIONAL CAPITAL RIVERS Mollendo MoqueguaMoquegua MAIN ROADS T A C N A RAILROADS MOQUEGUA To To BOLIVIA BOLIVIA PROVINCIAL BOUNDARIES Tacna acna Visviri isviri REGIONAL BOUNDARIES To Belén Belén INTERNATIONAL BOUNDARIES 75°W To Iquique CHILE CHILE SEPTEMBER 2006