Report No. PID10624 Project Name GUATEMALA-SECOND RURAL AND MAIN ROADS (@) PROGRAM Region Latin America and Caribbean Region Sector Roads and highways (90%); Sub-national government administration (10%) Project ID P055085 Borrower(s) MINISTRY OF FINANCE Implementing Agency Address MCIV & INFOM MCIV - Ministry of Communications, Infrastructure and Housing (Ministerio de Comunicaciones, Infraestructura y Vivienda) Address: Guatemala City Contact Person: Flora Escobar de Ramos Tel: 502-362-6057 Fax: 502-362-6059 INFOM - Municipal Development Institute (Instituto de Fomento Municipal) Address: Guatemala City Contact Person: Elio Abate Tel: 502-336-8103 Fax: 502-334-6735 Environment Category B Date PID Prepared January 10, 2003 Auth Appr/Negs Date November 22, 2002 Bank Approval Date March 18, 2003 1. Country and Sector Background "During the rainy season, the community is affected because the road is blocked by the mud and the landslides the result is that we can't buy or transport products to the market." Mam villager, QPES. Poverty and access. More than half the population of Guatemala is poor and nearly 2 million people in Guatemala live in extreme poverty. Although urban poverty is significant, poverty remains overwhelmingly a rural phenomenon in Guatemala. Poverty is twice as high in the rural areas and often the rural poor live in isolation because of the limited supply of transport infrastructure and services. An unsatisfactory road network, especially in rural areas, is a large determining factor in the poverty profile of the country--Guatemala has the dubious honor of being amongst the most unequal countries of the world (GUAPA 2002). The absence of all-weather roads limits access to basic services and a distribution network for crops and essential products, especially for the poor. This has been particularly unfortunate because the rural poor derive their income predominantly from agricultural labor. They also tend to live in small (less than 10,000 people) and ill-provided municipalities. Thus a key step for poverty reduction calls for integrating these smaller, rural municipalities which contain large percentages of poor populations, with services, markets and the rest of the economy. Amongst the regions in Guatemala, the northern and the north-western regions ("the poverty belt") are the most afflicted: more than one out of three people in these regions are extremely poor (32w in the North and 39t in the North-West, are extremely poor). Being a poverty targeted intervention, the main criteria for selecting municipal associations under the RMRP are the poverty level and the road needs. Table 1: Poverty and Access to road Types by Region, Guatemala 2000. HHs with Access to Road Type/ Total HHs** (W) All Poor HHs* (W) Extremely poor HHs* (W) Non-Poor HHs* (W) Surfaced Roads Unsurfaced roads Earth roads Footpaths No motorable roads All 57 12 43 39.8 69.9 37.9 62.5 13.3 Urban 24 3 76 65.3 58.7 22.3 34.9 10.1 Rural 67 17 33 28.3 75 44.9 75 14.7 Regions Metropolitan 21 2 79 65.2 57.3 22.3 34.3 3.2 North 66 17 34 25.8 66.3 15 75.1 17.8 North-East 35 0 65 18.7 77.2 51.2 34.9 18.3 South-East 62 13 48 32.6 73.4 69.9 77.8 14.4 Central 53 12 47 47.4 83.6 30 61.5 9.5 South-West 60 10 40 37 76.2 38.7 69.3 16.1 North-West 80 29 20 29.3 61.7 48.2 91.7 20.5 Peten 44 2 56 47.7 70 51.1 67 2.3 * As a percentage of all households in Guatemala. These figures are taken from the 'Household' portion of the ENCOVI 2000. ** As a percentage of Households in the 'Community' part of ENCOVI 2000. 'Total HHs' are those that have PSU (Primary Sampling Unit) data available. Source: World Bank calculations using ENCOVI 2000, Instituto Nacional de Estadistica, Guatemala. In the poverty belt, which includes the departments of San Marcos, Huehuetenango, Quiche, Alta Verapaz and Baja Verapaz, more than 70t of households are poor and more than 30t are extremely poor i.e. has an annual per capita income of less than US$255 (See Map 2). It is also not coincidental that physical access in these departments, as measured by the percentage of households experiencing road closures and the percentage of households without access to a motorable 1 road, is amongst the highest in the country (See Table 2). These departments are also predominantly indigenous - peoples that were very severely affected by the 35 year long civil strife that riddled the country between 1960 and 1995 (The World Bank, 2001). Road network administration, size and condition. Jurisdictionally, -2 - there are four types of roads in Guatemala: main, secondary, departmental and rural. The DGC under the aegis of the MCIV is responsible for constructing, rehabilitating and maintaining a large part of the 'classified road network'. The DGC also apportions funds between regional offices for road works. Rural roads are maintained variously by municipalities, communities, DGC, finca owners or others (Social Investment Fund or FIS, National Fund for FONAPAZ, etc.) 2 However, these roads rarely get central government financing for maintenance. All other roads, particularly the main road network, receive funding for their maintenance from COVIAL - the national road fund created in 1996. COVIAL is financed by a fuel surcharge of Q.1 per gallon of fuel. Approximately US$70 million are collected from this surcharge. Table 2: Guatemala's Road Size and Condition Guatemala's total road network is relatively small equaling 26,000 km. Of this, 14,000 km is 'classified' while the rest is still in the the process of being classified. 3 The classified road network comprises nearly 4,000 km of main and secondary roads (mostly paved) and 10,000 km of departmental and rural roads (unpaved). In the last 6 years considerable progress has been made in the rehabilitation and maintenance of the paved road network, and today, 759 of this network is in good or fair condition (maintainable condition). Less than half (45%) of the classified unpaved network (which includes unpaved secondary, departmental and rural roads) is in maintainable condition. It is also relevant that amongst the sub-sample of households and communities surveyed in 2000, 13% of the households used primarily dust roads or paths and trails to reach places outside their community. 4 Both these facts underscore the need for two kinds of rural road works in Guatemala: firstly the rehabilitation and subsequent regular maintenance of rural roads in Guatemala; and secondly, the improvement of tracks, paths and footbridges that remote communities use. The proposed RMRP addresses both these needs. Rural roads constitute about 63% of the entire road system of the country, with a length of approximately 19,000 km. It is estimated that less than half of these roads are in maintainable condition and that because of the general poor condition of the network, a large percentage of these roads become impassable during the rainy season. The absence of all-weather roads leads to considerable losses, especially for the rural poor, further compounding their condition. A country-wide assessment of the need for road works shows that the absence of all-weather roads are responsible to a large extent, for the absence of a reliable public transport system in this part of the country. Poor road conditions lead to large repair and maintenance costs for transport operators, and poverty in these areas, does not allow operators to transfer their costs to the consumers. The absence of a dependable road network also implies that people have to travel more than an hour (one-way) to procure wood. Most households in San Marcos and Huehuetenango are more than an hour away from a marketplace, where they can buy and sell their products. Once the ongoing and planned road rehabilitation and improvement projects financed by the Bank, the IDB and other multilateral agencies are completed, it is believed that the entire paved and 55% of the unpaved -3 - networks will be in good or fair condition provided adequate attention is given to maintenance. This promises to spur economic growth in the region. Even assuming that there is no/very little mobilization of new resources and migration of opportunities to this region, the reduction in transportation costs will aid people in the region by securing easily available and cheap transport infrastructure. Multiple agency and unclear responsibilities in rural roads. As mentioned earlier, the rural roads sub-sector, including the municipal roads, is characterized by a large number of financing and implementing agencies. The outcome of the multiple agency involvement is an array of ad hoc, often unsustainable interventions. This issue of multiple agency involvement in rural roads and its consequences was discussed during the Rural Transport Workshop supported by the Bank and held in Guatemala in May 2001. One of the conclusions of this discussion was that there is an urgent need to define the role of each agency and to coordinate their interventions. A great deal has been achieved though the ongoing Bank operation (Loan 4260-GU) but the issue will be addressed more in depth during the development of the Rural Transport strategy. The Rural Transport Strategy that will be prepared under the ongoing loan will contribute to the development of a more coherent set-up for the management and financing of rural roads which would also result in increased coordination among the International Financing Institutions, other agencies and the main stakeholders involved in the sector. 1 A road allowing the passage of vehicles with any kind of 'surface'. It may be paved or unpaved. 2 Finca owners play a specially significant role where present. An interesting anecdote is related by local experts: A recently constructed road which connects Guatemala to Honduras was commissioned at the beginning of 1995. However a short stretch of this road went through a banana plantation and the plantation owner would charge most freight vehicles a tariff for road use. This issue has since been resolved. 3 One of the byproducts of the SMRRPP was the classification of roads. 4 As part of ENCOVI 2000, 481 Primary Sampling Units (PSUs) were sampled, covering a total of 4,844 households, more than two-thirds of which were rural, and 57T of which were poor. 2. Objectives "(To have) a good road (un buen camino)" - response from a resident of an indigenous (kaqchikel) village when asked how welfare should be defined. Following the Peace Accords of 1996, the Government of Guatemala committed itself to a policy of decentralization as a means of increasing social cohesion and reducing poverty. It is well known that critical for creating an integrated society is physical connectivity and the elimination of geographic isolation. Thus, improving the road network in the country by assuring a readily available and affordable road network was identified as one of the key challenges in the GOG's Estrategia de Reduccion de la Pobreza (ERP)5 and in the recently tabled Guatemala Poverty Assessment (GUAPA 2002). Providing good quality roads and adequate year-round access to remote areas is also one of the key goals of the current administration. -4- These goals were first acknowledged in the ongoing Main and Rural Roads Project (Loan 4260-GU) which became effective at the end of 1998, and fructified in the San Marcos Rural Roads Pilot Project (SMRRPP). The Second Rural and Main Roads Project (RMRP) proposed here is an important step in furthering the Bank's assistance in meeting theses challenges. The project builds on the success of the model piloted under the SMRRPP to extend investment support to other regions of Guatemala, introduce new planning and service delivery approaches for increased participation of beneficiaries and community-based organizations, and strengthen the policy and institutional framework top enhance program sustainability. The overarching goal of the proposed RMRP is to increase quality of life and promote economic development by improving and maintaining access in rural areas to markets, schools, health centers and other social and economic infrastructure through broadened community participation. This in turn will help reduce rural poverty and build social cohesion. By emphasizing beneficiary involvement, the RMRP will assure that local development decisions reflect the needs and priorities of rural communities. The project will involve the replication of the SMRRPP in 2 new associations in the Department of Huehuetenango, which is one of the poorest of the country; and the consolidation of the institutional framework put in place by the SMRRPP in San Marcos. Key targets for the project are: (i) nearly 500,000 inhabitants of HUISTA and MAMSOHUE region will be provided with better access; (ii) approximately 400,000 inhabitants of ADIMAM region will continue to benefit from improved access; (iii) successful replication of the model in other municipalities prove that the institutional set-up can be put in place even in the absence of the broad incentives that surrounded the implementation of the ZONAPAZ initiative; (iv) participatory and decentralized institutional framework to deal with rural roads management consolidates; and (v) National Rural Roads and Transport Strategy (RRTS) adopted by the GoG and institutions involved strengthened and prepared for a larger intervention in the sector. The specific project development objectives of the RMRP are: Improve rural access on sustainable basis by improving paths, rural roads, secondary/departmental roads, and main roads; Develop institutional capacity at the local and centra level, for rural roads management and strengthening stakeholder participation; and Generate employment in rural areas. Since the RMRP will extend the framework tested in the SMRRPP, it is important to review some of the features and lessons learnt from the pilot. This is presented below. A description of the SMRRPP and its main impacts to date are also highlighted in Box 1 and further described in Annex 11. The SMRRPP was initiated under the ongoing Rural and Main Roads Project (L4260-GU) in the department of San Marcos, in the western part of Guatemala. The main focus of the SMRRPP was to put in place a new institutional framework at the local level to deal with rural road administration. It focuses its intervention on an area comprising twelve municipalities, integrated into a municipal association: the ADIMAM - 5 - (Associaci6n de Desarrollo Integral de las Municipalidades del Altiplano Marquense ). The mayors of the association are responsible, along with the municipalities that they represent, for identifying, financing and managing the rehabilitation and maintenance of the "core network" 6 1 with technical advice from a technical unit UTAV ( Unidad Tecnica de Asistencia Vial ), especially set up as part of the pilot under ADIMAM. A regional road fund ( Fondo Vial Regional, FVR ) was also established under the aegis of the SMRRPP, to administer the financial contributions received from the municipalities and other potential sources, for the rehabilitation and maintenance of the network. A major objective of the project is to ensure physical connectivity and access to services in rural areas. This requires traversing non-municipal roads for at least a part of the way. So the project complements its scope of improving rural roads with that of rehabilitating/improving departmental and secondary roads. These departmental and secondary roads connect the core network to the main road network of the country. Hence the scope of the ongoing SMRRPP spans two road jurisdictions: (i) the core road network, under municipal jurisdiction which the Bank co-finances with ADIMAM; and (ii) the national road network, under the jurisdiction of the General Roads Directorate, DGC ( Direcci6n General de Caminos), which the Bank co-finances with the GoG. Box 1: The San Marcos Rural Roads Pilot Project (SMRRPP) The SMRRPP is being implemented in the highlands of the Department of San Marcos--one of the poorest departments of the country located on the border with Mexico. The project includes 12 municipalities, covers an area of 3,800 sq. km and impacts about 400,000 inhabitants. The total length of the road network serving the project area is 1,320 km and includes roads under the jurisdiction of the municipalities (970 km) and of the General Roads Directorate (350 km). Before implementation of the project, the condition of the road network in the area was poor. The poor road condition was caused by the lack of funds, leading to dire neglect of road maintenance works and by the limited technical and management capacity of the municipalities to administer limited funding available. Road-related interventions were thus restricted to emergency repairs and many roads would become impassable during the rainy season. A preliminary impact analysis conducted as part of project preparation reveals that implementation of the SMRRPP has altered the situation considerably (See below and also Annex 11). The centerpiece of the SMRRPP is the creation of an institutional framework responsible for administering and financing municipal roads. In 1997, 12 municipalities in San Marcos, with assistance from the Bank, formed a municipal association named ADIMAM (Asociaci6n de Desarrollo Integral de las Municipalidades del Altiplano Marquense ). Their objective was to jointly tackle problems associated with poor road access. This innovative institutional arrangement undertakes the planning and execution of rehabilitation and maintenance works on a portion of the municipal road network. The SMRRPP also created a technical unit UTAV Unidad Tecnica de Asistencia Vial) which is responsible for planning, programming and managing the network and which reports directly to ADIMAM. Initially, UTAV was constituted by a local consulting firm which reported directly to ADIMAM. Now, UTAV is staffed with 3 local young professionals (2 engineers and 1 economist) trained by the consulting firm. The - 6 - financial aspects, which include the management of contributions received from the municipalities to cover the cost of UTAV and co-financing (with the Bank) the road works, are managed by a local road fund ( Fondo Vial Regional, FVR). The fund also reports directly to ADIMAM and is staffed by a financial professional. The SMRRPP is financed as follows: (i) Road rehabilitation: Bank 85%; ADIMAM: 15% (this amount is contributed by the municipality in ADIMAM benefiting from the works, and represents a variable financial contribution); (ii) UTAV: Initially the Bank financed it 100%; however beginning Year 3 of project implementation, i.e. in 2002, ADIMAM began to completely finance it. These funds will come from the annual deposit of Q70,000 that each municipality is required to make (fixed financial contribution); and (iii) Maintenance: works are currently being undertaken by beneficiary communities, with the support of local authorities; however, road maintenance micro-enterprises will be piloted under the proposed RMRP. The cost of the pilot will be shared with ADIMAM. At mid-point of project implementation, the SMRRPP had rehabilitated approximately 200 km of the core network, which has a total length of 450 km. Additional road sections critical to improving access to some remote communities with relatively large population and high economic potential have also been included in the SMRRPP. On completion, it is envisioned that rehabilitation of the entire core network will be accomplished and several short road sections outside the core network that are otherwise impassable during the rainy season, will be improved. The SMRRPP will also rehabilitate and/or improve approximately 250 kms of secondary and departmental roads connecting ADIMAM's core network to the main road network. There are two central government agencies involved in the implementation of the SMRRPP: the Municipal Development Institute (Instituto de Fomento Municipal , INFOM) which is responsible for the coordination of all aspects related with the implementation of the rural roads; and the General Roads Directorate (Direcci6n General de Caminos, DGC) of the Ministry of Communications, Infrastructure and Housing ( Ministerio de Comunicaciones, Infraestructura y Vivienda, MCIV) which is responsible for the same activities in the road network under its jurisdiction (main, secondary and departmental roads). A study of the preliminary impacts of the SMRRPP indicates that the ADIMAM area, in just a year after implementation of the pilot, witnessed a 1O increase in inhabitants who experienced an improvement in the frequency of public buses and a 13% increase in the number of people using buses and pick-ups. Also, a larger percentage of women in the project area are inclined to use public transport than women who are not in project municipalities. Inhabitants of the project area also witnessed a decrease in travel time (20%) and a reduction in prices of commodities. The SMRRPP has also facilitated increased 'access' to health centers and schools4. The main achievements of the SMRRPP can be briefly summarized as follows: Strengthening Social Cohesion. The major achievement of the SMRRPP has been developing social cohesion and building social capital and consensus. In an area ridden by conflict and consequently distrust and divisiveness, the Pilot has shown that (ADIMAM) mayors from different municipalities and with different ideologies are willing to sit together, set aside their political differences, and constructively take decisions about development priorities in the project area. Most decisions are taken to maximize -7 - 'long-term' social good rather than short-sighted local goals. Presented with historical evidence of grave discord in the area, this has truly been one of the most significant accomplishments of the Pilot. The SMRRPP has also shown that social cohesion strengthened by improved inter-community accessibility has encouraged interaction and exchange of goods, services and ideas. Improved access to nearby main cities and towns is encouraging an otherwise marginalized and isolated population to integrate itself into the mainstream; Municipal Empowerment through Municipal Association. The creation of ADIMAM for the initial sole purpose of tackling the common road infrastructure needs of the association has facilitated dialogue between the municipalities (of the association) and the central government (in Guatemala City). Chapter III of the recently amended Municipal Code (C6digo Municipal), which regulates the associations of municipalities, was inspired by the success of the SMRRPP7; An orderly and participatory process for selecting and implementing rural roads investments was established. The SMRRPP established a local mechanism for selecting, funding and implementing rural roads rehabilitation and maintenance programs. This model of ensuring local participation and empowering communities, has been lauded by the GoG and the GoG is planning to use it to design its rural road strategy in the country; Improving year-round rural access for the population of ADIMAM. With improved road quality due to rehabilitation, the inhabitants of the project area have experienced an improvement in the access to merit services such as health facilities, educational centers and employment, thus reducing the vulnerability of these communities and providing them with a greater choice set of opportunities. The results of the preliminary impact analysis 8 and other sectoral work 9 indicates that road rehabilitation in Guatemala has the largest impact on the provision and availability of public transport; Capacity building in GoG institutions. The capacity of the Municipal Development Institute (Instituto de Fomento Municipal - INFOM) to support the road development efforts of municipal associations was created and is currently being strengthened; Meeting National Development Objectives. The objectives of the SMRRPP are consistent with the prescriptions outlined in the GUAPA and the ERP. It is widely believed that geographic isolation caused by the country's complex topography and the bad quality of its road network have been instrumental in shaping the current poverty profile (Box 2). Both, the GUAPA 2002, the green cover version of which was presented in March 2002 and the ERP, presented at the Consultative Group meetings in February 2002, emphasize promoting pro-poor growth and investment in physical capital, amongst which rural roads figured prominently; and The success of the SMRRPP has been widely acknowledged. The decentralization fostered by the SMRRPP has received extensive support from the GoG (the President, the Vice- President and the Social Cabinet) and is viewed as a model means to deal with local infrastructure needs and initiatives. Having recognized its success in empowering and building social cohesion and participation, the GoG is using it as a prototype to design a rural transport strategy for the entire country. By drawing on the success of the SMRRPP and extending its framework to include other pilots, the proposed RMRP will capitalize on its achievements in San Marcos. It will also incorporate additional features designed to promote local development and aid the integration of - 8 - indigenous and isolated communities into the economic mainstream of the country. Box 2 presents the main characteristics of the RMRP Through the RMRP, the Bank will evince its continued active support for capacity building and strengthening decentralized institutions in the country. On July 1, 2002, the GoG's Decentralization Law (Ley General de Decentralizaci6n) came into effect. The objective of the law is to promote financial and administrative decentralization by transferring power from the central executive to the municipalities. It also aims to devolve power to civil associations (ADIMAM is an example of a civil association). The spirit and nature of the law is also adhered to in the institution of INFOM since through it, municipalities directly participate in decision-making and executing plans about rural roads. On physical grounds, comparable successes to those obtained under the SMRRPP may be expected in the new departments where the RMRP is proposed since these areas are similar to San Marcos in many ways: They are in the same part of the country, are as poor and as deprived of rural transport infrastructure and services as San Marcos, if not more (See Table 1). Additionally, ENCOVI householdslO in the departments of San Marcos, Huehuetenango, Quiche, Alta Verapaz and Baja Verapaz - where most of the RMRP will be implemented - report especially large economic losses due to high travel times caused by bad quality of roads and consequent scarcity of transport services. Landslides and mudslides are frequent in these areas, causing road closures and prolonged delays in access to basic services, work and markets. The RMRP will make financial and technical resources available for participating municipalities so that they can undertake road improvements and regular and sustainable maintenance works. This will go a long way in increasing social welfare within these departments. Table 3: Accessibility and Transport Infrastructure for some selected Departments, Guatemala, 2000. Rest of the Country San Marcos Huehuetenango Quiche Baja Verapaz Alta Verapaz Average over targeted departments* No. of Sampling Units 301 24 65 26 18 44 No. of Households Sampled 3086 233 617 246 197 465 W HHs without Motorable roads 11 16 21 19 13 20 19 W HHs without Public Transport 48 63 68 48 42 73 63 W HHs experiencing Road Closures 28 14 24 38 24 38 31 Time taken to get Water (mins.) 13 15 14 14 8 14 13 Distance traveled to get Water (kms). 0.2 0.4 0.3 0.3 0.2 0.5 0.3 Time taken to get Wood (mins.) 58 79 74 82 83 59 72 Distance traveled to get Wood (kms.) 1.2 1.4 1.6 1.7 2.2 1.8 1.7 Time taken to reach a Health facility (mins.) 47 49 51 29 88 48 51 Time taken to reach Work Place (mins.) 46 29 48 31 44 37 42 Distance traveled to reach a Market (kms.) 8 8 10 7 3 9 9 Time taken to reach a Market (mins.) 41 72 66 61 29 72 62 Source: World Bank calculations using ENCOVI 2000, Instituto Nacional de EstadUstica, Guatemala. Notes: Time is measured in minutes and is one way. Distance is measured in -9- kilometers (one way). Time taken to reach a health facility is calculated for individuals who visit a health facility. A health facility can include public hospital, hospital of the IGSS, a private hospital, a polyclinic of the IGSS, a health center, a health post, a community center, a private clinic or a private consultation, a private pharmacy or a state pharmacy. It excludes time taken by persons taken care of at their own home or at other homes. **Weighted average for ENCOVI households in Huehuetenango, Quiche, Baja Verapaz and Alta Verapaz 5The ERP was presented by the GOG, at the Consultative groups meeting in Ferbruary 2002. 6The "core network" is defined as the road network that provides minimum adequate accessibility to municipalities in the association. In defining this network, consideration is given to the financial capacity of the municipalities to provide the required resources to rehabilitate and maintain the network. 7The World Health Organization (WHO) defines "access" to a center if it is less than an hour away. 8The amendment of C6digo Municipal was approved in April 2002 together with the Ley General de Decentralizaci6n and the Ley de los Consejos de Desarrollo Urbano y Rural. 9Are Roads Enough: A limited Impact analysis of Rural Road Works in Guatemala, 2002. J. Puri, The World Bank, 2002. 1OIn 2000, the Instituto Nacional de EstadUstica , Guatemala conducted an LSMS (Living Standards Measurement Survey) or the ENCOVI 2000. One of the features of the ENCOVI 2000 is that a separate module in the 'community' section of the questionnaire is devoted to roads and transportation issues. The 'community' section of the questionnaire, where the module on 'Roads and Transportation' is contained, covers a total of 481 Primary Sampling Units. However this section is not representative at the national level or at the community level of the community. 3. Rationale for Bank's Involvement The Bank has supported the development of the Guatemala road sector for a number of years and has maintained an important policy dialogue on the development and maintenance of the sector. The Bank was instrumental in focusing DGC's attention on the advantages of contracting out maintenance and of increasing maintenance funding on a sustainable basis. Bank involvement led to the outsourcing of road maintenance and to the establishment of the national road fund, COVIAL. Today, 100t of the maintenance of the main road network (4,000 km) and 40t of the unpaved network is contracted to the private sector and the road fund collects enough resources to maintain the main road network under DGC's responsibility. The Bank is well placed to assist the Government in replicating the SMRRPP which is considered "best practice". In addition, Bank involvement is bringing several other best practice approaches to the design and implementation of rural roads projects including the experience obtained in the Second Rural Roads Project in Peru which received an Excellence Award from the Bank. The Bank is in a unique strategic position to strengthen GoG's efforts to - 10 - decentralize rural development and to design and implement sustainable funding arrangements or mechanisms for maintaining the rehabilitated road network. 4. Description The project comprises 4 components, as visualized in the following scheme: Costs for each component are summarized in the following table: A.1. Rural Roads Program A.2. Main and Departmental Roads Program B.1. Support for Decentralized Rural Road Development B.2. Support for Main/Departmental Roads - Physical Contingencies of Work - Price Contingencies 5. Financing Total ( US$m) BORROWER $17.02 IBRD $46.70 IDA Total Project Cost $63.72 6. Implementation Project set-up. The proposed program will be implemented over 5 years and will extend the framework of the successful arrangement made in the ongoing Pilot Project. Program implementation will be closely jointly coordinated by the Project Coordination Units (PCUs) established at DGC (COFINEX Coordinadora Financiamiento Externo ) and INFOM (USBM Unidad Coordinadora Banco Mundial ). However, DGC, through COFINEX, will be responsible for the overall coordination. COFINEX is the Project Coordination Unit and was established in the General Roads Directorate (DGC) of MCIV by Ministerial decree and is part of the permanent administrative structure of the DGC (COFINEX reports to the Planning Division of the DGC). It directly assists the Planning Division in matters related to the preparation of multiyear investment programs and in coordinating projects financed by the Bank and other multilateral and bilateral agencies. It is also coordinating activities of the ongoing Bank Loan (L4260-GU). Under the RMRP, the same PCU arrangement will be used: COFINEX will be responsible for the project components addressing road rehabilitation and improvement under DGC's responsibility, and for consultant services during the implementation of the RMRP. The other coordinating agency for this project will be INFOM (trough its coordinating unit, UCBM). INFOM will be responsible for implementing the rural roads components under municipal jurisdiction which include related technical assistance and consultant services. INFOM's experience in coordinating national and local development efforts and its participation in the implementation of the SMRRPP renders it the ideal agency to coordinate this portion of the project. However, additional qualified staff will have to be added to the current coordination unit to enable it to manage the much larger project. In a way similar to the SMRRPP, each association will contract out planning, programming and management of municipal roads within their boundaries to consultants, who will become the association's permanent technical service unit (UTAV). The UTAVs will also prepare, let and manage contracts on behalf of the members of the associations and will report to the associations. Technical assistance will be financed under the project to strengthen the associations. Technical assistance will also be provided to the UTAVs to ensure the establishment of adequate systems and procedures. Also, technical assistance will be provided to INFOM in order to strengthen its capacity to support local level development efforts. Financial Management and Accounting. As part of project preparation, the Financial Management specialist in the team performed an assessment of the financial management arrangements under the proposed project, in compliance with OP/BP 10.02. The overall financial management assessment will be confirmed during project appraisal. At present, the financial management arrangements at COFINEX and the PCUs meet minimum Bank requirements. This means that they are capable of recording all financial transactions correctly, they support the preparation of timely and reliable financial statements, safeguard the entity's assets and are subject to auditing arrangements acceptable to the Bank. Action plans were agreed with project management, requiring COFINEX to strengthen its human resources in the financial management area. Additionally, both COFINEX and UCBM will enhance their respective informatics systems to ensure that timely and pertinent financial information is available for appropriate overall project management. COFINEX will be responsible for consolidating information from both executing agencies. Progress Reporting The project will produce FMRs each calendar quarter, containing information on financial, physical, and procurement progress. These reports will be prepared within 45 days, after the end of each calendar quarter starting at the end of the third quarter of project implementation. Up to that date, traditional procedures for reporting and disbursements will be used. Audit Arrangements. A private auditing firm, acceptable to the Bank, will be contracted by PCUs to carry out the annual audit of the parts of the project under their responsibility. The auditor will be selected following Bank's "Guidelines for the Selection and Employment of Consultants by the World Bank Borrowers" dated January 1997, revised in September 1997 and January 1999. The audit terms of reference, acceptable to the Bank, will require interim reviews during each yearly audit. The audit report will include audit opinions on the project financial statements, special accounts opened at the Bank of Guatemala, and on the FMRs. The audit report will also include: (i) an assessment of the adequacy of accounting and internal control systems; (ii) a determination as to whether the Borrower, COFINEX and UCBM have maintained adequate documentation for all relevant transactions; (iii) verification that expenditures submitted to the Bank are eligible for financing under the Loan; (iv) a determination as to whether the Borrower, the PCUs have complied with the terms of the Loan Agreement and the applicable laws and regulations; and (v) identification of any ineligible expenditures. Copies of the audit reports will be submitted to the Bank within six months of the closing of the country's fiscal year ( January 1 - December 31). - 12 - Procurement Arrangements. The Procurement Capacity Assessment for the project will be updated before the end of the appraisal mission on January 2003. Overall, procurement was managed fairly well under the previous project (Loan 4260-GU) and no major issues emerged. For the proposed project, standard bidding documents and largely the prevailing procurement method thresholds and prior review arrangements will be retained. Also both PCUs (COFINEX and UCBM) will prepare and update timely procurement plans for Works, Goods and Consultants as a management toll to compare the procurement events as originally planned versus the accomplishments. 7. Sustainability The project will lead to rural road management techniques that are financially viable and sustainable. The two features of the project that make it sustainable in the long-term are its focus on community-based development and its cost-sharing mechanism. Community-based development ensures that the inhabitants of the community have a developmental stake in the project since it is after consultations with them that road segments are targeted. Community-based road maintenance micro-enterprises that generate employment will also guarantee that communities reap benefits of not just better roads but also higher incomes and consequently higher standards of living. To further ensure sustainability, the project also includes capacity building features. Financing is provided for technical assistance and training for the associations, the municipalities in the associations, INFOM and DGC. Finally the project presents organizational shortcuts for the local government since most rehabilitation and maintenance works are contracted out to small/medium sized contractors and community-based microenterprises. This ensures that the local government's goals are consistent with those of the project and will build pressure on the local government for sustained and continuous road maintenance. The financial cost sharing mechanism that has been incorporated into the project also insures that there is no 'principal-agency' problem and assures the long term sustainability of the project. Municipalities in the associations have to contribute annually amounts to pay for the services of UTAV and FVR (fixed financial contribution), and for 25? of the road rehabilitation costs (variable financial contribution). Maintenance costs following rehabilitation works will be paid in full by the municipalities except in the case of the Micro-enterprises Pilot Project financed under the proposed RMRP. This co-financing scheme ensures that there is a clearly defined 'ownership' of the project, with local governments clearly seeing the need to undertake and complete road works. Finally, the implementation of the SMRRPP has demonstrated that the presence of a 'beneficiary' population and of large and significant social impacts of the project will vitally impact the sustainability of the project. 8. Lessons learned from past operations in the country/sector Bank wide experience with rural roads development and maintenance has shown that the principal problems in achieving sustainable results have been: - 13 - Institutional weaknesses, especially at sub-national levels of government; Inadequate funding coupled with unreliable and untimely budgetary releases; excessive delays in the execution of works; Lack of a firm national framework or strategy for rural roads, resulting in dispersed efforts, piecemeal interventions and insufficient attention to institutional and financial reform; Low priority to road maintenance needs; Inadequate monitoring and evaluation of results; and Inadequate community participation and consequently a lack of accountability. During project implementation it is very important that the following elements be carefully monitored to ensure that project objectives are met: Ownership of the project at all levels must be ensured very early in the process so that, among other things, the necessary decisions are taken in a timely way. This has been difficult in Guatemala because of the many changes in personnel at all levels at INFOM and MCIV (including the DGC) during the past year. To reduce this risk, project preparation has ensured that community members and local leaders are always kept informed and involved in the project; Capacity building takes a long time and requires a substantial commitment of Bank staff time and supervision resources. This has been the case for the ongoing Rural and Main Roads Project which includes only one association. Much more will be required for the new operation; In addition to requiring intensive supervision, the new project will require a lot of flexibility to adapt the project to local conditions. It is anticipated that different associations may require different approaches; and The provision of operating support to both PCUs is critical to establishing managerial and technical capacity. To the extent possible, these elements will be built into the project design. Given the experience the project team has had with the implementation of the on-going project, no major difficulties are anticipated for those elements over which the team can exercise some control. 9. Environment Aspects (including any public consultation) Issues 10. Contact Point: Task Manager Guillermo Ruan The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone: 202-473-0083 Fax: 202-676-9594 - 14 - 11. For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. - 15 -