Report No. 34598-PE Peru Rural Infrastructure in Peru Effectively Underpinning Local Development and Fostering Complementarities January 26, 2006 Finance, Private Sector and Infrastructure Unit Latin America and the Caribbean Document of the World Bank LISTOFABBREVIATIONS ADINELSA Empresa deAdministracidn de Infraestructura Ele'ctrica S.A. (National Public Enterprisefor the Administration of Electricity Infrastructure) CAS Country Assistance Strategy CND ConsejoNacional de Descentralizacidn (National Council for Decentralization) DEP Departamento Especial de Proyectos (Special Projects Department) DIGESA Direccidn General de SaneamientoAmbiental (National Directorate of Environmental Sanitation) DNS Direccidn Nacional de Saneamiento (National Directorate for Sanitation) ENAHO EncuestaNacional de Hogares (National Household Survey) FITEL Fondo de Desarrollo de las Telecomunicaciones(Telecommunications Development Fund) FONCODES Fondo de Compensacidny Desarrollo Social (Compensation and Social Development Fund) FONCOMUN Fondo de CompensacidnMunicipal (Municipal Compensation Fund) FOSE Fondo de CompensacidnSocial Ele'ctrica (Electricity Social Compensation Fund) GDP Gross Domestic Product GOP Government of Peru IADBor IDB Inter-American Development Bank IC1 Information and CommunicationInfrastructure ICT Information and CommunicationTechnologies INADE Znstituto Nacional de DesarroZZo (National Institute for Development) INE Znstituto Nacional de Estadisticas (National Institute of Statistics) IVP Znstituto Vial Provincial (Provincial Road Institute) JASS JuntasAdministradoras de Servicios de Saneamiento LCE Ley de Concesidnde Electricidad (Electricity Concession Law) MEF Ministry of Economy and Finance MEM Ministryof Energy and Mining MIMDES Ministry of the Women and Social Development MTC Ministry of Transport and Telecommunications NGO Non-Governmental Organization O&M Operation and Maintenance OLADE Organizacidn htinoamericana de Energia (Latin-American Energy Association) OSIPTEL Organism0 Supervisorde Inversidn Privada en Telecomunicaciones (Entity for the Regulatory Supervisidn of Private Investmentin Telecommunications) PI1 Provincial Infrastructure Institute PRONASAR Programa Nacional deAgua y SaneamientoRural (National Rural Waterlsanitation Program) RIPA Regional Institute of the Province of Arequipa RWSS Rural Water Supply and Sanitation SNIP Sistema Nacional de Inversidn Pdblica VAT Value-Added Tax WEF World Economic Forum ACKNOWLEDGEMENTS The authors are grateful to the Peruvian Government, World Bank team and consultants who have contributed to this analytic work. Significant support was received from the staff of the Intersectoral Commission for Rural Infrastructure under the Presidency of the Council of Ministers (PCM); the Ministries of Transport and Telecommunication, Economy and Finance, Agriculture, Mining and Energy, and the National Commission for Decentralization. The government key counterpart team consisted of the members of the Intersectoral Commission for Rural Infrastructure and, particularly, Mr. Raul Torres, Provias Rural, Ministryof Transport and Telecommunications. The World Bank team was composed of Aurelio Menendez, (team leader and transport economist), Nicolas Peltier (co-team leader and infrastructure economist), Eduardo Zolezzi, Susan Bogach, Demetrios Papathanasiou (electricity sector), Robert Stephens (information, communication and telecommunications), Maria Angelica Sotomayor, Miguel Vargas and Rafael Vera (waterlsanitation), Elizabeth Dasso (NGO coordinator and social specialist) and Alonso Zarzar (social scientist). The following consultants were responsible for preparing the background studies and presentations at discussion seminars: Javier Escobal and Maximo Torero (complementarity of investments and impacts on rural incomes), Augusta Dianderas (rural waterhanitation), Ismael Aragon (rural electrification), Jose Luna (rural transport services), Jose Tavara (rural telecommunications), Miguel Rodriguez (expenditure review), and Michel Azcueta (municipal capacity and decentralization). Peer review and quality guidance was providedby Jennifer Sara, MarianneFay, Franz Drees-Gross, Christina Malmberg-Calvo, Alexander Bakalian, Daniel Lederman and LCSFP sector managers. FOREWORD Following the definition of a rural development strategy for the Peruvian Sierra 1 and its own strategy for poverty reduction, the Government of Peru (GOP) requestedWorld Bank's supportin 2 the definition of a multi-sector strategy for the enhancement and management of infrastructure in rural areas. This request for support was reflected in the CAS presentedto the Government inJuly 2002 and approved by the World Bank Board in August 2002. The preparation of the strategy underpins the efforts of the Government of Peru to increase the prioritization, efficiency and effectiveness in the delivery of public investment programs that have a direct impact on the productive lives of the rural poor and to support policy and institutional reforms that aim at decentralizing responsibilities andresourcesto the local level. Along these lines, the CAS Program Matrix includes the strategy as part of the support by the World Bank Group to the dimensions of competitiveness and equity, to facilitate productive investments and increase access to social services inpoor rural areas. The ESW examines the current institutional and delivery arrangements for infrastructure service provision in rural areas of Peru, focusing upon the water, sanitation, electricity, communications and transportation sectors, and proposes mechanisms for improvement. The analysis i s based upon cross-sectoral dialogues with a variety of government agencies at the national, regional and municipal levels, government information and supplemental reports, and sevenbackground studies commissioned by the World Bank specifically for this work. The commissioned studies are the following: ``Andisis de Los Sewicios de Znfraestruc~uraRural y las Condiciones de Vida en las Zonas Rurales de Peru" by Javier Escobal y MAximo Torero (Grupo de Andisis para el DesarroLLo, GRADE) - This study analyzes the effect of rural infrastructure investmentson the incomes of rural households, the changes in the composition of the income sources (e,g., increases in non- agricultural activities), andon the number of working hours. "Andisis de Gastos de Inversiones y en Provisidn de Sewicios de Zn~raestructuraRural y su Comparacidn con La EvoLucidn de 10s Zndicadores Socio-Econdmicos de las Areas Rurales en Peru"' by Miguel Rodriguez - This study provides an assessment of the resources spent on the rural infrastructure sectors (waterisanitation, roads, electricity and telecommunications) during the period 1998-2002, their geographical distribution across Peruvian departments, and the possible correlations of sector expenditures with percentageof rural population and poverty by department, province or district. "Peru: A Rural Development Strategy for the Peruvian Sierra," Country Management Unit for Bolivia, Ecuadorand Peru, World BanldFAO Cooperative Investment Center, Environmental and Socially Sustainable Development Network, June 2002. "Bases para la Estrategia de Superacidn de la Pobreza y Oportunidades Econ6micas para 10s Pobres," Gobierno del Per& 2002. Infrastructure refers to the facilities and services related to the provision of water (for domestic consumption and minor irrigation), sanitation, electricity, transport (mainly roads in the rural Sierra and coast, and other modes, such as rivers, in the Selva, and the services operating on them), telecommunications (mainly telephone servicesand information technology). Background papersare available upon requestfrom amenendez@worldbank.org or canbe downloaded from http://wbln00 18/LAC/LAC.nsf~CA~ocBvUnid2ndLan~ua~e/7 1B4692A34C9EAB885256EB30050D744?0 pendocument 1 "Andisis de Capacidades en 10s Gobiernos Locales del Perti" by Michel Azcueta - Upon interviews in a sample of 42 district municipalities and 17 provincial municipalities, this study summarizes the opinion from the municipal authorities and other key informants about the role of local governments, the planning mechanismsat their disposal, their on-going responsibilities, their technical and administrative capacities in the planning, investment and operation of infrastructure services, as well as their statedpriorities on each of these services. "Estudio para la Definicidn de Criterios de Priorizacidn de las Znversiones y de Medicidn de la Eficiencia en la Provisidn de Sewicios de Agua Potable y Saneamiento Rural" by Augusta Dianderas - This study provides an overview of the alternative coverage rates and prioritization mechanisms for each of the rural infrastructure sectors-waterhanitation, roads, electricity and telecommunications-as a basis for proposing an enhanced methodology in the definition of investment priorities for the rural waterhanitation sector. "Andisis de la Provisidn de Sewicios de Electrificacidn en las Zonas Rurales del Perti" by Ismael A r a g h - This study summarizes the current situation of the planning, financing, construction, operation, maintenance, andregulation of the provision of electricity inrural Peru. "Situacidn de 10s Servicios de Transporte en Zonas Rurales del Pelzi" by JosC Luna - This study evaluates the current conditions of transport services in Peru, describing the institutional framework and the results of a series of interviews in about 46 district municipalities in the rural Sierra, complementedwith five additional districts inother municipalities in departments surrounding the rural Sierra. "Estudio para la Definicidn de una Estrategia de Fortalecimiento y Expansio'n del Program de Teleco~unicacionese Info-centros en las Zonas Rurales del Peru" by JosC Tabarra - This study, based on a survey of three representativerural areas inthe three macro-regions of Peru, draws attention to the factors and variables for the definition of sustainability mechanisms in the provision of internet services in rural areas through info-centers, with an description of the technological options and the prevalent investment and operating costs, This study complements a more comprehensive one on ICTs in rural Peru that was carried out concurrently, with fundingfrom the Public-Private InvestmentAdvisory Facility (PPIAF). Inaddition to these studies, this strategy draws from an ample baseof information generatedby the ongoing PRONASAR and Rural Roads Projects, as well as supplemental research that provides context, history, and analysis regarding rural development in Peru and other developing and developed countries. Previous World Bank studies, including "Rural Strategy for the Rural Sierra" (2002) and the above-mentioned PPIAF ICT study (2004, in process) provided further strategies andinformation for the presentreport. The continued Bank-Government dialogue and infrastructure research program culminated in a national cross-sectoral workshop in Peru, in December 2003, as well as several meetings with the Intersectoral Commission for Rural Infrastructure (under the Presidency of the Council of Ministers) in May and September 2003, to discuss the contents and scope of the commissioned studies. The above studies, combined with the cross-sectoral dialogues, have provided the findings and recommendations incorporated into this ESW and are expected to aid in the design of a forthcoming rural electrification project and of a possible future rural infrastructure project. PPIAF, 2004, Fostering PrivateSector Provisionof Infrastructure in Rural Peru, preparedby Intelecon- ITC-ITDG,August. 2 EXECUTIVE SUMMARY Rural Peru i s characterized by dismal poverty, limited access to services and the attendant lack of opportunities. Three quarters of the rural populationlives inpoverty, and, at 51%, the extreme poverty rate is five times what it i s in urban areas. This differential i s particularly large, even for a region already characterized by significant rural urban differences. Access to infrastructure services i s similarly unequal, with Peru much below comparable countries, notably for sanitation, electrification and telecommunications. More immediately, the lack of services certainly constrains the rural economy' s productive potential and helps explain why Peru's agriculture ranks among the least productive of Latin America (Figure 1)- It also limits the diversification of the rural economy towards non-agricultural activities, an evolution that i s key to higher rural incomes. This "double dividend" on both productivity and diversification i s possible because productivity improvements can be labor-saving and they can therefore free some working time that can be used for productive activities outside the agricultural sector. Indeed, a central argument of this report i s that improvedruralinfrastructure will be key to improving rurallivelihoods on a sustainable manner. Figure 1: Peru's agriculture is one of the leastproductive inLatinAmerica I 10,000 8,000 I 6,000 4,000 2,000 0 Agricultural value added per worker (constant 1995 US$) Source:WorldDevelopment Indicators, 2004. The experience from the past decade shows that the importance of infrastructure has been only partially reflected in Peru's rural development policies. While a number of national andlocalplans have emphasized the demand for enhancedaccess to infrastructure services in rural Peru, public expenditures in rural infrastructure have been highly volatile, with a decreasing trend (Figure 2). On the other hand, although private participation in construction, operation and maintenance of rural infrastructure i s on the surge, direct private investments inthis area are still marginal. Duringthe period 1998-2002, only 2.6% of total investment in rural infrastructure came from private sources. The higher risks associated, the lower profitability and the increased marginal costs in areas with lower population density, but also in certain cases the lack of adequate incentives and the existence of regulatory constraints, are main deterrents for the private sector to directly 3 invest in rural infrastructure. Nevertheless, the experience of other countries shows that a large proportion of funding for ruralinfrastructure has to come from public sources (though not necessarily centrally-managed), even though this funding can be used to promote, to a very large extent, private sector participation in rural infrastructure's construction, operation and maintenance. However, the proportion of public funding varies significantly across sectors. Capital investments in rural roads are generally almost entirely funded from public sources while private investment can contribute greatly to the extension of rural telecommunications services. Inthe case of Chile, privateoperators financed on average 72 percent of capital expenditures associated with the development of public telephone services in rural areas. In sectors like electricity and telecommunications - which, unlike rural roads and waterlsanitation, are generally considered as private goods - a sound incentive framework (and corresponding public funding) can be effective in attracting substantial private financing for infrastructure, including in rural areas. The Peruvian experience, with the exception of rural public telephones, over the last decade suggests that the existingincentive framework has not been effectiveinfostering such participation. Figure 2: investmentlevelsfor some rural infrastructure sectors (1998-2002) (base 100in 1998). I I 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 1 t- w a t e r i s a n i t a 1ion -electric i l y ru ra I r o a d s I Sources: RODRIGUEZ, M.(waterhanitation), ARAGON, I. (electricity), MTC (rural roads). The Government of Peru i s well aware of the need to promote a more balanced development, Active steps have been taken to address the issue within the new institutional framework introduced since 2002 when ambitious decentralization reforms were passed. In particular, a number of national and sub-national development plans have now been developed to confront the problems of rural areas. All of them acknowledge the importance of infrastructure to reduce physical isolation, increase productivity and diversify economic activities. Ninety percent of the poorest quintile of the rural population work in the agriculture sector (mostly subsistence) and for them, access to local markets i s key. Thus, infrastructure's impact on agricultural productivity or diversification outside the agriculture sector can trigger significant benefits for the rural poor, as specifically discussed in the National Strategyfor Poverty Reduction and the Development of Economic O p ~ o r t u ~ i ~ i e ~ for the Poor. The National Plan for Territorial Development proposes to strengthen the emergence of secondary cities through a territorial perspective of the rural space, and better and more affordable urban infrastructure and communication services. The Sierra 4 Rural Development Strategy stresses the need to develop links between urban areas and agricultureflivestock production areas as well as economic corridors, productive infrastructure and private investment. Finally, the Planfor the S~sta~nableDevelopment of the Arnazonia region identifies a large number of projects, of which about one third are in the infrastructure sectors. These plans and strategies each have intrinsic value. However, they do not yet constitute a unified rural development strategy. Nonetheless, three recommendations emerge that should underpin the efforts to strengthen the delivery of infrastructure services in rural areas. The first i s to focus resources on areas with stronger economic potential. The second i s to adopt a territorial perspective that links rural economies to the surrounding towns in the context of a larger rural space - this should help avoid separate sectoral interventions that are planned with limited connection to the productive development of the rural territories. And the third i s to develop new approaches - as well as new implementation models - to the provision of infrastructure services with stronger linkages to local realities and participation. Together these three sets of recommendations will help promote the transition from subsistence to a more competitive agriculture, provide access to income- generating opportunities, and facilitate economic diversification outside agriculture. In addition, the ambitious agenda of decentralization reforms is being implemented with the goal of stimulating local economies, by making more resources and institutional capacity available at the local level. Since 2002, major laws have been passed to define the principles of the decentralization process, address its fiscal consequences, and develop the institutional framework. As a result, the share of public expenditures managed at the sub- national level has increased from 14% in 2002 to 23% in 2004. In parallel with the fiscal reforms, a national assistance plan for local and regional governments has been prepared to ensure that sub-national governments can reach sufficient institutional capacity, acknowledged by a certification from a nationalaccreditation system. This is promising for rural development in general and for the provision of adequate services in particular. The creation of local institutional capacity and the devolution of adequate budgetary resources are critical steps that should progressively allow the shift from a central, sector-based, vision of rural development, to a decentralized territory-based approach. With the new model, local participatory planning and prioritization workshops are being used to identify potential economic opportunities and elaborate local development strategies. When such planning i s performed at a sufficiently decentralized level (such as the province), rural stakeholders' needs are reflected more effectively, allowing them to contribute to the identification of the rural infrastructure needs that could be more effective at promoting local economic development and increasing rural incomes, In spite of the progress achieved, Peruvian mayors remain cautious and aware of the challenges ahead: most think that the fact that municipalities take over new responsibilities will have a positive impact on local development but they also recognize that they are not yet prepared to take over new responsibilities. Inorder to capture the main features of Peru's rural infrastructure gap, this report examined infrastructure provision through three dimensions: prioritization (is infrastructure, 5 investment properly aligned with the priorities set by the government for rural areas and the demand of the target population?), efliciency (are infrastructure services provided in an efficient manner with due attention paid to environmental, social and gender issues as well as ability to attract complementary private sector investments?) and efjectiveness (does the provision of infrastructure services effectively contribute to increasing rural incomes, which i s the ultimate effect sought for the long-termreduction of poverty inrural areas?). With regards to prioritization, although some similarities can be detected across sectors, there are major differences in the way planning and implementation i s performed for the various rural infrastructure sectors. The degree of involvement of local stakeholders i s one difference but, more broadly, the criteria and methodology used to prioritize investment alternatives differ significantly. In brief, the waterlsanitation and rural road sectors have tended to give more weight to social and poverty considerations while electricity gives more importance to economic criteria. The telecommunications sector (through FITEL) attempts to balance both considerations. These differences in planning methodology are likely to be the main reason behindthe higher correlation between poverty and provision of waterlsanitation and rural roads, than between poverty and that of electricity and telecommunications. In addition to relying on different planning criteria, each infrastructure sector has its own national planninginstrument, its own funding mechanism and even its own definition of rural areas. Finally, there i s little opportunity for coordination and exchange of success stories across ruralinfrastructure sectors. Although the quality of spending could certainly be improved, the amount of resources allocated to rural infrastructure i s dismally low. Over the 1998-2002 period, Peru invested about $97 million per year in rural infrastructure, amounting to 0.18% of GDP or about $24 per person per year. 97.4% of these resources came from public sources. In comparison, Chile with half the rural population share, invests about 0.28% of its GDP in ruralinfrastructure or four times as much in per capita terms. In the case of Guatemala, which has a large rural population, investment inrural infrastructure reached an average of at least 0.31% of GDP over the past 5 years. The limited resources allocated to rural infrastructure i s due to the generally low priority granted to investments in general (and to investments in infrastructure in particular) in the country's budget: Peru's public investment in infrastructure have hovered around half a percentagepoint of GDP over the last few years and, when including private investment, the totaljust slightly exceeds 2% of GDP on average over the period 1998-2001(1.5% in2001).This places Perulargely below Chile (around 2% of GDP for public investment in infrastructure alone and almost 6% when including private financing) and Brazil (around 1% for public investment and around 2.5% for public and private investments cumulated). In terms of eficiency, Peru's rural infrastructure gap is noticeable in terms of coverage, quality and cost. Only 28% of rural households have access to an unpaved road in good condition (13% to a paved road), 49% have access to sanitation services, 62% to water, 30% to electricity services and only 9.3% of villages had a public phone in 2003. In addition to the reduced availability of most services, other services are of low quality (water, Internet, use of traditional fuels as an alternative source of energy) or are expensive (electricity, freight transport, and telecommunications). 6 Nonetheless, progress has been achieved in each of the four infrastructure sectors (transport, waterlsanitation, electricity, and telecommunications) with regards to the participation of the private sector inoperation and maintenance with positive impact on the efficiency of such investments. New legislation has set a proper regulatory framework to liberalize the telecommunication and electricity sectors and to create incentives for sharing of right-of-ways between these sectors, Increased competition in telecommunications and private participationin electricity have substantially improved efficiency and fostered new investments. Nevertheless, the main electricity distribution concessions are concentrated in small areas around urban centers, and electricity distribution companies outside of Lima remain mainly state-owned. In spite of the existence of a best practice incentive mechanism (FITEL), that helped create two small private companies that provide public telephone and some Internet services in Peru's most isolated rural communities, the main operator continues to be the de-facto monopolist for the provision of basic telecommunication services in most rural areas and less than 50% of Peru's population i s covered by cellular networks, one of the lowest inLatin America. In the rural waterlsanitation and rural road sectors, construction of the physical infrastructure i s contracted to the private sector and operation and maintenance activities i s performed by market-based community mechanisms. The use of micro-enterprises to perform the maintenance for rural roads has proved an efficient mechanism to maintain rural infrastructure while at the same time helping develop entrepreneurial capacity inrural Peru. Although many tasks related to the construction, operation and maintenance of rural infrastructure are delegatedto private actors, they are publicly funded so that direct private investment in rural infrastructure remains marginal - about 3% of total funding flows in 1999-2003. This i s due to the higher risks and lower profitability. When considering the eflectiveness dimension, analysis performed by Escobal and Torero (2004) for this report found that the availability of infrastructure services in rural areas promotes income-generating opportunities, strengthens social capital and, ultimately, reduces poverty. Their work specifically address the direction of causality (the impact of infrastructure on rural households' income as opposed to the consumption effect of wealthier households purchasing more infrastructure services) relying on the propensity score matching approach. Escobal and Torero found that access to infrastructure services increases the number of hours worked per week, an impact that becomes significant when households have access to at least 2 services. In addition, economic diversification Suchas the 199311994Telecommunication Law, the 1992Electricity ConcessionLaw and the 2004 Law requiring sharing of right-of-ways. Propensity score matching was first developed by two statisticians, Rosenbaumand Rubin, in 1983. Since in observational studies assignment of subjects to the treatment and control groups is not random, the estimation of the effect of treatment may be biased by the existence of confounding factors. Propensity score matching is a way to "correct" the estimation of treatment effects controlling for the existence of these confounding factors basedon the idea that the bias i s reduced when the comparison of outcomesi s performed using treated and control subjects who are as similar as possible. These methods have become increasingly popular in medical trials and inthe evaluation o f economic policy interventions. 7 increases with the number of available infrastructure services: 85% of the working time of rural households without access to any infrastructure service i s devoted to agricultural activities, compared to 55% for households with access to three or more services. 8 A simulation also shows that the distribution of ruralhouseholds' income shifts up as more infrastructure services become available and that, as a result, poverty rates are reduced. According to this simulation, bringing all infrastructure services to the 30% of the Peruvian rural population without access to any service could help lifting half a million Peruvian out of poverty. Therefore, this impact on poverty could be even greater if investments inrural infrastructure were to focus on poor rural areas, with strong potential for economic development (and where some infrastructure services may already be partially available). The additional payment contributions that may arise from the existence of several services will be more than compensatedby the increasesinincome. Another important observation is that the different existing approaches for the various rural infrastructure sectors reduce opportunities for positive interactions. Seventy-four percent of rural households have access to zero or one infrastructure service and only 5% have access to the four services. At the same time, there i s substantial evidence that cooperative interactions across services can increase the impact of combined services on households' income compared to the sum of each infrastructure service taken individually (Figure 3). For example, rural households granted access to both water and telephone services have seen their income increased by 38% compared to 11%if adding the individual effect of accessing each service separately (accounting for causality effects). Interactions arise because many productive activities in rural areas require access to several infrastructure services. The need for combined services can be identifiedthrough localdevelopment plans pointing out the various potential productive activities that could be developed in a particular territory. Figure 3: Impact of availability of infrastructure services on ruralhouseholds' income. E u water+ electricity water electricity + + water + electricity + f telephone telephone + all- weather road -t.withinteractions-+--without interactions Source: Escobal and Torero (2004). While the evidence gathered by Escobal and Torero is already substantial, this strategy proposes to complement these results and test their robustness by establishing a specific monitoring and evaluation mechanismduring the implementation of the proposed agenda. However, this might not be the most efficient use of resources since this population without access to any service i s likely to live in the most remote parts of the country (Le., where the marginal cost of bringing access to infrastructure services is the highest). 8 Finally, the contribution of rural infrastructure investments to local economic development inrural areas i s enhanced when they can be aligned to local strategies through the greater participation of local stakeholders. In this regards, significant progress has been achieved with the implementation of a decentralized framework. While the "higher-tech" sectors with larger potential economies of scale (like electricity or telecommunications) remain significantly centralized, the waterhanitation and rural roads sectors have been decentralizing planning and operation at the municipal and community levels with the technical support of central agencies. For example, in the waterhanitation sector, district municipalities are involved through their own participatory planning instruments in the detailed design of projects, including determining who the beneficiary communities are. Similarly, rural road planning i s performed through district and provincial plans in which local governments must define the modalities of construction, rehabilitation and maintenance. In the rural electricity sector, some participatory mechanisms have been put inplace, such as the "electrification committees" butthis involvement of local stakeholders remains limited and mostly "upstream" in the planning process. Surveys show that while about half municipalities declare themselves to be involved in a waterhanitation program, and a third in rural roads, this proportion drops to one out of five for rural electricity and less than one out of ten for telecommunications. Inthis context, the proposed strategy intends to answer two key questions: How can rural infrastructure be harnessed to promote sustainable rural development and poverty alleviation?; and how should it be done? The strategy seeks to improve access to infrastructure by the rural population along the three dimensions of prioritization, efficiency and effectiveness. These three dimensions provide a conceptual framework that makes explicit the key tradeoffsltensions involved in improving the access to rural infrastructure and enhancing its provision. These trades-offs address the "what should be done" and "how", as follows: "level of access versus availability of resources": the amount of resources allocated to achieve higher coverage rates versus those that can be budgeted or collected from beneficiaries; "prioritization versus effectiveness": the selection of social and economic criteria for the prioritization of investments versus achieving larger impacts in terms of greater sustainability of investments and higher increases inrural incomes; "effectiveness versus efficiency": the selection of the appropriate institutional level to better reflect rural users' needs versus achieving the need for economies of scale and sufficient institutionalcapacity to managethe various infrastructure assets; "affordability versus incentive framework": necessity of revisiting the existing subsidy policy for rural infrastructure; "in-house versus contracting": the need for an framework that could foster better privatesector involvement inrural infrastructure; and "transfers versus capabilities": the timing of the transfer of new responsibilities to local governments in a progressive manner and along with related technical expertise. 9 The proposed strategy aims at implementing a new decentralized and market-friendly framework for rural infrastructure through a two pronged approach: the allocation of compzementary resources to align Peru's coverage rates of rural infrastructure with countries at similar level of development; and improved expenditure efliciency. Appropriate sequencing i s also an important element of the strategy since some substantial improvements in efficiency should precede major increases in expenditures. In particular, noticeable progress should be achieved with regards to the methodology adopted to prioritize investments, the reshaping of the subsidy policy or the strengthening of the management capacity at the local level. SUMMARY :THEPROPOSEDSTRATEGICFRAMEWORK Halve Peru's rural infrastructuregap /-\ In 10years I r Implementnew decentralized Doubleannual funding and market-friendlyframework for ruralinfrastructure comparedto average observed in 1997-2002. Focus resourceswhere they will have greatest impact Put users at the coreof the planning processand bridgeknowledgegaps in order plannerscan makerationalchoices Develop a subsidy policy which is transparent,linkedto results and keptto a minimum Enhancethe participation of the privatesector Ensurea timely transfer of responsibility Some of the implications of the proposed strategy are common to the four infrastructure sectors. The desire to foster complementarities across infrastructure services and better align rural infrastructure investments with localdevelopment strategiesjustifies the use of a common framework. This common framework should address the full cycle of rural infrastructure investment from planning, to funding to implementation. Halving Peru's rural infrastructure gap in the next decade would align the country with its neighbors and peers. It would promote local economic development through enhanced mrallurban linkages, help strengthen Peruvian secondary cities and reduce rural poverty. 10 Such an objective requires doubling in the current annual level of funding for rural infrastructure from its current level of around US$lOO million over the coming decade. While this clearly implies a budgetary effort for the Government of Peru, this would be modest (an annual $200 million would represent around 2% of the 2003 national budget and about a third of a percentage point of GDP). This budget target should not be out of range, given past public spending in infrastructure. In fact, this amount i s just slightly higher than the sum of the funding available in 1998 for rural roads and waterisanitation, combined with the statutory objective envisaged by the Law creating the Rural Electrification Fund and the current resources available for rural telecommunications through the Telecommunications Development Fund(FITEL). If the additional effort was considered out of range given the current fiscal constraint, financing for rural infrastructure should be found within the sectors. FITEL i s already working under such a model (its resourcesdo not come from the general budget but, rather, from a 1%tax on the revenues of telecommunications operators). Inthe electricity sector, a revision of the tariff policy with the introduction of cross-subsidies could be the way to generate additional resources that could be channeled through the Rural Electrification Fund (once effectively created). In the road sector, some countries like Brazil or El Salvador have earmarked transport-related user charges (eg. gasoline tax, vehicle licence fees) in a road fund and used the resources to finance the maintenance of transport infrastructure. While the key issue for Peru remains the necessity to find additional financing to develop its rural infrastructure, a customized strategy could be elaborated for each sector, either by raising the priority given to such investments in national (or local) budget allocation decisions, or by finding ways to generate additional resources within the sector by implementing earmarked users' charges or cross-subsidies. As to the means to improve expenditure efficiency, they involvethe following: 0 Focus resources where they can generate larger economic impacts - I t i s proposed that a mix of social and economic criteria - as well as the presence of other infrastructure - are used to allocate budgetary resources from the various infrastructure funds, up to the current level of resources. This would allow balance between the objective of reducing rural poverty, while ensuring an efficient use of resources by focusing on territories where access to infrastructure will help reveal potential economic opportunities and where complementarities across services can take place. For the additional resources, only economic considerations (productive potential) and opportunities for complementarities (presence of other infrastructure) should be taken into account. As such, these additional resources could make a substantial contribution to Peru's competitiveness agenda. This "two windows" model - the first window for existing resources combining social and economic allocation criteria, and the second for additional resources, aligned with the competitiveness agenda- would both finance rural infrastructure projects identified through the same methodology of decentralized participatory planning. A methodology consistent across sectors should be developed in the short term for the two windows as well as monitoring and data collection mechanisms. Inorder to maximize opportunities for complementarities across services, incentive mechanisms should be established for the coordination in the use of the four 11 existing sector-based funding instruments: PRONASARlMinistry of Housing, Construction and Sanitation, the Rural Electrification Fund, the Ministry of Transport and Communications, and FITEL. Such incentives could include modification of prioritization criteria in order additional resources are granted to projects with interactions across sectors. However, there are important differences between the telecommunication and electricity funds and the resources for waterhanitation and roads, as the former are intra-sector and independent of fiscal support. Increased coordination of these sector-specific funding instruments should help identify complementary investment opportunities that could save costs and increase economic development impact-such as simultaneous investments in fiber optic and electricity distribution networks. Put users at the core of the planning process and bridge knowledge gaps inorder local planners can make rational choices - This would require in the shortlmedium term the preparation of provincial participatory infrastructure plans based on local development plans. The provincial level has been chosen as the right institutional level for planning purpose because of its intermediary positioning between the regions - too large to be fully accountable to rural users - and the district municipalities - too small to have a sufficient technical capacity and to allow for economies of scale. While the province would be the key level o f implementation for the rural infrastructure strategy, close coordination would be needed with the central government (technical assistance, monitoring, and institutional capacity assessment), the regions (ruralelectricity regional plans, on-grid electricity and ICT investments implementation), the districts (supervision of implementation and provision of technical assistance to communities), communities (supervision of implementation, operation and maintenance of rural waterhanitation systems), and local and nationalprivate sector stakeholders that would be the key investors and managers for telecommunication and electricity networks. In order to strengthen local governments' capacity to prioritize among infrastructure investments, central agencies (Vice-Ministry of Sanitation, DEP, PROVIAS Rural, OSIPTEL) would prepare a "toolbox", provide technical assistance and ensure that bottom-up planning i s balanced with existing strategies of national infrastructure plans (PRONASAR planning methodology, National Plan for Rural Electrification, National Program for RuralTelecomslFITEL, nationalroadplans). Inparticular, central agencies -takinginto account the demand for infrastructure services expressedby ruralusers through "bottom-up" participatory process - would provide provincial planners with a list of alternatives for rural infrastructure investments. The preparation of the provincial infrastructure plans would then allow local stakeholders to prioritize among these alternatives, takinginto account rural needs and potentialities. e Develop a subsidy policy which is transparent, linked to results and kept to a minimum-The failure of the incentiveframework to promotehigher levels of private sector participation suggests engaging in a deep evaluation of existing subsidy instruments, followed by a restructuring of the framework. In certain cases, subsidies have been insufficiently predictable, in some cases, they have excluded certain categories of operators and introduced distortions, in other cases, they failed to create sufficient incentive to attract the private sector and make services affordable enough to 12 reach the rural poor. In the short term, it i s therefore necessary to review existing subsidy mechanisms within sectors and to put inplace mechanisms to better coordinate sector-specific subsidy programs. In the medium term, such a review should help revamp subsidy policies for infrastructure services in rural areas. Ultimately, for all sectors except roads, the pricing policy should reflect the cost of capital, operating costs, maintenance, management, administration and security, and a reasonable profit. The Peruvian (FITEL) and international experiences in minimum subsidy concessions and output-based aid could provide a valuable ground to redesign the existing framework. Cross-subsidies may be justified in certain cases (eg. electricity). Indeed, while in an ideal world the best subsidy i s clearly the targeted lump sum cash payment, in most Latin American countries, fiscal constraints impede the financing of many subsidies. Subsidies, where required to keep the service affordable, should be direct and transparent. When they exist, national regulators should monitor the application of subsidies and the pricing policies, in a manner that will not create disincentives for private sector investment. 0 Further delineate and facilitate private sector participation - Private sector participationhas already successfully occurred in each of the four infrastructure sectors. It needs to be further promoted as it can bring substantial benefits in terms of both efficiency (better use of resources) and effectiveness (creation of employment opportunitiesand of a local entrepreneurial capacity inruralareas). Inthe shortlmedium term, it is necessary to improve the business environment for private providers of infrastructure services, by revising and further developing the legal and regulatory framework. Inparticular, local authorities and technical staff should be trained to better understand their role (if any) in regulation and how to apply consistently the national regulatory framework. Local authorities should become facilitators that could bring together local entrepreneurs and NGOs to attract private investment, present multi- sectoral investment proposals to national authorities andlor rural investment funds, and do not impose unreasonable fees or technical requirements. To achieve that, the strategy recommends creating provincial infrastructure institutes-based on the experience of the Provincial Road Institutes- entrusting them with the planning of infrastructure interventions and contracting, when relevant, private entrepreneurs to implement the provincial infrastructure plans, under the authority of a provincial infrastructure board and with the technical support of central agencies. The mayors of all the municipalities in the province (district and provincial mayors) would be members of the provincial infrastructure board. The overall institutional environment should help identify and foster local entrepreneurs inrural areas that show the skills and may have some capital to invest in local infrastructure by providing training, matching grants, micro and SME-financing. Inthis regard, the micro-enterprises model could be valuably experimented inother sectors than rural roads. Sustain a timely transfer of responsibilities - A critical issue for a successful decentralization process i s to ensure that responsibilities are transferred in a timely manner, consistent with the buildingof a local management and technical capacity and along with sufficient financial resources. The strategy proposes to design a list of minimum requirements to be fulfilled before local governments can assume rural 13 infrastructure responsibilities. These requirements should include capacity for policy coordination (e.g., creation of rural infrastructure boards), planning, management and contracting capacity (e.g. creation of provincial infrastructure institutes), and incentives for the promotion of private sector participation. They should also address the sustainability of rural infrastructure investment(e.g. i s maintenance properly funded?), the capacity to deal with social, gender and environmental issues, as well as monitoring capacity (which could be performed by the regional level). National agencies should assess local governments' management capacity, evaluate local plans and provide customized and targeted technical assistance to low performers, in coordination with the CND. A comprehensive monitoring and evaluation mechanism should also be established, involving both the central and the local levels, in order to follow progress made in decentralizing responsibilities and fostering complementarities as well as to detect possible improvements to the proposed strategy and to deepen our knowledge of the interactions between rural infrastructure andlocaldevelopment. Summary : ProposedResponsibilitiesfor the Various Levels of Government -Provide knowledgeandtechnicalassistanceto localgovernments -Asses if institutionalcapacityis sufficient 1 1 -Monitor rural infrastructuredevelopment, outcomes and impact Regions -Prepareregional plansfor ruralelectricity -Contract privateprovidersto implement plans(on-grid) -Coordinatethe planningprocessfor rural infrastructure Provinces -Contract privateprovidersto implement plans -Providetechnicalassistanceto promotemicro-enterprises -Participatein planningprocessthroughprovincialinfra.boards Districts -Superviseimplementation -Providetechnicalassistanceto communities Communities -Superviseimplementation -Operateand maintainruralwaterlsanitationsystems I I Inaddition to cross-sectoral implications, specific improvements shouldbe pursued ineach of the four infrastructure sectors, as detailed inthe table below. Key amongthem are: In the water sector, efforts should focus in the medium term on clarifying the decentralized regulatory and institutional framework while building on the experience of the Juntas Administradoras de Sewicios de Saneamiento (JASS). This could in particular be formalized within the revision of the existing water sector law and the associated regulations and bylaws. The guidelines proposed by the existing 2003-2012 Strategic Planfor waterlsanitation services provide a goodbasis to engage the review of the existing subsidy schemes. The planning methodology could also be revised, taking 14 into account the role of the provincial government in coordinating access to different infrastructure services. Nonetheless, effective demand, as evidenced by the community's willingness to pay (at least 20% of the costs of new waterlsanitation costs and 40% for improvement and rehabilitation works), should continue being the corner stone of the planning process for any investment in waterlsanitation. Finally, institutional capacity needs to be strengthened at both central level (DNS planning, monitoring and evaluating capacity) and locallevel (JASS). Intheruralroadsector, responsibilities shouldbeclarifiedbetweenthevarious levels of government. Progressively, there should be a full devolution of responsibilities for rural roads' management at the local level while the role of the central agency, Provias Rural, should diminish and evolve. Planning could be improved to better take into account complementarities while building on the experience of the provincial road plans and the participatory prioritization workshops. The successful experience of the micro-enterprises should continue to be scaled up, by streamlining the introduction of competition with tendering of maintenance contracts. In the medium term, the provincial Road Institutes - about 25 have been created so far - should evolve towards provincial infrastructure institutes. The subsidy review should explore options with regard to facilitate the access of the poor to transport services. The Local Development Window, which has been successful in fostering inter-sector coordination and promoting synergies between infrastructure and economic opportunities, should be pursued and scaled up. Non-motorized tracks should continue to be addressed as one option for enhancing mobility incertain rural areas. Inthe rural electricity sector, there is an urgent need for a new legal and regulatory framework to mobilize resources for investment from national, regional and local governments, as well as public and private enterprises, including existing distributors. The review of existing subsidies should address the need to make these mechanisms predictable enough to create the right incentive for the private sector. This review should also address the fact that existing subsidies are not directly accessible to private providers, but only to DEP and ADINELSA. The role of ADINELSA would have to be reviewed to avoid potential conflicts of interests. The option of establishing a rural electrification fund independent from annual budgetary allocations should also be explored, along with the possible use of cross-subsidy schemes. The regulatory framework needs to be revised in order to incorporate the provision of minimum subsidy concessions or management contracts. The transition of EMSEMSA and EMSEUSA toward private-sector management should also be planned. There i s a need for decentralization of planning and prioritization of projects to the regional and provincial levels. With regard to maintenance, the possible use of micro-enterprises could be valuably explored. Finally, the costs of service provision could be reduced through changes in standards, design, construction of grid-connected projects and off- grid service provision through cost-effective renewable energy. Further capacity buildingmay berequiredinthis area, particularly for the regulator. Finally, in the rural telecommunication sector, efforts should focus on decentralization and on promoting local private sector participation, since this i s the 15 sector with the largest potential for private involvement. The review of the subsidy framework should focus on the sustainability of key institutions and programs (eg. the private sector companies that own the FITEL satellite community phones or the community Internet access centers) and on continuing the extension of services (eg. satellite community phones, Internet access centers) to highly isolated rural communities. If needed, for example to increase cellular coverage in rural areas, earmarking half of MTC's resources coming from licenses and fees' revenues, could bring additional funding for FITEL. In addition, in the shorter term, private sector participation could be promoted by lifting concession restrictions for small operators. Local governments' participation should be enhanced for both the prioritization of investment through the provincial infrastructure plans as well as plans to foster increased use or demand of ICT infrastructure, but also through representation in nationalcoordinationbodies (CODESI). CODESI needs institutional buildingto pursue its coordination role, develop common standards of solution designs and technology and develop strong monitoring and evaluation indicators. Finally, the various options to address Peru's national backbone gap (eg. PCEP) should be carefully assessed. National e-government initiatives such as the development of services for citizens (licenses, certificates) and businesses (registration, labor permits, export procedures) should be pursued and scaled up, with attention paid to bringingthese services to rural areas. Similarly, e-business initiatives should be pursued in rural areas, possibly through the use of training and matching grants to help deepen e-business markets and through upgrading Peru's telecenter network, under private sector management, to provide support services to very low-income entrepreneurs. Initiatives to stimulate demand for ICT services by local communities, governments and educational centers will create a virtuous circle as it will not only contribute to economic development but i t will also increase the commercial viability of the suppliers of ICT services which in turnwill reducethe needfor subsidies. Several cross-cutting environmental and social challenges apply to the four sectors. These challenges focus on the consideration of environmental mitigation measures, consideration of gender equity, and the appropriate inclusion of indigenous peoples. While the four sectors have adequate regulations to address environmental impacts, those related to gender and indigenous peoples require strengthening, albeit substantial advances in their mainstreaming have already taken place in the rural roads sector. Recommended actions include training of the sector institutions on gender equity issues and inclusion of indigenous groups and women in the planning, management, and supervision of projects. The definition of specific quotas-such as percentage of women participation in planning workshops or in the management of relevant project activities-can help direct the efforts, even if those quota do not represent benchmarks for mandatory compliance. Monitoring and reporting of direct and indirect effects of rural infrastructure on those groups can further provide the mechanisms for making adjustments towards achieving greater equity andbetter distribution of benefits among all society groups. The proposed agenda i s neither over ambitious nor unrealistic. On the budgetary side, the additional proposed effort is incremental compared to the overall amount of public investment and it wouldjust mean comingback to levels observed five years ago before the 16 fiscal situation imposed a dramatic decrease to public spending in infrastructure. On the institutional side, the strategy i s aligned with Peru's decentralization agenda and it does not involve radical changes that may be conflictingwith on-going reforms. Onthe contrary, the strategy proposes to deepen the decentralization process through the strengthening of local institutional capacities, the timely transfer of planning and operational assignments to local governments and the clarifications of responsibilities between the various levels of government. On the development side, the proposed approach would help enhance rural productivity and promote diversification outside the agriculture sector, in line with other existing rural development strategies for Peru. In addition, the territorial (provincial) approach to planning i s expected to promote the emergence of productive poles in rural Peru as well as the strengthening of ruralhrban linkages that could reinforce the network of Peruvian secondary cities. Finally, some of the proposed recommendations have already been successfully experimented by some infrastructure sectors. In such cases, the strategy has tried to promote cross-fertilization across the various sectors and to build on these successful experiences. Progress already achieved provides strong evidence that the proposed . institutional scheme i s already working. In particular the provincial road institutes have proved to be an efficient mechanism for rural road management, and their success i s a valuable argument that small and agile institutions such as the provincial infrastructure institutes could be successful in organizing planning, fostering private sector participation and providing technical and management expertise. Insum, while ambitious, the proposed agenda is indeed achievable if buildingon both the momentum created by the on-going decentralization process and on the existing positive reforms implemented ineachthe four infrastructure sectors. 17 OIlS Waterlsan 0Incorporate Buildcapacity of JASS, with Clarify decentralized itation complementarities criteria incorporation of "micro-enterprise" institutional and regulatory 0Strengthen planningcapacity type of model framework within the revision inthe sector (includingDNS) Adjust technical standards of water of the existing water law and and involve local supply systems to respondto the associatedregulations and governments through project capacity of potential users using bylaws. cycle appropriate technologies and Provideadequate level of 0Use of provincial designs according to rural needs training to the JASS infrastructure plans Redesignsubsidy policy, (provincial infrastructure building on the guidelines boards) to initiate promotion proposed by the existing 2003- activities of centrally founded 2012 strategic planfor W&S projects waterlsanitation 0Buildon the experienceof Stronger consideration of existing mesas de values and attitudes of concertacidrz usedby indigenous populations municipalities to determine the beneficiary communities, and the detailed design of waterlsanitation projects (final decision i s taken by the beneficiary community) 0Community commitment to O&M of the systems, by the establishmentof a JASS and payment of an up front cash contributionplus labor during construction to ensure sustainability Rural Strengthenthe experienceof Clarify responsibilities between Explore alternative options for Roads the talleres depriorizacion various levels of government, with reaching areas inthe Selva with and of the provincial an increasing devolution of consideration of indigenous participatory roadplans responsibilities to localentities and people andenvironmental Reviseddefinition of the ensuing scaling down of factors technical standards for rural attributions to central entity (Provias Assess potentialities and roads (building uponthe Rural) financial implications of experienceof the Rural Continued developmentof targeted subsidiesfor transport RoadsProgram) institutionalcapacitiesat the local services in the most remote Reviseprioritization level (through IVPs, becoming IIPs) areas methodology to include Continue scaling up, and incorporate Streamline the Local complementarities competition in, the maintenance Development Window's model mechanism with micro-enterorises Rural 0PrepareRegional Plans for Implement a new legaland Formalize FOSE over longer Electricity Rural Electrification, regulatory framework to mobilize periods to reduceuncertainty aggregatingdemand investment resources (introduce and utilize the existing cross- expressed in provincial rural concessions, tariffs, subsidy mechanismto balance infrastructure plans, and construction and operation tariffs across regions basedon decentralized standards) Implement rural electrification planningand prioritization of Revamp incentive framework for fund, without excluding cross- projects at regional level private sector participation, rather subsidies, and ensuring 0Develop planning than continuingthe channeling of predictabilityof subsidiesin methodology that ensures funds exclusively through order to reducerisks for private 18 investments are integrated ADINELSA andDEP (incorporate sector participation with local development real costs of investment and future Revisetechnical norms to strategies to ensure cost price of services); provide capital account for specific needs of efficiency, given increasing cost incentives (subsidies) to private ruralpopulations and marginal costs and public enterprisesto invest; sustainability of rural systems, Incorporate introduce competition for the reducing costs of service complementarities criteria subsidy basedon both contribution provision, expanding useof and include willingness of of enterprise and communityllocal renewabletechnologies for community to contribute government remote rural population Assess andclarify responsibilities of Undertake analytical work to ADINELSA andDEP to avoid explore the involvement of conflicts of interest communities inroutine Replaceelectricity committees by maintenanceof electricity participatory workshops for infrastructure planning and monitoring purposes The "network" nature of the Buildon the experienceof the facilities requires keeping convenios de capacitacion y specialized technical asistencia tecnica already signed capabilities and coordination at betweenthe DEP and some local the regional and nationallevels governments Rural Involvelocalgovernments in Scale up training programs for local Support activities of CODES1 Telecom- planning investmentsand governments building on the to achievecoordination of municat- aggregating and stimulating experienceof FITELand, possibly, efforts, incorporating ions demand for ICT services (i.e. INICTEL representativefrom local e-government, tele-education, Implement incentives to put private governments etc.) sector, including local 0Clarify responsibilities of local Develop strategy for fostering entrepreneurs, at the core of the governmentsinICT backbone infrastructure implementation strategy Continue support to the development Liftconcessionrestrictions limiting extension of FITELprograms to Increaseallocation of the entranceof small enterprises in isolated rural communities and resourcesfrom licenses and the market enable and facilitate FITEL's fees to existing rural Proactively identify opportunities to public telephoneoperators to telecommunication programs make simultaneousinvestments, invest inun-served areas such as FITEL, insteadof usingOBA mechanisms, in Put inplace new FITEL creating competing programs telecommunications, electricity and programs aimed at extending within MTC road projects (for instance, taking cellular coverageinrural areas Incorporate advantage of recently approved law Ensurefinancial sustainability complementarities criteria on sharingthe rightof way) of community internet access and include willingness of centers(see Box A.3 .) community and local Develop ICT services building businessto contribute on the experience of the telecenters The "network" nature of the facilities requires keeping specializedtechnical capabilities and coordination at the regional and national levels 19 TABLE TABLE ................................................................................................................................. 20 1 RURALDEVELOPMENTANDDECENTRALIZATIONINPERU21 . . 1.1. INTRODUCTION ....................................................................................................... 21 1.2. KEYRURAL DEVELOPMENT TRAITS ......................................................................... 21 1.3. RURALINFXASTRUC~EAND RURAL INCOMES ..................................................... 25 1.4. GOVERNMENT STRATEGIES ..................................................................................... 29 2. STATUSOFRURALINFRASTRUCTURE ....................................... 35 2.1. INTRODUC~ON ....................................................................................................... 35 2.2. P R I O R I ~ ~ ~ ~ O N ...................................................................................................... 36 2.3. EFFICIENCY ............................................................................................................. 44 3.2.4. EFFECTIVENESS ...................................................................................................... 54 STRATEGICFRAMEWORKFORRURAL INFRASTRUCTURE ................................................................................................... 60 3.1. STRATEGICTRADEOFFS AND RECOMMENDEDACTIONS .......................................... 60 3.2. INSTITUTIONAL AND FINANCIAL IMPLICATIONS ...................................................... 78 3.3. INSTITUTIONAL APPROACHES:THE ROLES OFTHEDIFFERENTSTAKEHOLDERS .......81 3.4. ENVIRONMENTAL, INDIGENOUS-PEOPLES AND GENDERFACTORS INTHEPROVISION OFINFRASTRUCTURESERVICES ............................................................................... 84 3.5. INDICATORS, BENCHMARKINGAND MONITORING: TOWARDS AN INTEGRATED .................................... 86 3.6. CONCLUSION............................................................................................................... PROCESSFOR THE EVALUATION OF SECTORPERFORMANCE 88 BIBLIOGRAPHY ......................................................................................................... 90 ANNEX 1 THE CONTRIBUTIONOF INFRASTRUCTURETO . INCREASINGINCOMESAND WELFAREOFRURAL POPULATIONS ............................................................................................................. 93 ANNEX 2.A. RURALTRANSPORT ..................................................................... 97 ANNEX 2.B. WATEWSANITATION ................................................................. 106 ANNEX 2.C. RURALELECTRICITY ............................................................... 113 ANNEX 2.D. RURALTELECOMMUNICATIONS ...................................... 120 20 1.RURALDEVELOPMENTAND DECENTRALIZATIONINPERU 1.1.INTRODUCTION Peru's rural population lives in conditions and with opportunities that are constrained by their limited access to productive assets and markets. A recent World Bank report on inequality in Latin American and the Caribbean 10 highlights the pervasive effects of differential access to productive assets and institutions in restraining the prospects for economic growth and the positive effects of this growth on poverty reduction. That report advocates increasing equal access to infrastructure to achieve better inclusion of all members of the society and reduce their livelihoodrisks. ''These proposals have particular relevance in the case of Peruwhere differential poverty rates between urban and ruralareas are substantial, particularly affecting indigenous groups, and where indicators of access to infrastructure, such as waterhanitation, roads and telecommunications, tend to fall within the bottom third of the Latin-American countries, Poverty rates inPeru have diminishedin neither rural and urban areas since 1998, basedon statistics compiled by the National Statistical Institute (INEI). They continue in spite of reasonableoverall growthrates and investment in rural infrastructure that averaged US$97 per year over the period 1998-2002 (about 0.18% of GDP, albeit with a declining trend). l2 Though it i s difficult to say with precision the extent to which interventions on rural infrastructure have hampered positive changes in poverty levels, it appears that a major shift in the provision of infrastructure facilities and services must take place in order to redress current inequalities in the access to services and increase opportunities in rural areas. This shift can currently be facilitated by the ongoing implementation of an ambitious decentralization framework that can help gradually transform the way in which ruralinfrastructure i s planned, financed and managed. 1.2. KEYRURALDEVELOPMENTTRAITS Peru's rural areas are spread over three main macro regions, the so-called Costa, Sierra (highlands) and Selva (jungle). Although the productive activities of these areas have diversified, most of them still consist of a large percentage of agricultural activities and the loWorld Bank, 2004, hequalily in Latin America und the Caribbean: Breaking with History ? The conclusions of the aforementioned report rest on several empirical studies that show that inequality with respect to access to water, sanitation, electricity or telephony are typically large and correlated with difference in income. Tackling the underlying sources of inequality involves broadening and equalizing the asset base-notably in infrastructure (and education). Further recent cross-country work (Calderon and Chong, 2003) shows that the more infrastructure a country has in place (including electric power, telecommunications, and roads) the less unequal it is. Given the limits on redistribution from taxes, especially in the short term, recommendations focus on the spending side of the equation to reverse a historical pattern of regressive provision of services that tend to reach the richer areas before they reach less endowedareas. 12 By comparison, for instance, during the same period, Chile invested about 0.28% of GDP in rural infrastructure, with a lower percentageof rural population. 21 set of activities that derive from them. For the country as a whole, agriculture generates 7- 9 percent of GDP and is very labor intensive, employing 20-25 percent of the labor force. The good performance of the sector in the 1990s (with agriculture GDP rising at a rate of 6.6% per year over a decade) masked strong disparities between the emergence of modern, often export-based, agriculture activities and the persistence of subsistence agriculture. In addition, relative to other Latin America countries, the productivity of the Peruvian agriculture remains among the lowest (Figure 1.1). Figure 1.1. Peru's agriculture is one of the least productive inLatinAmerica Agricutturdvalue addrdprr wcrkrr [cmsta-~t1995 Us] Source: WorldDevelopment Indicators, 2004. Diversification outside agriculture remains slower in rural Peru than in other South American countries (apart from Bolivia) as illustrated by comparing the share of the population living in rural areas and the share of the labor force working in agriculture (Figure 1.2). The economic importance of agricultural activities i s higher for poorer households inrural areas: 90% of the lowest income quintile of the rural population works inagriculture. Figure 1.2. Agriculture's contributionto employment and value-added has been falling ... 1950 1960 1970 1980 1990 1000 2010 Sources:WDI, FA0 (1950-2000and estimatefor 2010). 22 Figure 1.3. ...but,forthe ruralpoor, agriculture remains the mainsource of employment ... - _-I.- poorest second third second richest B ae quintile poorest poorest richest quintile quintile quintile quintile Source: ENAHO, 2001 (rural population only).. However, estimates also show that incomes increasingly come from non-agricultural activities. InruralPeru, 38% of working time i s dedicated to non-agriculturalactivities and yet these activities bring 56% of rural households' revenues (Figure 1.3). As illustrated by the composition of rural revenues by income groups (Fi ure 1.4), households with higher revenues diversified outside agricultural activities more. 19 Figure 1.4. . though lessso with increasing income I I 100% i 80% 60% 40% 20% 1i 0% 1 2 3 4 5 income quintile agricultural income non-agriculturalincome citransfers, others Source: EscobalandTorero (2004). Inthe three regions, rural economies have been affected by the limited performance and viability of the agriculture sector for those areas and households of lower incomes: (i)IntheCosta,agriculturalproductionrepresents60%ofthecountry's agriculturalGDP with only 21 percent of the cultivable land, but the profitability of 70% of the smaller units is often negative when taking into consideration the opportunity costs for land or l3 There is a wide array of literature illustrating the increasing importance of non-salaried and non- agricultural activities and the implications for the improving livelihoods in rural areas and the definition of rural development strategies. More closely related to the Peru context the following can be singled out: Escobal. 2001; Reardon, Berdegueand Escobar, 2001; and Bebbington, 1999. 23 labor. l4 Thus, many small producers get less than the equivalent income from local labor markets from their work on the farm. Profitability i s directly related to the size of the units (90% of them have less than 10 ha) and the type of management (entrepreneurial versus familial). It also depends on the type of products, where they are sold, and how they are produced. As we will see, these factors can be influencedby the opportunities that rural infrastructure canbringabout. (ii)theSierra,agriculturehasalargereconomicsignificancecomparedtothecountryas In a whole l5 it and remains the main source of revenues and employment in rural areas. Production in the Sierra consists mainly of potatoes, corn, quinoa (a cereal) and livestock (cattle and llamas). Productivity i s one-half that of Peru as a whole becauseof the lack of adequate economic infrastructure, the erratic climate, steep topography, irregular rainfall and traditional production technologies. With the exception of potatoes and white maize, the main products of the Sierra are highly tradable. However they have been affected by the long-term decline in world prices (-35 percent since 1970) and by increased competition on domestic markets from imported or locally- produced substitutes. l6 Average net rural household income i s only $1.30 per day compared to $3.10 inPeruas a whole. (iii)theSeEva,agriculturehasalowercontributiontotheregionalGDPduetotheweight In of the oil extraction industry in the local economy (in the Iquitos-Putumayo-Yavari region, it amounted to 68% of GDP, compared to 13% for agriculture and 1% for fisheries). 17However, agriculture-mostly subsistence-remains the major employer in the Selva's rural areas, as it is in the Sierra. There exist a high-but still underdeveloped-economic potential for certain product niches with high added value such as medicinal plants or aquarium fish. Sustainable exploitation techniques will be critical to preserving the full economic potentialof these natural resources. The economic conditions correlate inversely with the main poverty statistics for the three regions. Across the macro regions of Peru, poverty is more acute in the Selva (58% of the population) and the Sierra (63%). The Sierra and Selva have poverty rates of nearly double that of the Costa (32%). More than half of the extremely poor populationresides in the rural Sierra, though it has less than a quarter of the national population. The Selva regioncontains about 1.4 million poor and 0.8 million of the extreme poor. 18 Although the country i s rapidly urbanizing, its rural population remains significant. The share of the population living in rural areas has decreased from over 50% in 1960to about 30% in 2000 and i s expected to reach 27% in 2005. l9 Still, Peru's rural population l4"Estudio de la rentabilitad de la agricultura de la costa peruana y las inversionespara mejoramiento del riego", World BanWFAOICEPES, 2002. In 1996, it accounted to some 25 percent of the region's GDP compared to less than 10% for Peru as a whole. l6Peru's Rural Strategy,World Bank, 2003. ''Plan l7 de Desarrollo Sosteniblede la Amazonia, INADE,2000. "Encuesta Nacional de Hogares 2001," InstitutoNacionalde Estadistica (INEI),Lima, Perk INEI'sdefinition sets two conditions for "rural areas": (1) "the area is not adistrict capital or ir is a district capital with less than 3,000 people"; and (2) "the area has lessthan 100householdscontiguous or there are more than 100householdsbut they are disperse and there are not an activity center". 24 remains in the average (in percentage of total population) in South America (Figure 1.4). Also, with the exception of Paraguay, Peru has the lowest proportion of people living in secondary cities in South America. However, there appears to have been some progress toward a more balanced urbanization phenomenon between the three macro-regions as urban population growth has been higher in the Selva and Sierra. In these regions, the stronger urbanization rates are likely to promote the emergence of secondary urban poles that couldhelp reduce the primacy of the capital city. Figure 1.5. Ruralpopulation has been decreasingproportionally to the total population ...butremains largecompared to other South American countries 1960 1965 1970 1975 1980 1985 1990 1995 200 Nral rnother urban Lima Source: World Development Indicators, 2004. 1.3. RURALINFRASTRUCTUREAND RURALINCOMES Access to infrastructure assets influences the development of rural areas. Rural infrastructure can contribute to the diversification of economic activities: for example, infrastructure i s essential to develop tourism activities, and improve access to regional markets. Infrastructure can also help increase the productive time: better roads means less time lost in transit, running water means less time fetching water, electricity can allow households to work longer, by extending the daily time when light i s available. Finally, infrastructure can contribute to raise productivity: for example, electricity can allow some households to acquire fridges which are necessary to keep agricultural production fresh, and telecommunication services allows immediate access to crucial information (e.g., market prices of agricultural products). Annex 1provides a summary of the key evidence from various studies and countries on the relevance of infrastructure in increasing economic and social well-being of rural populations. InPeru, recent studies have shown the linkages that exist between infrastructure investment and productivity. 2o Comparing the evolution of total factor productivity with the evolution of the stock of infrastructure at the national level, the flow of private investment in infrastructure in the 90s has been shown to allow firms to reduce their operating costs and, thus, improve overall economic productivity. This is particularly critical in the Selva and 2oIPE, 2003. 25 Sierra regions where, because of their lower stock of infrastructure assets, economic performance has remained lower than what i s observed at the national level. 21 Rural development i s constrained by economic and social isolation. It i s difficult for people to harness the economic and social opportunities within a wider geographic region, to take advantage of employment opportunities beyond their settlement-at least without disrupting their household livelihood through forced seasonal or permanent migration--or to expand their income generating activities through interactions with other rural and urban market centers. 22 Isolation slows down the diffusion of new technologies and technical assistance, which often are vital to the conversion of a local economy from one of subsistence to a more competitive one. 23 The heavy dependence of the rural poor on agriculture makes them particularly vulnerable to climate shocks like El N ~ odroughts or , mudslides (thirty percent of households report to have been subject to exogenous weather- related shock in2000). 24 Inaddition, this further stressesthe needto enhanceaccess to and improve the condition of infrastructure to reduce vulnerabilities and facilitate the development of productive opportunities. In Peru, strong linkages exist between available rural infrastructure services and rural economic activities and income. 25 Household surveys illustrate how rural infrastructure encourages income-generating activities in the non-agricultural sectors. The proportion of households involved in non-agriculture activities increases with the availability of infrastructure services (Figure 1.6). Inaddition, when more than two infrastructure services are available, households tend to participate more in salaried rather than non-salaried non- agriculture activities. This may illustrate a more radical diversification (salaried activities are usually more permanent than non-salaried ones which may be occasional, opportunistic and associated with the informal sector). Moreover, the proportion of work time dedicated by households to non-agriculturalactivities increases with the availability of infrastructure services. Almost half of the worked time of households with access to three or more infrastructure services i s dedicated to non-agriculture activities, compared to 15% for households with access to none of these services (Figure 1.7). 21 The Sierra region represents about 22 percent of the national GDP (with about one third of the national population) and the Selva region contributes to 8% of the national GDP (with 15% of the population). Economic growth in these two regions has been low (an average annual 1.9 percent or 0.6 percent in per capita terms for the Sierra's GDP over the period 1970-1996,close to zero inper capita terms for the Selva's GDP over the period 1989-1995).If the people had not migrated, the Selva's per capita GDP would have fallen. 22The 2003 DFID-World Bank report "Peru: Voices of the Poor," highlightsthe priority given by the poor to infrastructure in their quest to improve their living conditions and opportunities and their perception of the need to boost the institutional response in the delivery of infrastructure services. Water and electricity services are singled out as critical as it i s the need to reduce the times to bring their products to the market. The poor further expresstheir willingness to contribute to the costs of implementing these proposals. 23Source: Peru, 2"dRural RoadProject, Project Appraisal Document, World Bank (2000). 24Source :2001 ENAHO household survey. 25Most of the quantitative results in the next paragraphs come from Escobal and Torero, 2004. The analysis of information i s basedon the use of the Propensity Score Matching methodology. 26 Figure 1.6. Access to infrastructureservices promotes economic diversification .. increaseof %of householdsactive Source: Escobal and Torero (2004). Resultspresentthe increaseof the percentage of rural householdswho become active (ie. spendtime)insalariedor non-salaried non-agricultural activities when they are grantedaccess to one or several infrastructure services. Figure 1.7. ..and the time dedicated to non-agriculturalactivities 0% 20% 40% 60% 80% 100% Source:Escobal andTorero (2004). More generally, access to infrastructure services increases time dedicated to income- generating activities. The results of a 2001 household survey shows that access to only one infrastructure service does not have any significant impact on the weekly working time (compared to households without access), but access to at least two services produces significant positive changes: access to two services raises the weekly working time by 4 hours and access to three or more raises i t by 11hours (see Figure 1.8). 27 Figure 1.8. Access to infrastructureincreasesthe number of worked hours per week. _I_-.-- -_ only one two three or more numberof infrastructure servicesavailable Source: EscobalandTorero (2004). Ultimately, access to infrastructure services inruralPeru contributes to raising households' income and this impact increases with the availability of multiple infrastructure services, The analysis of the 2001 data illustrates the impact of availability of infrastructure services on rural households' income (Escobal and Torero, 2004). Single infrastructure services with larger impacts include water services (+9%) and all-weather roads (+9%). Access to only telephone services or only electricity services has a more modest impact but these two services exhibits higher impactswhen combinedwith other infrastructure. Indeed, evidence shows that there exist significant cooperative interactions between the various services so that the impact of combined services i s higher than the added effect of each of them taken individually (Figures 1.9 and 1.10). Figure 1.9. Impact of availability of infrastructureserviceson rural households' income. s 0 water + electricity water + electricity + water + electricity + telephone telephone+ all- weather road +with interactions -without interactions Source: Escobaland Torero (2004). 28 Figure 1.10. Interactions of all-weather roads with other infrastructure services enhance the positive impact on rural households' income. .I Ec i45 40 3 .. n - -no-interaction with all-weather road 35 3a 0 30 3 25 L ,. 20 I . %h 15 _. ,- _,I - t ...-....-......-- ...-- 3 10 L .,,' . * ` .I 2 5 s o ,,*I Nomfrastructure Water only Water and Water, electricity service available electxicity andsanitation Source:EscobalandTorero (2004). To illustrate these interactions, let's assume a rural economy of four households with each an income of 100. If the first household i s granted access to water services, the second household to electricity, the third to telephone and the last to an all-weather road, we can expect that the availability of these services will raise the rural economy's income to 414 (ie. a per capita income growth of 3.5%). On the other hand, if only one household i s granted access to the four infrastructure services, the rural economy income would be expected to reach 427 (ie. a per capita income growth of 6.8%). Of course, this i s a simple model and equity consideration would have to be taken into account (such as with the use of redistribution mechanisms), but this clearly shows the possible benefits arising from interactions across services. The next chapters will explore this idea more into details. 1.4. GOVERNMENT STRATEGIES The figures and trends presented in the previous sections justify the efforts of the Government of Peru in attempting to define a ruraldevelopment strategy that addresses the shifting social and economic conditions of rural areas and their surrounding space, the viability of their sustainable growth and the improvement of their livelihoods. Key plans and strategies that have been developed are: (i)A nat~onalstrategy for poverty reduction and the development of economic opportunitiesfor the poor 26 puts emphasis on (1) broad-based economic growth; (2) decentralization; (3) participation and empowerment of the poor; and (4) an 26"Basespara la estrategiade superacidnde la pobreza y opo~unidadesecondmicaspara 10spobres", May 2002. 29 institutional framework promoting more coordinated and integrated approaches to growth. Poverty assessmentshave shown that extreme poverty in rural areas i s linked to the lack of productive assets and to geographic isolation (lack of access to markets and to social services). In spite of their growing importance 27, existing social programs have had limited impact to reduce poverty due to (1) uncoordinated and untargeted sector approaches; (2) excessively centralized management and lack of empowerment of the poor; and (3) low quality of interventions with insufficient follow up and evaluation. The conclusions of this strategy suggest that increasing economic opportunities for the poor could be achieved through improved rural infrastructures capable of promoting, among other things, agricultural productivity. Reinforcing local capacities i s proposed in order to identify local development opportunities, manage risks, reduce vulnerability (e.g. natural disasters), and promote active participation and empowerment of the poor. (ii)A Sierra rural development strategy, focusing on (1) sustainable rural economic growth; (2) human development; and (3) institutions. The strategy-not yet official- acknowledges that sustainable rural growth and poverty reduction are most likely to originate from the pull effect of national and urban growth. Indeed, urban growth and migration phenomena are particularly high in the Sierra: most towns are growing fast with an average growth rate of 3.7%. This i s nearly one point above the rate for non- Sierra towns. The problem of poverty in the Sierra i s so large and pervasive, that poverty reduction programs alone do not provide the answer and must be complemented by a comprehensive national development policy capable of generating equitable growth. Economic growth opportunities in the Sierra include (1) larger-scale programs, covering certain sectors and geographic areas, requiring major investments, know-how and private sector participation (dairy and alpaca sectors, tourists circuits, agro-processing, commercial forestry, transport and commercial services); and (2) small, diversified opportunities located in specific areas, mostly of a niche type. To develop these opportunities, the strategy proposes to develop market links between urban areas and agriculturellivestock, as well as economic corridors, productive infrastructure and private investment. It recommends promoting partnerships between producers, processing and exports firms, and government. On the institutional side, buildingon the decentralization momentum is recommended with the creation of Local Development Councils. The strategy also acknowledges the relevance of the cultural dimension. (iv)The Planfor the SustainableDevelopment of theAmazonian region (PDSA)gives priority to (1) valorization of resources and development of the productivesectors; (2) improvement of economic and social infrastructures; (3) territorial planning; and (4) promotionof the socio-cultural conditions of the populations. The plan identifiedand analyzed nine "geo-economic Development Units," including economic opportunities. The planidentifieda variety of potentialdevelopment projects, sorted according to the four strategic objectives. Of those assessed indetail, 35% are rural infrastructure 27Social expenditures have increased from 3.4% to 5.3% of GDP between 1990 and 2000, mostly due to specific poverty reduction programs whose resources have increased from 178 to 400 million USD between 1995 and 2001. 30 projects. 28 At the levelof eachunit, a development strategy has been designed, with an integrated approach combining social and economic infrastructure development as well as the reinforcement of the institutionalframework, (iii)A National Planfor Territorial Development has been prepared for the period 2004- 29 2013 by the National Decentralization Council (CND). It aims, among others, to (1) promote Peru's social and economic decentralization; (2) develop strong and sustainable regionaleconomies; and (3) contribute to the preservation of the natural and human environment. To reach these goals, six objectives have been identified : (1) strengthen the emergence of secondary cities through better urban infrastructure and communication services; (2) decrease transport costs between regions; (3) improve access and affordability of transport, communication and energy services to the largest number of Peruvians; (4) develop trade flows with neighboring countries; (5) produce economies of scale through a cluster approach; and (6) socially integrate neighboring regions with common cultural backgrounds. The plan also sets objectives for productive sectors, including a shift from subsistence toward a more competitive agricultural sector (Figure 1.10). 30 Figure 1.10. Proposedobjectivesof the NationalPlanfor Territorial development for the agricultural sector (2004-2013) 2003 2008 2013 Osubsistence agriculture Uextensive agriculture for national urban markets I agriculture traditional Source:CND (2004) These plans and strategies have each intrinsic value. However, they do not yet constitute a unified rural development strategy. Nonetheless, three recommendations emerge that should underpin efforts to strengthen the delivery of infrastructure services in rural areas. INADE,2003. 29 "Plan Nacional de Desarrollo Territorial 2004-2013: Construyendo el Perk de la Prdxirna Dkada", January 2004. 30The shareof subsistenceagriculture (with an average yield of US$500per ha) should decrease from 20% in 2003 to 4% in 2004, while the share of non-traditional exported agricultural production (yield of US$6,200 per ha) would increasefrom 13% in 2003 to 26% in 2013. Some objectives have also been set for the fishing industry as well as for the forestry sector whose competitiveness remains very low (Brazil produces 600 m3 per ha with a processingplant located 15 kmaway, compared to 50m3ha and 150kmfor Peru). 31 First, resources should be focused on areas with stringer economic potential. Second, a territorial perspective should be adopted, linking rural economies to surrounding towns, in the context of a larger rural space. This perspective will help to avoid separate sectoral interventions planned with limited connection to the productive development of the rural territories. Finally, new approaches to the provision of infrastructure services must be developed. Stronger linkages to local realities and participation will increase the effectiveness o f promoting a transition from subsistence to competitive agriculture, provide access to income-generating opportunities, andfacilitate economic diversification. Above those plans, the Government's overarching strategy focuses on the decentralization of responsibilities and resources to the regional and local levels. Since 2002, major laws have been passed regarding the creation of regional government levels, basic decentralization, fiscal responsibility, participatorybudgeting, accreditation of sub-national governments, and public sector reform. The Ley de Bases de Descentralizacidn approved in June 2002, defines three guidingprinciples for the decentralization process: it should (1)be fiscally neutral; (2) be gradual; and (3) enhance economic competitiveness. Box 1.1 highlightsthe mainissuesandchallenges of the decentralization agenda. Decentralization i s seen as an integral part of the modernization and democratization process as well as a way to reduce inequalities and increase responsiveness to local needs. 32 The transfer process will be carried out gradually over several years, in successive stages that initially affect sectors like transport and housing, and at a later stage education and health. 31 Fiscally, major modifications have occurred in 2004 with a significant transfer of responsibilities- and corresponding funding- to regional and local governments. Between 2003 and 2004, transfers to local governments will have increased by 31% to '' reach 2.8 billion Nuevos Soles. As a result, combined regional and local expenditures will have increased from 14% in 2002 to 23% of the national budget in 2004. In2004, regional and local governments will handle 18% and 38% of ublic investments, respectively, as recorded in the National System of Public Investment. A National Technical Assistance Plan for Local and regional Governments 33 has been prepared in order that sub-national governments can reach sufficient institutional capacity and obtain a certification to assume new responsibilities from the so-called NationalAccreditation System. The evolving decentralization framework creates the basis for furthering the transfer of resources and responsibilities to local and regional entities. However, the process must take into account that the municipal sector inPeru i s highly fragmented. InPeru, there are 194 provincial municipalities and 1,8 12 district municipalities (mostly rural). Each provincial municipality consists of a different number of districts. Districts can be quite small: according to the 1993 population and housing census, some, predominantly rural districts had less than 200 inhabitants. 34 Indeed, Peruvian municipalities are significantly smaller than their counterparts inneighbor countries (Table 1.4). This fragmentation of the municipal sector may increase the accountability of local governments to rural communities but, on the other hand, certain rural municipalities may not have reached the critical institutional mass to manage and implement local development policies. This i s especially true in the infrastructure sectors where economies of scale are more likely to increase efficiency. Thus, cooperation between district municipalities- for example at the provincial level- becomes paramount to develop sufficient institutionalcapacity, Table 1.4. MunicipalitiesinPeruare smaller than inother LatinAmerica countries. Number of municipalities 2,006 1,100 308 5,500 335 2,397 282 Total population not living 15.8 23.3 6.0 148.0 8.8 73.5 20.5 incapital city - million Average population per 7,910 21,210 19,470 26,910 26,300 30,650 72,850 municipality (except capital) Source: Authors. Municipalities are eager to take more responsibilities, yet they remain cautious and wary of the challenges ahead. A 2003 survey of 60 Peruvian municipalities (42 districts and 17 provinces, 83% rural and 17% urban) 35 has shown that three quarters of them think that the fact that municipalities take over new responsibilities will have a positive impact on local communities. Interms of infrastructure, in90% of the cases, the highest priority i s given to 31 Restoring Fiscal Disciplinefor Poverty Reduction in Peru -The World Bank, 2003. 32 CND, Informe Anual2003. 33 Plan Nacional deAsistencia Tkcnica y Capacitacio'npara Gobiernos LmaEes y regionales (PNCAT). 34 Schady, 1999. The smallest Peruvian district (Cochas in Yauyos province) has 145 inhabitants. 35 Azcueta, 2003, 33 taking additional responsibilities in the waterhanitation sectors, then to rural roads and electricity, and to a lesser extent to telecommunications (figure 1.9). However, two district municipalities out of three think that they are not preparedto take over new responsibilities. The level of preparation varies significantly across sectors: in 2003, 42% of municipalities thought they were already fully prepared and had sufficient resources to take over social programs, but this proportion drops to 2% for infrastructure. The three main conditions identified for successful transfer of additional responsibilities are (1) increased resources (28% of respondents); (2) better cooperation between the various levels of government (21%); and (3) more participation from the population(20%). Figure 1.11. Opinions of mayors regardingpriorities and conditions for a successful transfer of responsibilitiesto municipalities. teiec paths electricity nlralroads Sanitation water 0% a3% 40% 60% SO% lDO%l 0 5 10 15 20 25 30 Source: Azcueta, M.,2003 In sum, rural development in Peru aims at the diversification of production activities, strengthened linkages to surrounding urban centers, and policies geared to increased competitiveness for Peruvian products. In pursuing these objectives, rural infrastructure has a critical role to play. The decentralization process-s teadily advancing since 2002-represents a major opportunity to implement those principles and redesign the way infrastructure services are planned, developed and operated. Peruvian mayors are aware of the huge potential of the decentralization process for development but they are also aware of the difficulties associated with its implementation, particularly in the infrastructure sectors. Potential problems include insufficient technical expertise, limited financial resources, and the need for a cooperative framework between the various levels of government. The small size of many municipalities-and the concomitant limited technical capacity-is a reality that emphasizes the need for cooperation among neighboring municipalities in order to find the right balance between potential economies of scale and devolution of responsibilities at a level close to the rural infrastructure users and beneficiaries. 34 2. STATUSOF RURALINFRASTRUCTURE 2.1. INTRODUCTION Annex 2 presents the current conditions of each infrastructure sector, the institutional framework and the key issues and strategies for action. Each sector has been analyzed in the context of the three dimensions that underline the efforts of the Peruvian Government to reduce rural poverty: adequate prioritization, enhanced efficiency, and superior effectiveness inthe delivery of public investment programs that have a direct impact on the productive lives of rural inhabitants. For infrastructure services, these dimensions refer specifically to: (a) prioritization: are infrastructure services properly aligned with the priorities set by the government for rural areas and the demand of the target population ? (b) eficiency: are infrastructure services provided inan efficient manner (cost-effectiveness with due attention paid to environmental, social and gender issues) ? and (c) efectiveness: does the provision of infrastructure services effectively contribute to increasing rural incomes, which i s the ultimate effect sought for the long-term reduction of poverty in rural areas ? This chapter describes the common or diverging conditions of each infrastructure sector. It concludes with the key issues along each one of the three dimensions as a preamble for the definition of the proposed strategic actions: e Prioritization: What prioritization and planning mechanisms are currently used for each sector? What resources are currently allocated to rural infrastructure and to what extent i s spending aligned with prioritizationcriteria? EfJiciency: What i s the current situation interms of coverage, quality and cost for each sector? How does the situation of Peru compare with benchmark countries? What are the current approaches to private sector participation? Eflectiveness: Taking into account complementarities across infrastructure services, what i s the ultimate contribution of rural infrastructure to increasing rural incomes? To what extent do evolving institutional roles allow rural infrastructure investment to contribute to local development strategies? Obviously, there i s some overlap. For example, the situation of "evolving institutional roles" impacts the "prioritization" dimension as well as the "effectiveness" dimension,since planning mechanisms are increasingly decentralized. Similarly, the situation in terms of "coverage" also reflects Peru's current "prioritization" policy for rural infrastructure. The next chapter offers a more indepth explanation of the trade-offs that arise for some of these strategic issues with regards to the three dimensions of prioritization, efficiency and effectiveness. 35 2.2. PRIORITIZATION PlanningMechanismsand PrioritizationMethodologies The institutional framework for each of the rural infrastructure sectors was highly centralized until 2002. Central institutions-Provias Rural, FONCODES, DEP, OSIPTEL-have been largely responsible for the planning, prioritization, and implementation of investment programs in each sector, following up in various degrees with the operation and maintenance of the services. This institutional framework is currently changing as the decentralization agenda of the Government of Peru progresses, and responsibilities are gradually transferred to the local level, along with the capacity building of local institutions. Despite progress toward increased decentralization, each infrastructure sector has its own planninginstruments and its own centrally-managed sourcesof funding (Table 2.3): (i)ater/San~~aOver~the period 1998-2002, a large proportion of rural water ~ t ~ o : facilities were centrally planned and financed through FONCODES. In 2003, FONCODES was absorbed by the Ministry o f Women and Social Development (MIMDES) and a decentralization process at the regional level has been scheduled to be completed by the end of 2004. Inparallel and responding to the new decentralization process in Peru, the government designed a new strategy for the rural waterlsanitation sectors. A new program, the National Rural Water Supply and Sanitation Program (or PRONASAR) was designed by the recently created Vice-Ministry for Constructionand Sanitation to modify the centralized model, shifting the emphasis from construction to sustainability. PRONASAR pays FONCODES to perform fiduciary tasks and to contract private operators and NGOs for implementing and supervising the program. The main financing instrument for the period 2003-2008 i s PRONASAR, which amounts to a total investment of US$80 million (including US$50 million from a World Bank loan). PRONASAR aims at providing new or rehabilitated drinking water and basic sanitation facilities to approximately 900,000 people in about 3,100 communities nationwide, and will promote the improvement of training and hygiene practices in approximately 1,000 communities to benefit some 400,000 people. The program also has a strong institutional component with the purpose of strengthening local and regional institutions. Other programs in the waterhanitation sector are also implemented through FONCODES (with support from the Inter-American Development Bank and JBIC) for a total investment of US$35-40 million for the next 4 years, following exactly the new project cycle introduced with PRONASAR. In comparison, level of investment observed duringthe period 1998-2002 in the sanitation sectorreached an average of US$7 million per year. (ii)Electricity. A plan for rural electrification has been prepared for 2003-2012. 36 Iti s expected to bring access to electricity services to 4.2 million people during that period, and to bring coverage to 91% of the population (from 73% in 2001). About 335 projects have beenidentifiedfor a total investment of US$960.4 million. According to a 36Plan de Electr$cacidn Rural 2003-2012. '' 2002 law, 37 a Rural Electrification Fund should have been created to finance the plan, but the law and the Fund were never implemented. The law also established that resources allocated to the fund could not be lower than 0.85% of the national bud et, which would have brought around US$90 million annually over the next decade. If this provision were applied, it would represent a substantial increase compared to the level of investment observed during the period 1998-2002 (about US$43 million per year). (iii)Transport. Rural road planning is performed through district and provincial plans. In these plans, local governments must identify priority road segments to be rehabilitated and define the modalities of rehabilitation and maintenance. A specific project unit (PROVIAS Rural) in the Ministry of Transport and Communication manages the implementation of the road program defined by municipalities. Resources come from external financing, from the World Bank and the Inter-American Development Bank (IDB), andnationalcounterpart funding. Although the annual amount has beenvarying significantly, total annual resources amounted an average of about US$36 million over the period 1998-2002. (iv)T e Z e c ~ ~ ~ ~The~program~for~ rural .telecommunication projects 39 aims to ~ c a ~ n ~ connect 5,000 villages to the national telephone network by the end of 2003, and to connect 500 of those with access to telephone services to the Internet. The program has been financed by a Telecommunication Investment Fund (FITEL), 40 whose resources come from 1% of the revenues of telecom operators (around US$10 to US$12 million per year). Between 1998-2002, an average of US$11million was spent annually inrural telecommunications. Table 2.3. Eachrural infrastructuresector hasitsownplanningandfunding instrument Planning PRONASAR National Plan for Provincialand Nationalprogramfor instrument (National) Rural Electrification district road rural plans telecommunications Period 2003-2009 2003-2012 2003-2005 2004-2008 Central funding instrument FONCODES allocations budget PROVIAS Rural FITEL Theoretical US$23 million US$45 million (statutory) (with WBLDB US$90 million (with WBDDB US$lO-12 million annual funding support) support) Annual funding observedin US$7 million US$43 million US$36 million US$11 million 1998-2002 Source:Rodriguez 2004, and World Bank files on Projects. 37Law No. 27744 of 31.05,2002 :Ley de Electrificacion Rural y de LocalidadesAisladas y de Frontera. 38This statutory allocation levelhas remained ina new law passedby Congresson July 1, 2004. 39Programa de Proyectos de ~elecommunicacionesRurales (PPR). 40The Fondo de Inversion de Telecomunicacioneswas created by the Telecommunications Law with the sole purpose of financing telecommunication services in rural areas or in places considered of priority social interest. 37 Local governmentslcommunities have become increasingly more closely involved in the planning process of waterhanitation and rural roads (to a greater extent) and of rural telecommunications and electricity (to a lesser extent). In the waterlsanitation sector, district municipalities with local communities' representatives are involved through their own participatory planning instruments (mesas de concevtacidn) in the selection of the beneficiary communities, and later in the selection of level of services and detailed project design. Similarly, rural road planning i s performed through district and provincialplans. In these plans, local government must define the modalities of construction, rehabilitation and maintenance of rural roads. For both sectors, central agencies review local planning instruments for compliance with a list of requirements which have been previously communicated to municipalities. On the other hand, involvement of municipalities in the planning of electricity and telecommunications has been low. Municipalities participate in "Electrification Committees", whose role i s to formalize the official request for access to electricity services for a specific village, but the Executive Direction of Projects (DEP) of the Ministry of Energy and Mines i s the main institution in charge of planning investments. DEP has recently begun a process to transfer responsibilities and capacity for rural electrification planning to the regional governments. Similarly, in the case of telecommunications, communities and local governments prepare the formal request sent to FITELto ask for access to telecom services. This requestmustdemonstrate the existence of demand for such services, basedon surveys. Planning i s then performedby FITELin three stages: First, villages are selected in order to maximize population in a 5 km radius. Second, the existence of public phones and telecom infrastructure as well as economic potential and (in theory) complementarities with other services (education, health, roads) are taken into account. Finally, detailed analysis of each possible investment i s conducted, including cost analysis. At the end of this selection process, mayors are consulted during "prioritization workshops", though infact, identifiedinvestments barely change. Table 2.4. Localgovernments participatemore inthe planningprocessfor waterhanitation and rural roads than for ruralelectricity and telecommunications Water/ Local actors which are the District All Provincial All most involved municipalities municipalities municipalities municipalities Source:Dianderas(2004). The degree of involvement of local governments in the implementation, operation and maintenance of rural infrastructure services also differs across sectors (see Figure 2.1). The waterhanitation sector i s the sector where most municipalities declare to be involved: according to a 2003 survey of 60 Peruvianmunicipalities, about half of municipalities (but only 38% of district municipalities) declare to be in charge of a waterhanitation infrastructure program. Municipalities (including at the district level) are also somewhat active in rural roads (34% and 31%). In this regard, it should be noted that a 38 decentralization process i s in place to transfer the maintenance of rural roads to municipalities and, so, their involvement i s expected to grow (see section 2.3.). In the electricity sector, on the other hand, only a small minority (20%) of municipalities declare themselves to be incharge of a project. This involvement reflects, ina number of cases, the evolution of the "Electrification Committees" into "Administration Committees" which are occasionally-and with questionable success-involved in project's operation (e.g. relationship with the distribution enterprise and collection of user charges) or in construction (e.g. in-kind contribution like participation with transport costs) of electricity projects. Finally, the survey shows that involvement of municipalities in the telecommunication sector still remains anecdotal. Figure2.1. Municipalitiesare more involvedinthe management of waterhanitation and rural roads' programs thanfor rural electrification and telecommunications telecommunications electricity rural roads water and sanitation 0 10 20 30 40 50 60 %of municipalities managing an infrastructure prograr all municipalities Idistrict municipalities Source: Azcueta (2003). Variations in local governments' involvement reflect differences across infrastructure sectors in methodologies and criteria for prioritization. Two radically different approaches are used to prioritize infrastructure investments: one i s territory-based and the other i s project-based. In the territory-based approach, a list of criteria i s used by central agencies to prioritize across territorial area inorder to allocate funding within that area. Ina second stage, this funding i s used by local governments to finance the infrastructure projects that they consider to be the most relevant (after applying their own prioritization methodology, through their planning instruments). This approach i s used for waterlsanitation and rural roads. In contrast, in the project-based approach, central agencies directly prioritize infrastructure projects. This approach i s used for electricity and telecommunications, largely becauseof their emphasis on each individual project's profitability. In addition to these methodological differences, central agencies use different criteria to prioritize across territories or projects. In brief terms, the waterlsanitation sector uses a combination of poverty and social-based criteria and technical and economic assessment, the road sector has adopted a combined list of social, economic and institutional criteria and the electricity sector uses a combination of sociaVeconomicltechnica1 criteria (plus in theory, criteria measuring complementarities across sectors). Finally, the telecommunication sector does not use a standard list of criteria but rather, makes a 39 technical and economic assessment, taking into account (at least in theory) complementarities with other sectors. Table 2.5 summarizes the main criteria for each sector and the approximate weight given to each one of those criteria. Table 2.5. Prioritizationmethodologiesand criteria differ across sectors Centralagencies prioritize across NO (they directly temtories to YES NO (they directly prioritize YES prioritize across allocate funding across projects) projects) Territories which are Departmentsand districts Departmentsand provinces For departments: For bothdepartmentsand Coverage(33%) districts : Ruralpopulation(33%) Extremepoverty (22%) Criteria usedby Coverage (40%) Poverty(30%) Non-extremepoverty (22%) centralagencies For provinces : to prioritize Acute diarrheaprevalence Coverage(27%) across territories (30%) (only districts willing to co- Ruralpopulation(27%) finance investmentandprovide Extremepoverty (27%) TA to the JASS are eligible) Financialcapacity (7%) Pastinvolvement(7%) Who prioritize across projects ? Localgovernments Centralagencies Local governments Centralagencies Local participatoryplanningis No systematiclist usedto prioritize beneficiaries Status of projectdevelopment of criteria but andprojects.However,eligible (5%) Social(65%) comprehensive communitiesare self-elected, Existence of infrastructure Demandfor mobility (10%) technicalleconomic Criteria used to basedon their commitment to (5%) Access to public services assessmenttaking prioritize across O&M, establishinga JASS and Provincial coverage(50%) (5%) into account projects payingan upfront contribution ProjectNPV (5%) Access to villages (10%) possible incashandproviding labor. Percapitainvestment(5%) Access to tourist zones complementarities Small communitieswithout a Poverty(25%) (10%) (with health, minimumnumberof users or Geographicallocation (5%) Access to markets (10%) educationand low densityare ineligible. Complementarities(0%) roads) Source: Dianderas(2004). To further confound the planning methodologies appliedby each sector, the definition used for rural population is different for each one of them. For example, inthe electricity sector, rural areas are defined according to their unattractiveness to private operators (i.e. financial profitability i s not sufficient to attract private operators, and therefore, government intervention i s required to obtain an acceptable degree of "social profitability"). In the telecommunication sector (which i s similar to the electricity sector in the sense that private operators do not invest in rural areas because of their low profitability), the definition i s based on the INEI definition. 41Inthe water sector, rural areas refer to villages with less than 2,000 inhabitants. Finally, in the rural road sector, there i s no explicit definition of rural area and instead, rural roads are identified based on the classification of the entire network among rural, departmental and national roads. 41 The INEIdefinition is as follows: an area that is not a district capital or it is a district with less than 3,000 people, and has less than 100 households contiguous or there are more than 100 households but they are disperseand thereare no activity centers. 40 Resources Allocated to RuralInfrastructure Investments in rural infrastructure amounted to US$486 million over the period 1998-2002 an annual average of US$97 million, representing about 6% of Peru's average total capital roads and rural electricity. expenditures and0.18% of42GDP during the same period. More than 80% was spent inrural For the country as a whole, annual investment ininfrastructure (roads, telecommunications, electricity distribution and waterlsanitation) oscillated at around US$1.3 billion. 43In per capita terms, this means that annual infrastructure investment in rural areas was around US$14 to US$19, compared to an average of US$57 for the entire country. Sectors which have focused the least on rural areas include telecommunications (only 2% of total investment went to rural areas), roads (12%) and waterlsanitation (3 to 18% depending on the sources), On the other hand, half of total investment in electricity distribution i s now focused on ruralareas, where the main challenge i s the extension of coverage. Table 2.9. Exceptfor electricity distribution, investment intensity per capita is lower inruralareas than for the countrv as a whole Rural investment (million USD) 36 11 43 7 43** 9%rural 12% 2% 49% 3% 18% Total investment per capita 13 29 4 11 Rural investment per rural capita 5 2 6 1 6 ***Source: ***Source:IPE(2003) - averageannual (1998-2001). IPE(2003) - average annual (1990-1999). Source: IPE(2003) - average annual (1994-2002). NB :Other datacomefrom Rodriguez2004 andfocus onperiod 1998-2002. Since 1998, there has been a decreasing trend in rural infrastructure investments. Investments in rural electricity in 2002 represented about a third of what they did in 1998. Investments in roads in 2000 was about 40% of the level observed in 1998. In the water sector, investment levels plunged between 1999-2001 before recovering in 2002 to their 1998 level, as PRONASAR was implemented. 44 Although data are not available on it, the ruraltelecommunication sector is the only sector where an increasing trend may havebeen observed with the implementationof FITEL. This overall negative trend illustrates the impact that fiscal constraints had on public infrastructure investment in rural areas during that same period. The extent to which compression of public investment in infrastructure was used in order to reduce public deficit has been documented in Peru and in other Latin America countries. 45Inthe past, reduced levels of investment have strongly constrained the implementation of long-term 42Rodriguez, 2004. 43IPE,2003. 44Rodriguez, 2004 (waterlsanitation), Aragon, 2004 (electricity), MTC, 2004 (rural roads) 45Calderon, C., Easterly, W., and Serven, L.(2003). 41 plans to increase coverage of infrastructure services inrural areas: for example, during the period 1987-1988, investments in rural electrification were 33% of what was planned in the initial rural electrification plan, and, as a result, only 31% of the coverage expansion target could be achieved. The problem of decreasing investment allocations i s compounded by the increasing marginal cost of coverage expansion in rural areas, particularly for electricity, due to the lower-cost technology of interconnected systems. The experience of the past 10 year rural electricity plan i s that the average investment required to bring electricity services to one beneficiary in rural areas has been increasing faster than inflation. This cost was US$30 in 1993 and US$225 in 2002. Over the 10 year period of the plan (1993-2002), the average marginal cost was US$119 compared to the US$229 estimated for the next plan (2003- 2012). This feature is typical of infrastructure with network effects (i.e. it becomes increasingly expensive to reach the last isolated rural households). This implies that overall, electricity investment in rural electricity have followed an economically rational pattern (investment have been targeting in priority areas with higher urban density), although there are some exception (e.g. in 1999 and 2000 when the marginal costs have reached US$364 and US$314, respectively, per beneficiary). Figure 2.4. Expandingcoverageof electricity services inrural areas involves increasing marginalcosts (3-year movingaverage, base 100in1994). 500 - 400 I 300 -- 8 200 -- 100 -- 0 - I 1 =inwstment per beneficiary +inflation 1 Source:Authors, basedon datafromAragon (2004). Reflecting the prioritization criteria discussed in the previous section, rural infrastructure investments have targeted regions not entirely in relation to their rural poverty rates. Cumulative investment in rural infrastructure per department over the period 1998-2002 ranges from US$9 to US$764 per rural inhabitant, or between US$31 and US$198 when taking out the departments with the lowest and the highest numbers. Some departments with high absolute and relative levels of rural poverty are in the upper range for per capita rural infrastructure investment: Huancavelica (US$123) or Ayacucho (US$145). However, others with very high levels of rural poverty are on the lower range, such as Loreto (US$31). 42 Figure 2.1. Investment intensity inrural infrastructure is aligned with departmental ruralpoverty rates for waterhanitation and roads butnotfor electricity and telecoms. La Libertad 0.0 0.9 0.0 7.9 8.8 84.3 Loreto 17.3 8.4 0.0 4.9 30.6 94.5 Puno 0.2 17.5 15.1 4.4 37.2 83.3 Ica 0.0 22.5 15.2 4.8 42.4 72.0 Piura 0.4 38.9 0.0 10.5 49.8 95.6 Junin 1.4 11.4 32.3 8.5 53.7 88.5 Cajamarca 2.3 20.5 24.1 9.1 56.1 89.1 Tacna 0.0 47.1 0.0 9.2 56.2 63.6 Lambayeque 0.0 51.8 0.0 5.6 57.4 77.7 Ucayali 33.8 12.6 3.9 8.4 58.8 93.6 Lima 0.0 53.8 0.0 11.1 64.9 82.6 Huanuco 1.o 8.3 48.3 9.9 67.5 94.8 Ancash 0.2 7.4 50.5 10.9 69.0 87.7 cusco 12.6 39.1 30.8 5.O 87.5 95.5 Apurimac 0.3 17.8 72.8 6.2 97.1 92.7 Pasco 1.7 8.8 76.9 15.4 102.8 95.7 Huancavelica 2.2 55.4 59.6 5.4 122.6 96.1 Amazonas 55.7 51.3 0.0 17.5 124.5 89.9 Arequipa 0.9 117.1 0.0 8.2 126.2 81.7 Ayacucho 3.1 40.6 93.8 7.5 145.1 96.9 Moquegua 0.0 131.4 0.0 17.6 149.O 81.8 Madre de Dios 58.8 25.7 100.9 6.8 192.1 86.2 SanMartin 3.5 147.0 39.6 7.8 197.9 94.0 Tumbes 0.4 732.3 0.0 31.6 764.2 89.5 Source: Authors, basedon data from Rodriguez (2004) and INEI. When the data i s decomposed by sector, the average targeting over the period 1998-2002 appears to respond to poverty levels to a greater extent for investments in rural roads and waterhanitation than for those inruraltelecommunications and rural electricity, inline with the prevailing prioritization methodology for each sector. The level of investment ranged from US$O to US$60 per rural capita for waterhanitation and from US$O to US$101 for rural roads (some departments did not receive any funding). In spite of the positive correlation, there are still significant inconsistencies between the investment intensity and the level of rural poverty (more for waterhanitation than for rural roads). Incontrast, there seems to be no correlation between the investment intensity for rural telecommunications and the levels of rural poverty. For rural electrification, the correlation i s actually negative. Investments in rural telecommunication range from US$4 to US$32 per rural capita and from US$7 to US$732 for ruralelectricity (to US$147 if the highest point i s taken out). 43 2.3. EFFICIENCY Coverage, Quality and Cost InPeru, coverage of infrastructure services is comparatively low inrural areas. Table 2.1 shows figures comparing Peru with South-American countries and with countries of a similar level of development. In rural Peru, the electricity coverage was 30% in 1999 46 while only 13% of households had access to a paved road and 28% to an unpaved road in good condition. Only 9% of rural villages had a public phone in 2003. 47 Access i s highly dependent on the size of the rural communities: in communities of less than 500 people (where 2.7 million Peruvian live), only 44% of the population had access to drinking water services and 16% to sanitation in 2000. Similarly, only 3% of villages with less than 200 inhabitants (there are about 57,000 of them in Peru) had a public phone in 2003, compared to 28% for villages between 200 and 500 people and 93% for villages with a population exceeding 500 inhabitants. Furthermore, there are also large differences interms of access to services between rural and urban areas. In 2000, 87% of the Peruvian urban population had access to water services, compared to 62% in rural areas. For sanitation services, estimations range from 69% 48 to 79% 49 inurban areas and 30% to 49% inrural areas. Table 2.1. Exceptfor water services, access to ruralinfrastructure is lower inPeru thanincomparable countries WATER (2000) % of ruralpopulationwith access 62 60 67 73 SANITATION (2000) % of ruralpopulationwith access 49 52 29 71 ROADS % ruralhouseholds wl accessto pavedroads 13 NA NA % ruralhouseholdswl access to unpavedbut goodconditionroad 28 ELECTRICITY(1999) % of ruralpopulation with access 30 60 NA TELECOMMUNICATIONS(2003) % of villages with a public phone 9.3 NA NA * i.e.with a per capita GDP PPPequal to +/- 1,000 USD to the figure of Peru in2000. Source: World DevelopmentIndicators, OLADE, INEI, OSIPTEL. Figures may notbe strictly comparable since differentdefinitionsof "rural areas" mighthavebeenusedfor different sectorsandlor countries. Besides limited coverage, the quality of some infrastructure services (e.g. water quality, internet access, conditions of rural roads) remains low. Table 2.2 summarizes key indicators of the quality of services for the country as a whole, since quality indicators for rural areas only are not available. By sector, the figures indicate: In terms of transport infrastructure and services, firms rank Peru around average, compared to South America and to other countries with similar level of 46 OLADE. 47 INEI-OSIPTEL. 48 ViceMinistry of Constructionand Sanitation, 2002. 49 WorldDevelopmentIndicators,2000. 44 development. However, the situation may be less favorable in rural areas with only 8% of the tertiary roads considered as being in good or average conditions (1999) although72% of rural users rate freight transport services average. 50 Inthe water sector, industrialwater availability remains low compared to the rest of South America and the quality of tap water i s considered lower than comparable countries. 95% of the water service providers had problems of continuity in providing services and, at the national level, water services were only available 17.4 hours a day in 2001. Inruralareas, a 2000 study of 20 small and mid-sizecities has shown that three quarters had discontinuous water service and that in half, water services were available less than 10hours a day. 51 Inthe energy sector, ruralhouseholds tend to usetraditionalfuels extensively as the main source of energy when electricity services are not available. In Peru, traditional fuel consumption rates (about 28% of total energy consumption in 1998) are amongthe highest in South America. Traditional fuels are not only less efficient than modern sources of energy such as electricity, they also require a significant amount of time to be collected (time which could be used for income-generating activities) and have negative health and environmental consequences. In the telecommunications sector, reforms and increased competition have contributed to enhanced service quality of telephone services. For example, between 1993 and 2002, the average waiting time to get a connection to the telephone network has fallen from 118 months to 1.2 months. Users also acknowledge that Internet access i s easy to obtain; however, they remain dissatisfied by the quality and cost of Internet connections. Indeed, in spite of high levels of use, the characteristics of Internet access inPeruare not as favorable as in other South America countries: the proportion of Internet hosts i s still very low (4 per 10,000 people in 2000, compared to 39 in Brazil) and the number of secure Internet servers i s limited (35 in2001). Table 2.2. The quality of infrastructureservices inPeru is lower (water, Internet, use of traditional fuels as a low quality alternative) or similar (roads, telephone) to comparable countries. Legional Incom Industrial water availability (2001) (1 :not available) 4.6 5.4 4.5 Tap water safety (2001) (1: unsafe) 3.7 5.1 4.0 ROADS Roadquality outside major city (1: only allow low speed) 4.3 4.4 4.2 TELECOM~NICATIONS Telephoneffax infrastructure quality (1 :Low) 5.5 5.3 4.8 Speed and cost of Internet access (1 :slow and expensive) 3.4 3.8 3.6 ENERGY Traditional fuel consumption (7%total energy cons., 1998) 28 20 NA Source: WEF -Ciobal CompetitivenessReport 2001-2002, WDI (for traditional fuel consumption). SOLuna, 2004. "Diagndsticode10sservicios,2000, 45 Some infrastructure services (e.g., electricity and rural transport) remain expensive, particularly inrural areas. According to the WEF, 52 firms consider that electricity i s more expensive in Peru than in the rest of South America or in countries with similar level of development. This i s confirmedinpart by a survey conducted by OLADE inJune 2002: for residential consumers, the price of electricity in Peru i s the second highest in South America (after Uruguay); for industrial consumers, it i s the fourth highest after Guyana, Ecuador and Colombia. However, for commercial users, it remains among the cheapest in South America. Electricity prices in Peru vary significantly across regions, reflecting the highest marginal costs of providing services in outlying areas or the off-grid characteristics of the connection. Service providers classify areas in four categories to account for higher transmission costs in less populated areas. As a result, prices can more than double with off-grid technologies inruralareas compared to on-grid alternatives inthe capital city. Table 2.3. Electricity servicesinruralareas can be twice as expensiveas inLima. ~ City Type of area Technology Price of electricity Price relative (US ctlkWh) to Lima Lima Capital city Nationalgrid 8.25 100 Pun0 Mediumcity Nationalgrid 9.34 113 Antauta Rural Nationalgrid 11.87 144 Varios Rural Off-grid 16.73 203 cusco Medium city Nationalgrid 8.70 105 Andahuaylas Rural Nationalgrid 11.90 144 Ifiapari Rural 0ff-grid 17.87 217 Source:Aragon (2004). Transport services are also perceived by rural users as being expensive: 51% of freight transport service users in rural areas think that services are expensive or very expensive (44% for passenger transport services). While in rural areas, about half of the people live with less than a dollar a day, the typical cost for a 25 kmroundtrip for a passengerwith 50 kg of merchandise, can be estimated to US$2-3, i.e. between a third and half of the passenger's weekly income.53 The poor quality of tertiary roads i s a major reason for expensive transport services inrural areas: the largest item that enters the operating costs of vehicle (aside from the cost of gasoline) i s the replacement of tires (with 34% incidence in those costs). In the rural waterhanitation sector, the situation is however different as service charges in Peru are well below the required levels to recover costs of adequate operation and maintenance, not to mention the reposition of electro-mechanic equipment (with an average life of 5 years). Although charges for water are low, many communities still believe that access to water i s a right and a responsibility of the government to provide it, thus that they j2Global CompetitivenessReport 2001-2002. The cost of electricity in Peru is rated 3.5 by firms (on a scale of 1 to 7, 1 being the most expensive) compared to 3.7 for comparable countries in the region and 3.6 for countries comparable by income. 53Authors basedon data from Luna, 2004. 46 should not be charged for such an essential service. There i s evidence that sustainability of rural waterhanitation systems i s highly correlated to adequate cost recovery levels, as illustrated in Box 2.1. Another factor affecting charging for services in rural Peru i s the current fiscal policy that prevents the JASS of using micro-meters to charge a tariff per cubic meter (because a VAT i s assessed), thus a monthly fee i s charged to circumvent the VAT. Un-ability to charge per consumption is a major disincentive for a rational use of water. Regarding sanitation services, sewerage systems in rural areas present a number of difficulties: (i) low willingness to pay for sanitation services since a large proportion of benefits are positive externalities; (ii) sewerage systems require high levels of recurrent 47 costs; (iii)connection charges associated to conventional sewerage systems are high, not only because o f the connection to the network but also due to the internal connection in the household; and (iv) in rural areas, which usually have very low population density, sewerage systems are not economically viable because of the costs to connect dispersed households. On-site sanitation i s a preferable alternative and one that has proven more sustainable as no monthly fees are required and only an easier bi-annual maintenance i s necessary. 54 Current sector policy, supported by PRONASAR, aims at partly subsidizing the waterhanitation investment costs, but requires the community and the municipality to commit to sustainability by co-financing the investment. A pre-requirement for the construction or the rehabilitation of any water or sanitation system i s the demand from the community which i s elicited by (i) the creation of a JASS that will be responsible for O&M of the system; (ii) commitment of users to full cost recovery of recurrent charges; (iii) the the payment of an up-front cash contribution; and (iv) the provision of labor during constructionhehabilitation. Approaches to Private Sector Participation Rural infrastructure services are conducive to private sector participation in various forms. Those services that charge tariffs for their provision normally enjoy some level of private participation in their operation and management; in those without those tariffs (largely roads), private participation takes the form of contracts-within a wide spectrum of private sector involvement-with the public administration. This situation has taken place in the rural infrastructure sector in Peru, with a higher degree of involvement of private sector operation and financing in telecommunications, electrification and rural transport services, and lower inwaterhanitation and roads. After the boom of private funding for infrastructure in the 1990s when the energy and telecommunication sectors were liberalized, private investment has been decreasing. Crucial pieces of legislation were passed in the early nineties to open these sectors to private participation. Inparticular, the 1992 Electricity Concession Law (LCE) opened the electricity market to private participation. The LCE imposed that generation, transmission and distribution activities would have to be developed by the private sector. The LCE also established a regime for hydroelectricity concessions exceeding 10 MW and a system of regulated prices for electricity public service (and deregulated prices for other customers). As a result of liberalization, there were significant private financing flows related to the privatization process in the energy and telecommunication sectors during the period 1994- 1996. However, most of the regional electricity distribution enterprises have remained public (10 out of 13). Inaddition, other types of investment (to expand or modernize private facilities) have been decreasing during the period 1994-2002: energy sector investment has decreased since 1998 (only 16 million USD were reported in 2002, compared to 547 in 1997). In the telecom sector, investments other than those in government assets have also been stable or 54Source: APOYO, Estudio de sostenabi~id~dde FONCODES II. 48 decreasing since 1998 (apart from a good performance in 2001). They reached 188 million USD in 2002 compared to 648 in 1997 (770 in 2001). Private investments intransport are more recent and modest (75 million USD in 2002). In water, they remain anecdotal (56 million USD in 2001). As in most of Latin America, the involvement of the private sector requires a reassessment as prospective investments are usually less attractive financially and the regulatory frameworks require strengthening, while social backlash also i s a problem. Figure 2.3. Privateinvestmentininfrastructure inPeruhasfollowed a decreasingtrend (1994-2002). 300 :Do0 EO0 xoo -=15M 0 `E 1000 500 0 1994 19% 1996 1997 1R 1999 2000 Dl1 2002 1994 1995 1996 1397 1998 1999 2000 mi 2002 IenergyBtelecomsOtransport~~ter/~anitati~n I in~o~ernmeassetsInvestmenisinfacilities investments n ~ s Source: World Bank, PPIdatabase. The private sector i s involved in most segments of the management of rural infrastructure; however, funding still comes almost exclusively from public sources, There are examples of successful private sector involvement in the construction, operation, maintenance and supervision of rural infrastructure programs. These private operators are contracted by public institutions (sector ministries, central agencies, local governments and public enterprises) to execute rural infrastructure-related tasks. However, some caveats should be put to this apparently active involvement of private actors in rural infrastructure. In particular, in a number of cases, tasks are still performed "in-house" by public agencies. This i s particularly common for the electricity sector where investments have been implemented mainly by the DEP of the Ministry of Energy and Mines. They plan and contract for construction of projects, and then transfers the assets to publicly owned distribution companies or a state-owned corporation, ADINELSA. This corporation then contracts out operation and maintenance to others (including private firms). There are a few examples of municipal institutions involved in distribution of electricity services (off-grid installations of EMSEMSA inParamonga and EMSEUSA in Uctubamba). In addition, the fact that the main regional distribution companies remain state-owned i s a significant caveat to private sector involvement in this sector. In the telecommunication sector, there are only two private operators active in rural areas. Finally, in spite of the relatively active involvement of private actors, almost all of the funding for rural infrastructure still comes from public sources, illustrating the fact that rural infrastructure remains largely unattractive for private investors. Over the period 1999-2002, private investment in rural 49 infrastructure represented less than 3% of the total funding flows (13 millionUSD out of 486). 55 Table 2.7. Privatesector participationinruralinfrastructureis significant Waterisanitation Ruralroads Rural Rural telecom- electrification munications Project Municipalities with MTC (Provias preparation private execution Rural) with private MEMlDEP OSIPTEL execution Private with Private contractsfor Construction participation of main rural roads, Private Private municipalities municipalities in exceptional cases Control and Private with MTC with Private with OSIPTEL supervision of participation of participation of participation of directly or construction municipalities municipalities municipalities through private operators Intheory, private Communities MTC but transfer to operatorsbut most through Users' provincial distribution Operation and Committees: municipalities; companies are state- maintenance technical assistance maintenance owned ;"on-grid" Private operators from district performed by facilities could be municipalities micro-enterprises maintained by micro-enterprises Source: Dianderas (2004). The use of micro-enterprises to perform the maintenance of rural roads has helped develop a local entrepreneurial capacity. Over the last decade, the maintenance of rural roads in Peru` has moved from an "in-house" approach to the contracting of community-based private entities. These micro-enterprises are currently contracted by the Ministry of Transportation and Communication(MTC) but this responsibilityi s being transferred to the provincial road institutes, as part of the decentralization process. Micro-enterprises involve poor unskilled workers and have been successful increating an entrepreneurial capacity in rural areas. (Box 2.1.) Support has been provided by central agencies and, increasingly, by local governments, to help strengthen these micro-enterprises by providing them with training and progressively introducing market-oriented approaches. At the end of 2003, the maintenance of the roads through 500 micro-enterprises had created an entrepreneurial spirit, for the benefit of both women and men from poor rural communities, and helped create about 4,800 permanentjobs. Inthe water sector, pilot projects involving small local enterprises in the operation and maintenance of facilities, have been launched in 11 Peruvian cities as part of the PRONASAR. In the energy sector, while large "on-grid" investments are better managed by regional distribution companies, the operation and maintenance of "on-grid" technologies ("mini-hydro power plants", solar cells) can be efficiently performed by local communities or smalllmicro-enterprises. ''Source:Rodriguez, 2004. 50 Incentive mechanisms (subsidies) have been implemented to make rural infrastructure more attractive to private actors but their overall impact has been limited so far. Subsidies are either demand-based (making infrastructure services more affordable to users) or supply-based (makingrural infrastructure investment or operation more attractive to private operators). There are explicit or implicit subsidy mechanisms in all rural infrastructure sectors : (i)Electricity.Thearetwosubsidymechanismsineffectforelectricity:(a)acapitalcost subsidy provided through the MEMIDEP, and (b) a cross-subsidy on the tariff for small consumers provided through the Fond0 de Compensacidn Social Elkctrica - (FOSE). MEMreceives funds for the capital cost subsid from the national budget on an annual basis for its rural electrification program3 Using these funds, rural electricity projects are to be constructed by DEP (with actual execution contracted to private firms) and then transferred to publicly-owned distributors or the Empresa de Ad~inistraci~nde Znfraestmctura Elkcctrica S.A.(ADINELSA). Inthe case of transfer to ADINELSA, this firm further contracts the operation and maintenance to distribution firms or municipalities. When ADINELSA does not manage to contract operation and maintenance services due to lack of interest, ADINELSA directly manages these responsibilities. This may raise some issues of conflict of interest. The capital cost subsidymechanism i s only available for projects carried out by the public sector (Le., by the DEPof the MEM). The FOSE i s a "demand-based" cross-subsidy among customers created by Law No. 27510 of May 27,2001. According to this law, consumers of less than 30 kWWmonth (whether rural or urban), benefit from a price reduction of 25% for on-grid electricity services, and 50% for off-grid ones. The cost of the subsidyi s paidfor by all the other consumers. The total cost of the subsidy for 2002 amounted to S./ 3.6 million. 57 This mechanism results in a reduction of tariffs for 80% to 90% of rural users. The j6 The Rural Electrification Law of 2002 proposed a Rural Electrification Fund to provide capital cost subsidies, but the law was never put ineffect. Renewedlegislation has beenpassedby Congress inJuly 2004 but its effective implementation is pending. 57 Source Dianderas, : 2003. 51 FOSEwas renewed inApril 2004 but it is subject to periodic reviews which instill a level of uncertainty in its future funding levels. (ii)Teleco~~un~cations:FondodeInversidndeTeleco~~unicaciones The (FITEL) was created by the Telecommunications Law (Article 12) for the sole purpose of financing telecommunications services in rural areas or in places considered of priority social interest. Typical projects financed by FITELinclude granting a 20-year concession to private operators for public telephony services, the selection of the operator being based on an international tender for the lowest subsidy requested from FITEL for the installation, operation and maintenance of these public services. Box 2.2 shows an example of a successful minimumconcession model. (iii)~ater/San~tation: Central government i s partially financing the capital expenditure of rural waterhanitation programs but there are still some implicit subsidies for the operation and maintenance of facilities, especially those financed in the last decade without the specific requirement of creating JASS to become responsible for O&M. It 52 has been estimated that 70% of the cost of operation and maintenance of water facilities i s subsidized, only 30% i s being financed by user fees. The price of water services has increased by 40% over the period 1997-2000 (it decreased by 10% in 2001), 58 but local governments are reluctant to increase it to the level which would be required to cover operating costs. To respond to that reality, PRONASAR only invests innew or rehabilitation of infrastructure once there is an up-front commitment (and payment) from potential users. This up-front participation should show their commitment to the level of service and system design which they select in a participatory manner. The level of the participation i s determined so that there i s no need for explicit subsidies for O&M. Subsidies, however, will still be needed for the replacement of the infrastructure as there i s currently no depreciation included in monthly waterhanitation charges. (iv) Transport: PROVIAS Rural-with a contribution from municipalities-is financing the capital expenditure (cost of rehabilitation) and the current expenditure (maintenance) of rural roads programs. There are no demand-based subsidies since the use of ruralroads i s free of charge (though, indirectly, charges are levied on users through gasoline taxes and vehicle registration fees, beyond the overall value added taxes for other consumptiongoods). Table 2.8. Subsidy mechanisms are usedto increase the affordability of rural infrastructureservices. Capital MVCSI District municipalitiesI Subsidy expenditures user contributions PROVIASRural through FITEL MEM/DEP Supply- Currently70% of recurrentcosts PROVIASRural based subsidized and Guarantee Subsidyto Current No subsidy neededunder municipalities mechanism guarantee expenditures PRONASAR. On-sitesanitation (inshort-term to ensure does not requiresubsidizing transfers to profitability profitability current expenditures municipalities) Not applicable (water system design is chosenby the usersto Demand-based avoidthe needof subsidizing Not applicable FOSE current expenditures). On-site sanitationreduces subsidyneeds Source:Authors. Ina number of cases, the regulatory framework negatively affects possibilities for private sector participation. For instance, in the telecommunications market, concession restrictions limit the entrance of small enterprises as concessions at the provincial Ievel require an extension of 5 to 10% of installed telephones, implying significant initial investments. In.addition, small traffic volumes (27 minutes per day are needed to amortize ''Source :IPE, 2003. 53 the investment in a public phone, which i s high in comparison to the existing demand in many rural areas) and interconnection costs remain significant barriers to the expansion of coverage. For rural electrification, there i s currently no specific legal and regulatory framework. The 2002 Rural Electrification Law 59 (No. 27744 of May 31, 2002) has never come into force because it i s in conflict with the decentralization law setting responsibilities to regionalgovernments 6oand the 2003 finance law. Inwaterlsanitation, if a JASS wants to introduce a water tariff (per cubic meter) it will automatically pay taxes (VAT).Therefore, manyJASS chosecharging a flat fee, hencewithout micro-meteringit i s impossible for users to respond to prices and there i s a disincentive for rational water use. Private sector involvement is difficult to catalyze in the context of an unclear and unstable regulatoryenvironment. 2.4. EFFECTIVENESS Contributionto Increasing Rural Incomes There i s a significant correlation between the number of infrastructure services available to rural households and the average household's income per capita. Differences in prioritization criteria for the various sectors (i.e. the fact that certain sectors like water or rural roads will tend to focus on areas with high poverty rates while others like rural telecoms or rural electricity will focus on areas with higher likelihood of profitable tariffs) increase the chance of dispersion of resources and contribute to the low proportion of "combined" infrastructure services. Other factors may be at play, such as the fact that only the "richest" of the rural poor can afford several services (i.e., the service i s available inthe village but only the richest households' will be connected) but it could also be that increased access to infrastructure services brings more income-generating opportunities to the ruralpoor. Differences in definition, methodology and prioritization criteria reduce opportunities for complementarities across sectors. Each sector balances the social and the economic potential dimensions differently to prioritize across territories and projects. Waterhanitation facilities are considered as social infrastructure, while telecommunications are mostly handled as economic infrastructure. Infact, complementarities only benefited a minority of the rural population: in 2001, three quarters of Peru's rural households had access to no or only one rural infrastructure service (see table 2.2.). This means that opportunities for combined effects from access to several infrastructure services may only happen-when they happen-for a quarter of Peru's rural population. `'Leyde 59 electrijicacion rural y de zonas aisladasy defrontera. Ley Organica de GobiernosRegionales,promulgated on August 11,2002. 54 Table 2.2. Only a quarter of ruralhouseholdshave access to two or more infrastructure servicesand access is correlated to households' income No. of a\ ailablr ser\,ices `7r of rural households Average household's income per capita (Soles) None 30 192 One 44 235 Two 13 253 Three 8 320 Four 5 379 Source:Escobal and Torero 2004 basedon data fromENAHO 2001. Complementarities (i.e. combined access) across infrastructure sectors can increase the impact on rural incomes significantly compared to when they are present in isolation, particularly for electricity and telecommunication services (see chapter 1). Thus, additional payment contributions that may arise from the existence of several services will be more than compensated by the increases in income. The longer term effect i s to move incomes towards higher and more equitable distribution (Figure 3.7). Indeed, because of the missed opportunities for interactions, dispersion of rural infrastructure investments has a cost in terms of effectiveness. Besides the direct impact on income, there i s a potential resource saving impact for users when the administration, billing and fee collection for several infrastructure services i s merged. Furthermore, merged units could potentially get associated with other localities in their province thus generating economies of scale that could reduce the monthly charges, not to mention potentialresource savings intraining and capacity-building. Figure 3.7. Distributionof ruralhouseholds' income moves towards higher incomes when a higher number of infrastructureservicesbecomesavailable 0.006i A 0.005 0.004 .d 2 0.003 utation d I All infrastructure 0.002 0.001 0.000 0 100 200 300 400 500 600 Simulated household'sper capita income Source: EscobalandTorero, 2004. 55 EvolvingInstitutional Roles The process of decentralization to the municipal level has gained momentum since 2002 61, with an increasing involvement of local governments in infrastructure planning and management. However, sufficient institutionalcapacity i s an important condition in order to receive the full benefit of the decentralization of rural infrastructure. The 2002 World Bank CAS for Peru stressed that "a well-conceived decentralization policy could make a significant contribution to improving public sector performance, if accompanied with clear transfers of responsibilities and development of local management capacity." The CAS also reminded that decentralization measures had the inherent danger of "deteriorating the quality of public services, if sub-national governments are required to take over responsibilities for which they are either unprepared or unwilling to manage." Actions to avoid a deterioration of public services need to be taken when the policies, guidelines and the sequencing of decentralization are being designed. In the case of rural infrastructure, particular attention should be paid to: (1) planning capacity at the local level; (2) clear assignment of responsibilities among the various levels of government; (3) transfer of corresponding budgetary resources along with the new responsibilities; (4) securing resources for current expenditures (maintenance of infrastructure in particular); and (5) contracting procedures in order to involve the private sector in rural infrastructure. These elements are already been implemented inthe various infrastructure sectors: 0 Rural Roads. A decentralized management of rural roads' maintenance was first tested in 2001 in Arequipa and by the end of 2003, it had been implemented in 25 provinces. Under this approach, a provincialroad board consisting of the provincialand district mayors of the province, oversees an administrative unit-the so-called Provincial Road Institute, or IVP for the Spanish acronym-that manages the planning and maintenance of rural roads, The IVP i s a small and agile body which does not directly perform road management activities (maintenance in particular) but, rather, contracts private enterprises (contractors for rehabilitation works and micro-enterprises for maintenance) to execute these tasks. This model has provedto be effective interms of efficiency and accountability to rural users and i s currently being scaled up by the Provias Rural. Critical steps include securing financial resources for both road maintenance activities (specific financial procedures were designed and implemented for that purpose), a timely but effective devolution of responsibilities at the local level, and strong capacity buildingof local institutions. Inaddition to the 25 provinces, the Provias Ruralhas transferred resourcesto about 68 additional provinces and about 220 district municipalities, along with the commitments identified by that entity for the maintenance needs of the networks under the jurisdiction of those municipalities in the process of elaboration of provincial road 61The most important pieces of legislation on this topic include: Decreto Supremo no. 005-2001-PRES. which created the "Technical Secretariat for the decentralization Process", the Law no. 27680 " k y de Reforma Constitucional del Capitulo XIV del Titulo IV sobre descentrulizacion", the "decentralization core Law" ( " b y de Bases de la Descentralizucidn" published on 0712012002), and the Law no. 27972 " k y Orguniza de ~unicipa~idades'~ (published on 51281203). 56 plans. The assignment of responsibilities, however, i s sometimes not precisely limited as to which roads correspond to the municipallevel. The capacity of the IVPs to produce coherent and incremental road plans i s paramount to generate investment and maintenance programs that are commensurate with the criteria for the selection of options and the budget ceilings likely to be assigned by the central level to the municipalities. The IVPs must simultaneously-with support from Provias Rural-build up their management and administrative capacity to contract the investment and maintenance activities to achieve efficiencies in their implementation. In this respect, the maintenance mechanism through micro-enterprises-with their efficiency increasingly strengthened through competition for the contracts-have proved also an cost-effective manner of securing the proper upkeep of rural roads (in combination with periodic activities+very 4- to 5-year periods-that allow to restore largely initial road conditions). Waterhanitation, Planning for waterhanitation infrastructure is performed at the district levelthrough participatoryplanninginstruments. Operation and maintenance are performed by community organizations (Water User Associations for water and JASS 62for sanitation). Inthe past, the FONCODES model was geared towards the construction of new systems, so the community was organized only for the construction phase in "Executing Units" - nhcleos ejecutores - and not for the operation and maintenance. Inmany cases, those unist evolved into JASS, but they lacked proper training and technical knowledge to assume operation and maintenance tasks. This has largely contributed to the poor sustainability of waterhanitation investments. 63 Incontrast, the new PRONASAR model i s gearedtowards sustainability so that even though JASS participate in the construction phase, they are created to assume the responsibility of administration, operation and maintenance of the service. The project cycle includes extensive training capacity for the JASS before, duringand a year after the construction of the system. Sewerage systems, because of their complexities and high costs in lower density areas, are no-longer financed. However, different options of on-site sanitation are offered to beneficiaries who select the best option according to their payment capacity. Users are trained to perform the O&M of their sanitation equipment, as well as inhygiene education. Inthe near future, budgetary resources for waterlsanitation-which have been strongly decreasing since 1998-are expected to become less volatile, with the availability of funding from external partners (IDB, World Bank, CIDA). Moreover, higher contributions from communities and municipalities (at least 20% of the investment) are required, with the expectation that sustainability will improved (given the increased ownership from users). Finally, capacity building programs should allow for the enhancement of the efficiency of JASS responsible for the operation and maintenance of the systems. 62JuntasAdministradoras de Sewicios de Saneamiento. 63 Source: COWATER International, Inc. Sewicio de consultoria para la p l a n ~ c a c i ~ n proyecto de agua del y saneamient~rural (PRO~ASAR), Informe 2, Agosto 2001. 57 0 Rural electrification. Planning for rural electrification investment is still mostly performed at the central level and aggregated in the 10-year National Plan for Rural Electrification. Although a decentralization process at the regional level i s under way (andsanctioned with the recent approval of a new law), 64 local governments have been little involved in the planning process so far. Inthe electricity sector, electrification committees were originally created to contribute to the planning process, although only as originators of demand for the services. These committees have largely disappeared today but, in certain cases, they took over some tasks related to the operation of rural electricity services (e.g., fee collection). In the case of service provision from an interconnected grid, there are strong economies of scale that favor larger-scale enterprises. However, operation and maintenance of off- gridservice provision on a smaller scale, for example usingmicro-hydro systems, could be implemented usingcommunity- or micro-enterprises-based approaches. Inthefuture, alargepartoftheimplementation ofruralelectrificationprograms maybe handled at the regional level, which i s the natural level for large "on-grid" capital investment due to economies of scale and since most distribution companies have a regional focus. The involvement of lower levels of governments i s expected to be in identifying needs, potential demand, ability to pay and community contributions, as well as in the supervision of off-grid electricity systems (e.g., micro-hydro) which would need to be managed at the community level. 0 Rural telecommunications. Planning for rural telecommunication investments and services i s also essentially performed at the central level. Local governments are still not representedinthe CODESI, 65 a nationalcommission created to coordinate existing ICT initiatives. However, there i s an attempt to builda local capacity in this area (e.g. through training programs for local governments). Inthe telecommunication sector, operation of info-centuos and maintenance of public- phones couldbe also performed by small local enterprises. The very low level of resources available to local governments (for rural municipalities total annual revenues per capita amounted to about US$46 over the period 1998-2000, compared to US$62 for urban provincial municipalities) and the vertical imbalance (for rural municipalities, 62% of revenues come from transfers, compared to 33% for urban municipalities) further compounds the difficulties to proceed with transferring additional infrastructure responsibilities to rural municipalities (see Table 2.6 for a summary of the 64The Law to Regulate the Promotion of Private Investment in Rural Electrification, passedby Congress on July 1,2004 ConzisidndeDesarrollo de la Sociedad de la Ii$orrnacicin. Municipalities are defined as rural when more than half of the population live in rural areas (defined as (1) "the area i s not a district capital or it i s a district capital with less than 3,000 people"; and (2) "the area has less than 100householdscontiguous or there are more than 100householdsbut they are disperseand there are no center"). Most district municipalities are considered "rural" while all provincial municipalities are "urban". 58 resources of municipalities). Increasing local revenues (by handing out some fiscal autonomy to local governments) may be particularly needed: rural municipalities' own revenues per capita amounted to US$12 per year over the period 1998-2000 compared to US$36 for urban provincial municipalities. Moreover, unlike urban municipalities, most rural municipalities cannot currently borrow more to finance their expenditures: the average debt service for rural municipalities amount to about 25% of current revenues, which i s already the maximum allowed. Finally, it should be noted that some equalization i s performed through the transfer mechanism: rural municipalities receive a per capita transfer of US$29 compared to US$20 for urban municipalities. Inspite of lower revenues, rural municipalities' capital expenditures are about the same as for urban provincial municipalities relative to their population (US$20 and US$18), but these municipal investments include all sectors (i.e., also social and not only infrastructure). Table 2.6. Ruralmunicipalities haveless revenuesand are more dependent on transfers than urban provincialmunicipalities -Average 1998-2000 Revenues 330 46 100 1,172 62 100 Localtaxes and fees 87 12 26 674 36 58 Transfers 203 29 62 384 20 33 Loans 26 4 8 55 3 5 Others 13 2 4 58 3 5 Expenditures 339 48 100 945 50 100 Administrative costs 168 24 50 527 28 56 Debt service 22 3 6 58 3 6 Investments 142 20 42 346 18 37 Others 6 1 2 14 1 2 Source: Azcueta (2003). 59 - 3. STRATEGICFRAMEWORKFORRURALINFRASTRUCTURE INFRASTRUCTURE 3.1. STRATEGIC TRADE-OFFSAND RECOMMENDED ACTIONS Despite Peru's rural infrastructure gap, there has been significant progress in the four rural infrastructure sectors over the last few years. Chapter 1 and 2 highlighted the various government initiatives in rural development and decentralization, as well as the approaches being implemented in each sector to respond to the requirements of the decentralization agenda and the need to enhance the access of rural populations to infrastructure assets in a sustainable manner. This bodes well for the future expansion and sustainable management of rural infrastructure. In the future, however, there needs to be a shift of the overall perspective of rural infrastructure towards a set of interconnected investments and services planned more directly in responseto local rural development needs, and managed with due consideration to the strengthening of local capacities. The strategy seeks to improve the rural population's access to infrastructure assets inthree different dimensions: (1) alignment of investments with the priorities of rural areas; (2) efficiency of the sustainability and delivery of infrastructure services; and (3) effectiveness inachieving the expected impacts. Thesethree dimensions provide a conceptual framework that makes the key tradeoffsltensions involved in improving access to rural infrastructure and enhancing its provision explicit, namely: 0 Level of access versus a v a i l a b i l i ~ofresources. The goal of higher coverage rates must be weighed against the scope for budgetary increases and the limits for increases inthe tariffslfees collected from users. 0 Prioritization versus eflectiveness. The definition of the criteria for the prioritization of investments, with a greater emphasis on social or economic variables, must take into account the goal of greater sustainability of investments and higher increases in rural incomes. 0 Eflectiveness versus efliciency. The identification of the appropriate institutional level for the planning andlor implementationof rural infrastructure interventions with an aim at better reflecting rural users' needs must be balanced against the need for economies of scale, the network characteristics of the investments-particularly present in the 60 electrification and telecommunications sectors-and technological and management requirements of the infrastructure assets. ~ ~ o r ~ a bversusyincentiveframework. The capacity of rural inhabitants to pay for i l i ~ infrastructure services or contribute to their implementation must be weighed against the incentive framework for the providing entities-either public or private-to perform in an efficient manner, with an aim at providing services at a quality commensurate with the tariffs and fees charged or the resources allocated for operation and maintenance. In-house versus contracting. Alternative mechanisms for engaging the private sector must be tailored to each particular sector seeking to establish regulatory or contracting conditions that promote that engagement and efficiency. Transfers versus capabilities. While local governments are eager to assume further responsibilities in the implementation and management of infrastructure assets, the timing of the transfer of those responsibilities must be pursued in an active and progressive manner as the relatedtechnical expertise i s built up. The proposed strategic framework attempts to address those six trade-offs. It aims at implementing a revamped, decentralized and market-friendly framework for rural infrastructure with six corresponding strategic actions: (1) allocating complementary resources to meet emerging principles of rural development policies and align Peru with countries in similar level of development; (2) focusing resources where they will have greater impact in advancing economic conditions of rural areas; (3) puttingusers at the core of the planning process and bridging knowledge gaps so that planners can make rational choices; (4) developing a subsidy policy that i s transparent, linked to results and kept to a minimum; (5) enhancing the involvement of the private sector; and (6) ensuring a timely transfer of responsibilities and capacities to local governments. These actions are summarized inTable 4.2. Table 4.2. Trade-offs and corresponding strategic actions come? 61 Level of resources to meet the needs of emerging rural development principles. Chapter 2 presented estimates on the interactive effects between infrastructure services to more effectively increase the potential to increase rural incomes. Simulations show that making all infrastructure services available to the rural populationcurrently without access to any of these services, would reduce the poverty rate from 82.5% to 62.3% within that population (those who do not have any services at all)67. Since thirty percent of Peru's rural population do not have access to any infrastructure service, bringing all four infrastructure services to this entire population group would reduce the rural poverty rate by six percentage points, thus helping to lift, ceteris paribus, about half a million Peruvian (or 10% of the rural population living below the poverty line) out of poverty. Based on figures from Rodriguez (2004), this effort would require between US$0.7 billion (assuming constant marginal costs) and US$1.8 billion (taking as reference the highest marginal cost observed in each department). In comparison, ensuring universal access to all infrastructure services in rural Peru would cost between US$2.4 to $4.8 billion and, at current levels, could take up to 48 years! An alternative approachto estimate the ruralinfrastructure needs would consist of aligning Peru with comparable countries (either South American countries or countries with similar level of development), which entails at least halving the rural infrastructure gap in the coming decade. (In reality, taking into account that comparable countries will also make progress in terms of coverage extension during that same period, Peru would have to increase availability of rural infrastructure services even faster in order to catch up with them). The table below shows these estimates. Dependingon the sectors, Peruwould need to immediately reduce the gap by 6% to 74% (with the exception of rural water where the situation in Peru i s slightly better than for the rest of South America). The sectors where needs are higher are roads, electricity and sanitation. 67 Simulations of poverty rates with availability of infrastructure servicesfor populationwithout any services yield the following results: Just water 82.2% 184 Water and electricity 74.5% 234 Water, electricity and sanitation 69.9% 256 All infrastructure services 62.3% 294 Source: Escobaland Torero (2004). 62 Table 3.2. Requirements to bridge the rural infrastructure gap and align Peruwith comparablecountries Water - country as a whole - 35% - 30% - ruralareas +5% - 29% Sanitation - country as a whole - 41% - ruralareas --24% 6% - 43% -Roads * country as a whole - 16% - 74% Electricity - country as a whole - 59% NA - rural areas - 43% NA Telecommunications - country as a whole - 19% - 7% * Calculated, as proxy, the %of unpavedroads needingto bepavedto reachsame pavedroaddensity. as Halving the number of people lacking access to rural infrastructure services in the coming decade would require doubling the annual investment levels observed during 1998-2002. Depending on the source, estimations to halve the rural population lacking access to infrastructure services range from US$121 to US$241 million per year during 10 years, compared to US$97 million spent annually during the period 1998-2002. It should be noted that the higher cost scenario i s likely to be closer to actual needs since it i s calculated on the cost of investment needed to increase electricity coverage from its current level (increasing marginal costs) while the low case scenario i s based on average cost per connection observed during the period 1998-2002 (constant marginal costs). In this simulation, targeted subsidies to help finance current expenditures and make services more affordable are not taken into account (except for rural roads where maintenance costs are included). If a subsidy mechanism i s neededto make services more affordableto a specific targeted population, the financing requirements would have to be raised accordingly. A dynamic strategic plan assuming a probability of 0.25 for the low case scenario (marginalcosts similar to those in 1998-2002) and 0.75 for the high case scenario (based on increasing marginal costs), allows us to estimate that sustaining current levels of investment observed in 1998-2002 will only reduce the infrastructure gap in rural Peru by 26% over the coming decade. On the other hand, halvingthe ruralinfrastructure gap would mean sustaining annual investment levels double those of the past 5 years (about US$200 million per year). This estimate is based on halving the gap in all sectors in the same way. Since annual funding for rural infrastructure during the period 1998-2002 has been estimated to about US$lOO million, Peru should therefore aim at sustaining US$200 million per year for the next decade (Figure 3.3). Although this seems to imply a major spending effort for the Peruvian Government, it should be noted that it can be achieved i f (1) bringing investments in waterlsanitation and roads to levels observed in 1998, Le., before the 63 economic slowdown impacted on infrastructure spending; (2) funding rural electrification by the effective implementation of a sector fund similar to FITEL,therefore limitingannual budgetary spending to no more than the 1998-2002 average for the sector, but bringing the total amount to the statutory objective established in the rural electrification law; and (3) bringing additional resources sufficient to double FITEL's statutory objective (that could come from the license and spectrum fees collected by MTC which represent about twice FITEL's current revenues). Table 3.3. Financial requirements to halve the number of people inrural Peru lackingaccessto infrastructureservicesin 10 years. Rural roads Water/ sanitation Rural Ruralelectricity telecoms Highcase * Low case Capital investment 400 155 150 1,500 300 Current expenditures 200 Assumingcoveredby userfees or cross subsidies TOTAL 600 155 150 1,500 300 * Source: Rural Electrification Plan NB :Other datacome from Rodriguez (2004). US$ million Highcase Low case TOTAL for 10years 2,405 1,205 TOTAL per year 241 121 Average annual expenditures 1998-2002 97 Source: Authors. Interms of budgetary efforts, an annual US$200 million investment inrural infrastructure would represent around 0.3% of GDP for Peru (compared to an average of 0.18% over the period 1998-2002). It would also represent about 2.0% of the Peruvian government's budget in2003 or about 8.8% of the combined regionaland local expenditures in2003. As a comparison, over the period 1998-2002, Chile spent about 0.28% of GDP or 1.3% of government budget in rural infrastructure. However, when accounting for differences in percentages of rural population (14% in Chile compared to 27% in Peru in 2002), even with an annual US$200 million, the budgetary effort of Peru relative to its rural population would still be significantly lower than what Chile sustainedover the past 5 years. Table 4.1. Current funding levelsfor rural infrastructure Ruralroads 36.2 60 none Ruralelectricity 43.1 52 90 * Rural waterlsanitation 7.1 14.8 none Ruraltelecoms 10.8 NA 11 TOTAL 97.2 NA none * Fromthe Rural Electrification Law (pending implementation). The budgetary effort implied by the strategy seems therefore modest and the experience of other countries shows that some of them have been able to grant such priority to rural infrastructure in their national budget's preparation. However, Peru's tight fiscal constraint may limit the capacity of the Government to bring additional fiscal resources to rural infrastructure. Inthe medium term, the fiscal decentralization process will decentralize part of the decision at the local level, since local governments will be in a position to decide 64 what share of their budget should be allocated to finance infrastructure investment (but the fiscal constraint i s likely to be decentralized as well). Nevertheless, in the short term, the bulk of funding for rural infrastructure will be decided at the national level, within the preparation of the national budget. In this context, some alternative sources of financing could be explored. Direct private financing for rural infrastructure can be encouraged by creating a favorable institutional and regulatory environment. Nevertheless, this participation i s likely to vary significantly across sectors (there i s currently more potential for it in the telecom sectors) and subsidies will still be required in a majority of cases to account for the higher risk and lower profitability associated with rural infrastructure investments. An alternative way to raise revenues within the sectors (ie. without contribution from the national or local budgets) could be through the implementation of cross-subsidy schemes. The FITEL model i s already inspired by this approach: telecom operators pay a 1% tax on their revenues (ultimately, telecom users pay the incremental cost introduced by the tax) and revenues are earmarked to finance the extension of telecommunication services inrural areas. The Rural ElectrificationFund- whose implementation i s pending - could be financed under a similar cross-subsidy model. In the transport sector, some countries like Brazil or El Salvador, have used a different approach, based on users charges, to finance road maintenance expenditures. Under this model, transport-related user charges (such as gasoline tax, driving license fees or vehicle license fees) are earmarked in a road maintenance fund. While the resources generated in such a way do not necessarily involve cross-subsidy (charges are used to maintain the infrastructure used by payers not to expand access to different users), they are still generated andused within the sector. Ultimately, this can also free nationalbudget resourceswhich canbeused to expand the roadnetwork to rural areas. Whether Peru chooses to develop its rural infrastructure through direct budgetaryallocation or through financing generated within the sector, i s a question whose answer will depend on the fiscal constraint but also on a political economy decision of who should pay for it, Financing them from direct fiscal revenues would mean that the national government acknowledges the priority of rural infrastructure for the country's socio-economic development and decides that every taxable household should contribute to this priority. Implementing cross subsidies would mean that households who already benefit from infrastructure services should contribute to the development of these services to the one who do not have access yet. Users' charges for infrastructure maintenance would make users directly contribute to maintaining the infrastructure they are using (and possibly freeing budgetary resourcesto expand access), Focus resources towards enhancing impact on economic development and rural incomes. Resources from the various existing national funds for rural infrastructure can be allocated in a variety of ways from a "first-comes-first-served" to a predefined allocation basedon a number of criteria. As explained before, the choice among criteria i s critical as it will define the ultimate effectiveness of the interventions. The right combination of social and economic criteria would ensure that resources are allocated where they will have the greatest impact, becausethe poor will benefit from the infrastructure services, and they will be able to better seize existing income-generating opportunities. The right mix between socialleconomic criteria must take the intrinsic characteristics of each infrastructure sectors 65 into consideration but it must also try to maximize opportunities for stimulating agricultural and non-agricultural productive activities and account for the (actual or planned) presence of other infrastructure services. Indeed, the marginal benefit of using criteria perfectly tailored for a particular sector can be significantly exceeded by the cooperative gains produced by complementarities across sectors. The proposed criteria would be incorporated for its application to those resources currently being allocated to each sector. It would encompass a combination of social and economic criteria, with at least a 50% weight to economic criteria, including specific indicators that reflect the commitment of the beneficiaries to cover the maximum extent of the operation and maintenance of the services. This combination of criteria should allow reach those that fall outside the key economic corridors or growth areas but would still help to ensure appropriate levels of sustainability. This combinedmethodology has already been applied successfully to the ruralroads sector. For the waterhanitation sectors, given that the emphasis should be maintained in sustainability, technical and economic criteria should be maintained as first instance. However, the identification of relevant territories could be made at the provinciallevel and complementarities with other services could be included among prioritization criteria, basedon the provincialinfrastructure plans. A demand-driven approach should be the basis for the decision-making process. In the case of telecommunications and electricity incorporationof local economic variables and beneficiary participation complemented with leveraging financial resources coming from sector-specific funds with public funds, through output-based aid (OBA) or other subsidy mechanisms, will increase the impact of the interventions. For all sectors, the incorporationof the effects of complementarities can further strengthen the ultimateeffectiveness of investments. The proposed increased amount (double) for allocationto the sector would be allocated on the basis of the productivepotential of a territory. It will require collecting data on specific indicators at the district and provincial level and the elaboration of development plans once specific territories are identified. This prioritization criteria should lead to the greater effectiveness of interventions and enhancements to the attractiveness of those territories with economic potential (in the context of a territorial planning approach), with likely higher impacts on the development of non-agricultural activities, facilitation of the potential for market exchanges with secondary cities, and ultimately higher income increases. The detailed management scheme of the two financing windows for rural infrastructure (window 1: existing resources allocated based on both social and economic criteria; window 2: additional resources based on economic criteria only) will have to be determined by the Peruvian authorities. Window 1 would be likely to be close to the existing scheme, with the four different sources of financing for each sector. On the other hand, window 2 could either be itself split into the four sectors or be merged into a single fund whose objective would be to reinforce competitiveness in rural Peru by investing in rural infrastructure. For practical reason (higher compatibility with the existing framework), the first solution may be more feasible. One additional possibility could be 66 that window 1 i s more "territory-based" (ie. based on the funding level allocated to a particular territorylprovince) while window 2 i s more "project-based" (ie. all projects submitted to local governments compete at national level for funding). This would allow a ruralinfrastructure project with highproductive potentialbutwhich is located inaprovince with little pre-allocation of resources for rural infrastructure, to be given a "second chance" to find financing at the national level. In both cases, infrastructure investments would be identifiedthrough participatoryplanning at the locallevel (provincial infrastructure plans). While the methodology to assess the productive potential of a territory needs to be further refined, the application of the corresponding criteria will require additional efforts to collect the necessary data-particularly on economic potential-and the establishment of necessary monitoring indicators. The decentralization framework should allow the strengthening of these capacities at the local level (through entities such as the Provincial Road Institutes) as well as the development of benchmarks for measuring progress in the social and economic impacts of the infrastructure interventions. Table 4.3. Cross-sectorand sector-specificcritical steps requiredto enhance For the current level of resources, (WaterlSanitation) Incorporate complementarities implement a consistent methodological criteria approachto pre-allocate resourcesfrom (WatedSanitation) Community commitment to the various infrastructure funds or O&Mof the systems, by the establishmentof a budgetary resourcesconsidering a mix of JASS ad payment of an up front cashcontribution economic and social criteria as well as the pluslabor duringconstruction to ensure presence (actual or planned) of other sustainability infrastructure sectors, increasing the (Roads) Reviseprioritization methodology to weight given to economic factors include complementarities Allocate the proposed increasein (Electricity and Telecommunications) Incorporate resourceson the basisof economic complementarities criteria ,and include willingness considerations(productive potential) and of community to contribute presence of other infrastructure sectors (Telecoms) Proactively identify opportunities to Enhancedata collection and monitoring make simultaneousinvestments, usingOBA mechanismsanddevelop benchmarksfor mechanisms, intelecommunications, electricity and each sector road projects (for instance, taking advantageof recently approved law on sharingthe right of way) Incorporate beneficiaries of rural infrastructure as key stakeholders in the planning process and bridge knowledge gaps in order that local planners can make rational choices and promote complementarities between infrastructure services. The decentralization process initiated in Peru provides a unique opportunity to improve the effectiveness of rural infrastructure investments. The trade-off between the effectiveness of being close enough to rural users' needs and the efficiency of letting economies of scale play, should be solved differently across infrastructure sectors: capital and technology intensive sectors with higher network effects, such as rural electricity and telecommunications, are likely to be better managed at the regional level-with active ppticipation of provincial municipalities in planning and monitoring-while other sectors would be better implemented at the provincial level, with active participation of district municipalities and communities. In the case o f waterlsanitation, communities should also 67 be involved since they select the level of serviceltechnical designs, co-finance investment andare the ones operating and maintainingthe constructed facilities. The proposed scenario consists of giving a key role to the provincial level, which would in particular be responsible for the preparation of provincial infrastructure plans, in strong coordination with other stakeholders (district municipalities, communities). Planning and monitoring would be performed primarily at the provincial level (provincial infrastructure institutes, with oversight by all municipalities within a province) while implementation and operation and management would depend on the sector, with rural roads being assumed by the provincial level, rural electrification and telecommunications to be handled at the regional level, and, waterhanitation, stand-alone rural electrification, and non-motorized transport (NMT) tracks, by districts andlor communities, as pertinent, under the supervision and technical assistance of the provincial level. The provincial level then becomes the critical nexus for channeling requests to the specialized entities (particularly, in the case of electricity and telecommunications), undertaking the participatory prioritization, and supervising the implementation of the agreed plans, all in the context of the local (territorial) development plans. Inaddition, central agencies would have to be reformedto reorient their activities towards providing provincial entities (and local governments) with the technical support they need to prioritize infrastructure investments, attending the needs of those without enough technical and managerial capacity, and monitoring the overall performance of the sectors. Indeed, in order to be efficient and effective, local planning requires that the decision- making process is based on sufficient and reliable information regarding investment alternatives. Central agencies should provide provincial entities with technical information about potential infrastructure projects (e.g., requirement for capital investment and current expenditures, expected economic and social benefits, environmental impact). A "toolkit" including methodological advice could be developed and made available to those local entities. This toolkit would include infrastructure investment alternatives among which provincial entities would prioritize, based on the resources they have as well as local needs and priorities. These alternatives should be first elaborated by central agencies becausethey are the ones that have (at least inthe short term) sufficient technical expertise to assess the implications of such investments. However, participatory processes should be implemented in order central agencies could prepare these alternatives, taking into account local demand from rural stakeholders. In a second stage, the preparation of the provincial infrastructure plans would be a major opportunity for local stakeholders to be involved- at the provincial level - in the selection of the alternatives with the most potential to foster local development andpromote complementarities. As far as resources are concerned, one option would be to merge existing funding instruments into a single "rural infrastructure fund", an alternative which, in order to be implemented, would have to overcome many institutional and regulatory obstacles. For example, merging FITEL would mean using the 1% contribution levied on telephone operators for infrastructure investments which are not necessarily in the telecommunications sector. This would imply changing the whole regulatory framework 68 for FITEL. Something similar could happen with FOSE or the proposed rural electrification fund. Furthermore, such an approach could undermine the technical expertise developed by the agencies responsible for managing these resources by forcing restructuring at a time when they have begun to put in place second-generation programs that buildon lessons from the first generation, and would face opposition from the private sector which would likely oppose having funds generated by their industry be used for infrastructure development inother sectors. A preferable and more realistic option consists of keeping separate funds for each infrastructure sector, but facilitating and rewarding projects or initiatives that are coordinated and that enjoy additional contributions from the communities, through the appropriate incorporation of indicators that reflect the presence of these characteristics, as explained earlier. Such an approach would be facilitated with adjustments to the project evaluation methodology at the Ministry of Economy and Finance (the so-called National System of Public Investment or SNIP for its Spanish acronym) in order to incorporate a territorial assessment of the investments within a certain municipality, vetting the benefits generatedby the provision of the combined set of interventions of the local infrastructure plan, and balancing the combined needs at the national level for them to match the budgetary amounts allocated in the sectoral funds and distribute the resources to the entity entrusted with the implementation (either local, such as a provincial road institutes, or central or regional, such in the case of rural electrification). Table 4.4 provides other sector-specific actions inthis respect. Table 4.4. Cross-sector and sector-specificcritical steps requiredto incorporate beneficiaries of rural infrastructureas key stakeholders inthe planning process Provincial municipalities coordinate the (Waterlsanitation) Use of provincial infrastructure plans preparation of provincialparticipatory (provincial infrastructure boards) to initiate promotion infrastructure plans, consistent with local activities of centrally founded W&S projects developmentplans and involving rural (Water/Sanitation) Build on the experience of existing infrastructure stakeholders mesas de concertacio'nusedby municipalities to Budgetary resourcesto be allocated determine the beneficiary communities, and the detailed betweenthe various sectorson the basis design of waterlsanitation projects (final decision i s taken of the provincial infrastructure plans and by the beneficiary community) sector-specific funding available (Water/Sanitation) Strengthenplanning capacity inthe Central agencies (Ministries of Health sector (including DNS) and involve local governments and Housing, DEP, Provias Rural, through project cycle OSIPTEL) balancebottom-up planning (WatedSanitation) provide adequate level of training to with existing strategies of national the JASS infrastructure plans (PRONASAR (Water/Sanitation) Stronger consideration of values and planning methodology, National Plan for attitudes of indigenous populations RuralElectrification, National Program (Roads) Strengthenthe experience of the talleresde for RuralTelecoms, national and priorizacion and of the provincialparticipatory roadplans regional roadplans) (Roads) Explorealternative options for reaching areas in Central agencies prepare a "toolbox" the Selva with consideration of indigenous people and explaining local governments how to environmental factors balanceincurred costs with benefits and (Roads) Clarify responsibilities between various levels of impacts inorder to prioritize among government, with an increasing devolution of infrastructure investments responsibilities to local entities and the ensuing scaling Ensurethat the methodology, basedon down of attributions to central entity (Provias Rural) adiustmentsto that of the SNIP. Dromote 69 complementarities across infrastructure (Electricity) PrepareRegional Plans for Rural services Electrification, aggregatingdemand expressedin Training and technical assistancei s also provincial infrastructure plans, andbasedon decentralized provided with the "toolbox" planningandprioritization of projects at regional level Central agencies and localgovernments (Electricity) Develop planning methodology that ensures exchange information regarding rural investmentsare integrated with local development infrastructure alternatives inorder to strategiesto ensure cost efficiency, given increasing enhance analyticalbase marginal costs (Telecoms) Support activities of CODES1to achieve coordination of efforts, incorporating representativefrom local governments (Telecoms) Scale up training programs for local governmentsbuildingon the experience of FITELand, possibly, INICTEL Develop subsidy policies that are transparent, linked to results and kept to a minimum. The Peruvian Government has already introduced several subsidy mechanisms to either attract private sector providers to rural areas with low profitability (guarantee mechanisms in particular) or to raise the affordability of some services in rural areas (discounted price). These instruments already comply with some of the requirements of a successful subsidy-transparency, appropriate targeting, and results-based incentives-but their ultimate effectiveness remains limited. Inthe rural electricity sector inparticular, the current capital cost subsidy is available only to the public sector operators, through the MEM. There i s no mechanism to provide incentives to private or public companies to develop rural electrification projects. In addition, the current tariff structure and setting mechanism are inadequate for most rural electrification, resulting in electricity operations that are economically and financially unsustainable. However, full cost-recovery tariffs would be unaffordable to most of the rural population. Finally, funding for the FOSE remains uncertain, threatening the commercial sustainability of operations inrural areas and sending a wrong signal to private operators. Inthe waterlsanitation sector, the strategy outlined in the existing national plans includes cost-recovery via tariffs and better subsidy-targeting. Although some concrete actions have already been identified (e.g., participation of communities and municipalities for at least 20% of investment, grants for villages of less than 500 inhabitants), the actual implementation of these principles has yet to be carried out. In the waterhanitation sector, the strategy outlined in the existing program is based on upfront contributions from the community in cash and labor, as well as on cost-recovery of administration, operation and maintenance costs via users' charges. The current central sector agencies need to review the direct and indirect subsidy mechanisms for rural infrastructure services, with an assessment of the total incurred cost (and who pays), the final beneficiaries (of the infrastructure services) and the direct and indirect incentives produced. Then, recommendations could be made to improve existing subsidy schemes, with due consideration of the new decentralized institutional framework and of the role of the independent regulators in setting the pricing policy. Box 4.2 presents two important objectives to be considered in order to make infrastructure "work" for the poor. The first one i s promoting access which can entail relying on instruments requiring operators to promote access, reducing connection costs or increasing the number and types 70 of suppliers. The second one i s the promotion of affordability which can entail reducing actual bills, service cost or facilitating payment. promote access. 71 Well designed subsidy schemes can be very effective in sending the right incentives to the private sector at minimum cost for central andor local governments. There i s a wide international experience (particularly in Latin America) available in this area for all infrastructure sectors. In the telecommunications sector, the Peruvian experience with FITELis often considered as a best practice. Inthe waterlsanitation sector, the Paraguayan experience (Box 4.3) i s a good example of successful output-based subsidy schemes. Inthe electricity sector, the Chilean experience (Box 4.4) with minimum subsidy concessions couldprovide a good groundto redesign Peru's rural electrification policy. 72 Cross-subsidies schemes might be needed in some cases (in particular in the rural electricity sector, based on the experience of FOSE) because it is likely to be the best possible alternative to alleviate the hightariffs for poor consumers, andineffect, re-balance electricity prices among different geographic areas, Inorder to be fully effective in sending the right signal to private operators, these subsidy mechanisms have to be sustainable and predictable. Indeed, if private operators feel that the funding of subsidies i s not predictable enough, they will ask for a risk premium which can ultimately offset the effectiveness of the instrument (this i s an issue, in particular, for FOSE). In the transport sector, some subsidies mechanisms might bejustified inorder to bringtransport services to and from the most remote areas. Some countries, like Chile have successfully implemented such subsidies, through in order to avoid distortions with existing markets, further analysis i s needed to determine whether such subsidy mechanisms are adaptable to the situation of rural Peru. Table 4.5. Cross-sector and sector-specificcriticalsteps requiredto revamp subsidy mechanisms Review existing subsidy (WatertSanitation) Redesign subsidy policy and conditions mechanismswithin sectors and put (Roads) Assess potentialities and financial implications of inplacemechanismsto better targeted subsidies for transport services inthe most remote coordinate sector-specific subsidy areas programs (Electricity) Revamp incentive framework for private For all sectors except roads, target sector participation, rather than continuingthe channeling the pricingpolicy to reflect the cost of funds exclusively through ADINELSA andDEP of capital, operating costs, (incorporating real costs of investment and future price of maintenance. management. services); provide capital cost incentives (subsidies) to 73 administration and security, and a 1 private and public enterprisesto invest; introduce reasonableprofit, with a discount competition-for the subsidy basedon both contribution of when a direct subsidy is required to enterprise andcommunityllocalgovernment; keep the service affordable (Electricity) Formalize FOSE over longer periods to Review all sector-specific reduceuncertainty and utilize the existing cross-subsidy government fees and taxes gathered mechanismto balancetariffs across regions by line ministries and regulatory (Electricity) Implement rural electrificationfund, without agencies to assess whether they are excludingcross-subsidies,andensuring predictability of too highand the best mechanismto subsidies inorder to reducerisks for private sector channelthe related revenues participation Ensurethat national regulators set (Telecoms) Increaseallocation of resourcesfrom licences and monitor application of and fees to rural telecommunication programs such as subsidies, common national FITEL,insteadof creating competingprograms within regulations and procedures, tariff MTC setting mechanismsand pricing (Telecoms) Continue support to the extension of FITEL policy, and adequatequality of satellite phonesto isolated rural communities andenable infrastructure services, ina manner and facilitate FITEL's public telephoneoperatorsto move that will not create disincentives for infrastructure to un-servedareas private sector investment (Telecoms) Ensurefinancial sustainability of community internet access centers(see Box A.3.) Stimulate the framework for participation of the private sector in rural infrastructure. Private sector involvement can bring greater efficiency in rural infrastructure construction, operation and maintenance. This requires that a business- friendly regulatory environment be implemented, in particular for the categories of private providers that could be active in rural areas (like SMEs or micro-enterprises). Pricing and subsidy policies are major issues in this regard (including predictability of tariff structure). Barriers to private sector involvement in rural infrastructure include: (1) lack of sufficient incentives (e.g., inefficient subsidy policy); (2) poor regulatory environment (e.g., concession requirements in the electricity sector); and (3) unfair competition with public operators. Hence, fair competition, result-based management of subsidies, and suitable pricing policies are needed to enhance the engagement of private operators. Both local (result assessment, contracting) and national actors (competition, pricing) should be involved inthis regard. As previously explained, there already exist successful examples of private sector involvement inrural infrastructure in Peru. Inthe rural telecommunication sector, FITEL i s considered a best practice as a mechanism capable of fostering private involvement at a minimum cost for public finance. However, the regulatory framework could be improved in order to facilitate the entrance of small enterprises in the rural telecommunication market. The success of micro-enterprises' involvement in rural road maintenance suggests potential in other sectors (community-based operation and maintenance of waterhanitation services, management of off-grid electricity systems). The proposed scenario would be to build on these successful examples of private sector involvement in rural infrastructure. Opportunities of using the FITEL model of output- based aid as well as similar experience in other sectors in other countries (e.g., water in Chile) could be explored in other sectors. Regulatory changes may help attract new actors inrural infrastructure (e.g. lift concession restrictions for small and middle-sizeenterprises in rural telecommunications and rural electricity for off-grid technologies, develop legal 74 and regulatory framework for public-private partnerships in rural electricity, including provision of minimum subsidy, modify national procurement rules to promote contracting of micro-enterprises). Capacity building will also be needed to strengthen regulatory capacity at both national and local level. Finally, community-based entrepreneurial initiatives to maintain and operate rural infrastructure-specifically, rural roads, non- motorized transport tracks, and Waterlsanitation facilities-such as the JASS and the road maintenance micro-enterprises should be strengthened and scaled up with continued technical assistance. Table 4.6. Cross-sector and sector-specificcriticalsteps requiredto enhance privatesector participation Cross-sector Se Improve businessenvironment for private e (Waterlsanitation) Buildcapacity of JASS, with providers of infrastructure services, by incorporation of "micro-enterprise" type of model developing regulatory framework for e (WaterlSanitation) Adjust technical standards of private sector investment water supply systems to respondto capacity of Clarify and buildup regulation capacity for potential users usingappropriate technologiesand rural infrastructure servicesat national design according to ruralneeds level with a local presence; train regulators e (Roads) Continue scaling up, and incorporate about ways to address the specificities of competition in, the maintenancemechanismwith rural infrastructure; train local authorities micro-enterprises and technical staff to better understand 0 (Roads) Revise definition of technical standards for their role inregulation and to apply rural roads(buildingupon the experienceof the consistently the national regulatory Rural Roadsprogram) frameworks e (Electricity) Implement a new legal andregulatory Experiment micro-enterprises' framework to mobilize investment resources involvement inother sectors than roads (introduce rural concessions,tariffs, construction Identify and foster local entrepreneursin andoperation standards) rural areas that show the skills and may (Electricity) Assess and clarify responsibilities of have some capital to invest in local ADINELSA and DEPto avoid conflicts of interest infrastructure by providingtraining, (Electricity) Revise technical norms to account for matching grants, micro and SME- specific needsof rural populations and sustainability financing. of rural systems, reducing costs of service Educating local authorities on becoming provision, expanding use of renewabletechnologies facilitators to bringtogether local for remote rural population entrepreneursand NGOsto attract private (Electricity) Undertake analytical work to explore investment, present multi-sectoral the involvement of communities in routine investment proposalsto national authorities maintenanceof electricity infrastructure andlor rural investment funds, such as e (Telecoms) Liftconcessionrestrictions limitingthe FITEL, andnot to imposeunreasonable entrance of small enterprises in the market fees or technical requirements. e (Telecoms) Develop strategy for fostering backbone infrastructure development e (Telecoms) Implement incentives to put private sector at the core of the implementation strategy 0 (Telecoms) Develop ICT services building on the experienceof the telecenters Ensure a timely transfer of responsibilities, consistentwith local institutional capacity. Institutional capacity is a critical factor for the success of transferring rural infrastructure- related responsibilities so that it brings the expected effectiveness and efficiency benefits. As previously explained, it is recommended that only local governments reaching a 75 minimum set of requirements be given such responsibilities. Inaddition, customized and targeted technical assistance should be provided to those local governments who do not meet these requirements. Particular attention should be paid to planning capacity and the design of a sound participatory framework allowing all major local stakeholders to be involved in the planning process (e.g. participatory workshops, creation of a "provincial rural infrastructure board" involving the provincial and district mayors). The creation of Provincial Infrastructure Institutes (PI1)-based on the successful experience of the Provincial Road Institutes-could ensure the presence of a sound contracting and technical capacity. In the water sector, the new decentralized institutional framework needs to be clarified since the active legislation is outdated and does not address sustainability issues or decentralization. In the case of telecommunications and electricity, given their "network" nature and the required specialized technical capabilities, only partial responsibilities- focusing on planning, monitoring and, in some instances, specific tasks of the operation and maintenance- should be transferred to the proposed PII. Particular attention should be paid to existing local capacity to assess and mitigate social and environmental impacts associated with rural infrastructure. Sustainability will also have to be ensured (particularly regarding funding for current expenditures such as maintenance of rural infrastructure). Finally, monitoring capacity will be essential to follow up the implementation and impact of the new framework. It i s recommended that this monitoring i s handled by the central agencies, which will provide for a broader and more independent overview of the new policy's impact as well as benchmarking and experience-sharing across provinces and regions. Customized and targeted technical assistance programs can help local governments with weak institutional capacity reach sufficient expertise. A minimum set of requirement--as currently envisioned under the accreditation program of the CND, including in particular participatory planning capacity, minimum financial management and contractinglprocurement capacity-should be used to determine whether local government can handle the transfer of infrastructure services. 69 The proposed scenario focuses on ensuring a timely transfer of rural infrastructure responsibilities to local governments (or communities in the case of waterlsanitation), by using a list of minimumrequirements and by providing technical assistance to help local governments reach these requirements. Core requirements should include (1) existence of a participatory plans for rural infrastructure; (2) secured financial contribution (commitment to contribute to capital investment up to a pre-defined level and to maintenance costs); (3) A Law for Basic Sanitation was passed in year 2000 but it was revoked, so that the previous Water Sector Law passedin 1994is still being applied for the waterlsanitation sectors. 69Resources from the National Decentralization Council (CND) are committed to help build up the skills of regional and local leaders and its management teams (through the Technical Assistance Plan and Training for Local and Regional Governments-r PNCAT) and help achieve the required accreditation. The PNCAT also seeks to develop the statistical information at the regional level and incorporate information technologies inthe administration of regionalgovernments. Part of the processof accreditation includes the elaboration of the Participatory Regional Development Plans (PCDRs), with trainingto be given to the staff of the regional planning units. To date, the entirety of the 26 PCDRs are elaborated and approved-though not all of them are of the same quality and scope. 76 creation of a provincial infrastructure institute (approved by the provincial infrastructure board-see below) and designation of the managing director of this institute; and (4) minimumprocurement capacity. Finally, intensive training programs will be needed to ensure that sufficient technical skills and qualified people are available at the local level. The creation of specific multi- disciplinary rural development curriculums in engineeringschools and universities may be helpfulinthis regards. Table 4.7. Cross-sector andsector-specific critical steps required to ensure a timely transfer of responsibilities Design a list of minimumrequirements necessary (Waterlsanitation) Clarify new decentralized for localgovernmentsto qualify given rural institutionalframework and proceed with the infrastructure responsibilities enactment and implementation of revised Ensureadequate minimum sectoral skills in Waterlsanitation Law provincial planning authorities, with respectto (WaterlSanitation) provide adequate levelof demand assessment, basic project design, training to the JASS engineering, economics, project development and (Roads) Continued development of assessment institutionalcapacities at the local level Requirementsshould include planning capacity (through IVPs) (e.g. creation of rural infrastructure boards (Electricity) Replaceelectricity committees involving provincial and district mayors), and by participatory workshops for planning and management andcontracting capacity (e.g. monitoring purposes creation of provincial infrastructure institutes), (Electricity) Buildon the experience of the and incentives for the promotion of private sector convenios de capacitacion y asistencia participation tecnica already signed betweenthe DEP and Requirementsshould address sustainability of some local governments infrastructure investment (e.g. adequateprovisions (Telecoms) Clarify responsibilities of local for the operation and maintenanceof governments inICT infrastructure inrural roads and cost-recovery (Telecoms) Involve local governments in level tariffsluser charges inother sectors), and planninginvestments and designing capacity to deal with social, gender and applications and services, especially e- environmental issues, as well as monitoring government initiatives capacity (e.g. performed by regionallevel) (Telecommunications and electricity) The Sector-specializednational agencies should assess 'network" natureof the facilities requires localgovernments' managementcapacity, keeping specialized technical capabilities and evaluatelocal plans, and provide customized and coordination at the regional and national targetedtechnical assistance to low-performers, in levels coordination with the CND 77 SUMMARY :THE PROPOSED STRATEGIC FRAMEWORK Halve Peru's rural infrastructuregap /-\ In 10years Implementnew decentralized Double annual funding and market-friendlyframework for rural infrastructure compared to average observedin 1997-2002. Focusresourceswhere they will havegreatestimpact Put usersat the coreof the planning processand bridge knowledgegaps in order plannerscan make rational choicer Develop a subsidy policywhich is transparent,linkedto results and keptto a minimum Enhancethe participation of the privatesector Ensurea timely transfer of responsibility I 3.2. INSTITUTIONAL AND FINANCIAL IMPLICATIONS The new institutional framework will move from a "silo approach" to an integrated scheme allowing complementarities across sectors to take place. Figures 4.1 and 4.2 present a schematic representation of how the institutional framework would evolve. This integrated model seeks to maximize opportunities for complementarities at three levels: (1) planning; (2) funding; and (3) implementation. At the planning stage, the provincial participatory infrastructure plans will allow rural infrastructure users to determine what infrastructure investments are best aligned with their needs and, therefore, which are the most likely to promote rural development and poverty reduction. As to funding, a better coordination between existing rural infrastructure funds-provided they are funded to the appropriate level-will secure sustainable levels of funding for rural infrastructure and reduce transaction costs and rigidities caused by differing allocation methodologies. At the implementation stage, the local government's affiliated provincial infrastructure institutes and the regional governments (for rural electricity, including regional distribution companies), will ensure a more effective implementation of rural infrastructure interventions, in order that the desired combination of infrastructure services can be delivered when needed. 78 Figure 4.1. Current institutional framework 4 --------r------- W A ~ E RELEC~RICITY ROADS 1"""" r-------- TEL~COMS ? I I PLANNING Program oncertacio &........ IMPLEMENTING ..* Figure 4.2. Proposedinstitutionalframework .."..'......-...".., i Local 'j PLANNING Local Participatory InfrastructurePlans ~ FUNDING -u- w IMPLEMENTING Institutes) 79 Although the proposed model will involve the various levels of local institutions (from communities to district municipalities, provincial municipalities and regional governments), a key role would be assigned to the provincial level. This seems to be the right balance between the necessity to be as close as possible to users' needs and keeping a sufficient institutional capacity and allowing economies of scale to take place. The provinciallevel i s the natural level for rural roads, and it i s a suitable level to identify needs for rural electricity services which would then be forwarded to the regional level. Due to the experience it can gain by operating inother sectors, the provincial level i s also the right level to provide technical and management assistance to the water users' associations involvedinthe operation and maintenance of rural waterhanitation facilities. The proposed framework also recognizes that rural infrastructure services exhibit a spectrum of technical characteristics. Specifically, the level of network characteristics affects the appropriateness for management at the local level and the possibilities for economies of scale. At one end, interconnected electricity and telecommunication networks can enjoy high economies of scale and require their management as part of larger networks. At the other end, waterhanitation solutions, stand-alone electricity supply, or NMT tracks are often of a local nature and the possibilities for scale economies very limited. In between, rural roads present some network characteristics but these may not extend beyond territorial limits. One of the key actors proposed to implement the strategy would be provincial infrastructureinstitutes whose main responsibilities will be to coordinate the planning process at the local level and promote local entrepreneurial capacity. Provincial infrastructure institutes (PIIs) should follow the successful experience of the provincial road institutes (see the experience of the RIPA). They should be agile and private-sector friendly administrative structures, with a strong contractinglprocurement capacity. Provincial infrastructure institutes should promote the creation of micro-enterprises and their involvement in rural infrastructure-related activities. PIIs could start from the current responsibilities of the Provincial Road Institutes in terms of rural roads maintenance. Inthe case of the waterlsanitation sector, the PIIs could participate in identifying the districtslmunicipalities to achieve the cross-sectorial approach, and provide technical assistance to community-based organization involved in operationlmaintenance. Inthe case of rural electricity, they should coordinate with the competent institutions at the regional level (regional governments and regional distribution companies) in order to explore what would be the most relevant involvement of micro-enterprises in the sector (e.g. maintenance of mini-hydro and other off-grid technologies). Although each provincial infrastructure institute should be administratively hosted within the corresponding provincial government, it should report to a provincial infrastructure board consisting of the provincial and district mayors of the area where they are involved. Provincial and District municipalities benefiting from the institute's activities should contribute to its operating expenses. The geographic coverage of the PIIs would vary depending on the size of population, land surface, number of municipalities, and infrastructure needs. Several provinces can together 80 constitute a single PI1whereas one province may require two PIIs given its sheer size. In all, this initiative seeks to create a territorial perspective of infrastructure investments, and shift away from sectoral perspectives. 70 Figure 4.3. Proposed organization of the provincial infrastructure institutes Infrastructure lnstitUte I *....... I Localentrepreneurship ..............*.*.........*. generates Private operators capacity (micro-enterprise) Agencies 3.3. INSTITUTIONAL APPROACHES: THE ROLESOFTHEDIFFERENTSTAKEHOLDERS The participatory process. The success of decentralization reforms i s highly correlated with the degree of participation and empowerment of local stakeholders. If local institutions are captured by a small group of individual interests, the potential gains in effectiveness from increased proximity with local users will not be achieved. The quality of the participatory process and the involvement of the poor rural communities are crucial to ensure that infrastructure-related needs in rural Peru are effectively expressed and taken into account when planning infrastructure investments. It also contributes decisively to the promotion of complementarities across infrastructure sectors. In parallel with the decentralization reforms, the Peruviangovernments has recently made significant progress towards successful participation of local stakeholders in public investment planning (participatory budgeting, mesas de concertacidn, see table 4.7.). In addition, two infrastructure sectors already have gained a significant experience in this regard: the waterhanitation sector through specific municipal and community participatory planning instruments, and the road sector through the organization of workshops to prioritize alternative investments (talleres depriorizacion). It i s proposed that the favorable environment created by the recent reforms and the experienced gained in the water and 81 road sectors be used to create rural in~rastructurep a r t i c ~ ~ a ~orkshopsallowing all t o ~ major stakeholders to express their need and to prioritize among alternative investment options. A methodology for prioritization should be elaborated and provided-with related training, if needed-to help formalize the participatory process and help ensure alignment with other planning instruments (local development plans, national and regional infrastructure plans). These workshops should be an opportunity not only to identify priority infrastructure investments but also to design a local development strategy inwhich investments inrural infrastructure bring a maximized contribution, Table 4.S.On-going initiatives to enhance participatory management and monitoring inPeru. Initiative Participatory Identify needs and priorities through The Mesas de Concertucion Development Planning participatory processthat serves as the produced ConcertedDevelopment basisfor budget decision-making Plans Participatory Budget Determine budget allocations as Budget allocations are basedon Formulation efficiently and transparently as possible ConcertedDevelopment Plans by ensuring that budget decisions reflectconsensus-determinedpriorities and removinginformationbarriers between state and society Open Budget Information Ease access and use of public The Financial Integrated information to enhance budget analysis Monitoring System was modified by citizens and public officials alike, to to supply budget information for enhance public knowledge and national, regional and locallevels accountability INEIwas regulatedto ensureits ~ EnsureReliable Improve quality and credibility of Information information systems by using independenceand information autonomous and credible sources of reliability. A presidential decree information with external oversight. was approved and enactedto standardize and centralize information produced and usedby ministries through the Geographic Information System Use-Feedback on services Solicit opinions and feedback on Report cards were usedto solicit efficiency and effectivenessof services client feedback on the and monitor transfersfrom central to performance of public services local governments. MeasureImprovements in Evaluate progress inlevels of A transparency module was Transparencyand transparency and openness inpolicy includedinthe IV National Openness processes. Household Survey (ENAHO) to establish a baseline. ource: World Bank En Breve (2004) The provincial infrastructure boards. As previously explained, the provincial level appears to be the right compromise between sufficient institutional capacity and accountability to rural users, except for infrastructure investments where economies of scale become significant when dealt with at the regional level (eg. on-grid rural electricity investments). However, accountability can be increased if lower levels of government (district municipalities) and communities are also involved in the supervision process. To achieve this, it i s proposed that a provincial infrastructure board i s created ineach province, 82 involved in rural infrastructure management, Members of the board should include the provincial mayor and the district mayors. The board's mission i s to endorse the provincial participatory infrastructure plan, supervise its implementation, ensure the sustainability of infrastructure investment (in particular that maintenance i s performed adequately), supervise the work of the Provincial Infrastructure Institute (inparticular regarding private sector involvement in rural infrastructure) and ensure coordination with other levels of governments and communities. The board approves its internal operating rules and the distribution of the Provincial Infrastructure Institute's administrative costs across member municipalities. Summary : Proposed Responsibilities for the Various Levels of Government -Provideknowledgeand technicalassistanceto localgovernments Central Agencies -Asses if institutionalcapacityis sufficient -Monitor rural infrastructuredevelopment, outcomes and impact Regions -Prepareregionalplansfor ruralelectricity -Contractprivateprovidersto implement plans(on-grid) I I I I -Coordinatethe planning processfor rural infrastructure ~ -Contractprivateprovidersto implementplans Provinces -Providetechnicalassistance to promotemicro-enterprises -Participateinplanningprocessthrough provincialinfra. boards Districts -Superviseimplementation ~ -Providetechnicalassistanceto communities Communities -Superviseimplementation -Operateand maintain ruralwaterlsanitationsystems Coordination at the central level. Sector-specialized central agencies, including sector regulators when they exist, have a major role to play in ensuring a sound transfer of rural infrastructure responsibilities to local governments. However, the adequate level of regulation will vary across sectors and will require certain degree of flexibility to account for rural specificities (in particular in the waterlsanitation sector). Critical tasks in this regard include: (1) setting regulations and standards to govern activities inthe sectors (e.g., minimum design and construction standards, minimum operational standards, procedures for calculating tariffs); (2) designing the common economic and social criteria which will be used to allocate the resources from the various existing infrastructure funds, for each sector and for each province; (3) providing information and methodological guidance (e.g. the SNIP) regarding rural infrastructure investment alternatives in order to bridge local governments' knowledge gaps and allow them to make rational choices; (4) reviewing provincial infrastructure plans and balancing the regional plans with national infrastructure plans andbudgets; (5) designing the minimumrequirements that local governments have to meet in order to reach a sufficient institutional capacity to administer rural infrastructure 83 interventions by delegating them to private operators (inline with the accreditation process instituted by the CND); (6) assessing whether or not local governments meet these requirements; (7) providing local governments that do not meet these requirements with customized technical assistance allowing them to improve; and (8) monitoring progress made in the delivery of infrastructure services in rural Peru (by aggregating the work performed by the regions). The CND would be a natural candidate to be the national institution in charge of assessing the level of coordination and complementarities, along with the monitoring of the progress. 3.4. ENVIRONMENTAL, INDIGENOUS-PEOPLES AND GENDERFACTORSINTHE PROVISION OF INFRASTRUCTURESERVICES Environmentalassessments. Rural infrastructure projects vary in their possible impacts on the natural environment. Electricity can replace low-efficiency traditional fuels for cooking and lighting and, ultimately, have a positive environmental and health impact (reduced in-house air pollution). On the other hand, improving rural roads' condition may facilitate access to fragile natural ecosystems. Incertain cases, this access can allow the development of income-generating activities that may imply the exploitation of natural resources if not properly managed. In the Selva, there i s a large potential for forestry activities but also high-value niche markets (flowers, exotic and medicinal plants) which could help diversify local economies outside subsistence agriculture. Sustainability has to be ensured in order to maintain the full benefits of such economic potential. Rural infrastructure investment thus requires looking beyondthe direct physicalinterventions and into the possible spillover effects on the surrounding environment. Local capacity to assess environmental impact and propose mitigation has to be developed and ensured in parallel with the transfer of rural infrastructure services to local governments. This means addressing the direct impact of rural infrastructure investments through environmental impact assessments but also including rural infrastructure planning in the broader context of local sustainable development. Some local or regional development plans (such as the Plan for the Sustainable Development of the Amazonian regionj have already tried to adopt such a long-term integrated approach. The alignment of the provincial participatory rural infrastructure plans with existing plans for sustainable local development should be ensured in this regard, while including at the same time this sustainability dimension inthe rural infrastructure planning process. Iti s recommended that environmental sustainability be included in the methodological guidance provided to the prioritization workshops and that provincial infrastructure institutes be trained to include this dimension in their operating procedures (e.g. contracting environmental impact assessments when needed). Gender equity. Rural infrastructure investments also have direct and indirect effects on gender relations. Direct effects are linked with the respective access of men and women to rural infrastructure services, which results in differences in access to income-generating opportunities and welfare improvements. Indirect effects can include, for example, the way and extent to which men or women participate in activities induced by rural infrastructure investments (e.g., maintenance micro-enterprises). In all, the key element to address these 84 potential effects i s the level of internalizationof the gender dimension into the activities of the planning and implementing organizations responsible for rural infrastructure. In the case of waterhanitation services since women are the main users of the services (they wash, cook and take care of children's hygiene), most economic benefits are materialized through them (time savedfetching water could be used for other activities). Therefore, it i s crucial that they are involved in the decision-making process at early stages, inparticular to define project designs and the level of service, and that they participate actively in the JASS and in hygiene education activities to ensure maximization of economic and health benefits. In 1999, an exploratory gender impact assessment was performed by the Provias Rural to analyze gender roles and attitudes, and the differential effects of rural roads on the lives of women and men, with respect to seven issues: access to services, women's mobility, time use in domestic activities, access to resources and benefits, participation in local markets, labor market dynamics, and women's leadership and participation in community organizations. On the whole, this assessment showed generally positive effects of improvement of the rural roads system: facilitation of mobility, communications, access to resources, and participation in the labor market for both women and men, with women reporting a high level of satisfaction with the improvements made. At the end of the first phase of the Rural Roads Program, low levels of participation of women in micro- enterprises was reported but, in the second phase, upon internalizing the results of the impact assessment, a gender action plan was designed and implemented, allowing significant progress to be achieved regarding a greater participation of women in rural roads' planningand management (see Box 4.4). The experience from the rural road sector-achieved through the training of executing institutions ingender issues and equity actions, and the incorporation of specific targets for a set of activities (such as percentage of women and men participating in maintenance micro-enterprises)-should streamline the gender dimension in rural infrastructure planning and interventions. Particular attention should be paid to expression of women's needs in the participatory planning process for rural infrastructure, Comprehensive monitoring of direct and indirect effects of rural infrastructure services and induced economic activities on women's welfare and access to income-generating opportunities should also be performed. This monitoring would-if needed-help corrective actions to be designed and implemented, as illustrated inthe particular case of micro-enterprises. 85 Indigenous Peoples. In the national household survey of 2001 the indigenous population of Peru was estimated to represent 45.2% of the Peruvian population, around 12 million people. This survey also found that 63.8% of indigenous households are poor vis-&-vis 42% of non indigenous households, and 35.3% of the indigenous households are extremely poor vis-&-vis 16.6% of non-indigenous. The majority of the indigenous peoples of Peru live in the highlands and a small fraction in the Amazon region (around 300,000 out of 12 million). As expressed in the indigenous consultations that the Bank has carried out in Peru and as reported in several studies7', one of the most universally expressed desires of indigenous peoples i s to gain access to the basic public and social services offered to other citizens, such as waterlsanitation, electricity, health services, education and markets. Advancing the rural infrastructure strategy represents a major opportunity to implement a more socially inclusive approach for access to infrastructure services by indigenous peoples. This requires that representatives of indigenous peoples or grassroots organizations are fully included in the participatory planning process for rural infrastructure investments, taking active participation in the prioritization workshops. (In the context of the decentralization, the so-called regional and local coordination committees already include civil-society participants, but more should be done to include the above-mentioned representatives.) Furthermore, attention should be paid to possible specificities of indigenous peoples in terms of rural infrastructure needs. For example, rural roads may not be the exclusive mean of transportation in the rural SeEva where river transportation i s more frequently used by most communities. Extending the scope of the strategy to specific transport infrastructures (small wharves) could enhance effectiveness in those rural areas, with high ultimate impact on some indigenous groups. In addition, because of the potential to develop an entrepreneurial capacity and offer income-generating activities, micro-enterprises should also pay attention to indigenous representation. Finally, monitoring capacity has to be built up in order to strengthen knowledge about how indigenous peoples access to rural infrastructure services and what the direct and indirect impacts of these services on communities' welfare and income are. 3.5. INDICATORS, BENCHMARKINGAND MONITORING: TOWARDS AN INTEGRATED PROCESSFOR THE EVALUATIONOFSECTORPERFORMANCE Finding the right mix of social and economic indicators for resource allocation. As previously explained, the right choice of social and economic potential criteria is key to allocate resources to fund the optimal balance. Building on the experience of the various sectors a list of possible core and non-core indicators i s proposed in the table below. Further research should be performed to determine what the most reliable source for these indicators might be and whether they are available at the provincial level. Regarding economic potential indicators, a comprehensive review of existing local development plans "PeruZndigenousPeoples'DevelopmentBackground,PoliciesandProgramStrategy,WorldBank(1998). 86 could help determine whether the proposed indicators capture the complexity of the rural economies in Peru in a reasonable manner. Demand surveys are also required to establish payment capability and willingness to pay by rural inhabitants for rural infrastructure services. Table 4.9. Examples of indicators to assess social conditions andeconomic potentialin ruralPeru o Population lackingaccess to sanitation o Acute diarrheaprevalencerate o Population lackingaccess to electricity services o Extreme poverty rate o Population lackingaccess to telephoneservices o Poverty rate o Percentof rural road network needing rehabilitation o Non-agricultural revenues o Regional, localgovernment and o Number of firms incorporated community willingness to contribute to o Number of exporting firms o Freight carried ontransport infrastructure o Consumersability to pay for operation o Household incomes and maintenancecosts Monitoring inputs, outputs, outcomes and impact. In order to fully monitor the performance of ruralinfrastructure sectors and their impact on poverty and rural income, it i s proposed that an integrated monitoring methodology be prepared. The methodology should follow the logical flow of expected effects from inputs, to outputs, outcomes and, ultimately, impact (see Figure 4.4). Particular attention should be paid to building an efficient and reliable monitoring capacity, preferably at the regional level, and buildingon existing measuring instruments (e.g. household surveys). Experience gained by the NationalStatistics and Information Institute(INEI) could be useful inthis regard, as well as successful monitoringinitiatives such as the Citizen Report Cards (see Box 4.5). 87 Figure4.4. Towardsa comprehensivemonitoringframework INPUTS Fundingfor increasingrural infrastructurestock(new infrastructureand rehabilitation) Technicalassistanceprovidedto local governments by central agencies Participatoryplanningto prioritizeinvestments Creation of a soundenvironmentfor private sector involvement Integrationof environmentallgenderlethnicdimensions * I OUTPUTS I Ruralinfrastructurecoverage(access, affordabilityand quality of services) Number of localgovernmentsreachingsufficientinstitutionalcapacity, includingtargeting the inclusion of environmental/gender/ ethnic dimensions Degreeof privatesector involvement(number and amount of contracts, micro-enterprises) OUTCOMES Use of services (by poor households, bymen/women, by ethnicgroups) Improvementof rural Peru'scompetitiveness(businesscommunity's perceptionof the quality of rural infrastructureservices) Performaneeof decentralizationreformsin Peru Employmentscreatedin ruralareas(by micro-enterprises) + IMPACT 1 1 Reductionof poverty and extreme poverty in ruralareas Diversificationoutsidesubsistenceagriculture Reductionof gender/ ethnic inequalities Creation of sustainableruraleconomies and contributionto nationaleconomy 3.6. CONCLUSION The proposed agenda is neither over ambitious nor unrealistic. On the budgetary side, the additional proposed effort i s incremental compared to the overall amount of public investment and it wouldjust mean comingback to levels observed five years ago before the fiscal situation imposed a dramatic decrease to public spending in infrastructure. On the institutional side, the strategy i s aligned with Peru's decentralization agenda and it i s not involving radical changes that may be conflicting with on-going reforms. On the contrary, the strategy i s expected to make a significant contribution to the decentralization process through the strengthening of local institutional capacities, the timely transfer of planning and operational assignments to local governments and the clarifications of responsibilities between the various levels of government. Onthe development side, the proposed approach 88 would help enhance rural productivity and promote diversification outside the agriculture sector, in line with other existing rural development strategies for Peru. In addition, the territorial approach to planning i s expected to promote the emergence of productive poles in rural Peru as well as the strengthening of rurallurban linkages that could reinforce the network of Peruvian secondary cities. Finally, some of the proposed recommendations have already been successfully experimented by some infrastructure sectors. In such cases, the strategy has tried to promote cross-fertilization across the various sectors and to build on these successful experiences. Progress already achieved provides strong evidence that the proposed institutional scheme i s already working. In particular the provincial road institutes have proved to be an efficient mechanism for rural road management, and their success i s a valuable argument that small and agile institutions such as the provincial infrastructure institutes could be successful in organizing planning, fostering private sector participation andproviding technical and managementexpertise. The strategy has also tried to keep some options opened and, in such cases, to describe the trade-offs involved and to propose a methodology to solve them out. The issue of subsidies i s one of the areas where further analytical work will be needed in order to propose a revamped subsidy framework for rural infrastructure. Similarly, the approach to measuring the economic potential of a territory will also require further research. Insum, while ambitious, the proposed agenda is indeed achievable if buildingon both the momentum created by the on-going decentralization process and on the existing positive reforms implemented in each the four infrastructure sectors. The proposed roadrnap could have a major impact inbringingnew opportunities andreducepoverty i s rural Peru. 89 BIBLIOGRAPHY Background studies to the current strategy Aragon, Ismael. 2004. "Andisis de la Provisidn de Sewicios de Electrificacidn en las Zonas Rurales del Peru'' Azcueta, Michel. 2003. "Andisis de Capacidadesen 10s Gobiernos Locales del Perk" Dianderas, Augusta. 2004. "Estudio para la Definicidn de Criterios de Priorizacidn de las inversiones y de Medicidn de la Eficiencia de la Provisidn de Sewicios de Agua Potable y SaneamientoRural" Escobal, Javier and Torero, MAximo. 2004. "Andisis de los Servicios de Znfraestructura Rural y las Condicionesde Vidaen las Zonas Rurales de Peru" Luna, JosC. 2004. "Situacidn de 10s Sewicios de Transporte en Zonas Rurales del Peru" Rodriguez, Miguel. 2004. "Anrilisis de Gastos de Znversiones y en Provisidn de Servicios de Infraestructura Rural y su Comparacidn con la Evolucidn de 10s Indicadores Socio- Econdmicos de las Areas Rurales en Perd" Tavara, Jose. 2004. "Estudio para la Definicidn de una Estrategia de Fortalecimiento y Expansidn del Program de Telecomunicacionese Info-centros en las Zonas Rurales del Peru" References Bahl, Roy -Implementation Rules for Fiscal decentralization-World Bank (1999). Bebbington, A. 1999."Capitals and Capabilities: A Framework for Analyzing Peasant Viability, Rural Livelihoods andPoverty." World Development, Vol. 27, No. 12, pp. 2021-2044. Brenman, A. andM.Kerf. 2002. "Infrastructure andPoverty Linkages: A Literature Review." World Bank, Washington, D.C. Calderon, Cesar and Serven, Luis. 2004. "The Output Cost of Latin America's Infrastructure Gap," inEasterly andServen, Op. Cit. CND (Consejo Nacional de Descentralizacidn) - Infome Anual Presentadoante el Congreso de la Republica (2003). CND - Plan Nacional de Desarrollo Territorial 2004-2013, Construyendo el Perd de la Prdxima Dkada -Preliminary versi6n (January 2004). De Ferranti, D, Perry, G.,Ferreira, F.H.G., and Walton, M. 2003. Znequality in Latin American and the Caribbean: Breaking withHistory ? The World Bank DFIDandWorld Bank, 2003, Peru: Vocesde 10s Pobres,Lima, Peru(Abril) 90 Easterly, W. and Serven, L. - ed. 2003. The limits of Stabilization: Infrastructure, Public Deficits and Growth inLatin America - Stanford university Press andThe World Bank. Escobal, J. and C. Ponce. 2002. "The Benefits of Rural Roads: Enhancing Income Opportunities for the Poor." GRADE Working Paper 40-1. Lima, Peru. Escobal, J. 2001. "The Determinants of Nonfarm Income Diversification in Rural Peru." World Development, Vol. 29, No. 3, pp.497-508. Estache, A., V. Foster and Q. Wodon. 2001. Making Znfrastructure Reform Workfor the Poor: Policy Options based on LatinAmerican Experience.World Bank, Washington, D.C. Farkos, C. 2003. "Providing Rural Infrastructure Services to the Rural Poor: Lessons from DevelopedCountries." Consultant to the World Bank. G6mez-Lobo, A. 2001. "Designing Output-BasedSubsidiesfor Water Consumption." Viewpoint Note. World Bank, Washington, D.C. Grootaert, Ch., and Oh, G.T. 2001. "Rural Infrastructure Synergies: An Example from Peru." Mimeo of Rural Infrastructure Thematic Group, not processed. World Bank, Washington, D.C. Harrix, R.W., A. Kumar and V. Balaki. "Sustainable Telecenters ? Two cases from India." The Communication Initiative(http://www.com~nit.co~st2OO3/sld-7727.html) International Telecommunication Union (ITU) (2004) "Strategy for the development of rural telecommunications and universal access in Peru: Fund for Investmeni in telecommunication (FITEL)" IPE (Znstituto Peruano de Economiu) (2003) "La Brecha en Infraestructura, Servicios Pbblicos, Productividad y Crecimiento en el Perti". Mathys, A. and S. Claure. 1999. "Estudio de costos de proyectos rurales que proveen agua en la Regi6nAndina." World Bank, Waterhanitation Program, La Paz, Bolivia. Navas-Sabater, J., A. Dymond, and N. Juntunen. 2002. "Telecommunications and Information Services for the Poor: Towards a Strategy for Universal Access." World Bank Discussion PaperNo. 432, Washington, D.C. Pan-American Health Organization (PAHO). 2001. "Desigualdades en el acceso, us0 y gasto con el agua potable en AmCrica Latina y el Caribe." Serie Informes TCcnicos No. 3, Washington, D.C. Public-Private Investment Advisory Facility (PPIAF). 2004. Fostering Private Sector Provision of Infrastructure in Rural Peru, prepared by Intelecon-ITC-ITDG, The World Bank, Washington, DC, August. Pouliquen, L. 1999, "Rural Znfrustruc~urefrom a World Bank Perspective: A Knowledge~unugementFramework." World Bank, Washington, D.C. 91 Proenza, F., R. Bastidas-Buch and G. Montero. "Telecentros para el desarrollo econdmicos y rural en Amkrica Latina y el Caribe." Washington, DC: FAO, IUT, BID, 2001 (http:l/www.iadb.or~lict4devltelecentrosl) Reardon, T., Berdegud, J. and Escobar, G. 2001. "Rural Nonfarm Employment and Incomes in Latin America: Overview and Policy I~plications."World Development, Vol. 92, No. 3, pp.395-409. Schady, N. Picking the Poor: Indicators for Geographic Targeting in Peru, Princeton UniversityNVorld Bank (1999). Schejtman, A, and Berdegud, J. A. 2003. "Desarrollo Territorial Rural." Working Paper prepared for the FDA and the IDB. Centro Latinoamericano para el Desarrollo Rural, International Framing Systems ResearchNetwork (RIMISP). Songco, J. 2002. "DORural Infrastructure InvestmentsBenefit the Poor? EvaluatingLinkages: A Global View, Focus on Vietnam." World Bank, Policy Research Working Paper 2796, Washington, D.C. Vergara, R. 1999. "Estrategia de Desarrollo Rural para la Sierra Peruana: Desarrollo Productivo." Mimeo. SASE, Lima, Peru. World Bank, A RuralDevelopment Strategyfor the Peruvian Sierra, Mimeo (June 2002). World Bank, 2004. Rural Infrastructure in Chile, Enhancing Efficiency and Sustainability, Report No. 290037, Finance, Private Sector and Infrastructure Unit, Latin America and the Caribbean(May 23). World Bank, World Development Report 2004: MakingServices Work for Poor People 92 ANNEX 1.THE CONTRIBUTIONOFINFRASTRUCTURETO INCREASINGTHE INCOMEAND WELFARE OF RURAL POPULATIONS Physical infrastructure has long been considered an important determinant of economic growth. 72 Aschauer (1989), for example, finds very large returns to public capital in the United States. Canning, Fay and Perotti (1992, 1994) estimate large growth effects of physical infrastructure. Easterly and Rebelo (1993) find that public investment in transportation and communication is consistently correlated with economic growth. Lee and Anas (1992) find lack of infrastructure, particularly lack of a consistent supply of electricity, to be a major constraint on firms in Nigeria. Antle (1983) finds a significant role for infrastructure in agricultural productivity in developing countries, The micro-economic impact resulting from infrastructure services' availability have been described in a number of studies. The availability of infrastructure services is generally correlated to an increase in household income. Inrural areas, the bulk of infrastructure services' contribution to raisinghousehold income comes from three main effects: diversification of economic activities (in particular outside subsistence agriculture in rural areas), increase in working hours and improvement of productivity (e.g. by facilitating access to modern technologiessuch as fertilizers). Table 1. Examplesof Interactionsbetween RuralInfrastructure and Economic Performance Transport Greater productivity of for 50% of marketingcosts, which inturn accouit for 25-40% of the - 1 businesses costs of agriculturalproducts, Thus, agricultural products with higher - transportation costs will be significantly less competitive Access to InEthiopia, a 1994 survey showedhat the probability of using cheaperhetter fertilizer increased by 9 to 22% in seven regions because of cheaper goods and services costs if a farmer had access to an all-weather road. Increased InthePhilippines, after construction of ruralroads, studiesinaffected- household villages showed that gross household income increasedby 28%, income largely due to a 54% reduction inthe cost of transport. Higher fiscal InMorocco, a 1985study after aruralroadproject showedthat tax returns revenuesinthe project zone had increasedfrom Dh1,500 to Dh10,OO in 10years -______ Energy Greater I n Peru, electrification allowed a dairy collective to increasethe price productivity of per liter for milk from US$0.06 to 0.11becauseof improvements in businesses product reliability Economic Basedon household surveys inPeru, access to electricity increasesthe diversification share of ones income from self employed non-agricultural activities-- Information Increasedper A study growth statistics between 1960and 1989for Sub-Saharian and Com- capita income Africa and Latin America showedthat telephoneper worker was munication significantly correlated with real per capita GDP growth technology Waterlsanita Increased A 1998survey inHonduras showedthat families inthe lowest income- tion household quintile that didnot haveaccess to water inthe housecould expect to income see a 7% increasein income if they had access and a 11% increasefor access to piped sanitation services. Economic A 1998 study inNicaragua showedthat access to clean water was diversification strongly correlated with non-farm self employment. 72CANNING, David, World Bank 1998. 93 There is also large evidence of the contribution of infrastructure to poverty alleviation and welfare enhancement. 73 In addition to their direct effects on economic growth and income generating activities (and hence on poverty), infrastructure services have important consequences for households' welfare: better transport means easier access to social services (education and health), safer water means better health, electricity means longer time for children to study, cleaner fuel means less respiratory diseases, ICT means access to knowledge and education. In some cases, infrastructure also contributed to the empowerment o f women. Table 2. Examplesof Posil ve Interactionsbetween Infrastructure and Welfare InNigeria, 2 studiesshowedthat the average travel times from 1 farms to village for farmers were 18 minutes without roads and 8 minutes with roads Improved safety In 1991inEasterdCentral Europe, the annualcost of traffic accidents was estimatedto 1.5% of GDP Lower transportation InMorocco, an improvement programof the quantity andquality " costs of rural roads increasedthe percentageof trucks by 500%, resulting ina 50% decreaseintransportation costs. InMorocco, after aroadrehabilitation program, visits to hospitals healthcare by women increasedfrom 1.1to 2.3 and to health care centers from 2.4 to 3.1 InMexicocity, 40% of leadaccumulation inthe bloodof school environmentallnoise children was attributed to their exposureto areas with heavy ollution vehicle traffic Easier establishment InBrazil, after the implementation of afeeder-roadsproject, the of health centers number of inhabitants per hospital bed decreased from 740 to 630 inoneofthe region Ina series of studiesona total of 769 householdsinZambia, Ghana andTanzania, surveys showedthat when trips to collect water were only 5 or 15 minutes, 10.4 liters of water per day were consumedby each family member whereas, but when the walk was 33 minutes, daily consumption sunk to 7.9 liters Greater energy and InBhutan, girls enrollment inschoolsis 3 times higher invillages time to channel to which are 0 to 0.5 days walking time from a road than in villages education and easier which are 1to 3 days walking time from a road. access to the school Easierestablishment InMorocco, arural roadproject producedanincreaseinthe of schools project zones from 3 to 13.5 (compared to 2 to 3 in"control" zones) Increased Women located in a village on a main road inCameroon were empowermentof able to spend more time producing food to sell, and made an women average income of 570USD, comparedto 225USd for women in an isolated village, one and a half hours from the road. Energy Improvedaccess to Basedon a 1980survey inColombia, electrification allowed43% information of men and 44% of women to spendtime watching TV compared to 0% before electrification when TV was unavailable Less respiratory Itis estimated that exposureto wood smoke, usually fromthe use illness because of of biomass fuel for cooking and lightingaccounts for one thirdof all nasopharynx and larynx cancer in South America ''An extensive literature review i s presentedinBrenneman, A, and Kerf, M.2002. "Infrastructure and Poverty Linkages: A Literature Review," The World Bank, mimeo. 94 I Increasedliteracy and A 1980survey inColombia showedthat 72% of children readin time for reading the evening if they hadelectricity comparedto only 43% without becauseof improved electricity lighting Increasededucational A 1986survey inHonduras showedthat there were a strong and performance due to positive correlation betweenthe percentageof schoolsinatown improved school with electricity and the educational attainment of its student. quality becauseof electrification Increased According to householdsurveys inPeru, the use of biomass fuel empowerment of sources i s strongly and negatively correlated with the portionof a women woman's day that i s devoted to self-employment, while being positively correlated with the portionof a woman's day devoted to housework Increasedaccess to A 1999study of 20 LatinAmericancountries showedthat and Com- information, culture internet usage was strongly and positively correlated with ! munication and entertainment teledensity as expressed% main-lines per 100 inhabitants technology Improvedquality of education Radio Instruction, 22.5% without + Improvedaccess to Inthe Caribbean, useof atelephone-basedconferencesystem education allowed an university to offer a conferenceat a cost of 10times lower it would havecost if it hadbeenheldface-to-face Easier citizen Ina 2000 survey inArgentina, 15%ofNGOsreportedthey use participation -- the Internetto gain access to municipalinformation Waterlsanita Lower costsof water InParaguay, families connectedto apiped-water systemreported tion a 8% savings infamily income as a result of not havingto purchasebottled water from vendors Improvedhygiene A 1996survey inBrazilhas shown that 63% of the and health betweenrich and impoverished people could be explained by the lack of access to sanitation and water services Finally, Box A.1 presents the positive impacts o f rural infrastructure along the dimensions of economic opportunities, capabilities, empowerment and vulnerability, all in an attempt to include rural inhabitants and economies into the overall functioning of the national economy by increasing opportunities for rural populations. 95 96 ANNEX LA. RURALTRANSPORT A Status of ruraltransport infrastructureand services - Peru's road network consists of about 78,000 km, classified in three levels: national, regional and ruralroads, with lengths of about 17,000 km, 14,000 kmand47,000 km, respectively. In addition, there i s a large, unknown number of unclassified tracks that connect the dispersedpopulation to the ruralroad network. The table inthe next page provides a snapshot of the main characteristicsand statistics of the Peruvian rural transport sector and their comparison to those in similar countries. The table shows that: Road density is lower in Peru compared to the compared to South American average or to countries with similar level of development. Whichever way density is calculated (relative to geographic area or to population), road coverage is significantly lower in Peru when compared to the South American average or to countries with similar level of development. The situation i s evenworse for pavedroads which representonly 13%of the total-network. A large portion of the rural road network is in bad condition and only 8% of the tertiary roads are in good or average condition. According to the 2002 Global Competitiveness Report, firms rankPeru54* out of 75 countries (10" out of 17inLatinAmerica) for roadquality. As a result, availability of roads in good condition is low inruralPeru: a year 2000 household survey shows that only 28% of the population hadaccess to aroadingood condition. 74 Up to 1995, the rural road network, without a clear entity responsible for its management, was largely in poor condition, hampering the access for poor rural communities to the secondary and main networks, markets and social services. Acknowledging the importance of access to the reduction of poverty and improvement of the living standards of the rural populations, the Governmentof Peru initiated (with support from multilateral organizations) a major effort in 1995 ; upgrading the condition of the rural road network, through the rehabilitation of existing infrastructure, and establishing mechanisms for the maintenance of this infrastructure on a sustainablebasis. This effort took the form of the so-calledProgram of RuralRoads (or PCR for its Spanish acronym, later renamedProvias Rural). Since 1995, under the two phases of the above-mentioned Program, Provias Rural has undertaken the rehabilitation of about 9,000 km of rural roads (and another 2,700 kms of connecting departmental and national roads) and about 5,000 km of non-motorized (NMT) tracks, in the 12 departments that rank among the highest in rural poverty, most of them located in the highlands of the Peru Sierra. These lengths represent about 30 percent of the rural roads in those departments, The program further contributed to the sustainability of the rehabilitated network with the formation of about 500 maintenance micro-enterprises. The rehabilitation of the rural road network has impactedthe lives of about 3 million rural people, of which about 82% were poor. 74 Some recent work performed by the World Bank has shown that, on average, for a group of 24 IDA-only countries, 43% of rural dwellers had access to an all-seasonroad. This percentagehowever is not directly comparableto the 28% reported in the text because "all-season" does not equate to "good condition." 97 Good condition Average condition Bad condition Paved Total Primary road network (km) 1999 3,912 6,848 6,220 8,320 16,980 Secondary road network (km) 1999 2,156 634 11,461 1,136 14,250 Tertiary road network (km) 1999 282 3,593 43,095 940 46,970 Total road network (km) 1999 6,350 11,075 60,776 10,396 78,200 % pavedroad 1999 13 Peru South Countries wl similar level of development America Including China Without China Roaddensity (km per 1,000 people) 1999 2.8 7.1 1.6 3.9 Roaddensity (kmper km2) 1999 0.06 0.14 0.13 0.12 Pavedroad density (kmper 1,000 people) 1999 0.37 0.76 0.59 2.17 Pavedroad density (kmper km2) 1999 0.007 0.015 0.049 0.068 % rural hhds wl access to good condition road - 28 NA NA NA Peru Regionalcomparators Income comparators Roadquality outside major city (1: only allow low speed) 4.3 4.4 4.2 Competition intransport sector (1:none) 3.7 3.9 3.7 Central funding instrument PROVIAS Rural (on-going decentralization process) Theoretical annualfundingfor rural roads (according to WBlIDB program) 45 millionUSD with WBlIDB support Annual funding for rural roads observedin 1998-2002 36 million USD K u a lfunding for entire road network in 1998-2001 __ 297 millionUSD Share of funding for rural infrastructure 12% Annuhl fundingrequired for the next 10years to rehabilitate and maintain 60 millionUSD half of the rural road network PLANNING INFRASTRUCTURE Planninginstrument Provincialand district plans Involvement of local actors inplanning Significant Local actors which are the most involved Provincial municipalities % of municipalities involved ina rural road program 34% Central agencies prioritize territories to allocate funding YES (at department andprovinciallevels) Criteria usedby central agenciesto prioritize across territories For departments : For provinces : Coverage(33%) Coverage(27%) Rural population (33%) Rural population (27%) Extreme poverty (22%) Extreme poverty (27%) Non-extreme poverty Financial capacity (7%) (22%) Past involvement (7%) Managementcapacity (7%) Who prioritize across projects Localgovernments Criteria usedto prioritize across projects Social (65%) Demandfor mobility (10%) Access to public services (5%) Access to villages (10%) Access to tourist zones (10%) Construction Private Control and supervision of construction MTC with participation of municipalities Operation and maintenance MTC but transfers to provincial municipalities; maintenance Derformedbv micro-enternrises 98 The networks in the rest of the departments, however, have not had the same level of attention, if any. Inthe Selva, where natural rivers often constitute the main method of transport, Provias Rural initiated a pilot in 2004 in order to identify the specific transport needs of the Selva regions and advanced investment solutions. In addition, complementary investments and institutional building actions are beingundertakeninother departmentsinthe context of the decentralization of functions to the provincial and district municipalities. In this context five new departments have been incorporated in the program, with the rest to follow gradually, all following the decentralized methodology being implemented by Provias Ruralinthe sectionon "issues and strategies." In rural Peru, transport services for both passengers and freight are provided by private local operators. The low levels of local (mostly agricultural) production and the often dispersed demographic distribution leads to relatively low supply of services. This supply i s often more limited when the condition of the road i s poor. The Rural Roads Program has shown that improvements of road conditions has an immediate positive impact in the reduction of transport costs and subsequently the availability and reliability of transport services (as measuredby increase intraffic volumes andfrequencies and decreases in freight tariffs) and better road conditions, with less road closures. In addition, when in poorly accessible villages where less than 20 percent of households' income comes from wage-earning activities, this percentage was observed to be between 45 and 50 percent once transport access was improved. Furthermore, the enhanced condition of vehicular traffic appears to lead to noticeable improvements in the access to social services.7s The table on the next page summarizes the figures that resulted from a survey of transport services ina sampleof villages inthe three regionsof Peru-Costa, Sierra and Selva. 76 The table highlights that: Inrural Peru, transport services are mostly usedto trade goods and services locally. More than 60% of trips performedinrural 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 i s a typical distance in Peru to access an urban center (e.g. district municipality 77)from rural areas. Indeed, this type of trips i s characteristic of rural-arban linkages. Transport i s 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 inthe 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 i s a major source of inefficiency for the rural economy because it increasestransactiodwaiting 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). 75World Bank, "Implementation CompletionReport for the Rural RoadsRehabilitation and Maintenance Project," Report No. 22094, June 25, 2001. 76Luna, 2004. 77The average size for a district municipality inPeru i s 640 km2, Le. a square of 25 km. 99 e Transport services are expensive. The poor densitylquality 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 replacementof tires (with 34% incidence inthose costs), Inaddition, transporterstend to managetheir 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-50kg-merchandise" can be estimated to US$2-3, Le., betweenathirdand half of their weekly income. IAVAILABILITY OF SERVICES >once a Ionce aday I 4-6 times a 1 1-3 times a I Irregular 100 B Institutionalframework - Inthe past, the concurrenceof responsibilities betweenthe different levels of government generated confusion and hindered the development of institutional capacity in municipalities. While the Municipal Organic Law of 1984 requiredthat municipalities (both provincial and district) maintain and managethe rural road network, the Transport Law of late 1999 extendedsuch competencies to the Ministry of Transport. In this context, the municipalities were mere spectators of the activities on their road networks, In some cases, when municipalities owned heavy works equipment, they try to secure the complimentary resources from the national entities to undertake mechanized activities by force account. Often, they lacked the capacity to planand managethe networks under their respectivejurisdiction. Since 1995 and up to December 31, 2002, all roads were under the jurisdiction of the national government and, particularly, the Ministry of Transport and Communications (formerly, the Ministry of Transport, Communications, Housing and Construction). Rural roads were managed through the now-renamed Provias Rural, a semi-autonomousimplementing unit under the Ministry of Transport. Since end 2001, a second phase of the program has been underway, now with an additional mandate: to define and advance the framework for the decentralization to rural municipalities. With this mandate, the Provias Rural has gradually transferred the responsibility for the management of rural road networks to the so-called Provincial Road Institutes (or IVPs, for its Spanish acronym). These entities-up to 24 by March 2004-have been built-up at the provincial level with a supervisory board that includes the mayors of the provincial municipality and of the district municipalities in the correspondingprovince, taking into account the needto pool technical skills, to develop road plans and programs and to manage the contracts for the maintenance of the networks. Increasingly, additional responsibilities for rehabilitation studies and works are being transferredto the IVPs. Beyond physical infrastructure, the Directorate of Surface Transportation of the Ministry of Transport i s responsible for the norm and regulations of the provision of transport services, both for passenger and freight transport, and for road safety. The norms and licensing regulations or local traffic are to be enforced by provincial municipalities (and for moto-cars-the so-called moto- taxis-and similar type of vehicles, by the district municipalities within which they operate). Both provincial and district municipalities are responsible for collecting tickets or fines from traffic infractions (with support from the National Police). Insurance and registration regulations are issued by the INDECOPI, and their enforcement is entrusted to the level where the particular passenger or freight transport service operates. Finally, technical norms for the design of roads are issued by the Ministry of Transport andCommunications through its General Directorate of Roads. Resourcesfor investment inrural transport infrastructure have largely originated inthe central level since, on the aggregate, municipal revenues come mostly from property taxes and cover only about 46% of their total expenditures. This situation has been more difficult in small and rural municipalities, as legislation precludes the imposition of levies on rural lands and property taxes thus limiting their revenue base to the amounts generated by the alcabala tax (a tax on property transactions). The resulting fiscal deficit has been covered through intergovernmental transfers, mostly from the Fondo de Compensacio'n ~unic~paZ (FONCOMUN). In 2000, the use of FONCOMUN resources (limited until then to capital expenditures) was made more flexible to allow the use of them to cover certain recurrent costs and, in particular, those involved in the maintenance of road assets. With this, increasingly, provincial municipalities-almost the 100+ 101 universe of those where the Provias Rural i s supporting the rehabilitation of their networks-and the district municipalities within their jurisdictions are covering the upkeep of their rural road networks (with the total cost assumed by those municipalities when the responsibilities have been transferred to the IPVs-about 25% of that universe-and with 50% share in the remainder of the municipalities). C KeyIssues and Strategies - C1 Prioritizationof interventions - Planning methodology. The current planning methodology emphasizes social criteria but the potential for local economic development i s also taken into account. The planning of rural road rehabilitation and maintenance programs i s performed in two stages: first, PROVIAS Rural pre- allocate fundingat the department andprovincial levels, then, within this given budgetary envelope, local governments select the projects to be financed. Criteria for pre-allocation and project prioritization are mostly social (coverage, poverty levels, rural population, access to public services) but institutional issues (local governments financial and management capacities) and economic potential (mostly those that stem from increased agricultural and livestock production and productivity) are also taken into account. The importance of social criteria in planning rural roads projects explains why per capita investment intensity i s significantly aligned with rural poverty levels. However the current evaluation methodology encounters difficulties in its application due to the lack of updated data on agricultural and non-agricultural production and the fact that a formal population census has not been undertaken since 1993, To compensate for this deficiency, the Provias Rural is expecting to carry out a sequence of baseline data gathering to track impacts in ruralareas and compared them to a control sample. The results of these impacts should help better refine the evaluation methodology. Nonetheless, the Government should reinstate the population and production censuses to establish the information base to carry out formal evaluations of programs inrural areas. Designof interventionson ruralroadinfrastructure. The focus of the interventions has been on achieving a certain level of transitabilitylaccessibility and reaching out to the largest number of beneficiaries through cost effective mechanisms for the rehabilitation and maintenance of the infrastructure. Inthis respect, the interventions under the rural roads program proved that low cost rehabilitation (without paving) can provide the improvement to the access necessaryfor facilitating trade and social relations as well as eliminate situations of isolation (when motorized traffic levels are below 50 vehicles per day). This rehabilitation requires sustainedroutine maintenanceactivities (those performed by the micro-enterprises) and periodic maintenanceevery 4 to 6 years depending on the climatic and topographic conditions of the road. This rigorous maintenance regime ensures accessibility at afraction of the cost of paving. To complement this technological perspective, the Government is also proceeding with the definition of new technical specifications for low-volume roads, in order to accommodate to the extent possible (since in mountainous terrain, widening the shoulders is often extremely expensive) those designs to areas with very low traffic and include non-motorized transport alternatives. (The latest geometric design norms were developed in 2001 but they did not incorporate those considerations).78 78Forinstance,the shouldersare up to 0.3 meters which would not allowNMTto circulatealongside motorizedtraffic of higher speeds. A compromisebetweenthe widthof the mainsurface andthe needs of 102 Funding levels. Current funding levels for rural roads are insufficient to fill the gap with comparable countries. During the period between 1998-2002, average annual funding for rural roads amounted to US$36 million (12% of total road expenditures), with a decreasing trend. Lack of counterpart funding under fiscal constraint has prevented the country to reach yearly funding levels of US$45 million as initially designed under a joint World BanklIDB supported rural road program. Incomparison, the rehabilitation and the maintenance of half of the rural road network in bad condition over the next decade would require an annual fundingof about US$60 million. C2 Efficiency of operationsand institutionalframework - Operations and maintenance. Routine maintenance has been performed through the system of micro-enterprises. These micro-enterprises are a cost-effective maintenancesystem for the upkeep of the road network and have created employment opportunities for the ruralpopulations involved (or about 4,800 jobs). In addition, the initiative of maintenance through micro-enterprises has created entrepreneurial capacity in the communities involved and acted as catalyst for other local developmentinitiatives. The benefits, then, have gone beyondthe up-keeping of roads. This maintenance strategy has emphasized contracting out of maintenance activities (through the micro-enterprises) and phasing out of force-account by municipalities with their own staff and heavy equipment. The experience has been that, even for emergencies, it is more cost-effective to contract out the activities,. than to hold a costly equipment pool that requires scare additional expertise, replacement parts that are often hard to find, and the proper upkeep of that equipment. (To reduce the burden of the equipment, municipalities sometimes rent the equipment to private contractors. These arrangements require rental agreements that are difficult to draft and costing proceduresthat often do not reflect the actual amortization and operatingcosts of that equipment.) The current maintenancemechanismsshould continue to be strengthened, keeping the elements that make the performance of micro-enterprises accountable to local authorities and communities. Specific actions include the increasing incorporation of competition after several years of experimentation with rotation of micro-enterprise staff among the members of the community. ProviasRural has recently initiated the tendering of maintenancecontracts, allowing proposalsfrom micro-enterprises and contractors alike-with apparent positive success as most of the selected proposals corresponded to micro-enterprises. In all, these actions should enhance maintenance activities and reducedtheir cost, more closely tailoring those activities to the specific conditions of the roads and the efficiency of the contractedparty. Institutional capacity at the provincial and district level. The proper management of the rural road network requires the strengthening of capacities at the local (municipal) level. The Rural Roads Program is leading an effort to build up institutional capacity at the local level, develop of knowledge at the municipalities on planning and budgeting systems, including participatory approaches, and use labor-based methods and contract arrangements, through the demonstration of the positive impacts of the components of the program itself. In addition, an analysis of the constrains that may prevent municipalities from assuming their responsibilities in rural road management and financing showed that they lack the financial capability to assume the full responsibility over the roads within their jurisdictions. The incorporation of flexibility in the use of the municipal compensation fund (the so-called FONCOMUN) has allowed municipalities to co- finance the maintenance costs and initiate the sharing of responsibility, representing an effective ~ NMTmustbereachedto accommodatethis type of traffic while avoidingasubstantial increaseinthe investmentcosts. 103 step in the transition toward decentralization. This flexibility was incorporated by law in 2001and currently municipalities co-financed (up to 43%) the costs of maintaining the roads within their jurisdictions. For those with anIVP, they have assumed 100%of the maintenancecosts. To further strengthen the capacity at the local level, and take the need to pool technical skills into account, the program has established provincial road entities (so called, Institutos Viales Provinciales) in a gradual manner. About 25 IVPs have been created over the last 12 months, encompassing about 28 provincial municipalities and 150 district municipalities. These entities are entrusted with full management responsibilities over the rural network within the province (covering the provincial municipality and the corresponding district municipalities) and receive technical assistance and financial support (to bridge the gap not covered with the municipal co- financing resources) from the Program of Rural Roads. These provincial entities are gradually becoming the decentralizedagenciesin the transport sector, with specific agreementsmade with the municipalities within the pertinent geographic area. Inthe cases where the IVPs have beencreated, these entities have become fully responsible for the financing of the management of the road networks, using the resources from the FONCOMUN and a portion of the transfers received under the annualbudget. Institutional framework. The decentralization to the provincial and district municipalities (specifically, to the IVPs) will require an evolving and diminishingrole of the central entity-the Provias Rural-refocusing its role towards an emphasis on normative, technical assistance and monitoring activities, while municipalities assumed responsibilities for planning, contracting, and managementof their rural networks. Another element of this framework and of the capacity efforts is a need to focus on the reguatory functions of those municipalities (intandem with those being assignedto Regional Governmentson safety regulations andon passenger andfreight services of a regional nature). Given the low levels of traffic on ruralroads, the regulatory framework has not yet beenan impediment to the provision of the limited amount of rural transport services. However, as traffic increases, the capacity of provincial and district municipalities to enforce those regulations requires strengthening. C3 Effectiveness to achieve impacts - Institutional build-up. The results of the Rural Roads Program show that a gradual decentralization strategy combined with efficient delivery and maintenance systems can provide substantial impacts in a cost-effective manner. This process requires two key elements: (a) a sustained and incremental process, to build up capacities at the local level in the context of the implementation of positive experiences and ensure the ownership of the transfer of responsibilities and the commitment to allocate resources to attend those responsibilities; and (b) development of accountability, benchmarking and reporting systems, towards monitoring performance and creating incentives to achieve comparative performance. These elements imply training and strengthening the organization of municipalities, developing skills and appropriate management tools, and channeling the voice of users appropriately (the latter to establish a constituency to whom the local entity becomes accountable). In this respect, in the context of the suggested institutional framework described in the previous section, the sector must develop the monitoring and benchmark indicators that would allow for the observation of the progress in the decentralization as a whole and in municipalities (and regional governments). The National Decentralization Commission (or CND for its Spanish acronym) in coordination with the Ministry of Economy and Finance (MEF) has established an accreditation mechanism for the transfer of resources to regional and local governments (those for rural roads 104 rely on the process andproceduresbeing followed by Provias Rural) and i s expectedto implement a mechanism of performance reporting to measure the mentioned progress-including that of the transport sector. Inter-sectoral coordination. As reported in evaluations of rural roads interventions, development impacts can be maximize if, for an area with potential economic potential, a particular sector is complemented with interventions in other infrastructure sectors. In addition, the support to the identification and concept development (marketing) of the possible economic opportunities at the local level can further help the synergies among infrastructure and economic opportunities and lead to a sequential (if not simultaneous) coordinated strategies and actions that are territorially-based rather than defined from a sector perspective. Provias Rural has initiated this effort with the (technical assistance) support of the so-called "Local Development Window," The continued deepening-albeit gradual-of the decentralized framework should further help inthis direction, as the identification of needs and the solutions to attend them will take place at the municipal level. The designof the planningand implementing structureto pursuethis strategy is still pending. Non-motorized tracks. Access to rural roads in good condition represents a necessary condition for enhancing the opportunities of rural areas. In some areas of the rural Peru, however, particularly inthe Selva and Sierra, a scattered population live beyond the vicinities of those roads. For these inhabitants-largely very poor-access can be achievedwith cost-effective interventions on the non-motorized tracks that connect their households to the rural roads, These tracks, exclusively used by pedestrian and animal passage-the so-called "caminos de herradura"-have been upgraded by the Provias Rural and proved to provide a high impact at low cost, with the participation of the communities along their alignment (who normally contribute their labor). These efforts should continue their mechanismstransferredto the local level provincialand district, and maintenanceactivities should be strengthenedto preservethe rehabilitation investments. Transport services . A final issue relates to the effective supply of transport services and the extent to which this supply meets demand, in light of the improvement to the transport infrastructure. The information collected through surveys appears to show that private providers respond quickly to enhancements of the infrastructure with increases in frequency and quality of services and reduction of costs. Nonetheless, prices remain high in relation to rural incomes and further researchshould shed light on the potential bottlenecks and avenues to overcomethem. This issue also pertains with its particularities to the Selva region, where the only available access takes place often through rivers, with roads serving the function of feeding into the river ports. Zn all cases, specific analysis of safety conditions should also lead to address the reliability and security of the various modes of rural transport and the actions that should be implemented to reduce the potential adverseimpacts on their users-mostly poor ruraldwellers. 105 ANNEX 2.B. WATE~SANITATION A Status of ruralwaterhanitationsector - Peruhas a population of 26.7 million (MI, of whom about 70% live inurban areas and the 20011, remaining 30% in rural areas. A comparison of the coverage levels of the services in urban areas (82% with water and 69% with sanitation) with the coverage prevailing in rural areas (62% with water and 30% with sanitation) highlightsthe need for a sector investment strategy and policies that increasesthe priority given to serviceprovision inthe rural areas. The table in the next page shows that Peru has relatively similar coverage levels in Rural Water Supply and Sanitation (RWSS) when compared to other countries in South America, but that there i s a relative gap in coverage when compared to countries with similar level of development (excluding China). However, user's perception about tap water safety falls below countries of the same region and income. Despite an impressive increase in coverage in recent years, from 42% in 1990 to 62% in 2000, water supply rural coverage remains at relatively low levels with poor service sustainability. The government faces important challenges in expanding (RWSS) coverage and improving service quality. Duringthe decade of 1990to 2000, its efforts focusedon three mainelements: i)allocating financial resourcesto increase coverage ($US 425 million dollars invested duringthe period 1990- 1999); ii)promoting the updating of the Waterhanitation Law to include sustainability and efficiency concepts as basic funding criteria (however, the law was never implemented because of the lack of regulations and bylaws); and iii)strengtheningthe institutional framework (creation of a Vice-Ministry of Sanitation and a National Directorate for Sanitation (DNS)-however with insufficient funds to adequately staff it). Since 2000 the RWSS sector has changed its investment focus from the construction of new systems to the sustainableprovision of services, and as a result, a new project, PRONASAR (National Project of Rural Waterhanitation) of the Vice-Ministry of Sanitation was developed with a different cycle and with emphasis in service sustainability. 79 The main component of this project i s executed through FONCODES, but under the responsibility of DNS. In terms of investment needs, Peru will need to funnel about US$16 million annually during the next 10 years, in order to achieve the Millennium Development Goals for the Waterhanitation Sector. The Vice-ministry of Sanitation, with the support from the PRONASAR project, is expected to fund about half of the investment needs; however a significant portion of the PRONASAR resourceswill be usedfor rehabilitation of existing systems to prevent the collapse of those systems and avoid investments later on that would demandhigher costs. 79 PRONASAR is a 7-year World Bank funded RWSS project, launched in 2003, with The World Bank contributing US$SOM, the Government of Peru US$12.6M, h c a l Communities US$7.6M, the Canadian International Development Agency US$SM and local Municipalities US$4.8M. The project objective i s to increase the sustainable use of new and rehabilitated water supply and sanitation facilities in rural areas and small towns while emphasizing improvement in hygiene practices and training inoperation and maintenance. The project expects: i)to implement W&S services for 1.3 million people in rural communities through the construction and rehabilitation of infrastructure; ii)to strengthen the capacity of the local communities for services management; iii)to reinforce the municipal district role-provincial level capacity to plan and oversee W&S services in rural communities; and iv) to strengthen the DNS capacity to perform its supervisoryrole. 106 support Annual funding for rural waterlsanitation observed in 1998-2002 7 millionUSD Annual funding for entire water/sanitation sector in 1998-2001 244 million USD Share of funding for rural infrastructure 3% Annual funding required for the next 10 years to halve the rural population lacking 16 million USDlyear access to waterhanitation services Planninginstrument PRONASAR (National) Involvement of local actors inplanning Significant Local actors which are the most involved District municipalities / organized communities __ % of municipalities involved in a waterhanitation program 52% Central agencies prioritize territories to allocate funding YES ---I_- Criteria usedby central agenciesto prioritize across territories For bothdepartmentsand districts____.-.: Coverage (40%) Poverty (30%) Acute diarrheaprevalence (30%) Who prioritize across projects Local governments/ communities (mesas de concertacibn) Criteria used to prioritize across projects Local participatory planningi s usedto pIioritize beneficiaries and projects -.___ I Project preparation Municipalitiedusers' committees with private execution Construction Private with participation of municipalities/ u s e ~ i committees Control and supervision of construction Private with participation of I II committees I Operation and maintenance Communities through users' committees; technical assistance from district municipalities I Service coverage appears to be correlated with community size. According to the data presented in the table below for rural communities-defined as those with less than 2,000 inhabitants-the smaller the population, the less coverage level of waterhanitation services. If the size of the rural community i s related to poverty, the poorest communities lack access to services more acutely. If access to rural water services i s low, the access to sanitation services i s even lower, being the variation between 16% and 44 %, which demonstrates the lower priority for investment sanitation and the associated lack of a coverage increase strategy. 107 Table: RelationshipbetweenPopulationSize and RWSS Service Coverage Population Rank Population Population with drinking water Population with sanitation (in millions) services services Million of inhabitants 9i Million of inhabitants % From500 to 2000 2.9 2.4 82 1.3 44 From 200 to 500 3.1 1.9 59 0.9 28 Less than 200 2.7 1.2 45 0.4 16 Total 8.7 5.5 62 2.6 30 Source: Strategic Plan of the Sanitation Sub sector 2002 - 2011. Vice ministry of Construction and Sanitation, 2002. The average household expenditure for water services i s very low: it is about 1.6% of household income. However, there are regional variations: water householdexpenditure i s about 2.0% for the Coast region, 2.0% for the Jungle Region and 1.4% for the Sierra (Mountain) Region were gravity fed systems (lower O&M costs) are the norm - thus requiring a lower tariff. These figures are above the previously estimated by the World Health Organization (2001) of around 0.8% of household income that should be dedicated to water expenditures, but well below the benchmark for affordability of 5.0% for waterlsanitation. In nominal terms, a survey implemented by the national government indicated a national average of US$ 0.77 per month per household for water services. B Institutionalframework - The institutional framework for the waterlsanitation sector in Peru has been characterized by overlapping of planning, policy and normative functions between different agencies: SUNASS (National Regulatory Agency for Sanitation Services), DNS (National Directorate for Sanitation) , MEF (Ministry of Economy and Finance), DIGESA (General Directorate of Environmental Sanitation) in the Ministry of Health, FONCODES in MIMDES (Ministry of Women and Social Development), and local governments at the regionalldepartmental, provincial and district levels. The recent creation of the Vice Ministry of Construction and Sanitation within the Ministry of Housing, Construction and Sanitation in 2002 was aimed at reorganizing the sector to fill institutional voids andpreventing duplication of functions. Policy making authority for the waterlsanitation sector i s vested in the Vice Ministry of Construction and Sanitation, which is within the Ministry of Housing, Construction and Sanitation. Policy formulation and planning is the responsibility of the National Directorate of Sanitation (DNS),The PRONASAR Project Management Unit (PMU) technical staff oversees issues related to RWSS. The Strategic Plan for 2002 - 2011 and the National Sanitation Plan are the guiding documentsfor the DNS. The social investment fund-FONCODES-has been the main government agency involved inthe provision of RWSS infrastructure. Between 1991 and 1999, FONCODES invested US$361 million representing about 85% of total investment in RWSS in the period, estimated at about US$425 million overall. Because of lack of financial resources in year 2002, the investment in RWSS services was reducedto US$39 million, down from the US$75 million annual average inthe period 1997-1999. Inaddition, the Ministry of Health and NGOs with bilateral support have reduced their investment participation on RWSS infrastructure. During 1999, the RWSS investment by other institutions besides FONCODES (including NGOs) reached US$16 million. The table below illustrates the RWSS investment participation by different institutions during 1990-1999. 108 FONCODES $0.00 0.48 11.26 29.85 22.15 24.58 47.04 69 91 78.69 77.52 361.47 85% Other governmentinstitutions("' $057 029 0.44 0.16 0.25 4.67 7.00 10.00 4.89 73.50 41.78 10% NGOs $0.99 1.00 0.82 1.97 2.00 2.50 2.75 3.00 350 3.70 22.23 5% TOTAL $1.56 1.78 12.52 31.99 24.40 31.74 56.79 82.91 87.08 94.72 425.48 700% SOURCE:NationalSanitationPlan2003-2012 Viceministry01ConstructionandSanitation - p)lndudesfinancialexpenditures (") Priorto 1995indudesinvestmentfromthe HealthMinistry.On and after 1995indudesthe PopularCooperationSystem,andthe PRONAMACHS,INAOEand Frontier Projects Notwithstanding the increasing levels of financing dedicated to the RWSS, investment in urban waterhanitation absorbed about 82% of the total resources dedicated to the waterhanitation sector intheperiod 1990-1999.*O Even though the execution model developed by FONCODES emphasized rapid construction of infrastructure, there was a high risk of low-sustainability because the local institutions better positioned to provide post-construction technical assistance were not involved from project onset, and the beneficiaries did not contribute to the co-financing, often were paid for their labor contributions, and Water User Associations-or "Juntas Ad~inistradorasde Servicios de Saneamiento" (JASS)--were not trained to manage, operate andmaintain the systems. Traditionally, FONCODES' criteria for prioritizing investments has not included demand for services. Water and service standards used imitate those used in the urban areas, creating higher financial demands for rural communities that usually were unable to operate or maintain the systems. All these factors likely contributed to low levels of sustainability. Within PROSANAR projects, different appropriate technologies waterhanitation systems and different levels of service will be offered to the communities so that they can select an option according to their needs and financial capabilities to ensure long-term sustainability of the investments. The table below summarizesthe per-capitacosts of some of the systemcomponentsusedinthe rural areas. Table: Per capita costs of different RWSSservice levels inPeru Water Supply System with household connections 77 Sanitation with Latrines 22 Public Standpipes 41 Water Supply SystemRehabilitation with householdconnections 31 Source: National Sanitation Plan 2003-2012 - Vice ministry of Construction and Sanitation ~~ 8o FONCODES' social investment in the poor areas of Peru i s not limitedto RWSS. In the 1990-1999period, this institution invested about US$1,453M (25% dedicated to RWSS), from resources coming from the National budget (66%), external debt (30%) and donations and self-leveraged resources(4%). 109 To comply with the Decentralization Law, FONCODES was absorbedby MIMDESin2003 and i s inthe process of transferring its institutional functions to the Regional Governments. This process i s scheduled to be completed by December 2004. However, the specific functions for the provision of RWSS of the new Regional Governmentsare still to be defined, and the institutional capacity for this purposehave to be createdandstrengthenedat the receiving end. The District Municipalities work more closely with rural communities, thus they play a critical role in supporting communities receipt of co-financing for service construction, technical assistancefor service management, and operation and maintenance once the construction of the service infrastructure is completed. Service delivery at the rural level is usually performed by community associations (JASS) and information on quality and financial indicators such as service continuity, metering, unaccountedfor water, production, tariffs and water quality needs to be consolidated. Additionally, a Coordination Group supported by the World Bank Waterhanitation Program (WSP), consisting of government institutions, NGO's, and bilateral agencies working for the rural water sub-sector, has become an important body for sector policy discussion, definition of issues for research, performing pilots of innovative models for waterlsanitation service delivery, and sharing of knowledge. This coordination group could continue to play an important role supporting the water sector with proposals for the new Waterlsanitation Law, working pilots in the new decentralizedframework, and documenting bestpracticesto haveimpact in national investments. C -Key issuesandstrategies C1 Prioritizationof interventions - Planning capacity. The policy making and funds channeling to decentralizedunits (at the regional and municipal level) will demand the strengthening of the DNS planning and monitoring and evaluating capacity. For this strengtheningto be effective, it must have the political support of top sector authorities, thus facilitating a quick and timely availability of financial resources to increase coverage and rehabilitation, such as those of PRONASAR. DNS should be prepared to strengthen the planning capacity of the provincial infrastructure boards so that waterlsanitation issues are adequatelyconsidered andreflectedinthe provincial infrastructure plans Prioritization methodology. Traditionally, the criteria FONCODES has used for prioritizing investmentsdid not include demandfor services andemphasized social criteria without considering the potential for the sustainability of investments. Furthermore, water and service standardsusedin project design imitated those used in the urban areas, creating higher financial demands for rural communities that sometimes were unable to operate or maintain the systems. With PRONASAR, the Government changed that approach, introducing demand responsiveness criteria in the prioritization for new and rehabilitated systems. Although departments and districts are initially selected based on social and poverty criteria, the municipalities become self-elected based on economic criteria (co-finance investments and provider of T A for the JASS), final investment decision i s made by the community, agreeing to follow PRONASAR's rules, creating a JASS contribution in cash and labor and committing to pay all O&M costs. Initial prioritization could include complementarities with other public services and initial selection could be done by the provincial infrastructure boards. 110 C2 - Efficiency of operationsand institutional framework Sustainability of constructed systems. It i s estimated that only 30 % of the water services are sustainable, while the rest remainsat riskof falling into disuse after construction, The mainreasons for the lack of sustainability are i> projects are not based upon effective demand; ii)communities are not properly trained in management, operation and maintenance issues; and iii)the community does not receive support after the construction of the service is completed. 81 Furthermore, the lack of sufficient resources to cover the sector needs underlines the need to shift the focus to the sustainability of services (through community involvement andO&M cost recovery via tariff) and appropriate technologies instead of the previous approach that emphasized urban standardsinsystemconstruction andrehabilitation. Provision for investment in rehabilitation and expansion. When communities are faced with failing systems, they have no clear options as to what to do, or who to go to for assistance. Municipalities do not take responsibility for works in which they had no part and communities do not have the capacity to fund and carry out major repairs. PRONASAR i s designed to provide funding for the rehabilitation of systems; and preventing the need for early rehabilitation of infrastructure with central government support, by empowering the community through the JASS and making them responsible for their systems with the support of local governments as they are also involvedduringthe whole project cycle (e.g. at the beginning by co-financing the works and at the end by providingpost-construction technical assistance). These principles of the sector policy were outlined in the 2003-2012 Strategic Plan for Waterlsanitation Services, including cost-recovery via tariff and better subsidy targeting to the poor. Investment subsidies would also be linked to service efficacy. For the rural sector, the strategy outlined in the Plan includes contribution of the community and municipalities of at least 20% of investment, strengthening of community organizations (through the formation of Water User Associations or Juntas Administradoras de Sewicios de Saneamiento -JASS) and capacity to cover recurrent costs, and increased participation of the municipalities in service provision. The strategy also calls for non-reimbursable grants and other donations to be the focus for populations of less that 500 inhabitants. In the Strategic Plan, three broad guidelines are advanced for the design of a subsidy policy: i) tariffs should cover costs inorder to eliminate dependencyon the central governments, ii)subsidies should be targeted to the poorest population and iii)investment subsidies should be linked to service efficiency. Inaddition, for the rural areas, the Planoutlines three strategies: the community and the municipality participate inthe design process and select the level of service according to their capacity and should contribute at least 20% of the costs of new waterhanitation works and40% for improvement andrehabilitation works; 0 userpayments should cover at leastoperation and maintenance costs; and 0 the establishment of Water IJser Associations (JASS) i s a prerequisite for the execution of works. COWATER. Servicios de consultoria para la Planificacicin del Proyecto Nacional de Agua y SaneamientoRural (PRONASAR),InformeNo. 2 - 29 de Agosto del 2001. 111 Technical assistance to buildup institutional capacity at the local level. Municipalities have not carried out their oversight responsibility for water/sanitation service to ensure that communities are adequately operating their facilities and the Ministry of Health has not been able to provide the long-term and permanent hygiene education required to internalize the health benefits of new waterhanitation systems, However, since 2003, DNS and PRONASAR have made efforts to involve local municipalities in the projects aiming at improving their capacity in providing post- project technical assistance. PRONASAR also works closely with Ministry of Health and is a partnerof the Hand-washingInitiative for Peru. Institutional framework. The institutional reformundertakenin 2002 helpedreduce the numerous overlapping functions of the past. Further consolidation is required to adequately attend the demands of the evolving decentralizationprocess. The experienceof the RuralRoads Program with the Provincial Road Institutes are to be considered as possible units from where the technical expertise can be developed, the actions of municipalities can be monitored, and the training of the JASS cantake place. C3 Effectivenessto achieveimpacts - Completion and Updating of Legal framework to strengthen provision and sustainability of the RWSS services. Law 908 for Basic Sanitation passed in year 2000 has been revoked, and the previous Water Sector Law 26338 passed in 1994 i s currently being applied for the W&S sector. This Law does not specifically address the sustainability of RWSS investments, and does not consider the new decentralized institutional framework and its functions. The regulations and bylaws of the existing Law are still pending. The DNS with the support of NGOs and multilaterals is considering the revision of the formulation of a new Waterhanitation Law. High percentage of indigenous population in rural areas. The provision of RWSS services in Peru should take into account the highpopulation of indigenous people living in rural areas. The understandingof their cultural values, perceptions and attitudes towards water and excretadisposal methods is critical for the delivery of sustainable projects. Similarly, hygiene education programs are paramountto ensurefull beneficial impacts on health by the access of waterhanitation services. Monitoring. The successful implementation of these actions and strategies will depend on the proper monitoring of their progress and ultimate impacts. To this end, it is critical to develop the monitoring mechanisms in collaboration with municipalities and emphasize sustainability and O&M indicators, along with those that would help tailor the institutional strengthening initiatives andmeasurethe impacts on the ruralpoor. 112 ANNEX 2.C. RURALELECTRICITY A Status of ruralelectricity infrastructureand services - Peru's energy policy has addressed rural electrification since 1963 when a pilot program was launched in Valle del Manturo. However, the topic received little attention from Peruvian policy makers until 1978 when rural electrification became a priority with "mini-hydro" (50 to 2000 kW) consideredas the most relevant technology to extend coverageto rural areas. A significant step was taken in 1982 with the passingof the Electricity GeneralLaw and the creation of a specific division to promote electrification at the provincial, district and rural levels. In particular, a 25% tax was levied on large consumers (above 160 kWh per month) to finance rural electrification. However, little progress was observedbefore 1988: in 1983, only 16% of the Peruvian population had access to electricity services and this proportion was still less than 18% in 1988.The opening of the sector to private participation in 1992 with the passing of the Electricity ConcessionLaw (LCE) did not address the issue of rural electrification but in 1993, the Direccion Ejecutiva de Proyectos (DEP) was created with the specific objective of increasing access to electricity services in rural areas. Finally, in 2002, a specific law (Ley de Electr$icacion Rural de Zonas Aisladas y de Frontera) was promulgated in order to complement the LCE, focusing specifically on the particular problems of providing electricity service to the rural areas. In 2004, the implementation of this law has been delayeddue to conflicts with later decentralization laws. 82 Between 1993 and 2002, the DEP has invested around 560 million USD, providing 4.7 million people with access to electricity services. As a result, national coverage increased from 57% in 1993 to 75.3% in 2002. Duringthese 10 years, the DEP built 2,447 km of transmission lines and 13,895 km of distribution lines. The generation capacity was increasedby 39 MW through mini- hydro projects, 111 MW with thermal power plants and 0.8 MW with renewable energy technologies (solar and wind). In spite of the progress achieved in the last 15 years, access to electricity services in rural Peru remains low according to South America's standards. In 1999, only 73% of the national population had access to electricity services (compared to an average of 89% in South America) and, in rural areas, this proportion fell to 30% (60% in South America). Low coverage of electricity services translates into low consumption levels of commercial energy services and higher consumption of low efficiency traditional fuels with adverseconsequencesfor health andthe environment. In addition, electricity services remain expensive in Peru when compared to other Latin America countries (for residential consumers, it is the highest in South America after Uruguay). In rural areas with off-grid technologies, the provision of electricity services is likely to be more than twice as expensiveas the interconnectedurban areas. An ambitious plan was designed to increase electricity coverage in rural Peru in the next decade (2003-2012). With a total investment of 960 million USD, this plan could help bring electricity services to 4.2 million Peruvianandreach a coverage ratio of 91% in 2012. 82 A new Law to Regulate the Promotion of Private Investment in Rural Electrification was passed by CongressonJuly 1, 2004. While it is too early to assess the full implicationsof the law, it contains a number of elements that would support the proposed strategic actions listed later for rural electrification,including incentives for private investment, decentralized planning, and the creation of a "renewed" Rural Electrification Fund. As it happened with the 2002 law, additional efforts will be needed to develop and implementthe legalandregulatory regulations. 113 I Projects INFRASTRUCTURESTOCK financed by DEP 1993-2002 1Rural electrification plan for 2003-2012 Price of electricity inPeru 9.32 6.27 5.93 South America average 7.20 7.44 5.10 Users' perception of electricity cost Peru Regional comparators Income comparators (l=very expensive, 7=very cheap) 2001 3.5 3.I 3.6 Central funding instrument Rural Electrification Fund Theoretical annual funding for ruralelectrification (0.85% of national budget) 90 millionUSD Annual funding for ruralelectrification observed in 1998-2002 43 millionUSD Annual funding for the entire electricity sector in 1998-2001 87 millionUSD inplan) 150millionUSD I Planning instrument I Involvement of local actors inolannine All municipalities 20% NO fthev directlv orioritize across uroiects) Central agencies (MEM/DEP) Status of pro-jectdevelopment (5%) Existence of infrastructure (5%) Provincialcoverage (50%) Project NPV (5%) Per capita investment (5%) Poverty (25%) Geographical location (5%) Coinoiementarities (0%') Project preparation MEMDEP Construction Private Control and supervision of construction Private with participationof municipalities Operation and maintenance Intheory privateoperatorsbut most distribution companies are state-owned 114 A 2003 survey in three areas with rural electricity programs 83(two in the Sierra and one in the Costa) has shown that electricity is mostly used for lighting, radio and-in certain cases-TV. In the rural Sierra, access to these new communication medias has encouraged the youngest generations to migrate to urban areas but productive use of electricity remains limited, possibly because of insufficient complernentarities with other services. One example of productive use of electricity services i s the case of the Tuquile islands(see Box A.2.). A combination of infrastructure services (including electricity) has stimulated the development of tourism in these rural areas and brought significant additional income to poor households, B Institutionalframework - Since 1993, the DEP has been the major actor in charge of rural electrification in Peru. Its responsibilities include promotion, planning (preparation of the 10year Rural Electrification Plans), financing andprocurement.The DEPcontracts private consulting firms and construction companies to preparetechnical studies, supervise and perform physical works. DEP resources come from the GeneralBudget and from foreign financing (grants and loans). Once the infrastructure i s built, electricity assets are transferred to publicly owned distribution or the state-owned company ADINELSA (Empresa de Administrucion de Infrues~ruc~uraElectrica SA.). ADINELSA contracts the operation and maintenance of rural systems to public or private electricity companies, under a concession model. When contracting fails, ADINELSA takes over the direct responsibility of operating and maintaining the infrastructure. Twenty-one distribution companies operate/maintain the infrastructure and deliver electricity services to the population, According to the LEE, all of them should have been privatized, However, in2004, only two enterprises operating inthe Limaareaare fully privately-owned. 83Aragon, Ismael- Andisis de la Provisicinde Serviciosde Electrijkacionen Las Zonas Rurales del Peru - World Bank, 2004. 115 Although the on-going decentralization process should ultimately lead to an increase in their involvement in rural electrification, local governments still are little involved in the planning, construction or operation of electricity infrastructure. Only 20% of Peruvian municipalities declare they are involved in one way or another in a rural electrification program. Some consultation of local governments i s done by the DEP at early planning stage (such as through the "electrification committees") but, to a very large extent, prioritization across territories or projects remains the exclusive responsibility of the central level. In the construction phase, some municipalities andlor local communities have, in certain cases, contributed by providing materials, fuel or labor but this in-kind contribution remains informal. At operation stage, local government are generally not involved except in a very few cases (for example, two distribution enterprises - EMSEMSA and EMSEUSA-are owned by municipalities). C Key issuesand strategies - CP Prioritizationof interventions - Planning methodology:The current methodology includes a combination of economic and social criteria. However, the weight given to social criteria (poverty in particular) i s lower than for other infrastructure sectors (water and rural roads). Ultimately, this has some consequences for the targeting of rural electricity investments: the investment level in rural electricity per rural capita is slightly negatively correlated to the rural poverty levels of the departments, while it is positively correlated for roads and waterlsanitation. This reduces opportunities for complementarities across infrastructure services. For example, access to electricity services only i s found to have a slightly negative impact on households' income while access to both electricity and water services has an effect on household income about twice as large as for access to water services only. 84 Iti s true that for the poorest segments of the rural population, electricity services may often be a second priority or even a luxury good compared to access to waterlsanitation or to transportation services. However, even in the poorest areas, they can be a critical asset to seize income-generating opportunities (see the example of the Tuquile Islands). The planning methodology should ensure that the development of electricity services in rural areas is integrated with local development strategies. The planning process i s also facing considerable challenges due to the lack of good quality, up-to- date, demographic and socio-economic data. Despite DEP's efforts to solicit relevant information through electrification applications from municipalities, the overall planning process i s affected by out-dated demographic data (the last country-wide census took place in 1993), and socio-economic data for communities of questionable validity. It appears that this situation has resulted in faulty assumptions regarding demand projections and produced over-sized systems that render projects economically unworkable. Increasing marginal cost to raise coverage in rural areas: The cost of bringing electricity services to an additional Peruvian has averaged US$119 during the last 10-year plan (1993-2002) but it has beenestimated to US$229 for the next 10-yearplan. Even when accounting for inflation, there is large evidence that expanding coverage becomes increasingly costly, particularly when coming to rural areas with low population density. Reasonsfor this include network effects - when on-grid technologies are used - and reduced opportunities for economies of scale because of the lower population density. g4Escobal andTorero, 2004. 116 These increasing marginal costs explain why allocation of resources should not be exclusively basedon social criteria. Indeed, in rural Peru, extreme poverty rates will be the highest inthe most isolated rural areas where providing electricity services will be the most costly. However, in order to improve the effectiveness of investments in rural electrification and have an impact on rural poverty, a prioritization methodology allowing both social and economic perspectives to be taken into account should be designed, in close cooperation with other infrastructure sectors to promote complementarities across sectors, Funding levels. With an annual allocation of 43 million USD, investments in rural electricity have beenthe highest of all rural infrastructure sectors inthe past 5 years. However, they remain largely insufficient to bridge the infrastructure gap in rural Peru (up to 150 million USD per year for the next 10 years i s needed), Moreover, rural electrification in Peru is affected by irregular, and to a certain extent unpredictable, budgetary allocations. This uncertainty affects the planning and economic efficiency of system expansion, because it hinders the optimal design and execution of projects. In addition, due to the fluctuation of annual budgetary allocations, the financing system for rural electrification becomes vulnerable to political interference that tends to compromise the economic andfinancial viability of projects. The lack of predictable financing for systemexpansion negatively affects the interests of the private sector for rural electrification. The extension and service of electricity system i s a business that requires long-term perspective, and specialized personnel and equipment. Uncertainties regarding the availability of funds for the sector increasethe risk perceptions for private investors, and keep them from engagingpro-actively inrural electrification projects. The establishment of a rural electrification fund, independent from annual budgetary allocations, could resolve some of the above mentioned issues. This is the approach undertaken in the telecommunications sector of Peru, where the system expansion to rural areas is financed by ear- marked funds from l% of the total telecommunications revenues(FITEL); these funds are managed by the telecommunications regulator (OSIPTEL). Similar funds for rural electrification, where resources are generated within the sector, independently from state budgets, are in place in Chile, rnanagedby the National Commission of Energy, and inother countries of Latin America. C2-Efficiency of operationsand institutionalframework Private sector participation inrural electrification. Although the sector was liberalized in 1992 with the Electricity Concession Law (LCE), private participation in rural electrification remahs low: in particular, the majority of distribution enterprises remain state-owned (only the ones operating in the Lima area have been privatised). A new legal and regulatory framework, incorporating provision of minimumsubsidies is required, such as that usedin Chile. Private sector participation could be promoted through the use of well-designed concession models or management contracts, The specific case of the two existing municipal distribution enterprises- EMSEMSA and EMSEUSA-should be closely assessed in order to design the best transition toward private-sector management. Incentive framework. As part of a new legal and regulatory framework, the incentive scheme should be redesigned (possibly with the use of output-based subsidies and least-cost auctions) to attract private investors and operators in electricity distribution to rural areas. At present, all capital cost subsidies for capita1expenditures and systems operations are effectively directed to DEP and ADINELSA; there is no institutional framework to provide access to such incentives to potentially interestedprivate providers of electricity services. Subsidies necessary to enlarge access to rural populations should be targeted to ensure that they benefit those who mostly needthem andreach an 117 efficiencyleffectiveness optimum. The role of ADINELSA should be assessedand clarified inorder to avoid conflicts of interest that could penalize the entrance of private operators in the rural electricity market, Involvement of local governments. DEP i s now beginning to involve regional and local governments inthe design and implementation of rural electricity programs. Participatory planning should be deepened in order to take the needs of rural population into account more and to better align rural electricity investments with local development strategies. Local governments - particularly municipalities - have a closer understanding of what the rural population needs are: they can prioritize what the highest welfare benefits triggered by access to electricity services would be, whether they would come from connecting individual households (see the example of Tuquile), from public lighting, from connecting productive facilities (small industries, municipal markets) or from connecting social infrastructure (schools, health centers). The levels of governments most involved should take the technical capacity at the local level into account, as well as possible opportunities for economies of scale and the need to improve coordination with other infrastructure sectors. C4-Effectivenessto achieveimpacts Financial Viability of Rural Electrification Operations and Tariff Structure. Electricity tariffs establishedby the regulator are conceived and designed, under the Law for Electricity Concessions, mainly for areas with certain levels of consumer densities that primarily reflect the cost structures in urban, or peri-urban, areas. Insuch zones, the tariff level correspondsto an efficient economic cost for electricity provision, and allows for commercially viable distribution operations that are attractive to the private sector (indeed, private distributors in Lima have enjoyed high rates of returns). However, for rural zones, preliminary investigations indicate that the current tariff structure results inunsustainableeconomically andfinancially electricity services operations. The cross-subsidies scheme established under the Social Fund for Electricity (Fondo Social de Electrificacion, FOSE) i s a necessary mechanism to alleviate the high tariffs for poor consumers, and, in effect, re-balance electricity prices among different geographic areas. FOSE, however, is subject to reviews that instill a level of uncertainty for the commercial sustainability of operations in rural areas (which during the early years of electrification are usually characterized by low demand). This mechanism needs to be formalized for longer time periods and expanded appropriately to allow for the longer term sustainability of rural operations. Employment generation. The development of infrastructure services in rural areas i s an opportunity to create income-generating activities, by providing an adequate level of maintenance. In particular, some labor-intensive tasks related to the routine maintenance of electricity infrastructure could be performed by private SMEs or micro-enterprises. Further analytical work should be conducted to explore this possibility, including an assessment of the requirements in terms of technical capacity building at a local level. The successful experience of the micro- enterprises involved in the maintenance of rural roads could provide a basis for such an analysis. Employment opportunities could be generatedfor men and women. Technology. The existing technical norms for systems design and the regulated requirementsfor quality of service probably exceed the practical needs of rural consumers and this imposes additional, unnecessary, costs for the operations of rural electricity systems. While the DEP has recently adopted standardsmore adequatefor the rural electricity markets, further work needs to be done on the part of the regulator for the quality of service regulations to account for the specific needs of rural populations andthe financial andeconomic sustainability of rural systems. 118 The initial strategy of the Peruvian government to develop rural electricity services relied significantly on the development of small hydroelectricity plants. The 1993-2002 rural electrification planalso illustrated the highpotential of other renewablesourcesof electricity (solar, wind). In remote areas of rural Peru, off-grid technologies are the most cost-effective solutions to expand coverage. These technology choices have to be carefully assessed and costlbenefit evaluation tools designedinorder to guide local andcentral plannersin their investment choices. Transfer of responsibilities to local governments. The current model of rural electrification policy relies heavily on a central agency-the DEP-which concentrates the whole technical and management expertise for planning and implementation. A transfer of planning responsibilities should be performed together with a transfer of corresponding budgetary resources and of the related technical and management expertise. A realistic capacity-building plan should be designed to allow knowledge diffusion at the local level, involving the DEP and specialized local institutions (preferably at the provincial level). 119 ANNEX 2.I). RURALTELECOMMUNICATIONS A -Status of ruraltelecommunications services Concurrent with sector privatization and liberalization, the Peruvian government established an innovative universal access program in 1993 (known as the Fondo de Inversion en las ~ e ~ e c o ~ ~ n ~ corcFITEL)ethat dramatically increasedaccess to ICT services-both phone and u ~ o n ~ internet- to Peru's poorest and most isolated communities. This program has become a global best practice for output based aid (OBA) programs in telecommunications andother sectors. As a result of four FITEL-sponsored and subsidized tenders totaling US$58.6 million, private operators installed 6,517 public phones and 514 Internet centers that use satellite technologies in rural districts by the end of 2003, benefiting more than 6.74 million people living in rural areas and resulting in weighted average distance required to reach a public payphone to go from 40km to 5.8km. Internationally, an average distance of around 5 km is a relatively common Universal Access target. While many localities in rural areas are still not within 5 kmof a FITELpayphone, FITEL has reached the vast majority of the places where operators can supply service in a commercially viable manner with the help of start-up subsidies. As a result of FITEL's public Internet projects and the pioneering work of Red Cientificu Peruuna (RCP), a private sector company with an NGO, Peruhas a very highlevel of community accessto Internet, concentratedin urban areas, but with some presence in rural areas. The latest generation of FITEL and MTC initiatives will likely further increasethis access. Despite dramatically increasing access to fixed and mobile phones, Peru has far less coverage of telephone services compared to other countries in the region and of similar incomes. In2000, the cumulative number of fixed and cellular phone lines was 117 per 1,000 inhabitants, compared to 294 for South America and 177 for countries with a similar level of development. In 2002, fixed line and cellular penetration levels of 78 and 86 per 1,000 people were still far less than those of other Latin American countries. Most notably, Peru's cellular penetration level of 78 per 1,000 people is the worst of 10comparableLatinAmerican countries as can be seen inTable 1. Table 1: Peru's telecommunicationinfrastructure Mexico 100.9 25.4 51 6,315 147 255 Colombia 43.7 II24.5 40 1,881 179 106 Peru 26.7 i 26.9 21 2,131 78 86 Venezuela 25.1 ! 12.8 275 3,757 112 256 Chile 15.6 14.0 21 4,115 231 . 428 Ecuador 13.1 36.6 46 1,076 110 121 Bolivia 8.7 37.1 8 885 68 105 Paraguay 5.5 I 43.4 14 982 47 288 Uruguay 3.4 1I 7.9 20 3,618 279 155 Source: World Bank. Contrasting with the Limited coverage, the quality of telecommunications services i s slightly better ranked by users than in the rest of South America. The situation i s also significantly less favorable incountries with a level of development similar to Peru's. 120 This availabilitylquality assessment differs for Internet and telephone services: while access to telephone services remains lower than in comparable countries, public access to the Internet is significantly better in Peru, as i s the proportion of Internet users in the population. On the other hand, while users seem to be more satisfied by the quality of Peru's telephonelfax services, they rank Perulower than comparablecountriesfor speedandcost ofInternet services. According to the MTC, lack of sufficient and lower-priced terrestrial backbone infrastructure in Peru is severely hampering the ICT sector development. Telefonicu del Peru' (TdP) is the only company with any significant backbone network in the country, though nearly all of this i s concentrated in the costal region and the prices it charges are very high. This lack of terrestrial backbone in Peru makes satellite the only choice for data or voice connectivity in most of the country. However, unlike terrestrial backbones, satellites exhibit low economies of scale and have significant low traffic restrictions. OSIPTEL-FITEL and beginningin 2004, MTC. Construction Privatesector with limitedpublic subsidies for capital investmentinOSIPTEL-FITEL-funded projects Control and suvervisionof construction OSIPTEL-FITEL directiv or through vrivate overators. 121 B - InstitutionalFramework Peru's 1991 Telecommunications Law established a competitive framework for the sector. An independent regulatory agency and a universal service fund were established in 1993. The incumbent operator was privatized in 1994, and the sector was fully liberalized in 1998when TdP's fixed-line monopoly ended. Since 1998, the provision of ICT infrastructure has been fully open to competition, more than 53 concessionshave been grantedfor local and long distance service, four companies compete to provide mobiletelephone services, and hundredsof companiesare registered to provide internet serviceprovision(ISP) and a wide-range of ICT infrastructure and services. Inaddition to legislation establishing a regulatory framework for private provision of telecom services, Peru has also implemented a basic framework comparableto other countries inthe region for electronic transactions. Legislation to support e-signature (Ley de Firmas y Certificados Digitales) and address cybercrimes dealing with electronic fraud and child pornography have been passed (though regulations are still pending and expected within the coming six months). An electronic invoicing law is expectedto be adoptedinJuly andregulations completed before the end of the current calendar year. Data privacy and creation of a Cornisionado para la Proteccion de la Privacidad remains, however, under a presidential directive and has not been legislated despite a draft preparedin 1999. The lead government agencies responsible for ICT infrastructure and services development since the early-1990s have beenthe Ministry of Transport of Communications (MTC) as the government policy maker, OSIPTEL as the sector regulator, and OSIPTEL's FITEL as the universal service agency. Beginning in 2000, a growing number of other government agencies, notably the Ministries of Agriculture, Education, Economy and the Presidency of the Consejo de Ministros (PCM) began to develop ICT-related programs. Table 2 provides a non-exhaustive summary of some of these initiatives. An institutional structure has evolved that can be characterized as largely fragmented, in which different entities administer mostly separate ICT initiatives that frequently have not been well coordinated, duplicate efforts and do not make the best use of resources and infrastructure. The government recognized this andin2003 establishedthe Comisidn ~ultisectorialpara el Desarrollo de la Sociedad de la Znfomcidn (CODESI) presidedover by the PCMand including all ministries and key agencies (CONCYTEC, OSIPTEL, INEI, INDECOPI). It has a short-term mandate, using resources and staff from line ministries, to take inventory of initiatives across the country, identify ways to improve coordination between initiatives and entities, and particularly to help the government develop and implement a more strategic approach to better employ ICT for economic andsocial development. To date, CODESIhas generateda draft e-Peru actionplan 85 and orchestratedsix working groups to help deepen and complete the plan, While the final report is scheduled for July 2004, draft documents reveal its emerging institutional and strategic direction. They highlightthe role of the Government as promoter and facilitator of the development of the Information Society and propose a participative strategy (government, private sector andcivil society) managed andcoordinated by a centralized organization that designs, monitors and evaluates the evolution of the Information Society. The three top priorities reflected in the five-point plan (the other two are education and organization) are to develop an Information Society through: (1) ICT infrastructure initiatives that 85"e-PERU: Propuestas para un Plan de Accidn para el Acceso Democrdtico a la Sociedad Global de la Informacidn y el Conocimiento", Comisidn Multisector~alpara Masijicar el us0 de Internet, Ministerio de Transportes,Comunicaciones, Vivienday Construccidn(MTC), 2003 122 address perceived ICT infrastructure gaps and reach low-income segments of the country at an affordable price; (2) e-government, to foster transparency and efficiency within the government, improve working relations with citizens and businesses, reduce corruption risks and democratize decision-making processes; and (3) e-business, to improve industry economic competitiveness, create employment, and reachinternational markets. FITEL is the major source of financing for rural telecommunications. Currently, FITEL raises approximately $12 million per year from a 1% tax on the revenues of telecommunications operators. On the other hand, the MTC raises approximately $20 million per year from license and spectrum fees but, until 2003, the MTC's funds were mostly returnedto the generaltreasury. With the establishmentof the MTC Project Office in 2003, the MTC has sought approval from the MEF to retain some of these funds for its ITC programs. FITEL's funds are required, under Peru's telecommunications law, to be used for ITC projects. FITEL has indicatedthat most of its existing funds that have and will be raised for the next several years have been allocated to cover the subsidies for on-going FITEL projects (FITEL Ithrough IV) and to the newly unveiled FITEL V project. Finally, the ICT sector i s probably - even more than rural electricity -the least decentralizedof all rural infrastructure sectors. In 2003, only 7% of all municipalities (2% of district municipalities) were reporting to be involved in the management of a telecommunications program. Planning and prioritization of investments remain almost exclusively managed at the central level although FITEL is developing its dialogue with local governments in particular through capacity-building initiatives. Table 2: Government ICT initiatives ENTITY INITIATIVE Government Initiatives Cornrnisionde CODESI was establishedin2003 to better coordinatethe growing number of Desarollo de la governmentICT initiatives and to helpthe governmentdevelop and implementa Sociedad de la morestrategicapproach for the ICT sector to foster economic and social Informacion development. All ministriesparticipateinCODESI with MTC actingas the (CODESI) commission's secretary. CODESIheldits first meetingsin late2003 and established six working groups chargedwithcataloguingand assessing the needs and challenges inthe following areas: infrastructurefor the information society (chairedby MTC), developmentof capacitylhumanresources (chairedby the Ministry of Education), applications (CONYCTEC), ICTsfor productiveuses and services (INDECOPI), e-government(Presidency of Ministries) and preparationfor the 2005 World Summiton Information Society(Ministry of ForeignAffairs). CODESI will issue a report on the findings andrecommendations of its six working groups inJuly 2004. Dependingon the finding of the CODESIreport, CODESI will either be dissolvedor given a new mandate. Preliminary reports indicatethat CODESI membersare exploring financing optionsto enable CODESIto continue its work. FITEL-OSIPTEL (1)PublicTelephones FourFITEL-sponsoredand subsidizedtenders totaling US$58.6 million, enabled FITELis the privateoperators to install 6,5 17public satellitephones inrural areas. The InvestmentFundfor programs serve more than6.74 million peoplelivinginruralareas andresultedina Telecommunications decrease in weightedaveragedistance requiredto reachapublic payphonefrom established by the 40kmto 5.8km. governmentto (2) Internet Access promotethe In2003, two FITELtenders includedrequirementsthat operators provide514 development of communityInternet access points incertaindistrict capitals. In2004, FITEL 123 INITZATZVE obtained approval to launchFITEL V, a US$1.2 millionpilot project aimed at low-income areas providing both Internet access infrastructure and capacity-building in a more integrated manner (done incoordination with municipalgovernments, operators andNGOs) in68 rural locations with acombinedpopulation of 144,535 or 2% of the ruralpopulation-42 of which are provincial capitals and 26 district capitals. I FITELV, basedon lessons learnedfromprior FITELInternetprojects is expected to be implemented inSeptember 2004. Lessonslearned will be usedto expandthe project to the remaining 818 district capitals. Commercial sustainability and local content development and capacity building are key components of FITELV. (3) Content-Development andCapacity-Building FITEL has increasingly included components aimed at stimulating demand, developing local content and capacity-building with local governments and NGOs in areas where they have implemented their Internet project. Some of these initiatives include a US$515,000 Sistema de Informaci6n para el Desarrolio Rural that received support from the World Bank`s Infodev; and Informaci6n Agraria Via Internet para Agricultores de laJunta de Usuarios del Valle del rio Chancay-Huaral. This project cost is US$212,153 and directly targets 6,000 inhabitants and indirectly 16,000 inhabitants. FITEL-OSIPTEL has also partnered with several institutions including the Peruvian center for Social Studies (CEPES), Estacion Experimental Donoso (INIA-MINAG), Technical Administration of Riego District (ATDR-Huaral-MINAG), General Secretariat for Agriculture information (DGIA- MINAG), andthe Chancay-Huaral District Commission for Riego. Ministry of (1)Rural Internet. $350,000 pilot intwo ofPeru's poorestregions-Huarazand Telecommunication Ayacucho. This pilot is focused on providingInternetaccessand local content for andTransportation economic development to 30 rural villages smaller than those servedby FITEL's I programs. IfMEFapproval is obtained for the overall project, the project seeks to serve 1,050 rural communities with an estimated budget of $14.25 million not including nearly $900,000 in satellite and Internet accesscosts which MTC indicates will be covered $36 inmonthly fees that will be covered by provincial governments and $36 through user fees. (2) PeruvianGovernment Communications Platform(PCEPper Spanish acronym). The Ministry of Finance recently approved an MTC $10.5 million project to build and manage a government telecommunications network that will linkallMinistries inLima with their offices inLima's 24 departments. The goalis to lower costs of government communications, to stimulate increaseddevelopment and use of e-government applications and to aggregatee-government traffic. MTC is working out operational details including whether network managementand operation will be outsourced or providedby the government. (3) NationalBroadbandNetwork (RNBA per Spanishacronym). This initiative seeks to addressa major bottleneck for telecommunications and Internet development inPeru- the lack of adequate and affordable backbone access, especially inareas other than the coast. The network would largely be a fiber-optic network that would use existing or new electric transmission and distribution towers. Ifthe initiative simply builds a network that complements the existing, though limited, fiber optic networks, the MTC estimatesthe cost of 3,753 km network will be $55.6 million. Ifthe goal i s to builda national network to serve all 24 regions, the MTC estimatesthe 6,595 krnnetwork will cost $100.1 million. An in-depthoptions, demand and feasibility study will needto be carried out. INICTEL Programa Bdsico de Aplicacih de Tecnologhsde la Informacibn y (National Institute Comunicacwnpara Zonas Rurales. for Telecomm Training and Research) Ministry of (1)Edured. Education (2) Proyecto Huascaran 124 ENTITY INITIATIVE This ambitious 2002 initiative seeksto help with Peru's decentralization planby helping 1,634 municipalgovernments to develop and manage e-government information and application with specialfocus on gathering financial and statistical information though it also proposed to use ICTs for distance learning and e-health. A pilot project was planned inJunin. Ministry of (1) e-procurement Economy (2) MyPymesMarketplace PROMPYME (3) Failed initiativeto transform urbantele-centersinto BusinessCenters (CABIPYMES) CONCYTEC II (1)National Emergency Planfor ICT Development Innovation2002-2006- - . (ConsejoNucional Proposal de Cienciay (2) IADB-CONCYTEC PRODUCE-MEF-Multi-sectoralproject that aims to - Tecnologia) design a mechanism for finance ICTprojects to increasecompetitiveness inthe country. This project is developed incollaboration with the IADB,through non- refundable funds from the Japanese Special Fund. Private Sectorand Non-Government Initiatives Red Cientiflca 1 RCP in 1994 becameone of the first privatecompaniesinLatin America to launch a comprehensiveprogram to establish "cabinas p$blicas de Internet" nationwide. RCP's campaign resulted inthe establishment of more than 1,500 Internet public RCP i s a private accesspoints. RCPcontinues to carry out a wide-range of educational and capacity- companyiNGO building efforts to promote the use of Internet and to foster economic development. The World Bank has funded RCP as the Peru Country Gateway. RCP is the Peru's Development Gateway counterpart to the World Bank's Development Gateway. Terra Inka This initiative will help small tourismcompaniesinCusco to increasetheir competitiveness by helping them to establish a web presence, to conduct transactionsonline and to use e-commerce. C Key IssuesandStrategies - A recentWorldBank-sponsoredstudy, concluded that Peruis probably oneof the mostchallenging countries in the Andean region in which to develop commercially feasible ICT networks due to demographic, geographic, and income distribution factors. 86Further improvements in access to ICTs will require a rangeof government incentives aimed at the private sector, including additional regulatory reforms and capital subsidies. While FITEL'Sprograms have been highly effective at dramatically increasing access to public payphonesinPeru's most isolated andpoor areas, Peruneeds to further increasetelecommunication infrastructure penetration levels, especially inrural areas, in order to reach the level of other Latin American countries. Failure to do so will hinder economic and social development of rural areas. Key elements to achievethis objective are: puttingregulatory and other measuresinplace to ensure the commercially sustainability of the private sector companies that own the FITEL satellite community phones; continuing to support the extension of FITEL satellite phones on an ad-hoc basis to highly isolated rural communities; and beginning to explore ways to foster backbone infrastructure development. A full cellular expansion project has been identified for 175 cell sites andcould benefit to morethan 1.6millionpeoplelivinginruralPeru. Dymond, Andrew. Final Report and Draft Strategy. Private sector provision of telecommunications services in rural and peri-urban areas in Peru. June, 2004. 125 C1- Prioritizationof interventions Involve local governments in planning. Prioritization of investments could involve local governments. This involvement should be sought when planning infrastructure investments, since municipalities are more aware than central agencies of what rural users' needs actually are and what complementarities could be promoted with other services. Local governments should also be consulted when designing applications and serviceswhich could be relevant for ruralusers. Solve backbone gap with attention paid to rural access. Further studies should be carried out to assess the existence and reasons for the alleged "national backbone" gap and to identify options to address it. This assessment should take the impact of the proposed national investments on rural access to telecommunication services into consideration. Preliminary estimates by the MTC of the cost of building a national backbone network, using in large measure existing or new electric transmission or distribution networks, range from US$53 million to as high as US$130 million. The MTC has indicated that private operators will not invest in any meaningful way in terrestrial backbones without significant aggregation and stimulation of demand by large users such as governments. In light of this, and given the growing government interest in using ICTs for economic development and improving governance, the MTC has proposed the building of a Peruvian Government Communications Platform (PCEP per Spanish acronyms) and a National Backbone Network. The PCEP, recently approved by the Ministry of Finance, is a $10.5 million project to buildand manage a government telecommunications network that will link all Ministries in Lima with their offices in Lima's 24 departments. The goal is to lower costs of government communications, to stimulate increaseddevelopment and use of e-government applications and to aggregate e-government traffic. MTC is working out operational details such as whether network managementandoperation will be outsourcedor providedby the government. Involvement of local governmentsinthis initiative should also be promoted. Increase funding. Current funding levels of FITEL (US$ 10-12 million) are insufficient to match the sector's needs in rural areas. These levels are also significantly lower than the resourcesraised by MTC from license and spectrum fees (around US$ 20 million). In order to help halving Peru's rural infrastructure gap, an objective could be set in order to dedicate half of MTC's resources coming from licensesandfees' revenuesto rural telecommunications programs. C2 Efficiency of operations andinstitutional framework - Implement incentives to put the private sector at the core of the rural telecommunications implementation strategy. Since the early 1990s, the government's approach to the ICT sector has been to remove the government from the provision of any ICT infrastructure and to foster private sector provision of ICT infrastructure and services through competition, open market entry and targeted subsidy programs for remote rural and low-income areas. Peru needs to continue to learn from this experience by encouraging the private sector to buildout infrastructure inruralareas with the correct incentives and, where limits of this approach have been reached in some areas, to undertake more pro-active and well-coordinated initiatives and investments. Such a strategy could materialize through (1) building OSIPTEL capacity to increase cellular coverage in rural and peri- urban areas, potentially also by increasing funding for some of FITEL'SOBA subsidies if OSIETEL`s planned cellular expansion pilots are carried out and are successful; (2) ensuring the success of the fourth cellular license's tender, which could include incentives to build out rural areas; and (3) developing other initiatives such as e-government and national backbone and broadband infrastructure initiatives to first use OBA-schemes and other incentives to foster private sector infrastructure build-out and increase competition instead of building government-owned or 126 managed infrastructure. There could be important synergies and cost-savings to building such networks incoordinationwith initiatives inthe electric and gas sectors. C3-Effectiveness to achieve impacts Improve coordination among institutions and initiatives. CODESI i s an important first step to improve the coordination of a growing number of government ICT initiatives. The impending completion of the CODESI work provides an excellent opportunity to providetechnical support on the operational implementation of the plan inthe areas focusing on citizens and businesses in order to help ensure that it incorporates international best practices, has solid coordination in these areas and i s a success. This component would in particular include institution-building to develop coherent government leadershipof CODESI (or its successor organization) incooperation with the private sector. The component would also consider common standards of solutions designs and technology, coordination of further ICT regulatory reforms between ministries and agencies, facilitation of decentralized programming and operation of programs, development of strong monitoring indicators, and evaluation of impacts. Finally, CEDES1 could also valuably involve local governments. Ensure financial sustainability of community Internet access centers. The key challenge for these new generations of community Internet access centers is their providing for their financial sustainability, ensuring there is sufficient capacity-building and having local buy-in and use of them. A recent World Bank study found that the FITEL pilot project in this area is well-designed, although it still requires local buy-in from community leaders and municipalities. 87 The study, however, raised questions on the financial sustainability and demand estimates of the MTC project. 87Ibid, Dymond. 127 88 The MTC has indicated it will carry out pilots in 2004 that will demonstrate the viability and economic development impact of its initiatives. Another option, as describedin Box A.3, would be for FITEL and MTC, to carry out pilots to test the viability of implementing more carefully designed and targeted Internet access centers basedon the geographic, social and economic profile of each rural community. A key finding of both recent World Bank studies of Peru (Tavara and Dymond) was that increased coordination between all Peruvian ministries and agencies with Internet access centers as well as tele-education project, is critical to ensure government resources are better-used and to ensure complementarity of initiatives. Develop ICT services in rural areas, building on the experience of the tele-centers. In recent years, the Government has fostered the use of ICT to better deliver government servicesto citizens, improve interactions with business and industry, empower citizens through access to information, and generate more efficient government management. Numerous e-Government initiatives have been launched, including the Government's own portal, the economic transparency portal and the public procurement portal for SMEs, to reduce corruption, increasetransparency, increasepublic 89 revenue growth, andor reduce costs. The Government should build upon such initiatives through (1) process re-engineering and one-stop Internet enablement of a variety of services for citizens (licenses, certificates) and businesses (registration, labor permits, export procedures) that integrate and promotes cross-agency cooperation, and enables online accessto legislation relevant to citizens and businesses which links to ongoingjustice projects; and (2) integration of sub-national systems for financial managementand property registration. Promote e-business. Notwithstanding gains in national ICT infrastructure, e-business adoption rates in Peru are marginal among large business and especially low among smaller firms. Impact analyses show that productivity andcompetitiveness gains beginmainly once firms have passedthe connectivity and web-enablement stages and reach online transactions andintegration with business management practices. While the efficiency of ICT infrastructure and online security are commonly viewed as key barriers to adoption, surveys show that more formidable barriers are awareness of benefits, skills to assess and undertake e-business, and financing e-business development. Peru should buildpublic-private partnershipsand promote the adoption of e-business practices at the firmlevel via: (1) trainingandmatchinggrants to help deepen e-business markets at regional and sectoral levels to promote awareness, skills upgrading and learning-by-doing, helping jump-start intermediary e-business services markets (consulting, training, trade associations); and (2) investingin e-business support services to very low-income entrepreneursby upgrading Peru's telecenter network into high-value, sustainable networks under private sector management that embodies strong e-learning business skills programs, micro-business-appropriate applications and content. "Ibid, Dymond. e9 www.perU.gob.De, httu:litransvarencia-econo~ca.mef.~ob.uen,http://www.sunat.aob.ve/ and (httu:llwww.uromuyme.~ob.ve/cotnvrasestatalesl). 128