PROGRAM INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB7695 Operation Name PERU SECOND DPL WITH A CAT DDO Region LATIN AMERICA AND CARIBBEAN Country Peru Sector Flood protection (60%); Public administration- Financial Sector (40%) Operation ID P149831 Lending Instrument Development Policy Lending Borrower(s) MEF MINISTRY OF FINANCE Implementing Agency Ministry of Economy and Finance Peru Tel: (51-1) 311-5938 Fax: (51-1) 311-9900 rcaceres@mef.gob.pe Date PID Prepared January 15, 2015 Estimated Date of Appraisal January 20, 2015 Estimated Date of Board March 12, 2015 Approval Corporate Review Decision Following the corporate review, the decision was taken to proceed with the preparation of the operation. I. Country and Sector Background The proposed US$400 million Disaster Risk Management Development Policy Loan (DPL) with a Catastrophic Risk Deferred Drawdown Option (CAT DDO) will support the Government of Peru (GoP) to mobilize resources in the aftermath of a disaster and strengthen disaster risk reduction and climate change adaptation measures in the country. A first DPL with a CAT DDO (P120860) in the amount of US$100 million was approved by the Board on December 9, 2010 and renewed for three years in 20131. The proposed operation builds on the successful achievements of the program supported by the first CAT DDO and the dialogue and collaboration between the World Bank and the GoP on disaster risk management since 2007. As part of its broad disaster risk management strategy, the GoP has requested a second CAT DDO. The proposed operation strengthens actions undertaken by the Ministry of Economy and Finance (MEF) to increase the availability of contingency lines of credit and be able to quickly access resources and respond to disasters. Since 2011, the GoP has subscribed contingency lines of credit with the Bank and other international financial institutions (IFI) and 1 The Bank and the GoP agreed and established new target results under the same policy areas of the policy matrix, to be achieved by December 9, 2016. bilateral cooperation2. Over the past five years the GoP has taken significant steps to strengthen the legal and institutional framework to reduce disaster and climate risks. Peru’s National Agreement (Acuerdo Nacional) approved Policy (32) on Disaster Risk Management (Executive Decree N°111-2012-PCM), which aims to promote a culture of prevention and contribute directly to the sustainable development process at the national and sub-national levels3. The national policies define general guidelines for inclusive, equitable and sustainable development and to affirm democratic governance in the country. In addition, the National Agreement Forum (Foro del Acuerdo Nacional) composed of the three levels of Government and the main political and social institutions of the country provides a space for dialogue and consensus building to advance the development agenda. At the national level Peru also has the Bicentennial Plan 2021, “Plan Bicentenario el Peru hacia el 2021”, approved on March 2011 (Executive Decree N° 054-2011-PCM) and updated on December 20134. This strategic development plan, part of an agreement between the major political parties in the country, has six strategic areas5 and the proposed operation supports area (6) Environment and Natural Resources, under which the GoP has identified adaptation to climate change as one of the five strategic priorities. In 2011, the establishment of the new National Disaster Risk Management System (SINAGERD) allowed Peru to move from an emergency response focused system towards a comprehensive disaster risk management system. On February 19, 2011 the Law N° 29664 on DRM was issued creating the SINAGERD6. The DRM law promotes a comprehensive approach for disaster risk management, mandating all public institutions at all levels of government to include disaster risk management considerations into their sectorial and planning processes in order to avoid the creation of new risks and reduce existing risks. On May 26, 2011 the Regulations of Law N°29664 were adopted through Executive Decree N°048-2011-PCM establishing the DRM institutional framework defining the roles and coordination mechanisms for different actors involved in managing disaster and climate risks in the country. The DRM Technical Secretariat at the Presidency of the Council of Ministers (PCM) created by the law oversees SINAGERD’s coordination. A new agency, CENEPRED, was created to be responsible for disaster risk information, risk reduction policies and reconstruction processes. INDECI, existing agency under the former institutional framework, remains responsible for emergency response. In addition, the DRM law gives the Ministry of Economy and Finance (MEF) the strategic role of defining and implementing a national financial protection strategy against disasters. The resources from the first CAT DDO were the first contingent resources to be part of GoP’s national financial protection strategy. 2 The catastrophe contingent lines of credit currently contracted are: US$ 300 million with CAF, US$300 with the Inter-American Development Bank (IADB) and US$100 million of the first CAT DDO. A US$100 million is under preparation with JICA. 3 Acuerdo Nacional Unidos Para Crecer: http://acuerdonacional.pe/. 4 CEPLAN submitted the updated Bicentennial Plan to the PCM for approval on December 2, 2013. Source: http://www.ceplan.gob.pe/noticias/ceplan-culmina-version-actualizada-del-plan. 5 Peru Bicentennial Plan strategic areas: (1) fundamental rights and people’s dignity; (2) opportunities and access to services; (3) State and governance; (4) economy, competitiveness and employment; (5) regional development and infrastructure; (6) environment and natural resources. 6 Ley del Sistema Nacional de Gestión de Riesgo de Desastres; http://www.eird.org/imagenes/pdf/aprobacion-ley- GRD.pdf. In May 2014, the National Disaster Risk Management Plan (PLANAGERD) 2014-2021 was approved 7 establishing the policy framework to comply with the SINAGERD Law. PLANAGERD is a strategic document that aims to actively reduce vulnerability of the population and their livelihoods against disaster and climate risks. Anchored in five strategic objectives, the Plan establishes a comprehensive set of specific objectives and priority actions for the main DRM processes: risk identification, risk reduction, emergency response, post- disaster recovery and institutional development. The Plan defines an implementation strategy to be achieved with the support and participation of all sectors and the three levels of government. In addition, the Plan identifies a financing scheme for the allocation of budget resources for DRM that involves national, regional and local government budgets. The Plan integrates the Disaster Vulnerability Reduction and Emergency Response Budgetary Program 068 (BP068) 8, which has been created and managed by the MEF since 2010, in order to increase the allocation of public resources for DRM and systematically monitor their outputs. In line with the progress described in the area of DRM, the Ministry of Environment (MINAM) is currently in the process of updating the National Climate Change Strategy (NCCAS) 9 approved in 2003. The 2014 draft of the Strategy provides guidelines for the three levels of government to develop action plans, establish specific goals and promotes the participation of civil society, the private sector and indigenous organizations10 in climate change adaptation. The NCCAS was approved in 2003 (Executive Decree N°086-2003-PCM), a draft under public consultation was released in July 201411. Furthermore, since 2004 the General Law on the Environment N°28611 established a framework for climate change adaptation in Peru. The Law, along with the National Environment Policy approved in 2009 (Executive Decree N°012-2009-MINAM), establishes the legal framework aimed at ensuring the country’s sustainable development through protection and restoration of the environment, and conservation and sustainable use of its natural resources12. II. Operation Objectives The development objective of the proposed operation is to strengthen the legal and institutional framework to contribute towards the reduction of Peru’s fiscal and physical vulnerability to disasters. This objective will be achieved through 5 Prior Actions under three pillars: • Pillar 1: Improving public resource allocations for disaster risk management: strengthening the financing mechanisms for the implementation of PLANAGERD and mainstreaming of disaster risk management policies into subnational planning; • Pillar 2: Strengthening vulnerability reduction policies in infrastructure for Education 7 Executive Decree N°034-2014-PCM on May 12, 2014. 8 PP068 is under the Framework of the Results-Based Budget (PPE) Strategic Budgetary Program, which is specifically for integrated disaster risk management. Source: Inter-American Development Bank, ‘Program to Reduce the Vulnerability of the State to Disasters III (PE-L11138) Loan Proposal’, June 18, 2014. 9 Ministerio del Ambiente (MINAM), ‘Estrategia Nacional Ante el Cambio Climático’, Borrador 2014. 10 MINAM, Presentación ‘La ENCC Marco general: Antecedentes, Proceso y Contexto actual’, 22 de agosto 2014. 11 Resolución Ministerial N°227-2014-MINAM. 12 Ministerio del Ambiente (MINAM), 'Plan de Accion de Adaptacion y Mitigacion Frente al Cambio Climatico', 2010. and Housing sectors and flood protection measures: integration of vulnerability reduction policies in the Education and Housing sectors, and establishment of flood protection planning to reduce the impact of extreme weather events; • Pillar 3: Increasing Peru’s capacity for post-disaster recovery and reconstruction: strengthening of the Government’s institutional capacity to effectively plan and implement post-disaster rehabilitation and reconstruction processes and guarantee the operational continuity of the government. Disasters from adverse natural events could represent significant explicit and implicit contingent liabilities to the government. MEF recently finalized a seismic risk profile showing that the Probable Maximum Loss (PML) for a 100-year return period could generate losses of at least 10 percent of the total exposed value of public assets and infrastructure13. Based on this information, the Government’s financial protection strategy against disasters prioritized the contracting of specific contingent lines of credit. The proposed second CAT DDO for US$400 million will allow the Government to increase the availability of immediate liquidity in the aftermath of a disaster for up to US$1.2 billion. The CAT DDO is a flexible financial instrument providing rapid liquidity to the Government upon declaration of a State of Emergency. Having in place these resources will enable the Government to focus its efforts on efficiently responding to the emergency and recovery rather than spend valuable time and resources on fundraising activities. III. Rationale for Bank Involvement The design of the proposed operation builds on the continuous collaboration on DRM with the GoP and the achievements of the first CAT DDO program. The proposed operation strengthens and expands policy reforms supported under the first CAT DDO, which has three policy pillars: (i) risk reduction policies in public investment through the development of a Strategic Budgetary Program for Disaster Vulnerability Reduction and Emergency Response, (ii) vulnerability reduction actions in infrastructure sectors of health, water and sanitation, and (iii) mechanisms for financial protection against disasters. The proposed program strengthens policy reforms under these areas by supporting the alignment of the DRM budgetary program and regional planning processes within the PLANAGERD; expanding vulnerability reduction policies in additional infrastructure sectors such as education, housing and water resources management; and expanding the financial protection strategy mechanism against disaster to establish a post-disaster reconstruction framework and an operational continuity policy for governmental agencies and services. IV. Tentative financing Source: ($m.) Borrower 0 International Bank for Reconstruction and Development 400 Borrower/Recipient IBRD Others (specify) Total 13 Preliminary numbers based on draft reports shared by MEF. V. Institutional and Implementation Arrangements The Ministry of Economy and Finance (MEF) will monitor the progress of the proposed operation during the entire drawdown period. Under the first CAT DDO, the GoP has been strongly commitment to the implementation of a comprehensive DRM program. Progress in the three policy areas was highly satisfactory, with all seven expected policy results achieved in 2014. The MEF continues to exercise overall oversight for budget implementation in Peru. The MEF, as the coordinating body, will be supported by the General Directorate for Debt and Public Treasury (DGETP), the Sectoral Program Coordination Unit (DCPS) and the respective lines ministries and agencies coordinating the policy reforms. The Bank will monitor both the macroeconomic environment and the implementation of the program supported by the DPL during the drawdown period. This will be done through frequent visits to the country and regular communication with the MEF and key sectors. VI. Risks and Risk Mitigation The overall risk for the proposed operation is low. The political context is stable and not likely to affect the operation’s PDO. The 20th session of the Conference of the Parties (CoP) was hosted by the GoP, demonstrating the Government’s commitment to the climate change adaptation and disaster risk management agenda. The Bank will mitigate risks that may arise during implementation through close technical and policy dialogue with key stakeholders within the Government as part of continuous Bank supervision as well as technical assistance. VII. Poverty and Social Impacts and Environment Aspects Poverty and Social Impacts. A PSIA was developed according to World Bank guidelines to provide an analysis of the outcomes on poverty and inequality of the policy actions outlined in the project. For the PSIA, information was gathered from literature reviews, Specific quantitative analyses by region, gender and indigenous origin were also performed when possible. Through collaboration and the provision of evidence, the PSIA was also used to strengthen the policy dialogue with GoP counterparts. Overall, the Government policies supported by the Peru Second CAT DDO are expected to have a positive poverty and social impact. In line with the proposed operation’s main objective of enhancing disaster risk management, reducing vulnerability in infrastructure sectors and setting up a legal and institutional framework for post-disaster actions, positive impacts from each of the supported reforms is expected, given the strong links existing between natural hazards vulnerability and poverty. Environment Aspects. Prior actions selected for the proposed operation are not likely to cause significant effects on Peru’s environment, forests, and other natural resources. On the contrary, in each pillar of the operation contains prior actions that can enhance proper natural resources and environmental management. Under pillar 1, the prior action on enabling the inclusion of disaster risk information into regional development planning (through the CENEPRED Administrative Decree 044-2014 (May 23, 2014) approving the guidelines for the incorporation of DRM in the Regional Development Plans) might emphasize and capture the dynamics among vulnerabilities, disasters risks, inadequate natural resources management and regional development outcomes set in those Regional Development Plans. Under pillar 2, the prior action on strengthening flood protection programs aligned to the PLANAGERD and climate change adaptation strategy might be a robust instrument if it mainstreams, and is connected to, specific options to revert natural resource degradation such as deforestation or loss of forest cover and water pollution in targeted watersheds. Finally, under pillar 3 the establishment of a regulatory and institutional framework and coordination mechanisms to manage and finance post-disaster reconstruction processes will lead to environmentally friendly planning of critical reconstruction activities such as debris disposal, shelter location, and recovery of ecosystems, among others. VIII. Contact point World Bank Contact: Fernando Ramirez Cortes Title: Senior Disaster Risk Management Specialist Tel: (202) 473-8920 Fax: Email: framirezcortes@worldbank.org Borrower Contact: Rosario Caceres Title: Directora de la Dirección Unidad de Coordinación de Préstamos Sectoriales, MEF Tel: (511) 311-5938 Email: rcaceres@mef.gob.pe IX. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop