The World Bank Cusco Regional Development (P117318) REPORT NO.: RES33054 RESTRUCTURING PAPER ON A PROPOSED PROJECT RESTRUCTURING OF CUSCO REGIONAL DEVELOPMENT APPROVED ON NOVEMBER 22, 2013 TO THE REPUBLIC OF PERU SOCIAL, URBAN, RURAL AND RESILIENCE GLOBAL PRACTICE LATIN AMERICA AND CARIBBEAN Regional Vice President: Jorge Familiar Calderon Country Director: Alberto Rodriguez Senior Global Practice Director: Ede Jorge Ijjasz-Vasquez Practice Manager/Manager: Ming Zhang Task Team Leader: Sergio Dell'Anna, Zoe Elena Trohanis The World Bank Cusco Regional Development (P117318) ABBREVIATIONS AND ACRONYMS COPESCO Commission to Supervise the Cultural Tourism Plan PERU-UNESCO (Comisión Especial para Supervigilar el Plan Turístico Cultural PERU UNESCO) MEF Ministry of Economy and Finance (Ministerio de Economia y Finanzas) PDO Project Development Objective PIU Project Implementation Unit The World Bank Cusco Regional Development (P117318) BASIC DATA Product Information Project ID Financing Instrument P117318 Investment Project Financing Original EA Category Current EA Category Full Assessment (A) Full Assessment (A) Approval Date Current Closing Date 22-Nov-2013 31-Jan-2019 Organizations Borrower Responsible Agency REPUBLIC OF PERU Cusco Regional Government Project Development Objective (PDO) Original PDO To improve the quality of tourism and solid waste management services and increase the resilience of the tourism sector to the impacts of natural disasters in the provinces of Calca, Urubamba, and Cusco. OPS_TABLE_PDO_CURRENTPDO Summary Status of Financing Net Ln/Cr/Tf Approval Signing Effectiveness Closing Commitment Disbursed Undisbursed IBRD-83060 22-Nov-2013 24-Jul-2014 03-Nov-2014 31-Jan-2019 16.05 4.70 11.35 Policy Waiver(s) Does this restructuring trigger the need for any policy waiver(s)? No The World Bank Cusco Regional Development (P117318) I. PROJECT STATUS AND RATIONALE FOR RESTRUCTURING A. Project Status 1. An IBRD loan of US$35 million for the Cusco Regional Development Project was approved on November 22, 2013 with a closing date of January 31, 2019. Due to local government elections and the resulting changes in leadership, the loan was declared effective only on November 3, 2014. The Project Development Objective (PDO) is to improve the quality of tourism and solid waste management services and increase the resilience of the tourism sector to the impacts of natural disasters in the provinces of Calca, Urubamba, and Cusco. The project comprises four components: Component 1 - Development and Consolidation of Tourism Services; Component 2 - Integrated Solid Waste Management; Component 3 - Disaster Risk Management and Disaster Preparedness; and Component 4 - Institutional Strengthening, Management and Monitoring and Evaluation. 2. The project has consistently experienced delays in implementation, with the main challenges being: (i) the lack of key personnel and high staff turnover within the Proyecto Especial Regional Plan COPESCO — Commission to Supervise the Cultural Tourism Plan PERU-UNESCO (Comisión Especial para Supervigilar el Plan Turístico Cultural PERU UNESCO,)—which houses the Project Implementation Unit (PIU); and (ii) the overall weaknesses in procurement capacity, financial management and safeguards procedures. In addition, the communities of Parcco (Calca Province) and Poroy (Cusco Province) opposed the construction of sanitary landfills in their respective areas. 3. The project was restructured in June 2017 (following the project’s midterm review in September 2016) to prioritize activities that were deemed achievable within the remaining project time frame, such as the Urubamba and Calca landfills, tourism activities under Component 1, and some of the disaster risk prevention activities under Component 3. This restructuring included: cancellation of the construction of the Cusco landfill (Component 2); cancellation of a few sub- projects under Component 3; and a reduction of the funds available for the Competitive Fund for Tourism (Component 1) and activities under Component 4. However, the Government chose not to pursue a cancellation of funds at that time. Subsequently, due to the project’s continued poor performance, government requested a partial cancellation in the amount of US$18.9 million, which was approved by the Bank on June 28, 2018. 4. As of June 2018, only US$4.7 million, equivalent to 13 percent of the original loan amount and equivalent to 29 percent after the partial loan cancellation, had been disbursed. The project has faced major procurement issues (see below) and most of the remaining activities will not be completed by the loan closing date. As such, the project will not achieve its development objective. 5. Compliance with covenants and fiduciary policies. The project is in compliance with legal covenants and World Bank fiduciary policies. However, there have been issues with procurement and financial management. There is an overall lack of performance in procurement processes. On June 13, 2018 the Bank declared misprocurement without cancellation for the contracts for the Urubamba landfill and the Competitive Fund for Tourism. The audit report for 2015–2016, which was submitted in April 2018 after a one-year delay, showed documentation discrepancies (which relate mainly to procurement processes and procedures followed by the PIU) and internal control deficiencies, as well as their impact on the project financial statements. The revised audit report for 2015–2016, which was submitted in June 2018, was acceptable to the Bank. The 2017 audit report, which was received on June 27, 2018, was not found to be acceptable to the Bank; a revised version of the 2017 audit report was received on August 23, 2018 and was found acceptable to the Bank on September 7, 2018. COPESCO has agreed to reinforce the procurement and financial management functions for the remainder of the project and ensure compliance with Bank fiduciary guidelines and procedures. The World Bank Cusco Regional Development (P117318) 6. Status of implementation of individual project components. The status of implementation of the individual project components is summarized below. 7. Component 1: Development and Consolidation of Tourism Services. Technical specifications and bidding documents for the rehabilitation and access to the tourist site Ollantaytambo and for the rehabilitation of three observation points in the Sacred Valley (including building permits and environmental certifications) have been completed. Preparation of technical specifications and bidding documents for the rehabilitation and access to the tourist site Pisac is ongoing. However, none of the expected works will be undertaken, given the lack of time to complete the works before the loan’s closing date. The consulting service to implement the Competitive Fund for Tourism was launched, a working plan was prepared, an initial logo and campaign were launched, and 50 small enterprises were registered. However, as indicated above, the Bank declared misprocurement without cancellation for this contract following a post-procurement review. It is unlikely that the regional government of Cusco will continue to execute this contract using counterpart funds. Finally, while a few terms of reference for Technical Assistance for Strengthening of Tourism Services are ready, the consultancies will not be launched given the lack of time to complete them within the remaining project period. 8. Component 2: Integrated Solid Waste Management. The Bank declared misprocurement (without cancellation) for the contract for the construction of the sanitary landfill in Urubamba province on June 14, 2018 following a procurement post-review. In view of that, the works were financed by counterpart funds and the site was inaugurated in September 2018. The contracting process for consulting services to reinforce the capacity for operation and maintenance of the landfill is ongoing under Bank financing with the objective of having the contractor in place before the site is operational (planned for November 2018). Trucks and equipment for the collection of waste have been purchased and distributed; additional special equipment for the operation of the landfill is in the final stages of procurement. The declaration of misprocurement for the works will likely hamper the procurement of the remaining services and goods to be procured under loan financing and hence the overall operation of the landfill. 9. Technical specifications and bidding documents for the construction of the landfill for Calca province have been finalized, including building permits and environmental certifications. However, none of the bids received met the minimum criteria. Construction of this landfill will not be financed under the project as the works cannot be completed by the loan’s closing date. 10. Component 3: Disaster Risk Management and Disaster Preparedness. Technical specifications for risk mitigation works in the Ccochoq river basin in the province of Calca have been completed, but the bidding process for works will not be launched as the works cannot be completed by the loan closing date. The preparation of technical specifications and bidding documents for the Early Warning System for the Patacancha Valley in Ollantaytambo and the Kitamayu Valley in Pisac are expected to be completed before the loan’s closing date. However, the Early Warning System will not be procured under the project due to lack of time to purchase and install the system before the loan’s closing date. 11. Component 4: Institutional Strengthening, Management and Monitoring and Evaluation. Implementation of this component has been consistently affected by staff problems (lack of key personnel and high turnover) and the lack of progress of the other three components. B. Rationale for Restructuring 12. It is necessary to restructure the project to reflect the cancellation of loan proceeds processed in June 2018 and to focus the project on the few activities that can be completed before the loan closing date. The key changes proposed are summarized below. The World Bank Cusco Regional Development (P117318) II. DESCRIPTION OF PROPOSED CHANGES 13. Changes in Components and their Costs. The proposed restructuring would involve changes to Components 1, 2, 3, and 4 based on the June 2018 partial cancellation of US$18,946,215 from the loan. The proposed changes to each component are described in the following paragraphs. 14. Component 1: Development and Consolidation of Tourism Services. For Sub-component 1.1, Consolidation of Tourism Services, it is proposed to cancel the works for the rehabilitation and access to the Pisac archeological site, given the significant delays in preparing the technical specifications and bidding documents. Similarly, the works for the Ollantaytambo site and the observation points in the Sacred Valley will not be carried out. Sub-component 1.3, Technical Assistance for the Strengthening of Tourism Services, will be cancelled due to the lack of time to carry out consulting services for the preparation of plans and actions for strengthening tourist services. It is therefore proposed to reduce the loan financing for this category from US$14,651,802 to US$2,227,924 (Category 1 of the Loan Agreement, which includes Sub- components 1.1 and 1.3). 15. The scope of Sub-component 1.2, Competitive Fund for Tourism, will be reduced from US$2,000,000 to US$1,285,848 (Category 2 of the Loan Agreement, which includes only Sub-component 1.2). 16. Component 2: Integrated Solid Waste Management. Through the cancellation, the loan proceeds allocated for this component are proposed to be reduced from US$10,419,413 to US$8,774,724 (Category 3 of the Loan Agreement). Most of the funds available following the cancellation will not be disbursed. The Urubamba landfill was finalized with counterpart funds following the declaration of misprocurement. The Calca landfill is proposed to be excluded from the project due to insufficient time. Similarly, some of the associated equipment and capacity-building activities related to the Calca landfill are also proposed to be excluded from the project. 17. Component 3: Disaster Risk Management and Disaster Preparedness. It is proposed to cancel the works in the Ccochoq river basin in Calca province due to the significant delays in the preparation of technical specifications and bidding documents. Procurement and the installation of the Early Warning System in the Patacancha Valley in Ollantaytambo and the Kitamayu Valley in Pisac are also proposed to be excluded from the project due to time constraints. Similarly, due to limited time, the consulting service for the Emergency Preparedness and Risk Reduction Plan is proposed to be excluded from the project. The loan proceeds available for this component are therefore proposed to be reduced from US$4,916,781 to US$2,481,474. (Category 4 of the Loan Agreement). 18. Component 4: Institutional Strengthening, Management and Monitoring and Evaluation. Based on the utilization of funds to date and an estimate of the requirements until the loan closing date, it is proposed to reduce the allocation of loan proceeds for this component from US$3,012,004 to US$1,283,815. 19. Table 1 provides a summary of the proposed project activities (by component) and their expected results. Table 1: Summary of Project Activities and Expected Results Project Activities Expected Results Component 1: Development and Consolidation of Tourism Services Pisac - Road rehabilitation and archeological works Technical specifications Ollantaytambo - Road rehabilitation and archeological works Technical specifications Observation sites Technical specifications Competitive Fund for Tourism Initiated Component 2: Integrated Solid Waste Management The World Bank Cusco Regional Development (P117318) Urubamba landfill Completed Calca landfill Technical specifications, permits, and bidding documents Capacity building for landfill operation (Profesionalización) Under bidding, expected to be completed Consultancy for the set-up of a financial management trust fund (Fideicomiso) Terms of Reference Rural and Social Safeguard Plans Expected to be completed Machinery (trucks, heavy machinery for landfill operation, protection and Partially purchased cleaning materials) Component 3: Disaster Risk Management and Disaster Preparedness Early Warning System for Kitamayu and Patacancha Technical specifications Prevention and Risk Reduction Plan Terms of reference Component 4: Institutional Strengthening, Management and Monitoring and Evaluation Project Management Scope reduced 20. Safeguards. There are no changes to the Bank safeguards policies applicable to the project and project will remain a Category A project. 21. Changes in disbursement estimates. The disbursement estimates are proposed to be revised based on disbursements processed to date and disbursements that are forecasted for the remainder of the project period, taking the proposed changes into account. Most of the loan funds available following the June 2018 partial cancellation will not be disbursed. The project is expected to close with an estimated disbursement of US$ 4.8 million, equivalent to 13.7 percent of the original approved loan and 29.9 percent of the post-partial cancellation loan amount, and an undisbursed balance of about US$ 11.2 million. 22. Change in implementation schedule. COPESCO has prepared a revised implementation plan for the project, which focuses on the key activities related to the operationalization of the Urubamba landfill. This plan is acceptable to the Bank. 23. Changes in procurement. The Procurement Plan has been updated to reflect the changes in project scope and is acceptable to the Bank. 24. Changes in the Results Framework. It is proposed to revise the Results Framework to reflect the proposed changes to the project. Accordingly, the following indicators will be dropped: PDO Indicator 1 (percent reduction in the dissatisfaction rating of the upgraded tourism sites under the project) and PDO Indicator 3 (number of people covered by a functioning early warning system for natural disasters); and Intermediate Results Indicator 2 (existing tourism sites equipped with improved infrastructure installments) and 7 (emergency preparedness plan established for tourists). In addition, the following indicators have been revised: PDO Indicator 2 (number of people in the project area from whom waste is collected and disposed in one of the project sanitary landfills) and PDO Indicator 4 (direct project beneficiaries); and Intermediate Results Indicators 3 (industrial and municipal waste disposal capacity created under the project), 4 (informal and formalized recyclers benefiting from project social inclusion activities), 5 (number of provincial sanitary landfills constructed under the project), and 6 (number of municipalities provided with equipment and works for improved collection, recycling and street sweeping). The World Bank Cusco Regional Development (P117318) III. SUMMARY OF CHANGES Changed Not Changed Results Framework ✔ Components and Cost ✔ Reallocation between Disbursement Categories ✔ Disbursement Estimates ✔ Overall Risk Rating ✔ Implementation Schedule ✔ Implementing Agency ✔ DDO Status ✔ Project's Development Objectives ✔ Loan Closing Date(s) ✔ Cancellations Proposed ✔ Disbursements Arrangements ✔ Safeguard Policies Triggered ✔ EA category ✔ Legal Covenants ✔ Institutional Arrangements ✔ Financial Management ✔ Procurement ✔ Other Change(s) ✔ Economic and Financial Analysis ✔ Technical Analysis ✔ Social Analysis ✔ Environmental Analysis ✔ IV. DETAILED CHANGE(S) The World Bank Cusco Regional Development (P117318) OPS_DETAILEDCHANGES_COMPONENTS_TABLE COMPONENTS Current Current Proposed Proposed Cost Action Component Name Component Name Cost (US$M) (US$M) Development and Development and Consolidation 22.20 Revised Consolidation of Tourism 3.52 of Tourism Services Services Integrated Solid Waste Integrated Solid Waste 12.96 Revised 8.77 Management Management Disaster Risk Management and Disaster Risk Management and 7.51 Revised 2.48 Disaster Preparedness Disaster Preparedness Institutional Strengthening, Institutional Strengthening, Management and Monitoring 5.59 Revised Management and Monitoring 1.28 and Evaluation and Evaluation TOTAL 48.26 16.05 OPS_DETAILEDCHANGES_REALLOCATION _TABLE REALLOCATION BETWEEN DISBURSEMENT CATEGORIES Financing % Current Allocation Actuals + Committed Proposed Allocation (Type Total) Current Proposed IBRD-83060-001 | Currency: USD iLap Category Sequence No: 1 Current Expenditure Category: GO,CW,NCS,CS,TR,WKP - Pts 1.1 &1.3 2,227,924.00 350,378.41 2,227,924.00 100.00 100.00 iLap Category Sequence No: 2 Current Expenditure Category: GO,NCS,CS - Pts 1.2 1,285,848.00 101,271.06 1,285,848.00 100.00 100.00 iLap Category Sequence No: 3 Current Expenditure Category: GO,CW,NCS,CS, TR & WKP - Pt 2 8,774,724.00 3,123,057.57 8,774,724.00 100.00 100.00 iLap Category Sequence No: 4 Current Expenditure Category: GO,CW,NCS,CS, TR & WKP - Pt 3 2,481,474.00 124,531.73 2,481,474.00 100.00 100.00 The World Bank Cusco Regional Development (P117318) iLap Category Sequence No: 5 Current Expenditure Category: GO,NCS,CS(incl. Audit),TR & WKP, OP - Pt 4 1,283,815.00 0.00 1,283,815.00 100.00 100.00 Total 16,053,785.00 3,699,238.77 16,053,785.00 OPS_DETAILEDCHANGES_DISBURSEMENT_TABLE DISBURSEMENT ESTIMATES Change in Disbursement Estimates Yes Year Current Proposed 2014 0.00 0.00 2015 0.00 0.00 2016 1,000,000.00 1,000,000.00 2017 10,486,000.00 1,000,000.00 2018 18,965,000.00 3,000,000.00 2019 4,549,000.00 1,000,000.00 2020 0.00 0.00 2021 0.00 0.00 OPS_DETAILEDCHANGES_SORT_TABLE SYSTEMATIC OPERATIONS RISK-RATING TOOL (SORT) Risk Category Rating at Approval Current Rating Political and Governance  High Macroeconomic  Moderate Sector Strategies and Policies  Substantial Technical Design of Project or Program  High Institutional Capacity for Implementation and  High Sustainability Fiduciary  High Environment and Social  High Stakeholders  High The World Bank Cusco Regional Development (P117318) Other Overall  High The World Bank Cusco Regional Development (P117318) . Results framework COUNTRY: Peru Cusco Regional Development Project Development Objectives(s) To improve the quality of tourism and solid waste management services and increase the resilience of the tourism sector to the impacts of natural disasters in the provinces of Calca, Urubamba, and Cusco. Project Development Objective Indicators by Objectives/ Outcomes RESULT_FRAME_TBL_PDO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 To improve the quality of tourism and solid waste management services and increase the resilience of (Action: This Objective is New) Percent reduction in the dissatisfaction rating of the upgraded tourism sites 0.00 0.00 0.00 0.00 0.00 30.00 30.00 under the Project (Percentage) Action: This indicator has been Marked for Deletion Number of people (tourists and residents) in the Project area from whom waste is 0.00 0.00 0.00 0.00 0.00 751,683.00 751,683.00 collected and disposed in one of the Project sanitary landfills (Number) Action: This indicator has been Revised The World Bank Cusco Regional Development (P117318) RESULT_FRAME_TBL_PDO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 Number of people (tourists and residents) covered by a functioning early warning 0.00 0.00 0.00 27,500.00 27,500.00 27,500.00 703,044.00 system for natural disasters under the Project (Number) Action: This indicator has been Marked for Deletion Direct project beneficiaries 0.00 0.00 0.00 0.00 0.00 751,683.00 751,683.00 (Number) Action: This indicator has been Revised Female beneficiaries 0.00 49.40 49.40 49.40 49.40 49.40 49.40 (Percentage) Action: This indicator has been Revised PDO Table SPACE Intermediate Results Indicators by Components RESULT_FRAME_TBL_IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 Development and Consolidation of Tourism Services (Action: This Component is New) Pilot Competitive Fund for Tourism for small No No No No Yes Yes Yes businesses in the Sacred Valley operational (Yes/No) The World Bank Cusco Regional Development (P117318) RESULT_FRAME_TBL_IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 Existing tourism sites equipped with improved 0.00 0.00 1.00 2.00 3.00 3.00 3.00 infrastructure installments (Number) Action: This indicator has been Marked for Deletion Integrated Solid Waste Management (Action: This Component is New) Industrial and municipal waste disposal capacity (per 0.00 0.00 0.00 0.00 0.00 9,125.00 9,125.00 year) created under the project (Metric ton) Action: This indicator has been Revised Informal and formalized recyclers (households) benefiting from Project 0.00 0.00 0.00 0.00 0.00 11.00 11.00 social inclusion activities. (Number) Action: This indicator has been Revised Number of Provincial sanitary landfills 0.00 0.00 0.00 0.00 0.00 1.00 1.00 constructed under the Project (Number) Action: This indicator has been Revised The World Bank Cusco Regional Development (P117318) RESULT_FRAME_TBL_IO Indicator Name DLI Baseline Intermediate Targets End Target 1 2 3 4 5 Number of municipalities provided with equipment and works for improved 0.00 0.00 0.00 0.00 12.00 12.00 12.00 collection, recycling and street sweeping (Number) Action: This indicator has been Revised Disaster Risk Management and Disaster Preparedness (Action: This Component is New) Emergency Preparedness Plan established for tourists No No No No Yes Yes Yes (Yes/No) Action: This indicator has been Marked for Deletion Strategic Regional Plan updated for prevention and No No No Yes Yes Yes Yes reduction of disaster risk (Yes/No) IO Table SPACE Click here to enter text. The World Bank Cusco Regional Development (P117318)