Documentof TheWorld Bank FOR OFFICIAL USEONLY ReportNo. 26754-PE INTERNATIONAL BANKFOR RECONSTRUCTIONAND DEVELOPMENT PROGRAM DOCUMENT FORA PROPOSED PROGRAMMATIC SOCIAL REFORMLOAN 111 INTHEAMOUNTOFUS$lSO MILLION TO THE REPUBLIC OF PERU October 14,2003 HumanDevelopmentDepartment Bolivia, Ecuador,Peruand Venezuela Country ManagementUnit LatinAmerica andthe CaribbeanRegion This document has a restricted distribution and may beused by recipients only inthe performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. REPUBLIC OFPERU-GOVERNMENTFISCAL YEAR January 1-December 31 CURRENCYEQUIVALENTS (Exchange Rate Effectiveas of 09/26/03) Currency Unit =Nuevo Sol US$l.OO = 3.48 WEIGHTSAND MEASURES Metric System ABBREVIATIONS AND ACRONYMS AFP Administrator of Pensions Funds (Administradora de Fondos de Pensiones) INIED National Instituteof Infrastructure(InstitutoNacidnal de CACE Educational Advisory Center (Centro deAtencidn Infraestructura) a la ComunidadEducativa) JSDF Japan Social Development Fund CGR Supreme Audit Institution (Contralori'a General de MEF Ministry of Economy andFinance (Ministerio de la Repliblica) Economia y Finanzas) CIAS Inter-Ministerial Social Policy Commission MIMDES Ministry of Women and DevelopmentAffairs (Comisidn Interministerial deAsuntos Sociales) (Ministerio de la Mujer y de Desarrollo) CLAS Community ManagedHealthFacilities MINED Ministry of Education(Ministerio deEducacidn) (Comunidades Locales deAdministracidn de MINSA Ministry of Health(Ministerio de Salud) Salud) MIPRE Ministry of the Presidency (Minisrerio de la CND NationalCouncil for Decentralization (Consejo Presidencia) Nacional de Descentralizacidn) MMM Multi-Annual MacroeconomicFramework (Marco CONSUCODE NationalCouncil for ContractsandProcurement Macroecondmico Multianual) (Consejo Superior de Contrataciones y MSM Multi-Annual Social Framework(Marco Social Adquisiciones del Estado Multianual) COOPOP Popular Cooperation(CooperacidnPopular) ONP Oficina de Normalizaci6nProvisional(OfSiceof CTAR Transitory Council of RegionalAdministration Pensions Administration) (Consejos Transitorios de Administracidn Regional PAYG Pay-As-You-Go CUANTO CUANTO, Research Center (Centro de PCM PrimeMinister's Office (Presidenciade Consejo de Investigacidn CUANTO) Ministros) DFID Departmentfor IntemationalDevelopment PETS Public Expenditure Tracking Survey DGAES General Directoratefor Economies SocialAffairs PRONAA National FoodAssistance Program (ProgramaNacional (Direccidn General de Asuntos Econdmicos y de Asistencia Alimentaria) Socials) PSAL Programmatic Structural Adjustment Loans DISA RegionalHealth Department(Direcciones PSP Priority Social Programs (Programas Sociales Regionales de Salud) Priorizados) DMT DepartmentalManagement Team PSRL Programmatic Social ReformLoan ENAHO NationalHouseholdSurvey (EncuestaNacional de RM ResourceManagement Hogares) ROC RegionalOperations Committee ESSALUD Health Social Security Institute(formerly known as SBS Banking and InsuranceSuperintendence IPSS) (Superintendencia de Banca y Seguros) FIDE IntergovemmentalDecentralization Fund SEACE ElectronicProcurementand Contracting System of the FONCODES Social Investmentand CompensationFund(Fondo State (SistemaElectrdnico deAdquisiciones y Nacional de Compensacidn y Desarrollo Social Contrataciones del Estado) FONCOR RegionalCompensationFund(Fondo de SIAF IntegratedFinancialSystem (SistemaIntegrado de CompensacidnRegional) Administracidn Financiera} GDP Gross Domestic Product SIS Integral HealthInsurance(Seguro Integral de Salud) GIS Geographic Information System SIVISO Systemof Social Accountability of Antipoverty GOP Governmentof Peru Programs(Sistema de Vigilancia Social) IMF IntemationalMonetary Fund SNP National Pensions System (SistemaNacional de INEI NationalStatistics Institute (InstitutoNacional de Pensiones) Estadistica e Informa'tica) SPP PrivatePensions System(SistemaPrivado de INFES NationalInfrastructure Institutefor Educationand Pensiones) Health (lnstituto Nacional de Infraestructura en SUNAT National Superintendence of Tax Administration Educacidn y Salud) (SuperintendenciaNacional deAdministracidn Tributaria) WFP World FoodProgram Vice President: David De Ferranti Country Director: Marcelo Giugale Sector Director: Ana-Maria Arriagada Sector Leader: Daniel Cotlear Task Team Leader: Daniel Cotlear FOROFFICIAL USEONLY TABLE OF CONTENTS I INTRODUCTION . .............................................................................................................. 1 I1 THE ECONOMICAND SOCIAL SETTING . ................................................................ 3 A POLITICAL CONTEXT ............................................................................................................. ......................3 B MACROECONOMIC c.POVERTYAND .. CONDITIONSAND 0.00K 3 SOCIALINDICATORS ............................................................................................................ ........................................................................................ 8 D WCENT TRENDSINSOCIALEXPENDITURE . ................................................................................................ 9 111 THEGOVERNMENT'SMEDIUMTERMSTRATEGY . ........................................ 11 A THENATIONAL AGREEMENT ................................................................................................................... 11 B THESTRATEGYFORPOVERTY .......................................................................................................... ............................................................................................. 12 C THEDECENTRALIZATION ... REDUCTION PROCESS 13 I V THE SOCIALREFORMPROGRAM . ........................................................................ 14 A IMPROVING. THE ANTI-POVERTY FOCUSOFPUBLIC EXPENDITURES ....................................................... 14 A.1. POVERTY REDUCTION STRATEGY ............................................................................................... 14 A.2. SHIFTINGTOPRO-POORPROTECXEDEWENDITVRE ................................................................. 15 A.3. TARGETING OF SOCIAL PROGRAMS: PENSION REFORM ............................................................ 18 A.4. TARGETINGOFSOCIALPROGRAMS-THEA TRAB~~~ARWORKFAREPROGRAM .......................... ...................... 21 AS .TARGETING OFSOCIAL PROGRAMS-RURAL INFRASTRUCTUREPROGRAMS 22 AND ........................................................... 23 B IMPROVING ACCESSTOQUALITY . A.6. DECENTRALIZATION REFORMOFFOODPROGRAMS HEALTH AND EDUCATION SERVICES ................................................... 26 B.1. HEALTH CARE 26 B.2. EDUCATION .................................................................................................................................. .............................................................................................................................. 31 C TRANSPARENCY PARTICIPATION THEPOOR ................................................................................ 35 D TRANSPARENCY .. AND OF OFFINANCIALAND PROCUREMENTADMINISTRATION ................................................ 40 D.1. PROCUREMENT ADMINISTRATION ............................................................................................. 40 D.2. FINANCIAL ADMINISTRATION ..................................................................................................... 41 V THE PROPOSEDLOAN . ................................................................................................ 44 A LINKTO COUNTRYASSISTANCE STRATEGY 44 B PROGRAMOBJECTIVES. BENCHMARKS TRIGGER^... .. ............................................................................................. AND ........................................................................ 45 c.LOANDISBURSEMENTANDAUDITS........................................................................................................... B.1. PRIORACTIONS FORPSRL111AND TRIGGERS FORPSRL Iv.................................................. 45 54 D PROCUREMENT .......................................................................................................................................... 54 E ENVIRONMENTAL .. ASPECTS ....................................................................................................................... 54 F MONITORING EVALUATION ............................................................................................................... 56 G BENEFITSAND RIS ~s .. AND ................................................................................................................................. 57 ANNEX 1: LETTERPOLICY FROMTHEGOVERNMENTOFPERU OF ............................................................. 61 ANNEX 2: PSRL 111TRIGGERSPROPOSED DURING APPROVALOF PSRL 11AND PRIORACTIONS ..........86 ANNEX 3: JUSTIFICATION MOVINGPERUTO A HIGHCASECAS LENDING FOR SCENARIO ....................... 91 This document has a restricted distribution andmay be usedby recipients only in the performance of their official duties I t s contents may not be otherwise disclosed without World Bank authorization . . ANNEX 4: RESULTS MONITORINGPSRLI11 IN ............................................................................................. 93 ANNEX 5: PARTICIPATIONANDTRANSPARENCY ............................................................................................ 97 ANNEX 6: DECENTRALIZATION .................................................................................................................... 105 ANNEX 7: PERU-KEY ECONOMICINDICATORS ........................................................................................... 110 ANNEX 8: PERU- KEY EwOSUREINDICATORS ........................................................................................... 113 ANNEX 9: PERUAT A GLANCE ...................................................................................................................... 114 ANNEX 10: OPERATIONSPORTFOLIO(IBRD/IDA AND GRANTS) ............................................................. 116 ANNEX 11: STATEMENT OF IFC's ............................................................................................................... 117 FIGURES FIGURE1 GDPANDINFLATION (PERCENTCHANGE) ........................................................................................ 4 FIGURE2 TAXREVENWGDP(PERCENT) ......................................................................................................... 6 FIGURE3 PRIMARYBALANCES THEGOVERNMENT ... OF (PERCENT OF GDP) .................................................... 6 FIGURE4 SOCIALEXPENDITURES: . 10 FIGURE5 SPENDINGINPRIORITY SOCIALPROGRAMS(PERCENT OFGDP) . PERU1999.2003 ....................................................................................... .................................................. 11 TABLES TABLE1 .......................................................................................... 7 TABLE2 PERU: NONFINANCIALPUBLIC SECTORFINANCINGNEEDS ..VULNERABILITY INDICATORS. 1999-2003 (us$MILLIONS)................................ 8 TABLE3 POVERTYRATESBY REGION. 2001 ...................................................................................................... 8 TABLE4 PERU: PRIORITY SOCIAL PROGRAMS (NON-SALARY CURRENT AND CAPITAL ORDINARYBUDGET .. (MILLIONSOLES) 16 TABLE5 PERU SIS MAINPERFORMANCEINDICATORS ............................................................................... 28 TABLE6 PRIORACTIONSAND ORIGINALTRIGGERSFORPSRL111 .. - ............................................................................................................................................... .............................................................. TABLE7 PRIORACTIONSFORPSRL111.TRIGGERS TABLE8 RISKSAND MITIGATING .. ACTIONS ...............................................................................................................46 FOR PSRL IvANDMONITORING INDICATORS 47 57 This project was preparedby a team that included: Daniel Cotlear (Task Team Leader. LCSHD). Jose Roberto Lopez Calix (Macro- framework and protected programs. LCSPE). Elaine Tinsley (Macro annexes. LCSPE). Livia Benavides (Education. LCSHD). Juan Pablo Uribe (Health. LCSHD). Pedro Francke (Targeting and food programs. LCSHD). Rafael Rofman (Pensions. LCSHD). William Reuben and Annika Silva-Leander (Participationand Transparency. SDV). Elizabeth Dasso (Participation and Transparency.LCCPE). Kathrin Plangemann (Decentralization. Participation. Transparency. LCSPS). Keisgner Alfaro (Sr. Procurement Specialist. LCOPR). Patricia Mc Kenzie (Sr. FinancialManagementSpecialist. LCOAA). Ana Karina Rozas (general support. Junior ProfessionalLCSHD). and Luisa Maria Yesquen (Language Program Assistant. LCSHD). In addition. a number of people provided useful comments and revisions at different states of the process: Charles Griffin and Shantayanan Devarajan (peer reviewers). Vicente Fretes-Cibils (Lead Economist and Sector Leader PREM. LCC6A). Andrea Silverman (Sector Leader. LCSFP). Evangeline Javier (Sector Manager LCSHH). Christopher Chamberlin (Sector Manager LCSHS). Gillette Hall (LCSHS). Karla McEvoy (LCSHS). Truman Packard (LCSHD) Katherine Bain (Team Leader LCSPR). Daniela Gressani (Director. Strategy and Operations LCRVP). Isabella Micali Drossos(Sr.Counsel.LEGLA) . REPUBLICOF PERU PROGRAMMATICSOCIALREFORMLOANI11 LoanAnd ProgramSummary Borrower: Republic of Peru Beneficiary: Ministryof Economy andFinance Amount: For a Fixed-SpreadLoan (FSL)of US$lSO.O million. Terms: Fixed Spread Loan in U.S. dollars with 14 years maturity, including an 8-year grace period with commitment-linked schedule and customized level principal repayment. Front-EndFee: 1%on principal amount, to be withdrawn from Loan Account on or promptly after the Effective Date CommitmentFee: 0.85% on undisbursed loan balances for first four years, standard charge of 0.75% on undisbursed loan balances thereafter, beginning 60 days after signing, less any waiver. Obiectivesand The thirdProgrammatic Social ReformLoan (PSRL 111) Description: continues to provide Bank support to the Government's medium- term social reform program. The medium term objectives of this program are to: (i)improve the anti-poverty focus of public expenditures; (ii) improve the access of the poor to quality health and education services; and (iii)improve the transparency of social programs and empower their beneficiaries in the design and implementation of these programs. The main achievements of PSRL I11 are: Component I: Improve the anti-poverty focus of public expenditures: (i) Priority Social Programs (PSPs) are the being protected despite pressures arising from demands for increased teacher and health worker salaries and from new administrative needs linked to decentralization; (ii) targeting of several key anti-poverty programs has improved; (iii) legislation has been approved to reduce untargeted subsidies to high income pensioners; (iv) legislation presented to Congress includes the decentralization of food aid programs with measures to improve targeting and performance-management. Component 2: Improve the access of the poor to health and education programs: (i) significant gains in health care coverage have been obtained and pro-poor reforms inhealthpolicy are becoming mainstreamed; and (ii)progresshasbeenmadeindevelopingtheeducation sector's human resources management system. Component 3: Improve the transparency and social oversight of resource allocation: (i) transparency has improved with the widespread implementation of a user-friendly information system that allows beneficiaries to monitor budgets and expenditures for all PSPs and physical goals and results for a group of PSPs; and (ii) social participation was strengthened by the launch of user satisfaction scorecards and the i institutionalizationof user satisfaction surveys and by the approval of new TransparencyLegislation. The PSRL I11will continue to protect critical social programs for the poor in a time when the country is facing the double adjustment of reducing the fiscal deficit and confronting the cost of decentralization. It will also help increase the quality and efficiency of social expenditures by increasing the coverage of key services for the poor. It will help set the framework for decentralization by supporting the launch of the first decentralization package, particularly food programs. At the same time, PSRL I11 helps set the stage for further social sector decentralization by supporting the development of key instruments (such as SIS, Performance Agreements, teacher electronic payrolls) needed to decentralize health and education services. The mechanismsfor public oversight of social policy supported by the operation will enhance the influence and voice of the poor on key social programs and help strengthen civil society at the national, regional andlocal level. The intersectoral approach of the PSRL has strengthened the contacts between the Ministry of Economy and Finance, the Office of the Prime Minister, the Ministry of Women and Social Development and the Ministries of Educationand Health. - Risks: The country faces four principal risks to the successful continuation of the social reform program. The first risk is fiscal sustainability related to insufficient tax reform, pressure for high spending linked to pressuresto increase wages in the public sector and an inadequate fiscal decentralization framework. Mitigation actions for this risk include: the granting of legislative powers to the executive to pass a tax reform in September 2003; the positive IMFreview of the Stand By Arrangement and the relaunch of the National Agreement to regain consensus and governance; and the passing of key legislation to ensure that subnational government debt and tax policy have a fiscally responsible framework. The second risk i s external; a narrow export base dependent on commodities increases the economy's exposure to terms of trade shocks. Mitigation actions include the promotion of export diversification and competitiveness enhancement and the maintenance of a flexible exchange rate policy which permits the country to adapt better to external shocks. A third risk is that the Government commitment to priority social programs (PSPs) i s lost in the context of decentralization, leading to backtracking in the gains achieved in targeting, efficiency, quality and monitoring of the PSPs or that there is lack of capacity to implement the reforms. To mitigate these risks, the draft 2004 Budget Law and the draft Intergovernmental Transfer Law (both presented to Congress) provide special protection to the budget of PSPs, utilize pro-poor criteria to distribute their funds, and provide for the use of performance agreements to emphasize results and efficiency. Capacity building for the implementation of reforms i s supported by the Bank and other agencies in the form of analytical and advisory work in the areas of health, education and food aid; .. 11 investment operations in the areas of health and rural education; and a planned technical assistance loan that would, interalia, provide support for developing a monitoring and evaluation systemfor a decentralized context. Scheduleof Disbursements: US$150 million immediately after loan effectiveness, planned for November 2003. Poverty Categorv: The proposed loan is directly focused on budget protection for priority social sectors andon improvedtargeting. Rate of Return: Not applicable. PraiectIDNumber: PE-PO78951 Maw IBRD26572R1 ... 111 I.INTRODUCTION 1. This memorandum describes the third Programmatic Social Reform Loan (PSRL 111)to the Republic o f Peru, a single-tranche loan for US$150 million to continue Bank support to the Government's medium-term social reform program. The medium term objectives of this program are to: (i) the anti-poverty focus of public expenditures; (ii) improve improve the access of the poor to quality health and education services; and (iii) improve the transparency of social programs and empower their beneficiaries in the design and implementation of these programs. The PSRL Iwas prepared in 2001 with the Transition Government that followed the demise o f the Fujimori Government and emphasized transparency and budgetary protection of key social programs. PSRL I1was prepared in 2002, during the first year of the Toledo Administration and supported the design and launch of longer term reforms in anti-poverty programs and the social sectors. The Implementation Completion Report for PSRL I1 rated the loan as having a satisfactory outcome, likely sustainability and modest institutional development impact. 2. Inits original design, the PSRLseries was expected to conclude with a consolidation of social and anti-poverty reforms in PSRL 111. Indeed progress in implementing the original program to be supported by PSRL I11has been broadly on track with a few areas proceeding faster and a few others more slowly (see paragraph 5, Sections IV and V and annex 2). However, progress in two additional areas has been considerably faster than expected. In the area of pensions, there i s a renewed effort to give a strategic direction to reforms and to control the growth of untargeted subsidies. Second, decentralization i s being implemented more rapidly than expected, with a major impact on the social sectors. Starting in mid-2002, legislation has been passed giving regional governments and municipalities significant responsibilities and funding for social programs, also regional authorities have been elected for the first time. A group of social programs are being transferred to municipal and regional governments in 2003, and more programs and funds will be transferred in 2004. Reflecting these new, larger challenges and accelerated reforms, the proposed PSRL I11is in an amount of US$l50 million (from an original expected amount of US$lOO million) and a fourth PSRL i s proposed to be added to the program to consolidate the social reform program in a decentralized context. In the new context, several areas o f reform not previously foreseen have been added to PSRL 111: (i) legislation has been presented to Congress to ensure that the decentralization of the food aid programs also improves the targeting and the emphasis on results; (ii) 2004 Budget proposed the to Congress provides new institutional safeguards to prevent diversion of funds from Priority Social Programs (PSPs) in the context of decentralization; (iii) legislation has been passed to reduce subsidies to high-income pensioners; and (iv) a new Transparency Law has been passed, giving increased access to public information. 3. The Government has also requested a new Programmatic Structural Adjustment Loan focusing on Growth and Fiscal decentralization. In the area of decentralization, the new PSAL would cover the broader issues of decentralization, including fiscal decentralization and competitiveness, while the PSRL IV would exclusively deal with the decentralization of the social programs. These two loans have been envisaged as part of the High Case scenario in the CAS approved by the Board on August 19, 2002. Peru has complied with all triggers enabling it to move to the HighCase lendingscenario as discussed inAnnex 3. 4. Reforms under the PSRL series have been supported by policy dialogue and technical assistance provided through analytical and advisory services, and under World Bank-financed 1 investment and technical assistance operations. The design of the PSRL benefited from the recommendations of several economic and sector reports including a health report (Peru: Improving Health Care for the Poor. Report No. 18549, dated May 28, 1999), an education report (Peru: Education at a Crossroads. Report No. 19066, dated December 30, 1999), a Public Expenditure Review (Peru: Restoring Fiscal Discipline for Poverty Reduction. Report No. 24286, dated October 24, 2002), and a study on pensions, currently under preparation (Peru: Restoring the Multiple Pillars of Old Age Income Security) or from informal advisory studies on decentralization of the social sectors and the food aid programs. Furthermore, implementation of the reforms under PSRL i s being supported by ongoing Bank-financed investment projects in health (Health Reform APL. Loan No. 3244-PE), education (Rural Education APL, Loan No. 7176-PE), and water and sanitation (PRONASAR. Loan No. 7142-PE). They will also be complemented by a technical assistance from a JSDF grant, a technical assistance loan currently under preparation and by a further analytical work on food aid programs. Support from other agencies has also been important for the implementation of the PSRL, including on decentralization by the IADB, in health by IADB, PAHO, USAID and DFID and in Education by IADB, USAID, DFID, GTZ and CIDA. 5. As explained in more detail below (in sections IV and V), the main achievements of PSRL I11consist of ComponentI:Improve the anti-povertyfocus of public expenditures: The Priority Social Programs (PSPs) are being protected despite pressures arising from demands for increased teacher and health worker salaries and from new administrative needs linked to decentralization; Targetingof several key anti-poverty programshas improved; Legislation has been approved to reduce untargeted subsidies to highincome pensioners; Legislation presented to Congress includes the decentralization of food aid programs with measuresto improve targeting andperformance-management. Component 2: Improve the access of thepoor to health and educationprograms Significant gains in health care coverage have been obtained and pro-poor reforms in health policy are becoming mainstreamed; Progress has been made in developing the education sector's human resources management system. Component3: Improve the transparency and social oversight of resource allocation Transparency has improved with the widespread implementation of a user-friendly information system that allows beneficiaries to monitor budgets and expendituresfor all PSPs and physical goals and results for a group of PSPs; Social Participation was strengthened by the launch of user satisfaction scorecards and the institutionalization of user satisfaction surveys and by the approval of new Transparency Legislation. 6. This Project Document (PD) i s organized as follows. Section I1of the PD describes the economic and social setting for the loan, including a description of the evolution of social expenditures. Section 111 describes the Government's medium term strategy. Section IV 2 describes progress in the social reform program and future challenges. Section V describes the loan, including the prior actions under PSRL I11and the proposed triggers for PSRL IV. 11. THE ECONOMICAND SOCIAL SETTING A. PoliticalContext 7. The arrival of President Toledo has strengthened democracy in Peru. After a decade o f the Fujimori regime and a short transitional government, President Toledo was elected to office amidst an economic recession. Beginning its period in July 2001, the new government received support from the international community at the Madrid Consultative Group Meeting in October 2001, signed a two-year Stand-By Agreement with the IMF in February 2002, and a National Agreement ("Acuerdo National") to catalyze consensus between the major political parties, unions and civil society on an ambitious poverty reduction agenda supported by fiscal discipline and decentralization inJuly 2002. 8. Though the economy i s stable and growing, the Government's agenda continues to face difficult political challenges. Political tensions have risen, but the administration has so far maintainedlegislative support for keeping the reform program on track. By end-2002, a regional protest in Arequipa stopped the privatization of two power plants. In May 2003, the country entered into a state of emergency to deal with a strike by public sector workers and agriculture producers. Recently, elected regional governments are pressing for greater transfers some remain opposed while others are reaching a more realistic approach, looking for ways to balance their finances with their own initiatives. Nevertheless, the Government has maintained fiscal responsibility. In April it passed a revised Law of Fiscal Prudence and Transparency; and in June-July, i t approved tax and spending measures to finance the increased wages, rather than seeking a higher deficit. 9. A new Cabinet was appointed inJuly. The new Prime Minister, Beatriz Merino, and her team have brought renewed strength to the Government's reform program. Her plan is comprehensive and ambitious and includes a new system of concessions that would be attractive to the regional governments, a tax reform and fiscal measures to ensure the fiscal sustainability of the reform process, and the merging and decentralization of the social programs, including the introduction of conditioned transfers, benchmarks and performance management at the subnational level. She also declared a state of emergency in the Education Sector. The polls have reacted very favorably to the new Cabinet, giving it approval ratings of over 50 percent. The international markets have also reacted favorably: by end-August, the EMBI fell to its lowest historic level during the present administration: 357 basis points. B. MacroeconomicConditionsand Outlook 10. The political environment has not affected the continued improvement of the economy. In 2002, a year of deep recession for Latin America (average GDP growth was -1.2 percent), Peru's growth was highest in the region. Led by mining, manufacturing and construction, real GDP grew 5.3 percent (nearly two points above the original forecasts of 3.5 percent). In 2003, GDP growth in the non-primary sectors slowed down in April-May, but 3 improved in June, indicating that the projected 4 percent growth i s likely to be achieved (Figure 1). The annual inflation rate at 1.5 percent (end-of period) was the second lowest inthe region in 2002. InJuly 2003, following a four month consecutive decline, inflation was at 2 percent year over year; near the bottom of the Central Bank's target range of 1.5-3.5 percent for 2003. International reserves are adequate-more than twice the level of short term external debt liabilities-and increasing due to a dynamic export performance and strong private capital- namely foreign direct investment-inflows into sizable mining investment projects, which put moderate pressure on the Nuevo Sol to appreciate. Supported by declining international interest rates, spreads on local and dollar interest rates remain stable. The unemployment rate shows a moderate declining trend since March, although unemployment in Lima has not fallen and most employment increases have been concentrated inlarge firms. Figure 1. GDPand Inflation (percent change) 6% 10% 5% 8% 4% 6% 3% 4% 2% 1Yo 2% 0% 0Yo -1Yo -2% 98 99 00 01 02 03 RealGDP. LHS - Inflation, RHS 11. The economic programsigned under the Stand-By Arrangement with the IMF is on track and international markets remain confident that it will continue on sound course. All Stand-by performance criteria and most structural benchmarks were met for the end of June. Structural benchmarks include a revised Fiscal Prudence and Transparency Law (FPTL), new proposed legislation on tax reform (including the elimination of regional and sectoral tax exemptions), and legislation on fiscal decentralization. Negotiations for a new Arrangement would start late this year. EMBI spreads on Peruvian external bonds have followed a declining trend, linked to domestic political events: it decreased from a peak 820 basis points in August 2002 to 420 basis points last May, then increased to 490 basis points following the events that led to the Cabinet reshuffle last July, and bottomed down again to a historic low level of 357 end-August following new Prime Minister Merino's announcement of "strict austerity" as general policy, and consolidation of the reform o f the state, tax, social security, decentralization 1. Data are from the Central Reserve Bank of Peru and the Ministry of Labor. 4 and education as specific policy priorities. Currently, Peru's spreads are in line with those of Mexico and Panama. 12. A marked improvement in external conditions-terms of trade and capital inflows-have contributed to Peru's economic recovery, healthy external balances and solid reserve position. Supported by a 2.5 percent increase in the terms of trade, due to increasing mineral prices and falling oil prices, exports grew 9.1 percent in 2002 and imports 2.3 percent, a trend that continued up to the first semester of 2003. As a result, the current account deficit decreased to about 2 percent of GDP in 2002. Significant public and private capital inflows of about US$1 billion also contributed to an increase in gross international reserves of about US$832 million in2002. Inflows remained strong as of mid-2003. 13. Fiscal balances are also improving based on two pillars: tax reform and austere expenditure policies. A projected small primary surplus for 2003, will be the first since 1998 (Figure 3), and the 2 percent o f GDP fiscal deficit target of the Non-Financial Public Sector (NFPS) (consistent with a combined fiscal deficit of 1.9 percent of GDP), as contained in the FPTL, i s estimated to be met this year for the first time. These achievements are partly the outcome of a gradual tax reform that aims to increase revenues, widen the tax base and give the tax collection agency strengthened powers to reduce tax evasion. Following several administrative tax reform measures adopted in 2002, Congress approved a tax package on July 2003, including a one-percentage point VAT rate increase through end-2004, and excise taxes hikes on alcoholic and petroleum products. Tax measures have led to a marked improvement in the tax ratio, which was close to 13 percent o f GDP in the first quarter o f 2003 (Figure 2), and projectedto reach 12.7 percent of GDP by end-2003. Improving fiscal balances also result from austere expenditure policies. These include cuts in the President's salary by 30 percent, ministers' salaries by 20 percent and other public officials between 10-30 percent depending on the salary earned. Goods and services expenditures were also reduced by 5 percent. The Government has requested extraordinary powers to Congress to approve the last set of tax reform measures announced in late July,* and resisted populist pressures for additional spending from newly created regional governments in the draft budget law for 2004. Both actions are essential to meet a projected 1.5 percent of GDP fiscal deficit target of the NFPS, as required by the revamped Fiscal Responsibility Law for 2004. 2. Key pending measures include the elimination of regional and sectoral tax exemptions, the re-launchingof the single unified minimum tax for small and medium firms, and further administrative measures to strengthen income tax administration. The reform could also lower the VAT rate from 19 percent to 18 percent (reversing the recent rise), but imposinga financial transactions tax, although only for transactions above a certain amount. 5 Figure2. Tax Revenue/GDP(percent) Figure3. PrimaryBalancesof the Government(percentof GDP) 13.5T \ 0.4 1 I 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.o 10.5 I1.O -1.2 ' I 99 00 01 02 @3 Central mCombined 14. Authorities have adopted debt management measures to increase Peru's medium term debt sustainability. Although Peru's debt is high, vulnerability indicators have improved over the past few years (Table 1). Public debt ratios, in particular, have decreased: the public sector debt ratio i s estimated to decrease from 46.1 percent of GDP in 2002 to 44.3 percent of GDP in 2003; and, following a successful Brady bond debt buyback of US$923 million in February 2002, the public external debt service ratio will decrease from 31.6 percent of exports in2002 to 22.0 percent of exports in2003. The public debt profile makes Peruless vulnerable to sudden changes in investor sentiment compared to other Latin American emerging markets: external debt accounts for about 78 percent and i s virtually all medium and long term, with almost three-quarters committed to multilateral and bilateral creditors. Moreover, international reserves ratios are stable and increasing, and the share o f foreign currency deposits in total banking deposits is stable. In addition, the economy is buffered by a fiscal consolidation, a managedfloating exchange rate regime, a well capitalized banking system, diversifiedtrade links and limited dependence on financing from international capital markets. In the medium term, and according to the revised Multi-Annual Macroeconomic Framework (Marc0 Macroecono'mico Multianual-MMM in Spanish), public debt would decrease to a sound benchmark of 40 percent of GDP by 2006. Bank debt sustainability analysis confirms that Peru could achieve this benchmark if it continues to have growth rates above 4 percent and obtains primary fiscal surpluses close to 1percent of GDP in 2005-06.3 3. The World Bank and the Interamerican Development Bank (2003), Restoring Fiscal Discipline for Poverty Reduction in Peru. A Public Expenditure Review, Washington DC. 6 Table 1. VulnerabilityIndicators,1999-2003 (Percentof GDPunlessotherwiseindicated) 1999 2000 2001 2002 2003 p Public Sector Debt 48 46 46 46 44 O/w: in domestic currency 6 6 7 7 7 O/w : external public debt service (percent of exports of G&S) 23 32 22 Share of foreign currency deposits in total deposits 77 77 74 73 71 Share of foreign currency loans in total credit 82 82 80 79 77 Total external debt (percent of GDP) 56 53 51 49 47 Total external debt (percent of exports of goods and services) 372 327 320 305 282 Total debt service (percent of exports of goods and services) 54 50 39 36 34 Gross official reserves in percent of short-term external debt (residual maturity basis) 122 154 141 206 207 in percent of foreign currency deposits at banks 99 93 95 103 105 Risk-based capital asset ratio (in percent) 12 13 13 13 15. Consolidationof Peru's medium-termfiscal stance relies onexternalfinancing. Peru requires a minimumexternal fiscal support of US$1.5 billion during the period 2003-05 (Table 2). Assuming compliance with the fiscal deficit targets of the FTRL and growth o f 4 percent of GDP, Peru's financing needs are approximately US$2.7 billion in 2003, of which about 55 percent correspond to public debt amortization. Projected external sources of financing represent about 80 percent (US$1.9 billion) o f total needs, of which US$1.5 billion i s expected to be budget support. The estimated increase in financing needs in the next two years is due to two factors: (i) scheduled amortization payments have an additional bump o f about US$500 million in 2005, bringing the share of public debt amortization in total financing needs to about 75 percent in 2005; and (ii) projected sources have a shortfall from the phasing out o f privatization revenues. Peru's debt management strategy under the revised Marc0 Macroeconbmico Multianual (MMM) is based on minimizing the cost of new borrowing and on extending maturity through multilateral financing. Multilateral debt i s about 450 basis points below market rates, and additional domestic debt i s not a cheaper substitute for multilateral financing and would worsen Peru's repayment profile. As domestic interest rates-on nuevos soles or dollars-are substantially higher than those from multilateral financing, and as the domestic market remains reluctant to absorb notes beyond a three-year horizon-which means that any bond issued in 2003 would likely be repaid in 2005-further domestic debt would only complicate an already difficult debt amortization profile scheduled for that year. 7 Table 2. Peru: Non Financial Public Sector Financing Needs (US$Millions) 2003 2004 2005 2006 Gross financing needs 2,700 2,581 2,719 2,219 NFPSdeficit 1,190 953 677 335 Scheduled amortization 1,510 1,628 2,042 1,884 External 1,123 1,279 1,343 1,405 Domestic 386 350 699 479 Sources 2,700 2,581 2,719 2,2219 External 1,943 2,075 2,073 1,623 Fiscal support 1,500 1,600 1,550 1,100 Projects 410 450 500 500 Condonation 33 25 23 23 Internal 757 506 646 596 Privatization 157 20 20 20 Other sources 600 486 626 576 Source: Revised Marco Macroecon6mico Multianual2004-06 C. Poverty and social indicators 16. The economic growth of 2002 had a positive effect on reducing poverty. The poverty and extreme poverty rates diminished by about 1 percent in 2002, while unemployment has fallen from about 10 percent to just over 9 percent between 2000 and 2003. The poverty rate in Peru for 2001 was estimated at about 55 percent and extreme poverty at about 25 percent (Table 3). Table 3. Poverty rates by region, 2001 Poverty rate Population Extreme Population (millions) poverty rate (millions) Coast - - 39.3 5.3 - 5.8 - 0.8 Lima 31.9 2.4 2.4 0.2 Urban 44.6 2.1 7.6 0.4 Rural 62.7 0.8 19.7 0.3 Sierra 68.7 - 6.6 39.7 - 4.2 Urban 51.6 1.7 18.3 0.6 Rural 83.4 4.9 60.8 3.6 $e& 72.0 - 2.4 45.6 - 1.4 Urban 62.4 1.o 34.9 0.6 Rural 74.0 1.4 43.7 0.8 All Peru 54.8 14.3 24.4 6.4 17. Poverty i s much higher in the rural areas, where it reaches about 78 percent and where extreme poverty i s about 50 percent (versus 42 percent poverty rate and 10 percent extreme poverty rate in urban areas). Poverty also varies greatly within regions, with Sierra (mountain) and Selva (jungle) regions much poorer than the Costa (coastal) region and Lima, the capital city. More than half o f the extreme poor live in the rural Sierra. a 18. Rural areas also have worse health and education indicators than urban areas, with much higher rates of chronic malnutrition (40 percent vs. 13 percent), infant mortality (45 per thousand vs. 24 per thousand) and lower net attendance rates to secondary school (74 percent vs. 44 percent). Indigenous people, who account for 15 percent of the population and live mostly in rural areas, suffer from exclusion, discrimination and poverty rates of around 70 percent. Indigenous people and rural inhabitants also have less access to basic services such as water and sanitation, justice or public security. 19. Many o f the extreme poor work in agriculture and fishing (80 percent), making them particularly vulnerable to climate shocks. Thirty percent of households report to have been subject to exogenous shock in the last year, according to 2001 ENAHO household survey. Natural phenomena such as the El Niiio event, droughts or avalanches affect some areas o f the country almost every year. 20. In contrast, health indicators have improved substantially in recent years, although they remain below the average for countries of Peru's income level. Infant mortality rate was 33 per thousand in 2000, down from 60 per thousand in 1991. Half of the infant mortality occurs in the first month of life, and is connected to poor birth conditions. Chronic malnutrition (stunting) for children under 5 was 25 percent in 2000, down from 36.5 percent in 1991. 21. Education indicators have also improved. Access to basic education i s widespread, with a primary attendance rate of over 90 percent, and coverage of secondary education continues to increase despite the recent recession. Adult illiteracy rates are still high (26 percent in rural areas) but mostly concentrated in older people. However, education quality and outcomes are low, comparing poorly with other L A C countries, because of low effective hours of instruction, inadequate learning materials and poor teacher quality and motivation. 22. The quality of other social services has improved as well, although there i s still room for further gains. A recent nationwide survey rated the quality of services of five social programs between 3.2 and 3.6 in a 1to 5 scale (with 5 being the highest score). As well, only 5.2 percent of people surveyed reported being the victim of corruption (paid a bribe or similar), and only 12 percent thought that hospital services were "bad". D.Recenttrends inSocialExpenditure 23. Since 2001, the Transition and the Toledo Governments have emphasized the importance of increasing social expenditure and of bringing budget protection to priority social programs. Both the National Agreement and the Basespara la Estrategia para la Superacidn de la Pobreza call for a gradual and sustained increase in social expenditure. The National Dialogue proposes a minimum annual increase of 0.25 percent of GDP in the national budget to education, until it reaches a benchmark 6 percent of GDP.4 In a similar vein, the Buses para la Estrategia pura la Superacidn de la Pobreza calls for a 2 percent of GDP increase in the overall budget assigned to social expenditures by 2010. Recognizing these targets are ambitious and subject to budget 4. The recently approved General Education Law also states the 6 percent of GDP target. 9 constraints derived from fiscal sustainability, the Estrutegiu also calls for a significant restructuring of poverty alleviation programs in order to make them more efficient and effective. 24. The share of social expenditure to GDP, after collapsing during the hyperinflation period of the 1980s, recuperated sharply from 3.9 percent of GDP in 1990 to 6.8 percent o f GDP in 2000. The three broad components ("functions") of social expenditures in the Peruvian budget (education, health and social assistance) have been steadily increasing (Figure 4). In recent years, this share has continued increasing, albeit at a more moderate pace, reaching a budget allocation equivalent to 7.1 percent o f GDP in the 2003 budget. This is a remarkable achievement during a period of fiscal retrenchment that reduced government non-interest expenditure from 18.4 percent of GDP in 2000 to 17.0 percent of GDP in 2003, and cut the fiscal deficit by a third. Figure 4 . Social Expenditures: Peru 1999-2003 13,000 1 3,000 t - - - - - 1,000 4 1999 2000 2001 2002 2003 Budget AnOS Note: Datafor 1999-2002 refers to effective expenditures, data for 2003 i s allocation. 25. The priority social programs (PSPs) are the main source of the increase in the social budget, rising from 0.6 percent of GDP in 1999 to 1.2 percent of GDP in 2003. PSPs comprise the expenditures for basic education, health and community assistance, that are oriented to expenditures and critical inputs such as textbooks and medicines, rather than the payment of salaries or pensions (Figure 5). In this way, the Peruvian government has been protecting and expanding the expenditures that are more easily cut during crisis, and that play a crucial role in improving the quality o f basic services to the poor. 10 Figure5. SpendinginPrioritySocial Programs(Percentof GDP) I Total PSPSpending, LHS 1.4 1.18 1.23 0.8 ~ 1.2 --Re-Rimary Mucation 1.o 0.6 0.8 -I-RimaryEducation 0.4 0.6 +-Secondary Education 0.4 1+IndividualHealth ~ 0.2 10.2 I0.0 O'O 1--eColectiieHealth I 1999 2000 2001 2002 2003 I . e--:-,---I m ---..- %.. 26. Improving targeting in education and health i s a long-term task, as relocating schools or health clinics i s very difficult, and new facilities are put in place gradually. However, the Peruvian government i s aiming to improve targeting with programs such as the Seguro Integral de Sulud (SZS),that guarantees free access to a package of health services mostly for mothers and children, and that puts emphasis in the poorest departments. In education, a WB-financed rural education project targeting high-poverty rural areas has recently been approved. Other social programs, such as food-aid programs and rural infrastructure programs, are much more flexible. These programs have improved targeting in the past years: expenditures o f food-aid programs in the first quintile of districts have gone up from 30 percent in 2002 to 35 percent in 2003 and 38 percent inthe 2004 budget. 111. THE GOVERNMENT'S MEDIUMTERM STRATEGY A. The NationalAgreement 27. The National Agreement i s a joint statement adopted in July 2002 by the government with representatives of the major political parties, religious groups and civil society. It contains 29 policies directed to accomplish four objectives: (i) Democracy and Rule of Law; (ii) Equity and Social Justice; (iii) Competitiveness; (iv) Efficiency, Transparency and Decentralization. The relevant policies aimed at poverty reduction and the social sectors state that the Government will: Assign an increasing proportion of public expenditures to investments in education and health care, improve the efficiency of these investments and target these expenditures toward the poorest; Favor the participation of poor citizens in the identification o f needs, the design of solutions and the management of social programs; Establish systems for the identification, attention and promotion o f employment for people without means o f support; 0 Encourage institutional development, efficiency, equity and transparency o f the government in resource allocation, especially on programs oriented to reduce poverty, encouraging participation and supervision by civil society organizations; 0 Guarantee the exercise of rights and access to justice administration for the poor; 0 Encourage a culture of prevention and control of risks and vulnerabilities, assigning resources for prevention, assistance and reconstruction. B. The Strategy for Poverty Reduction 28. The guidelines for social policy are established in the "Bases para la Estrategia de Superacidn de la Pobreza y Oportunidades Econdmicas para 10s Pobres" ("Guidelines for a Poverty Overcoming Strategy and Economic Opportunities for the Poor"-hereafter Estrategia), approved inJanuary 3rd, 2003,5 that comprise three pillars: 0 Pillar of dignity, whose objective is to accelerate economic recovery, achieve sustainable growth and generate worthy and sustainable jobs, as well as to establish a social protection network and budget protection for priority social programs. Pillar of equity, whose objective is the development of human abilities that permit social development and the access of poor people to quality social services, such as health, education and culture. Pillar of institutionality, whose objective is to improve resource allocation transparency and bolster citizen involvement inits oversight. 29. As stated inthe Estrategiaand with the support of PSFU I1and PSRL III,large numbera of programs o f food aid, infrastructure for poor areas and social assistance for the elderly, orphans and disabled have been grouped under the institutional umbrella of the Ministry of Women and Development (MIMDES). To further reorganize and improve the targeting and efficiency of these social protection programs, in the context of decentralization, the strategy proposed a reform in their structure. Social protection will be implemented by local governments and would consist of three integrated programs financed by conditional transfers regulated by MIMDES. These programs would transfer resources to the local governments according to agreed upon procedures, objectives and targets. The proposed programs are: (i) a Local Development program, that will transfer resources directed to create infrastructure and economic opportunities for the poor; (ii) Solidarity program, that will transfer the resources a currently used for food aid to improve the vulnerable groups' quality of life; (iii) a Family Assistance program, that will transfer resources to assist people in physical and moral risk, and families in catastrophic situations. The reforms leading to the new structure will be put in place by the 2004 BudgetLaw and by the Law of Intergovernmental Fiscal Transfers (IFT).6 30. To assure the effective accomplishment of the strategy, the Inter-sectoral Commission for Social Affairs (CIAS) of the Presidency of the Council o f Ministers i s leading the effort of strengthening inter-sector coordination. The government i s also planning to develop a monitoring 5. By DS 002-2003-PCM. 6. The IFTLaw was presentedto Congress as part of the government actions for this loan. 12 and evaluation system for social programs that will support the Estrategia and will receive support from a Bank-financed technical assistanceloan (TAL) underpreparation. C. The DecentralizationProcess 31. Significant progress has been made since 2001 in the creation of the legal framework for decentralization. The Decentralization Framework Law sets out the principles for: (i) the assignment of services and competencies (shared, exclusive and delegated) to different levels of government; (ii) the development of fiscal rules and transfer mechanisms; (iii) sequencing of the decentralization, starting with anti-poverty programs, to be followed by other sectoral transfers. Other key decentralization laws have also been passed, including one for regional governments and another for municipal governments, broadly defining their institutions, roles and resources. Progress has also been made in drawing up the fiscal decentralization framework. Laws on fiscal decentralization and on Inter overnmental Fiscal Transfers have been drafted in close coordination with the Bank! The implementation of the institutional framework for decentralization has also substantially advanced, with the creation of the National Decentralization Council to coordinate the decentralization process and the setting-up of regional and local government institutions, including the consultative bodies with civil society representation. In parallel to the PSRL, a PSAL for Growth and Decentralization i s under preparation by the Bank with a focus on decentralization, economic growth and competitiveness. This loan will provide the broader framework for decentralization by promoting the fiscal and institutional framework for reform. Key components of this loan are the design of the fiscal responsibility mechanisms for subnational government; the design of the accreditation system and performance contracts that will help maintain minimum sectoral standards for decentralized service delivery; civil service reform; participatory budgeting and competitiveness. 32. While the Government has achieved progress in passing legislation that established the overall principles for decentralization and the organization of the regional government and the municipalities, it still has significant challenges ahead in relation to establishing the rules that will govern the social sectors and the anti-poverty programs in a decentralized context. The IFT draft law contains a chapter of "Programmatic Transfers" (Le. transfers subject to achieving targets to be set by national programs). One of the contributions of PSRL I11i s the drafting o f this chapter (see details in section IV.A.6.), and PSRL IV will contribute to drafting the regulations for this law, while the TAL under preparation will support the implementation of the system of programmatic transfers. Another challenge i s to define the role of the sector ministries vis-a-vis the regional governments in health and education. The existing legislation i s ambiguous about the roles of the different actors in these sectors, yet de facto the decentralization of these sectors has already began as more than 50 percent of education and more than 44 percent of health expenditure will be managed by the newly elected regional 7. The dialogue to draft these laws was led by the team preparing the Growth and Decentralization PSAL, with inputs from the PSRLteam for the chapter of the IFT law on the decentralization of food programs. 13 authorities in2004 (mostly for salaries).8 A clear legal basis for the decentralization of education and health remains indispensable and will be supported by PSRL IV. This legislation should build on international lessons suggesting that the decentralization of health and education must clearly establish the responsibilities to be undertaken by the regions and establish the policy and regulatory role of the sectoral ministries providing the ministries with financial and other incentives to help them enforce their role. Latin America offers several examples where decentralization of the social sectors was followed by years of deterioration of these services which forced the Central Government to reassume the financial responsibility for these sectors, at a high fiscal cost. A transitory legal safeguard has been added to the 2004 Budget law, prohibiting the regional government from reallocating funds assigned for health and education. IV. THE SOCIALREFORMPROGRAM 33. The social reform program supported by the PSRL has three main components: (a) improve the anti-poverty focus of public expenditures; (b) improve access of the poor to quality health services and education; and (c) improve transparency and participation o f the poor in social programs. The progress achieved in these components with support of PSFU I, and I11 I1 andthe challenges for PSRLIVare described below. A. Improvingthe anti-povertyfocus of publicexpenditures. 34. The GOP i s improving the anti-poverty focus o f public expenditures, to reinforce its targeting and increase its effectiveness. Four groups of activities are being implemented to achieve this objective: (i) Formulation and initialimplementation of a poverty reduction strategy. (ii) Reorientation of public expenditures towards social programs that benefit the poor. (iii) Improvements in targeting social expenditures by reforming pension systems, establishing a well-targeted anticyclical workfare program and improving targeting of rural infrastructureprograms. (iv) Reforming the food distribution programs by integrating them, improving their targeting, and focusing on results inthe context of decentralization. A.1. PovertyReductionStrategy 35. The lack of a strategy weakened the impact of Peru's anti-poverty efforts during the last decade. Absence of clear objectives, coexistence of overlapping social programs, lack of coordination between sectors and programs, inadequate designs and lack of monitoring and 8. While the Framework Law mandates that Health and Education are to be transferred at the final stage of the process, as of 2004 the Regional Directorsof Health and Education will cease to be appointed by the sectoral ministries and will become officials of the Regional Authorities (with technical accountability to the sectoral ministries). Also, against the letter of the law, a Supreme Decree of August 2003 transferred the teacher payrollsof Callaoto the RegionalAuthorities and opens the door to do the same in Lima during2004. 14 evaluation were some of the main problems in this area. These problems were reinforced by a clientelistic and untransparent use of the anti-poverty programs. This led to inefficiencies, increased administrative costs, poor targeting of beneficiaries and the prevalence of programs that do not contribute to reducing poverty or to increasing human capital. 36. Duringthe transition government and under PRSL I, "Social Letter"(Cartu Social) was a approved by the Mesa de Concertacidn de Lucha contra la Pobreza. The Social Letter established broad guidelines for social and economic policy adopted by the government, civil society, the Catholic Church and international cooperation agencies for poverty reduction. During the preparation of PSRLII, in December 2001 President Toledo issued a Social Policy Letter stating the "pillars" that guide the government's social policy (dignity, equity and institutionality). In July 2002, the National Agreement (Acuerdo Nacional) was signed by representatives o f political, religious, civil society and Government, approving 29 policies, including one for poverty reduction. 37. The poverty reduction strategy was further developed duringthe preparation of PSRL I11 with the publication of the Bases para la Reduccidn de la Pobreza. The Bases are described above (Section IIlB). 38. Under PSRL lV, the anti-poverty strategy will become fully mainstreamed into the Governments' planning and budgeting process by the adoption of a a macro-social multi-annual framework as a chapter of the macroeconomic multi-annual framework. This policy will have several advantages: (i) the macroeconomic multi-annual framework i s institutionalized and has to be approved each year by the council of ministers, (ii) it will set the base for a multi-annual budgetingin the social sectors, and could provide a clearer protection for priority programs, (iii) will establish more clear objectives, goals and policies for social policy in a medium-term strategy. A.2. Shifting to Pro-Poor Protected Expenditure 39. Budgetary protection under PSRLs has played a critical role in preserving the quality o f pro-poor social expenditure, and was designed to play a countercyclical role. The Government initiated a social protection policy in the 2001 budget (table 3). It selected 11 programs distributed among eight sectors: education and culture, health, transport, justice, social and community assistance, sanitation, agriculture and energy. Budget protection consisted of assigning a minimum envelope for the 11 programs equivalent to US$1 billion (Y3.5 billion), representing about 10 percent o f the national budget or 2 percent of GDP. This protection was initiated as a tool to preserve a minimum level of quality social investment during fiscal adjustment and economic contraction. It then became an important instrument of the overall strategy for poverty reduction in the medium term. 40. Under PSRL 11, the Government complied with the execution of the 2001 budget for the protected programs. Spending in these programs surpassed the target, despite recessionary trends. Four issues, though, were identified reviewing the experience of 2001: (i) budget protection at the level of aggregate sector expenditure was also needed to guarantee "floor" spending required to make progress towards medium-term development goals; (ii) broad the coverage of the protected programs and large amount assigned to them increased budget rigidity; (iii)fewindividualprogramsexhibiteddeviationsbetweenplannedandexecutedexpenditures, a with education programs showing a significant under-execution, and social and community assistance indicating over-execution; and (iv) critical monitoring and evaluation of protected 15 spending was missing. As a result, the protection policy was refined. Budgetary protection at the level o f aggregate sector expenditure was introduced. Protection became limited to six programs in three sectors (down from 11 programs in eight sectors), with a global allocation equivalent to 1.2 percent of GDP, which reduced budget rigidity (Table 4). To deal with deviations between planned and executed expenditure, individual indicative targets for each of the programs were again defined for 2002, but with flexible contingency clauses for the event o f a budgetary resources shortfall or to allow for up to 30 percent spending reallocations from underexecuting to overexecuting programs. Inaddition, the government agreed to develop pilot user-friendly monitoring and evaluation tools for PSPs, supported by the SIAF, and in some cases performance management contracts for specific projects (sub-categories of the PSPs) likeA Trabajar or the Mother and Child Health Insurance (SIS-MI). Table 4. Peru: Priority SocialPrograms (Non-Salary Current and Capital Ordinary) Budget (MlnsSoles) Program 2001 2002 2003 code Sector Budget Executed Budget* Executed Budget** Executede 26 Pre-PrimaryEducation 132 66 230 124 126 114 27 Primary Education 467 151 229 142 214 149 28 Secondary Education 467 107 212 123 271 199 63 Collective Health 180 152 180 150 171 163 64 Individual Health 471 660 835 735 887 795 14 Assistance*** Social & Comm. 331 682 635 1,089 941 893 Other Programs 1,493 1,832 TOTAL 3,541 3,650 2,321 2,363 2,610 2,313 % National Budget 9.9 10.2 6.5 6.6 5.8 5.2 % of GDP 1.9 1.9 1.2 1.2 1.2 1.1 Notes: e Estimate. *PSRL I1reduced the number of PSPs. **Includes a S/100 million budget expansion agreed under PSRL-111. ***Includes food supplementary programs transferred from Collective Health and the A Trabajar program;excludes Vas0 de Leche, ComedoresPopulares and FIDE. Source:MEF, DNPPand SIAF-SP 41. Under PSRL 111, the Government had a mixed performance in the implementation of budgetary protection. The global executed expenditure for all six programs exceeded its aggregate target (adjusted inreal terms) in 2002. However, the original individual targets for the three education PSPs--pre-primary education, primary education and secondary education-were missed. In2003, the approved budget allocations for each of the three sectors were also met, but individual allocations missed their original target in four out o f the six programs (pre-primary and primary education, and collective and individual health programs). In view of these outcomes, the Bank agreed to allow inter-program transfers up to 50 percent of their original allocations, and in exchange the authorities complied with two compensatory actions. First, to offset original budget underallocations to individual PSPs in 2003, authorities approved supplementary budget allocations for about W O O million, bringing five individual PSP allocations to at least their executed 2002 level, adjusted in real terms. Second, the 2004 Budget Law (art. 8) explicitly banned further diversion of funds from the PSPs ineducation. 16 42. Decentralization has brought new challenges to budgetary protection policy. In the context of the decentralization process, four new issues have emerged in 2003: (i) priority social spending i s being reviewed, with significant uncertainty arising from the transfer of education and health sectors to regional governments; (ii) a level of under-execution i s likely from the budget shortfall of privatization revenues earmarked to finance the PSPs executed by subnational governments; (iii) social community and assistance programs addressing extreme poverty are being reorganizedinto three funds, and at the same time their execution i s being decentralized to the subnational level; and (iv) given decentralized execution, the need of a monitoring and evaluation system i s even more critical. 43. To address these challenges, under PSRLIV,the government and the Bank have adjusted the PSPs. These adjustments aim to preserve the national priorities through the decentralized programs, while improving their focus, efficiency, transparency and monitoring mechanisms. They include: (i) AMarcoSocialMultianual(MSM)isbeingdesignedtoincludeasachapterin the Marco Macroeconomico Multianual (MMM). The MMM provides an annual consensus on national macro/fiscal priorities, and i s approved by the Cabinet, every year, subject to quarterlyreviews and publishedby the media. (ii) New legislation topreservepriority social spending in education and health under the decentralization process will be submitted to Congress. According to the decentralization chronogram, a new law will be submitted by March 30, 2004. The new law will define a policy framework (rationale, objectives, and instruments) and norms for conditional transfers to regional and local governments in both sectors. It will include physical and financial benchmarks and monitoring indicators, periodic reporting requirements, and incentives and performance agreements. This law will be consistent with the law of fiscal transfers being proposed under PSRLI11(see section below). (iii) Global execution is adjusted to at least 85 percent for 2003 and budget reallocations from under-pe~ormingto over-pe$orming programs are reduced to a maximum of 30 percent. The 2004 approved budget will maintain the global execution, and the execution level of no less than three individual budget allocations for the PSPs, at least at their 2003 levels in real terms. For 2004, the execution of the PSPs for the months prior to the appraisal of PSRL IV will have reached at least 85% of their global target with individualreallocations not above 30 percent (target to be measured according to the average seasonality of 2001, 2002, and 2003). N o diversion of funds from the PSPs to payrolls, benefits or to other programs will be allowed. The authorities indicated that the 2004 budget figures for individual PSPs under PSRL IV are only "floor" allocations that will be increased if tax reform i s completed successfully before end-2003, and that the final allocations will be contained inthe approved Budget Law. (iv) Based on the successful pilot experiences and supported by the TAL, the SZAF will expand its user-friendly and decentralized management system to track and control the implementation of conditional transfers to local governments by MWIDESRONDEL; and will monitor benchmarks agreed for the remaining PSPs (based on their intermediate indicators, performance management contracts and/or accreditation mechanisms). 17 A.3. Targeting of Socialprograms: PensionReform' 44. Peru's pension system i s not achieving its main goal of providing income security to the elderly. Only 15 percent of the labor force contributes to one of the existing programs, and less than 25 percent of the elderly receive a benefit. Considering that nearly 40 percent of the population aged 65 and more lives on an income below the poverty line, and that participation in the pension system i s strongly related with income level (only 1.6 percent of the poorest quintile o f workers make contributions to Social Security), it i s safe to assert that the system needs important changes. The situation in Peru i s one of the worst in South America, only Paraguay has lower social security coverage than Peru. 45. While the coverage of the system i s low, Peru makes a significant fiscal effort to finance the pension systems from general revenues, partly as a result of the transition costs generated by the 1992 reform and partly due to the deficit of the Civil Servants program. The deficit of the public pension systems in 2002 was close to 2 percent of GDP, equivalent to 69 percent of the amount set aside to service Peru's external debt; 63 percent of public spending on education; 1.8 times the government's expenditure on healthcare; and 1.4 times the amount set aside to alleviate poverty. 46. The pension system in Peru has three main components. The Private Pensions System (Sistema Privado de Pensiones-SPP) was created in 1992 to replace the old unfunded system and i s organized as a competitive, multiple provider and individual account based scheme, where workers make monthly contributions and receive, after retirement, a benefit in the form of an annuity or a scheduled withdrawal from their accounts. The system i s run by four pension fund managers ("Administradora de Fondos de Pensiones"-AFP), andhas almost 3 million affiliated workers, but only 1 million contributes each month. The pension funds have on average obtained a significant return (close to 7 percent real), but their costs are too high, close to 40 percent of net contributions (of which one third i s used to pay a disability and survivors insurance). The fees do not reflect high operational costs, which have steadily declined in the last few years, but rather a lack of competition and transparency inthe market. The supervisory agency i s a specialized division of the Superintendency of Banks and Insurance, which has been trying to promote competition and reductions infees, with little success. 47. The second component is the National Pensions System (Sistema Nacional de Pensiones-SNP), a traditional PAYG scheme that continued for some workers after the 1992 reform. It pays benefits after 20 years of contributions and 65 years of age; benefits increase with the years of contributions. As o f December 2001, the average pension was approximately 70 percent of average wages. SNP also pays benefits to workers retired before the 1992 reform and provides a Recognition Bond to those who joined the SPP but had contributed before. The program i s managed by a central pension office ("OJicina de Nomalizacidn Previsi0naZ"- ONP), an autonomous agency attached to the Ministry of Economy and Finance. The 2002 deficit of SNP was equivalent to 0.6 percent o f GDP. Several parametric reforms, introduced by Law 27617 in early 2002, have corrected a medium to long term tendency to increase deficits, 9. This section is based on the findings of a World Bank study of the Peruvian pension system. (Peru-Restoring Pillars of Old Age Income Security) The draft of this study i s currently beingreviewedby the Government. 18 and current projections indicate that the cost will slowly decline to around 0.2 percent o f GDP in the medium term. 48. Finally, a civil servants program called Ckdula Viva (CV) offers very generous benefits and runs a large deficit, close to 1.4 percent of GDP in 2002. Workers can retire after fifteen years of service, with no minimum age, and benefits are equal to 100 percent of the wage of active civil servants. The government has tried to close the system and limit benefits since the early 1990s, but legal challenges and political pressures have weakened these attempts. In 1996 the Government passed Decree 817, establishing maximum benefits, limiting access to the system and, more important, creating a central registry o f all participants, managed by ONP. This decree was repealed by the Constitutional Court in 1998 and the effort to centralize the administration was then terminated. 49. The most critical problem in Peru's pension system i s the very low coverage, especially among the poor, and the lack of a reasonable strategy to overcome it. While the main cause can be linked to weak labor markets and extended informality, specific measures can be adopted to improve access, without generating additional fiscal pressures or creating negative incentives for labor force formalization. As fiscal resources are limited, efforts should be made to increase compliance within the existing systems by improving enforcement and by increasing incentives, and to protect the poor elderly excluded from the system. New, targeted non-contributory benefits designed to complement the pension system benefits could be created to provide basic assistance to the poorest elderly, preserving the fiscal sustainability. A medium term strategy should be developed to attain these goals, but until recently no government office had such responsibility. As of mid 2003, most strategic decisions were taken at the Ministry of Economy and Finance, although there was no office or staff formally responsible for this. 50. The fiscal cost of C V and SNP limits the possibility o f developing a targeted anti poverty program for the elderly. Expenditures in these two programs are inflexible, but they should decline over time, provided that no new challenges to the legal framework are successful. Simulations prepared by World Bank staff indicate that expected savings in the next few years should be enough to finance a targeted non-contributory benefit to cover poor individuals aged 75 and more. 51. Finally, SPP has some important efficiency problems, affecting the cost of the system for active workers and reducing the incentive to participate. Both at the accumulating stage and after retirement the level of competition among providers i s low, resulting in high costs for workers and high returns for fund managers (in 2002 the average return on equity for pension fund managing companies was close to 80 percent). The excessive costs in the accumulating stage results in lower income for workers, and on top o f that, high fees in the annuity markets results in lower retirement benefits. The regulatory framework i s designed assuming a competitive environment, but the industry appears to have, as in other countries in the region, an oligopolistic structure. 52. Government Strategy and Actions under PRSL 111. The pension system inPeru is not offering adequate income security to the elderly. Improvements in the design and operation o f the system are necessary, focusing in two areas: (i) institutional organization and strategic planning; and (ii) the high fiscal cost and serious equity problems of CV. The government has recognized these problems and several actions have been taken to address them. Among those, the most relevant are: 19 (A)To solve the institutionalproblems and increase coverage, MEFhas issued RM326-2003- EF/15, charging the Direccidn de Asuntos Econdmicos y Sociales (DGAES), with the authority to: (i) Develop a strategy to increase the coverage of the system, considering the coordination of contributory and noncontributory schemes. (ii) DevelopastrategytoincreaseefficiencyandtransparencyinSPP,SNPandCV, inorder to reduce costsfor workers andpublic finances. (iii)Collect,processanddisseminateinformationaboutthedifferentpensionsystems, including periodic statistical reports, actuarial studies, short and long term projections, fiscal and equity impact assessments, links to the tax system, et cetera. (iv) Prepare draft legislation or norms to implement the strategies described above. (B)To reduce the inequity and fiscal costs linked to the C V and improve control over the system, Decree 870/2002 was passed in February 2003 requiring that all entities paying benefits under the CV scheme must present actuarial balances, and send the basic information to ONP. As a result, ONP and the DGAES should have access to detailed information regarding the liabilities of most public entities by the time PSRL lV is prepared. Also, new legislation was approved by Congress in July 2003 (Laws 28046 and 28047) including: (i) ThecreationofanewcontributiontotheCVschemetobemadebybeneficiaries of the system earning more than S/43,600 a year. Contributions rates will be similar to those of the income tax. (ii) An increase inthe contribution rate paidby active workers to CV from the current 6 percent to 13 percent immediately and further increases to reach 27 percent by 2009. (iii) Establishment of a maximum benefit of S/3,100 per month 53. These measures should produce additional income to finance CV by approximately S/ 80 million in 2004, a relatively low amount. However, as the main problem of Cedula Viva in the last decade has been the inability of the Government to effectively close the access to the system, the impact o f higher contribution rates and lower benefits for future retirees should result in a realignment of incentives to join C V and, consequently, a reduction in pressure from different groups of civil servants to gain access. While these changes represent a clear improvement, past experience indicate that there i s a significant risk of reversal by the Constitutional Court and careful monitoring will be necessary. 54. Finally, the Government has taken measures to increase transparency and reduce costs in the SPP, promoting competition and efficiency. The SBS issued a regulation in mid-June, modifying disability and survivors' insurance. The new regulation eliminates a scheme created soon after the new SPP started operations requiring beneficiaries o f survivor or disability benefits to obtain an annuity from the same company that provided the basic insurance. The new 20 system will allow beneficiaries to choose from among several annuity providers, resulting in more transparency, competition and reduced costs for pensioners." 55. By the time PSRL N is negotiated it is foreseen that: (9 DGAES should have prepared and published documents describing the strategy it will adopt to increase coverage and reduce inefficiencies in the system, defined an action plan and schedule, and has initiated its implementation; (ii) An information system should be operative, resulting in publication of quarterly statistical reports and other documents including the financial and actuarial balances of the SNP and C V institutions. Following Decree 026- 2003-EF, ONP should collect information on the actuarial status of each institution participating in C V and report to DGAES. This includes detailed demographic and financial data, which should be part of the information system developed by DGAES; (iii) The changes in CV legislation approved by laws 28046 and 28047 should be fully implemented; and (iv) B y mid-2004 affiliates will be able to switch funds by internet, and select annuity providers using an electronic bidding process that protects them and promotes reductions incosts. A.4. Targeting of SocialPrograms-The A Trabajurworkfare program 56. Three years of economic downturn (1998-2001) had adverse effects on the employment and incomes of the poor. The poverty rate went up 7 points, from 48 percent to 55 percent, between 1997 and 2001 and urban unemployment went up, reaching 9 percent. However, the government didn't have social protection programs clearly designed to deal with this issue. During the first months of its administration the Toledo government put in place a workfare program known as "A Trubujur", with urban and rural components. The rural component combines the social protection objective with that of rehabilitating and maintaining small infrastructure-mainly rural roads. The urban component is more tilted towards the social protection objective. The government has implementedbothA Trubujur programs, generating in 2002 and 2003 the equivalent to 70,000 six-month jobs in 1,500 subprojects in more than one thousand rural districts, at a cost of approximately US$86 million, and 125,000 four-month jobs in2,600 urbansubprojects at a public cost of US$54 million. 57. With PSRL I1support, the main characteristics of these programs were established, with emphasis on adequate targeting: (i) 300 soles wage was fixed to self-target the poor; (ii) a a geographical targeting mechanism that uses a poverty map to allocate resources to districts was used in both urban and rural A Trubujur programs; (iii) on non-salary expenditures were caps established, and (iv) it was agreed to carry out impact evaluations o f both programs. 10. Also, SBS i s preparing regulationsto increase the transparency at the time any beneficiary selects an annuity provider, by designing an electronic quoting system, and also to simplify the process of switching between AFPs, in order to promote competition and reduce fees. These last two regulations should be complete and implementedby the time PSRL IV is prepared. 21 58. During the design period, there was some concern about the self-targeting wage rate. Although earnings distribution data indicated that this rate was adequate to target the poorest income quintile in urban areas, in rural areas incomes are lower. For PSRL 111, before a second stage o f A Trubujur rural was initiated, the government did a study on the adequacy of the 300 soles wage for rural areas. The study revealed that the wage was not higher than the rural equilibrium wage and that less than 10 percent o f beneficiaries where non-poor," revealing a well-targeted program. 59. The successful targeting of both A Trubujur programs has been confirmed with household survey data, complying with the goals set for PSRL 111. In A Trubujur Rural, 45 percent o f beneficiaries come from the poorest income quintile and 79 percent from the first and second income quintiles. InA Trubujur Urbuno, 52 percent of beneficiaries belong to the first urban quintile, and 32 percent to the first quintile. Thirty percent o f urban beneficiaries suffered a shock that reduced family income in the last year. These numbers show a program much better targeted that any other national social program in Peru, reflecting a good combination o f geographical targeting and self-targeting with the wage. The first i s probably more effective in rural areas, andthe second inurban areas. 60. Maintaining the focus of the program on transferring income to the poor and controlling administrative expenses has also been addressed within PSRL III.A Trubujur Rural take measures to limit its non-wage expenditures to 60 percent of the total, higher because it also has a infrastructure maintenance objective. In A Trubujur Urbuno, the program financing to subprojects has a cap of 25 percent for non-wage expenditures. Administrative costs have been of 10.5 percent o f the total, but this include some 2 percent of fixed start-up costs. Direct income transfers (wage expenditures) as a proportion o f all costs, are 63 percent-efficient by international standards. 61. Finally, evaluations have been made. The impact evaluation for A Trubujur Urbuno has now been completed by an independent researcher, after an extra sample of the national household survey (ENAHO) was taken for program beneficiaries and its households. The evaluation shows the program i s well-targeted, but also that it only gives expected additional income of one fourth of the total wage. That is, if the beneficiaries haven't been working for A Trubujur, their expected income would have been of 220 soles. For A Trubujur Rural, the analysis done early on wage adequacy has been complemented by a qualitative evaluation. 62. Due to the economic recovery, now in its second year, and to the efforts to transfer social protection responsibility to the municipalities the government i s downsizing the anticyclical A Trubujur programs. A Trubujur Rural is virtually finished as no budget has been made available for this program in 2004. A Trubujur Urbuno i s downsizing its operations, and may also be discontinued in 2003. AS. Targeting of SocialPrograms-Rural infrastructure programs 63. One of the main causes of the highpoverty rate in rural areas i s lack o f infrastructure. To overcome this, over the last decade Peru developed numerous and overlapping rural 11. Approximated by a proxy-means test methodbased on a survey made to beneficiaries. 22 infrastructure programs, including some components of Foncodes, Pronamach, PAR, Caminos Rurales and others, that had a total 2002 annual budget of S/. 200 million. Policies aimed to improve their efficiency have been under way under several WB projects, including Pronamach's Rural Poverty Alleviation Project (closing shortly), Caminos Rurales I1 and Pronasar Rural Water and Sanitation project (approved in 2002). 64. PSRLIand 11. With PSRL Isupport there was an initial attempt to improve efficiency by strengthening the coordination between key programs. Specific improvements included: (i) the use of the same poverty map, (ii) coordination of wages paid, (iii) monitoring and evaluation procedures and (iv) the introduction of performance agreements with MEF. In PSRL 11, the unification of some of these programs was attempted, and a Supreme Decree merging Foncodes, the Pronamach and the small projects within INADE was issued. However, institutional resistance stopped the process, even after a second Supreme Decree ratifying the first was issued. More recently, the MIMDES issued a resolution merging three specialized agencies (Foncodes, PAR andCoopop) into the structure of the line ministry. 65. PSRL 111. The preparation of PSRL I11included a trigger to improve the targeting of rural infrastructure programs. The goal set in the trigger has been surpassed and currently 52 percent of expenditures go to the first district quintile and 80 percent go to the first and second district quintiles. 66. PSRL IV.The government is now studying the creation of a unified local infrastructure fund that will operate through municipalities as part of the decentralization process. As the WB i s actually processing, in parallel to the PSRL, a Growth and Fiscal Decentralization Loan, and as several of these rural infrastructure programs are going to be transferred to regional and local governments, the infrastructureprograms will be addressedinthe future by this other loan. A.6. Decentralization and reform of food programs 67. The government spends approximately S/. 850 million per year (0.45 percent of GDP) in food programs that reach 44 percent of the Peruvian households and 61 percent o f the poor households. These include the municipal Vas0 de Leche program and other food programs managed by PRONAA, an agency under MIMDES. The PRONAA program includes: i)infant food programs, targeted to pre-schoolers with nutritional objectives, ii)school feeding programs, with nutritional and educational objectives; and iii)food programs for adults (the largest of which i s ComedoresPopulares). 68. Government Strategy. Duringthe 1990s,these programs were subject to corruption and clientelistic misuse and were fragmented in more than a dozen programs spread over three different institutions (PRONAA, INS and FONCODES), with overlapping beneficiaries. Most of them also lackedclear objectives, had almost no monitoring and evaluation, andits linkages to health, sanitation, interventions in mothers' education and capacity building at the community level were weak. The Transition and Toledo Governments have sought to reform these programs to allow them to play a role in a safety net, because they reach a large proportion of the poor and have some self-targeting elements induced by the quality of the food and the requirement that mothers participate and collaborate with their time. A reform of these programs was necessary to improve targeting, transparency and participation, developing new strategies to make them efficient in pursuit of clearly set goals. But this proved to be a daunting task, as political pressures from long-time beneficiaries, mayors and lobbies from food producers pressed hard to 23 avoid any changes. After makingprogress in several areas, the government has now decided to launch an over-arching strategy for reform taking advantage of the decentralization process. 69. PSRL Iand 11. In 2001 and supported by PSRL I,the transition government greatly improved the transparency and accountability of the food programs, and began unifyingthem by transferring the FONCODES' infant and school feeding programs to INS. In2002 within PSRL I1and exceeding the original benchmark, the GOP approved a Supreme Decree unifying all the central government food programs in PRONAA and established a multisectoral Board o f Directors for PRONAA, so as to improve links with the education and health sectors. The Ministry of Health normative role in nutrition matters was confirmed in that process. The government also set and complied with targeting goals, and reduced the budget for Comedores (the worst targeted and least efficient food program but also one of the more difficult to reform) as it launched the A Trubujur program as part of its social protection strategy. 70. PSRL 111. The reform path set in 2002 for PSRL I11 was to continue improving targeting, introduce health and nutritional education components on the food programs, produce impact evaluations or baselines and develop a conditional cash-transfer pilot program. However, the global strategy for the reform of the food programs has been modified in the context of the decentralization process. In this process, social protection programs, including food programs, will be among the first to be transferred to sub-national governments, this will be done together with the introduction of mechanisms to reinforce accountability and participation in social programs. Beginning in October 2003, food programs will be transferred to municipalities, which i s consistent with the fact that the Vusode Leche program, that accounts for 40 percent of the food programs' expenditures, has been managed by municipalities since its creation almost twenty years ago. 71. However, the experience of Vuso de Leche program i s a clear example that decentralization does not necessarily mean an improve in efficiency or transparency. A recent WB-financed PETS study showed that only 70 percent of Vuso de Leche transfers to municipalities reach the local committees in charge of the food distribution. The study also found that 40 percent of the food distributed to the households i s not consumed by the target population (children less than 5 year old), but by other household members. Another WB recent impact study on Vuso de Leche (Alderman and Stifel) showed that while the program i s well targeted to the poor, with local women's committees contributing to targeting, its food contribution does not have a measurable nutritional impact. 72. Inthis context, the PSRLI11reforms of the food aid programs have beenredefined. The GOP now faces the difficult task of completing the unification o f food programs, initiating their decentralization and-in that difficult context-continue improving their targeting and performance. As the decentralization of the programs requires a redefinition of the procedures followed by the food programs, the Government views this as a unique opportunity for reform. Two significant steps are being taken under PSRL 111. First, in the proposed 2004 budget, the government allocated food aid resources directly to municipalities using a pro-poor index. The index i s composed of two formulas. The first formula improves marginally the targeting of the actual distribution of the food programs for adults (a more ambitious attempt of reform met with strong political resistance). The second formula establishes a pro-poor distribution for all the other food programs, based on under nutrition and unsatisfiedbasic needs indicators. 24 73. Second, to promote efficiency and transparency in the food programs, within PSRL I11 the government presented the IntergovernmentalFiscal Transfers Law that will: (i) these protect resources from being diverted to other uses (an increased risk in the context o f decentralization), (ii)formalize the use of a pro-poor formula in later years for allocations to municipalities, and (iii)establish that the resources will be transferred following performance agreements signed with the local governments by a central agency that will monitor them in a participatory way. These measures would ensure that the decentralization process i s set in a path that protects social protection funds, improves targeting and promotes efficiency-enhancing reforms of the food programs. 74. Inthe context of preparing this decentralization process, the government has also made progress in the originally planned targets. There has been important progress on geographical targeting, exceeding the goal agreed with the Bank for PSRL 111-now 35 percent of the food aid budget i s going to the poorest quintile of districts and 60 percent i s going to districts on the two poorest quintiles, setting the pace for an improved geographical allocation o f funds to municipalities in the decentralized context. The conditional cash transfer pilot (which had been originally established as a trigger for PSRL 111) has been designed and approved but has not yet been launched. There has also been progress in producing impact evaluations and baseline studies for several programs, including Vas0 de Leche, PANFAR, PACFO and PANTBC (an independent evaluation has also been made for school feeding programs), that can be the beginning of a clearer policy-making role of PRONAA or the central agency that will follow it. Transparency has also been enhanced, by publishing in the Consultu Amiguble the budget and food distributed to each district, attention center and program.12 75. PSRL IV. For PSRL lV, the objective is to institutionalize a well-functioning decentralization process of the food programs, with the approval of the Intergovernmental Fiscal Transfers Law and its regulations. The proposed trigger i s the implementation o f the pro-poor allocation formula, of the performance agreements as the means to transfer funds and of the transparency of the results included in this law. The performance agreements would be implemented by PRONAA or the agency responsible, establishing clear goals and procedures o f the programs, and a monitoring system should be in place. Another trigger for PSRL IV would be to improve the purchasing procedures for food under these programs. 76. As these reform objectives demand developing and strengthening the capacities of MIMDES and PRONAA, the TAL under preparation will provide support for it, inparticular for the design of the performance agreements, the negotiations of them with local authorities, the implementation of the monitoring system that will support those PASand for the inclusion o f the Performance Agreements andtheir results in the Consultu Amiguble. 12. Complementing the various efforts underway with the food programs, the Ministry of Health has defined a nutrition program to be followed by all public health providers. Additionally, it has included the provision of iron supplements within the SIS benefit plan, securingits access for children under two years of age, as well as for pregnant women. MOH i s already buying and distributing needed supplies throughout the service delivery network to jump start the use of iron supplements. In the immediate future, SIS reimbursement will allow hospitalsand centers to replenish stocks, maintaining the availability of iron supplements. 25 B. Improvingaccess to quality healthand education services 77. One of the key objectives of Peru's strategy to overcome poverty i s to continue the thrust to obtain universal coverage of basic health and education services. Peru has a broad coverage of primary education but still has a way to go on secondary education, and health services do not reach some 20 percent of the population. Poor people confront not only geographical barriers, but also economic and cultural barriersto these services. The quality of the services must also improve to make them attractive to users. The current context of decentralization i s both a challenge and an opportunity for the health and education sectors. As explained above, in many countries, the coverage and quality of the social sectors has suffered following decentralization. Other countries have shown that-if done carefully-the process o f decentralization can be used to improve the incentives facing regional authorities and service providers. Some countries in Latin America have succeeded in doing this by decentralizing the provision of services, while centralizing the financing o f these services, and tying the financing to specific performance criteria. It should be noticed that decentralization of healthand education should not be equated with the transfer of all responsibility over health and education workers to subregional governments and that this particular reform has failed in most Latin American countries where it has been attempted. B.l. HealthCare 78. Inequitable access to health services and financial inefficiencies are the two main challenges facing the health sector. Despite an expansion in the supply o f health services, economic and cultural barriers persist as significant obstacles to access, especially for the poor and the rural segments o f the population. Duplication with poor service coordination among various health care subsystems also persists throughout the country creating troublesome inefficiencies. These are particularly significant between the two largest financial sources in Peru's health sector: the public hospital network (run by the Ministry of Health and the sub- national health authorities) and the nation's social security institute (ESSALUD, financed through payroll taxes and covering approximately 6.8 million Peruvians). 79. The Government's Strategy. In order to overcome economic barriers to service utilization, the GOP launched an infant and maternal public health insurance scheme, focusing on the poor and rural populations. Simultaneously, cultural barriers to basic services were addressed through the expansion of an innovative arrangement (known as the CLAS model) that empowered local communities to administer their own primary health services. 80. Parallel to these policies on access, the GOP identified specific actions to improve the overall efficiency of the health sector, chronically affected by the lack of coordination within public health expenditures and the absence o f linkages with performance indicators. Initial steps taken include promoting better service coordination between ESSALUD and the public hospital network, and introducing management agreements between the Ministry o f Health and sub- regional and local governments. In the long-term, these actions are expected to contribute to preparing instruments and capacities required for the health sector to perform well in an increasingly decentralized environment. 81. The Decentralization framework law mandates the decentralization of health and education services, but does not specify what this will entail and leaves the design o f this process 26 to norms or legislation that i s yet to be produced. At present, a technical team at the Ministry of Health i s developing a proposal that would transfer the provider networks to the regional governments and would strengthen the policy-making and regulatory role of the ministry using SIS and the performance agreements. 82. Actions under PSRL-Iand -11. Under PSRL-I, the GOP launched a health insurance scheme initially known as the "Seguro Materno-Infantil"; later on, in 2001, this program was merged with an existing school-based insurance (the "Seguro Escolar"), forming what i s known today as the "Seguro Integral de Salud" (SIS). SIS's objective i s to reduce service costs for poor citizens by reimbursing public providers for variable costs incurred in health care delivery (mainly, essential drugs and medical supplies). Additionally, by using a fee-for-service reimbursement mechanism, SIS induces the supply of those basic health interventions included inits benefits package. 83. Under PSRL-11, SIS coverage rates for women and children were greatly expanded nationwide, surpassing all initial estimates (see Table 5). Financial resources for SIS were secured by the national government via general revenues, maintaining the commitment level for the infant and maternal components despite the recent inclusion of additional benefits plans13. Legal and organizational actions were taken, in close coordination with the MOH and the Ministry of Finance, to guarantee a stable managerial status for SIS. Although SIS still faces challenges and has considerable opportunities for further improvement, preliminary evaluations indicate that it has been an effective instrument for targeting health services to the poor and increasing access to basic health care (such as prenatal care, skilled birth assistance, and ambulatory pediatric visits). 13. Between 2002-03, the COP included two new benefit plans in SIS: plans D and E, covering specific adult populations. 27 Table5. Peru-SIS MainPerformanceIndicators Indicator Plan A Plan B Plan C Plan D and E TOTAL (0-4 years) (schoolage) (pregnant women) (adults) Coverage December2003" 2,183,221 4,474,279 547,143 295,357 7,500,000 (May 31,2003) (1,948,196) (3,386,132) (433,106) (171,078) (5,938,512) December2002 2,O 13,923 3,109,962 544,876 194,926 5,863,687 December2001 395,000** n.a. 154,000** n.a. n.a. Percentageof Total Services Delivered 42% 35% 21% 2% 15,170,607 (2002) services Percentageof Total Production Cost 34% 30% 30% 6% $228.5 (2002) million soles Average Cost per Service (2002) $12.30/soles $12.90/soles $21.80/soles $41.80/soles $15.06/soles Annual Services per Affiliate (2002) 3.2 1.7 5.8 1.5 2.6 Notes: ** Fromthe * Estimatedbasedon May 31,2003 figures. PSRL-11. Source: SIS InformationSystems, 2003. 84. Complementing the insurance effort, community involvement was strengthened as a means to reduce cultural barriers to access and enhance the responsiveness of primary health facilities. The first two phases of this program supported progress made in involving local communities in co-managing primary health care, via local health plans discussed and agreed with the health authorities. With support by this program, roughly 25 percent of all basic health centers in Peru became "Comunidades Locales de Administracidn de Sewicios de Salud" (CLAS); that is, local not-for-profit citizen associations enabled to actively run primary health care in their communities. 85. To address the efficiency challenge, previous stages of the program introduced results- oriented instruments in the health sector. Management agreements between the MOH and the departmental health services (DISAS) were first signed during 2002, as part of the PSRL-II. These agreements were initially limited to indicators related to individual health services. Simultaneously, efforts conducive to better coordination of ESSALUD and the M O H progressed, setting the stage for two successful pilot service-exchange agreements in two departments, now inprocess of being scaledup. 86. The GOP also attempted to advance with comprehensive reforms in ESSALUD that would improve its efficiency and effectiveness. These included designing and approving a comprehensive managerial plan that would enhance performance and transparency (via 28 performance agreements, cost and productivity studies, tariff reviews and others). Unfortunately, intense political instability (reflected in frequent abrupt changes in ESSALUD's top management) hampered progress inmost of these action^.'^ 87. Actions under PSRL-111. PSRL-I11 consolidates and expands previous efforts in both equitable access and efficiency, while preparingthe Peruvian health sector for advancing in the decentralization process. Policy actions recognized by PSRL-I11 have (i) improved access to health services for the poor, via consolidating and expanding SIS and increasing local community involvement in primary health care; and (ii) further reduced sector inefficiencies, by advancing coordination between ESSALUD and the M O H and supporting the use of management agreements within the public sector. (i)Reducing access barriers to health care for the poor. PSRL-111maintains SIS's focus on infant and maternal health care, further strengthening its insurance function and expanding coverage. Affiliation rates for pregnant women and children under 5 years o f age have significantly increased, surpassing initial targets: by the end of 2002, 544,876 women and 2,013,923 children were affiliated (this compares to initial targets of 339,000 and 823,000, respectively). Service utilization rates suggest improved access for these groups. However, the recent inclusion of additional benefits plans and the expansion of eligible services (now including tertiary care) have created a worrisome tendency that could divert SIS from its original objectives: reimbursements are increasingly moving towards high complexity care, mostly limited to urban settings. In order to prevent this distortion from affecting basic health care coverage for the rural poor, the GOP has included in the 2004 national budget law presented to Congress a clear separation of SIS's primary and secondary health care expenditures from those corresponding to tertiary care, hence protecting the former. 88. Additionally, the government has taken needed actions to strengthen SIS's managerial capacity, including (a) integrating its information systems; (b) being fiscally responsible (all changes in targets and/or benefit plans have been accompanied by the correspondent budgetary allocations); (c) assuring sufficient resources to maintaining expected coverage goals; and (d) directly reimbursing providers for services delivered, thus guaranteeing the presence of a proper in~entive'~.Efforts related with quality assurance (auditing o f perinatal and maternal deaths) and improvements of monitoring and internal control systems are underway with technical assistance from the WB-financed health reform project (loan No. 4527-PE). Additionally, a detailed 2003 performance agreement has been signed between SIS and MEF and i s being closely monitored. 89. Local co-management of primary health services has increased in Peru, supported by various studies that indicate positive results in terms of access to health care, consumer satisfaction and efficiency. Under PSRL-111, 762 CLAS associations now function throughout the country, including 2,091 health centers (or roughly 35 percent of all first level establishments), up from 1,461 that existed by the beginning o f 2002. These CLAS, with a total 14. More recently (June, 2003), the approval by Congress of an autonomy law for ESSALUD further distanced its management from the control locus of the executive branch. Nonetheless, the law does define that ESSALUD must maintain its fiscal responsibility. 15. Currently, SIS reimburses directly to 128 "unidudes ejecutorus" throughout the country. Included here are the 34 departmental health services ("Direcciones de SaluaP', DISAS) and public hospitals head of referral networks. 29 annual budget estimated in 73.2 million soles and accounting for over 4,900 active community members and 5,800 health care workers, serve now more than 8 million citizens, mostly in poor, rural settings. (ii)Improvingtheefficiencyofhealthcare delivery. Also under PSRL-111, the MOH has signed new management agreements with all 34 DISAS for 2003. These agreements are now more comprehensive, including additional health indicators such as SIS coverage rates, disease surveillance results, and immunization rates, among others. Close monitoring of the 2002 and (current) 2003 agreements has been conducted b y the MOH anddiscussed with the DISAS. This exercise has lead to policy alignment and timely decision making. 90. Lessons learned during previous phases of this program, with attempts to improve the internal efficiency of ESSALUD in a context of political and managerial instability, has lead PSRL-I11 to focus efforts on securing basic coordination in service exchange and investments between ESSALUD and the MOH. Arrangements were made for exchanging services in five departments, reducing inefficiency in the supply of services in both institutions and improving access both to basic health services (for ESSALUD affiliates) and to complex care (for MINSA- dependent uninsured citizens).I6 Both entities are now jointly reviewing their major procurement and investment plans for 2003 and 2004, making sure there are no redundancies and arranging proper agreements to further share excess service capacity. 91. Perspectives and Triggers for PSRL-IV. While maintainingachievements reached in the previous phases o f the program, the PSRL-IV will further advance two policy instruments considered critical for the health sector to gradually decentralize: SIS and management agreements. Specifically, the fourth operation will recognize SIS' s efforts to further expand infant and maternal coverage rates (reaching now over 560,000 pregnant women and 2,400,000 kids under 5 years of age), improve skilled birth attendance rates, and introduce reforms in design and operational features (e.g. in its benefits packages, tariffs and referral systems) that will help controlling excessive resource allocation intertiary care. 92. As mentioned above, a key trigger for PSRL IV will be the putting in place of a legal framework for the decentralization of the health sector. The PSRL-IV will also recognize progress made with results-based management within a decentralized context. Annual management agreements between the national and sub-national health authorities will be maintained, now including close monitoring with results made public for enhanced accountability and citizen participation. The M O H anticipates that management agreements will become the critical instrument for guiding a gradual decentralization process o f health functions without deteriorating key indicators. 16. The departments with active service exchange agreements between MINSA and ESSALUD are Tacna, Huhuco, Huancavelica, Loreto and Ucayali. 30 B.2. Education 93. The Education sector in Peru suffered a difficult blow when the PISAI7 student performance evaluation results were published. The evaluation showed that 15 year-old Peruvian students have serious difficulties reading and understanding what they read. Prior student assessments had given similar results, but this test, which allows comparisons with other countries, led to national outrage and the subsequent declaration of emergency inthis sector. 94. A key underlying reason for these poor results are the poor quality and motivation of the teaching staff in Peru. The average teacher salary in Peru i s approximately 230 dollars per month, which i s relatively low for Latin America. The salary scale i s also quite compressed with average pay in the highest teacher category only 1.4 times that of the starting pay level compared with a good practice ratio of at least 5:l. There are no salary adjustments or other incentives for teaching in rural areas or other hardship posts which result in a high share of schools in rural and low-income urban areas operating with teacher shortages even though the system-wide student-teacher ratio i s a relatively low 25:l at the primary level, which suggests that the overall quantity of teachers i s adequate. 95. In order to introduce processes that will address human resource problems, it is indispensable to restructure the way that teachers are managed in the sector. Currently, 49 percent of the teachers are still being paid through payroll systems that are subject to manipulation, either in the process of manually entering the individual's payroll information or when giving orders to the bank to proceed with payment. In addition, the payrolls are not linked to teacher positions so that staff may be paid salary amounts that may not correspond to the position they work in. For example, in an initial cross-check carried out in Lima, Ministry of Education (MINED) found that some janitors and teacher assistants were reported and paid as teachers or even as school directors. 96. Another human resource problem i s that teachers are poorly deployed. Teacher deployment i s highly centralized. Open-ended contracted teachers "own" their positions and are very difficult to move. On the other hand, term-contracted teachers are subject to redeployment. Given that contracted teachers today amount to approximately 18 percent of the teaching body, the impact of rationalizing this group, through redeployment or cancellation of their contracts, i s limitedbut can still have an important impact in the system. 97. The current context o f decentralization urgently requires addressing the human resources problem in the sector. Initial estimates show that $50 million per year could be saved if the payroll system i s cleaned up and rationalized. If this i s not done, in the medium term, regional governments could start demanding more budget to finance non-existent teacher positions, thus ballooning the recurrent cost education budget, putting at risk the services and investment budget, which finance school materials, training, and other quality inputs. 17. The Programme for International Student Assessment (PISA) is an OECD-sponsored effort which aims at measuring how well 15-year-olds perform in three forms of literacy: reading, mathematical and scientific. The PISA 200/2001 was administered to 43 countries of which 15 were non-OECD. Peru was the lowest ranking country. 31 Government Strategy 98. Throughout the Toledo Government, education has been highup on the national agenda. It i s an important component of the Acuerdo Nacional and the Estrategia de Superacio'n de la Pobreza. In addition, Congress recently approved a new General Education Law which is very much in line with both these documents, all of which aim at improving the quality o f education in Peru, ensuring equity, and taking into consideration cultural and language differences. They also emphasize the significant role that teachers play inthis process. 99. The publication of the PISA results forced the Government to take immediate actions. The sector was declared in emergency, prioritizing key strategic actions which are expected to contribute to improving education quality, while at the same time preparing for the decentralization process. Key priorities are to: (a) improve the quality of education with a focus on reading-comprehension and math; (b) improve teacher quality and motivation; (c) increase access to education to excluded populations through strategic projects and programs; (d) increase system accountability; and (e) increase education financing. These policies are in line with the critical policies identified inthis sector, but the declaration of emergency allows the Government to take swifter actions and to have education spending prioritized in the budget, if and when revenues increase. 100. MINEDis focusing on improving teacher quality and motivation through a two-pronged approach. MINEDi s committed to implementing a unified payroll system; developing a teacher position system which allows for cross-checking of teacher positions with the payroll; and launching a rationalization process, where contracted teachers would be redeployed to schools with greater need for teachers. At the same time, MINEDi s designing teacher incentive schemes that will promote greater time-on-task and improved quality. It should be emphasized that based on lessons learned in many Latin American countries that have attempted to municipalize the teachers and failed at the attempt-the government is notconsidering the full transfer of teachers to the regional governments. Actions under PSRLIand PSRL I1 101. The PSRL Program has supported the GOP sector policies, with an emphasis on teacher quality and motivation. Prior sector work and other studies carried out during the preparation of the Rural Education Project showed that Peru had improved significantly in its curricular reform and in the distribution of materials at the primary level. However, teachers lacked appropriate training and motivation to be able to implement the changes decreed by MINED. 102. The GOP has long recognized that teacher quality and motivation need to be addressed in order to ensure overall improvement in the quality o f education. This objective was approached through two strategies: (a) the introduction o f new information systems to allow for greater efficiency in teacher management; and (b) development of incentive pay to increase teacher motivation. As part of the first strategy, PSRL Isupported an important effort to try to clean-up the payroll and career management system in order to make it more transparent and efficient. The new payroll system was implementedin six payroll processing units reaching a coverage of 44 percent of the teachers nationwide. With this system, MINED was able to detect teachers who were no longer in the system but were still being paid, or teachers who were not being paid appropriately according to the position that they were holding. Subsequently, under PSRL 11, 32 MINEDrepresentatives stated their interest inpromoting an overall reform of the teacher career, as part of an ambitious vision that would lead to a new Teacher Career Law. This vision turned out to be too optimistic, given the national political context. A teachers' strike in May 2003 showed that any reform would require a difficult negotiationprocess. 103. As part of the second strategy, under PSRL IMINED identified the following teacher incentives as key policy instruments, particularly for rural areas where teacher quality i s lowest: (a) financial incentives for teacher attendance, scaled with respect to distance between the school and the provincial capital, (b) financial incentives for teacher's ability to speak the local tongue fluently; (c) living facilities; and (d) appropriate training for multigrade environments. Under PSRL 11, MINED initiated a pilot program to provide incentives to teachers in rural areas with the specific objective of ensuring teacher attendance in rural schools. The pilot was implemented, but with insufficient evaluation thus far. 104. A second policy supported under the PSRLI1addressedtwo population groups which are commonly excluded from the system: pre-school children and indigenous children whose mother tongue i s not Spanish. It was agreed that these excluded groups should be targeted in the prioritization of education investments in order to achieve the Millennium Development Goal of universalprimary education. 105. A thirdpolicy area addressedthe issue of transparency and participation. Under PSRL 11, MINED had committed to the reorganization of schools through the creation of strong school councils in order to promote dialogue between the school and the community and to promote accountability at the local level, MINED issued a decree which makes school councils compulsory. 106. The GOP has made an overall effort to improve transparency. As part o f this general effort, under PSRL I,MINED published 1998 student assessment data and the comparative analysis of the 1996 and 1998 data. Under PSRL 11, in November 2001, MINED carried out student performance assessments, including, for the first time, children in rural multigrade schools and Quechua and Aymara speakers, and has publishedpreliminary results. Also, under PSRL 11,the final report of the Commission for National Consensus on Education was published as inserts in newspapers with national distribution--"Propuestu de Acuerdo Nacional por la Educacidn" and "Las Vocesdel Pais" and a complaints hotline and center was installed. Actions under PSRLI11 107. Inthis phase, the PSRL continued to support all three priority policies, but with a greater emphasis on the teacher component. The Government had committed to continue implementing the human resource management system as a trigger for PSRL 111, as the implementation of the system i s a key prior action for the decentralization of the sector. Under this operation, MINED has implemented the payroll system in two additional Regional Offices, thus reaching a total coverage of 51 percent o f the teachers. MINED has also developed a teachers position system which has been implemented in Lima and Callao. This system was used to cross-check teacher positions with the payroll, resulting in significant clean-up. Finally, MINED initiated the rationalization of teachers through a pilot in two Lima districts, identifying approximately 20 percent of teachers that could be redeployed to areas where teachers were in greater need or whose contracts were cancelled. MEF has also supported MINED by initiating the 33 implementation of the automated payment of teacher salaries through the SIAF system, thus hinderingmanipulation inthis step of the process. 108. A second key action is the design of teacher incentives to promote deployment and permanence of teachers in rural areas, as well as to improve performance system-wide. MINED has re-launched the pilot in three rural areas of Peru. The pilot covers 1000 teachers and will evaluate the impact of providing monetary and non-monetary incentives for teacher attendance and performance. As part of the pilot, MINED is strengthening the Consejos Escolares Consultivos (school councils), with the assistance of DFID, which will be responsible for monitoring teacher attendance. A monitoring and evaluation system has been designed and the baseline is under implementation. 109. As part of the teacher incentives system, MINED is carrying out an in-depth study to design incentives for teachers nationwide. This study will propose a new teacher pay scale that would include greater differentiation between payment levels and performance incentives. This study i s expected to be ready duringthe first quarter of 2004. 110. Inaddition, during this phase, MINEDcarried out actions to cover excludedpopulations. MINEDdeveloped, approved and initiated implementation of a comprehensive early childhood development strategy. In the case of bilingual education, PSRL I11targeted increased coverage to 75,000 rural indigenous children (15 percent of the total population) for the 2002 school year, through the provision of bilingual materials and an improved teacher training program. MINED trained approximately 4,300 teachers, achieving an approximate coverage of 90,000 students. Materials were distributed to these children too. 111. Finally, in the area of transparency, MINED implemented the Centro de Atencio'n a la Comunidad Educativa, CACE (a complaints center) which has been operating mainly in Lima, but also receiving calls, through its toll free number, from other areas in Peru. In early April, CACE launched a promotion program nationwide announcing their web sites and email address. This had a positive impact on the ratio of feedback received from outside Lima. As part of this strengthening process, MINED has issued a Directive which requires that regional and sub- regional offices receiving complaints through CACE, to respond within 72 hours of receiving the complaint. Perspectivesfor P S R L I V 112. The main challenge for the education sector in the next year will be the implementation of the proposed National Education Emergency Plan and to get ready for formal decentralization in 2005. MINED i s in the process of mapping the actions towards the decentralization, but is clear that implementing the sector's Human Resources Management System and designing incentives for improving quality of education and redeployment of teachers to hardship areas are critical initial steps to achieve an ordered transition. 113. MINED is committed to the implementation of the Human Resources Management System nationwide. The system includes the operation of the unified payroll system, crosschecking of payroll and positions, electronic payment of salaries, and rationalization of short term contract positions. MINED has planned to install the system and process the payroll in at least 75 percent of the executing units, reaching an expected coverage of 80 percent of the teaching staff. Payroll and teaching positions will be cross-checked for at least 50 percent of the teachers. The payroll system will be linked to MEF's SIAF which will pay at least 50 percent of 34 the teachers directly into individual accounts. Finally, MINED will rationalize 50 percent of term-contracted teachers so that they are redeployed to areas where there are greater needs, or their contracts will be canceled. MINED expects that the combination of these measures will help ensure that personnel are being paid for the specific job they carry out. Initial estimates in saving to the sector are about US$50million per year, or approximately 45 percent of the non- salary annual budget for the sector. 114. The second benchmark, addressing a teacher incentives system, will be implemented using a two-pronged approach. MINED will continue implementation of the rural teachers incentive pilot during the 2004 school year. This pilot i s expected to provide lessons regarding: (a) the impact of monetary and non-monetary incentives to teachers and schools in teacher attendance and student performance, and (b) the role of school councils in monitoring teacher attendance. DFID i s currently providing technical assistance in training school councils to carry out this monitoring function. MINED i s also evaluating possible teacher incentives that would be applicable system-wide. A study, initiated under PSRL 111, should be concluded during the PSRL IV phase. The study i s expected to design a new teacher pay structure that will include base pay plus performance incentives based on periodic evaluation. Recommendations from this study and from the pilot program will be used to draft the new teacher pay scale and incentive structure. C. Transparency and Participationof the poor'' 115. When the transition government came to power, years of weakened democratic institutions, lack of government transparency and increased levels of corruption had undermined the accountability o f the Peruvian state to its citizens. The lack of transparency and lack of access to information was manifested in the limited availability of information on state budgets and expenditures, and on the eligible beneficiaries and the expected results of government programs. There was also little public awareness regarding citizens' rights and the responsibilities of civil servants. Finally, there was little or no space for citizens to participate in the formulation and elaboration of public policies, and no formally recognized mechanisms to allow users and citizen oversight of state actions and programs. 116. Following the opening up of Peru's political environment, the transition government of President Paniagua and subsequently the Toledo administration announced a strategy to consolidate transparent and democratic institutions in Peru, buildinga state aimed at "serving the people." An emphasis was placed on giving voice to the people and transparently managing state resources. Within the PSRL, this translated into the objective of improving transparency in social programs and expenditures and empowering beneficiaries to participate in the policy and budget process. The specific objectives were to i)provide access to information for all citizens, depoliticizing the use o f public information and restoring its credibility; ii)provide citizens with the means to plan, budget and oversee the services which are provided to them and thereby ensure that their voice i s heard and reflected accurately in government actions; and iii)provide 18. The issues discussed in this sectionare addressed in greater detail in Annex 5. 35 an institutional framework and recourse mechanisms for citizens to seek resolution in the case of abuse of public roles or funds. 117. The strategic priorities of the PSRL were defined through a broad consultative process and national dialogue in Peru which involved the GOP, the World Bank as well as other key stakeholders of the reform, such as public sector representatives, the private sector, civil society and the donor c~mmunity'~. 118. DuringPSRL Iand 11,the GOP made important advances inenhancing citizens' accessto information by increasing transparency of government actions and programs through a series of new initiatives. The GOP launched an Economic Transparency portal aimed at makingfinancial and budget information easily accessible and useful to citizens as a source for influencing and monitoring public action, providing monthly information on budget transfers to and expenditures of a selected number of social programs. Increasing access to information also meant ensuring that the information made accessible was accurate and reliable. The National Institute of Statistics and Informatics (INEI) was identified as key to the production of credible statistical information. In order to reduce political interference in the INEI, as was the case during the FujimoriAdministration, and reinforce its role as a technical agency, it was agreed that measures needed to be taken to move more forcefully in that direction. Finally, in order to measure the impact of the afore-mentioned actions and to enhance citizens' voice on issues of corruption, the GOP proposed to assess public perceptions on transparency and corruption by first establishing a baseline. To do this, it was proposed to incorporate a module on transparency into the ENAHO national survey. 119. PSRL 111: Piloting; accountability mechanisms and creating; institutional frameworks. The PSRL I11focused on providing voice to the users of the Priority Social Programs concerning the quality and transparency of services received, and on institutionalizing measures to enhance transparency and participation in a context of increasing decentralization. In that context, the PSRL I11witnessed significant advances in providing citizens with greater voice in planning and oversight of government activities though two main actions. The first was the inclusion and analysis of a module on transparency in ENAHO, and the second was the implementation of a pilot applying the citizen report card methodology to evaluate the performance of a selected number of social services, as experienced by users. The results of both the ENAHO survey and the outcomes of the report cards was disseminated by high-ranking government officials in an event that brought together media, government and civil society representatives. 120. The GOP also made important progress in providing a legislative framework for institutionalizing greater citizen participation in public policy formulation, implementation and monitoring, greater transparency and improved access to information. Most importantly, the DecentralizationFramework Law, together with its constitutional changes and the respective law for the newly created regions and the law for municipalities created an unprecedented framework for citizens' participation, civic engagement and social vigilance, granting far-reaching individual and collective rights and institutionalizing participation and transparency. This can be exemplified by several important advances: 19. For a description of the consultation process for the PSRL, see Annex 5, "Report and Recommendation of the Presidentof the IBRD to the ExecutiveDirectors", PSRLII,August 19,2002. 36 (i> Citizens participation i s recognized as a fundamental right throughout the legal framework and will soon be codified in detail through a special law. (ii) RegionalandLocal Coordination Councils were created inaddition to the respective regional or local councils, and are required by law to take into account citizens' voice. Buildingon the positive experience with the mesas de concertacion and other initiatives, they seek to establish a forum for coordination and consultation between government and civil society. With 35 percent and 40 percent civil society representation respectively, they are consultative legislative and executive bodies to participate in and monitor public action. Participatory planning processes have been established that require the creation of a regional, provincial and district development plan, which are based on consultations with civil society. Likewise, inputs from civil society are required for all subnational investment plans. A major innovation i s the mainstreaming of participatory budgeting. The Framework Law on Participatory Budgeting that establishes a uniquely strong process for participation of civil society in the creation of the subnational budgets, unparalleled in Latin America. Participatory budgeting will be the focus of the participation and transparency component of the Decentralization, Growth and Competitiveness Loan that will complement the important advances made under the PSRL. The Transparency and Access to Information Law and its regulations stipulate a far-reaching right to information and creates corresponding mechanisms to hold the public sector more accountable. Community participation in the design, execution and monitoring of local projects has been expanded in several social programs, and efforts are undertaken to mainstream community oversight to all social programs to be decentralized. 121. This new framework for participation means Peru has one of the most advanced legislative structures for citizen participation inpublic policy and budgeting processes at national and especially at the subnational levels in all of Latin America. 122. Enhanced user oversight of the performance of service providers and the implementation of a legal framework to improve public transparency are not possible without accessible, timely and reliable information. In that respect, PSRL I11supported the development o f the Economic Transparency Portal into an accessible database of information on all government budgets and expenditures updated on a monthly basis (including not just social programs, but also such items as defense), down to the departmental level. This site (called Consulta Amigable) i s accessible to everyone on the Internet. For three programs (PRONAA, SIS and A Trubujar Urbano), expenditures were also linked to physical goals, facilitating the monitoring of expenditures versus achievement of results. For these programs, information on their objectives, services offered and eligibility criteria were included as well. 123. In the same direction, PSRL I11 supported the effort to reinforce INEI's technical character and reduce its susceptibility to political interference. Although total financial and political autonomy was initially visualized, this initiative met with resistance, due to fiscal and legal considerations. Several alternatives are under deliberation to achieve the same objectives 31 in the current political context, including strengthening the capacity of INEI with technical assistance and providing it with an external oversight body with representatives from academia, civil society and the public sector. In the framework of the PSRL I11dialogue, the GOP has proposed the establishment of a monitoring and evaluation (M&E) system and has designated the authority which will be responsible for its design and implementation. In that respect, INEIi s expected to play a key role as a provider of official statistical information to the M&E system, and therefore will need to be strengthened to fulfill this function?' PSRL N:Monitoring and EvaluatingResultsto Support Performance Management 124. Building on the efforts initiated during the previous PSRLs, the transparency and participatory mechanisms developed will be implemented within the context of the monitoring and evaluation system to be developed by the GOP under the PSRL N. The implementation of a transparent, participatory and results-oriented M&E system will help put in place processes by which the government will be able to effectively track progress in reaching the objectives o f the PSPs within a decentralized context and will help enhance the transparency, quality and efficiency of expenditure. This requires strengthening the capacity of regional and local governments to effectively monitor the implementation of their programs, both regarding targets, such as inputs and outputs, as well as process, such as participation. It also requires strengthening the capacity to make effective use of the information derived from the M&E system to adjust program performance, so that any detected weaknesses can quickly feed into program management and be translated into performance improvement. The M&E system will be closely linked to the accreditation system and performance management agreements, especially regarding sectoral minimum standards and institutional capacity. A set of participatory monitoring and evaluation mechanisms will be put in place, allowing the views o f service users and citizens to be effectively heard with the aim of improving service delivery and empowering the poor. 125. With the support of the TAL, currently under preparation, the M&Esystem will track and evaluate the levels and appropriate mix of spending on the PSPs at the national, regional and when applicable, at the municipal level, the critical inputs and outputs, and the level o f satisfaction of users measured through user-satisfaction monitoring methodologies. The TAL will also support activities aimed at strengthening INEI's capacity to produce reliable and timely information needed for the M & E system. In the first year of implementation the system will report results at the national and regional level every six months. The reports will gradually disaggregate information down to the provincial and district level. 126. Inorder to ensure the neutrality and objectivity of the M&E system and its connection to result-based management and decision-making processes, a multi-sector oversight committee composed of ministries, other government agencies, and representatives of regional and local governments, will be formed. The committee will coordinate and oversee the information produced for the M&E system. 127. The Consultu Amiguble constitutes a key tool of the M&E system. However, the information made accessible in Consultu has to be not only complete and accurate, but also 20. A Technical Assistance Loan (TAL) to support the development of capacity of government and civil society actors for the design and implementationof the monitoringand evaluation system is under preparation. 38 understandable and communicated in a user-friendly manner. The PSRL N will thus support an even more user-friendly Consulta, and ensure that the quality o f its information improves by providing more complete information on expenditures linked to achievement o f results for all PSPs, down to the provincial and, when applicable, to the local (district) level. It will also include technical descriptions of the programs, for users to have access to information such as type of services offered, eligibility criteria and geographical coverage. A grant21 has been approved and is meant to complement the activities of the PSRL, focusing specifically on strengthening the capacity of civil society to monitor the performance of PSPs. It will also seek to improve access o f the poor to the information contained in Consulta by creating interfaces tailored to their needs and through complementary means to the web, such as for example community radio, bulletin boards and community media, as the Internet still remains out reach for many of Peru's poor. 128. The PSRL N, the TAL and JSDF grant will also support the institutionalization of participatory M&E mechanisms. This will include, among other efforts, systematizing the use of such tools as participatory users' satisfaction evaluations and community-based expenditure tracking mechanisms in the monitoring and evaluation of the PSPs, permanently including the user satisfaction and perception of corruption module in ENAHO, and a greater participation of community-based organizations which are involved in the management of social protection programs. To this extent, the TAL will also support the strengthening of M&E in the decentralized social programs of MIMDES, according to the fiscal transfer law. 129. The implementation of an effective participatory M&E system requires that citizens are easily able to access information on public programs and services at all levels o f government. Duringthe PSRL IV,the implementationof the Law of Transparency andAccess to Information will be an important objective, particularly strengthening the capacity of CCLs and CCRs to disseminate information on PSPs and other decentralized social program to citizens and communities. 130. The trigger and benchmark of the PSRL IV in the area of transparency and participation are based in part on feedback received from civil society organizations and multi-stakeholder roundtables, which have followed the progress in the area o f transparency andparticipation since the approval of the first PSRL22. 21. Japanese Social DevelopmentFund grant (TF051333) < I 4 I E S 0 o C m m * a a 0 a Y t4 v) 0 * 4a =I, e , e , 'Ci 0 Y e, N 0 f .-3 v1 4 .-.-e,ma U .-.-C 0 8 fe, m v1 B U *0 -.- xBa e, .-Ca Y U Y iz i v1 - I -x t--- t- .-C N ln 0 m m C. LoanDisbursementandAudits 162. Disbursement arrangements would follow the simplified procedures for SALS/ SECALs approved by the Board on February I,1996. The Borrower will open an account in the Central Bank of Peru. Once the Bank formally notifies the borrower that the loan is available for withdrawal, the borrower will submit a simplified withdrawal application so that the proceeds of the loan are deposited by the Bank inthis account, for use in accordance with the Loan Agreement. Disbursements will not be linked to specific purchases, and supporting evidence for disbursements i s therefore not required. The proceeds of the loan may not be used to finance expenditures typically excluded under the Loan Agreement. Although a routine audit of the deposit account would not be required, the Bank reserves the right to request that an audit be conducted in accordance with International Standards on Auditing, by an independent firm acceptable to the Bank. If requested, the audit will be performed in accordance with terms of reference (TORS) approved by the Bank. D.Procurement 163. Key procurement actions agreed in the Peru CAS to achieve the objectives o f increased transparency, economy and efficiency and reduced levels of corruption in public procurement are being implemented inthe context of the PSRL 111. Among these actions are the strengthening of the control and supervision roles of the CGR and CONSUCODE over the public contracting system and the phased implementation of an E-Government procurement system. Progress achieved in implementing these activities i s provided in the Policy Matrix discussed above. 164. The review of the country legal procurement framework, including the development of specific local regulations for selection and contracting of consultants and the implementation of local standard biddinghelection documents are also paramount actions agreed in the CAS to enable the achievement of increased transparency and efficiency in public procurement. Although the GOP has recently conducted a review of the procurement law and a revised draft proposing specific changes in it i s expected to be submitted to Congress shortly, it will not address issues regarding procedures and practices in conflict with international accepted procurement standards. The preparation and implementation of national standard procurement/selection documents has not yet started. E.EnvironmentalAspects 165. Peru's efforts of the last few years to address environmental issues have continued with some success and new challenges. In 2001, an Environmental Issues and Strategic Options Study was carried out jointly by FA0 and the World Bank to identify the major environmental issues and their underlying causal factors; review the institutional framework, policies and instruments in place; and suggest strategic options. The main environmental issues identified in the study remain largely unchanged; but some progress has been made in the development of a regulatory framework, laws and norms to govern environmental management of sectoral activities. The national coordinating and consultative body (Consejo Nucional del Ambiente-CONAM) under the President of the Council of Ministers i s the regulatory entity for environmental management in Perk Its role i s to coordinate, supervise and enforce sectoral environmental regulations. The CONAM has: (i) established an institutional framework to harmonize environmental legislation and institutional 54 responsibilities; (ii)developed a body of sectoral-based environmental legislation; (iii) established a series of prevention and control instruments (e.g. environmental impact assessments, environmental compliance programs, and territorial environmental assessments for public and private projects, environmental quality standards, I S 0 14000, decontamination plans and others); and (iv) established a national protected area system. Progress i s also discernible in the private sector as demonstrated in the number of approved environmental management plans developed by industries to bring them into compliance with the legislation, particularly in the fishing, mining and energy sectors. Most recently, special attention has been given to environmental issues related to the mining and hydrocarbon sector in connection with large private investments inthis sectors. 166. The institutional capacity for environmental management, however needs significant improvement. Inparticular, Peru's environmental assessmentframework i s characterized by fragmentation among line ministries, overlapping of mandates and competing -and often contradictory - interests. Although regulations, standards, procedures and instrumentshave been nominally adopted, their enforcement is still very weak. Environmental assessment review i s currently under the responsibility of several sectoral units, including: INRENA at the Ministry of Agriculture, DIGESA at the Ministry of Health, the environmental units at the Ministry of Energy and Mining, the Vice-Ministry of Transports and the Vice-Ministry of Housing. The recent decentralization has further complicated the institutional arrangements for environmental management. In addition to sector-based units at the central level, CONAM established 23 new Regional Environmental Commissions responsible for bringing together the public and private sector, and civil society to discuss and coordinate environmental policies at the regional level. This effort responds to the policy on Sustainable Development and Environmental Management adopted through the National Agreement which focuses on poverty alleviation and environmental management through increased institutional coordination and citizen participation. 167. The increasingly complex institutional arrangements continue to present major challenges for an effective and efficient environmental management in Peru. A simplified institutional set up would help address important and growing gaps in technical and managerial capacity, surveillance and monitoring systems, enforcement and public awareness. Priorities for action are the consolidation of an integrated environmental and social impact assessment system; the harmonization of standards, criteria and parameters for environmental management (in particular for air, water and solid waste); and strengthening the institutional capacities for the enforcement of environmental legislation and environmental management. These challenges form part of the Bank's continuing dialogue with the GOP. Venues for this dialogue are definedin the FY03-07 CAS, which include the preparation of new investment projects (e.g. roads, urban transport, agriculture) that normally require an environmental analysis and should include components to strengthen environmental units in sector ministries, as well as environmental data collection and monitoring. Currently, the Bank i s working with the Government of Peru in two analytical areas for policy development and regulations: Environmental and Social Issues of the MiningSector and Environmental Health. The results of this work will be incorporated into the range of Bank operations including activities related to the PSRL IV as appropriate. 168. With regard to the indigenous population, special attention i s given to this population by some protected social programs, as well as Bank-financed projects (education, health, Indigenous and Afro-Peruvians Peoples Development LIL)on the needs of the dispersedand indigenous groups. Also, the GEF-financed Indigenous Management of Protected Areas in 55 the Amazon Project will help regularize issues related to land-tenure and environment inthe Amazon area. F.Monitoringand Evaluation 169. Under PSRL I,the principal emphasis for social sector reform was placed on transparency of information. The development of a monitoring and evaluation system was initiated, leading to the establishment of specific objectives by districts which were published on the web, but generally the indicators established to monitor the loan were not generally quantified and outcomes were defined in general terms, without clearly specifying the indicator or the quantitative goal. This strategy was modified under the PSRL 11, in which the M&E system focused on medium-term impact indicators (such as for example percentage of poor and infant mortality), developed with technical assistancefrom the World Bank. The government for the first time specified indicators and established medium-term goals (for 2006), linking them to the social reform program included in the Letter of Policy. The emphasis was thus placed on linkingactions to medium-term objectives and to establish the corresponding indicators. 170. During preparation of PSRL 111, the government has made an effort to review the progress made towards the medium-termindicators and results of this effort are presented in table 7 and in Annex 4, and suggest that there has been progress in many key areas. At the same time, efforts to monitor and evaluate the key social programs have brought to light the need to implement: a new system of monitoring and evaluation will be needed once the social programs become decentralized, since several programs will be implemented by sub- national governments, regulated by sectoral ministries and financed by the Ministry of Finance. Progress has also been made on the impact evaluations of the key social programs done by independent professionals or institutions. Similarly, the score card methodology which i s based on client satisfaction of services was carried out for 5 social programs. For the future, M & E will be fine-tuned in the following two areas: First, the matrix of triggers (Table 7) establishes revised, more realistic medium-term development goals, in order to maintain credibility in the efforts to focus on results. Second, emphasis has been placed on specifying and quantifying monitoring indicators that can be tracked on a yearly basis. Further details on progress on this area are described inAnnex 4. 171. The establishment of a M&E system for the six PSPs incorporating elements of social participation and transparency i s defined as a trigger for the PSRL IV. This system i s aimed at improving decision-making and accountability and supporting management based on results in a decentralized context. The government has already designated a technical coordinator for this effort. The Bank plans to provide support for this effort under the proposed Social Sector Technical Assistance Loan whose principal objective i s expected to be the development of this monitoring and evaluation system. 56 G.Benefitsand Risks 172. The immediate major benefit of the PSRL program will be its contribution to Peru's maintenance of social stability during a difficult period of adjustment towards economic recovery. The PSRL I11will continue to protect critical social programs for the poor in a time when the country i s facing the double adjustment of reducing the fiscal deficit and reducing the cost of decentralization. It will also help increase the quality and efficiency of social expenditures by increasing the coverage of key health services for the poor and prevent the loss of education coverage and quality. It will help set the framework for decentralization by supporting the design of the first decentralization package, particularly food programs. At the same time, in a country where decentralization will profoundly change the social sectors, it helps set the stage by supporting the development of key instruments (such as SIS, Performance Agreements, teacher electronic payrolls) that prepare the stage for the decentralization of health and education. The mechanisms for public oversight of social policy supported by the operation will enhance the influence and voice of the poor on key social programs and help strengthen civil society at the national, regional and local level. The intersectoral approach of the PSRL has strengthened the contacts between the Ministry of Economy and Finance, the Office of the Prime Minister, the Ministry of Women and Social Development and the Ministries of Education and Health. The ultimate success of the programmatic operation will be measured by the extent to which public expenditures have actually reached the poor and had a positive impact on their quality of life. Risks are summarized inTable 8. Tal WB instruments to support mitigating actions Decentralization and Reform I given legislative powers exports PSAL inAugust to passtax reform. The reform i s expected to raise 2 H Pressurefor High Spending consensusand governance. __ 3 Growth and Decentralization Decentralization Framework PSAL Bank-financedPSAL. Transfers Law 57 Key Assumptions WB instrumentsto support mitigating actions M Export diversification and 3rowth and of exports competitiveness jecentralization ?SAL Protecting the H 4. The 2004 Budget Law ITL is presentedto budgetsof PSPs protects Healthand Congressand passed Education PSPs in 2004. by Congress. A new The Intergovernmental legal framework Transfer Law (ITL) regulating transfers in would protect anti- health and in poverty PSPs in 2004 and education i s put in beyond. Future Health place and Education Legislation would protect Health and Education transfers after 2004. Geographical M 2004 Budget Law ITLRegulations are PSRL, Health Sector Targeting distributes anti-poverty published including a ReformAPL, Rural PSPs to municipalities transparent pro-poor Education APL according to pro-poor distribution formula. formula in 2004. The new Education Regulations of ITL would and Health spell out a pro-poor Framework spells out distribution of anti- an explicit pro-poor poverty programs in formula for the future years. distribution of FutureHealth & resourcesto regions Education Legislation should spell out the actions for the distribution of the resources Efficiency: (Local H 6. Anti-Poverty ITLis passedand PSRL, Health Sector Targeting, Efforts on Programs: Efficiency regulations are Reform APL, Rural basic health and standards published making the Education APL education, Results- maintainedhncreased transfers effectively orientation) through implementation conditional on of ITL and its regulations. efficiency and on (Key support by TAL) meetingcertain Health: SIS 2004 budget targets and criteria for for mothers and children program execution. is satisfactory; SIS will be reformed to limit linkages to high complexity; Performance Agreements will continue to be signed bv Elected Regional 58 Risks Mitigating Actions Key Assumptions WB instruments to support mitigating actions Governments. Education: Electronic Payroll and rationalization of term-contracted teachers will prevent a worsening of the distribution of teachers; incentives to improve the distribution will be - piloted. 7 Monitoring & M 7. A new M&Esystem is The Government TAL, JSDS Evaluatioflranspare establishedwith an gives strong political ncy/'articipation/Qua intersectoraVNationa1- support to the lity SubnationaVCivil Society implementation of a focus. Consulta Monitoringand Amigable/SIAF continues Evaluation system to be developed covering the PSPs and provides administrative data on coverage and budgeting. INEIis strengthenedand provides continuous population-based information on coverage (and satisfaction) of PSPs Report Cards become institutionalized Municipalities execution of anti-poverty PSPs make them more participatory Participation in health (through CLAS) and education (through councils) is not reversed. 8 Implementation H 8. Accreditation Capacity of Legislation i s passedand municipalities and only sub-national MIMDES governments with proven capacities receive the responsibility of providing services. MINDESis rapidly re- engineered and develops the capacity to play the role of the various agencies that will be dismantled in 2004 without big losses in execution. - 59 Risks Level MitigatingActions Key Assumptions WB instruments to of support mitigating Risk actions Commitmentto Reforms Ownership by the PSRL Reform program new Cabinet has beenendorsedby the new Cabinet The link between H The Launch of a new MEFandCIAS effort to monitor and continues to be weak evaluate social programs and is not effective to strengthensthe guide policy reform development of a unified inthe social sectors. political effort to continue to advanceinthe reform. Pensions. CBdula M RecentLegislation Viva i s reopened (by reduces the incentives to the Constitutional join Ckdula Viva by Tribunal or by increasing its cost. The pressuresfrom Sub- new Pension's Authority National Authorities). continues the public campaign to informthe Ipublic of the costs of Cedula Viva. 60 ANNEX 1: Letter of Policyfrom the Government of Peru 61 RIINISTERIODE ECONOJIIA Y FINANZAS CARTA DEPOLiTICA SOCIAL 2003-2006 Prioridades y compromisos IRESUMEN L a politica social del Gobiemo es uno de 10s instmmentos claves en la lucha contra la pobreza. L a primera prioridad es garantizar el acceso universal a servicios bisicos de calidad (salud, educacidn, nutrici6n) para evitar la pe'rdida de potencial humano. Una segunda prioridad se orienta a incrementar las oportunidades econ6micas para la poblaci6n pobre incidiendo, en primer lugar, en el mantenimiento preventivo de la infraestmctura social y productiva (postas, escuelas, vias, canales de regadio, etc). De otro lado, se trata de mejorar la eficiencia y transparencia de la gestidn pdblica a1 mismo tiempo que proteger y racionalizar el gasto social, en el context0 de la descentralizacibn y sobre la base de 10s recursos que ya han sido asignados a 10s sectores. Generar oportunidades de trabajo digno y productivo es el gran desafio para toda la sociedad. L a inversibn, producci6n y productividad son responsabilidad principalmente del sector privado. L a acci6n del Estado s610 genera condiciones y tiende unpuente a las comunidades con familias que no pueden expresar sus demandas en el mercado y adolecen de un alto de'ficit de consumo. L a inversi6n social adicional se guia por las seiiales de alerta basadas en las demandas de las familias en riesgo, lo que permite integrar y simplificar las acciones que se derivan del diagn6stico. Teniendo como antecedentes el Acuerdo Nacional, la Carta Social suscrita en el marco de la Mesa de Concertaci6n de Lucha Contra la Pobreza, y las Bases para la Estrategia de Superaci6n de la Pobreza y Oportunidades Econ6micas para 10s Pobres, este documento contiene: diagn6stic0, objetivos y requisitos de la politica social, prioridades y compromisos para el perfodo 2003-2006, culminando en medidas inmediatas a aplicar para garantizar su cumplimiento. 11.DIAGNOSTICO El 54 por ciento de peruanos -en proporci6n coincidente con quienes se encuentran en el subempleo y desempleo- vive con menos de US$ 2 diarios', la mitad en keas rurales (7,4 millones de personas) y la mitad (7,2) en el &rea urbana, incluyendo Lima Metropolitana. L a pobreza extrema afecta a 4,8 millones de personas; cuyo ingreso, es menor a un d6lar a1dia, y no alcanza a cubrir necesidades basicas de alimentacibn. El 77,1% de la poblaci6n rural es Encuesta Nacional de Hogares 2002 62 pobre y el 50,3% se encuentra en pobreza extrema. En el k e a urbana, incluyendo Lima Metropolitana, 1,71millones son pobres extremos. 22 M 16 16 14 12 10 8 6 4 2 EldCficit de consumo se expresa en la cantidad adicional de recursos monetarios anualesque las familias pobres necesitarian generar para salir de la pobreza. EldCficit de consumo basic0 que afecta a1total de pobres (i.e. la diferencia entre el costo promedio de la canastab6sica de consumo per &pita, aproximadamente US$2 diarios, y el gasto per c6pita de cada familia) se estima en US$ 3 260 millones para el aiio 2003, mientras que el dCficit de consumo alimentario que afecta a1 total de pobres extremos (Le. la diferencia entre el costo promedio de la canasta b6sica de alimentos per dpita, aproximadamente US$ 1diario, y el gasto per &pita de cada familia) se estima en US$716 millones para el mismo aiio. 40 , O 3500,O 30 , O 25C0,o 2m,o 1m,o 10 . 0 5coO 0.0 a w r Ln 0 N 0 m P 0 (0 0 N N N El crecimiento econ6mico es indispensable, para la reducci6n de la pobreza. En el period0 1994-1997, caracterizado por un importante crecimiento econ6mico, se produjo una disminuci6n de la pobreza y pobreza extrema, sobre todo en las zonas urbanas, siendo asi que en las Areas rurales la pobreza est6 vinculada a factores mAs permanentes. Luego de superar la fase de estancamiento iniciada en 1998, la economia peruana ha crecido en 5,3 por ciento en el aiio 2002, la mayor tasa de 10s Cltimos cinco aiios lograda en un context0 de turbulencia econdmica y politica en la regibn. Sin embargo, el crecimiento no es condici6n suficiente; se requiere asegurar su carActer inclusivo y su efecto redistributivo, alineando la politica 63 econ6mica y la politica social en funci6n del objetivo comdn de reducir la pobreza. Se trata de superar la situacidn actual del mercado de trabajo -caracterizado por una alta proporci6n de trabajo independiente y familiar en unidades de escasa productividad- asi como el desarrollo incipiente de la infraestructura productiva bfisica y 10s mercados locales en las zonas rurales; reconociendo, a1 mismo tiempo, que la discriminaci6n cultural y la debilidad en el ejercicio de la ciudadania se suman a 10s factores econ6micos para explicar la pobreza. Poblaaonencorxlici6nde potreza v4 .. 50.o 40.0 30.o 20.0 iao ao 1991 1934 1987 19% 1999 Po0 2031 El gasto social del Estado tambiCn aument6 en la dCcada del 90; sin embargo, su enfoque asistencial y la falta de eficiencia en muchos de 10s programas limitaron su impacto. En la actualidad se pretende incrementar la cobertura y la eficacia en el ejercicio de la funcidn social del Estado a trave's de un conjunto de medidas orientadas a mejorar la gerencia, a reorientar el us0 de fondos para una mejor atenci6n de prioridades y a garantizar transparencia, comprometiendo en ese sentido a todos 10s niveles de gobierno. 111.POLfTICA SOCIAL, OBJETIVOS Y REQUISITOS La Politica Social tiene como prop6sito alcanzar el desarrollo pleno de las capacidades humanas, sociales e institucionales y la bdsqueda de la equidad y justicia social. Se expresa en el conjunto de lineamientos y acciones que define el Gobierno para asegurar a todos 10s peruanos unnivel de vida digno y el acceso a bienes y servicios pdblicos. El gobierno est6 comprometido, en el marco de la Estrategia de Superacih de la Pobreza,con 10s siguientes objetivos: Reducci6n de la Pobreza Total y Pobreza Extrema. Aumentar el acceso integral (simult6neo) a 10s servicios basicos de salud, educaci6n y nutricidn de 10s pobres extremos. Aumentar el acceso de 10s distritos a lainformaci6n sobre la ejecuci6n fisica y presupuestal de 10s programas sociales. Sus objetivos coinciden con 10s contenidos del objetivo Equidad y Justicia Social del Acuerdo Nacional,el cual contiene las siguientes politicas 64 a) Reducci6n de la pobreza. b) Acceso aunaEducaci6n PiiblicaBhsica Gratuita y de Calidad c) Acceso a 10s Servicios de Salud y a la Seguridad Social d) Garantizar laNutrici6nInfantil y Promoci6nde la SeguridadAlimentaria familiar e) Promoci6n del Empleo Digno y Productivo f) Promoci6nde la Igualdadde Oportunidades sinDiscriminaci6n Sin embargo, la politica social por s i sola no puede lograr el desarrollo humano a1 que aspiramos. Por ello, las acciones encaminadas a1cumplimiento de 10s otros tres objetivos del Acuerdo Nacional, se constituyen en requisitos para potenciar y hacer sostenibles 10s logros de la PoliticaSocial: - Competitividaddel pais, que comprende -entre otros prop6sitos- laformaci6n del capital humano, la formalizacibn de la actividad empresarial de la pequeiia y microempresa, el desarrollo de las cadenas productivas, indispensables para incrementar las oportunidades econ6micas de 10s pobres, mejorar su inserci6n en el circuit0 de la producci6n, permitiendo con ello la generaci6n de empleo de calidad. - DemocraciayEstadodeDerecho, cuyoprop6sitoesasegurarunclimadeestabilidad y cooperaci6n politica, promover la competencia democritica y garantizar las elecciones libres y transparentes, el pluralism0 y la alternancia en el poder, es decir generar el ejercicio pleno de la ciudadania y del clima de confianza y seguridad que necesitaunpais para avanzar en el desarrollo. - EstadoEficiente, TransparenteyDescentralizado,cuyoprop6sito finalesconstruir y mantener un Estado eficiente, eficaz, modern0 y transparente a1 servicio de las personas y de sus derechos, creando las condiciones para el desarrollo ciudadano, y alentando el fortalecimiento del sector privado y la sociedad civil. En particular, es importante que se cumpla una serie de desarrollos paralelos que haran viables y sostenibles 10s logros en el campo social, principalmente: Consolidaci6n de la gobernabilidad en 10s distintos niveles de gobierno; Modernizaci6n y racionalizaci6n del Estado; Transparencia y Acceso a la Informaci6n del Estado; Consolidaci6n de 10s espacios de concertaci6n entre Estado y Sociedad Civil; Reforma del Poder Judicial, en particular lo concerniente a la primera instancia; asi como el sistema de pensiones. IV. PRIORIDADESY COMPROMISOSDEPOLiTICA SOCIAL 2003-2006 Las prioridades y compromisos, como tambiCn las medidas que posteriormente se seiialan se establecenteniendo en cuenta el contexto, que en este period0 est6 marcado por el proceso de descentralizacibn y por la necesidad de racionalizar y proteger el gasto social, asegurando que 10s recursosinvertidos realmente lleguen a la poblaci6n objetivo. 65 IV. 1PrioridadesPresupuestales Las prioridades se expresan de dos maneras, dependiendo del origen de 10s recursos financieros: 1) con 10s recursos actualmente asignados, reasignaci6n de 10s presupuestos al interior de cada una de las 3 grandes areas; y 2) con eventuales aumentos presupuestales, en un escenario de bonanza fiscal, 10s recursos se destinartin siguiendo este orden de prioridades. Para aplicar sus prioridades, el gobierno ha definido una politica presupuestaria orientada a incrementar gradualmente 10s recursos destinados a esas actividades e inversiones, dentro del marco del equilibrio fiscal. Esta politica presupuestaria se refleja en las siguientes orientaciones, que se han venido aplicando y se mantendran en el futuro pr6ximo: i) Atender preferentemente el presupuesto orientado a las funciones de educaci6n y cultura, salud y saneamiento, y asistencia social: o Durante el 2002, se ejecut6 mas del 95% de lo presupuestado en cada una de estas tres funciones. o Enel 2003, se ejecutar6por lo menos lo ejecutado en el 2002. o Para el 2004, se ha presupuestado una cantidad superior a la del 2003 en el proyecto de ley entregado a1Congreso el 30 de agosto. ii) Proteger el presupuesto dirigido a 6 programas sociales protegidos (educaci6n inicial, educaci6n primaria, educaci6n secundaria, salud individual, salud colectiva y promoci6n y asistencia social y comunitaria), particulmente respecto a 10s gastos no salariales niprevisionales. o Durante el 2002, en estos rubros globalmente se ejecut6 una cantidad superior altotal presupuestadoinicialmente. o Para el 2003, se presupuest6 un monto global superior, y se mantuvieron montos para 4 de estos 6 programas superiores a 10s del aiio anterior. A1 menos 85% de este monto global sera ejecutado. o En el proyecto de ley de presupuesto del 2004, se ha aumentado el monto global y 10s presupuestos de 3 de estos programas (cambigndose el programa de asistencia social y comunitaria por 10s programas sociales y de lucha contra la pobreza transferidos a 10s gobiernos locales). o En el proyecto de ley de presupuesto 2004 se ha incorporado un articulo impidiendo que presupuestos orientados a estos rubros Sean trasladados a gastos salariales o a otros programas. o En el proyecto de ley de equilibrio financiero, se ha establecido que en cas0 haya recursos ordinarios mayores en 2% a l o presupuestado, estos ser6n destinados como primeras prioridades a educaci6n y salud. IV. 2 Objetivosy politicaspor sector Salud Bhsica: Objetivos: garantizar el acceso y la atenci6n de calidad a la poblacih, en particular la que vive en situaci6n de pobreza; previniendo y controlando 10s riesgos y daiios asociados a enfennedades transmisibles. Se debe priorizar la ejecuci6n de las actividades preventivas en 66 general y las relacionadas a madre-nifio y familias en riesgo en particular. Asegurar un subsidio pdblico en el otorgamiento de un Plan Garantizado de Salud para las familias m6s pobres. Acciones de Politica: - EstablecimientodelSeguroIntegraldeSaludparaaumentarelaccesoaservicios de salud prioritarios, sobre todo materno-infantiles, ampliando ripidamente su cobertura (se ha logrado afiliar mas de 540 mil gestantes y m6s de 2 millones de menores de 5 aiios hasta diciembre del 2002). Para promover la eficiencia del SIS y mejorar su sostenibilidad financiera, el presupuesto del 2004 separar6 10s recursos orientados a1 primer y segundo nivel de 10s orientados a hospitales, de tal manera de evitar que las atenciones complejas, menos equitativas y menos costo-efectivas, capturen la mayor parte del presupuesto. - Consolidar la separaci6n y especializaci6n de las funciones de provisi6n descentralizada de 10s servicios a travCs del fortalecimiento de las Comunidades Locales de Administraci6n de Salud (CLAS) y del rol de gobierno del Ministerio de Salud, a traves de 10s Convenios de Gesti6n con 10s Gobiernos Regionales y/o Locales. - Consolidar y avanzar en el intercambio de servicios de salud entre el MINSA, ESSALUD y el sector privado, utilizando mecanismos de mercado (compra o venta de servicios) entre 10s distintos subsectores cuando sea conveniente. Educacih Bhsica: Objetivos: mejorar la calidad del proceso de aprendizaje en el nuevo sistema educativo, cerrando 10s dCficit de cobertura y equidad, en particular en las zonas rurales; priorizar la educaci6n inicial, primaria -en particular, mejorando asistencia, horas efectivas y material educativo- y secundaria, asegurando once aiios de escolaridad y 10s logros educativos b6sicos para todos. Elevar la asistencia de alumnos y docentes para lograr las 1000horas efectivas anuales. Asegurar la matricula oportuna (segdn edad normativa) de 10s niiios y niiias en el primer grado de primaria, y el incremento del ndmero de niiios y niiias que logran el sexto grado de primaria en la edad normativa. Prestar especial atenci6n a la poblacidn no cubierta, en particular 10s grupos bilingues, rural y menores de cinco aiios. Prioridad.- Mejorar la calidad de la Educaci6n BBsica y reducir el dCficit de cobertura, principalmente en inicial y secundaria. Acciones de Politica: - Flexibilizar y desarrollar mecanismos de incentivos en la administraci6n de recursos humanos que permita tener el ntimero pertinente de alumnos por docente, asegurando la presencia de docentes calificados a 10s niiios y niiias mis pobres. Para ello, se viene desarrollando un proyecto piloto en zonas rurales y se ha publicado un estudio sobre 10s sistemas de incentivos aplicables a la educaci6n ptiblica peruana. - Implementar un sistema automatizado de planillas y de control de plazas a nivel nacional, que permita evitar 10s "maestros fantasmas", realizar el analisis de carga docente y procesos de racionalizacih, y facilitar la aplicaci6n de un portafolio de criterios para el pago de incentivos con alcance regional y local. 67 Proteccih Social Objetivo: avanzar en construir una red de protecci6n social que asegure a la poblaci6npobre peruanade 10s principales riesgos originados por el ciclo econ6mico y el desempleo, y por el ciclo de vida (vejez) Acciones de Politica: - Disefio e implementaci6n del programa "A Trabajar", tanto urban0como rural, en un context0 de crisis econ6mica y problemas de empleo agudizados. Estos programas aseguran una adecuada focalizaci6n mediante una combinaci6n de autoselecci6n mediante el salario y de focalizaci6n geogrifica. Asimismo, se ha tenido cuidado que no generen costos administrativos excesivos, y se han desarrollado evaluaciones de impacto. A futuro, en funci6n del crecimiento econ6mico logrado y las mejores oportunidades de empleo que se esth generando, estos programas serin paulatinamente desactivados, rescatando las lecciones aprendidas en el marco de una politica permanente de mantenimiento preventivo de 10s activos comunitarios, con unus0 intensivo de mano de obra. - Con relaci6n a 10s programas alimentarios, se presentari a1Congreso unproyecto de ley de transferencias programiticas que asigna recursos a 10s municipios de acuerdo con una f6rmula de distribuci6n pro-pobre, sin poderse usar para otros fines y define mecanismos para que 10s recursos Sean entregados mediante convenios de gesti6n que establezcanmetas y procesos a ser monitoreados. - Mejoramiento de la equidad en el sistema de pensiones, corrigiendo las distorsiones generadas por el sistema de CCdula Viva, limitando beneficios y estableciendo contribuciones mayores a 10s afiliados. Asimismo, se ha definido una autoridad gubernamental encargada de desarrollar y monitorear el conjunto de las politicas de seguridad para la vejez, que seri la Direcci6n General de Asuntos Econ6micos y Sociales (DGAES) del MEF. V. REFORMAS INSTITUCIONALES ENSECTORES SOCIALES Para lograr estos objetivos y para mejorar la gobernabilidad, se consider6 necesario desarrollar algunas reformas, particularmente en 10s sectores sociales, orientadas a mejorar la transparencia y la participaci6nciudadana. Acciones de Politica: - Aprobaci6n de una Ley de Acceso a la Informaci6n Pbblica, y su Reglamento, que aseguran el derecho de cualquier ciudadano a obtener informaci6n de las instituciones pbblicas. - Desarrollo dentro del SIAFde la Consultu Amigable, de ficil acceso en Internet y en la mayoria de provincias del Peni, y vinculaci6n en ella de metas fisicas y 68 procedimientos de accesopara 3 programas sociales (PRONAA, SIS y A Trabajar Urbano). - Desarrollo de un piloto de "Libretas de Calificaci6n", mediante las cuales 10s ciudadanos han dado su opini6n respecto de la calidad de 10s servicios ofrecidos por 5 programas sociales claves (Vaso de leche, Desayunos escolares, Servicios - de salud, PRONOEIs y A Trabajar Rural) en varias regiones del pais. Mejoramiento de las regulaciones del sistema de compras pbblicas, mediante la publicaci6n de reglas coordinadas entre CONSUCODE y la Contraloria General de la Repbblica. VI. MEDIDASDEGOBIERNODE CORTOPLAZO Parael cumplimiento de estos objetivos, el gobierno hapriorizadounconjunto de medidas urgentes a adoptar en 10s pr6ximos doce meses, que son las siguientes: 1. Vinculaci6n entre la Planificaci6n Macroecon6mica Multianual y la planificacih de la Politica Social (incluye previsi6n) mediante el Capitulo Social en el Marco Macroecon6mico Multianual, y de Cste con 10s respectivos PlanesEstratCgicos Sectoriales Multianuales y 10s Planes Operativos Institucionales anuales. 2. Desarrollode un Sistema Funcionalde Seguimiento y Evaluaci6nque permita vigilar y difundir 10s valores de 10s indicadores -de impacto, resultados y proceso- asociados a1cumplimiento de la Politica Social, incluido 10s de previsi6n social. 3. Institucionalizar la proteccidn presupuestal del gasto destinado a las funciones y 10s programas sociales prioritarios. 4. Descentralizacidn de 10s programas sociales -incluye programas alimentario nutricionales y de inversi6n social productiva- y de educaci6n y salud, con un marco legal que promueva eficiencia, focalizaci6n, participacibn, transparencia y responsabilidad fiscal, como compromiso y medio de involucrar a 10s actores regionales y locales en el cumplimiento de 10s Lineamientos de Politica Social. Fortalecer y desarrollar 10s Convenios de Gestidnpara tal fin. 5. Desarrollo de unaestrategia integral respecto a 10s sistemas previsionales, con Cnfasis en el objetivo de aumento de cobertura hacia 10s pobres. 6. Focalizar en 10s grupos mis pobres, la asignacidn de 10s recursos pdblicos de 10s programas sociales de superaci6n de la pobreza. Identificacihnominal de las personas, familias y poblaciones objetivo de 10s programas. 7. Continuar el incremento de la cobertura de unplan garantizado de salud (incluye nutrici6n y aprestamiento psicomotor) por el Seguro IntegTal de Salud a 10s niiios menores de 5 aiios y las gestantesde familias pobres, atendidas preferentemente por 10s servicios del 1" y 2" nivel de atencidn. El mecanismo de pago del SIS debe cubrir totalmente todos 10s costos (incluyendo pago de personal) en el cas0 de las Comunidades Locales de Administracidn de Servicios de Salud (CLAS). 8. Consolidar un sistema de gesti6n del docente, a travCs de: la implementaci6n de un sistemabnico de planillas a nivel nacional; cruce de plazas y planillas; 69 racionalizaci6n del ndmero de docentes contratado's; y validaci6n de unpiloto de incentivos a docentes rurales. 9. Implementar mecanismos para dar mayor transparencia al manejo de 10s recursos pdblicos en 10s programas sociales y que el acceso de las operaciones del sector p6blico incluya la gesti6n de 10s niveles locales y regionales de gobierno. 10. Foment0 de la vigilancia social y de 10s mecanismos que recojan lapercepci6n de 10s usuarios respecto de la calidad de 10s servicios pdblicos, con especial Cnfasis en la ejecuci6n de programas y proyectos de inversi6n social productiva. 11. Fortalecer las reglas y procedimientos paraunaeficiente ejecucibn, unapropiado control y rendici6n de cuentas en las adquisiciones y en la administraci6n de 10s recursos financieros del Estado, incluyendo la gesti6n de 10s gobiernos regionales y locales, en particular para 10s sectores sociales y 10s programas alimentarios. VII. SEGUIMIENTO Y EVALUACION DE LAS MEDIDAS DEL GOBIERNO DE CORTOPLAZO Los 3 objetivos priorizados por el gobierno, van a ser evaluados a travCs de determinados indicadores. Para cada uno de ellos se ha fijado metas a alcanzarse hacia el 2006. OBJETIVOS Indicadores Informacidn (2002) Meta a 2006 Reduccidn de la Pobreza - Tasa de Pobreza - 49% --p- Total y Pobreza 3NAHO Extrema. -Total dePobreza Tasa 23.9% - 20% Extrema Aumentar el acceso - Tasadefamilias 3NAHO - 29% integral a 10s servicios extremas pobres que basicos de salud, tienen acceso a servicios educacidn y nutricidn de de salud, colegios 10s pobres extremos. nacionales y a programas de alimentacidn del Estado. Aumentar el acceso de - Porcentajede 100% 10s distritos a la municipalidades informacidn sobre la distritales que tienen ejecucidn fisica y acceso a Consulta presupuestal de 10s Amigable, la cual programas sociales. incluye ejecucidn descentralizada de programas sociales y de educacidn y salud. Para evaluar avances en el cumplimiento de estos objetivos a1 2006, es importante seguir de cerca indicadores que midan peri6dicamente 10s avances en las medidas del gobierno a ejecutarse en el corto plazo. Para cada uno de estos indicadores se ha fijado metas a alcanzarse hacia el 2004. 70 MEDIDAS DE GOBIERNODE Indicadores Fuente de Valores Meta a 2004 CORTO PLAZO Informacih basales (2003) Vinculaci6n entre - MMMincluye Diario El - MMM - MMM2005- MMM, Politica Social, Capitulo Social. Peruano 2004-2007 2007 incluye 'ESEMs y POIs contiene Capitulo Social. recuadro social. - PESEMssociales - Ninguno - 100% elaborados sobre la base de definiciones de Capitulo Social del MMM. - Techos - Ninguno 00% presupuestalesde sectores sociales son asignados sobre la base de PESEMs. - POIssociales - Ninguno 00% elaborados sobre la base de respectivos PESEMs. - Politicapara - Ninguna - Politica incrementar eficiencia y publicada y en cobertura de sistema implementacih. previsional lesarrollo de un sistema - Instituci6n nacional - Comunicac - Ninguna - Institucih ie seguimiento y responsablede conducir i6n del MEF designaday en waluaci6n seguimiento y funciones evaluacibn. - Informeperi6dico - Portalde - Ninguno - 2Informes sobre indicadores de Transparencia semestrales. seguimiento. Econ6mica. - Porcentajede - Portalde distritos seguidos en su Transparencia - Ninguno - 100% ejecuci6n Econ6mica. descentralizadade 10s programas sociales. - Porcentajede - Portalde - Ninguno - 100% sectorescon al menos 1 Transparencia programa evaluado. Econ6mica. nstitucionalizaci6n de - Ley de Presupuesto Diario El - Ninguno - LeyPresupuesto 'SP incluye articulo que Peruano 2004 incluye brinda protecci6n articulo sobre PSP. presupuestala PSP. Iescentralizacibn de 10s - Ley de transferencias DiarioEl - Ninguna - Leypublicaday xogramas sociales y de que norma Peruano en vigencia ;aludy educacidn descentralizacibn de programas nutricionales y de inversi6n social productiva - Norma del Poder Eiecutivo aue establece - Ninguna - Norma 71 MEDIDASDE GOBIERNO DE Indicadores Fuentede Valores Meta a 2004 CORTO PLAZO Informacih basales(2003) rol regulatorio del publicada y en MINSA y MINEDUen vigencia la planificacih y monitoreo de 10s recursospara educaci6n y salud canalizados a 10s -gobiernos regionales. Porcentaje de - Ninguno - 100% recursos de 10s programas nutricionales que son transferidos presupuestalmente a 10s gobiernos locales. Focalizaci6n de - NormadelPoder Diario El - Ninguno - Noha programas sociales. Ejecutivo que establece Peruano publicada y en unsistema uniforme de vigencia identificar a 10s usuarios de 10s programas sociales. [ncremento de cobertura - Coberturade - Informe - 540mil - 560mil materno-infantil del SIS gestantes afiliadas a1 SIS :n centros y puestos de sa1ud.Z -SIS.Cobertura deniiios - Informe - 2,o - 2,2 millones menores de 5 aiios SIS millones -afiliados a1 SIS. Porcentaje del - Informe - 67% - 75% presupuesto del SIS SIS ejecutado en 10s centros -y Porcentaje de puestos de salud. - Informe - 35% - 35% establecimientos de MINSA salud bajo administraci6n CLAS. - Porcentajede DISAs - Informe - 100% - 100% que han firmado MINSA convenios de gesti6n con Ministerio (incluye indicadores de todas las direcciones generales y e l SIS). - Porcentajes de Convenios de Gesti6n iforme - 100% - 100% que han sido seguidos MINSA trimestralmente. 'onsolidaci6n de un - Porcentaje de - Informe - 51% - 80% ;istema de gesti6n del docentes pagados por MINEDU locente. sistema unificado de planillas. - Porcentaje de - Informe - 20% - 75% unidades ejecutoras del MINEDU MINEDUcon sistema linico de planillas 72 MEDIDASDE GOBIERNO DE Indicadores Fuentede Valores Meta a 2004 CORTO PLAZO Informacidn basales(2003) - Porcentajede - Informe - 0% - 50% unidadesejecutorasque MINEDU tienen integrado sistema de plazasy planillas - Pilotodeincentivos - Informe - Ninguno - Piloto docentesrurales MINEDU rediseiiado y en imdementaci6n Aumento de - NdmerodePSP - Informe - 0 - 1 transparenciaen gesti6n seguidos bajo la SIAF de gobiernos nacionales, Amigable. regionales y locales de -Consulta Porcentaje de - Informe - 0% - 0% 10s programas sociales. Gobiernos Locales, con Direcci6n presupuesto Nacional de participativo aprobado. Presupuesto Pdblico. Foment0 de la vigilancia - Ndmero de PSP en - Informe - 6 - 6 social y del analisis de la 10s que ha habido PCM percepci6n de usuarios evaluacidn de calidad de respecto de 10s servicios servicios. pdblicos. Fortalecimiento de 10s - NormadelPoder Diario El - Ninguno - Norma procesos de Ejecutivo que establece Peruano publicada y en adquisiciones ejecutados mejoras en 10s procesos vigencia por 10s gobiernos de adquisiciones por 10s nacional, regional y programas sociales local. descentralizados. Lima, octubrede 2003 73 SOCIAL POLICY LETTER FOR 2003-2006 Prioritiesand Commitments (TranslatedVersion) I.SUMMARY The Government's social policy is one of the key tools in the struggle against poverty. The first priority i s to ensure universal access to quality basic services (health, education and nutrition) to prevent the loss of human potential. A second priority i s directed at increasing economic opportunities for the poor, underscoring in the first place the preventive maintenance of social and productive infrastructure (health facilities, schools, roads, irrigation canals, etc.). Inaddition, we aim at improving the efficiency and transparency of government spending while protecting and rationalizing social expenditure, against the backdrop of decentralization and based on the resources that have already been allocated to the sectors. Creating opportunities of dignified and productive work for the poor i s every society's major challenge. Investment, production and productivity are mainly the responsibility of the private sector. State initiatives can only create enabling conditions and bridges for communities where families cannot express their demands through markets, and suffer major consumption deficits. Social investment i s guidedby the warning signals sent by households at risk. These signals allow us to integrate and simplify the actions that will follow our diagnosis. Having as background the National Agreement, the Social Letter signed in the framework of the Consensus Round Table Against Poverty and the Foundations for the Strategy to Defeat Poverty and Create Economic Opportunities for the Poor, this document deals with the social policy diagnosis, objectives and requirements,as well as the priorities and commitments for the 2003-2006 period. As a conclusion, it lists the immediate measures aimed at ensuring their accomplishment. 11. DIAGNOSIS Fifty-four percent of Peruvians, a ratio similar to the percentage of underemployed and unemployed persons, live on less than US$2 a day,l half of them in the countryside (7.4 million people), and the other half (7.2 million) in cities, including Metropolitan Lima. Extreme poverty grips 4.8 million persons with incomes under one dollar a day who are unable to meet their basic food needs. The poor comprise 77.1 percent of the rural population and 50.3 percent of them live in extreme poverty. In cities, including Metropolitan Lima, 1.71 million persons live inextreme poverty. 'NationalHousehold Survey-2002. 74 Graph 1 PROP. EMPLOYED POPULATION: TRENDS TO 2025 I I I I MllllOnS ot persons I : I 2 I I I Y A I980 1985 - - 1990 1995 2000 2005 2010 2015 2020 2025 TOLEAP Prop Employed EAP ource:INEI.MEF Consumption deficits are expressed by the additional amount of annual money resources poor families would need to generate to lift themselves out of poverty. The basic consumption deficit that grips the entire poor population (Le. the difference between the average cost of the per capita basic consumption basket of approximately US$2 per day and each household's per capita expenditure) i s estimated at US$3,260 million for 2003, while the food consumption deficit endured by the population in extreme poverty (Le. the difference between the average cost of the per capita basic consumption basket of approximately US$1 per day, and each family's per capita expenditure) i s estimated at US$716 million for that year. Proj. consumption deficit (million US$) 4 000,O~ 3 500,O 3 000,o 2 500,O 2 000,o 1 500,O 1 000,o 500,O 0,o 2001 2002 2003 2004 2005 2006 Basic consumption def. Food consumption def. Economic growth i s indispensable for reducing poverty. From 1994 to 1997 when Peru experienced major economic growth, poverty and extreme poverty diminished, in particular inurban areas. Inrural areas, poverty is related to factors of a more permanent nature. After overcoming the stagnation period that started in 1998, Peru's economy grew 5.3 percent in 2002, the highest rate in the most recent five year period, despite the region's economic and political turmoil. However, growth i s not sufficient. We must ensure that it will be inclusive and have a distributive effect by aligning economic and social policies to the shared objective of reducing poverty. The twofold purpose i s to overcome the present condition of the labor market characterized by a high proportion of independent and household labor organized in 75 units of low productivity, and to provide momentum to the incipient development of basic productive infrastructure and local markets in rural areas, while recognizing that cultural discrimination and a weak exercise of citizens' rights are other non-economic factors in that contribute to explaining poverty. Populationin povertycondition (Yo) 60. 50. 40. 30. 20. 70. 3. 199 199 199 199 199 20'0 200 . -P n n n _I . _ A _ _ _.--,!L-._ Duringthe 1990s,the State's expenditures also increased. However, emphasis on handouts and the inefficiency of many programs reduced its impact. At present, we aim at expanding coverage and increasing the efficacy of the State's social function through a number of measures aimed at improving management, redirecting the use of resources to better serve priority needs while ensuring transparency, with a commitment from all levels of government. 111. SOCIAL POLICY, OBJECTIVES AND REQUIREMENTS Social policy has as its objective to accomplish the full development of human, social and institutional potential, in the search for social equity and justice. It translates into the guidelines and initiatives identified by the Government to ensure all Peruvians a dignified life and ready access to public goods and services. Inthe framework of the Strategy to DefeatPoverty, the Government of Peruis committed to accomplish the following objectives: Reduce poverty and extreme poverty. 0 Provide comprehensive (simultaneous) access to basic health, education and food services for the extremely poor. Increase district level access to information on the physical and budgetexecution progress of social programs. Its objectives are similar to those of the Social Equity and Justice goal, included in the National Agreement. It includes the following policies: 76 a) Poverty reduction. b) Access to Free Quality Basic PublicEducation. c) Access to Health Care Services and Social Security. d) EnsuringChildNutrition and PromotingFamily Food Security. e) Promoting Dignified and Productive Work. f) PromotingEqualOpportunities without Discrimination. However, social policy in itself cannot achieve the human development to which we aspire. For this reason, the initiatives below, leading to the accomplishment of the three other goals of the National Agreement, are also necessary to leverage and achieve the sustainability of the Social Policy accomplishments. - National competitiveness, comprising among others, building human capital, formalizing the business activity of small and micro companies, developing productive changes, which are indispensable to expand economic opportunities for the poor, improving their insertion in the production circuit and thus ensuring the - generation of quality employment. Democracy and the Rule of Law, with the purpose of ensuring a climate of political stability and cooperation, promoting democratic competition and guaranteeing free and transparent elections, pluralism and the alternation in power, i.e. making possible the full exercise of citizens' rights and the climate of trust and security the country - needs in moving towards development. An Efficient, Transparent and Decentralized State, the ultimate purpose of which is to create and maintain an efficient, effective, modern and transparent State to serve people and protect their rights, while creating the enabling conditions for citizen development and promoting a stronger private sector and civil society. In particular, it is important to ensure a number of simultaneous developments to ensure viable and sustainable achievements in the social arena, mainly: enhanced governance in various levels of government; modernization and rationalization of the State; transparency of and access to State information; strengthening of spaces for consensus-building between the State and civil society; and reform of the Judiciary, in particular in the lower instances, and of the pension system. IV. SOCIAL POLICY PRIORITIES AND COMMITMENTS. 2003-2006 The priorities and commitments, as well as the measures mentioned below are established taking into account the overall environment which, during this period, i s signed by the process of decentralization and the need to rationalize and protect social expenditure, ensuringthat the invested resourceswill effectively reach the target populations. IV. 1Budgetpriorities Priorities are expressed in two ways, depending on the source of financial resources: 1) resources already allocated, and reallocation of budgets within each of the three main areas; 77 and 2) eventual budgetary increases in a scenario of fiscal prosperity. Resources will be allocated in the following order of priorities. To enforce its priorities, the Government has outlined a budget policy aimed at gradually increasing the resources allocated to these activities and investments within a framework of fiscal balance. This budget policy i s reflected in the following initiatives, all of which are already underway and will continue to be enforced inthe near future. i)Pay preferential attention to the budgets for education, cultured, health, sanitation, and social assistance: o In 2002, over 95% of the budgeted amounts were executed for each of these functions. o In2003, an amount at least similar to 2002 will beexecuted. o For 2004, an amount higher than in2003 was includedinthe draft law sent to Congress on August 30,2003. ii)Protectthebudgetfor sixprotectedsocialprograms(initialeducation, primary education, collective health and promotion, social and community assistance), in particular with respect to non-wage and pension expenditures. o In2002, the executed amount was higher thaninitially budgeted. o In 2003, the overall budget was higher and amounts for four of the six programs were higher than a year before. At least 85% of this global amount will be executed. o The 2004 draft law has increased the global amount and the budgets for three of the programs (the social and community assistanceprogram was substituted for the social programs and the poverty struggle program that were devolved to local governments). o The 2004 draft law includes an article to prevent bidet transfers from these items to wage expensesor other programs. o The financial equilibrium law establishesthat ordinary resources 2% or higher than originally budgeted will be allocated to education and health as a first priority. IV.2 Sector objectives and goals Basic Health: Objectives: Ensuring access to quality health care for the people, in particular for the poor, while preventing and checking the risks of and damage caused by transmissible diseases; ensuring a public subsidy through a guaranteed health plan for the poorest households. Priority will be given to executing preventive activities in general and those relating to mothers and children and families at risk. Ensuringa public subsidy for a Guaranteed health Plan for the poorest families. 78 Policy initiatives.- Creating the Comprehensive Health Insurance Plan (Seguro Integral de Salud or SIS) to increase access to priority health services, in particular mother-child health, and quickly expand their coverage. (Over 540 000 pregnant mothers and over 2 million children under 5 years old were affiliated to December 2002). To promote the SIS's efficiency and attain financial sustainability, the 2004 budget will discriminate first and second level resources from resources for hospitals, so that more complex level of care that i s less equitable and cost-effective will not capture most of the budget. Consolidate separate and specialized service supplies through stronger Local Community Health Management Committees (CLAS) and the governance role of the Ministry of Health through management agreements with regional and local govemments. Consolidate and move ahead in the exchange (purchase and sale) of health services among the Ministry of Health, Essalud social security and the private sector through market schemes among subsectors, as appropriate. Basic Education Objectives: To improve the quality of learning in the new school system and close the coverage and equity gaps, in particular in rural areas; set a priority on initial and primary education-in particular by improving attendance, actual learning time and educational material-and high school, by ensuring eleven years of schooling and universal basic schooling accomplishment. To increase student and teacher attendance to reach 1000 effective class time per year. To ensure timely enrolment (according to statutory age) of boys and girls in first grade primary, and to increase the number of boys and girls who graduate from six grade primary school according to the statutory age. Pay special attention to the population not covered, in particular the bilingual, rural, and under-5 segments. Priority.- Improve the quality of basic education and reduce the coverage gap, principally for initial and high school education. Policy initiatives.- Developing and introducing flexible mechanisms to create incentives for a system that manages human resources and ensures an appropriate number of students for every teacher, and guarantees that the poorest boys and girls will be taught by qualified teachers. A pilot project for rural areas is underway and an study on incentive systems applicable to Peruvian public education has been published. Introducing an automated payroll and teaching positions control system to prevent the proliferation of "ghost teachers", evaluate teaching loads and rationalization processes, and facilitate the introduction of a set of criteria for merit-based payments at the regional and local levels. 79 Social safety net Objective: to build a social safety net that will protect poor Peruvians from the main economic cycle and unemployment risks, and from old age. Policy initiatives: Design and implement the "A Trabajar" job creation program in both the cities and the countryside in view of the economic crisis underway and acute unemployment. These programs ensure the proper targeting of resources by adequately combining self-screening through geographic and focalization criteria. Care was exerted to avoid excess overhead expenses and put inplace the corresponding impact evaluation schemes. In future, as a consequence of economic growth and better job opportunities, these programs will be phasedout, while drawing lessons learned inthe framework of an ongoing policy to preserve community-based labor-intensive initiatives. - With respect to food programs, the Government will submit to Congress a Proposed Law for the transfer of resources linked to social programs to Local Governments. The Law proposes that transfers be based on a pro-poor formula preventing these resources from being allocated to other ends. It also includes mechanisms to deliver resources through management agreements introducing targets and processes subject to monitoring. - Greater equity will be introduced in the pension system, by correcting the distortions introduced by the permanent pension readjustment scheme ("CCdula Viva"), limiting benefits and increasing contributions of members. A government agency-the General Bureau for Economic and Social Affairs (DGAES) under the Ministry of Economy and Finance- has been created to design and monitor a set of old age pension policies. V. INSTITUTIONAL REFORMSINSCOAILL SECTORS To reach the above objectives and improve governance, it was considered necessary to introduce certain reforms, inparticular in social sectors, aimed at improving transparency and citizen involvement. Policy initiatives: Approving a Public Information Disclosure Act and the corresponding regulations to ensure the citizens the right to obtain information from government agencies. 80 Developing Consulta Amigable (Friendly Query), under SIAF (Integrated Financial Management System) to provide easy Internet access and access to information in most provinces of Peru, and include them in the physical and procedure access goals for three social programs (PRONAA, SIS and A Trabajar Urbano). Developing a pilot "Libretas de Calificaci6n" (Report Cards) program to give citizens a voice respecting the quality of five social programs (Glass of Milk, School Breakfasts, health services, PRONOEIs and A Trabajar Rural) in several regions throughout Peru. Improve regulations for government procurement by publishing conformed rules for CONSUCODE (the government's procurement and bidding administration) and the General Controller's Office. VI. SHORT TERM GOVERNMENTPOLICIES To achieve the above goals, the government has prioritized a set of emergency policies for the next twelve months, including: 1. Linking Multiannual Microeconomic PlanningandSocial Policy (including pensions) planning, and linking the latter to the Multiannual Sector Strategic Plans and annual Institutional Operation Plans. 2. Developing a Functional System for Follow up and Evaluation that will allow to oversee and publishimpact, results and process indicator figures linkedto the accomplishment of Social Policy Goals, including pensions. 3. Institutionalizing protectionfor budget expenditures aimed at the priority social functions and programs. 4. Decentralizing social programs, including nutrition food programs, social productive investments, health and education, as a commitment and way to involve regional and local stakeholders inenforcing Social Policy Guidelines. Strengtheninganddevelopingthe relevant Management Agreements. 5. Developing a comprehensive pension strategy with an emphasis on increasing coverage for the poor. 6. Targetingthe poorest groups and allocating to themgovernment resources from social programs aimed at defeating poverty. Individually identifying the program's target persons, families, and populations. 7. Pursuingthe continued increase in coverage of a Guaranteed Health Insurance (including nutrition and psychomotor early training) within the Comprehensive Health Care (SIS) insurance for poor under-5s and pregnant mothers, preferably through care services of the first and second levels. SIS disbursements should 81 cover all costs infull, including payrolls, for Local Community HealthManagement Committees (CLAS). 8. Strengthening a management system for the teacher community, through a single nationwide system for payrolls, and cross-referencing teacher positions and payrolls, rationalization of teachers under temporary contracts, and validation of an incentives pilot project for rural teachers. 9. Introducing schemes that will provide for more open use of public resources in social programs and include local and regional government management inthe disclosure mechanisms for the public sector. 10. Fostering citizen watch and mechanisms to collect the users' perceptions on the quality of public services, with an emphasis on the execution of programs and projects related to productive social investments. 11. Strengthening rules andprocedures for the efficient execution, appropriate control and enhanced accountability in State procurement and management of financial resources, including regional and local government level management, inparticular for social sectors and food programs. VII. MONITORINGAND EVALUATIONOF SHORT TERM GOVERNMENT MEASURES The 3 priority Government objectives will be evaluated by means of certain indicators. Goals to be reached by 2006 have been fixed for each of them. Baseline Goal - (2002) (2006) - 49% poverty. HOUSEHOLC -54.3% - 20% 23.9% Increasecomprehensive - Proportionofindigent NATIONAL (simultaneous)access to families who HOUSEHOLC 25% 29% basic health, educationand simultaneouslyaccess SURVEY nutrition services for the MINSA health, public extremely poor. school and State food services. Increasedistrict-level - Percentageofdistrict SIAF 0% 100% access to information on the governments that access physical and budget Friendly Queries progress made in social ("Consulta Amigable") programs. Governmentdisclosure facility, featuring decentralizedexecutionof social, education and healthprograms. 82 To evaluate progress in achieving the goals for 2006, we must closely watch indicatorsthat will regularly measure progress in short term execution of government measures. Goals to bereachedby 2004 have beenfixed for each of them. SHORT TERM GOVERNMENT Indicators Source Baseline Goal to 2004 MEASURES (2003) inkaees between MMM. -MMM include Social El Peruano - MMM - MMM2005- socialpolicy, PESEM~ Chapter. 3fficial Gazette. 2004-2007 2007 includes md POIs -Social PESEMs includes Social Chapter. preparedconsidering social box. definitions in the MMM - 100% Social Chapter. - None -Social sector budget - 100% ceilings basedon - None PESEMs - 100% -Social POIs prepared on - None the basis of - Policyhas corresponding PESEMs - None been published -Policytoincrease and i s underway. pension system efficiency and coverage. leveloping a monitoring -Anationalorganization - MEFNotice. - None - Institution md evaluation system. i s responsible for - Economic designated and monitoring and Transparency - None operational evaluation. Portal. -Regularreportson - Economic -underway. 2reportsper monitoring indicators. Transparency - None semester. -Percentage of districts Portal. subject to monitoring of -Economic - 100% decentralized execution Transparency - None of social programs. Portal. -Percentage of sectors - 100% featuring at least one evaluated program. nstitutionalizingPSP. -Budget Act includes 31 Peruano - None - 2004Budget article for protecting 3fficial Gazette. Act includes PSP PSP budgets. article. lecentralizing social, -Transfer Law regulates I1Peruano - None - Lawhasbeen iealth and education decentralized nutrition 3fficial Gazette. published and Irograms. and productive social enacted. investment programs. - None - Regulation -Executivepowerorder has been gives MINSA and publishedand is MINEDUgoverning underway. role in the planning and - None monitoring of resources for health and education - 100% channeled through regional governments. - Percentageofresources from nutrition programs transferred to local government budgets. 83 SHORT TERM GOVERNMENT Indicators Source Baseline Goal to 2004 MEASURES (2003) Targeting social programs. - Executive branch order El Peruano - None - Regulation creates a uniform systen Official Gazette. has been to identify users of published and social programs. enacted. Increasing SIS mother- -Coverage of pregnant - SISReport - 540 - 560 child coverage in health women affiliated to SIS. - SISReport thousand thousand posts and centers. -Coverage of under-5s affiliated to SIS. - SISReport - 2.0 -Percentage of SIS millions - 2.2 millions budget executedby - MINSA health centers and posts. Report - 67% -Percentage of health - 75% facilities under CLAS - MINSA - 35% management. Report - 35% -Percentage of DISAS signing management - 100% agreementswith - MINSA - 100% Ministry (including Report indicators for all Genera. - 100% Bureaus and SIS). - 100% -Percentage of managementagreements subject to quarterly monitoring. 2onsolidating a teacher - Percentageof -esourcemanagement teachers paid through - MINEDU - 51% - 80% System. the single payroll Report system. - Percentageof - MINEDU - 20% - 75% MINEDUexecuting Report units under the single payroll system. - Percentageof -MINEDU - 0% - 50% executing units using the Report integrated -positions/payroll system. Incentive pilot - MINEDU - None - Pilot program for rural Report redesignedand teachers. underway. Yncreasingtransparency in . Number ofPSP - SIAFReport - 0 - 1 iational, regional and local checked through ;overnment management Friendly Query. Ifsocial programs. . Percentageoflocal - CND Report - 0% - 0% governments with approved participatory budget. ;ostering citizen watch and . Percentageof PSP - PCM Report - 6 - 6 crutinizing the users' with service quality )erception of social evaluations. ,ervices. 84 I SHORT TERM GOVERNMENT Indicators Source Baseline (2003) Goal to2004 MEASURES Strengthening procurement - Executive Power processes by national, order introducing Official Gazette. has been regional and local improved procurement published and governments. procedures for enacted. decentralized social programs. Lima. October 2003 85 ANNEX 2: PSRL I11Triggers ProposedDuringApproval of PSRL I1and Prior Actions PSRL I11Triggers Description PrincipalPriorActionsfor PSRL111 proposedduring Disbursement approvalof PSRLI1 WORK POVERTYREDUCTION REDIRECTINGGOVERNMENTSOCIAL AND SOCIALPROTECTIONSPENDING - A pro-poorreorientation( governmentspending ' At least 95 percent of the MET. The global executed amount for the three At least 95 percent of the global budget for global budget for the three priority functions reached 98.2 percent, or the three priority social functions priority social functions higher than the 95 percent minimum budget (Education and Culture, Health and (Education and Culture, required for the three priority functions. Notice Sanitation and Social Assistance for Healthand Sanitation and this was also the case of the three functions S/11,391 million) was executed in 2002; Social Assistance) was taken separately. and the budget allocations for 2003 executedin 2002. (Ifthere (Education and Culture, Health and were budget cuts, the Sanitation and Social Assistance, for a total minimumtarget is 90 IPIA 2002 Executed2002 of S/12,266 million) are greater than their percent). Education I 6,067,175,165 5,997,700,966 98.9% Health and 2002 executed amounts (for a total of Sanitation 3,328,132,004 3,198,784,283 96.1% SI11,18 1million) adjusted in real terms. social issistance 1,995,561,464 1,984,950,448 99.5% rota1 11,390,868,633 11,181,435,697 98.2% PrioritySocial Programs There is evidence that the The global executedbudgetreached S./2,363 The global executed' budget for the six total executedbudget for million, or 2 percent above its goal. However, selectedPSPs was maintained at its 2002 the six selectedPSPs three of the six programs failed to meet their agreedbudget level and budget remained at the agreed minimumtargetsbecauseof low execution reallocations from under-performing to level and that budget capacity in the Ministry of Education and the over-performing PSPs were not above 50 reallocations were not diversion of PSPfunds to finance payrolls (this percent of their minimumagreed budget above 30 percent of the diversion took place in 2002 and again in 2003). levels. The 2003 approved budget agreed budgetedlevels. To prevent this diversion inthe future the 2004 maintained the global and at least four (Soles: initial education = Budget law will explicitly ban such individual budget allocations for the six 230, primary = 229 and reallocations. selectedPSPs, at least at their 2002 levels in secondaryeducation = real terms. Measures were taken in the 212, individual health = PIA2002 Exec. 2002 % 2004 budget law (Art.8) to prevent 835, collective health = Initial 230,000,000 123,891,218 54% diversion of funds from the PSPs to 432 and social and Primary 229,000,000 141,891,828 62% payrolls. community promotion and Secondary 212,000,000 123,062,621 58% Individualhealt 835,000,000 734,562,115 88% assistance = 383. Does Community not include Glass of Milk, 432,000,000 380,286,657 88% Soup Kitchens nor "A Socialand Trabajar" job creation commun. programs). SECTORS: Assistance 383,000,000 859,366,419 224% 2,321,000,000 2,363,060,858 102% MEFIDNPP and MEFIDGAES, MINEDU, MINSA. MIMDES. 86 PSRL 111Triggers Description Principal Prior Actions for PSRL I11 proposedduring Disbursement approval of PSRL I1 Workfare a. In2002, the A Trabajar Evaluations show 51,7 percent of beneficiaries a. In2002, the A Trabajar Program was Program was implemented in the urban sample belong to the first quintile implemented as follows: as follows: (31,6 percentinthe first decile) and 79,3 percent (i) There is evidence that inthe top two quintiles. (i) isevidencethatatleast50percent There at least 40 percent of urban of urbanA Trabajar beneficiaries belong to A Trabajar beneficiaries the first quintile and at least 78 percent to belong to the first quintile first and secondquintile households. and at least 80 percent to first and secondquintile households. (ii) There i s evidence that ENAHO 2002 put targeting at 45 percent for the (ii) isevidencethatatleast44percent There at least 40 percent of rural first quintile and 79 percent for the top two of rural A Trabajar beneficiaries belong to A Trabajar beneficiaries quintiles, although the sample was relatively the first income quintile and not less than 78 belong to the first income small at only 269 observations. percent to first and second quintile quintile and not less than households. 80 percent to first and secondquintile households. (iii) isevidenceA There The PSRL I11goal has beenaccomplished. InA (iii) InA Trabajar Urbano, 76 percent of Trabajar Program's Trabajar Urbano, 76 percent of subproject costs subproject costs financed by the program go spending in unskilled labor financed by the programgo to unskilledlabor. to unskilled labor and 63 percent of total inrural areas was at least Data point to 10percent overhead, so 63 percent expenses go to payrolls of unskilledlabor. 40 percent of the total, and of total expenses go to payrolls of unskilled In A Trabajar Rural 42 percent of total at least 75 percent in urban labor, an acceptable figure by international costs and 55 percent of subproject costs go areas. standards.In A Trabajar Rural 42 percent of to unskilledlabor. total costs and 55 percent of subproject costs go to unskilledlabor. (iv) An assessment of the I n A Trabajar Urbano: an impact evaluation has (iv) An assessmentof the concluded A A Trabajar Rural and beenmade by an independent researcher and its Trabajar Rural and Urbano programs was Urbanprograms was results discussed. For A Trabajar Rural, an performed and their results debated in performed, their results assessmenthas beenmade, basedin a survey to public and published. debatedinpublic and brigade members. published, and changesto the program's design were started b. A study was concluded Actions concluded. Reviewed by several b. A study was concluded on the impact of on the impact of wages professional experts from a range of agencies. wages paid to brigade members of the A paid to brigade members FONCODES received the final report and has Trabajar Rural programas a device for of the rural A Trabajar put recommendations into practice. self-targeting. program as a device for self-targeting. Bank recommendations accepted and underway for the second project cycle. 1. References to approved budget means the Presupuesto Inicial de Apertura, and to executed budget means the PresupuestoDevengado. 87 PSRL I11Triggers Description Principal Prior Actions for PSRL I11 proposed during Disbursement approval of PSRL I1 FoodPrograms Pilot programdistributing The pilot has been designedand formally Intergovernmental Transfer Law i s cash instead of food in at approved, but has not been launched yet. submitted to Congress establishing the rules least five districts Instead, other areas of reform have gone beyond for the decentralization of the food completed and evaluated. the initialexpectations: (i) food aid the programs, including: (i) The budget will be programs have improved their targeting transferred to municipalities following a (expenditures inthe first quintile of districts pro-poor transparent formula, (ii) the went up from 30 percent to 35 percent) and the transfers will be conditional on explicit government has allocated these resourcesin the performance criteria procedures to be 2004 Budget Law according to a pro-poor and monitored by a specialized Social undernourished formula (excepting Protection Agency, (iii) the resources "comedores"); (ii) this programs are being cannot be diverted to other purposes. transferred to municipalities beginningin October 2003 under an improved design. An The 2004 budget for food-aid programs Intergovernmental Transfer Law will be (except "comedores") is distributed to submitted to congress establishing that food aid municipalities following a pro-poor and transfers will be conditional on performance undernourished formula that allocates 38 agreementswith municipalities specifying percent of budget to first quintile districts procedures and results targets, will protect these and 68 percent to first and secondquintile. resourcesfrom being diverted to other uses and will be distributed following a pro-poor formula. Pensions NEW The DGAES of MEFhas beencharged with the RM326-2003-EF/15 published,giving responsibility of developing strategies and DGAES responsibility over pension policy, monitoring implementation for old age income including (i) strategic planning to increase security policies. Strategieswill aim to increase coverage and improve efficiency of the old coverage, efficiency, and integration of the age income security systems; (ii)collecting different social protection systems, including and publishing consolidated statistical and SPP, SNP, Cedula Viva,non contributive institutional information on all old age benefits and others. income protection systems, including a quarterly statistical report and special studies; and (iii) drafting legislation to implementthe strategies. NEW The government made advancestowards the 1. Two laws were approved, establishing (i) control and rationalization of Cedula Viva. For the creation of a Pension Assistance this, it proposed and obtained approval from Contribution, to be financed by current Congress to introduce changes in the Cedula beneficiaries of Ckdula Viva earning SI Viva system, increasing contribution rates and 43,400 a year; (ii)immediate increase of limiting benefits. These measures will have a contribution rate from current 6 percent tc small direct fiscal effect (estimated at S/ 80 13 percent and further increases to 20 million) but are critical to reduce incentives to percent in 2006 and 27 percent in 2009; and civil servants to try to join the system, as it (iii)maximumbenefitofSI3,100 amonth a becomesless generous. i s set for new beneficiaries. 2. A report on the financial and actuarial statusand evolution of the Ckdula Viva system has been completed. 3. PSRL I11coveragegoals By the end of 2002, SIS's affiliations in the By December 2002, SIS surpassedthe -cached and at least75 infant and maternal components had clearly infant and maternal coverage goals set forth 88 PSRL I11Triggers Description PrincipalPriorActions for PSRLI11 proposedduring Disbursement approvalof PSRL I1 percent of SIS budget was surpassedthe referred triggers: 2,013,923 under inPSRL11,reaching 544,876 pregnant executedin first and 5s (245 percent) and 544,876 pregnant women women (161 percent of the goal) and second level health (161 percent). By May 31,2003, affiliation 2,013,923 kids under the age of 5 (245 facilities. Note: PSRL I11 figures still clearly exceeded the expected percent of the goal). 2002 goals are 823,000 national goals: 1,948,196 under 5s (237 percent) children under5 years of and 433,106 pregnantwomen (128 percent). The 2004 national budget law presentedby age and 339,000 pregnant However, during 2002, SIS was not able to reach GOP to Congressincludes the separationof women. its budget execution goal by complexity level of SIS's reimbursements allocated to primary health care: roughly 70 percent of its total and secondary care from those for tertiary expenditures correspondedto primary and care, protectingthe former. secondary health carecenters (159.4 million soles out of a total of 228.9 million soles). From January to May 2003, expenditure at levels Iand I1facilities remained below target at 63 percent (or 74.1 million soles out of a total of 117.1 million soles). To correct this situation that threatensto divert SIS's resourcesaway from its original objectives, additional policy actions will be takenby the national government effectively protecting SIS's budget allocation in levels Iand I1for 2004. EDUCATION AND CUL JRE Poorquality andlittlemo iationof teachers; inefficientmanagement a. Evidence that the new Strengthening MOE's Human Resourcessystem Progressmade indeveloping the sector's measures on the: (i) is critical in order to ensure efficient human resources system: (i) Unified Payroll teacher career structure; managementof teachers nationwide in System operational in a total of 8 executing (ii)merit-based teacher preparation for the decentralization process. units, with a coverageof 51 percent of the incentive system; (iii) Progressto date includes expansion of the teacher population, and plans to cover 80 teacher profile; (iv) a UnifiedPayroll Systemto cover 51 percent of percent of teachersby July 2004; (ii) clean- teacher evaluation system; teachers nationwide, initial cross-checking of up of the payroll systeminLima and Callao and (v) sanctions for payroll and teacher positions in Lima, and a pilot (30 percent of the teacher population) as a teachers with rationalization process, which reassigned result of the cross-checkbetween teaching administrative misconduct teachersunder term contracts to other locations. positions and payroll system; (iii) have beeninitiated. Further to this, MOF has initiated payment to automated payment of teacher salaries individual teachersthrough SIAF. through SIAF inMINEDheadquartersand Implementation progresshas been limited due to two Lima executing units, with the purpose opposition from the Teachers' Union and to of avoiding possible interference in the constraints in the Sectoral regulations that limit payment process; (iv) Ministerial interventionof MINEDcentral Personnel Resolution issued naming a committee to Department in Regional Offices. This limitation implement the Teachers Positions System should be overcome a Ministerial Resolution and the Unified Payroll System in all authorizing the PersonnelDepartment to executing units. implement the payroll and positions systems in the Regional Offices. b. Evidence that, by The pilot on rural teacher incentives was Development of a hardship and merit November 30, 2002, (a) at implemented in 2002, but without sufficient incentives system through: (a) a pilot least400 rural teachers evaluation, thus failing to provide useful inputs programto evaluate hardship and merit received financial and for the incentives component of the teacher incentives for rural teacherscovering 1000 training incentives; (b) an career reform. A second pilot was started in July teachers, and including a detailed additional 600 rural to test, in an initial phase, hardship incentives monitoring and evaluation system; (b) a teachers received a and, in 2004, performance-basedincentives. study to design new meritincentives training package; (c) at The pilot includes a monitoring and evaluation applicable to the education system. 89 I PSRLI11Triggers Description PrincipalPriorActions for PSRLI11 proposedduring Disbursement approvalof PSRLII I least 3,000 teachershave 1system. Terms of reference and the contract for 1 been included under the the baselinehas been issued. I naddition, a wider incentives program for the study is under implementation to design merit 2003 school year. incentives that would be applicable to all teachers inthe system. I I INSTITUTIONAL PILLAR: ENHANCEDGOVERNANCE PARTICIPATIONAND PARTNERSINPUBLICPOLICIES CommunityOversight a. Pilot system for The "Libretas de Calificacidn" tool was 1.Pilot systemfor people's assessmentof people's assessmentof designed, implemented and tested for assessing government services launched. government services five social services (Glass of Milk,School Food, 2. Law of transparency and access to public launched PRONAA, Servicesof Health Facilities-Ministry information and its regulation approved. of Health, Non-School Initial Education- 3. S I A F made available through an internet Ministry of Education, and A Trabajar Rural- portal "Consulta Amigable '' which FONCODES). The assessment is basedon the provides information on budget and clients' experience of individual satisfaction. expenditures for all government programs. The consulting company hired for the 4. Physical goals linked to expenditures for assessment, resorted to focus groups and three programs (PRONAA, SIS and A discussionswith the programs to identify the Trabajar Urbano). criteria and indicators for evaluating and designing the tool. Then, a survey was implemented at the national level using the "Libretas de Calificacidn" to evaluate users satisfaction. The results were presentedto local agency officials and high ranking program officials who issuedmemoranda pointing to the way in which each of the agencies will use the datafrom "Libretas de Calificacidn" to identify deficiencies and introduce measures. In coordination with "Mesas de Concertacidn " (multi stakeholderround tables) local agencies of the programs and the consulting firm organized regional public presentations of the survey results. I n addition to the report cards, a module on transparency has been permanently incorporated into the household survey ENAHO. The module aims at assessingcitizens' perceptions on transparency and corruption. PENDING: A schedule for presentation of results by the Central Goveinment to the public. TRANSPARENTPROCL LEMENTAND FINANCIAL MANAGEMENT Moretransparentandeffi ent procurement,andgreater governmentability to fight corruption :. CGRand Each agency has issuedand publishedin the ICGR and CONSUCODE issued oversight CONSUCODE to publish period LUUL-LUUJ a number or directives ana . ^^^^ ^^^^ . ^.. . . Iana. supervision regulations concerning . . 1 . mandatory oversight and rules on oversight and supervision concerning public procurement for mandatory use of all supervision regulations for management of public procurement by government agencies. a l l government agencies. government entities. 90 ANNEX 3: Justificationfor MovingPeruto a HighCase CAS LendingScenario Conditions for a CAS HighCase lendingscenario requires achieving four triggers: 1. A macroeconomic framework acceptableto the World Bank. 2. A fiscal policy/debt management strategy in place conducive to (i)tax revenue/GDP a ratio higher than 12.5 percent, and (ii)increase debt sustainability inthe medium term. 3. Successful launching of policy and institutional reforms toward growth and policy alleviation including actions to reform state institutions, develop decentralization in a fiscally sound framework, and promote private sector competitiveness. 4. Satisfactory portfolio performance measured by a disbursement ratio higher than 20 percent and a ratio of commitments in problem projects below 20 percent. The country i s incompliance with all triggers, as follows. The country maintains a solid macroeconomic framework. All IMF Stand-by performance criteria remain on track after its third review. There are no major imbalances in the economy and vulnerability indicators point toward a stable recovering economy: growth and exports remain robust, inflation i s low, the exchange rate i s stable, external and fiscal accounts are in good standing and improving, and the country's risk has reached historic low spreads. Tax revenuecollectionmeets the requiredCAS High Case target and is improving. The average tax ratio for the first two quarters of 2003 was 12.7 percent of GDP, and the estimated 2003 and 2004 annual tax ratios are at 12.7 percent of GDP and 13.0 percent of GDP, in an increasing trend from the 2002 ratio of 12.1 percent of GDP. Such outcomes reveal the impact of a set of tax policy and administration measures already approved by Congress. Coupled with expenditure cuts, adopted revenue measures should allow Peru to follow the path of reduced fiscal vulnerability and, for the first time, meet the fiscal deficit target contained in the Law of Fiscal Prudence and Transparency (FPTL) for the Non-Financial Public Sector (NFPS), 2.0 percent of GDP for 2003 and 1.5 percent of GDP for 2004. Implementationof a new management strategy hasstrengtheneddebt sustainability in the medium-term. Supported by the Bank and the IMF, the country has issue new debt rules and improved debt management capacity. In February 2002, the country achieved a successful Brady debt buyback for about US$923 million that improved debt service repayment profile and reopened international markets for Peruvian sovereign bonds. Last April, the passage of the revised FTRL last April adequately addresses medium term debt sustainability, as well as regulates subnational debt management. The Law sets a target 40 percent of GDP public debt ratio for 2006. New domestic debt in Soles was also issued successfully, improving domestic debt maturity, developing the local capital market, and contributing to de-dollarize public debt. As a result of these measures, public debt ratios continue to decrease on a sustainable path: the public sector debt ratio is estimated to decrease from 46.1 percent of GDP in 2002 to 44.3 percent of 91 GDPin2003; and the public external debt service ratio is estimatedto decrease from 31.6 percent of exports in 2002 to 22.0 percent of exports in 2003. 0 Authorities have developed a comprehensive set of fiscally neutral institutional reforms. These reforms are accompanied by the PSRL I11 and a parallel Bank Programmatic operation on Growth, Competitiveness and Decentralization. Actions to reform state institutions include the merging and rationalization of social programs under the new Ministry of the Women and Social Development, and the approval by Congress of pension reform, which increasesworkers' contributions, closes the access by new public workers to the expensive regime of Ckdula Viva,and places an upper limit on pensions. Both actions contribute to the sustainability of the fiscal accounts in the medium term. Actions to develop a fiscally sound decentralization include a regulatory framework approved between 2002 and 2003 that incorporates principles of fiscal and debt sustainability at the subnational level: the Framework Law of decentralization endorses the principle of fiscal neutrality; the Organic Law of Decentralization includes the principles of transparency, accountability and responsibility interms of borrowing and establishesfiscal rules for regional and local governments; the Law of Regional Governments details the exclusive and shared responsibilities and allows the Central Government's oversight over the regional government's finances; the draft Law of Intergovernmental Transfers, designed with the support of PSRL 111, conditions transfers to local governments in exchange of their assumed responsibility in implementing social programs and sector allocations with the support of management contracts; and the draft Law on Fiscal Decentralization, supported with the support o f the IMF, IDB and the Bank, seeks to ensure that decentralization is fiscally sustainable. Finally, actions to ensure private sector competitiveness include export promotion and infrastructure development policies being implemented by the Government and including a new institutional framework for export development-developing export capacity at the enterprise and regional level-and production chains, new conditions for access to foreign markets; new quality control practices; improved access to exports finance; reduction of logistic costs by improving infrastructure and trade logistic services such as Customs controls and security services at ports and airports. 0 The WBG portfolio performance is in line with the benchmarks required. At present, the disbursement ratio i s around 27 percent and there are no problem projects. 92 ANNEX 4: ResultsMonitoring inPSRLI11 1. Background. Monitoring and evaluation has historically been an area where the Peruvian state has demonstrated serious deficiencies. During the Government of Fujimori, this was aggravated due to the manipulation and lack of transparency of official statistics, which led to the concealment of information-for example in the area of education-which resulted in serious criticisms on the part of citizens. 2. PSRL I.Inthe PSRL I, principalemphasis for the reform of the social sectors was placed the on transparency of information. The development of an M&E system was initiated, leading to the establishment of specific objectives by districts which were publishedon the web. The indicators established to monitor the loan itself were not quantified in the majority of the cases. The outcomes were defined in general terms, without clearly specifying the indicator or the quantitative goal. 3. PSRL 11. This strategy was modified in the PSRL 11, in which the M&E system of the loan was framed within the general strategy of the government, which included medium-term impact indicators (such as for example percentage of poor and infant mortality), developed with technical assistance from the World Bank. Inthis phase, the government for the first time specified indicators and established medium-term goals (for 2006), linking them to actions of a social reform program, which was included in the Letter of Policy. The emphasis was thus placed on linking actions to medium-term objectives and to establish the corresponding indicators. However, in some cases of innovative indicators, such as the ones for transparency and perception of the quality of services, the exact definition of the indicators and the baseline were left pending. This effort to establish indicators was also part of the National Agreement process, which established a number of goals for the 28 approved policies. 4. PSRL 111. Inthe process leading up to the PSRL 111, the government has made an effort to review the progress made towards the medium-termindicators. The results of this effort are presentedin the table below and in the matrix of triggers presented in the main text of the Project Document. These results suggest that there has been progress in many key areas supported by the loan. They also suggest the need for a greater methodological precision and for more realistic targets in a number of areas noted inthe table. 93 MEDIUM-TERMDEVELOPMENTINDICATORS Indicator and goal Advance registered Changes proposed Comments establishedinPSRLI1 by government in the indicator or goal Extreme poverty rate Extreme poverty Extreme poverty rate Reduction of goal to 2006 is reduced from 24,4 percent rate reducedto 23,9 reduced from 24,4 compatible with 4 percent annual in2001 to 18percent in percent in 2002. percent in 2001 to 20 growth and an elasticity of poor 2006 percent in 2006. people incomes to GDP of 0,6. Poverty rate reduced from Poverty rate reduced Poverty rate reduced Difference from 2001 to 2002 i s not 54,8 percent in 2001 to 45 to 54,3 percent in from 54,8 percent in statistically significant. percent in 2006 2002. 2001 to 49 percent in Reduction of goal to 2006 i s 2006 compatible with 4 percent annual growth and an elasticity of poor people incomes to GDP of 0,6. Monthly real income of Income of the Monthly real income Difference from 2001 to 2002 i s not the poorest quintile of the poorestincome of the poorest quintile statistically significant. economically active quintile of the EAP of the economically Reduction of goal to 2006 is population increasedby was 123 soles in active population compatible with 4 percent annual 20 percent in 2006. 2001 and increased increasedby 15 growth and an elasticity of poor 3,8 percentbetween percent in 2006. people incomes to GDP of 0,6. 2002 and 2001, Infant mortality rate The indicator will be measuredby a reduced form 33 per continuous DHS 2003-2007 under thousand in 2000 to 26 per implementation, the initial data will thousand in 2006 become available in 2004. Maternal mortality rate The indicator will be measuredby reduced from 185 in 2000 the continuous DHS 2003-2007, and to 160per 100,000 live the data will become available in births in2006. 2007. Chronic malnutrition rate The indicator will be measuredby among children below age the continuous DHS 2003-2007, and 5 reduced from 25 in 2000 the initialdata will be available in percent to 20 percent in 2004. 2006 Percent of institutional 4 complementary The indicator will be measuredby births increasedfrom 57,9 indicator to monitor the continuous DHS 2003-2007, and percent in 2000 to 61 innually will be the initial data will be available in percent in 2006 3irthscovered by 2004. UOH-SIS. Proportion of children ?roportionof Proportion of The changeinbaseline and goal from who are at the age- :hildren who are at children who are at PSRL I1to PSRL I11is due to the appropriate level in 6Ih he age-appropriate the age-appropriate change in information source. PSRL grade increasedfrom 5 1.3 eve1in 6Ihgrade level in 6Ihgrade I1usedMINEDstatistics. PSRL I11 percent in 2000 to 55 ncreasedfrom 5 1.8 increasedfrom 51.8 i s using School Census. percent in 2006 )ercent in 2000 to percent in 2000 to 54.2 percent in 2001 59.7 percent in 2006 Proportion of children 'roportion of 16 Proportion of 16 The changein baseline and goal from completing primary and rear old children in year old children in PSRL I1to PSRL I11i s due to the secondary school in 11 jfh grade of 5'h grade of change in information source. PSRL years (rural and urban) ,econdaryeducation secondary education I1usedMINEDstatistics. PSRL I11 increasedfrom 21 percent with respect to the with respect to the is using School Census and MINED in 2000 to 25 percent in 6 year old 16 year old statistics. 2006. )opulation increased population increased 94 Indicator and goal Advance registered Changes proposed Comments established inPSRL 11 by government in the indicator or goal from 22.7 percent in from 22.7 percent in 2000 to 25.9 percent 2000 to 30.6 percent in2002. in2006. Proportion of studentsin Proportion of The indicator now includes data 6" grade who took the studentsin 6" grade which was not available during standard ability test in of primary education preparation of PSRL 11. The goal for 2006 is 101percent in who achieve 2006 is qualitative as there i s no rural and 102 percent in satisfactory trend datato allow quantification. urban (100 percent in performance in the After 2001, the next standard test i s 2001) standard ability test planned for 2004. in 2006 improves as compared to the 2001test where performance results were: 13.0percent and 2.4 percent for urban and rural areas, respectively, inlanguage, and 9.9 percent and 1.1 percent inrural and urbanareas, respectively, for math. Index of public perception Households in which The indicator has been formulated of transparency inpublic at least one member precisely and calculated for the first service has been a victim of time with the ENAHO 2002 corruption was transparency module supported by reduced from 5,2 PSRL111. percent in 2002 to 4 percent in 2006 20 percent improvement 20 percent The indicator has been formulated inthe index of the improvement inthe precisely and calculated for the first perception regarding the index of the time with the pilot scorecards quality of public services perception regarding supported by PSRL 111,but covers the quality of public only 5 regions and 5 social programs. services, that was 3,45 by the pilot scorecards. 5. The efforts to monitor and evaluate the key social programs have brought to light the need for a major institutional reform: A new system of monitoring and evaluation will be needed once the social programs become decentralized. Several programs will be implemented by sub-national government, regulated by sectoral ministries and financed by the ministry of finance. This new set-up will demand higher levels of accountability and no government agency i s currently charged with the task of monitoring and evaluating other agencies or sub- national governments. The government i s committed to developing a M&E system for the social programs under PSRL IV. The Bank will support these efforts with a TAL. 95 6. Simultaneously to the advances in the general monitoring of the program, in the PSRL 111,progress has been made on the impact evaluations of the key social programs. Hence, impact evaluations of A Trabajar Urbano and A Trabajar Rural have been made and discussed publicly and evaluations of various food programs have also been carried out (Vaso de Leche, PANFAR, PACFO and PAN-TBC). These evaluations were done by independent professionals or institutions. Similarly, the score card methodology which i s based on client satisfaction of services was carried out for 5 social programs. Also, the analysis of the ENAHO results and the independent budget analysis are studies which shed interesting light on the efficiency and management of the programs and will help establishing baselines for monitoring. In parallel, other impact evaluations of programs such as Rural Roads and School Breakfasts have been done and published by independent research institutes. However, the lessons learned from these evaluations and the resulting corrections to the programs remain weak. 7. For the PSRL N,two major advances in this area are proposed. On one hand, the matrix of triggers in the main text of the PD establishes revised medium-term development goals, in order to maintain the focus on results. Second, emphasis has been placed on specifying and quantifying monitoring indicators that can be tracked on a yearly basis. 8. Also, the establishment of an M&E system for the six PSPs incorporating elements o f social participation and transparency i s defined as a trigger for the PSRL N. This system i s aimed at improving decision-making and accountability and support management based on results in a decentralized context. It will be developed progressively interms o f the programs, areas and indicators to be included and will be transparent and participatory. In the near future, the intermediate development indicators will be established more precisely and completely, as will the sources of verification and information and the methods to apply the lessons from the policies. To advance in this task, the government has designated a person to be the technical coordinator of this effort and will soon designate a political authority to lead it. The Bank will support this effort with the TAL for the reform of the social sectors, which will have as a principal objective the development of this monitoring and evaluation system. 96 ANNEX 5: Participation and Transparency Background and Issues When the transition government of Paniagua came to power in 2000, years of weakened democratic institutions, lack of government transparency and increased levels of corruption had led to undermine the basic accountability mechanisms between the state and citizens in Peru. The scandal unleashed by the exposure of the corruption network of presidential advisor Montesinos not only precipitated the fall of the Fujimori government, but also helped position corruption-a symptom of faltering accountability-at the heart of the public debate in Peru. Hence, the 2002 household survey-which for the first time included questions aimed at measuring households' perceptions of corruption of public institutions-shows that corruption i s perceived to be the third biggest problem in Peru (34 percent), after unemployment and poverty (74 percent and 61 percent before lack of credibility of the government (13.2 percent), delinquency (11percent), andthe poor quality of education (11percent). The results of the survey show that corruption directly affects people in their daily lives, often limiting their access to public institutions and their services, generating a profound sense of distrust of these. According to the survey, the percentage of households of which at least one member has been a victim of corruption i s 5 percent. If the 15 percent of those that have not had any contact with public institutions in the last year are excluded, the figure i s 6.1 percent. Corruption i s shown to have a significant financial cost, the amount paid by households to corrupt civil servants representing 0.4 percent of their total expenses and 1.1 percent of their food expenses. The total amount represents approximately a third of government transfers to households through anti-poverty social programs. However, while the budgetary coefficient of corruption varies little according to income, corruption weighs more heavily on the poor. The lack of accountability of the state and of public institutions i s also demonstrated by the fact that access to them i s biased towards urban areas, although poverty-and thus the need for public services-tends to be concentrated in rural areas. Hence, one inevery ten residents in urban areas did not have any contact with the state, while in rural areas this is the case for one out of five citizens. An analysis of the household survey results attributes the lack of differential access to public services to a combination of factors, including lack of confidence in these on the part of the population, corruption and organizational limitations resulting in inefficiencies in service delivery. The survey shows that there are serious accountability failures between citizens and politicians and policy-makers in Peru. First, the possibility for citizens to exercise their voice seems to be largely determined by the level of income. Hence, whereas 19 percent of the first income quintile vote, only 9.5 percent for the lowest quintile exercise their right to vote-or 15.2 percent of the non-poor versus 10.9 percent of the poor. This means that many of the poor are excluded from influencing public action through elections. Moreover, even for those who vote, the institutions in which households have less confidence in are precisely those that are intended to represent and protect them, mediate and watch for their interests, administer justice and create legislation. Hence, political parties (80.6 percent), the congress (72.5 percent), the police (65.7 percent) and the judicial power (56.7 percent) are the public institutions people least trust. More 97 people distrust the Ombudsman (49.5 percent) than those who do not (49.1 percent). This indicates a serious lack of institutionalization of formal mechanisms of accountability in Peru. Similarly, the police and the judiciary are the institutions that are most subject to corruption, as measuredby the percentage of households having to pay bribes to them. Accountability between service providers and clients i s often also weak. Hence, 5.9 percent of households report having had to pay bribes to municipalities, 3.2 percent to FONCODES, 1.2 percent to PRONAA and 0.7 percent to water services. There i s also a serious issue of inefficiency in public institutions, pointing to failures in accountability mechanisms along the service-provision chain, which involves ministries, national service providers, sub-national governments, and front-line local service providers. Hence, as many as 61 percent and 66.1 percent of households considered that the transaction carried out in PRONAA or FONCODES was not effectively resolved or implied a significant cost (compared with 65.4 percent for the police). 18.5 percent of households also considered that the service provided by municipalities was poor, compared with 33 percent and 41.8 percent for the police and thejudiciary and 11.9 percent and 10.2 percent for FONCODES and PRONAA respectively. The low performance of municipalities points to the risk that decentralization-if not adequately managed - may weaken even further the accountability mechanisms between policymakers and service providers at the local level. In addition to weak accountability between public institutions, their services and households, citizens have few channels to adequately voice their concerns and complaints about these. As shown above, formal mechanisms of representation and accountability are weak and not perceived as trustworthy. Few resort to recourse mechanisms to voice their concerns, with as many as nine out of ten households not engaging in procedures to denounce acts of corruption, often for fear of reprisals. Solutions Following the opening of Peru's political environment in 2000, the transition government of Paniagua and then the Toledo administration announced a strategy to reverse the previous regime's pattern of corruption and lack of transparency, implementing a strategy to consolidate transparent and democratic institutions in Peru andbuildinga state aimed at serving the needs of the people. Efforts were focused on increasing citizens' voice and increase transparency and efficiency inthe management of state resources. This strategy was seen as central for the PSRL's focus on social sector reform, in which increasing accountability through mechanisms to enhance the voice and access to information of clients was seen as key to improving service delivery for the poor. Within this context, the PSRL objectives in the area of transparency and participation translated into i)providing access to reliable and credible information for all citizens and clients on the protected social programs to effectively increase clients voice over the services, express their demand and effectively monitor the performance of these ii)providing citizens with the means to plan, budget and oversee the services provided to them and thereby ensure that their voice i s heard and reflected accurately in government actions: and iii)providing an institutional framework and recourse mechanisms for citizens to seek resolution in the case of abuse of public funds. 98 Since the approval of the first PSRL in 2001, the GOP has made significant advances in providing the legislative framework and institutional environment for enhancing accountability between policy-makers and citizens, organizational providers and the state, and providers and clients, laying the basis for enhanced service delivery and effective poverty reduction. Enhancing accountability between politicians, policy-makers, service providers and citizensklients The WDR 2004 emphasizesthe key role that informationplays inproviding citizens with informed voice and the basis to assess whether actions of the state have promoted their well- being. This enables them in turn to identify the limitations and gaps to enhancing the accountability of politicians, policy-makers. Information not only provides citizens with the means to hold governments accountable, but also i s key for the state to be able to adequately monitor service providers. The advances of the GOP in making information more easily available to citizenshsers since the approval of the first PSRLhave been significant and represent a watershed in Peruvian history, where a culture of secrecy around government actions, programs and resources used to persist. The approval of the Law on Transparency and Access to Information and its corresponding regulation testifies of the commitment of the GOP to enhance access to information inPeru by providing a legislative framework for citizens and public officials alike to access information on government actions at all levels and in all spheres. Another important achievement i s the creation of the government portal ConsultuAmiguble which provides for the first time ever inPeru, monthly updated information on government budget and expenditures for all sectors and programs-including the priority protected social programs PSPs-on a publicly available internet site. The portal provides citizens with the means to asses whether the state i s abiding by its proclaimed commitments, by verifying the effective transfer of resources in relation to committed outputs. The experience with Consultu has shown the challenges involved inproviding reliable andaccurate information for citizens to effectively be able to monitor state actions, with decentralization adding another layer of complexity. Indeed, publishing the information i s only the final step of a process that requires an effective information management system behindit. It requires that national, regional and local governments have Internet access, the adequate hardware and software and that they institutionalize the practice of recording their expenditures through the Financial Management System (SIAF). In addition, it requires modifying the budgeting model, to one based on results, so that expenditures can be tracked according to outputs and results, and institutionalizing a system of internal monitoring to track these. The GOP has committed to tackle the latter challenges inPSRL IV. Another action that the government has taken to enhance the quality of information has been to identify mechanisms to strengthen the National Institute of Statistics and Informatics (INEI) to provide reliable and timely information on government programs. The implementation of these mechanisms during PSRL IV, will be key to the implementation of a transparent, participatory and result-orientedMonitoring and Evaluation system (M&E system). Particularly in cases where formal mechanisms of accountability such as parliaments and the auditor general are weak, a monitoring system, which combines horizontal and vertical accountability mechanisms, i s necessary. One of the ways that civil society in Peru has been involved in supporting social accountability i s through conducting an independent budget 99 analysis, with financial support from the World Bank. The analysis looks at stated budget commitments versus expenditures in the different sectors-with a particular focus on the social programs. The analysis has generated discussions in civil society and the media, which has played a key role in disseminating the results of the study to the public. One of the weakest elements of the budget analysis i s related to the inherent limitations of the budgeting and expenditure monitoring process, which does not include results and outputs. In addition, the enforceability aspect has been weak, as the state has not formally responded to some of the gaps and inconsistencies identified inthe budget analysis. Another mechanism to enhance citizens' voice and enhance their capacity to monitor state actions and performance are the so-called citizens report cards (Libretus de cuZifcaciones). These enable clients of services to directly assess the performance of government services, playing the same role as client surveys in the context of private service delivery. The aim being to assess public service delivery from the point of view of the users, providing them with voice, which-if linked to the appropriate incentives-can be used to enhance performance in public on the evolving performance of the programs at the national level - can also be used by citizens sector delivery. The subsequent and aggregated results of the surveys, which provide indications to encourage the state to take actions to improve the performance of certain programs, according to the diagnosis made by the users themselves. In the case of Peru, letters issued by corresponding agency directors committing to incorporate the feedback into the performance management agreements of their service providers, materialize the enforceability mechanism to reward or punish service providers according to conclusions resulting from the application of the citizen report cards. Another way to enhance the voice of citizens, and to identify patterns of exclusion from service provision-something the score cards do not do, as they only evaluate the perceptions of users-is to conduct national surveys of perceptions of corruption, level of trust in public institutions, efficiency of services and access. With initial support from the World Bank in developing a module with that purpose within the national household survey, the GOP has now made this a permanent component of the monthly household survey. This will enable the state, citizens as well as donors and the private sector to assess the evolution of these perceptions over time. Finally, the Peruvian Congress has approved a number of other laws which are aimed at institutionalizing participatory processes in planning and budgeting at all levels of government (Participatory Budgeting law, Decentralization law, Regional and Municipal Government law), making Peru one of the countries with most advanced legislative frameworks for the institutionalization of citizen participation in public policy processes at national, regional local levels. This will enable to bridge the representation gap of the electoral system and bring citizens closer to the policymakers in the identification of demands and formulation of appropriate actions to design them. The legislative framework establishes the creation of Local and Regional Coordination Councils, which will have a 35 percent and 40 percent civil society representation respectively, and which will play a key role in the formulation and monitoring of regional and local government actions. Within this context, participatory budgeting pilots have beencarried out innine departments. 100 Enhancing accountability between serviceproviders and the state The state generally provides resources and delegates powers to and responsibility for collective objectives to service providers. The WDR 2004 conceptual framework views this relationship in the form of a compact or broad agreement about a long-term relationship, in which the provider agrees to deliver a service, in return for being rewarded or punished depending on whether performingor not. Inthe case of Peru, this accountability relationship has been weak and risks becoming even weaker in the context of decentralization, if clear compacts are not established between the new service providers-regional and local governments-and the state. The Transference Law under preparation would have to tackle this issue, by establishing accreditation systems for regional and local governments as well as performance management agreements to strengthen both accountability and enforceability mechanisms between the national and sub-national levels. Both the accreditation systems and the performance management agreements should include indicators related to participatory M&E mechanisms, to ensure that citizens and clients' voice i s heard and taken into account in the formulation of policies and management of services. They will also include indicators related to transparency and access to information to ensure that regional and local governments also put in place mechanisms and processes to enhance citizens' access to information. Enhancing accountability betweenproviders and citizens-clients The WDR 2004 framework suggests strengthening the "short route to accountability"- that between service providers and clients-in addition to measures to strengthenthe "long route to accountability", given that the policymaker cannot specify all actions of providers in the compact. The effective way to achieve this i s to increase the client's power over providers, by enhancing their voice to reveal their needs and demands and to monitor the provider's provision of services. For clients to effectively be able to monitor the effectiveness and accountability of service providers, they must first have access to information about these services, what their eligibility criteria are, conditions of access and geographical coverage. The Consulta has to date made an attempt to include this kind of information for three social programs (PRONAA, SIS and A Trabajar Urbano), but it lacks specific information on services offered and eligibility criteria by executing unit. This information will be expanded to all protected social programs during PSRL IV. In addition, the PSRL IV will also seek to enhance the outreach capacity of regional and local governments to effectively provide information on its programs and activities. Complementary actions of civil society organizations will have to put an emphasis on improving the poors' access to information through complementary means to the web, such as for example community radio and local bulletins, as Internet remains within limited reach for many of Peru's poor, despite the extended network of public Internet hubs. Finally, community score cards represent an important tool to link service providers directly with clients. B y organizing face-to-face meetings between the two groups, the clients are able to voice their concerns and the providers listen, respond and incorporate the feedback. 101 Civil Society Converging Initiatives Peruvian Civil Society has deployed a myriad of converging social accountability initiatives at the national, regional and local level. The above-described set of actions linked to the PSRL, cannot reach sustainability if they do not count with a strong and independent engagement of civil society. The attached table provides detail information of those initiatives which converge with and complement the PSRL. They show the way that civil society organizations have been able to take advantage of the evolving enabling environment for civic engagement and prepares itself to face the challenges posed by decentralization and poverty reduction. Attachment: Civil Society Social Accountability Initiatives by Organizations and Topics Discussed Consultations & social accountability Topics referred to the F'SRL 111 actives ForumMacroSouthRegion, Led by the Arequipa Chamber of Shared vision for regional development, that including institutions inApurimac, Commerce, includingthe business includesMacro SouthRegion,Apurimac, Huancavelica, Ilo, Tacna, Moquegua, sector, NGOs andMayors of Cusco, Arequipa, Puno, Ilo. Puno, Cusco andArequipa provinces. Apun'mac, Cusco, Huancavelica, Ilo, Tacna, Moquegua, Puno, and Arequipa provinces. IndigenousConsultations Ledby organizationsfrom the A view for the development of the country, Meetings with Andean and Amazonian communitiesand the Technical with an indigenouscommunities perspective indigenous people representatives, and Secretariat of CONMA - and with cultural dimension. The main topics representatives of the afro-Peruvian National Commissionfor Andean, were: the civil rights of the indigenous to communities. leaders- of the PCM ,Council of Amazon and Afro Peruvians protecttheir land, the improvement of quality of life, development and institution Ministries. Consultationsincluded strengthening. Focusingon (i) knowledge of four levelsof participants, the indigenoushealthproblems (ii) accordingto their experience. intercultural bilingual education, basic and university education(iii) improvement of nutrition quality, and (iv) gender equity. Led by the consortium of Country development vision; local initiatives Social Development-,start its institutions groupedby the Civil to fight against poverty; social topics; consultationprocessinthe provinces Society initiative, the Catholic democratic institutionality; economic, andregions; andends with afinal Church and community based cultural-social andpolitic rights. The encounter inLima. CONADES takes organizations, such as local proposals are: (i) administration of the basic place every year. NGOs, religiousassociations, social services by the Municipalities, Universities, unions, citizen decentralizationof services; (ii) CONADES i s the ANC - associations. The secretariatof the improvementsin the life conditions and human development -child malnutrition, Asociacidn Nacionalde Centros mortality, analphabetism, basic sanitationand de Investigacidny Promocidn potablewater, children abuse, family violence, adolescent pregnancy. The last topic included i s transparency and social I accountability for the performanceof the public socialprograms. Poverty Fora- a) Instancesto coordinatefight against I OrganizationCommitteeformed poverty. Macro Regions: Piura, San Martin, by: * Civil Society (CONADESI b) Be informedabout the access of the poor Cusco andcentral Lima; ANC - * COPEME, unions CGTP, people to the basic social services, as health, farmers CCP); education, nutrition,justice, water and Private Sector - (CONFIEP y sanitation; COPEI); Govemment (MEF, M. c) Informand evaluate the regional Macro Regions: Trujillo; of the Presidency and M.of experienceson the fight against poverty to Huancayo; Arequipa; Iquitos. Labor) and the Intemational ease the access, efficiency and equity in the Cooperation(World Bank, IADB, provision of basic services. USAID, EuropeanUnion - d) The opportunities for the creation of DFID). employment, with the selectionof relevant cases for the debate. The participants on each 102 Organizers Macro Region represent the four sectors involvedinthe Organization Committee of the Forum. e) Maintopics on social services are: (i) concertation between the country sectors, (ii) mechanisms for the participation of the Civil Society; (iii) decentralize the design and management of basic services; (iv) development of Information, Education and Communication campaigns IEC; (v) increase the human resourcesprofessionallevel; (vi) gender perspective. 0Maintopics onemployment are: the macroeconomic, finance, legal and institutionalconditions. The last Forumwas on decentralization closing the process of the national dialogue on poverty. Mesas de concertacidn de lucha contra la Pobreza - Roundtable Ledby a priest from the Catholic About one thousand MESAS has been Church nominatedby the installed in the country, with a similar attacking poverty President of the Republic of Peru, structure to the Executive Committee inLima. working closely with an Executive The MESAS are at the department, provincial Committee including and district level. According to its goals the representatives of civil society MESAS promote dialogue, concertation, organizations, community based partnership among stakeholders inthe zone organizations, private sector, to: facilitate the processof preparing the public sector the Ministry of participatory budget, transparency and social Economy and Finances, the main accountability of the social programs, ministries for social sectors, and promote the implementation of initiatives to the international cooperation The . combat poverty such as A Trabajar Rural. In structure of the MESAS came from the national budget for 2003, nineof the 25 the four forum of the national participatory budget preparedby the MESAS dialogue. have been approvedby the Ministryof Economy and Finances for its implementation at the department level. Defensoria del Pueblo, the Led a process of designing and The community consultation focused on, (i) Ombudsman Office piloting a social accountability information at the local level on the five mechanism (SIVISO) for ten rural social programs, (ii)skills and attitudes districts in the departments of toward social accountability and Ayacucho, Huancavelica, transparency; (iii) social indicator of impact; Apurimac. The Ombudsman (iv) the local demand on social accountability Office of Lima in coordination and transparency. with the Office of Ayacucho led a The Ombudsman Office now includes in their community consultation on five activities social accountability techniques by social programs (Foncodes, Rural the registration of complaints on social Roads, Rural Electrification, programs and a more friendly site for PRONAA and PRONAMACHCS. collecting complaints The SIVISO was sponsored by the www.ornbudsman.rob.pe World Bank, the Ministry of The site linksto other sites of social programs Economy and Finances and and the Consulta Amigable of MEF. Executedby Ombudsman Office. Civil Society Task Force on SIVISO Led by the umbrella organization The Task Force deals on going discussion on ,tobuildanational systemfor social Grupo Propuesta Ciudadma, and social accountability for social programs, accountability mapping civil society in association with NGOs such as connecting to the PSRL 111and IV. DESCO organizations. CIES (consortium of research and CAD were hired by OXFAM UK and 103 soci ctive OmbudsmanOffice, NGO Transparencia, CAREPeru, OxfamUK,MESAS, DFID and CTT (Centro de transferencia de Tecnologia) of the CatholicUniversity civil society organizations and municipalitiesofferspublicinformationon in associationwith four Municipalities municipalitiesinstallinginthree the municipalbudget andactivities, this (Huamanga, San Martin, Cajamarca Municipalities(Huamanga,San informationsystemis supportedby local andrecently San Jeronimo in Cusco)to Martin andCajamarca) the web NGOs for disseminationof window, installan informationsystemfor local site publicwindow. www.ventanaRublica.0rg.De transparency on public investment. The site links to the ConsultaAmigableof the SIAF/ MEF site www.transuarenciaeconomica.mef.,eob.ue I The Participa Peru Project, i s an Led by Grupo Propuesta IT h i s umbrellaorganization does monitoring initiative of 13 NGOsinLima and CiudadanainLimai,CEDEPAS the decentralizationprocess andimplements a seven departments andsponsoredby andCAREinCajamarca, CBC social accountability mechanismat the the USAID andArariwain Cusco,CEDEP in regionallevel.Topics focusedare, (i) budget Ica, FloraTristan andCIPCAin management, (ii) transparency, (iii) civic Piura, CEAS, CEPCO and participation,and (iv) socialprogramssuch as MESASin San Martin, CAAP in educationandhealth.There is a site Ucayali. www.uarticiDaDeru.org.ue that provides informationonthe projectoutcomes andtools for community participationintransparency activities. Other initiatives from civil society Ledby the CAD Ciudadanos Al CADreportsonthe processof implementing on social accountability and Dia, CNR CoordinadoraNacional transparency andaccess to informationfrom transparency action, promotingaccess de Radio,Ventana de la Sociedad the Govemmentof Peru, in its web site to internetto follow uppublic Civil, and RedCientificaPeruana. www.ciudadanosaldia.org investment,informationand performance. I RCP frequently surveyon the useof the ConsultaAmigable andreportsabout TransparenciaEconomica in its web site www.vachav.org.ue MESAS hasdevelopeda web site to inform andreport on the processof civic consultation includingreportson social accountabilityon social programs in its web site ~w~.n~esasdeconcertacion.org.ue 104 ANNEX 6: Decentralization Contrary to other Latin American countries, Peru is a relative latecomer to decentralization. It has been one of the most centralized countries in the region, despite its great fragmentation into 25 departments, 194 provincial municipalities and 1,864 district municipalities. Initial decentralization attempts from the 1960s onwards were reversed in the early 1990s, when regional governments were suspended and non-elected Transitional Regional Authority Councils were established. Almost ten years later, an unprecedented decentralization process has started. The Toledo government arrived to power in July 2001 with an ambitious state reform agenda, with a strong push for democratization, modernization and decentralization. The decision to decentralize is mainly politically-driven, with great support and highexpectations of the population. The Decentralization Framework Law, passed in July 2002, constitutes the legal basis for decentralization, outlining the government's vision on decentralization. It mainly addresses (i) assignmentofservicesandcompetencies(shared,exclusive anddelegated)todifferent the levels of government; (ii)fiscal rules and transfer mechanisms; (iii)the sequencing of decentralization, starting with the transfer of social programs, to be followed by sectoral transfers, with the exception of the health and education sectors, to be decentralized in the last stage. According to the law, the process i s to be: o Permanent: decentralization is legally binding for all government institutions o Dynamic: constant andcontinuous process o Irreversible: and aiming at the attainment of long-termgoals for the country o Democratic:promoting equality of opportunity andbasedonparticipation o Integral: encompassing the whole country, the public and private sector o Subsidiary: public services assigned to those levels which are closest to the citizen and which assure efficient service-delivery o Gradual:the process will take place inprogressive and organized steps Progress has been made inthe elaboration of the legal framework for decentralization.Key decentralization laws, such as on regional and municipal governments have been approved, broadly defining their institutions, roles and resources. Other laws relevant to the decentralization process, such as the framework law on participatory budgeting, the law of decentralized investment promotion and important sectoral laws have also been passed, such as the General Education Law. Major laws still pending are the fiscal decentralization law, the fiscal transfer law and the accreditation law regarding the certification of subnational governments to receive resources. The implementation of the institutional framework for decentralization has also substantially advanced. At the central level, the National Decentralization Council, with ministerial rank, has been set up to coordinate and monitor the decentralization process. Line ministries have established transfer commissions to develop sector decentralization strategies. After the first regional elections were held in November 2002, regional governments were 105 created in January 2003, replacing the deconcentrated agencies. They have largely completed their institutional set-up, including the Regional Presidency, Regional Council and Regional Coordination Councils, composed of mayors and civil society. The latter, a new consultative body, has generally also been set up at the local level (both provincial and district), as the corresponding Local Coordination Council, in additional to the traditional municipal bodies. Progresshas also been made in the elaboration of the fiscal decentralization framework. A draft fiscal decentralization law, dealing with fiscal rules, taxes and subnational debt, has been sent to Congress where it i s expected to be approved shortly. Most relevant for the PSRL are the new earmarked transfers, the so-called programmatic transfers for social programs to municipalities. The draft fiscal transfer law suggests the establishment o f a single fund for poverty-reduction within the Ministry of Women and Social Development (MIMDES), the so-called Fondo de Superacion de la Pobreza. This fund i s based on a key government framework, the bases for a strategy to overcome poverty, designed by the PCM and the CIAS and concretizes a Supreme Decree of April 2,2003, announcing the transfer of social programs for October 2003. Many of the formerly fragmented social programs have now been merged into the fund, such as the food programs and social infrastructure programs, accelerated by the fusion of programs as part of the expenditure rationalization taken during May's state of emergency. The transfer of these social programs merged into the fund will be dependent on the fulfillment of minimum conditions, such as management capacity and sectoral criteria, established by the MIMDES and others, regardingthe verification of mechanisms for the transfers, established by the CND. Transfers are to be started as the first decentralization package in October 2003, and specifically for food programs in January 2004. The three types of programmatic transfers of the fund are: 0 Social Protection Transfers: These transfers mainly regard food programs and would transfer resources from the Vas0 de Leche program and PRONAA 0 Productive Social Znvestment Transfers: These transfers will be constituted largely from resources from FONCODES and PRONAMACHCS, and will also include resources from PROVIAS RURAL, Electrificacibn Rural, INFES and INADEprojects 0 Family Assistance Transfers: These transfers will deal with short-term interventions as opposed to the longer-term social protection transfer interventions. They include INABIF, CONADIS, and the comedorespopulares. There is no legal framework yet for the decentralization of educationand health. Contrary to the social programs that are part of the first decentralization package starting this October, there is no mention yet inthe fiscal transfer law of the transfers for education and health sectors. This might be explained by the fact that the education and health sectors are de iure (Decentralization Framework Law) designed to be the last stages of the decentralization process. However, de facto the decentralization process for these sectors has already begun. More than 50 percent of education and more than 44 percent of health expenditure has already been transferred to the regions which are in large part responsible for the wage bill. They also decide, in close coordination with the Ministry of Education and Health about the designation of the regional directors responsible for these sectors and who report to both the relevant ministry and 106 the regional government. For Lima and Callao, large part of the functions for the education sector have also been decentralized, by virtue of a decree on the state of emergency in the education sector. In the Education and Health Ministries, so-called Transfer Commissions have been set up to elaborate a plan for the decentralization of the respective sector. Some preliminary decentralization strategies both for health and education have already been elaborated. At the same time, there are growing political pressures from regional governments, and to a lesser extent, also from municipal governments, to acceleratethe transfer of education and health. The government, however, has so far seen no need to legislate the decentralization of the health and education sector this year, referring to these sectors being the last stages of the decentralization process. Given the unclear functional assignment to different levels of government, the political pressures and the international experience with the decentralization of health and educatian which has often resulted in a deterioration of service delivery and fiscal imbalances, for the PSRL team, a clear legal basis for their decentralization remains indispensable. Next steps for PSRLI11and IV: PSRL 111:The fiscal transfer law was presented to Congress in early September. Regardingthe PSRL, it will regulate the decentralization of food programs, as described above. A special focus will be put on targeting, based on a simple, transparent andpro-poor formula. Another focus will be on results-based approach, that emphasizes management by results and specific sectoral targets, greater focus on monitoring and evaluation and the use of the accreditation system and performance management contracts to achieve such targets. Finally, civil society and community participation will be expanded beyond the participation of the Local Coordination Councils and include Mesas de Lucha contra la Pobreza and community organizations in the design, management and monitoring of food programs. PRSL IV: The legal framework for the decentralization of health and education will be created. The accreditation law i s expected to be approved in early 2004, setting the fiscal, institutional and sectoral conditions for decentralizing resources to subnational governments and laying the basis for a continued reporting, monitoring and evaluation system, including in health and education. Programmatic Adjustment Loan on Decentralization and Growth: The PSRL i s complemented by another loan under preparation to support the COP in decentralization and fiscal consolidation. This loan, focusing on decentralization, economic growth and competitiveness, reinforces the PSFU objectives by promoting the fiscal and institutional framework for reform, including inthe social sectors. Its components are: 0 Tax policy 0 Intergovernmental fiscal transfer system, including the decentralization of selected social programs, such as the social fund Subnational borrowing 0 Asset management 0 Accreditation and management capacity 0 Performance management contracts Civil Service 107 Participation and transparency Competitiveness, especially regional competitiveness Inparticular, its components regardingtax reform, subnational debt and competitivenesswill provide the overall economic and financial background for the PSRL, helping stimulate growth and reorient pro-poor expenditure, in line with the PSRL macroeconomic objectives on social reform. The proposed tax reform aims inter alia at expanding the subnational tax base and administration while the design of the subnational debt framework promotes a hard budget constraint and strong supply- and demand-driven limits on subnational borrowing. These objectives and measures ensure that the macroeconomic risks inherent to decentralization will be minimized and help generate resources and maintaidincrease spending for social expenditure, includingthe PSPs. This includes intergovernmental fiscal transfers, which are particularly relevant to the transformation of food programs into earmarked transfers, such for PRONAA. Thejoint dialogue currently carried out by both Bank teams on the fiscal transfer system promotes the fiscal sustainability of the decentralization process, and sectoral objectives, as how to ensure the quality of decentralized service-delivery of both social infrastructure projects and food projects, regarding issues as the functional assignments at the provincial and district level, the flow of resources, the targeting mechanisms and indices, and co-financing modalities. This comprehensive approach creates further synergies between the SAL and the PSRL, contributing to a more effective integration of the decentralization of food programs into the fiscal transfer system. The institutional framework for decentralization, particularly regarding the functional assignment rules, the civil service reform component and the accreditation system will provide the institutionalbasis for decentralization inthe social sectors. The civil service component of the SAL focuses on selected civil service reforms at the subnational level. In aiming at registering subnational civil servants, keeping their number at a fiscally sustainable level, and improving transparency in the management of the civil service, it will also reinforce the education and health components of the PSRL in the goals of teacher and health workers' reform. PSRL objectives, such as a reform of the teachers' career system, including performance monitoring and incentives will be strengthened by a broader reform of subnational civil servants as part of the SAL, including the census of teachers and the promotion of a civil service legal framework introducing greater performance management, transparency, fiscal responsibility and especially hiring limits and new SIAF modules for civil servants at the subnational level. Part of the institutional framework that the SAL supports as well as a contribution to the design of an effective intergovernmental fiscal transfer system i s the accreditation process, a mechanism envisaged by the Decentralization Framework Law to certify subnational governments before they will be able to receive the transfers corresponding to their assigned functions. The support of the SAL to an adequate design of the accreditation system which i s objective, simple, transparent, and convertible in a reporting, monitoring and evaluation system will help the effective decentralization inthe social sectors of the PSRL, startingwith the transfer 108 of food programs and to be followed by decentralization of health and education. The fiscal and management capacity requirements are to be complemented by the sectoral requirements for transfers that are an integral part of the transfer of food programs in the PSRL, particularly regarding targeting and performance monitoring of the food programs. Other institutional components of the SAL are performance management contracts. The design of performance agreements as an instrument to stimulate fiscal responsibility, improve management capacity and to provide minimumsectoral standards conducive to maintaining and enhancing the quality of service-delivery will help assure fiscally sustainable transfers and minimize the risks for a breakdown of service-delivery. As performance agreements are an important instrument for the PSRL, especially regarding the decentralization of food programs to ensure access to and the quality of those services, it will thus benefit from their comprehensive design, encompassing both fiscal and institutional as well as specific objectives for the social sectors. Both the PSRL and the SAL have a participationand transparency component, which are mutually reinforcing. The SAL' focus on participatory budgeting provides a framework to promote participation in the formulation and priorization of subnational budgets, extending also to budget monitoring. It thus supports especially the PSRL social vigilance and transparency mechanisms, for example through the institutionalization of participatory planning linked with the participatory budgeting, the website "Consultu Amiguble" and the use of scorecards. The participatory budgetingwas originally part of the PSRL, but has now been shifted to the SAL as it goes beyond the social programs. The priority given to participatory budgeting and broader participation and transparency issues relevant for both credits i s also reflected in the support given to it by the Technical Assistance Loan (TAL). The TAL was originally designed for the PSRL,but because of its great relevance to the SAL and the interconnectedness between the two loans, will now strengthen capacity for common areas and components for both loans, such as participationand transparency. 109 ;5 0 GI 0 Q -.-% 3 e E .e > e 2 > cj 0 0 v) .I I .I Y m e, vi e, 0 E E Y2 E .e Y m 3 vi Q c vi 3 9 9 8 v) 3 vi vi IE i i -5e, 0 Y v1 8E D m * r 3 a 3 0 0 c 0 B -s a2 * c 2 m 2 r 0 e ANNEX 8: Peru- Key Exposure Indicators Total debt outstandingand 29687 30542 29217 287102735827993 28446 28955 29363 disbursed(TDO) (US$m)a Net disbursements(US$m)a 2146 1334 1563 790 543 711 1093 732 722 Total debt service (TDS) (US$m)a 3553 2275 4006 4025 3239 3299 3365 3964 4087 Debtand debt service indicators(%) TDOKGS~ 304.6 340.6 323.9 285.1 276.0 271.3 263.7 251.9 233.0 TDO/GDP 50.2 53.7 56.6 53.7 50.5 49.2 46.7 45.6 44.1 TDSKGS 36.5 25.4 44.4 40.0 32.7 32.0 31.2 34.5 32.4 ConcessionaVTDO 17.6 12.0 13.2 13.7 13.6 14.3 PUBLIC EXTERNALDEBT Total ExternalDebt 19224.619319.719503.219255.41894420704 21809 22593.6 23319.5 ExternalDebt/ GDP 32.5 34.0 37.8 36.0 35.0 36.4 35.8 35.6 35.0 IBRD exposure indicators (%) IBRDDS/public DS 6.2 10.6 11.2 12.5 14.0 13.9 14.2 13.7 13.7 Preferredcreditor DS/public DS (%)c 21.1 40.5 34.9 46.9 43.0 43.5 39.1 40.6 39.7 IBRDDSKGS 1.9 2.1 2.7 2.8 3.0 2.9 2.9 2.8 2.6 IBRDTDO (US$m)d 1920 2128 2417 2590 2625 2609 2598 2611 2508 Share of IBRDportfolio (%) 1.8 1.9 2.0 2.1 2.2 2.1 2.2 2.2 2.1 IFC (US$m) Loans 39 56 66 99 127 127 Equity and quasi-equitye 26 29 31 58 59 68 MIGA MIGA guarantees (US$m)f 182 214 236 330 271 298 a. Includespublic and publicly guaranteed debt, private nonguaranteed, use of IMFcredits and net short-term capital. b. "XGS" denotesexports of goods and services,includingworkers' remittances. c. Preferredcreditors are defined as IBRD, IDA, the regional multilateraldevelopmentbanks, the IMF, andthe Bankfor InternationalSettlements. d. Includespresent value of guarantees. e. Includesequity and quasi-equitytypes of bothloan and equity instruments. f. MIGA's datais ona fiscal year basis. 113 ANNEX 9: Peruat a Glance Peru at a dance 9/16/03 I tmons oraooos anaservtces -~9 2 3 3 Lower-middle-incomegroup ~ -U1 ^ ^ tJD 4 8 t- STRUCTURE of the E C O N O M Y 1982 1992 2o01 2o02 1 Growth of investment and GDP I (%of GDP) ( O h ) Agricuiture 8.6 7.7 7.7 7.6 2o Industry 35.2 26.8 25.9 27.6 io Manufacturing 30.3 16.1 14.3 t3.8 0 Services 40.1 57.8 59.5 58.0 -io Privaleconsumption 58.4 77.7 72.1 71.7 _m General government consumption 11.0 7.9 11.2 W.9 Imports of goods andservices 19.5 15.5 7.5 17.2 -GDI -GDP 1982-92 1992-02 2o01 2o02 Growth of exports and imports (%) I (average annualgrowth) Agricuiture 1.7 6.2 -0.6 7.0 2 o T Industry -0.1 4.4 0.7 5.2 10 Manufacturing -0.3 3.2 -1.1 4.3 Services -1.5 3.5 0.1 5.6 Private consumption -0.5 3.5 4.4 .I0 Genera! government consumprion _1.6_ -2.1 _ . 4.8 . _ 0.3 Gross domestic investment -1.1 3.3 -7.4 -Exports -Imports Imports of goods and sewices 0.0 5.4 2.7 Note:2002 data are preliminary estimates. 'Thediamonds showfourkeyindicatorsin thecountry(inb0ld)comparedwith its income-groupaverage.Ifdataaremtssing,thediamondwill be incompiete. 114 Peru PRICES and GOVERNMENT FINANCE 1982 1992 2001 2002 D o m e s t i c prices Inflation (%) 1 (%change) Consumerprices 65.0 73.5 2.0 0.2 implicit GDP deflator 652 69.2 1.1 0.o Government finance (%ofGDP,includes current grants) Current revenue t3.5 14.1 142 1 97 98 99 00 01 -5 Current budget balance -0.8 -0.7 -0.4 Overall surpius/deficit -3.9 -2.8 -2.2 -GDPdefiator -o-CPI T R A D E 1982 1992 2001 2002 (US5 millions) Export and import levels (US$ mill.) Totalexports (fob) 3,661 7,007 7,647 T Copper 0,000 756 986 1,187 Fishmeal 427 835 823 8.000 Manufactures 966 2,183 2,260 6,000 Total imports (cif) 4,001 7,273 7,440 Food 480 530 535 4,000 Fueland energy 396 907 978 2.000 I Capital goods 1,063 1,919 1,843 0 Export price index (W95=WO) 85 79 82 96 97 98 99 00 01 02 import price index(W95=WO) 69 98 99 Exports olmports Terms of trade (1995-WO) 96 80 82 B A L A N C E o f PAYMENTS 1982 1992 2001 2002 (US5 millions) Current account balance t o GDP (%) Exports of goods andservices 4,077 4,497 8,5ff 9,192 0 Imports of goods andsewices 4,436 5,4t? 9,618 9,933 1 Resource balance -359 - 9 n -1,101 -741 2 Net income -989 -1,635 -1P4 -1,509 Net current transfers 0 460 1,042 1,043 .3 -4 Current account balance -1,348 -2,090 -1,183 -1,207 -5 Financingitems (net) 1,264 2,658 1,631 2,192 -6 Changes in net reserves 84 -569 -448 -985 7 Memo: Reserves including goid (US5millions) 0 3,365 8,933 9,726 Conversion rate (DEC, localNS5) 6.98E-7 1.2 3.5 3.5 EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US5 millions) :omposition o f 2002 debt (US$ mill.) Total debt outstanding anddisbursed 10,709 20,343 27,358 27,993 iBRD 478 956 2,625 2,609 IDA 0 0 0 0 G: 2.589 A: 2.609 Total debt service 2,036 1,004 2,190 2,755 IBRD 56 194 300 304 IDA 0 0 0 0 Compositionof net resource flows Official grants 53 238 702 Official creditors no 306 744 297 Privatecreditors Iff8 -97 294 1,436 Foreign direct investment 48 -79 1,070 2,391 Portfolio equity 0 0 43 -9 World Bank program Commitments 378 1,150 230 100 \ E Bilateral - Disbursements 85 0 149 146 I IDA -- IBRD D- Other multilateral F. Private Principal repayments 22 94 114 163 > - I M F G Short-term - Net flows 62 -94 35 -ff Interest payments 33 186 142 Net transfers 29 -100 194 -151 -158 Development Economics 9/16/03 m ANNEX 11: Statementof IFC's HeldandDisbursedPortfolio As of 7/31/2003 (InUS Dollars Millions) Held Disbursed FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2001Tecnofil S.A. 5.4 2 0 0 5.4 2 0 0 2001UPC 7 0 0 0 7 0 0 0 1993194199 Yanacocha 20 0 0 35 10 0 0 35 2003TIM Peru 70 0 0 0 7 0 0 0 0 2000Agrokasa 5.4 0 0 0 5.4 0 0 0 1999Alicorp 17.33 0 20 14.29 17.33 0 20 14.29 2002FTSA 7.5 0 1.5 0 7.5 0 1.5 0 2002Gloria 25 0 0 0 0 0 0 0 2002ISA Peru, SA 17.66 0 0 7.7 17.66 0 0 7.7 2001Inka Terra 5 0 0 0 5 0 0 0 1997Interbank-Peru 8 0 0 0 8 0 0 0 2002103 Interseguro 0 0.59 0 0 0 0.59 0 0 2000Laredo 8.57 0 5 0 8.57 0 5 0 1998LatinoLeasing 6.04 6.46 0 0 6.04 6.46 0 0 2002MIBANCO 2.33 0 0 0 2.33 0 0 0 1999Milkito 3.5 0 3.5 0 3.5 0 3.5 0 0/84/91 Minera Regina 0 0 0 0 0 0 0 0 2003Norvial S.A. 18 0 0 0 0 0 0 0 1998Paramonga 13.17 0 0 11.12 13.17 0 0 11.12 2001PeruOEH 6 0 4 0 2 0 4 0 1994PeruPrvtznFund 0 9.65 0 0 0 9.65 0 0 1994PeruPrvtznMgmt 0 0 0 0 0 0 0 0 1993196/00101 Quellaveco 0 0.75 0 0 0 0.69 0 0 1999RANSA 8.13 0 0 0 8.13 0 0 0 Total Portfolio: 254.03 19.45 34 68.11 197.03 19.39 34 68.11 ApprovalsPendingCommitment Loan Equity Quasi Partic 2002InkaTerra Swap 0.25 0 0 0 Total PendingCommitment: 0.25 0 0 0 117