Document of The World Bank FOR OFFICIAL USE ONLY Report No: 51128-PE PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$20 MILLION TO THE REPUBLIC OF PERU FOR A SIERRA IRRIGATION PROJECT June 25, 2010 Sustainable Development Department Bolivia, Chile, Ecuador, Peru, Venezuela Country Management Unit Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective March 15, 2010) Currency Unit = Nuevos Soles (S/.) S/. 2.90 = US$1 US$0.34 = S/.1 FISCAL YEAR January 1 ­ December 31 ABBREVIATIONS AND ACRONYMS ALA Local Water Administration (Administración Local del Agua) ANA National Water Authority (Autoridad Nacional del Agua) ATDR Irrigation Technical Administration (Administración Técnica del Distrito de Riego) CFAA Country Financial Accountability Assessment CPAR Country Procurement Assessment Report CPS Country Partnership Strategy CR Irrigation Commission (Comisión de Regantes) DGAASA MINAG's Directorate General for Environment Affairs (Dirección General de Asuntos Ambientales del Sector Agrario) EA Environmental Assessment EIRR Economic Internal Rate of Return EMF Environmental Management Framework FG Farmers' Group for Component B FM Financial Management GOP Government of Peru GDP Gross Domestic Product ICR Implementation Completion Report IDB Inter-American Development Bank INCAGRO Agricultural Extension and Research Project (Proyecto de Investigación y Extensión Agrícola para la Innovación y Competitividad para el Agro Peruano) INIA Instituto Nacional de Innovación Agraria) IPP Indigenous People Plan IPPF Indigenous People Planning Framework JNUDRP National Federation of Water Users' Organizations (Junta Nacional de los Usuarios de los Distritos de Riego) LG Local Government M&E Monitoring and Evaluation MEF Ministry of Economy and Finance MINAG Ministry of Agriculture ii FOR OFFICIAL USE ONLY NPV Net Present Value O&M Operation and Maintenance PROFODUA Irrigation Water Rights Formalization Program (Programa de Formalización de Derechos de Uso de Agua) PRONAMACHCS National Program for Watershed Management and Soil Conservation (Programa Nacional de Manejo de Cuencas Hidrográficas y Conservación de Suelos) PDO Project Development Objective PMP Pest Management Plan PSC Project Steering Committee PSI Irrigation Subsector Project (Proyecto Subsectorial de Irrigación) QBS Quality Based Selection QCBS Quality and Cost Based Selection RG Regional Government RADA National Water Right Registry (Registro Administrativo de Uso de Agua) ROSC Report on the Observance of Standards and Codes SIL Specific Investment Loan SNIP National System for Public Investment (Sistema Nacional de Inversión Pública) SRP Standard Request for Proposals TA Technical Assistance TSA Treasury Singly Account WUA Water Users' Association (Junta de Usuarios) WUO Water Users' Organization (Organizaciones de Usuarios) Vice President: Pamela Cox Country Director: Carlos Felipe Jaramillo Sector Director Laura Tuck Sector Manager: Karin Kemper Task Team Leader: Marie-Laure Lajaunie This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. PERU Sierra Irrigation Project CONTENTS Page I. STRATEGIC CONTEXT AND RATIONALE ................................................................. 4 A. Country and sector issues....................................................................................................... 4 B. Rationale for Bank involvement ............................................................................................ 5 C. Higher level objectives to which the project contributes ....................................................... 6 II. PROJECT DESCRIPTION ................................................................................................. 6 A. Lending instrument ................................................................................................................ 6 B. Project development objective and key indicators ................................................................. 7 C. Project components ................................................................................................................ 7 D. Lessons learned and reflected in the Project design .............................................................. 8 E. Alternatives considered and reasons for rejection ................................................................ 11 III. IMPLEMENTATION ................................................................................................... 11 A. Partnership arrangements ..................................................................................................... 11 B. Institutional and implementation arrangements ................................................................... 12 C. Monitoring and evaluation (M&E) of outcomes/results ...................................................... 13 D. Sustainability........................................................................................................................ 14 E Critical risks and possible controversial aspects ................................................................... 15 F. Loan conditions and covenants............................................................................................. 18 IV. APPRAISAL SUMMARY ............................................................................................ 19 A. Economic and financial analyses ......................................................................................... 19 B. Technical .............................................................................................................................. 20 C. Fiduciary .............................................................................................................................. 21 D. Social.................................................................................................................................... 22 E. Environment ......................................................................................................................... 23 F. Safeguard policies................................................................................................................. 25 G. Policy Exceptions and Readiness......................................................................................... 25 Annex 1: Country and Sector Background .............................................................................. 26 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ................. 34 iv Annex 3: Results Framework and Monitoring ........................................................................ 38 Annex 4: Detailed Project Description...................................................................................... 41 Annex 5: Project Costs ............................................................................................................... 53 Annex 6: Implementation Arrangements ................................................................................. 54 Annex 7: Financial Management and Disbursement Arrangements ..................................... 57 Annex 8: Procurement Arrangements ...................................................................................... 71 Annex 9: Economic and Financial Analysis ............................................................................. 76 Annex 10: Safeguard Policy Issues ............................................................................................ 89 Annex 11: Project Preparation and Supervision ................................................................... 100 Annex 12: Documents in the Project File ............................................................................... 102 Annex 13: Statement of Loans and Credits ............................................................................ 103 Annex 14: Country at a Glance ............................................................................................... 105 Annex 15: Maps IBRD 37679 ................................................................................................. 106 v PERU SIERRA IRRIGATION PROJECT APPRAISAL DOCUMENT LATIN AMERICA AND CARIBBEAN LCSEN Date: June 25, 2010 Team Leader: Marie-Laure Lajaunie Country Director: Carlos Felipe Jaramillo Sectors: Irrigation and drainage (60%); Sector Manager/Director: Karin Erika Kemper/ General water, sanitation and flood protection Laura Tuck sector (35%); Agricultural extension and research (5%) Themes: Rural services and infrastructure (85%); Water resource management (15%) Project ID: P104760 Environmental category: Partial Assessment Lending Instrument: Specific Investment Loan Joint IFC: Joint Level: Project Financing Data [X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 20.00 Proposed terms: VSL, payable in 18 years, including 17.5 years of grace period, with bullet repayment on June 15, 2028 and a front-end-fee of 0.25% of the loan amount payable from the Borrower's proceeds. Financing Plan (US$m) Source Local Foreign Total Borrower 24.00 0.00 24.00 International Bank for Reconstruction and 13.94 6.06 20.00 Development Local Farmer Organizations 4.33 0.00 4.33 Total: 42.27 6.06 48.33 Borrower: Republic of Peru Responsible Agency: Ministry of Agriculture Through Programa Subsectorial de Irrigación (PSI) Emilio Fernandez 130, Santa Beatriz, Peru Tel: (51-1) 424-4488 Fax: (51-1) 332-2268 jviladegut@psi.gob.pe PSI-IU- Peru IRENA ­ Peru Estimated disbursements (Bank FY/US$m) FY 2011 2012 2013 2014 2015 2016 Annual 1.20 3.80 7.80 13.00 17.80 20.00 Cumulative 1.20 5.00 12.80 25.80 43.60 63.60 Project implementation period: Start January 3, 2011 End: December 31, 2015 Expected effectiveness date: January 3, 2011 Expected closing date: December 31, 2015 Does the project depart from the CAS in content or other significant respects? [ ]Yes [X] No Ref. PAD I.C. Does the project require any exceptions from Bank policies? Ref. PAD IV.G. [ ]Yes [X] No Have these been approved by Bank management? [ ]Yes [X] No Is approval for any policy exception sought from the Board? [ ]Yes [X] No Does the project include any critical risks rated "substantial" or "high"? [X]Yes [ ] No Ref. PAD III.E. Does the project meet the Regional criteria for readiness for implementation? [X]Yes [ ] No Ref. PAD IV.G. Project development objective Ref. PAD II.C., Technical Annex 3 The Project Development Objective (PDO) is to contribute to increasing agricultural production and productivity in targeted areas of the Sierra. Project description [one-sentence summary of each component] Ref. PAD II.D., Technical Annex 4 Component A. Modernization and Rehabilitation of Collective Irrigation Systems (Total cost1 US$16.42 million). Component B. Irrigation Technology Improvement (Total cost US$11.64 million). Component C. Capacity Building and Support to Production and Marketing (Total cost US$10.38million). Sub-component C.1. Capacity Building of Water Users' Organizations (Total cost US$4.92 million). Sub-component C.2. Capacity Building of Agricultural Producers and Business Groups (Total cost US$5.46 million). Component D. Formalization of Water Rights and Extension of the National Water Rights Administrative Registry (Total cost US$ 3.43 million). Component E. Project Implementation Support (Total cost US$ 6.41 million). Which safeguard policies are triggered, if any? Ref. PAD IV.F., Technical Annex 10 Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Pest Management (OP 4.09) Physical Cultural Resources (OP 4.11) Indigenous Peoples (OP 4.10) Safety of Dams (OP/BP 4.37) Significant, non-standard conditions, if any, for: Ref. PAD III.F. Board presentation: None. Loan/credit effectiveness: Adoption of the Operational Manual in a manner satisfactory to the Bank. Condition of Disbursement: For Component D: Execution of the Institutional Cooperation Agreement between MINAG/PSI and ANA. 1 Total cost includes base cost and contingencies, but excludes the front-end-fees. 2 Other Covenants: * The Borrower, through MINAG, shall: (a) operate and maintain the PSI with a structure, functions and responsibilities acceptable to the Bank; and (b) ensure that the PSI has the required professional staff for the implementation of the Project. * The Borrower shall maintain a Project Steering Council to oversee the implementation of the Project and, inter alia, appoint and/or remove the Project coordinator, approve annual operational plans. * The Borrower, through MINAG/PSI shall carry out the Project in accordance with an operational manual satisfactory to the Bank (the Operational Manual). * For purposes of carrying out Component D of the Project, the Borrower, through MINAG/PSI shall enter into an Institutional Cooperation Agreement with ANA. * The Borrower, through MINAG/PSI shall carry out the Project in accordance with the provisions and recommendations of the Environmental Management Framework (EMF), the Indigenous People Planning Framework (IPPF) and Pest Management Plan (PMP) and ensure that the Project activities do not involve any Resettlement. * In connection with the carrying out of each of the pre-investment studies under Components A and B of the Project, the Borrower shall ensure that the terms of reference for said Project activities include a provision mandating the Borrower to incorporate and/or cause to be incorporated the applicable Safeguard Policies into each of said studies. * Upon approval of any given Subproject, the Borrower, through MINAG/PSI, shall enter into an agreement (the Subproject Agreement) with the pertinent Subproject Beneficiary under terms and conditions described in the Operational Manual. * Not later than six months after the Effective Date, the Borrower shall implement a financial information system in a manner satisfactory to the Bank, including, inter alia, the required functionality to allow preparation of financial reports and control and monitoring of Subprojects. * Not later than six months after the Effective Date, or at a later date if the Bank so determines, the Borrower, through MINAG-PSI, shall appoint an independent auditor, with a maximum of a three-year contract duration, to carry out the audits referred to in the Loan Agreement, all under terms of reference and with qualifications and experience satisfactory to the Bank. * The Borrower, through PSI, shall have all the procurement records and documentation for each fiscal year of the Project reviewed, in accordance with appropriate procurement reviewing principles, by independent external reviewers acceptable to the Bank. 3 I. STRATEGIC CONTEXT AND RATIONALE A. Country and sector issues 1. As a result of strong economic policies, Peru has become one of the best- performing economies in Latin America. Between 2001 and 2008, Peru's Gross Domestic Product (GDP) increased on average by more than five percent per year. While the global economic crisis has depressed economic growth in 2009 and weakened the near term economic outlook, Peru is well placed to resume its high growth path once the global economy stabilizes. As a result of past strong economic performance, the national poverty rate dropped by nine percentage points between 2004 and 2007; however, at 39 percent, it remains high for a country of Peru's GDP level and some of the reductions in poverty rates might have been lost as a result of the global economic crisis. Poverty has not declined significantly in the Sierra (Highlands) and Amazon regions, which have the highest poverty rates in the country. The 2002 Household Survey indicates that the incidence of poverty in the rural Sierra is about 75 percent (4.2 million people), with more than 40 percent of the population (2.3 million people) being extremely poor. In the Sierra, most households obtain their incomes from the agriculture sector. Eighty percent of the households depending on agriculture for their livelihood are poor. 2. Deprivation in the Sierra poses a risk to integration and political stability. Poverty reduction in the Sierra is one of the top priorities of the Government of Peru (GOP). In 2006, GOP launched "Sierra Exportadora", a program setting ambitious goals for agricultural production and exports, job creation, income generation and poverty alleviation throughout the Sierra. This ambitious initiative emphasizes the expansion of the agricultural production of small farmers, by helping them identify and exploit commercial opportunities and developing products that can compete in national and international markets. Irrigation schemes, viewed as potential economic growth poles because of their importance for the production of higher value crops for exports and urban markets, are key in this development policy and their modernization in the Sierra region is the purpose of the proposed Project. 3. Today, the Sierra accounts for 400,000 ha of irrigated land, about 30 percent of its cultivated area and a third of the total irrigated area in the country. This area is managed by a total of 34 Water Users' Associations (Juntas de Usuarios ­ WUAs) whose jurisdiction ranges from 1,700 to 47,000 ha of irrigable land per scheme, with an average of about 10,000 ha. Irrigation systems are usually small, supplied mostly from surface water and consist of a network of open canals, generally unlined, with rudimentary water intakes and distribution systems. Irrigation systems generally do not include water regulation (i.e. small reservoirs, dams) which, combined with the seasonality of rainfall, limits agricultural production to a few months per year. Less than 5 percent of irrigated land is equipped with improved on-farm irrigation systems, such as drip irrigation or sprinklers. 4 4. Management of irrigation infrastructure is weak. Following the economic crisis of the late 1980s, the Government transferred the full responsibility of operating and maintaining the irrigation schemes to the water users, progressively organized in new management entities, i.e. water commissions (Comisiones de Regantes-CRs), and themselves grouped in WUAs. These relatively recent water users' organizations co-exist with more traditional ones (Comités de regantes and comunidades campesinas), sometimes creating confusion regarding roles and responsibilities. Water Users Organizations2 (WUOs) in the Sierra have received very limited capacity building and infrastructure investments, as the Government and donors have traditionally focused their support on the coastal area of Peru. In general, WUOs in the Sierra are financially and technically weak, with low water tariffs and collection rates ­ insufficient for adequate operation and maintenance (O&M) ­ and a limited number of professional water managers, water guards and other paid staff. As a result of limited capacities, there is very little, if any, planning or daily management of the water distribution and irrigation services. Poor maintenance contributes to the gradual degradation of the infrastructure and the performance of the water delivery service limiting water quantity, frequency and reliability at the field level. Finally, it is believed that the absence of formalized agricultural water use rights in the Sierra, in a context of increasing water scarcity and conflicts over water use, discourage private investments (by individual farmers or corporations) in irrigation infrastructure and other agricultural capital investments, contributing to the low productivity of the Sierra agriculture. 5. For all these reasons, the problems of low quantity, uniformity, frequency and reliability of water supply to the crops often persist even in irrigated areas, although to a much lower extent than in rain-fed conditions. In many areas of the Sierra, irrigation infrastructure and management need to be improved in order to increase the value of agricultural production and to allow the production of higher value crops3 for internal markets and exports. The proposed Project aims at improving the irrigation performance in selected irrigation schemes of the Sierra, while taking into account local practices about land and water, and the aspirations of the people. B. Rationale for Bank involvement 6. Over the past ten years, the Bank has successfully engaged in Peru's irrigation sector. Through the World Bank supported Irrigation Subsector Projects I and II (Proyecto Subsectorial de Irrigación-PSI, Reports # 13542-PE and 32353-PE), it has developed and implemented a successful approach to improve irrigation performance in coastal areas, including a successful program of agricultural water use rights formalization and registration (Programa de Formalización de Derechos de Uso de Agua - PROFODUA). With its global irrigation experience and deep level of involvement in the sector dialogue 2 WUOs is understood here as the water users' associations (Juntas de Usuarios ­ WUAs), the irrigators' commissions that compose them (Comisiones de Regantes ­ CRs), the irrigators' committees (Comités de regantes) or any eligible water organization acceptable to the Bank. 3 In the Project "higher value crop" means a crop whose production value per ha is, at least, twice the average production value per ha in the Sierra area. It is therefore not restricted to export crops, such as fruits and vegetables, but rather include crops that provide good financial returns to farmers, whether exported or not, whether traditional or recently introduced. 5 in Peru, the Bank can play a unique role, through the Project, in supporting irrigation improvement in the Sierra, particularly in: · Tailoring the successful approach to irrigation improvement that was supported in the coastal area under PSI I and II, to the Sierra environment; · Supporting the extension of the water use rights formalization program to the Sierra; and · Advising PSI on ways to strengthen linkages between farmers, processing and marketing agents. C. Higher level objectives to which the project contributes 7. The Project will contribute to achieving the GOP's objective of improving living conditions of the population in the rural Sierra. In addition, the Project responds directly to two of the three pillars of the 2007-2011 Country Partnership Strategy (CPS - Report #37913-PE, discussed by the Executive Directors on November 9, 2004), namely economic growth (accelerating growth and widening its base, making growth environmentally sustainable) and social development (strengthening human capital). 8. Improving irrigation is essential to promoting social and economic development in rural areas and in the Sierra. The Project will: · Improve farmers' incomes and create opportunities for job creation, thereby contributing to improving socio-economic conditions in the rural Sierra and reducing incentives for rural-urban migration by low income families; · Contribute to more productive and sustainable irrigated agriculture in the Sierra; · Increase the value of agricultural produce from the Sierra, sold to internal markets as well as exported; · Increase agricultural water rights security, thereby encouraging farmers to invest in farming capital, including irrigation improvements and conversion to higher value crops. II. PROJECT DESCRIPTION A. Lending instrument 9. The total Project cost is US$48.28 million4 with a Specific Investment Loan (SIL) of US$20.0 million with the following features: (a) commitment linked, variable spread IBRD loan, payable in 18 years, including 17.5 years of grace period, with bullet 4 Total cost excludes the front-end-fee estimated at US$0.05 million. 6 repayment on June 15, 2028 and (b) Front-end fee of 0.25 per cent of the Loan amount payable from the Borrower's proceeds (not capitalized). B. Project development objective and key indicators 10. The Project Development Objective (PDO) is to contribute to increasing agricultural production and productivity in targeted areas of the Sierra. The achievement of the PDO will be monitored through the following performance indicators: · Percentage of producers' groups supported by the Project that have satisfactorily implemented their business plan. · Number of WUAs that satisfactorily implement the O&M plans of the irrigation systems modernized or rehabilitated by the Project; C. Project components 11. While a limited number of Project activities cover the entire Sierra area i.e. the jurisdiction of 34 WUAs, most activities take place in the territory of 12 WUAs selected for their relatively higher level of performance and their potential for the production and commercialization of higher value crops (detailed selection criteria are described in Annex 4). These 12 WUAs are: Huancabamba, Cajabamba, Rio Mashcón, Rios Chonta - Cajamarquino, Callejon de Huaylas, Mantaro, Tarma, Huancavelica, Ayacucho, Cusco, Valle del Colca and Juliaca (see Map in Annex 15). They cover an area of about 170,000 ha of irrigated land and include about 190,000 water users (about 40 per cent of the irrigated land and irrigators in the Sierra). 12. The proposed Project includes 5 major components: Component A. Modernization and Rehabilitation of Collective Irrigation (Total cost US$16.42 million) 13. This component will finance pre-investment studies and design, execution and supervision of Subprojects to support eligible WUOs to improve their water supply service to farmers, through the modernization or rehabilitation of collective irrigation systems, including, inter alia: (a) water intakes improvement; (b) canal improvement; and (c) construction and/or rehabilitation of small water regulation reservoirs. Component B. Irrigation Technology Improvement (Total cost US$11.64 million) 14. This component will finance pre-investment studies and design, execution and supervision of Subprojects to support eligible farmers groups, and to increase irrigation performance at the farm level through the installation of improved on-farm irrigation systems, including, inter alia: (a) the carrying out of works and provision of equipment at the farm intake (e.g. installation of pipes, pumping units, filters, meters, pressure regulators and individual hydrants, and rehabilitation or construction of small regulation reservoirs,); and (b) carrying out of works and provision of equipment on the irrigation plots (e.g. installation of sprinklers and drip systems, land leveling and gated pipes). 7 Component C. Capacity Building and Support to Production and Marketing (Total Cost US$10.38million) Sub-component C.1. Capacity Building of Water Users' Organizations (Total Cost US$4.92 million) 15. This sub-component will strengthen the capacity of WUOs through, inter alia: (a) the carrying out of a comprehensive capacity building program for Prioritized WUOs, including the carrying out of a participatory diagnosis of WUOs; and (b) the participatory identification of Subprojects for Component A of the Project within the territorial jurisdiction of the Selected WUAs. Sub-component C.2. Capacity Building of Agricultural Producers and Business Groups (Total Cost US$5.46 million) 16. The sub-component will strengthen the capacity of agricultural producers and business groups through: (i) the promotion of Component B of the Project by raising awareness of farmers on the benefits of Subprojects under said Component of the Project; (ii) supporting the establishment of farmers' groups; and (iii) providing technical assistance to farmers' groups and their agricultural productive chains to formulate and implement viable business plans. Component D. Formalization of Water Rights and National Water Rights Administrative Registry (Total Cost US$ 3.43 million) 17. This component will provide technical assistance and equipment to (a) formalize and issue water licenses; (b) expand RADA to cover the selected WUOs; and (c) install water measuring devices. Component E. Project Implementation Support (Total Cost US$ 6.41 million) 18. This component would support the provision of technical assistance, training, and acquisition and utilization of equipment to PSI for: (a) the administration, monitoring, (including the base line study), evaluation and auditing of the Project; and (b) the carrying out of awareness raising campaigns for all Sierra WUAs on the implication of the new water law and on improved water management practices. D. Lessons learned and reflected in the Project design 19. The following lessons learned have been taken into account in Project design: 20. Past experience in Peru (PSI I and II, Plan Meriss)5 and elsewhere has revealed that adopting a demand-driven and participatory approach to irrigation improvement increases the sustainability and effective use of irrigation infrastructure provided that local 5 Irrigation Subsector Supplemental Project, Implementation Completion and Results Report, World Bank report # ICR1092, 2009; Irrigation Subsector Project, Implementation Completion Report, World Bank report # 29838, 2004; Plan Meris, Project Impact Evaluation #54, USAID, 1984. 8 organizations responsible for their management receive sufficient training and support. Accordingly, the Project will: (a) follow a demand-driven, participatory, and gender-sensitive approach to irrigation improvement in which WUOs/farmers' groups will participate in irrigation subproject selection, design, execution and financing; and (b) offer training and support to WUOs and farmers' groups to strengthen their technical and financial capacity of managing irrigation systems, while taking into account local practices of water distribution. 21. While participation of beneficiaries in subprojects (i.e. in the process of selecting, designing, executing and financing) is essential to ensure sustainability, there is a risk of overestimating beneficiaries' capacity to financially and technically contribute, as shown under PSI II. In addition, in an environment with very little culture of cost recovery in irrigation and limited financing capacity, as is the case in the Sierra, government's financial support for a significant portion of the irrigation infrastructure investment is crucial to stimulate demand. (a) Adapting to the Sierra environment the approach introduced on the coast under PSI I&II, the proposed Project will share the costs of off-farm and on-farm irrigation investments with WUOs and farmers' groups. The required financial contribution from beneficiaries' under this Project is much lower than in the coastal area to reflect the higher level of poverty in the Sierra, lower level of cost- recovery and to address the difficulty faced by WUOs and farmers' groups in the three Sierra pilots included in PSI II to meet their financial contributions to Project investments. (b) Under PSI II, feasibility studies (perfiles y expedientes técnicos) for irrigation subprojects (both components A and B) were the responsibility of Project beneficiaries. In general, the quality of these studies turned out to be poor, and required a lengthy and costly review process by PSI staff, which often had to redo subproject designs. Under the proposed Project, considering the much lower capacity of farmers and WUOs in the Sierra, PSI will be responsible for the preparation of the subproject feasibility studies. 22. Under PSI II, only farmers' groups of at least six members could apply for on-farm irrigation improvements (Project component B). This was a Project requirement meant to encourage farmers' organizations to form groups. However, this has tremendously slowed-down the implementation of the component because of the difficulty in finding neighboring farmers interested in equipping their land with improved on-farm irrigation systems, and capable of providing the required co-financing. This situation is expected to be even more difficult in the Sierra, where farmers' ability to pay for on-farm irrigation improvement is much lower. In addition, this condition could exclude medium farmers with good potential for cash crop production and marketing that could provide a strong example to their neighbors. While individual farmers will not be eligible under the proposed Project to benefit from on-farm irrigation improvements - it goes against 9 Government's rules for public investments (Sistema Nacional de Inversión Pública - SNIP) - the Project reduces the minimum size of a farmers' group to two individuals. 23. Under PSI II, the selection of on-farm irrigation subprojects followed a competitive grant approach. The implementation of this competitive grant approach was slow and cumbersome because: (a) it required, within each WUA, launching a competitive process for each type of irrigation technology (drip, sprinklers, improved gravity systems) separately; and (b) it was necessary to obtain a critical mass of subproject proposals before proceeding to the selection process, while demand for this component was limited. Hence, this competitive grant approach was one of the main reasons explaining the slow implementation and non achievement of this component's targets under PSI II. In the proposed Project, this competitive grant approach is eliminated. Instead, subprojects that meet a clear and widely disseminated set of criteria (as detailed in Annex 4) are selected on a first-come, first-served basis. 24. Past experience in the Coastal area and Sierra reveals that projects supporting increases in agricultural production without ensuring a market for such production have very often resulted in a depression of agricultural prices in the local markets. More generally, experience worldwide shows that in the absence of markets, or where markets are extremely volatile and unpredictable or where prices are kept artificially low, irrigation development beyond subsistence levels simply fails. Under PSI II, agricultural producers with a potential and an interest in improved on-farm irrigation technologies had to form small farmers' groups with a collective production and marketing strategy, defined in a business plan elaborated with the help of agro-business consultants. This plan is a requirement of the national system for public investment in irrigation projects, and includes the marketing arrangements for the produce (e.g. with a trader or an agro- processing firm). These business plans have increased the integration of producers in agricultural supply chains and their connection to markets (foreign and domestic) under PSI II. The proposed Project will follow the same approach while strengthening monitoring of the plans' implementation. 25. Past experience in the Sierra of Peru (e.g. Plan Meriss) shows that the impact of some small-scale irrigation projects is less than its potential, mostly because the project design tends to excessively focus on the technical and infrastructure side. Indeed, water is a necessary but not sufficient condition. Irrigation projects should focus more on technical assistance and services, based on an assured source of water for irrigation. The proposed Project follows an integrated approach to irrigation improvement, combining irrigation infrastructure improvements, capacity building of WUOs and farmers' groups in irrigation and crop management, support to agriculture productivity/value chains, and formalization and registration of water rights. 26. Due to the importance of temporary migration of men for work, women are usually responsible for most of the tasks related to agricultural production, while men are usually responsible for irrigation administration. In addition, female producers are constrained by a lower level of education, technical skills and confidence. Empowering rural women through a process of integration is of particular importance for economic and social development in the Sierra. Two gender pilots were undertaken in Cajamarca and Arequipa 10 as part of Project preparation. These pilots aimed to better position women to participate in water management and to improve their involvement in the different stages of the agricultural supply chain. The lessons learned from the gender pilots served to improve the approach that PSI will use for building the technical, management and financial capacities of prioritized WUOs in the Sierra. The capacity building activities under Component C will include awareness building and training with some targeting to youth and women. Social and gender issues will also be identified in rapid participatory diagnostics of WUOs. E. Alternatives considered and reasons for rejection 27. Water Sector Modernization Project. Consideration was given to combining potable water supply and sanitation, water resources management (WRM) and irrigation into one single Project. However, this alternative was rejected because water supply and sanitation and WRM & irrigation are assigned to two different ministries, and it was felt that under these circumstances, the Project would become institutionally too complex to implement. 28. Sierra Irrigation and Water Resources Management Modernization Project. The initial Project Concept included both irrigation improvement in the Sierra and modernization of water resources management nationwide. During Project preparation, at the request of the Government, this option was rejected because these two operations were very distinct, with different PDOs, geographical areas and implementation agencies. Instead, two separate projects have been prepared: the proposed Project on irrigation in the Sierra, and the Water Resources Management Modernization Project. 29. Another alternative considered for the irrigation component was to work intensively in the Sierra but continue strengthening the capacity of the weakest WUOs in the coastal area. This alternative was rejected by the GOP who considered the concentration of resources in the Sierra a priority, as the Coast already benefited from phases I and II of PSI. III. IMPLEMENTATION A. Partnership arrangements 30. The Project will work in cooperation with other rural development programs/organizations in the Sierra, mainly where the intervention areas, target groups and project timing coincide (e.g. Sierra Exportadora, INCAGRO/INIA and Dirección General de Competitividad Agraria of MINAG), while being complementary with the actions of other rural development programs with distinct intervention areas and target groups (e.g. Aliados/AGRORURAL, PRONAMACHCS). 31. Cooperation would mainly concern the implementation of activities under component C2 (support to agricultural production and marketing in areas benefiting from on-farm irrigation improvements) and the identification and preparation of irrigation 11 infrastructure subprojects to be financed under components A and B. More specifically, the following types of cooperation are envisaged: (a) Support to the identification of irrigation subprojects (both collective and on-farm improvements) by efficient communication and information sharing on the demand for irrigation improvements, as formulated in the business plans of farmers' groups, regional production plans, territorial development plans, and river basin plans. This would be particularly important in the case of Sierra Exportadora and INCAGRO/INIA, as those projects do not support irrigation improvements, but complementary activities. (b) Support to the improvements of the supply chain of strategic crops, mainly by INCAGRO/INIA, Sierra Exportadora and the Dirección General de Promoción Agraria. (c) Providing adaptive research results and extension services to farmers benefiting from on-farm irrigation improvements (component B), mainly by INCAGRO/INIA, Sierra Exportadora and the Dirección General de Promoción Agraria. B. Institutional and implementation arrangements 32. The Programa Subsectorial de Irrigaciones (PSI) under the Ministry of Agriculture (MINAG) will be responsible for overall Project implementation and coordination, as well as the direct implementation of components A, B, C, D3 and E. The National Water Authority (Autoridad Nacional del Agua - ANA), under the Ministry of Agriculture, in coordination with its local offices (Administraciones Locales del Agua ­ ALAs) will be responsible for the implementation of subcomponents D1 and D2 (formalization and registration of water rights). PSI is an experienced executive agency for Bank and other development partners' projects. It has already implemented PSI I and II in the coastal area of Peru. ANA is a recent institution that was created in 2008. It has incorporated the former Water Resources Institute (Intendencia de Recursos Hídricos- IRH), that was responsible for implementing PROFODUA under PSI II. ANA is the implementing agency of the World Bank financed Water Resources Management Modernization Project (loan number 7701-PE, Report #47689-PE) approved in July 2009 as well as a similar project implemented by the Inter-American Development Bank (IDB). 33. A Project Steering Committee (PSC) will provide high-level guidance, oversight and control to the Project. The PSC will among other things, oversee Project's implementation and appoint and/or remove the Project coordinator. It will be composed of representatives from the following entities: MEF, MINAG, ANA, the National Water Users Organization Federation (Junta Nacional de los Usuarios de los Distritos de Riego - JNUDRP), Agro-export Association (ADEX), University/Research Centers and Regional Governments. The composition and functions of the PSC are detailed in the Project's Operation Manual. 12 34. WUOs will be directly involved in the implementation of component A. More specifically, they will: (a) participate in collective irrigation subproject identification, selection, design, financing, execution and supervision; and (b) be responsible for collecting water fees and operating and maintaining the collective irrigation systems. 35. Farmers' groups will be directly involved with the implementation of component B. More specifically, they will participate in on-farm irrigation subproject identification, design, financing and will be responsible for infrastructure's operation and maintenance. They will also be responsible for the formulation and implementation of their business plans. 36. Local and Regional Governments will finance up to 40 percent of the Government's contribution to the costs of subprojects construction and supervision, depending on their financial capacity. 37. ALAs will directly be involved in the implementation of component D. Once water rights are issued, ALAs will be responsible for controlling and enforcing compliance of the terms and conditions of water rights and will collect water use fees (retribución económica por el uso del Agua)6. Finally, ALAs will be responsible for approving the annual irrigation water tariff and O&M plan proposed by WUOs and for supervising their implementation. 38. More details on the Project implementation arrangements are provided in Annex 6 and in the Project Operation Manual. C. Monitoring and evaluation (M&E) of outcomes/results 39. PSI will have overall responsibility for Project Monitoring and Evaluation (M&E). ANA and its local ALA offices will be responsible for the M&E of Component D. Within PSI, an M&E specialist will supervise and work closely with the component coordinators and social and environmental specialists at the national level, the latter having their own M&E strategy and working closely with their teams in the regional offices to collect and analyze data. WUOs and farmers' groups will play an active role in the monitoring of Project implementation, in particular in the follow-up of the action plans and capacity building programs formulated by the WUOs and the business plans of the farmers' groups. Baseline studies, a mid-term review and final evaluation will be conducted. 40. The M&E specialist will submit quarterly reports on implementation progress to the Project director. PSI will submit semi-annual reports to its Steering Committee and to the Bank, covering the status of implementation, outputs, outcomes, financial statements, procurement, environmental and social issues and actions taken to ensure satisfactory Project implementation. More details on the M&E arrangements are provided in Annex 3 and in the Project's operation manual. 6 Water Use Fees are set by ANA to recover part of the cost of managing water resources. These are different from the irrigation water tariff proposed by WUOs and approved by ALAs to finance WUOs O&M plans. 13 D. Sustainability 41. Borrower's commitment and ownership to the Project have been expressed by the following actions: (a) MEF, MINAG, PSI and ANA have expressed their commitment to the Project by actively participating in its formulation. MINAG and MEF have financed Project formulation and have requested and approved the Project. (b) GOP's commitment to the Project's integrated and participatory approach to irrigation improvement was demonstrated by the successful implementation of PSI I and II in the coastal area and by the issuance of the 2003 Government's Irrigation Strategy. (c) GOP's commitment to economic development and poverty alleviation in the Sierra was demonstrated with the launch of Sierra Exportadora in 2006. The Project is in line with the national strategy for rural development in the Sierra. 42. Critical factors affecting the Project's sustainability and their integration in Project design. (a) Strong users' ownership of irrigation subprojects. This is essential to guarantee the long-term sustainability and effective use of improved irrigation schemes (both collective and on-farm). In order to ensure strong users' ownership, the Project will follow a demand-responsive, gender-sensitive and participatory approach to irrigation improvement by which water users will identify subprojects and participate in their design, financing and execution. A critical element of this approach is the cash contribution of farmers and WUOs to subprojects. (b) Long-term support is given to WUOs and farmers so that their technical, financial and administrative capacity is sufficient to successfully manage the improved irrigation systems on their own. The Project will provide TA to WUOs and farmers on technical, financial and administrative aspects of irrigation management, including the formulation and implementation of an O&M plan and the establishment of a water tariff that, together with the labor contribution from farmers, should ensure adequate implementation of the O&M plan. (c) Adequate cost recovery from water users to ensure the adequate implementation of the O&M plans. The Project will strengthen the financial capacity of WUOs by: (i) providing assistance/training to WUOs in setting-up an adequate water tariff level; (ii) raising awareness of water users on the role and responsibilities of WUOs and their members (thereby increasing water users' trust in and commitment to their WUOs) and on the importance of paying for irrigation and drainage services; (iii) improving water service delivery and thereby farmers' willingness to pay for irrigation services by strengthening the technical and managerial capacity of WUOs and improving collective infrastructure; (iv) through components B and C2, improving farmers' revenues (and thereby their ability to pay for irrigation services) by facilitating the transition to higher value 14 crops and strengthening the main agricultural supply chains in the irrigation schemes; and (v) setting an eligibility criterion for WUOs to benefit from irrigation infrastructure improvement, namely a minimum level of cost recovery (see Annex 4). (d) Sustainability of water sources. In the irrigation schemes of the Sierra, the sources of water are rivers fed by rainfall and, in some cases, the melting of snow. Some irrigation schemes have small collective reservoirs. Water availability for irrigation varies from year to year and season to season depending on precipitation. In many river basins, irrigation faces rising water shortages due to over-design, infrastructure deterioration, lack of regulation and increasing demand from competing water uses. Over the long run, water availability for irrigation may further decrease due to increasing competing demand and climate change. The Project will strengthen the resilience of irrigation schemes to water scarcity and climate change by reducing irrigation water losses and building and/or improving small reservoirs. In addition, the formalization of water rights and the installation of measurement devices, both financed by the Project, provide the tools to allocate water rights based on long-term water availability and help farmers secure entitlement to water, thereby reducing the risks of shortages in over-exploited rivers. (e) Adequate design and quality construction of irrigation infrastructure. PSI will be responsible for subproject design and supervision of the works. Considering PSI's substantial experience in irrigation rehabilitation and modernization, the quality of design and construction should not be an issue. (f) Access to markets. Market access is key to ensuring that irrigation development goes beyond subsistence farming, thereby justifying the investment and ensuring the sustainability of on-farm irrigation improvements (Component B). Accordingly, the Project will only carry out subprojects under Component B that have a viable business plan. E Critical risks and possible controversial aspects 43. The overall risk rating for the Project is moderate. The Project does not include any controversial aspects that would pose a reputational risk for the Bank or GOP. Risks that may affect the achievement of the PDO and results of the components are summarized below, together with measures identified for minimizing these risks: Risk Risk Mitigation Measure Risk Rating with Mitigation To Project Development Objectives and Component Results Social unrest. Peru is prone to social · GOP has established Partnership fora (Mesas de L conflicts with indigenous people, Diálogo) with Indigenous Populations to address the especially in communities affected by issues affecting communities and made concessions (extractive industries). recommendations to improve the consultation Those conflicts can lead to significant processes and development of Indigenous disruptions for local populations and communities. The human-rights Ombudsman has 15 impact the national political scenes. played an important role informing, monitoring, and Those unrests could delay Project enhancing trust in the mediation process between the implementation in certain provinces of Indigenous communities and the government the Sierra. authorities. Prices of agricultural commodities · The Project supports the diversification of agricultural L drop as a result of increased local supply production for different exports and urban markets or the Free-Trade Agreements. (component B) avoiding over supply. On-farm irrigation subprojects must have a viable business plan (eligibility criteria). The Free Trade Agreement between Peru and the United States should also positively influence exports of some agricultural goods. · By strengthening farmers' organizations on key aspects of price setting (quality, quantity, reliability, negotiations skills), the Project will help farmers get a better price for their produce and cope with potential price decreases of traditional crops. Risk of poor management of irrigation · Increased ownership through a demand-driven and M systems by WUOs and farmers participatory approach. · Intensive training and prolonged support to WUOs and farmers in charge of O&M. Risk related to water resources · The Project will mitigate the risks associated with L availability and climate change. It is water variability through the expected that water availability will construction/rehabilitation of small reservoirs. increase in the short term in the valleys · The Project will improve water use efficiency in depending on glaciers but then decrease irrigation hence mitigating the risk of reduced water sharply by 2030-2050. availability for irrigation. Components A and B. Risk of delayed · PSI and each regional government involved in the S implementation of Components A and B Project will sign an agreement specifying the due to regional governments difficulties responsibilities of each party, including financial in financing their share of subproject responsibilities. cost. · Regional governments financing is not mandatory and is defined based on their financial capacity. Risk of delays in the implementation of · Awareness campaign on the benefits of sub- M Component A because WUOs have component A and the opportunity that the Project difficulty financing their share of offers by supporting such irrigation improvement. subproject investment costs and because · Financing conditions have been tailored to the Sierra the rainy season will reduce the time context. during which civil works can be · Only WUOs that exceed a certain level of cost implemented. recovery are eligible for Project support under this component. · Component C1 will provide prolonged capacity building services to WUOs in need. Risk that demand for Component B is · Awareness campaign on the benefits of component M lower than expected because in order to B and the opportunity that the Project offers by be eligible, farmers need to set-up a supporting such irrigation improvements. formal group and farmers' groups have · Financing conditions and the minimum size of the difficulty financing their share of group (2 members) have been tailored to the Sierra subproject investment costs. circumstances. · Support from Sierra Exportadora and other related projects for the identification of subprojects. 16 Component B. Risk of delays in the · The location of subprojects under Component B will M implementation and underestimation of have relatively good access to markets because one subproject costs because there are not of the eligibility criteria is to have a viable business enough on-farm irrigation equipment plan. suppliers' ready to work in the Sierra -- · Only farmers' groups are eligible for subproject Risk that equipment suppliersare not financing and bidding processes will be done for a willing to provide TA to farmers in the package of nearby subprojects when feasible. O&M of the improved irrigation scheme. · PSI will maintain a list of trusted equipment suppliers. All components. Risk of delays and · PSI will establish new field offices. S difficulty in monitoring the · PSI will work with local partners in the different implementation of business plans and valleys of the Sierra as much as possible. O&M plans because of the Project's · PSI will work primarily within 4-5 prioritized and challenging logistics. The Project eligible WUOs within the selected 12 WUAs involves working in 12, mostly unconnected, valleys of the Sierra and communication is very difficult during the rainy season from November to April. Component C. Risk that the · Specific and adequate budget has been allocated M Government/Project does not give within the Project for training and prolonged support enough priority to WUOs and farmers to WUOs and farmers. training, support (implementation of the · Outcome indicators specific to increased WUOs' business plan and O&M plans) and and farmers' capacity. monitoring, but concentrates on · Within PSI, different departments are responsible for infrastructure improvements. subproject implementation (components A and B) and support to WUOs and farmers' groups (Component C). Procurement. Two agencies will · A Procurement Plan has been prepared setting the S participate in the Project's implementation, particular contracts of civil works, goods and services; PSI and ANA. PSI will have the fiduciary the proposed methods for procurement of such contracts responsibility. and the related Bank review procedures. PSI has previous experience with the use of · Activities and responsibilities for each implementing Bank's Procurement Guidelines. Before agency will be clearly defined in inter-institutional starting Project implementation, the PSI agreements (PSI will have the coordinating and fiduciary must hire a procurement specialist role). following Terms of Reference agreed with · Training in Procurement will be provided to the the Bank. ANA is a newly created entity implementing agencies, PSI and ANA. (created on March 13, 2008) whose organization is being put in place. ANA has · Procurement risk will be reassessed and revised once limited capacity in procurement of there is evidence that mitigating measures such as externally-financed projects (as a newly adequate implementation of (a) the Operation Manual's created entity). toolkit of shopping procedures and contractual forms for subproject implementation, and (b) procurement reviews conducted by independent auditors and/or Bank staff are complied with. Financial Management (see the risk (see Annex 7) S matrix in Annex 7) H = High (greater than 75 per cent probability that the outcome/result will not be achieved) S = Substantial (50 to 75 per cent probability that the outcome/result will not be achieved) M = Moderate (25 to 50 per cent probability that outcome/result will not be achieved) L = Low or negligible (probability of less than 25 per cent that the outcome/result will not be achieved) 17 F. Loan conditions and covenants 44. Condition of effectiveness: Adoption of the Operational Manual in a manner satisfactory to the Bank. 45. Condition of disbursement: For Component D: Execution of the Institutional Cooperation Agreement between MINAG/PS. 46. Covenants Applicable to Project Implementation: (a) The Borrower, through MINAG, shall: (a) operate and maintain the PSI with a structure, functions and responsibilities acceptable to the Bank; and (b) ensure that the PSI has the required professional staff for the implementation of the Project. (b) The Borrower shall maintain a Project Steering Council to oversee the implementation of the Project and, inter alia, appoint and/or remove the Project coordinator, approve annual operational plans. (c) The Borrower, through MINAG/PSI shall carry out the Project in accordance with an operational manual satisfactory to the Bank (the Operational Manual). (d) For purposes of carrying out Component D of the Project, the Borrower, through MINAG/PSI shall enter into an Institutional Cooperation Agreement with ANA. (e) The Borrower, through MINAG/PSI shall carry out the Project in accordance with the provisions and recommendations of the Environmental Management Framework (EMF), the Indigenous People Planning Framework (IPPF) and Pest Management Plan (PMP) and ensure that the Project activities do not involve any Resettlement. (f) In connection with the carrying out of each of the pre-investment studies under Components A and B of the Project, the Borrower shall ensure that the terms of reference for said Project activities include a provision mandating the Borrower to incorporate and/or cause to be incorporated the applicable Safeguard Policies into each of said studies. (g) Upon approval of any given Subproject, the Borrower, through MINAG/PSI, shall enter into an agreement (the Subproject Agreement) with the pertinent Subproject Beneficiary under terms and conditions described in the Operational Manual. (h) Not later than six months after the Effective Date, the Borrower shall implement a financial information system in a manner satisfactory to the Bank, including, inter alia, the required functionality to allow preparation of financial reports and control and monitoring of Subprojects. 18 (i) Not later than six months after the Effective Date, or at a later date if the Bank so determines, the Borrower, through MINAG-PSI, shall appoint an independent auditor, with a maximum of a three-year contract duration, to carry out the audits referred to in the Loan Agreement, all under terms of reference and with qualifications and experience satisfactory to the Bank. (j) The Borrower, through PSI, shall have all the procurement records and documentation for each fiscal year of the Project reviewed, in accordance with appropriate procurement reviewing principles, by independent external reviewers acceptable to the Bank. IV. APPRAISAL SUMMARY A. Economic and financial analyses 47. This Project follows a framework approach, in which actual subprojects are not known in advance, but only after grassroots demand (from WUOs and farmers' groups) has been verified along with other eligibility criteria. Due to its framework approach, many of the specific costs and benefits of the Project will only be known at the time of implementation, when the farmers/ water users interested and eligible have submitted their proposals for irrigation improvements. Hence the results presented below can only be considered preliminary. Economic analysis 48. A cost-benefit analysis was carried out. Its main results include a Project Net Present Value (NPV) of US$16 million and an Economic Internal Rate of Return (EIRR) of 21 percent, way above the opportunity cost of capital estimated at 12 percent. The sensitivity analysis reveals that the EIRR is fairly robust to the risks identified in the Project risk matrix. Annex 9 provides further details on the economic analysis, the methodology followed and main assumptions. 49. During Project implementation, a cost-benefit analysis will be carried out for each subproject as part of the subproject feasibility studies (a requirement from National System for Public Investment - SNIP). Only subprojects with an EIRR higher than 11 percent will be executed. The previous project in the coastal area, PSI II, followed this approach to ensure the economic viability of subprojects. Consultants hired by PSI will be responsible for formulating the feasibility studies including the economic analysis. PSI agricultural economist will be responsible for reviewing their soundness. Project financial analysis 50. Following the same methodology as the economic analysis, but using market prices, the financial analysis for the whole Project leads to Financial Internal Rate of Return (FIRR) of 12 percent and the financial NPV of US$0.5 million. The significant difference between the results of the economic and financial analyses are due to the 19 following factors: (a) the absence of taxes on agricultural produce; (b) the significant taxes on capital costs, incremental O&M expenditures and crop production costs subject to a 19 percent value added taxes; and (c) the low economic value of unskilled labor and energy, estimated at only 41 percent and 66 percent of their financial values respectively. 51. The financial profitability of irrigation improvements. The main financial benefits accruing to farmers are the increase in revenue stemming from agricultural intensification and diversification towards higher value crops. On the other hand, production costs are increased by higher use of inputs (increased use in pesticides and fertilizers, work for land preparation, irrigation and harvesting, and use of more expensive seeds). Increases in net revenues as a result of Project activities, as well as FRRs, taking into account farmers' contribution to irrigation and crop investments, were calculated for different types of subprojects. 52. The calculations carried out suggest that the technical improvements proposed are potentially attractive from a financial point of view. Possible growth of net incomes range from about US$100 per ha and per year without conversion to higher value crops and to more than US$2,100 per ha and per year, with changes to higher value crops (compared to an average farm income of US$585/ha/year in irrigated areas). 53. The results of the models also suggest that part of the direct investment costs could be absorbed by the beneficiaries, while still maintaining attractive profits. It is considered however, that farmer contributions to investment costs should not be pushed higher than what is proposed in the Project, as farmers have to make their financial contribution upfront before being able to enjoy the returns mentioned above. Providing cash contributions is particularly difficult considering the usually very low level of farms revenues in the Sierra and limited access to credit. In addition, conversion to higher value crops requires substantial additional production costs (e.g. seeds, fertilizers) that should also be paid up front. B. Technical 54. The design of the irrigation Project is in line with international good practices in the sector. The approach followed by each component and its rationale are explained below: Selection of the Project area 55. While a limited number of Project activities cover the entire Sierra area (i.e. the jurisdiction of 34 WUAs), most activities will take place in the territory of 12 WUAs. These 12 WUAs were selected for their potential for the production and marketing of higher value agricultural commodities for internal urban markets and exports (detailed on the selection criteria are provided in Annex 4). They cover an area of about 170,000 ha and count about 190,000 irrigation water users (about 40 percent of the irrigated land and irrigators in the Sierra). Overall Project approach 20 56. The Project follows an integrated approach to irrigation improvement. This integrated approach aims at increasing the value of agricultural production in the territory of the selected WUAs by combining: o off-farm and on-farm irrigation infrastructure improvements to increase water availability and improve timing of water delivery, which are key to increasing yields and quality as well as allowing conversion to the production of higher value crops for exports and urban markets; o capacity building of WUOs and farmers to improve irrigation scheme management and farmers' irrigation and agricultural practices; thereby improving the overall performance and sustainability of irrigation and agricultural; o support to farmers' organizations in their cropping and marketing strategies to optimize the revenue/price they can get from their produce. o the formalization of agriculture water rights, securing agricultural water rights in an increasing water scarcity environment, and thereby encouraging farmers' investments, such as irrigation improvements and the conversion to the production of higher value crops. 57. The technical solution for the off-farm irrigation rehabilitation and modernization (component A) aims at improving water availability and reliability at the farm level. It includes lining of canals, the construction or improvement of small reservoirs and modernization of hydraulic structures. On-farm irrigation improvement would involve switching from traditional surface furrow irrigation to multi-gate surface irrigation or pressurized irrigation with sprinklers and drip systems, and the provision of simple guidelines to the producers on irrigation scheduling. Modern on-farm irrigation technologies are key to the production of higher value crops, as it ensures the amount and frequency of irrigation required by those crops, especially in a context of limited water availability. 58. Security of water rights is becoming an increasingly important issue for farmers in a context of competing water demands and increasing water scarcity. The Project, through Component D, will support the formalization of agricultural water rights based on long- term availability. This should encourage farmers' investments in particular in improved irrigation technologies and in switching to the production of higher value crops, but also help ensure that water resources are not over-exploited. C. Fiduciary Financial Management 59. The Project's inherent and control risks are rated as Substantial (S) for the following reasons: (a) while PSI is an existing entity with experience in the implementation of Bank-financed projects, its financial management performance under the previous project (PSI II - BIRF-7308-PE) was rated moderately satisfactory because of weaknesses in the internal control system and the lack of adequate information for monitoring purposes; and (b) Project design is complex because it calls for the interaction 21 and coordination among different participating agencies (PSI, ANA, Regional Governments (RGs), WUOs and farmers' groups. It is more complex than under the former Project PSI II, because the Sierra is a new area of intervention for PSI, there are multiple sources of financing, and there has been some changes in the flow of funds arrangements. 60. On the basis of the review performed and progress achieved so far, the financial management team concludes that the proposed arrangements ­ as designed - are acceptable to the Bank, subject to the effective and successful implementation of the remaining actions. Although PSI has worked to overcome the weaknesses mentioned above, FM arrangements within PSI still need to be strengthened in order to properly address identified risks and at the same time, allow smooth Project implementation. Required actions have been discussed and agreed with PSI, and progress has been made. However, there are still some issues on which the entity is working on: (a) adjustments and full implementation of the financial information system, including the required functionalities to allow preparation of financial reports, SOEs and recording, control and monitoring of subproject; (b) Inter-institutional Agreement between ANA and PSI reflecting funds flow arrangements in the framework of the new Budget Law; and (c) the appointment of independent auditors, not later than six months after Project effectiveness. Procurement 61. The Project will have two implementing agencies PSI and the National Water Authority ­ ANA. PSI will be responsible for the fiduciary aspects of the Project as a whole, as well as technical implementation of activities under its purview. An assessment of the implementation agencies' capacity to implement procurement actions for the Project was completed at appraisal. The Capacity Assessment Report is part of the Project files. The assessment looked into PSI and ANA: (a) organizational structure; (b) facilities and support capacity; (c) qualifications and experience of the staff that will work in procurement; (d) record-keeping and filing systems; (e) procurement planning and monitoring/control systems used; and (f) capacity to meet the Bank's procurement contract reporting requirements. It also reviewed the procurement arrangements proposed in the Procurement Plan. The procurement team has assessed the procurement risk as Substantial, due to the pending identification of the key fiduciary team in PSI and ANA. D. Social 62. Social impacts. The Project will have substantial social benefits. No adverse social impacts are anticipated. The social assessments undertaken in Mantaro, Colca, Mashcón and Chonta irrigation districts indicate that the Project will improve the living conditions in the households. Specific benefits include: (a) slowing down the strong trend in rural to urban migration fueled by the persistent poverty in rural areas; (b) improving farmers' incomes; (c) job creation; (d) possibly decreasing the hardship associated with traditional, rudimentary irrigation techniques (such as night irrigation); and (e) raising awareness on the safe use of pesticides, therefore decreasing risks on human health. The Project will be 22 inclusive of poor campesinos in agriculture production, of both men and women from indigenous and non indigenous background. 63. Target beneficiaries and Participation. The Project's target beneficiaries are irrigating farmers with good access to markets and capacity for the production of higher value crops. Most of them will not be very poor, will not be indigenous people and will not belong to a communidad campesina. The Project strategy is based on a partnership between stakeholders including WUOs, farmers' groups, traders and agro-processing firms, partner organizations (NGOs, etc.), MINAG, local and regional governments. Subproject participation will be at three levels: (a) at the regional and local levels for subproject financing; (b) at the WUOs and farmers' group level, for subproject financing design, construction, supervision and O&M of the irrigation systems; and (c) at the farmers' group level for the production, processing and marketing of agricultural production. 64. Indigenous Peoples. The irrigated areas targeted by the Project include farmers that are mestizos and indigenous peoples. This policy was triggered because some of the Project activities will have a direct impact on indigenous people whose concentration is high in the Sierra. The main indigenous Peoples groups living in the Sierra are Quechua and Aymara. Since individual subprojects will only be identified during Project implementation, and because the Bank's screening process indicates that Indigenous People are likely to be present in the Project area, but their presence cannot be determined until the subprojects are identified, the Borrower has prepared an Indigenous Peoples Planning Framework (IPPF). The IPPF provides for the screening and review of subprojects in a manner consistent with Bank safeguard policies. The IPPF will ensure that: (a) indigenous people affected by the Project receive culturally appropriate social and economic benefits; and (b) when and if potential adverse effects on indigenous peoples are identified, those adverse effects are avoided, minimized, mitigated, or compensated. Further details are included in Annex 10. 65. Gender. The role of women in irrigation in the Sierra is important due to the temporal migration of men to the cities in order to generate a sufficient income for meeting the needs of the family. The Project will pay special attention to cater to the needs of female farmers in the Sierra, making sure that they benefit from the capacity building activities and encouraging the fair representation of women within WUOs. E. Environment 66. The Project is expected to produce neutral environmental impacts. Depending on the type of subprojects implemented under components A and B, it would generate positive, neutral or small negative impacts, the latter in terms of magnitude and significance, mostly temporary. No large scale, significant and/or irreversible impacts are foreseen. The Project is expected to have positive environmental impacts through support to: (a) better irrigation management, hence potentially increasing overall water availability for irrigation and decreasing conflicts between water users; (b) more efficient drainage of irrigation schemes, thus preventing eventual water logging and soil salinity; (c) more adequate use of fertilizers, hence reducing both human and ecosystem health risks, 23 through technical assistance and promotion of an Integrated Pest Management strategy where there is currently use of highly and moderately hazardous pesticides (WHO Categories I and Category II); and (d) improved and more transparent management of scarce water resources, through the formalization of water rights and their registration. 67. Potential adverse impacts would be mostly localized and temporary in the areas where irrigation schemes will be rehabilitated and/or modernized, the latter including the possibility of new, small infrastructure works (see Table 4.2 in Annex 4 for details on the types of subprojects) They could possibly include (for details see Annex 10): (a) soil erosion; (b) partial destruction of landscape including deforestation of small spots of riparian vegetation; (c) surface and ground water pollution, from sediments, pesticide residues and fertilizers; (d) disrupting hydrological dynamics; (e) change in the environmental value of lagoons not considered as critical habitat; (f) damage to historic cultural heritage areas; and (g) noise, toxic waste, dust and air pollution from vehicular and construction activities. 68. An Environmental Assessment and an Environmental Management Framework (EMF) has been prepared. The EMF establishes the process and institutional requirements for environmental management, particularly subprojects screening process as well as environmental monitoring mechanism. It ensures that subprojects are subjected to an adequate EA process, that they do not create any serious adverse impacts on the local environment, and that appropriate mitigation measures are included in designs and cumulative impacts are duly taken into consideration. Subprojects for environmental screening, evaluation, approval, and monitoring procedures are incorporated into the Project design (i.e. subprojects cycle). These procedures, detailed in the EMF report, are included in the Project's Operation Manual. Depending on the nature and magnitude of their potential negative environmental impacts, subproject proposals will be classified into a specific category of impact, in order to determine related requirements to reduce or eliminate potential negative environmental impacts. Given that the 12 WUAs where the subprojects will be carried out are known, the EA has identified the locations and types of natural habitats in these areas. The Operation Manual includes the Project's negative list of locations considered as critical natural habitats, to exclude those sites from Project financing. Although environmental risks are relatively small in magnitude for the components financed under the Project, environmental monitoring will be part of construction supervision activities to ensure the application of the required mitigation measures. 69. The Project will build on the existing EA capacity established within PSI II, which will be strengthened to support subprojects EA review in the Sierra. The EMF includes provisions for strengthening EA capacity within PSI and foresees mechanisms to monitor implementation and measure impacts. The Bank will receive regular reports from PSI on progress achieved regarding the implementation of the environmental management framework. 24 F. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [X] [] Natural Habitats (OP/BP 4.04) [X] [] Pest Management (OP 4.09) [X] [] Physical Cultural Resources (OP/BP 4.11) [X] [] Involuntary Resettlement (OP/BP 4.12) [] [X] Indigenous Peoples (OP/BP 4.10) [X] [] Forests (OP/BP 4.36) [] [X] Safety of Dams (OP/BP 4.37) [X] [] Projects in Disputed Areas (OP/BP/GP 7.60)* [] [X] Projects on International Waterways (OP/BP 7.50) [] [X] 70. During Project preparation, environmental and social screening was conducted as per the Bank's Operational Policy 4.01 and the Project has been classified as "Category B" regarding environment. The safeguard policies on EA, Natural Habitats, Pest Management, Physical Cultural Resources, Indigenous People, and Safety of Dams will apply. Since the individual subprojects will only be identified during Project implementation, a framework approach will be followed for managing environmental and social impacts. The EA (including EMF and PMP) and the IPPF and were disclosed in- country (http://www.psi.gob.pe/inicioPSI.html) and at the World Bank's Info Shop and Public Information Center, prior to appraisal7. G. Policy Exceptions and Readiness 71. No policy exceptions are required. 72. Project readiness. (a) An operation manual satisfactory to the Bank has been prepared; (b) The Institutional Cooperation Agreement between PSI and ANA has been drafted and the Bank has provided comments to this draft. (c) FM improvement action plan is under implementation; (d) Assessment of procurement systems and capacity completed; procurement plan for at least the first 18 months of Project implementation prepared and approved by the Bank. * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas 7 The IPPF was disclosed "in-country" on 3/5/2008 and submitted to Infoshop on 5/29/2008. The EMP was disclosed "in-country" on 4/7/2008 and submitted to Infoshop on 5/29/2008. The PMP was disclosed "in-country" on 3/5/2008 and submitted to Infoshop on 5/29/2008. 25 Annex 1: Country and Sector Background Peru: Sierra Irrigation Project Poverty in the Sierra is much higher than the national average, is mainly rural, and poses risks to political stability and integration. 1. Between 2001 and 2008, Peru enjoyed strong economic growth and sound macroeconomic policy, with GDP increasing on average by more than 5 percent per year. However, over the last few decades poverty has not been significantly reduced in the Sierra and Amazon regions, which have the highest incidence of poverty in the country. Poverty levels are also significantly higher in rural areas. The 2002 Household Survey indicates that the incidence of poverty in the rural Sierra is about 75 percent (4.2 million), nearly 25 points above the national average, with extreme poverty reaching more than 40 percent (2.3 million) of the population. In the Sierra, most households obtain the majority of their incomes from the agriculture sector. Eighty percent of the households depending on agriculture for their livelihood are poor. 2. Farmers' productive strategy in the Sierra responds to the "safety first" principle and the need to employ their labor as much as possible throughout the year, making full use of opportunities that markets and a diversified environment can provide. Semi-subsistence farming on minifundia 8 (landholding typically smaller than one ha) is the most common production pattern; with low yields, low cropping intensity and recourse to off-farm employment to supplement incomes. Seventy-five percent of farmers own their land. Farmers practice diversified agriculture. Land is generally fragmented into several plots (three on average) at different altitudes within different agro-ecological zones. They often combine crop farming with cattle rearing. They grow different crops, frequently using different seeds of the same crop. They produce both for subsistence purposes and the local market. They complement agricultural production with temporary migration. 3. Despite significant contributions to agriculture production, women traditionally are not involved in the decision-making of their most important resource: water for irrigation. Discrimination against marginalized women and youth along with limited state presence in large portions of the Sierra is a long-standing problem in the country. Empowering poor rural women to participate in decision making within WUOs' boards, along with promoting economic and social development through a process of capacity building activities, is of particular importance to poverty reduction. 4. Deprivation in the Sierra poses a risk to political stability and integration. Poverty reduction in the Sierra is one of the top priorities of the Government of Peru. 8 In the Sierra, 65 percent of farmers own less than one ha of agricultural land and account for about 16 percent of the total cultivated land. Relatively "large" farmers (more than ten ha), represents less than six percent of the farmers and own more than 50 percent of the agricultural land. 26 Poverty reduction in the Sierra is a Government priority and must rely on increased agricultural growth, especially in produce for exports and urban markets 5. Agriculture in the Sierra faces many challenges, but also presents some comparative advantages that should be exploited. Compared to the Coast, productive options in the Sierra are often limited and economic risks high because of its relatively harsher climate and topography, important soil erosion, very small and fragmented landholdings, bad communications and physical access (i.e. limited access to markets and information - bad road access resulting in high transport costs, often not covered by the low market prices for traditional crops in the nearby markets, low telecommunication access, lack of market information), scarce and degraded land and water resources, weak local institutions and low social capital (i.e. low level of education and weak farmers' organization) and insufficient technology and capital inputs (i.e. credit, extension services). 6. On the other hand, farming and irrigation in the Sierra also have comparative advantages for the production of crops requiring a period of cold; have better phytosanitary conditions than in the coast, a strong tradition of community work, and the possibility of drip or sprinkler irrigation with natural pressure (reducing irrigation investment and O&M costs). There are some encouraging examples showing that these comparative advantages can be exploited while overcoming the above mentioned constraints. The increasing, but still limited (25,000 ha), production of higher-value crops for internal markets and exports are an example (see table 1.1 below). 27 Table 1.1: High value crops under irrigation in the Sierra Area with high value No. WUA Irrigation district High Value crops crops (ha) 1 Abancay Abancay 2,200 Fruits 2 Alto Chicama Chicama 7,021 Grapes, Avocado 3 Alto Jequetepeque Jequetepeque 1,197 Avocado, Mango 4 Apurimac Apurimac 170 Onion, Tomato, Garlic 5 Ayacucho Ayacucho 450 Garlic, Oregano, Onion, Tomato 6 Cajabamba Cajabamba 600 Avocado Artichoke, Mango, Flowers, 7 Callejón de Huaylas Huaraz 2,800 Avocado 8 Candarave Locumba-Sama 150 Oregano 9 Colca ­ Chivay Colca-Sihuas-Chivay 365 Fruits, Oregano 10 Huancane Huancané 27 Onion 11 Huancavelica Huancavelica 120 Garlic 12 La Convención La Convención 510 Mango, Citrus 13 Mantaro Mantaro 5,186 Artichoke, Fruits, Maca 14 Omate Tambo - Alto Tambo 1,650 Vid, Avocado, Lime, Chirimoya 15 Pasco Pasco 100 Maca 16 Pausa Ocoña ­ Pausa 25 Oregano, Avocado 17 Puquina- La Capilla Tambo - Alto Tambo 157 Aromatic herbs 18 Tarata Locumba-Sama 135 Garlic 19 Tarma Tarma 350 Flowers, Artichoke, Oregano 20 Utcubamba Utcubamba 1,018 Citrus & Fruits Total 24,231 7. The Government's strategy and the proposed Project are designed to build on these successful experiences. They propose to further develop the Sierra's agricultural commodities production for internal urban markets and exports, taking advantage of the export industry already developed in the coastal area and the possibility of producing "off-season" for northern markets. 8. The Government's poverty reduction and rural development strategy for the Sierra relies on increased agricultural growth in produces for internal markets and export. Government's strategy for rural development in the Sierra is to promote rural economic growth, particularly in produces for internal urban markets and exports, so as to increase rural jobs, incomes and reduce poverty in a sustainable way. In order to do that, the Government proposes to harness the pull effect of national and urban growths as well as export markets. In this context, the development of market links between national urban and export markets and agriculture/livestock areas is crucial. Hence, it proposes to use productive and marketing alliances9 between producers, processing and export firms and government as one instrument to strengthen that linkage. This could stimulate agro-processing of more Sierra products (potatoes, barley, and milk) instead of imported ones and promote exports of Sierra products (e.g. large grain white maize, artichokes, quinoa, and alpaca wool), handicrafts and niche products. 9 Productive and marketing alliances are agreements between producers, processors/wholesalers/exporters, government and rural service providers that identify market outlets for specific products. They organize all the steps of the production and marketing chain. 28 9. In 2006, the GOP launched "Sierra Exportadora", a program setting ambitious goals for agricultural production and exports, job creation, income generation and poverty alleviation throughout the Sierra. This ambitious initiative emphasizes the expansion of the production of small farmers, by helping them identify and exploit commercial opportunities and developing products that can compete in national and international markets. Because of its importance for the production of higher value crops for internal urban markets and exports, the irrigation areas, viewed as potential economic growth poles, are key in this development policy and their modernization, in terms of both infrastructure and management, is the purpose of the proposed Project. Irrigation improvement is key to rural development in the Sierra because the production of higher value crops requires frequent and reliable irrigation 10. Irrigation is necessary to the production of higher value crops in the Sierra. The majority of the rainfall occurs between November and May. The rest of the year, only crops with high resistance to water scarcity are technically viable. Those crops are typically of low economic value and yields. Moreover, the rainy season itself is characterized by irregular rainfall: it is not rare that the interval between two consecutive rainfalls exceeds a month. In this condition the production of higher value crops is highly risky and, in practice, only lower-value crops, with low yields and a short production cycle are produced. 11. Within the important range of crops that are not possible without irrigation, the Sierra Exportadora Program is supporting the following, all of them of higher value: processed and fresher artichokes, paprika, chinese bean (kolantao), green pepper, yellow potato or variety serranita, flowers (carnation, rose, mum); quinoa; fresh and processed garlic; kiwicha; tara (powder or seeds);grain oat; cochineal and carmine; maca in powder; purple maize; ocra; green and dry broad been; oregano and lentils; elder berry, lúcuma, custard apple and passion fruit. 12. However, in many areas of the Sierra, with the current state of irrigation infrastructure and management, reliable and frequent irrigation is not possible and most farmers still cultivate lower value crops, tolerant to water scarcity. Performance of irrigation in the Sierra 13. Almost 20 years after the issuance of the law on the organization of water users (Decreto Supremo 037-89-AG), the transfer of irrigation management from the government to WUOs remains a difficult process: (a) water supply of the irrigation system is put under pressure by competing water demands within and outside the scheme, complicating water allocation and distribution; (b) irrigation infrastructure has been progressively deteriorating; and (c) WUOs struggle to become financially autonomous mainly because producers cultivate low-value crops and face several production and marketing difficulties. Furthermore, many uncertainties persist about the respective roles and responsibilities of the different WUOs (Junta, Comisiones and Comités), and the Government, respectively. 14. The raison d'etre of the WUAs in the Sierra is much less obvious than of the ones along the coast. In the coastal areas of Peru, the service provided by the WUAs is clear: they are responsible for the O&M of a large-scale irrigation scheme on which all water users organized in irrigation commissions and committees depend. In the Sierra, however, WUAs are often composed of commissions and committees that are not linked together through a common irrigation scheme or infrastructure network. Within a WUA, commissions and committees often 29 depend on different small irrigation schemes, located in different sub-basins and geographically dispersed. The commissions and committees often have their own personnel for the O&M of their system, and their own tariff system, and often have a clearer role than the WUA. Hence, in order to improve the technical and financial management of WUAs in the sierra, the Project will pay particular attention to enhancing the capacity of the commissions and committees, in a bottom-up approach, and at the same time building the credibility and vision of the WUAs, and trust between WUAs and commissions/committees. 15. Farmers alone, or with the help of various Government or donors funded projects, have developed irrigation systems designed to take advantage of the rainy years. Today, the Sierra accounts for about 400,000 ha of irrigated land, about 30 percent of its cultivated area and a third of the total irrigated area in the country. This area is managed by a total of 34 WUAs whose jurisdiction ranges from 1,700 to 47,000 ha of irrigable land, with an average of 10,000 ha. Irrigation systems are usually small, supplied mostly from surface water and consist of a network of open canals, generally unlined, with rudimentary water intakes and distribution systems. Irrigation systems generally do not include regulation (i.e. small reservoirs, dams) which, combined to the seasonality of rainfall, limits agricultural production to a few months per year. Less than five percent of irrigated land is equipped with improved on-farm irrigation systems, such as drip and sprinklers. 16. Irrigation schemes are often over-designed, rudimentary and deteriorated, limiting water supply quantity, frequency and reliability at the field level. Water availability is generally insufficient to irrigate the whole equipped area in a normal year. Moreover, these systems have in general very low water efficiency, mainly due to the wide use of basic irrigation technology (i.e. unlined canals, rudimentary water intakes and distribution systems and unimproved surface irrigation in the fields) and deteriorating infrastructure due to poor O&M (see below), reducing water availability at the field level even further. In addition, these systems generally do not include water regulation (i.e. small reservoirs, dams), limiting further water supply frequency and reliability. Management of irrigation infrastructure is weak. 17. Many ambiguities still exist about the respective responsibilities of the various types of WUOs and the Government (Administraciones Locales de Agua - ALAs) in the management and regulation of the irrigation schemes Following the economic crisis of the late 1980s and the government's inability to further finance the operation and maintenance (O&M) of the irrigation systems through its former Local Irrigation Office10 (Administraciones Técnicas de los Distritos de Riego - ATDR), water users formally organized in water commissions (Comisiones de Regantes - CR) and their federations (water users associations or Junta de Usuarios - WUAs), were given the full responsibility for operating and maintaining the irrigation schemes, except for the head structures. These legally established groups (WUAs and CRs) were frequently established "on top" of existing, informal and more traditional water users organizations, such as the Irrigation Committees (Comité de regantes), sometimes causing confusion and duplication of functions. Head structures of the irrigation systems (such as dams and multiuse canals) are mostly managed by "Proyectos Especiales" that 10 ATDR was transferred to the National Water Authority in 2009 and are now called ALAs. 30 are public organizations established for the construction and O&M of large hydraulic infrastructure that had been, for the most part, transferred to regional governments. The ATDRs were renamed Local Water Administrations (Administraciones Locales de Agua ­ ALAs) and transferred from the regional governments to the National Water Authority (Autoridad Nacional del Agua - ANA) in 2009. They are responsible for overseeing WUAs management, in particular annual budget and irrigation tariff approval and supervision. Those are generally weak institutions with little means to carry out their functions. 18. WUAs struggle to achieve a financial and technical autonomy. WUAs in the Sierra are financially weak, with low water tariffs and collection rates. componente ingresos Junta de Usuarios Sierra There is often no professional water manager or water guards, a very limited number of paid staff (for example, in the Mantaro Irrigation District: there are only two paid staff: one clerk for cost recovery and a technician for an irrigated area of 25,100 ha and 38,574 water users). As a result, there is very little, if any, planning or daily management of the water distribution. The absence of clear water distribution rules at the collective level often benefits the farmers located upstream to the detriment of those located at the tail end of the canal: there is very little equity in water distribution. Poor maintenance contributes to the gradual degradation of the infrastructure and its performance. 19. Finally, it is believed that the absence of formalized agriculture water rights in the Sierra, in a context of increasing water scarcity and conflicts over water use, discourage private investments (individual farmers or corporations) in irrigation infrastructure and other agricultural capital investments, contributing to the low productivity of the Sierra agriculture. 20. For all these reasons, the problems of low quantity, uniformity, frequency and reliability of water supply to the crops often persist in irrigated areas, although to a much lower extent than in rain-fed conditions. In many areas of the Sierra, irrigation infrastructure and management need to be improved in order to increase the value of the agricultural production and to create an enabling environment for the production of higher-value crops for internal urban markets and exports. Government's and Project approach to increasing irrigation performance in the Sierra The Proposed Project ­how it addresses the issues mentioned above. Sierra The Government, and the proposed Project, build on those experiences to further develop the production of agricultural commodities in the Sierra for urban 31 and export markets. GoP's objective through its Sierra Exportadora Program (launched in 2006) is to link the farmers of the Sierra with urban and export markets, and benefit from the export industry developed in the coastal area. Sierra Exportadora supports the production and marketing of specific niche products (e.g. avocado, processed potato chips, canola, peach, etc.) as well as local development in regions with a strong potential for agricultural export (e.g. Majes, Rio Cachi, Valle de Condebamba, Lagunillas etc.). Improving the performance of irrigation in the Sierra requires: (a) Rehabilitating and modernizing irrigation infrastructure to increase the quantity, frequency, uniformity and reliability of water supply to meet the requirements of higher value crops for internal markets and exports. This requires infrastructure investments in the collective system including modernization of water intakes, canal lining and the construction/rehabilitation of small regulating reservoirs. At the farm level, this would involve switching from traditional surface furrow irrigation to modern on-farm irrigation techniques, such as surface irrigation with multigate systems and pressurized sprinkler or drip irrigation. (b) Capacity building of WUOs. Infrastructure rehabilitation and modernization need to be complemented with improving irrigation schemes management to ensure effective and sustainable use of the irrigation system. WUOs in particular, need strengthening in the operation (especially planning and distribution of the water supply) and maintenance requirements of the systems. Improving their financial performance through increased volumetric metering, improvement in water tariff structure and collection rates is also key. Improving the financial performance of WUOs is very much linked to increasing farm incomes (farmers' capacity to pay), as well as the quality of service (farmers' willingness to pay). (c) Technical and management support to farmers. Awareness of farmers needs to be raised on the advantages of improved on-farm irrigation techniques. Farmers need to be trained on irrigation practices and higher value crop production. For many small farmers, the transition to higher value commodities may be complicated, as (d) Supply chain approach. The agro-supply chains are important partners in improving the performance of the irrigation systems: In several areas in the sierra, agro-processing firms (e.g. dairy firms, processing firms of artichoke) have established themselves around the irrigation schemes, as (i) the availability of irrigation water increases the reliability of the supply of raw products by the producers; and (ii) the concentration of producers in the area facilitates the organization of the transport of products from the farm to the firm. The performance of the irrigation scheme in terms of matching irrigation supply and demand, but also the water fee collection, is greatly influenced by the functioning of these agro-processing firms. The latter are 32 likely to have a good overview of the production basin, and express clear objectives and targets. With a view of creating dynamic partnerships to improve the performance of the irrigation scheme, it is essential to bring together agricultural producers, agro-processing firms and supporting institutions operating in the area around strategic issues related to the productivity, the regularity of deliveries, and the quality of the raw product. (e) Importance of land and water rights for irrigation performance: Land and water security provided by formalized water and land rights are likely to encourage farmers to invest in their farming system, for example in improved on-farm irrigation technologies or the conversion to higher value crops. ANA, under MINAG, is responsible for issuing of water rights to irrigation units and Indigenous Communities (comunidades campesinas). The proposed Project will extend to the Sierra, the formalization of agriculture water rights through the Programa de formalización de derechos de Uso de Agua (PROFODUA) and their registration in the National Water Use Registry (RADA). The Proposed Project ­ how it is aligned with Government's strategies 22. The proposed Project would support the Government's Strategy for rural development in the Sierra by promoting investments in irrigation modernization and building irrigators' capacity for the production of higher-value crops for exports and internal markets. It will focus on areas with potential for growth (the irrigation perimeters as an economic corridor), building human capital and local institutions through implementation following participatory processes and training. 23. It is also in line with the 2003 Government's Irrigation Strategy and directly supports three of its sub-objectives, namely: (a) increase water use efficiency through the rehabilitation and modernization of irrigation infrastructure and improvement of its O&M; (b) promote equitable and sustainable water use by regularizing water rights taking into account water availability and water use efficiency; and (c) promote the development of technically and financially self-sufficient WUOs responsible for the O&M of irrigation infrastructure. 33 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies Peru: Sierra Irrigation Project 1. The following Table is presenting on-going or recently completed projects financed by Peru's Government, IBRD, or other development agencies with objectives related to irrigation, water resources management, and rural development in the Sierra: Sector/Issue Project Implementing Agency Loan Agency Amount (US$ million) Off farm and on-farm Irrigation Subsector PSI IBRD 10.3 irrigation improvements, Project ­ PSI II formalization of agricultural (report # 32353 ­ water rights in the coastal PE) area of Peru. Rural Development in the Sierra Rural AGRORURAL IBRD 20.1 Sierra Development Project ­ ALIADOS (Report # 37733-PE) Nation-wide support to Agricultural INCAGRO IBRD 25 agricultural research and Research and extension Extension APL Phase 2 (Report # 31389-PE) Piloting adaptation strategies Adaptation to the In Peru: IBRD/GEF 7.5 in irrigation and water impact of rapid Environment resources management in glacier retreat in the National Council Peru, Ecuador and Bolivia. tropical Andes (CONAM) Project (GEF) (Report # 39172- PE). Support to the creation of Sierra Exportadora PROSIERRA IDB 15.0 farmers groups and Project agricultural supply chains in the Sierra Conservation of natural Programa Nacional PRONAMACHCS JBIC 43.0 resources and management de Manejo de of small catchments Cuencas Hidrográficas y Conservación de Suelos ­ PRONAMACHCS Irrigated agriculture Programa PSI JBIC 56.9 Subsectorial de Irrigación PE-P31 34 Cooperation and coordination with other development projects/organizations in the Sierra. 2. The Project will work in cooperation with other rural development programs/organizations in the Sierra, mainly where the intervention areas, target groups and project timing coincide (e.g. Sierra Exportadora, INCAGRO/INIA, Dirección General de Competitividad Agraria of MINAG, Decentralized Rural Transport Project), while complementing the actions of other rural development programs with distinct intervention areas and target groups (e.g. Aliados/AGRORURAL, PRONAMACHCS). 3. Cooperation would mainly pertain to the implementation of activities under component C2 (support to agricultural production and marketing in areas benefiting from on-farm irrigation improvements) and the identification and preparation of irrigation infrastructure subprojects to be financed under components A and B. More specifically, the following types of cooperation are envisaged: (a) Support to the identification of irrigation subprojects (both collective and on-farm improvements) by efficient communication and information sharing on the demand for irrigation improvements, as formulated in the business plans of farmers' groups, regional production plans, territorial development plans, and river basin plans. This would be particularly important in the case of Sierra Exportadora and INCAGRO/INIA, as those projects do not support irrigation improvements, but complementary activities. (b) Support to the improvements of the supply chain of strategic crops, mainly by INCAGRO/INIA, Sierra Exportadora and the Dirección General de Promoción Agraria. (c) Providing adaptive research results and extension services to farmers benefiting from on-farm irrigation improvements (component B), mainly by INCAGRO/INIA, Sierra Exportadora and the Dirección General de Promoción Agraria. Sierra Exportadora is a program under the Council of Ministers (Presidencia del Consejo de Ministros Sierra Sierra Exportadora Sierra Exportadora Consejos Ejecutivos Descentralizados, Sierra Exportadora 35 6. INCAGRO (Agricultural Extension and Research APL Phase 2, Report # 31389-PE) is supported by a World Bank loan (APL) with the objective to establish a private sector-led and decentralized agricultural technology innovation system benefiting small and medium-scale farmers. Established in 2009, INCAGRO is a program under INIA (Instituto Nacional de Innovación Agraria). The national program has decentralized units in the Sierra. It supports competitive funds to co-finance subprojects in adaptive research, strategic research, extension and capacity building, based on business plans that reflect producer demands and provide solutions to production and market problems. The fund includes special conditions to facilitate access for rural women and indigenous populations. The third and last phase of the APL is expected to be initiated in mid 2011. 7. The target groups of INCAGRO and PSI are similar, as they concern mostly small to medium producers with strong market articulations. It is expected that both projects will collaborate to better understand and support, at the level of some key agricultural supply chains and at the regional level, the production, marketing and innovation dynamics, and to create synergies between the interventions targeting agricultural producers and their associations, service providers, and related stakeholders. INIA Instituto Nacional de Investigación Agraria sierra 9. Dirección General de Competitividad Agraria (DGCA) of MINAG. The General Directorate of Agricultural Competitiveness is responsible for proposing and implementing public policies, strategies and plans that aim to foster the competitiveness of the agricultural sector in terms of economic, social and environmental sustainability. DGCA applies competitive funds to finance business plans duly sustained by organizations of small and medium producers, with the objective to promote their articulation to key agricultural supply chains. The collaboration envisaged between PSI and the DGCA relates to: (a) participation of DGPA in the dissemination of information regarding PSI activities and the sensitization of farmers on the advantages of on-farm irrigation improvements; (b) indication to PSI of farmers' groups that benefit from DGCA support in improving their agricultural production and marketing; and (c) DGCA would provide support in the monitoring of the value chains that receive support from both DGCA and PSI. The Project will also coordinate with other Peruvian funds available at 36 regional and local levels that aim at supporting the strengthening of producers' organizations and agricultural supply chains, where project beneficiaries, intervention areas and timing coincide. 10. ALIADOS (Sierra Rural Development Project, Report # 37733-PE) is a World Bank financed project implemented by AGRORURAL under MINAG, aiming to improve the assets and economic conditions of poor and extremely poor rural families in 6 regions of the sierra (Apurimac, Ayacucho, Huancavelica, Junín, Huanuco, and Pasco) where the level of violence during the social conflicts of the 80s and 90s was particularly high. Project support to poor rural families is channeled through two mechanisms: (a) a Community Development Fund supporting rural communities (comunidades campesinas) in areas with low access to markets (i.e. target group very different from PSI); and (b) a Rural Business Fund supporting poor rural producers and their associations in the formation of business alliances with other market actors in the value chain. ALIADOS is not financing productive infrastructure such as irrigation. 11. The target groups of PSI and ALIADOS are different. ALIADOS focuses on the districts that were subject to high levels of violence during the social conflicts of the 80s and 90s, the poorest districts of those regions, and targets poor rural producers with a market-oriented mindset. PSI is targeting the larger-scale irrigation systems in those regions, not necessarily located in the poorest districts, and within those areas, farmers that are entrepreneurial with a market-oriented mindset. 12. PRONAMACHCS (National Program for Watershed Management and Soil Conservation) is a nation-wide, decentralized program of MINAG with more than 25 years of experience in the management of natural resources in the sierra, mostly in the high Andean areas. It targets rural communities (comunidades campesinas) of poor and extremely poor farmers. PRONAMACHCS support is based on the formulation, by the targeted communities, of communal plans based on participatory diagnoses that identify and prioritize investments and service requirements. The target groups of PRONAMACHCS and PSI are distinct. PRONAMACHCS targets communities of poor and extremely poor farmers, mainly located in the high Andean areas, with limited access to markets. PSI, on the other hand, targets relatively better-off farmers (individuals or groups), with strong potential for the production of higher value crops, mostly located in irrigated valleys, and with better road access. 13. PRONAMACHCS is financing some irrigation investments, though different from those financed by PSI. PRONAMACHCS focuses on relatively small irrigation systems and has only introduced on-farm irrigation improvements (sprinkler irrigation) on a pilot basis, while PSI focuses its irrigation improvements within larger scale irrigation schemes, promoting a wide range of improved on-farm technologies (ranging from improved flood irrigation to drip systems), and combining infrastructure improvements with strong capacity building of the WUOs, essential for ensuring the sustainability of the investments. 37 Annex 3: Results Framework and Monitoring Peru: Sierra Irrigation Project Results Framework PDO Outcome Indicators Use of Outcome Information To contribute to increasing · Number of WUAs (out of 12) that Y5: Input into agricultural production and satisfactorily implement the O&M plans of implementation productivity in targeted areas of the the irrigation and drainage (I&D) systems completion report Sierra. modernized or rehabilitated by the Project Y5: Assess the demand · % of producers' groups supported by the and feasibility of funding Project that have satisfactorily an expansion or scaling- implemented their business plan up phase Intermediate Results Results Indicators for Each Use of Results One per Component Component Monitoring Components A and C1. · Number of WUOs that have benefited from Modernized/rehabilitated irrigation collective irrigation infrastructure Y1-4: Input into the systems and strengthened capacity modernized or rehabilitated by the Project Project M&E reports of WUOs to operate and maintain · Number of water users that have benefited them. from the modernization or rehabilitation of Y5: Input into collective irrigation infrastructure by the implementation Project completion report · Area (ha) that has benefited from modernization/rehabilitation of collective Y5: Assess the demand irrigation infrastructure by the Project and feasibility of funding · Number of WUAs (out of 12) that have an expansion or scaling- achieved eligibility criteria for Component up phase 11 A · Number of WUAs (out of 12) in which O&M plans for irrigation infrastructure modernized or rehabilitated by the Project have been formulated Components B and C2. · Area with improved on-farm irrigation · Improved on-farm irrigation systems by the Project (ha) practices · Producers with improved on-farm · Stronger inclusion of the irrigation systems by the Project (Number) producers in the agro-supply · Percentage of producers' groups supported chains by the Project that satisfactorily operate and maintain their improved on-farm irrigation schemes · Producers's groups that have formulated a business plan according to Project's guidelines · Percentage of subprojects that complies with the the Pest Management Plan 11 Eligibility criteria for Component A are: (i) water tariff collection efficiency is higher than 50%; (ii) the WUO is legally established and (iii) the WUO has a technician in charge of O&M. 38 Component D · Number of water licenses issued Irrigation units with water rights · Number of water licenses registered formalized and registered and with · Number of water measuring devices water measuring devices installed 1. The above Results Framework was developed with PSI staff and forms the basis for the Project M&E system. Outcome and results indicators may be refined with WUAs during Project implementation. This exercise could lead to the preparation of a specific results framework for each of the 12 WUAs, and a revised Results Framework for the overall Project. 2. In addition, it is proposed to collect, through specific studies, impact indicators to measure the Project's achievement of higher level objectives. Such indicators may include: (a) average increase in the agricultural income of producers benefiting from infrastructure improvements (collective and on-farm) in the Project area; (b) average increase in the value of agricultural production sold to internal markets by producers benefiting from the Project; and (c) number of jobs created by the Project. These impact indicators will be collected at three points in time: as part of the baseline during subproject design; for the mid-term review and for the final evaluation. The same indicators will be measured for comparable areas that do not benefit from the Project. 3. The Planning, Budgeting and Monitoring Office (Oficina de Planeamiento, Presupuesto y Seguimiento ­ OPPS) of PSI's executing Unit will have overall responsibility for the Project M&E. It will include a full-time M&E specialist who will work closely with the thematic coordinators in each regional office, ANA, as well as the institutions contracted for Project implementation at the local level. When possible, the WUOs themselves will collect data related to subprojects and the implementation of the O&M plans of the irrigation infrastructure. To this end, they will be trained in basic monitoring and evaluation. 4. M&E arrangements are detailed in the Project Operation Manual, including the data flow between OPPS and: (a) the other departments/offices of PSI involved in Project implementation; (b) the regional PSI offices; and (c) ANA. M&E will be facilitated by the use of a web-based, customized computer application. PSI will submit semi-annual reports to the Bank covering the planned actions, status of implementation, outputs, outcomes, financial statements, procurement, environmental and social issues, and actions taken to ensure satisfactory Project implementation. These quarterly reports will be shared with policy makers to facilitate effective Project management, reformulation of Project strategy if needed, and lesson-sharing. 39 Arrangements for results monitoring Monitoring of outcomes and intermediate results Targets Project development Outcome indicators Base Y1 Y2 Y3 Y4 Y5 objective line To contribute to · Number of WUAs (out of 12) that satisfactorily increasing agricultural implement the O&M plans of the irrigation and 0 0 1 4 5 7 production and drainage systems modernized or rehabilitated productivity in targeted by the Project areas of the Sierra. · % of producers' groups supported by the Project that have satisfactorily implemented 0 0 0 50 75 80 their business plan Intermediate results Result indicators Components A and C.1 · Number of WUOs that have benefited from Modernized/rehabilitated collective irrigation infrastructure 0 0 2 6 7 9 irrigation systems and improved/rehabilitated by the Project. strengthened capacity of · Number of water users that have benefited from WUOs to operate and the modernization or rehabilitation of collective NA maintain them. irrigation infrastructure by the Project12 · Area (ha) that has benefited from the modernization/rehabiliation of collective NA irrigation infrastructure carried out by the Project · Number of WUAs (out of 12) that have 0 0 2 6 8 10 achieved eligibility criteria for Component A13 · Number of WUAs (out of 12) in which O&M plans for irrigation infrastructure 0 0 2 6 8 10 modernized/rehabilitated by the Project have been formulated Components B and C2 · Area and producers with improved on-farm · Improved on-farm irrigation systems by the Project irrigation practices - Producers 0 0 170 350 750 1,000 · Stronger inclusion of - Ha 0 0 250 500 1,000 1,500 the producers in the · Percentage of producers'groups that agro-supply chains satisfactorily operate the improved on-farm 0 0 50% 60% 70% 75% irrigation systems · Producer groups that have formulated a 0 0 17 35 75 100 business plan according to Project guidelines · Percentage of subprojects that complies with 0 0 50% 60% 70% 75% the Pest Management Plan Component D. · Number of water licenses issued 0 600 1,400 2,300 2,700 3,000 Irrigation units with water rights formalized and · Number of water licenses registered 0 0 600 1,400 2,300 2,700 registered and with water measuring devices · Number of water measuring devices installed 0 50 130 210 250 12 It is basically impossible to set a meaningful target for this indicator at project design because the number of water users and the area that will benefit from Component A depends on the location of the subprojects (i.e. the further upstream the subproject is located, the larger the number of beneficiary users and area), which will only be known during implementation as a result of a demand-driven process. 13 Eligibility criteria for Component A are: (i) water tariff collection efficiency is higher than 50 percent; (ii) the WUO is legally established; and (iii) the WUO has a technician in charge of O&M. 40 Annex 4: Detailed Project Description Peru: Sierra Irrigation Project Objective 1. The Project development objective (PDO) is to contribute to increasing agricultural production and productivity in targeted areas of the Sierra. 2. This will be achieved through strengthening the technical, financial and management capacity of WUOs and farmers. Project area 3. While a limited number of Project activities cover the entire irrigated area in the Sierra (the jurisdiction of 34 WUAs), most activities only take place in the territory of 12 WUAs. These 12 WUAs were selected based on the following criteria: a) minimum area of 1,500 ha; b) better management capacity than the average, as measured by water tariff level and collection efficiency; and c) potential for the production of higher value crops, estimated on the basis of the current irrigated area under higher value crops and the percentage of this area over the total area of the WUA. 4. The 12 WUAs cover an area of 170,000 ha (about 40 percent of the irrigated area in the Sierra) and about 190,000 water users. The average irrigated area per farmer in the Project area is 0.9 ha (see Table 4.1 and map 1 for the name and localization of these WUAs). 41 Table 4.1. Prioritized WUAs IRRIGATION IRRIGATION IRRIGATED REGION PROVINCE DISTRICT WUA USERS COMMISSIONS COMMITTEES AREA Name Name Name Name Number Number Number Ha Huancabamba, Sondor, Sondorillo, Carmen de la Piura Huancabamba Huancabamba 12 49 8,200 12,543 Frontera, Canchaque and San Miguel del Faique Cajabamba, Condebamba, Cajabamba Cajabamba 4 166 11,730 7,315 Cachachi y Sitacocha. Cajamarca Cajamarca Cajamarca Río Mashcón 8 47 4,163 2,083 Baños del Inca, Río Chonta y Cajamarca La Encañada y 16 34 9,793 7,786 Cajamarquino Jesús Recuay, Huaraz, Carhuaz, Callejón de Ancash 35 districts 33 366 46,978 52,140 Yungay, Huaylas Huaylas, Caraz y Corongo Jauja, Concepción, El Tambo Mantaro 21 129 19,164 14,686 Junín Huancayo, Chupaca Tarma Tarma Tarma 32 262 15,300 4,935 Huancavelica, Churcampa: 7 Huancavelica Churcampa, distritos; Huancavelica 11 227 10,302 5,747 Angares. Huancavelica Huamanga, Huanta, Sucre, Huacasancos, Ayacucho Vilcashuamán, Ayacucho Ayacucho 41 565 34,805 39,357 Fajardo, Cangallo, Lucanas Anta, Acomayo, Calca, Cusco Cusco Chumbivilcas, Several Cusco 144 700 23,697 11,041 Paucartambo, Quispicanchi, Urubamba Callalli, Sibayo, Tuti, Chivay, Yanque. Coporaque, Ichupampa, Arequipa Caylloma Valle del Colca 31 10 6,477 9,639 Lari, Madrigal, Achoma, Maca, Cabanaconde, Tapay y Huambo Puno San Román Juliaca Juliaca 47 141 3,782 2,988 TOTAL 400 2,696 194,391 170,260 42 Project approach 5. The Project follows an integrated approach to irrigation improvement, similar to the one implemented by PSI in the coastal area of Peru, but tailored to the specificities of the Sierra. This integrated approach aims at increasing the value of agricultural production in the territory of the selected WUAs by combining: (a) collective and on-farm irrigation infrastructure improvements to increase water availability and uniformity in the fields and improve timing of water delivery, key to increasing yields and crop quality as well as allowing conversion to the production of higher value crops; (b) capacity building of Water Users Organizations14 (WUOs) and farmers to improve irrigation scheme management and farmers' irrigation and agricultural practices, thereby improving the overall performance and sustainability of irrigation schemes and agricultural production; (c) support to farmers' organizations in their cropping and marketing strategies to optimize the revenues/price they can get from their produce; and (d) the formalization of agricultural water rights, securing agricultural water rights in an increasing water scarcity environment, and thereby encouraging on-farm investments, such as irrigation improvements and the conversion to the production of higher value crops. Detailed Project Description Component A. Modernization and Rehabilitation of Collective Irrigation Systems (Total Cost US$ 16.42 million) 6. This component will finance pre-investment studies and design, execution and supervision of Subprojects to support eligible WUOs to improve their water supply service to farmers, through the modernization or rehabilitation of collective irrigation systems, including, inter alia: (a) water intakes improvement; (b) canal improvement; and (c) construction and/or rehabilitation of small water regulation reservoirs (see Table 4.2 below). 7. Component A supports eligible WUOs to improve their water supply service to farmers (i.e. increasing water availability and reliability, increasing water distribution equity, and/or improving the timing of water delivery), especially, in areas with potential for the production of higher-value crops and, in particular, but not only, in areas where farmers will benefit from on-farm irrigation improvements through component B. 14 WUOs are defined here as the water users' associations (Juntas de Usuarios ­ WUAs), the irrigators' commissions that compose them (Comisiones de Regantes ­ CRs) or any eligible water organization acceptable to the Bank. 43 Table 4.2. Types of Subprojects (Component A) Type of Description of possible infrastructure subprojects Intervention - Canal improvements (i.e. canal lining) and related works and/or equipment Rehabilitation and (e.g. small aqueducts, siphons, water measurement devices); Modernization - Water intakes (from rivers or reservoirs) - Works on existing small reservoirs (e.g. gate or outlet repairs, leak reduction) - Construction of new water intakes (from rivers or reservoirs) to supply Construction existing irrigation systems (except of new small - Civil works for the extension of existing small reservoirs (max. accumulated regulation height of 5 m) reservoirs) - Construction of new artificial ponds/tanks at the head of the irrigation plots; Construction - Construction of small water regulation reservoirs (max height of 5 m) of new small regulation reservoirs 8. WUOs eligibility criteria. In order to encourage improvements in collective irrigation management and increase the likelihood of subprojects sustainability, only WUOs, within the selected 12 WUAs, reaching a minimum performance level are eligible for Component A. Eligibility criteria are: a) the WUO must be legally established15; b) the WUO must have a technical staff in charge of the operation of its collective irrigation network; and c) collection efficiency of water tariff must be at least 50 percent16. 9. Component C1 provides capacity building to WUOs within the jurisdiction of the 12 WUAs in order to help reach eligibility level. 10. Subprojects eligibility criteria. Only subprojects meeting the following conditions would be eligible for Project financing: a) be requested by an eligible WUO, which commits itself to elaborate and implement an operation and maintenance (O&M) plan for the collective irrigation network concerned by the subproject; b) complies with environmental and social safeguards; 15 WUOs must be legally established, in line with Article 31 of the Water Resource Law of 2009. WUOs legally established will be able to sign contracts and open bank accounts that are necessary to implement subprojects. 16 Collection efficiency is applied to the current water bill as well as past water bills. To that end, PSI and the WUO will agree on an annual payment schedule to recover past water bills. 44 c) complies with cost-sharing rules (see below); and d) complies with the national rules for public investments17. 11. Implementation. PSI and WUOs will be responsible for the implementation of Component A. PSI will contract individual consultants, consulting firms or NGOs to carry out subproject feasibility studies and detailed designs, and individual consultants for the supervision of works. Civil works will be implemented through two modalities: a) subprojects whose cost is equal or lower than Soles 1,200,000 (about US$ 400,000 equivalent) will be carried out by the concerned WUO following the "community works" procedures; and b) subprojects whose cost is higher than Soles 1,200,000 (about US$400,000 equivalent) will be carried out by a construction firm selected through a competitive bidding process. 12. Cost-sharing rules. Table 4.3. Cost-sharing rules (Component A) Subprojects with a cost below Subprojects with a cost higher Soles 1,200,000 than Soles 1,200,000 Feasibility studies WUO: 10%; PSI: 90% Technical designs PSI: 100% Construction and supervision WUO: 15% of which at least 3% WUO: 10% in cash in cash PSI and RG: 90% PSI and RG: 85% Operation and Maintenance WUO: 100% (O&M) Note: Regional Governments (RG) 13. Regional governments may also participate in subproject financing. Their contribution would vary depending on their financial capacity and is expected to reach up to 40 percent of the Government's total contribution to subproject construction and supervision costs. Component B. Irrigation Technology Improvement (Total Cost US$ 11.64 million) 14. This component will finance pre-investment studies and design, execution and supervision of Subprojects to support eligible farmers groups, and to increase irrigation performance at the farm level through the installation of improved on-farm irrigation systems, including, inter alia: (a) the carrying out of works and provision of equipment at the farm intake (e.g. installation of pipes, pumping units, filters, meters, pressure regulators and individual hydrants, and rehabilitation or construction of small regulation reservoirs,); and (b) carrying out of works and provision of equipment on the irrigation plots (e.g. installation of sprinklers and drip systems, land leveling and gated pipes). 17 As set forth by the Sistema Nacional de Inversiones Públicas (SNIP). 45 15. This component supports farmers, located within the jurisdiction of the 12 prioritized WUAs, in increasing irrigation performance at farm level through the installation of improved on- farm irrigation systems in areas cultivated with, or to be dedicated to, the production of higher value agricultural commodities. 16. Farmers' groups' eligibility criteria. Farmers' groups must comply with the following requirements to be eligible: a) be a group of at least two farmers legally established (Acta de Acuerdo or other similar document), or be an organización campesina o nativa when communal land is concerned and; b) have a land property title (Título de propiedad in the case of individual farmers or Certificado de posesión in the case of communal land). 17. Subprojects eligibility criteria. Only subprojects meeting the following conditions would be eligible for Project financing: a) be requested by an eligible farmers' group, which commits itself to elaborate and implement an O&M plan for the on-farm irrigation infrastructure concerned by the subproject; b) have an adequate water supply to cover the irrigation requirements of the crops concerned by the subproject; c) have a total investment cost below S./ 6 million (US$2 million equivalent) d) maximum Project subsidy per farmer is S./ 120,000 (US$40,000 equivalent); e) maximum subproject cost per ha is S./ 15,000 (US$5,000 equivalent); f) comply with social and environmental safeguards; g) comply with the cost-sharing rules (see below); h) comply with the national rules for public investments (SNIP); and i) farmers' groups must have a valid business plan for the subproject, i.e. which follows the minimum requirements set forth in the Project Operation Manual. 18. Implementation. This component will be implemented by PSI and farmers' groups (FG). PSI will contract individual consultants, consulting firms or NGOs to carry out subprojects feasibility studies and detailed designs, and individual consultants for supervision of works. Civil works will be implemented through two modalities: a) subprojects with a cost equal to or less than Soles 1,200,000 (about US$400,000) will be implemented by FG following the "community works" procedures; and 46 b) subprojects with costs higher than Soles 1,200,000 (about US$400,000) will be carried out by construction firms selected through a competitive bidding process. 47 Table 4.4. Cost-sharing arrangements (Component B). Subprojects with a cost below Subprojects with a cost above Soles 1,200,000 Soles 1,200,000 Feasibility studies FG: 20%; PSI: 80% Technical design PSI: 100% Construction and supervision WUO: 20% of which at least WUO: 15% in cash 10% in cash PSI and RG: 85% PSI and RG: 80% O&M 100% FG Note: Farmers' Group (FG) and Regional Government (RG) 19. Cash contribution will have to be deposited in a Bank account, before start of construction, to ensure commitment from FGs to the subprojects. The possible in kind contribution from FG (e.g. supply of materials, labor etc.) will be estimated and quantified in the feasibility studies. 20. Regional governments may also participate in subproject financing. Their contribution would vary depending on their financial capacity and is expected to reach up to 40 percent of the Government's total contribution to subproject construction and supervision costs. Component C. Capacity Building and Support to Production and Marketing (Total Cost US$ 10.38 million) Sub-component C.1. Capacity building of Water Users' Organizations (Total Cost US$4.92 million) 21. This sub-component will strengthen the capacity of WUOs through, inter alia: (a) the carrying out of a comprehensive capacity building program for Prioritized WUOs, including the carrying out of a participatory diagnosis of WUOs; and (b) the participatory identification of Subprojects for Component A of the Project within the territorial jurisdiction of the Selected WUAs 22. More specifically, this sub-component will support two broad types of activities: (a) Capacity Building of prioritized WUOs In the territory of the 12 selected WUAs, a comprehensive capacity building program will be undertaken targeting prioritized WUOs and tailored to their needs. To this end, the following steps will be followed: (i) in each of the 12 selected WUAs, a rapid participatory diagnosis of the WUOs will be carried out, from which 4 to 5 WUOs will be prioritized18; (ii) for these prioritized WUOs, a more thorough participatory diagnosis will be undertaken, from which a baseline will be drawn and an action plan will be formulated. The diagnosis will identify the main issues (e.g. technical, financial, administrative, social) faced by WUOs and farmers related to irrigation service and the action plan will include both structural and non structural measures to address the issues identified in the diagnosis. The action plan will include a comprehensive capacity building 18 Prioritization criteria are defined in the Project Operation Manual. 48 program to be carried out by component C1 and a preliminary list of subprojects for component A; and (iii) implementation of the comprehensive capacity building program. 23. The comprehensive capacity building program will help prioritized WUOs: (a) achieve eligibility level for Component A; (ii) further identify subprojects proposals for component A; and (iii) formulate and implement an adequate O&M plan19 and budget to improve their water delivery service to the agricultural producers and, more generally, to increase their sustainability and the quality of their management (this would include the O&M needs of the water control and measuring devices financed by sub-component D3). 24. Specific attention will be given to ensure that strategic problems identified in the diagnosis phase are linked with actions supported by the Project at the level of the main irrigation system (component A), at tertiary and field levels (component B), through the formalization of water rights (component D), and the support to agricultural production and marketing (component C2). (b) Promotion of Component A The Project will also support the promotion of component A among the 12 selected WUAs. This will include the (i) dissemination of information explaining how to benefit from the program and (ii) workshops to help identify subprojects. Sub-component C1 will be entirely financed by the Project and would be undertaken by PSI, with locally contracted partners. Sub-component C2. Capacity Building of Agricultural Producers and Business Groups (Total Cost US$5.46 million) 25. The sub-component will strengthen the capacity of agricultural producers and business groups through: (i) the promotion of Component B of the Project by raising awareness of farmers on the benefits of Subprojects under said Component of the Project; (ii) supporting the establishment of farmers' groups; and (iii) providing technical assistance to farmers' groups and their agricultural productive chains to formulate and implement viable business plans. 26. This sub-component aims at improving the value of agricultural production in the irrigation scheme and, thereby, improving the financial capacity of farmers and WUOs. This would include: (i) facilitating the transition of interested farmers' groups to improved on-farm irrigation technologies and higher value crops; and (ii) supporting better coordination of farmers with regards to agricultural value chains (driven by, for example, local agro- processing firms, supermarkets, intermediaries, medium to large farms etc.) linked to the irrigation scheme, especially around issues such as productivity, reliability of deliveries and quality, and price. 19 This would include the establishment of a water users' registry, an inventory and infrastructure plan, a cropping calendar and an internal water distribution plan. 49 27. This sub-component will operate in the territory of the 12 selected WUAs. It will: (i) raise the awareness of farmers on the benefits of irrigation improvements at tertiary and on-farm levels; (ii) provide information about the different steps of the subproject cycle (project component B); (iii) support the establishment of farmers' groups20 with interest in improved irrigation systems (e.g. improved gravity systems and sprinkler and drip irrigation); (iv) provide technical assistance to help farmers' groups formulate and implement their business plans around viable agricultural supply chains (this will include collection of a baseline and monitoring of results for each subproject and technical assistance to properly operate and maintain the improved on-farm irrigation schemes and cultivate the higher value crops); and (v) support the main/most promising agriculture supply chains in the 12 selected WUAs. 28. This activity will involve: (i) the installation of demonstration plots with improved irrigation systems, higher value crops and good agricultural practices (including safe use of pesticides and integrated pest management); (ii) communication campaigns (radio messages, posters); (iii) workshops, technical discussions, study tours and demonstrations on the completed subprojects; (iv) technical assistance to farmers groups on irrigation, crop production and formulation and implementation of business plans; and (v) technical assistance to strengthen the main agriculture supply chains, through the following activities: (1) a participatory diagnosis of the main/most promising agricultural supply chains (identification of key actors, technical and economic performance, identification of main issues at the production and marketing levels, and demands and supply in terms of technology and services); (2) the formulation of an action plan to address the constraints identified in (1), including the identification of actions that could be implemented by the Project (through components A, B and C) and complementary actions through strategic alliances with local partners; and (3) implementation of part of the action plan through (a) components A, B and C, and (b) the promotion of interactions between farmers' groups and key stakeholders (public and private extension services and technical assistance providers, processing and marketing firms, credit agencies etc.) that could carry out the other complementary actions identified in the plan. 29. These activities will be implemented by PSI with locally contracted agro-business consultants and partners. Component D. Formalization of Water Rights and National Water Rights Administrative Registry (Total Cost US$3.43 million) 30. This component will provide technical assistance and equipment to (a) formalize and issue water licenses; (b) expand RADA to cover the selected WUOs; and (c) install water measuring devices. 31. This component would support the Government's Program for the formalization of agricultural water rights (PROFODUA) in the selected 12 WUAs, updating the existing national water rights registry (RADA) accordingly and installing measuring devices at the head of selected irrigation units. Table 4.5 below lists the area covered by the component. 20 Farmers of a same group must belong to the same irrigation system and must have similar objectives for their respective business plan. 50 Table 4.5. Area covered by Component D Local water authority (ALA) Valley/Sector Water licences to be issued per Irrigation Unit 1 Alto Piura ­ Huancabamba Huancabamba 49 2 Cajabamba Cajabamba 47 3 Cajamarca Mashcón 34 4 Cajamarca Chonta 182 5 Huaraz Alto Santa-Callejón de Huaylas 436 6 Mantaro Mantaro 142 7 Tarma Tarma, Acobamba, Palcamayo 293 8 Huancavelica Huancavelica 665 9 Ayacucho Cachi-Ayacucho 267 10 Sicuani Alto Vilcanota, Alto Apurímac 800 11 Colca-Sihuas-Chivay Colca 10 12 Juliaca Juliaca 150 TOTAL 3,075 Sub-component D1. Formalization of Irrigation Water Rights (Programa de Formalización de Derechos de Uso de Agua Agrícola - PROFODUA) (Total Cost US$ 0.24 million) 32. This sub-component would support the formalization of irrigation water rights, with the objective of securing farmers' access to irrigation water and stimulating private investments. 33. In order to facilitate water distribution, volumetric measuring and pricing, the sub-component will establish "bloques de riego" which are irrigation units grouping a set of water users. According to the new Water Resources Law, water rights are to be assigned to irrigation units and not to individual water users, to facilitate water resources management by the local water authority. WUOs would deliver water to the head of the irrigation unit and farmers would distribute water internally. Ultimately, WUOs would charge for water on a volumetric basis at the head of the irrigation unit. 34. The National Water Authority (ANA) and its local ALAs will be responsible for the implementation of this sub-component in close coordination with WUOs. The sub- component will finance consultants for field and office work, office equipment, Geographic Information System (GIS), satellite images and car rental. Sub-component D.2. Extension of the National Water Rights Registry (Registro Administrativo de Uso de Agua - RADA) (Total Cost US$0.77 million) 35. RADA is essential for water rights administration, including updating and monitoring. The objective of this subcomponent is to register in the existing RADA the water rights that were 51 formalized under D1. This will entail the procurement of hardware, of software and consultant services, as well as capacity building of the staff responsible for its operation. 36. This sub-component will be implemented by ANA and its local ALAs offices. Sub-component D.3. Water Measuring Devices (Total Cost US 0.63 million) 37. This sub-component would also finance the feasibility studies, works/installation and supervision of works of some 250 water measuring devices to be installed at the head of the irrigation units defined in relation with the formalization of water user rights under sub- component D1. These activities would be entirely financed by the Project. Component E. Project Implementation Support (Total Cost US$6.41 million) 38. This component would support the provision of technical assistance, training, and acquisition and utilization of equipment to PSI for: (a) the administration, monitoring, (including the base line study), evaluation and auditing of the Project; and (b) the carrying out of awareness raising campaigns for all Sierra WUAs on the implication of the new water law and on improved water management practices. (a) Increased awareness of WUOs on key aspects of water management This activity will finance awareness raising campaigns/training sessions for all Sierra WUAs, including the Irrigation Commissions and Committees that compose them, on key aspects of water management. Topics to be covered include: (i) the new Water Resources Law, its regulations and norms; (ii) the functions and responsibilities of WUAs, CRs and Irrigation Committees, respectively, in particular with regards to water distribution, maintenance and financing; (iii) water tariffs; (iv) water users' obligations and rights; and (v) conflict management. ALAs staff will also participate in the training sessions. (b) Project administration This activity will finance Project administration, monitoring and evaluation and auditing of the Project. 52 Annex 5: Project Costs Peru: Sierra Irrigation Project Local Foreign Total Project Cost By Component US$ US$ US$ million million million A. Modernization and Rehabilitation of Collective Irrigation 15.46 0.46 15.92 B. Irrigation Technology Improvement 10.74 0.55 11.29 C. Capacity Building and Support to Production and Marketing 7.92 2.15 10.07 C.1 Capacity building of Water Users' Organizations 3.54 1.23 4.77 C.2. Capacity Building of Agricultural Producers and 4.38 0.91 5.29 Business Groups D. Formalization of Water Rights and National Water Registry 2.80 0.52 3.32 D.1 Formalization of Irrigation Water Rights (PROFODUA) 1.80 0.24 2.04 D.2 Extension of National Water Rights Registry (RADA) 0.57 0.18 0.75 D.3. Water Measuring Devices 0.43 0.10 0.53 E. Project Implementation Support 4.06 2.17 6.23 Total Baseline Cost 40.98 5.85 46.83 Physical Contingencies 0.85 0.11 0.96 Price Contingencies 0.44 0.05 0.49 Total Project Costs1 42.27 6.01 48.28 Interest during construction - - - Front-end Fee2 - 0.05 0.05 Total Financing Required 42.27 6.06 48.33 1 Identifiable taxes and duties are US$ 9.0 million, and the total project cost, net of taxes, is US$39.3. Therefore, the share of project cost net of taxes is 81.3%. 2 Front-end fee is 0.25% of Loan Amount (US$20 million). 53 Annex 6: Implementation Arrangements Peru Sierra Irrigation Project 1. The Proyecto Subsectorial de Irrigaciones (PSI) will be responsible for overall Project coordination and implementation. The National Water Authority (Autoridad Nacional del Agua ­ANA) will be responsible for implementation of components D1 and D2 (formalization and registration of water rights). PSI has substantial experience managing World Bank financed projects, as the proposed Project will be its third one. ANA is a recent institution that was created in 2008. It is implementing another World Bank financed project (the Peru Water Resources Management Modernization Project ­ P107666, Report #47689- PE) and one IDB project. 2. PSI is a decentralized organization of MINAG, responsible for the implementation of irrigation programs/projects. It was established in 1996 to implement the World Bank financed PSI I project (loan 4076-PE). Its headquarters are in Lima and it has four regional offices. 3. PSI is currently implementing a total of three projects/programs aimed at improving irrigation in the coastal area of Peru: · Irrigation Subsector Project (JBIC loan #PE-231 of 5.972 Yen, or about US$56.9 million), launched in 2006, with the objective of improving irrigation performance in the coastal area of Peru. · On-farm Irrigation Improvement Program, created by law #28585 in June 2005, a government program aimed at supporting the conversion of traditional surface on-farm irrigation systems to improved gravity systems (gated pipes, land leveling) and/or pressurized systems (sprinklers, drip systems). · Community Work Program (Núcleos Ejecutores), launched in August 2009. This program is implemented by national, regional and local public institutions to execute infrastructure subprojects. Within this program, PSI is preparing and implementing about 140 irrigation subprojects (rehabilitation of collective irrigation infrastructure and improvement of on-farm irrigation systems). 4. With the proposed Project, PSI would extend its activities to the Sierra region. This would require strengthening three of its existing regional offices (Chiclayo, Trujillo and Arequipa) and the creation of two new ones (Junín and Cuzco). PSI's organizational chart is presented below. 54 Chart 6.1. PSI Organizational Chart Executive Director Executive Direction Administration and Financing Legal (OAF) Planning, Budgeting and Monitoring & Evaluation - OPPS Drainage and Irrigation Infrastructure Department - DIR Irrigation Management Department - DGR Subproject studies Supervision Capacity Building On-farm Irrigation and TA Office Improvement Office Norte Chiclayo Sur Arequipa Junín Trujillo Cuzco Regional Regional Office Regional Office Regional Office Regional Office Office Transferred from Lima NB: the new offices are indicated in grey. Project implementation responsibilities of the main departments/offices of PSI. 5. Project implementation will require efficient coordination between the central headquarters and the regional offices. At the central level, the main departments and their functions are described below: · Planning, Budget and Monitoring and Evaluation Office (OPPS). This department is responsible for: overall planning, budgeting and monitoring, evaluation and reporting. It also approves the feasibility studies for subprojects with costs below US$400,000. Feasibility studies of subprojects with costs above US$400,000 are approved by the Ministry of Finance (MEF). 55 · Administrative and Finance Office (OAF). This department is responsible for accounting, administrative and financial transactions control, preparation of financial statements, and procurement and contracting. · Irrigation Infrastructure Department (Dirección de Infraestructura de Riego-DIR) is responsible for the implementation of components A. More specifically, it is responsible for the preparation, review and approval of subprojects ToRs, feasibility studies and technical designs; irrigation subprojects screening and approval, according to eligibility criteria and Project's procedure; technical and financial supervision of subprojects implementation; preparation of annual operation plan and budget for its activities, and progress monitoring and reporting. · Irrigation Management Department (Dirección de Gestión de Riego-DGR) is responsible for the implementation of components B, C1 and C2. More specifically, it is responsible for the preparation, review and approval of subprojects ToRs, feasibility studies and technical designs; irrigation subprojects screening and approval according to eligibility criteria and Project's procedure; technical and financial supervision of subprojects implementation; preparation of ToRs for technical assistance and training; supervision of TA and training; preparation of annual operation plan and budget for its activities and progress monitoring and reporting. 6. Regional offices: The regional offices are responsible for the preparation of annual plans which integrate the planning efforts at WUOs level, periodic progress reports on the activities taking place in their areas of intervention; technical review of the irrigation infrastructure subprojects proposed by the WUOs (component A); promotion and diffusion of Project objectives, activities and eligibility criteria; coordination with regional and local governments, WUOs, Local Water Authorities (ALAs), and other relevant projects and programs related to irrigation, water resources management, and rural development in the Sierra; reception of subprojects and their transfer "en afectación de uso" to WUOs; coordination with consultants and contractors in order to solve technical and administrative problems; and monitoring compliance of contractors and consultants with contracts stipulations. 7. Project Implementation Agreement with ANA. ANA will implement subcomponents D1 and D2 under Component D (Agriculture Water Rights Formalization and National Water Rights Registry). The signature of an Institutional Cooperation Agreement between PSI and ANA is a disbursement condition for Component D. 8. Agreements between the Regional Governments and PSI regarding subproject financing. When Regional Governments finance part of the subproject construction and supervision, an agreement will be signed between PSI and those RGs. 56 Annex 7: Financial Management and Disbursement Arrangements Sierra Irrigation Project Executive Summary of Financial Management Assessment 1. As part of the preparation process of the Sierra Irrigation Project, a financial management assessment was undertaken in accordance with OP/BP 10.02 and the FM guidelines21. The objective of the assessment was to determine whether the implementing entity had acceptable financial management arrangements in place, notably sound budgeting, accounting, reporting, flows of funds arrangements, financial reporting, auditing, and an internal control system, to properly manage and account for all Project proceeds and to produce timely, accurate and reliable financial information for general as well as Bank purposes. The assessment was conducted between January and July 2008, and updated in April 2010. 2. The PIU, Irrigation Sub-Sector Project (PSI), of the Ministry of Agriculture implemented the Irrigation Subsector project (Report #13542-PE), financed through loan BIRF-7308. PSI is a continuing entity that has developed experience in working with externally financed projects, including the World Bank. PSI's performance under the former project was rated moderately satisfactory as there were some weaknesses related to the internal control system, and lack of adequate information for monitoring purposes was identified. In addition, the design of the new operation includes some additional complexities (e.g. new areas of intervention, multiple sources of financing, and some changes in the flow of funds arrangements). Upon such considerations, and although the FM arrangements of the new project will extensively rely on existing arrangements within PSI; there is an eminent need to strengthen those arrangements in order to properly address identified risks and at the same time, allow for smooth project implementation. Required actions have been discussed and agreed with PSI; however, as of the date of this assessment, PSI is still working on the following aspects: (a) Adjustments and full implementation of the financial information system, including the required functionalities to allow preparation of financial reports, Statements of Expenditures (SOEs) and recording, and control and monitoring of subprojects (dated covenant to be complied with within six months after effectiveness). (b) Inter-institutional Agreement between ANA and PSI reflecting flow of funds arrangements in the framework of new Budget Law. (Disbursement Condition ­ Category 4- Component D of the Project.) (c) Not later than six months after the Effectiveness Date, or a later date agreed with the Bank, the Borrower, through MINAG-PSI, shall appoint independent auditors, with a maximum of a three-year contract duration, to carry out the audits of the project. (Dated covenant.) 21 Financial Management Practices in WB-financed Investment Operations issued by the FM Sector Board (FMSB) on November 3, 2005. 57 3. The Project's FM inherent and control risks are rated as Substantial (S). Consequently, the Project overall FM residual risk is also Substantial. Downgrading this rating will highly depend on the successful implementation of the action plan, whose compliance will be evaluated towards Effectiveness. 4. On the basis of the review performed and progress achieved so far, the financial management team concludes that the proposed arrangements ­ as designed ­ can be considered acceptable to the Bank, subject to the effective and successful implementation of the remaining actions. SUMMARY OF FINANCIAL MANAGEMENT ASSESSMENT Country Issues 5. During 2008, in the context of the preparation of a series of DPLs, the Bank undertook a review of Peru's Public Financial Management (PFM) and the reforms undertaken to strengthen it. These PFM reforms are based on the recommendations of the 2001 Country Financial Accountability Assessment (CFAA), the 2004 IMF Fiscal Report on the Observance of Standards and Codes (ROSC), the 2005 Country Procurement Assessment Report (CPAR), and other GoP initiatives to modernize its public institutions over the last several years. The review was further complemented through a joint assessment with other development partners following the Performance Measurement Framework (PEFA). The results of the assessment were shared with the GoP, and the final report has been accepted by the GoP and was published. The results of the PEFA assessment, from the perspective of the six budget dimensions measured by the framework, concluded that, overall, PFM in Peru is functioning satisfactorily and in line with international best practices. A few areas are still in need of improvement and in many cases reforms are still in progress, with other corrective measures or improvements still to be prioritized and embedded within the PFM reform agenda in the medium and long term. The continuity of the improvements in the systems and institutions will enable Peru to further strengthen the country's PFM system, which will play a decisive role in supporting poverty alleviation and modernization of the State. 6. The most critical reforms to improve the management of public finances and efficiency of public spending initiated during the last few years are well advanced and some of them were completed in early 2009. A new budget classification system and a new accounting chart have been adopted in line with international standards and are operating in all government ministries and agencies. The implementation of the Treasury Singly Account (TSA) at the central government level is progressing well with sufficient coverage at this time to meet international standards. The foundations for a performance-based budgeting system have made steady progress with the development of well-defined measures of performance that link priority policies and programs. The reforms in the area of performance-based budgeting included several policies and procedural changes and expansion of the strategic programs in the 2009 budget. 7. On fiscal transparency, Peru ranks about average among Latin American countries. In the last few years, Congress approved a Law of Transparency and Access to Public Information (2003) and its regulations; also, the government integrated financial management system "sistema integrado de administración financiera" (SIAF) became available through an on-line portal 58 "Consulta Amigable", and a pilot system for users' assessment of government services was launched. With the further development of the new SIAF and continued dissemination of budgetary information through the web, Peru's ranking should improve considerably. 8. Similar to the rest of the portfolio, and as explained below, proposed projects will use and follow country arrangements for budgeting, and accounting, and from there on, the budget will be executed through SIAF. Risk assessment and Mitigation 9. The FM risk assessment presented below constitutes a summary of the issues related to the Project as a whole, as of the date of this document. On such basis, the Project's FM inherent risk is considered Substantial (S), and similarly, the Project's FM control risk is also considered Substantial (S) as some aspects of financial management, including mitigation measures, still need to be implemented in order to adequately support project implementation. On such basis, the overall FM risk rating is Substantial (S) at this time. Risk Risk Risk Mitigating Measures Incorporated Condition of Rating into Project Design Negotiations/Board or Effectiveness (Y/N)? Inherent Risk Country Level M In spite of having multiple participating A draft generic Inter-institutional The participation of agencies, (PSI, ANA, the beneficiaries Agreement, (PSI and RGs) Regional Governments and potentially Regional Governments ), reflecting agreed arrangements (RGs) to subprojects Project design is straightforward; was reviewed and agreed with financing is optional and activities, as well as roles and the Bank before negotiations. may cause delays in responsibilities of each implementing Project implementation. entity are clearly defined, are described in the Operation Manual and will be reflected in the inter-institutional agreements . Entity Level S A draft generic Inter-institutional New PSI-regional offices with a liaison Agreement, (PSI and RGs) PSI does not have role between PSI and RG will be opened reflecting agreed arrangements experience in interacting in new areas of intervention (Junín and was reviewed and agreed with with the Regional Cusco) to facilitate the interaction. the Bank before negotiations. Governments in the Sierra. RGs may Inter-institutional agreements ­ participate in satisfactory to the Bank- will be signed subprojects financing. between PSI and participating Regional Governments to establish the mechanism to coordinate and operate. Closely follow-up with PSI to identify the need to strengthen PSI's team with experienced and qualified staff. Project Level S Inter-institutional agreements among the A draft generic Inter-institutional Project design calls for various implementing agencies to ensure Agreement, (PSI and RGs) coordination among better coordination to establish the reflecting agreed arrangements several entities ­ PSI, arrangements for the Annual Operations was reviewed and agreed with WUOs and possibly Plan, Budget program, funds availability, the Bank before negotiations. RGs- which may cause etc. 59 delays in subprojects implementation. This is particularly true in those cases where RGs will participate in subprojects financing. Chart flows detailing processes and procedures, as well as Component A Specific processes and procedures have responsible parties and implementation involves been designed for the implementation of documents required for the transfer of funds to subprojects, including adjusted and Components A and B have been "cuentas strengthened flow of funds arrangements, defined and approved by the mancomunadas" to be as well as follow-up mechanisms, and Bank. managed by WUOs, that simplified reporting formats. may have low capacity, especially in the Sierra. It has been agreed that the implementation Simplified financial reports for of an integrated information system that, WUOs have been defined and among others, will facilitate the recording approved by the Bank. and control of subprojects. PSI will ensure that WUOs are trained in The Operation Manual (FM the administrative and financial chapter) has been submitted and arrangements. approved by the Bank. Information system implemented and validated six months after effectiveness. Dated covenant (Y) Overall Inherent Risk S Control risk Budgeting, Accounting S Lack of an integrated An integrated information system ­ Integrated information system to information system that currently used in other WB-projects is be implemented by PSI within would allow PSI to: i) being adjusted - to respond to PSI needs. six months after Effectiveness record and control Special emphasis has been given to the project activities, by subproject module, preparation of Dated covenant (Y) project component/sub- financial reports, and preparation of component; ii) SOEs. systematically and comprehensibly record and control implementation of subprojects, including transfer of funds to WUOs, counterpart contributions; and iii) prepare reliable financial information (IFRs, financial statements and SOEs). Internal Control S Specific accounting policies have been The Operation Manual (FM Lack of adequate defined for the recording and control of chapter) has been submitted and accounting policies and transferences to WUOs and those will be reviewed by the Bank procedures for supported through the implementation of 60 monitoring progress on an integrated information system. Agreed subprojects may affect arrangements were reflected in the the availability of Operation Manual. reliable information for monitoring and reporting. Flow of Funds S Flow of funds arrangements for PSI A draft generic Inter-institutional PSI does not have the contributions have been strengthened and Agreement, (PSI and RGs) required mechanisms to streamlined. PSI will manage the funds reflecting agreed arrangements ensure a smooth flow of contribution from participating RGs, was reviewed and agreed with funds arrangements for where applicable. Specific processes and the Bank before negotiations. counterpart procedures for the provision, control and contributions provided recording of RGs' contributions have also by RGs, where been defined, are included in the applicable. Operation Manual and will be reflected in the corresponding inter-institutional Flow of funds agreements. arrangements in place for the financing of subprojects under the WUOs may pose delays and may interfere with liquidity in the DA. Flow of funds Specific arrangements including roles and Inter-institutional Agreement arrangements for responsibilities for ANA and PSI for between ANA and PSI reflecting activities under payment processing would be reviewed funds flow arrangements. Component D -executed and approved by the Bank, and reflected by ANA- are still in the Inter-institutional Agreement. Disbursement Condition pending definition. (Category 4-Component D) Training to update the staff in disbursement will be provided to Administrative procedures of PSI/ANA. flow of funds arrangements reflected in the Operation Manual and approved by the Bank. Financial Reporting S PSI will be responsible for presenting to Format and content of IFRs have Previous financial the Bank the financial reports. been defined and approved by reports were prepared the Bank. manually and they did Core content of IFRs has been agreed not adequately reflect with the Bank, including the fair advances in subprojects. presentation of advances to WUOs. Information systems will be adjusted to Integrated Financial System will allow the preparation of the quarterly provide Financial Reports. IFRs and annual financial statements following the accounting policies and Dated covenant (6 months procedures defined for the project. after effectiveness) The SOEs will be prepared from the Integrated Information System. Auditing M Financial auditors will be appointed An acceptable audit firm under 61 Potential delays in the following the agreed arrangement with ToRs acceptable to the Bank will selection and CGR, and to the extent possible for be selected within six months contracting of an audit two/three fiscal years. from effectiveness. firm, which may also Audit ToRs ­to be approved by the Bank- affect the timeliness and will provide for interim reviews, Dated covenant (6 months comprehensiveness of including on-site visits to subprojects. after effectiveness) the review. Overall control risk S Overall FM Risk S WEAKNESSES AND ACTION PLAN 10. On the basis of the assessment performed, the following key actions discussed and agreed with PSI are pending implementation as of the date of this document. Institutional Arrangements Responsible Target Date Inter-institutional Agreement between PSI and ANA setting up the financial management arrangement for Disbursement condition (Category 4 PSI-ANA component D in the framework of recently approved ­ Component D) budget framework. Accounting ­ Integrated Financial System and Financial Reports Complete the implementation/ adaptation of the integrated information system considering not only the standard modules of accounting, budget, and treasury, Dated Covenant (six months after PSI but also the adaptation of the requirements to control effectiveness) components A and B, the module to prepare IFRs, and the module to prepare SOEs. Auditing Contract for Annual Audit Within six months from PSI Effectiveness Date (Dated covenant) Implementing Entity, Organizational Arrangements and Staffing 11. The Proyecto Subsectorial de Irrigación (PSI) is a decentralized organization under the Ministry of Agriculture (MINAG). The organizational structure of PSI includes an Executive Direction, supported by the following areas: Legal Office, Administration and Financing Office, Planning, Budgeting and Monitoring Office, and Regional Offices of: Arequipa, Lima, Trujillo, Chiclayo. As part of the Project, two new Regional Offices will be opened in the cities of Junín and Cusco and the current Regional Office of Lima will be incorporated into PSI Unit. It is expected that these Regional offices will play a liaison role between PSI central office and regional governments, in case the later participate in subproject financing. 12. The Administration and Finance Office is responsible for accounting, administrative and financial transactions, control, preparation of financial statements, procurement and contracting, and as such it is also expected to undertake overall responsibility for the project's financial management tasks, in close coordination with the Planning, Budgeting and Monitoring Office, 62 and other participating entities. Currently the Administrative and Finance Office is composed of a finance specialist, an accountant, and two administrative assistants. The Planning, Budgeting and Monitoring office is composed of one budget specialist, one treasury officer, and two technical officers for planning and monitoring. Although the administrative and Finance Office is familiar with Bank-financed projects and has developed expertise in project implementation, it is important to mention that the design of the new project includes some additional complexities (e.g. multiple sources of financing ­IBRD, Central government funds, Regional Governments contribution, and beneficiary contributions-, WUOs with low capacity, new flow of funds arrangements, etc,) that require the design and operation of robust FM arrangements. FM staff ­with required qualifications and practical experience- will be key to ensuring adequate FM arrangements throughout the life of the project and it is expected that the same administrative staff will continue executing the new project. To that end, the PSI FM team will require close follow-up and technical assistance, at least during the beginning of the project. 13. Implementation of Component A - Modernization and Rehabilitation of Collective Irrigation, and Component B ­ Irrigation Technology Improvement, calls for the participation of Water User Organizations (WUOs), groups of farmers and possibly Regional Governments. As detailed in Annex 4 (Implementation Arrangements), both WUOs and farmers' groups are expected to contribute with financial resources and also play a key role in the implementation of subprojects. In terms of financial management, the participating Regional Governments will be responsible for including in their annual plans and budget, which will be approved by MEF, the necessary resources for the co-financing of the subprojects, as per the commitments made in the respective inter-institutional agreements. For those cases where RGs decide to participate in subprojects financing, specific arrangements for the provision of RG's contributions -in cash- have been discussed and would be reflected in the respective inter-institutional agreements to be entered into effect between PSI and participating RGs. 14. The Water Users Organizations (WUOs), understood as the Water Users Associations (Juntas de Usuarios and Comisiones de Regantes) and Group of Farmers, will participate in the financing of the subprojects with monetary and in-kind resources in a percentage defined in the Inter-institutional Agreement to be entered into between PSI and WUO/Farmers's Groups. Following project design, WUOs and farmers will become the real executing bodies of sub- projects, and as such they would assume responsibility for managing financial resources, as per the procedures established under different modalities. 15. Component D. Formalization of Irrigation Water Rights and their registration in the national Water Rights Registry (RADA), subcomponents D1 and D2 would be implemented through the recently created Autoridad Nacional del Agua (ANA), which replaces the resource Instituto de Recursos Hídricos (IRH), under the same Ministry of Agriculture. Due to some restrictions included in the recently approved Budget Law in relation to financial transfer of funds, arrangements for implementation of Component D would differ from those followed under the former project. While ANA would remain responsible for the technical issues, PSI would undertake responsibility for processing payments and account for funds allocated for this component. The inter-institutional agreement between PSI and ANA has been drafted and was reviewed by the Bank, the specific arrangements mentioned above are being incorporated in the agreement. 63 Programming and budget 16. The preparation of the annual Budget will be in line with general government procedures regulated by the Annual Budget Law established by the Ministry of Finance through the Dirección Nacional de Presupuesto Público (DNPP) and related guidance. The budget is operated under the Sistema Integrado de Adminsitracion Financiera (SIAF). PSI will have the responsibility to formulate the budget to the (DNPP) for Loan funds and Central Government funds of the project In case RGs have decided to co-finance subprojects, they will process a budget financial transfer to PSI on the basis of the amounts committed and reflected in the respective agreements signed. Following local regulations, the amount effectively transferred will be incorporated under PSI's budget. From then on, PSI will assume responsibility for the administration of those funds as well. 17. PSI will have the responsibility for preparing, recording, and monitoring the overall project budget, including all sources of financing ­ IBRD, and contributions from Central Government, Regional Governments, and WUOs/farmers- following the functional classification in terms of components, sub-components and activities of the project. To this end, PSI has established specific processes and procedures for the preparation of the annual operational plans (POA) and respective budget, to make sure that those activities are coordinated with participating entities - Regional Governments, WUOs, and ANA ­ in a timely manner and that all required information and documentation is available. 18. The budgetary control will consist of: i) timely preparation and approval of annual programs, budget and procurement plans, establishing linkages between them; ii) proper recording of the approved budget in the financial management system; and iii) timely recording of commitments, and payments as needed, to allow for adequate budget monitoring, and also provide accurate information on project commitments for programming purposes. Accounting Policies and Procedures 19. The implementing entity will have to comply with the local requirements. Therefore, the project would use the Chart of Accounts established in SIAF. This chart of accounts has been complemented with a more functional classification, including project components/sub- components that would be implemented through the proposed integrated financial management system. Project transactions and preparation of financial statements will follow the cash basis of accounting. The main FM regulatory framework for the project will consist of: (i) Peru's laws governing budget and financial management; and (ii) each entity's operating manuals and norms, as applicable. 20. Project-specific FM arrangements that are not contemplated in the documents cited above have been documented in a concise FM section of the project's Operation Manual. Among others, specific reference has been made to: (i) the internal controls appropriate for the project; (ii) the formats of project financial reports; and (iii) auditing arrangements. 21. Specific accounting policies and procedures for the recording and control of disbursements made to WUOs' bank accounts (Component A) have been established. Following those arrangements disbursement will be recorded as advances in a "Deferred Expenditures" account (Cuenta Diferida). The advances will be kept in this account until they are documented, when 64 they are finally recorded as investments. Accordingly, the balance of the "Deferred Expenditures Account' will be reflected as such in the IFRs. 22. Counterpart contributions. As established in the respective agreements, cash contributions from WUOs/Farmers will be effective upon the subprojects are approved. Specific processes and procedures for the recording, controlling, and reporting of such contributions have been defined in the Operation Manual. In-kind contributions will be provided in accordance with the financial schedule of each subproject. PSI has established valuation criteria to allow a consistent mechanism to verify, record and control those contributions providing for its later inclusion in the project financial reports and project financial statements. Information System 23. SIAF offers specific controls in terms of budget execution and the project will benefit from the use of SIAF to monitor the financial activities of the project (especially budget and budget execution). However, project features call for the need to have in place an integrated information system that would enable PSI to systematically and comprehensibly record project transactions by project component and sub-component, including all sources of financing, and at the same time respond to the project's reporting requirements. Taking into account the lack of such a tool represented a major weakness in the past, PSI has made the decision of using an integrated information system ­Sistema de Información Gerencial- (SYGER) currently being used by another Bank-financed project, the Agricultural Research and Extension II project, managed by INCAGRO. Even though this system includes the basic standard modules, including budget, accounting and treasury, and it is basically prepared to allow preparation of financial reports and statement of expenditures, PSI is currently working on the enhancement and adaptation of system functionalities adjustment and complemented those modules to respond to PSI's and the project specific needs in view of different modalities and intervention schemes. Those adjustments include: i) a subproject module that allows the recording of disbursements made to the WUOs/Farmers, amounts documented and the respective outstanding balances following different disbursement modalities; ii) a financial reporting module from which IFRs can be issued, in the formats and content agreed with the Bank; and iii) a module for the preparation of Statement of Expenses (SOEs) that allow the proper recording of the payments/disbursements made in accordance with the flow of funds arrangements defined for the project. It has been agreed that the whole system to manage project funds will be fully implemented and become operational six months after project effectiveness. Such commitments will be reflected as a dated covenant under the legal agreement while this process is completed and taking into account that project activities would be simple at the beginning, it has been agreed that PSI would start project operations using the tools available for the former project. Procedures and Internal Controls 24. PSI has developed expertise and has put in place processes, procedures, and internal control mechanisms for the implementation of the former project. However, given the features and complexities of this new project and PSI performance, those procedures needed to be reviewed and strengthened accordingly. To that end, PSI has worked on the design of detailed chart flows (flujogramas) that describe the procedures, roles and responsibilities, documents required/generated and specific internal controls, both ex-ante and ex-post, to be followed for the implementation of each component, providing for an adequate segregation of duties, 65 especially related to the disbursement mechanisms, and the review and recording of supporting documents. The defined processes and procedures will later be evaluated as they are complemented with the information system. 25. As mentioned above, the draft inter-institutional agreement between ANA and PSI is being revised to reflect the specific provisions included in the new Budget Law regarding payment mechanisms. 26. PSI does not have an Internal Audit Department. However, since last year, the Controller General's Office of the Republic of Peru (CGR) has assigned to PSI the Internal Control Office (OCI) with internal auditors. In addition, in the course of its regular internal audit activities vis- à-vis the internal auditors of the Internal Control Office (OCI), assigned to the Ministry of Agriculture, which depends from the Controller General's Office of the Republic of Peru (CGR), may include project activities in their annual work plans. If such audits occur, the implementing entity will provide the Bank with copies of internal audit reports covering project activities and financial transactions. Financial Reports 27. It is expected that the financial reports will be prepared automatically from the integrated information system. On a quarterly basis, PSI will prepare unaudited interim financial reports (IFR) containing at least: (i) a statement of sources and uses of funds (with expenditures classified by subcomponent), including cash balances and outstanding balances under Component A; and (ii) a statement of budget execution with expenditures classified by the major project components and subcomponents, that allow comparison with estimated amounts. Financial reports should include all sources of financing, clearly identifying in-kind contributions. Specific format and content of IFRs have been defined taking into consideration the accounting policies and procedures established for the recording of advances to WUOs. PSI will be responsible for submitting the interim reports to the Bank no later than 45 days after the end of each quarter. 28. On an annual basis, PSI will prepare the project financial statements, including cumulative figures as of the end of that year, of the financial statements cited in the previous paragraph. The financial statements will also include explanatory notes in accordance with the Cash Basis International Public Sector Accounting Standard (IPSAS), and the entity's assertion that loan funds were used in accordance with the intended purposes as specified in the Loan Agreement. These financial statements, once audited, will be submitted to the WB no later than six months after the end of the Government's fiscal year (which equals the calendar year). 29. Working papers for the preparation of the quarterly and annual financial statements will be maintained on the Unit's premises, and made easily accessible to WB supervision missions and to external auditors. Financial reporting at the level of the beneficiary. 30. On the basis of the experience developed in the former project and following the arrangements established for the implementation of the sub-projects, PSI has worked on the design of simplified financial reports that enable WUOs to record and document the use of the 66 resources disbursed to the subprojects joint-bank accounts (cuentas mancomunadas). Those reports should also allow the segregation of the in-kind contributions. The PSI regional offices (Oficinas Zonales) will verify those reports and prepare comprehensive reports reporting on the overall financial situation of each subproject which will be used by PSI central office for accounting, and follow-up purposes. Auditing arrangements External Audit 31. PSI will prepare the annual project financial statements, which will be audited following International Standards on Auditing (ISA), by an independent firm and in accordance with terms of reference (TORs), both acceptable to the Bank. The audit opinion covering project financial statements will contain a reference to the eligibility of expenditures. An audit firm will be hired by PSI with the intervention of the Controller General's Office of Peru (CGR) which will perform the audit of the project and provide the audit report. The audit terms of reference would require a report on the adequacy of the entity's internal control system in relation to the project, including the regional offices and a review and visit to a sample of WUOs. PSI will submit the audit report to the Bank no later than six months after the end of each fiscal year. 32. No later than six months after the Effectiveness Date, or a later date agreed with the Bank, the Borrower, through MINAG-PSI, shall appoint independent auditors, with a maximum of a three-year contract duration, to carry out the audits. The contract will be renewed each year, subject to approval by the Bank. 33. The audit work described above can be financed with loan proceeds. PSI will request the contracting of the first external audit within six months after Loan Effectiveness. Audit Report Due Date 1) Project specific financial statements June 30 2) Special opinions DA June 30 SOE June 30 Flow of funds and Disbursement Arrangements 34. Considering the results of the assessment, the following disbursement methods may be used to withdraw funds from the credit: (a) reimbursement, (b) advance, and (c) direct payment. 35. Under the advance method and to facilitate project implementation, PSI will have access to a segregated Designated Account (DA) in US dollars which will be opened and maintained in the Banco de la Nación del Peru in the name of the project. The account would be managed by the PSI. Therefore, they will have direct access to funds advanced by the Bank to these DA. Funds deposited into the DA as advances would follow Bank disbursement policies and procedures, as described in the Disbursement Letter and Disbursement Guidelines. 67 36. The ceiling for advances to be made into the DA would be US$1 million for the first year of implementation starting on the date of effectiveness, to be increased to US$2 million in the second year. The reporting period to document eligible expenditures paid out of the DA is expected to be on a quarterly basis. 37. Supporting documentation for documenting project expenditures under advances and reimbursement methods would be records evidencing eligible expenditures (e.g. copies of receipts, invoices) for payments for consultant services against contracts valued at US$100,000 or more for firms, and US$50,000 or more for individuals; for payments for goods against contracts valued at US$100,000; for payment for civil work against contract value at US$250,000 or more. For all other expenditures below these thresholds and operating costs and non-consultant services, supporting documentation for documenting project expenditures will be Statements of Expenditures (SOEs). 38. All consolidated SOE documentation will be maintained for post-review and audit purposes for up to one year after the final withdrawal from the loan account. 39. Direct Payments supporting documentation will consist of records (e.g. copies of receipts, supplier/ contractors invoices). The minimum value for applications for direct payments and reimbursements will be US$400,000 40. Retroactive Financing. The Bank has agreed with the Government to finance retroactive expenditures for a maximum of US$4,000,000 for eligible expenses incurred on or after May 31, 2010, but in no case more than 1 year from the date of the LA. Disbursements under Components A 41. Under this component, there would be two modalities to manage the disbursements to the sub-projects: (i) Subprojects which cost less than Peruvian Soles 1,200,000 (aprox. US$413,000) would follow similar arrangements to those used by the former project and on which PSI has developed some expertise. Under those arrangements, PSI would deposit its contribution (BIRF and RO) and RG's contribution, as applicable, to the joint bank account (cuenta mancomunada) to be managed by PSI and the WUOs from where payments to contractors would be made. For Bank disbursement purposes, the deposit from PSI to the "cuentas mancomunadas" for each sub-project will be presented and documented using a customized Statement of Expenditure (SOE) following the instructions included in the disbursement letter. In addition, PSI will maintain a record of contributions to the mancomunadas as well as payments to individual contractors for each subproject on its accounting books. (ii) Subprojects under component A costing above soles 1,200,000 (aprox. US$413,000) would be managed by PSI, through a direct contract with the contractors. Therefore the WUOs contribution will be deposited into a PSI bank account from which payments to contractors would be made upon receiving a request from the beneficiaries, accompanied by the agreed supporting documents. For Bank disbursement purposes, these payments would be presented and documented using the standard SOE format. 68 42. The specific flow of funds arrangements have been described in the Operation Manual and additional guidance will be provided to WUOs. The customized statement of expenditure will be used for documenting expenditures under this component. Additionally, PSI is putting in place adequate internal control mechanisms and supervision throughout subproject implementation to ensure that the activities financed by the project are completed before the loan closing date. Disbursements under Component B 43. Under this component, there would be two modalities to manage the disbursements to the sub-projects: (i) Subprojects under soles 1,200,000 (aprox. US$413,000) would follow similar arrangements to those used in the former project, in which each farmer or group of farmers will be required to open and maintain a joint bank account (cuenta mancomunada) in order to deposit their contribution. However, Regional Governments' and PSI's (BIRF and RO) contributions will be administered indirectly by PSI. Under such arrangements PSI will pay contractors directly upon receiving a request from the beneficiaries, accompanied by the agreed-upon supporting documents, including evidence of payment for the counterpart share. For Bank disbursement purposes, these payments would be presented and documented using the standard SOE format. (ii) Sub-projects under component B that cost more than soles 1,200,000 (aprox. US$413,000) would be managed by PSI, through a direct contract with the contractors. Therefore the farmers/group of farmers will deposit their contribution into a PSI bank account, from which payments to contractors would be made upon receiving a request from the beneficiaries, accompanied by the agreed supporting documents. For Bank disbursement purposes, these payments would be presented and documented using the standard SOE format. Disbursements under Component C 44. Activities under component C will be managed directly by PSI and as such payments will follow the standard procedures used by PSI which have proved to be adequate. For Bank disbursement purposes, these payments would be presented and documented using the standard SOE format. Disbursements under Component D. 45. The FM arrangements for component D would be different from the previous project as they must comply with the new National Budget Law recently passed by the Government. PSI will administer the funds of component D on behalf of ANA and make payments directly to contractors upon receiving a: (i) payment request from ANA; and (ii) the respective supporting documentation dully approved by the relevant ANA representative. Therefore, for Bank disbursement purposes, these payments would be presented and documented using the standard SOE format. Disbursements under this component will be subject to the signing of the Inter- institutional Agreement between ANA and PSI reflecting final arrangements and administrative procedures between PSI and ANA which will be reflected in the Operation Manual. 69 Table of Loan Proceeds Amount of the Loan Allocated Percentage of Expenditures Category (expressed in USD) to be financed (1) Subprojects under Part A of the Project 5,580,000 100% (2) Subprojects under Part B of the Project 3,625,000 100% (3) Goods, Consultant Services, Non- Consultant Services and Training under 5,310,000 100% Part C of the Project (4) Goods, Consultant Services, Non- Consultant Services and Training under 1,785,000 100% Part D of the Project (5) Goods, Consultant Services, Non- Consultant Services and Training under 3,700,000 100% Part E of the Project TOTAL AMOUNT 20,000,000 46. WB FM Supervision Plan. A WB FM Specialist will follow-up with the PSI team to ensure compliance of the action plan towards project effectiveness and during Project implementation. After effectiveness, and based on the risk assessed, an FM Specialist will perform a review of the annual audit reports and IFRs, including two on-site visits to PSI, at least during the first two years of implementation, in order to verify the continuing adequacy and effective operation of the arrangements proposed, especially under Components A and B. The subsequent supervision strategy would be adjusted accordingly. Readiness for implementation 47. Significant progress has been reached so far; however, there are still some important actions ­identified in the risk assessment section- that are listed below: (a) Disbursement condition: The execution of the Institutional Cooperation Agreement between PSI/MINAG and ANA is a disbursement condition under Category 4 of the loan agreement (Component D). (b) Dated covenant: Not later than six months after the Effective Date, the Borrower shall implement a financial information system in a manner satisfactory to the Bank, including, inter alia, the required functionality to allow preparation of financial reports and control and monitoring of Subprojects. (c) Dated covenant: Not later than six months after the Effective Date, or at a later date if the Bank so determines, the Borrower, through MINAG-PSI, shall appoint an independent auditor, with a maximum of a three-year contract duration, to carry out the audits referred to in Section II.B.3 of this Schedule, all under terms of reference and with qualifications and experience satisfactory to the Bank. 70 Annex 8: Procurement Arrangements Peru: Sierra Irrigation Project A. General 1. Procurement for the proposed Project would be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004 revised October 2006 and amended May 2010; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 revised October 2006 and amended May 2010, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 2. Procurement of Works: Major Civil Works are not expected to be part of the Project. Works procured under this Project would include minor works for collective irrigation and drainage systems, such as water intake and canal improvements and small reservoirs, among others. Most of the Civil Works will be related to subprojects. Civil works contracts procured under ICB are not envisioned. To the extent possible, contracts for these Civil Works will be grouped in bidding packages. Contracts with estimated values of more than US$3,000,000 equivalent will be procured following ICB procedures. Contracts with estimated values below US$3,000,000 equivalent per contract may be procured using NCB procedures. Contracts which cannot be grouped into larger bidding packages and estimated to cost less than US$250,000 per contract may be procured using Shopping procedures. Given the prominent involvement of the Water Users Organizations (WUOs - Juntas de Usuarios and Comisiones de Regantes), it is envisioned that Community Participation in procurement may be used as per the criteria and instructions of the Operational Manual. The procurement will be done using Bank's SBDs and a model of request for quotations satisfactory to the Bank included in the Operational Manual. 3. Procurement of Goods: Goods procured under this project would include vehicles for regional offices, computers and office equipment and supplies, software, furniture, irrigation related specialized equipment, field materials, cartographic equipment, communication equipment, aerial photographs and satellite imagery. To the extent possible, contracts for these goods will be grouped in bidding packages of more than US$250,000 equivalent and procured following ICB procedures. Contracts with estimated values below this threshold per contract may be procured using NCB procedures. Contracts for goods which cannot be grouped into larger bidding packages and estimated to cost less than US$50,000 per contract may be procured using Shopping (national/international) procedures. The procurement will be done using Bank's SBD for all ICB and National SBD and a model of request of quotations agreed with (or satisfactory to) the Bank in the Operational Manual. 4. Procurement of non-consulting services: Non-consulting services procured under this project would include printing and publication services, geological surveys, public awareness 71 campaigns and communication and internet services, including mobile phone services. The procurement will be done using Bank's SBD for all ICB and National SBD and a model of request of quotations agreed with (or satisfactory to) the Bank in the Operational Manual. 5. Selection of Consultants: Consultants services under this project would include: technical assistance to support WUOs (Juntas de Usuarios and Comisiones de Regantes), farmers and farmers' groups; legal services for formalization of water rights and improvement of irrigation management; technical assistance in commercialization and; participatory diagnostics and elaboration of action plans. In addition, there will be technical assistance provided for feasibility studies, design and supervision of infrastructure subprojects. Research Institutions and NGOs would be able to perform activities under the project. Short lists of consultants for services estimated to cost less than $350,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Where firms are not required, individual consultants will be hired according to Section V of the Guidelines. 6. Training: The project will finance all costs associated with training, study tours and workshops required for the Project as described in the Annex 4 (Detailed Project Description). A yearly or by semester training program will be presented to the Bank for its concurrence and adherence to the objectives of the overall Project, including training for staff of the implementing unit. 7. Procurement in the Subprojects: A substantial portion of the Project funds are expected to finance demand-driven subprojects for irrigation infrastructure both at collective/off-farm (Component A) and on-farm (Component B) levels. These subprojects will be executed by groups of beneficiaries or WUAs approved by PSI management, using matching grants mechanisms. It is expected that a portion of these funds will be applied to procure civil works and goods as follows: 8. Procurement of simple civil works and goods (i.e., equipment and materials for works) of small value will be required to implement components A (canal improvements and related works and/or equipment, water intakes, works on existing small reservoirs, extension of existing small reservoirs, new artificial ponds/tanks and small water regulation reservoirs), and B (collective works and equipment up to the farm intake and works and equipments on the irrigation plots). 9. Procurement of works and goods will be conducted directly by the beneficiaries or WUAs. PSI will also carry out the validation, profile, and design of works, with the help of a team of consultants, prior to awarding the subprojects. The beneficiaries or WUAs will procure works and goods using shopping mechanisms, based on comparison of price quotations obtained from a minimum of three contractors. Requests for quotations must indicate the description of specifications of works and completion time. An evaluation of quotations must be provided, and the terms of the accepted offer be incorporated in a brief contract. 10. Direct Contracting can be used following Paragraph 3.6 of the Guidelines. The beneficiaries or WUAs can also rely on the participation of local community groups or individuals and small local private sector entities in the delivery of works through negotiated contracts on the basis of specified schedule of prices and simplified specifications. The selection criteria and contracts will be provided in the Operational Manual. 72 11. PSI will provide oversight of the entire process. PSI will conduct ex-post reviews of procurement and field visits to ensure every payment is supported by the level of physical implementation and quality specifications. PSI will publish all contract awards on its web page. Information to be published will include at a minimum: the names of bidders and the contractor awarded, and the contract amount. B. Assessment of the agency's capacity to implement procurement 12. Following the implementation arrangements defined in Annex 6 of this document, project procurement will be carried out by: (i) PSI for Components A, B, C, D3 and E; and (ii) ANA for Component D1 and D2. 13. An assessment of the implementation agencies' capacity to implement procurement actions for the project was carried out by a LCSPT staff. The capacity assessment report is part of the project files. The assessment looked into PSI's and ANA's: (a) organizational structure, (b) facilities and support capacity, (c) qualifications and experience of the staff that will work in procurement, (d) record-keeping and filing systems, (e) procurement planning and monitoring/control systems used, and (f) capacity to meet the Bank's procurement contract reporting requirements. It also reviewed the procurement arrangements proposed in the Procurement Plan. 14. The overall project risk for procurement is SUBSTANTIAL. The level of risk for this project will be reassessed and revised once there is evidence that mitigating measures such as (i) the adequate implementation of the Operational Manual; (ii) the development of Bidding Documents for project implementation, and (iii) procurement reviews conducted by independent auditors and/or Bank staff. C. Procurement Plan 15. The Borrower, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team during Negotiations and will be available through the Procurement Plan Execution System (SEPA). It will also be available in the project's database. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. D. Frequency of Procurement Supervision 16. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended annual supervision missions to visit the field to carry out post review of procurement actions. The Bank will assist the Borrower in the start-up activities by providing training to key staff in procurement under Bank procedures. E. Thresholds for Procurement Methods and Prior Review 17. Thresholds recommended for the use of the procurement methods specified in the project procurement plan are identified in the table below, which also establishes thresholds for prior review. 73 Thresholds for procurement methods and prior review (thousands of USD) Contract Value Contracts Expenditure (Thresholds) US $ Procurement Method Subject to Category thousands Prior Review 1. Works >3.000 ICB All 250 ­ 3,000 NCB First <250 3 Quotes First Regardless of value DC All Community Participation under <250 subprojects None 2. Goods >250 ICB >350 50 - 250 NCB First <50 Shopping First Regardless of value DC All 3. Consulting Services >200; <200 Terms 3.a Firms >100 QCBS, QBS, FBS, LCS of Reference Terms of <100 QCBS, QBS, FBS, LCS, CQS Reference Regardless of value SSS All >100; 3.b Comparison of 3 CVs in accordance <100 Terms Individuals with Chapter V of the Guidelines of Reference ICB = International Competitive Bidding NCB = National Competitive Bidding DC = Direct Contracting QCBS = Quality- and Cost-Based Selection Note: QBS = Quality-Based Selection FBS = Fixed Budget Selection LCS = Least-Cost Selection CQS = Selection Based on Consultants' Qualifications SSS: Single Source Selection 74 F. Details of the Procurement Arrangements Involving International Competition 1. Goods, Works, and Non Consulting Services (a) List of contract packages to be procured following ICB and direct contracting: Not expected. 1 2 3 4 5 6 7 8 9 Ref. Contract Estimated Procurement P- Domestic Review Expected Comments No. (Description) Cost Method Q Preference By Bid- (000) (yes/no) Bank Opening USD (yes/no) Date (b) ICB Goods contracts estimated to cost above US$ 250,000 per contract and all direct contracting will be subject to prior review by the Bank. 2. Consulting Services (a) List of consulting assignments with short-list of international firms. Not expected. 1 2 3 4 5 6 7 Expected Estimated Review by Ref. Description of Selection Proposals Cost (000) Bank Comments No. Assignment Method Submission USD (Prior/Post) Date (b) Consultancy services estimated to cost above USD 200,000 per contract and single source selection of consultants (firms) will be subject to prior review by the Bank. (c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than USD 350,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 75 Annex 9: Economic and Financial Analysis Peru: Sierra Irrigation Project A. Introduction 1. Most of the Project interventions/subprojects are based on a participatory approach with farmers' groups and WUOs. Hence many of the specific costs and benefits of the Project will only be precisely known at the time of implementation, when the farmers' groups/ WUOs interested and eligible have submitted their proposals for irrigation improvements (subproject proposals). The analysis below is based on a sample of subprojects selected on the basis of the financial envelope to be provided by IBRD. 2. At this stage, the Project costs and benefits can only be estimated roughly and the financial/economic analysis is therefore limited. There are nevertheless a certain number of questions which it is necessary to answer concerning the viability of the Project as well as its sustainability over time. To this end, the following two sections address respectively: (a) the financial and economic returns (internal economic rate of return) of the Project overall and (b) the financial profitability of the improved production systems proposed. B. Economic Analysis 3. A cost-benefit analysis was carried out over a period of 20 years. Its main results indicate a Net Present Value (NPV) of US$16 million and an Economic Internal Rate of Return (EIRR) of 21 percent, well above the opportunity cost of capital estimated at 12 percent. 4. A sensitivity analysis was carried out to determine the robustness of the NPV and IERR to changes in key variables (see table 9.1. below for the main results). The analysis indicates that the Project's economic viability is fairly robust to the main risks identified in the Project risk Matrix (see Section 5 of the main text), namely (i) delays in Project's implementation; (ii) lower achievements than expected in terms of areas benefiting from Components A and B (delays, lower demand, subprojects financing issues); and (iii) reduction in agricultural prices (market issues). 5. Of particular interest is the changing value for the area benefiting from Component A. Indeed, as mentioned in the results framework, and based on the lessons learned from PSI II, it is very difficult to appreciate the area that will benefit from off-farm irrigation improvements during Project design, because it depends on the location of the subprojects within the irrigation perimeters (i.e. the more upstream a subproject, the larger the area benefitting from the subproject). It is estimated that, to be economically justified, and everything else remaining equal, Component A will need to improve at least 6,500 ha. This should be easily achieved for the following reasons: (a) it is half of the irrigated area expected to benefit from Component A based on a representative sample of subprojects (which is significant); (b) a single subproject improving a water intake or a small reservoir, for example, typically benefits the entire irrigation scheme that usually covers hundreds or thousands of ha; and (c) experience shows that WUOs tend to privilege subprojects that benefit the most people within their community. 76 Table 9.1. Sensitivity Analysis Switching Values / % change in Parameters Base Case Scenario parameters Area benefiting from Component A 13,500 ha 6,500 ha 22 Area benefiting from Component B 1,500 ha None Agricultural output prices See Table 2.1 in Appendix 2 - 34% Investment costs (Components A and B) See Table 2.4 in Appendix 2 + 185% Total Benefits See Table 2.4 in Appendix 2 - 20% - Extension of Project implementation period from 5 to 7 years: EIRR = 16% Summary of Benefits and Costs Table 9.2. below indicates the main Project's benefits in the base case scenario. Table 9.2. Main Project's benefits Component A Component B Total Increase in irrigated area 2,850 0 2,850 (ha) Increase in irrigated area with higher value crops 0 1,500 1,500 (ha) Increase in value of agricultural production 2.2 3.21 5.41 (US$ Million) Increase in average revenue by family 220 2,234 565 (US$/family/year) Increase in water availability 13.8 2.44 16.24 (Million m3/year) Main assumptions and methodology Area directly benefiting from irrigation improvement 6. Based on available budgets for Components A and B and unit costs derived from the sample of subprojects (US$700 per ha for Component A and US$3,500 per ha for Component B), it is expected that at least 13,500 ha and 1,500 ha will benefit from Components A and B respectively. 7. Quantified Benefits are derived from additional crop production in the targeted areas. They materialize in three ways: (a) increases in the agricultural area actually irrigated; (b) yield increases; and (c) a shift from low value crops to higher value crops. Detailed assumptions regarding the estimation of the agricultural benefits for each component and for the overall Project are described below and in Appendix 1. 8. Based on the findings of the preparation studies, detailed per ha crop budgets have been developed for the main crops of the selected WUAs for both "with" and "without" Project scenarios. The agricultural products considered in the analysis are: potato, sweet corn, carrot, onion, barley grain and forage (e.g. Alfalfa, Oat and barley grass) artichoke, garlic, strawberry, avocado, tara, lucuma and peach. 22 Even in the absence of any on-farm irrigation improvement, the Project would still have an EIRR of 13 percent. 77 9. Increase in the agricultural area actually irrigated. Agricultural benefits will stem from an increase in the area actually irrigated resulting from increased water use efficiency (mainly from improvements in water intakes, canal lining and the adoption of improved on-farm irrigation technologies). It is expected that the agricultural area actually irrigated will increase on average by about 8 percent in the area benefiting from subprojects. By actually irrigated, one does not mean an increase in the equipped irrigated area, but rather an increase in the area irrigated that is already equipped. 10. Increases in yields will stem from both components A and B. Improved irrigation involves a quantity of water available to the crops closer to the optimum at the most critical stages of the plant development cycle and a better uniformity in crop water distribution. Expected yields are calculated using the Crop Response Factor (Coefficient Ky - FAO, Yield Response to Water, Rome, 1986), on the grounds that, in water scarcity situations, the relationship between the increase in water availability and the increase in crop yields is linear. Ky for representative crops of the Project area is: 1.10 for potato and carrot, 1.15 for barley and 1.25 for corn. (See Appendix 2, Table 2 for information on current and expected yields). 11. Change in land use. In addition, agricultural benefits will stem from a change in land use, through a shift from lower-value crops (mainly basically potatoes, sweet corn, carrot and barley grain) to higher value crops (artichoke, onion, garlic, strawberry, avocado, tara, lúcuma and peach) or forage (alfalfa, oat and barley grass) for livestock production. Overall, the conversion to higher value crops is estimated to happen on 1,500 ha. 12. Additional agricultural production at full development is shown in the table below. The increases in production concern higher value crops and forage for livestock production. It is expected that they will be easily absorbed by the markets as national and international demand for these products is strong and the additional production from the Project is not significant in comparison to the volumes presently traded in those markets. Finally, for higher value crops, producers will be required to find a partner market agent, such as a wholesaler buyer, processor or intermediary to take part in the producer proposed business plan. The business relationship, (e.g. proposed purchasing conditions, volume, price), will be outlined in a letter of intent, which will be part of the documents required for the proposal to be financed by the Project. Production (Tons) Production (Tons) Crop Crop Current Expected Current Expected Potato 217,404 213,218 Avocado - 3,008 Sweet corn 67,516 66,242 Tara - 2,390 Carrot 52,246 51,251 Lúcuma - 1,440 Barley grain 8,154 7,999 Peach - 4,309 Artichoke - 12,854 Alfalfa - 10,646 Onion - 22,986 Oat - 5,616 Garlic - 3,662 Barley for. - 4,754 Strawberry - 19,155 78 13. It should be noted that the crops listed above are representative crops selected for the purpose of the analysis. Actually, and especially in the case of horticultural crops, increased volume of production will affect a much larger range of crops that could include among others: lettuce, cabbage, tomato, watermelon and pepper. 14. Adjusting financial prices to economic values was done using specific conversion factors provided by the Ministry of Finance. This concerns such items as unskilled labor and energy23, for which the conversion factor is of 0.41 and 0.66 respectively. In this case, the specific conversion factor was applied directly to domestic market prices to obtain the economic value of the item. 15. For the items for which no specific conversion factor is readily available, the adjustments made to convert market prices to economic values included two steps: (a) the elimination of all direct taxes and subsidies from the market prices (e.g. value added taxes); and (b) adjustment for possible price distortions, including the use of the foreign exchange premium. Costs 16. Additional agricultural production is made possible by the combination of several interventions: (a) the rehabilitation and modernization of off-farm and on-farm irrigation infrastructure; (b) capacity building to improve irrigation management; and (c) support to agricultural production and marketing. All costs of these components have been included. Certain other investments have a less direct impact on output in the Project area (including overall Project implementation support). For these components, benefits are more widely spread and therefore only a portion of the related costs was taken into account. The costs and benefits related to the formalization of water rights (Component D) have been excluded from the analysis on the basis that they would be extremely difficult to quantify. 17. Based on the above, the following investment and incremental O&M costs have been included: (a) cost of feasibility studies, technical designs, works and supervision of works linked to the rehabilitation and modernization of collective and on-farm irrigation and drainage infrastructure; (b) replacement costs of the infrastructure mentioned above; (c) additional crop production and harvesting costs related to increased agricultural production; (d) cost of capacity building of WUOs, farmers' groups and farmers; and (e) 95 percent of cost of Project management, to exclude the share related to water rights formalization. C. Financial Profitability of the Production Systems 18. The overall Project financial analysis indicates that the Project financial internal rate of return (FIRR) is 12 percent, which corresponds to a Net Present Value of US$0.5 million (see cash flow in appendix 2). The significant difference between the EIRR estimated at 21% and the FIRR is explained by the following factors: (a) the absence of taxes on agricultural produces; and (b) the significant taxes on capital costs, incremental O&M expenditures and crop production costs with: investment costs and agricultural inputs subject to a 19 percent value added taxes and the low economic value of unskilled labor and energy, estimated at only 41 percent and 66% percentof their financial values respectively. 23 The parameters provided by the Ministry of Finance for the Sierra region are indicated in the Resolución Directorial No 009-2007-EF/68.01. 79 19. The financial profitability of the improved production systems accrued to farmers is the increase in revenue stemming from intensification and diversification towards higher value crops. On the other hand, production costs are increased by higher use of inputs (increased use in pesticides and fertilizers, work for land preparation, irrigation and harvesting, and use of more expensive seeds). The financial analysis focuses on the profitability of all subproject types. Increases in net revenues as a result of Project activities were calculated for all types of subprojects and FRRs to take into account farmers' contributions to irrigation and crop investments. The results of the models demonstrate that the possible growth of net incomes with improved irrigation is substantial: about US$160 per ha and per year without conversion to higher value crops and more than US$2,100 per ha and per year, in most cases with changes to higher value crops. FRR ranges from 13 to 243 percent. Farmer´s Financing Participation (BFP) and FIRR Incremental Farmer´s participation Cost annual net 15% 100% Sub-project incomes BFP BFP FIRR US$/ha US$/ha FIRR % US$/ha US$/ha % Comp. A. Canals improvement without 713 153 126 95 839 13 change to high value crops. Comp. A. Reservoir improvement. 143 87 26 330 170 49 Comp. B. 1. Drip irrigation with natural 3,764 2,857 50 479 3,663 62 pressure for vegetables. Comp. B. 2. Drip irrigation with natural 3,175 8,301* 464 46 3,090 34 pressure for fruits. Como. B. 3 Well drip irrigation with for 4,688 2,659 684 348 4,563 44 vegetables. Comp. B. 4. Drip irrigation with 6,203 2,693 905 297 6,036 45 reservoir and pumping for vegetables. Comp. B. 5. Sprinkler irrigation with 1,941 435 283 154 1,889 21 natural pressure for forages. Comp. B. 6. Multi-gates irrigation for 1,313 1752 186 940 1,245 141 vegetables. NB: incremental incomes considered a conversion to the production of higher value crops. * After 11th year 20. The results presented above can only be considered preliminary. However, because as indicated above, many of the costs and benefits will only be known at the time of implementation when the populations involved will have made their choice regarding the irrigation improvement and crop production they want to adopt. However, it is clear that the technical improvements proposed are potentially attractive from a financial point of view. 21. The calculations carried out also suggest that part of the direct investment costs could be absorbed by the beneficiaries, while still maintaining attractive profits. It is considered however, that farmers' contribution to investment costs should not be pushed higher as farmers have to make their financial contribution upfront before being able to enjoy the returns mentioned above. This is particularly difficult considering the usually very low level of farm revenues in the Sierra (the average revenue per ha of irrigated area is about US$586/ha) and limited access to credit. In addition, the conversion to higher value crops requires substantial additional production costs (e.g. seeds, fertilizers) that, should also be paid upfront and are not mentioned in the above table (typical production costs for higher value crops are US$2,500 per ha versus US$1,600/ha for traditional crops). 80 Annex 9 - Appendix 1. Detailed Economic Evaluation per Component 1. Areas benefiting from collective irrigation improvement 1. This component is expected to improve irrigation water supply services (i.e. increasing water availability and reliability and/or improving the timing of water delivery) on 13,500 ha. This will be done mostly through the rehabilitation and improvements of irrigation canals (85 percent of the improved area), and to a lesser extent, through the rehabilitation and improvement of small reservoirs (15 percent of the improved area). There could be other types of work such as improvement of water intakes, but their relative importance is expected to be small. 2. The economic evaluation of this component involves: (a) calculation of the effects of canal and reservoir improvements on irrigation water availability; (b) estimation of the effects of increased water availability on yields, irrigated area and cropping patterns; (c) calculation of incremental benefits per ha resulting from (b); (d) calculation of capital and incremental O&M costs resulting from canal and reservoir improvements per ha; and (e) calculation of net benefit flows over 20 years for an area of 13,500 ha from costs and benefits per ha calculated above and including the corresponding share of the costs of components C1 (technical assistance for improved irrigation management) and E (support to Project implementation). (a) Increase in water availability: a. Canal improvement (11,475 ha). In the Sierra, a representative canal has a conduction efficiency of 70 percent. Canal improvement is expected to improve conduction efficiency to about 90 percent, which will increase water availability at the end of the irrigation canal (entrance of the distribution network) by 20 percent24. Considering that typically, water availability per ha (measured at the end of the conduction canal) is about 4,000 m3/ha, and assuming that about 11,475 ha would benefit from this activity, increased water availability25 would be approximately 13 million m3. b. Reservoir improvement (2,025 ha). A representative reservoir in the Project area has a capacity of 0.9 million m3 and serves an area of 350 ha. Rehabilitation/improvement would typically increase reservoir capacity by 20 percent (or by 180,000 m3). Considering that typically conduction efficiency is about 70 percent, a reservoir improvement would increase water availability at the entrance of the distribution network by 126,000 m3, or 360 m3/ha. This represents a 9 percent increase in water availability per ha. Assuming that 2,025 ha would benefit from this component, increased water availability would be of 0.73 million m3/year. 24 To maintain the improved irrigation canals in a good state, it is estimated that annual maintenance costs will be increased by an amount corresponding to 2 percent of the cost of canal improvement (incremental maintenance costs). 25 To be measured at the end of the conduction canal. 81 Benefited area Increase in water availability at the entrance of the irrigation network (ha) Million m3 % Canal improvement 11,475 13.11 20% Reservoir improvement 2,025 0.73 9% Total 13,500 13.84 18% c. Increase in water availability could be used to (i) increase water allocation on currently irrigated land, translating in increased yields; and or (ii) increase irrigated area, as currently water is insufficient to irrigate all the equipped land. In the case of canal improvement (currently 11,475 ha), it is assumed that increased water availability is used to increase water supply to 4,600 m3 per ha, achieving a total irrigated area of 14,325 ha. In the case of reservoir improvement, due to the smaller increase in water availability that this activity would generate, it is assumed that all incremental water is used to irrigate better currently irrigated land without a change in cropping pattern. Water availability would increase by 9 percent in the irrigation plots. Benefits would materialize through increased crop yields. Without project Area (ha) Water availability (m3/ha) Water consumption (m3) Canal improvement 11,475 4,000 45,900,000 Reservoir improvement 2,025 4,000 8,100,000 Total 13,500 54,000,000 With project Area (ha) Water availability (m3/ha) Water consumption (m3) Canal improvement 14,325 4,600 65,895,000 Reservoir improvement 2,025 4,360 8,829,000 Total 16,350 74,724,000 Increase 2,850 128,724,000 (b) Yields increases. As mentioned earlier, yield increases were estimated using the crop response factor provided in the FAO, Yield Response to Water, Rome, 1986. (c) Incremental net "farm" benefits. In order to calculate the incremental net farm benefits, three sets of crop budgets were estimated: (i) the "without" Project scenario: traditional crops with low yields; (ii) traditional crops with higher yields in the case of canal improvements; and (iii) traditional crops with higher yields in the case of reservoir improvements. Based on these crop budgets, changes in cropping patterns and irrigated area, the average increase in net benefits is estimated at US$163/ha. (d) Capital costs. In the Sierra, the average cost of canal improvement has been estimated at US$770/ha (including feasibility studies and supervision costs), while the rehabilitation of a typical reservoir has been estimated at US$156/ha. Weighted average improvement cost is about US$700/ha. 82 (e) Other costs. The benefits calculated here not only depend on the implementation of component A, but also on the technical assistance provided to improve irrigation management (component C1). Part of the costs of component E (project implementation) was also included in the economic costs. This part was calculated as the share corresponding to the cost of component A/ total project cost. (f) Incremental operation and maintenance costs. Rehabilitation and modernization of off- farm irrigation systems should reduce required operational and maintenance costs. However, current budget allocated to the operation and maintenance of the system is insufficient. Hence, it is assumed an incremental annual maintenance expenditure equivalent to 2 percent of capital costs in order to maintain the performance of the irrigation infrastructure overtime. (g) Useful life of irrigation infrastructure. The useful life of the off-farm infrastructure investment is estimated at 40 years. Summary of results for component A Area benefiting from component A ha 13,500 Average cost per ha (NPV) US$ 700 Increase in the irrigated area ha 2,850 Increase in the irrigated area with ha 0 higher value crops Increase value of irrigated Million US$/year 2.2 agricultural production (NPV) Increase in average revenue by US$/family/year 220 family (average farm size: 0.9 ha) Increase in water availability Million m3/year 13.8 2. Areas benefitting from on-farm irrigation improvement only Component B 3. This component is expected to improve on-farm irrigation technologies on 1,500 ha, where upstream improvement of the irrigation infrastructure is not required. This would allow switching to the production of higher value crops. Six types of sub-projects have been identified (see table below). Percentage of Participation on Component B by subproject Type of subproject % of participation Type 1. Drip irrigation with vegetables with natural pressure 19 Type 2. Drip irrigation with fruits with natural pressure 5 Type 3. Drip irrigation with vegetables with pumping unit from wells 10 Type 4. Drip irrigation with vegetables with reservoir and pumping unit 25 Type 5. Sprinkler irrigation with fodder with natural pressure 36 Type 6. Improved surface irrigation (land leveling and multi-gate system) with vegetables 5 83 (a) Incremental net benefits per ha. Main benefits derived from the implementation of the subprojects are related to (i) the conversion to the production of higher value crops; and (ii) a 20 percent increase in the average yields of these crops in the Sierra in case of pressurized irrigation (drips and sprinklers) and 10 percent in the case of improved surface irrigation. Incremental net benefits were calculated based on crop budgets estimated in both the "with" and "without" project scenario (see Appendix 2 for details). (b) Capital costs. Capital costs were estimated for each of the subproject type by PSI, including works, feasibility studies and supervision. The average capital cost for Component B is US$3,264/ha. Component B cost by subproject % of participation Area (ha) Cost (US$/ha) Benefits (US$/ha) Type 1 19 3,361 2,857 Type 2 5 2,835 8,301 Type 3 10 4,186 2,659 Type 4 25 5,538 2,693 Type 5 36 1,733 435 Type 6 5 1,140 1,752 Total/average 1,000 3,264 2,141 (c) Incremental operating and maintenance costs. Operation and maintenance costs on on-farm irrigation infrastructure have been included in the crop budgets in both "with" and "without" Project scenarios. Incremental O&M costs are shown in the table below: O&M costs by subproject Type of subproject O&M costs (US$/ha) Type 1 103 Type 2 139 Type 3 275 Type 4 246 Type 5 147 Type 6 114 Total/average (d) Useful life of the infrastructure 4. The following table shows the useful life of the different elements of an improved on-farm irrigation system considered in the analysis. 84 Useful Life of On-farm improvement (Component B) Element Years Element Years Drip lines 2 Pumping equipment 10 PE pipes and irrigation archs 10 Pumping station 40 PE pipes with drip emitters 15 Sediment chamber 30 Irrigation valves 15 Main canal 30 Irrigation head unit (filters, injectors, 15 Intake 30 control and measurement devices etc) Multi-gate pipes 15 Reservoir 15 Sprinklers and accessories 15 Tertiary canals and furrow preparation 10 for multigate irrigation Register box 20 Land leveling 10 Structures for multi-gates irrigation 30 Preliminary works (cleaning)) 40 Buried PVC pipes 40 Ditches 40 Block anchors for buried pipes 40 5. Other costs included in the analysis. The benefits calculated above do not only depend on on- farm irrigation improvements. They also depend on the technical assistance provided under component C2. In addition, is included in the economic cost of the component the share of the project administration (component E) proportional to the relative cost of component B and C2 in total Project cost. Summary of results for component B Area benefiting from component B ha 1,500 Increase in the irrigated area ha 0 Increase in the irrigated area with higher value crops ha 1,500 Increase value of agricultural production Million US$/year 3.21 Increase in average revenue by family (average size US$/family/year 2,234 farm: 0.9 ha) Increase in water availability Million m3/year 2.44 85 Annex 9 - Appendix 2 Table 2.1 Prices (US$/kg) Crop Price Crop Price Crop Price Potato 0.13 Onion 0.11 Lúcuma 1.32 Sweet corn 0.11 Garlic 0.43 Peach 0.7 Carrot 0.09 Strawberry 0.35 Alfalfa 0.08 Barley grain 0.25 Avocado 0.44 Oath for. 0.08 Artichoke 0.47 Tara 0.34 Barley. 0.07 Table 2.2. Yields Yield (kg/ha) Expected Shift to high value crops due to on-farm technification Canal Reservoir Not Crop Current Improvement Improvement Pressurized Pressurized Potato 27.000 31.050 29.700 - Sweet corn 11.180 12.857 12.298 - Carrot 17.300 19.895 19.030 - Barley grain 2.700 3.105 2.970 - Artichoke - 12.000 - 12.000 14.400 Onion - 30.000 - 30.000 36.000 Garlic - 8.000 - 8.000 9.600 Strawberry - 25.000 - 25.000 30.000 Avocado - - - - 16.000 Tara - - - - 17.837 Lúcuma - - - - 18.000 Peach - - - - 32.154 Alfalfa - - - - 21.250 Oath for. - - - - 16.814 Barley for. - - - - 17.040 Table 2.3 Financial analysis. Cash flow Costs Benefits4 Cash Flow Year Comp. A1 Comp.B2. Comp. AB3 Comp. C.1 Comp. C2 Comp. E Total Comp. A Comp. B. Total 0 0 0 310,407 0 0 310,407 0 0 0 -310,407 1 1,498,034 208,652 498,684 2,447,741 1,140,074 803,608 6,596,793 0 0 0 -6,596,793 2 2,183,939 1,058,741 1,858,847 1,373,778 1,214,148 509,154 8,198,607 238,669 0 238,669 -7,959,938 3 3,348,015 1,927,530 3,306,338 849,148 915,593 648,637 10,995,260 596,673 347,410 1,465,198 -9,530,062 4 3,424,948 1,311,842 2,392,343 869,667 1,740,407 514,223 10,253,430 1,193,346 1,012,651 3,724,973 -6,528,457 5 1,371,233 957,345 1,606,006 186,963 1,235,704 603,207 5,960,457 1,782,870 1,429,107 5,355,639 -604,818 6 227,607 210,175 343,478 0 0 0 781,260 1,973,805 1,758,454 6,369,940 5,588,680 7 227,607 158,862 266,509 0 0 0 652,978 1,973,805 1,814,527 6,510,123 5,857,145 8 227,607 263,114 422,887 0 0 0 913,609 1,973,805 1,880,504 6,675,065 5,761,456 9 227,607 195,258 321,103 0 0 0 743,968 1,973,805 1,930,793 6,800,787 6,056,819 10 227,607 205,212 336,034 0 0 0 768,853 1,973,805 1,991,254 6,951,939 6,183,086 11 227,607 140,703 239,271 0 0 0 607,581 1,973,805 2,043,183 7,081,763 6,474,182 12 227,607 304,733 485,315 0 0 0 1,017,655 1,973,805 2,089,868 7,198,475 6,180,820 13 227,607 299,937 478,121 0 0 0 1,005,665 1,973,805 2,120,688 7,275,526 6,269,861 14 227,607 414,206 649,525 0 0 0 1,291,338 1,973,805 2,135,535 7,312,644 6,021,306 15 227,607 125,775 216,878 0 0 0 570,261 1,973,805 2,141,256 7,326,945 6,756,684 16 227,607 234,079 379,334 0 0 0 841,020 1,973,805 2,141,256 7,326,945 6,485,925 17 227,607 318,22 505,546 0 0 0 1,051,373 1,973,805 2,141,256 7,326,945 6,275,572 18 227,607 541,991 841,202 0 0 0 1,610,799 1,973,805 2,141,256 7,326,945 5,716,146 19 227,607 529,909 823,08 0 0 0 1,580,597 1,973,805 2,141,256 7,326,945 5,746,348 20 227,607 205,212 336,034 0 0 0 768,853 6,514,192 3,783,790 15,973,667 15,204,814 1 Includes investment and maintenance costs. EIRR = 12% 2 Includes investment and replacement costs. Daily maintenance costs are included in crop budgets. NPV (12%) = US$470,000 3 Includes investment and maintenance costs for Component A and replacement costs for Component B. 4 Includes investment residual value. 87 Table 2.4 Economic Analyses Cash flow Costs Benefits4 Cash Flows 1 2 3 Year Comp. A Comp. B . Comp. AB Comp. C1 Comp.C2 Comp. E Total Comp. A Comp B. Total 0 0 0 310,407 0 0 310,407 0 - 0 -310,407 1 1,213,557 169,029 403,984 685,814 1,140,074 803,608 6,177,994 0 - 0 -6,177,994 2 1,769,209 857,686 1,505,852 1,751,715 1,214,148 509,154 7,229,827 724218.1 - 724,218 -6,505,609 3 2,712,227 1,561,492 2,678,464 2,298,439 915,593 648,637 9,365,561 1810545.2 530,156 2,340,701 -7,024,860 4 2,774,551 1,062,723 1,938,037 1,473,535 1,740,407 514,223 8,899,608 3621089.4 1,550,423 5,171,512 -3,728,096 5 1,110,835 775,546 1,301,025 648,632 1,235,704 603,207 5,213,280 5409939.8 2,195,615 7,605,554 2,392,274 6 184,385 170,263 278,252 0 0 0 632,899 5989314 2,704,200 8,693,514 8,060,615 7 184,385 128,694 215,899 0 0 0 528,978 5989314 2,795,414 8,784,728 8,255,750 8 184,385 213,149 342,581 0 0 0 740,115 5989314 2,898,801 8,888,115 8,148,000 9 184,385 158,178 260,125 0 0 0 602,688 5989314 2,979,224 8,968,538 8,365,850 10 184,385 166,242 272,221 0 0 0 622,848 5989314 3,075,230 9,064,544 8,441,696 11 184,385 113,984 193,833 0 0 0 492,201 5989314 3,156,561 9,145,875 8,653,674 12 184,385 246,864 393,154 0 0 0 824,403 5989314 3,229,292 9,218,606 8,394,203 13 184,385 242,979 387,326 0 0 0 814,689 5989314 3,276,902 9,266,216 8,451,527 14 184,385 335,548 526,18 0 0 0 1,046,113 5989314 3,299,882 9,289,196 8,243,083 15 184,385 101,89 175,693 0 0 0 461,968 5989314 3,308,754 9,298,068 8,836,100 16 184,385 189,627 307,298 0 0 0 681,310 5989314 3,308,754 9,298,068 8,616,758 17 184,385 257,79 409,543 0 0 0 851,717 5989314 3,308,754 9,298,068 8,446,351 18 184,385 439,067 681,457 0 0 0 1,304,909 5989314 3,308,754 9,298,068 7,993,159 19 184,385 429,28 666,777 0 0 0 1,280,441 5989314 3,308,754 9,298,068 8,017,627 20 184,385 166,242 272,221 0 0 0 622,848 10093054 5,304,680 15,397,734 14,774,886 1 Includes investment and maintenance costs. EIRR = 21% 2 Includes investment and replacement costs. Daily maintenance costs are included in crop budgets. NPV (12%) = US$15.84 Million 3 Includes investment and maintenance costs for Component A and replacement costs for Component B. 4 Includes investment residual value. 88 Annex 10: Safeguard Policy Issues Peru: Sierra Irrigation Project Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [X] [] Natural Habitats (OP/BP 4.04) [X] [] Forests (OP/BP 4.36) [] [X] Pest Management (OP 4.09) [X] [] Physical Cultural Resources (OP 4.11) [X] [] Involuntary Resettlement (OP/BP 4.12) [] [X] Indigenous Peoples (OP 4.10) [X] [] Safety of Dams (OP/BP 4.37) [X] [] Projects on International Waterways (OP/BP/GP 7.50) [] [X] Projects in Disputed Areas (OP/BP/GP 7.60) [] [X] Piloting the Use of Borrower Systems to Address Environmental and [] [X] Social Safeguard Issues in Bank-Supported Projects (OP/BP 4.00) Summary of Environmental Assessment 1. Overview. Environmental considerations will be an integral part of subproject design, implementation, O&M and monitoring. The Project is expected to produce neutral environmental impacts. Depending on the type of subproject (on-farm and off-farm irrigation infrastructure improvements), it could generate positive, neutral or minor negative impacts, the latter in terms of magnitude and significance, mostly temporary. Project design includes mechanisms to prevent negative impacts during implementation and specific attention will be given to identifying and avoiding potential negative impacts that the subprojects may have collectively. 2. Project Summary. The Project aims at increasing the value of agricultural production and improving assets of rural families in targeted irrigated areas. This result would be achieved by financing capacity building and small infrastructure subprojects (small to medium sized physical works) for improved irrigation infrastructure, improved irrigation management practices, and strengthened WUOs, improved coordination between irrigation schemes and the agricultural supply chains, and formalization of water rights. The subprojects would be proposed by water users (communities, groups of producers in the WUAs). It is expected that these subprojects would trigger the above-mentioned Bank's environmental safeguards. While a limited number of the Project activities will cover the entire Sierra area, in other words the jurisdiction of the 34 WUAs (400,000 ha of irrigated land), the majority of Project activities will only concern 12 WUAs selected for their relative level of performance and their potential for the production and commercialization of high value crops. These 12 WUAs are (corresponding region in parenthesis): Alto Piura-Huancabamba (Piura), Callejón de Huaylas (Ancash), Cachi (Ayacucho), Colca (Arequipa), Cusco (Cusco), Huancavelica (Huancavelica), Lagunillas (Puno), Mantaro and Tarma (Junín), Chonta, Condebamba and Mashcón (Cajamarca). These 12 WUAs cover an irrigated area of about 170,000 ha (about 40 percent of irrigated area in the Sierra). Component A would benefit up to 10,000 ha of irrigated land (11,000 families) and Component B about 1000 ha (900 farmers) within these 12 WUAs. 89 3. Project Components and Costs. A substantial proportion of the Project funds are expected to finance subprojects aimed at improving irrigation infrastructure both at collective / off-farm (Component A) and on-farm (Component B) levels, while providing technical assistance and market services (Component C). Subprojects supported under Component A could include canal improvements (i.e. canal lining) and the construction or improvement of small water regulation reservoirs and water intakes. It also finances the feasibility studies, works/installation and supervision of works of some 250 measuring devices at the head of the hydraulic sectors defined in relation with the water user right formalized under component D1. Subprojects supported under Component B would finance the feasibility studies, execution and supervision of subprojects aimed at improving on-farm irrigation systems and including: (a) collective works and equipment at the tertiary level up to the head of the irrigated plots; and (b) works and equipment on the irrigation plots. Only subprojects meeting a set of criteria would be eligible for Project financing. These criteria are detailed in Annex 4 and aim, among other things, at ensuring that subprojects will comply with environmental and social safeguards. 4. Positive Environmental Impacts. The Project is expected to have positive environmental impacts through support of: (a) better irrigation management, hence potentially increasing overall water availability for irrigation and decreasing conflicts between water users; (b) more efficient drainage of irrigation schemes, thus preventing eventual water logging and soil salinity; (c) more adequate use of fertilizers, hence reducing both human and ecosystem health risks, through technical assistance and promotion of an Integrated Pest Management strategy where there is currently use of highly and moderately hazardous pesticides (WHO Categories I (b) and Category II); and (d) improved and more transparent management of scarce water resources through the formalization of water rights and their registration. 5. Potential Adverse Environmental Impacts. The Project area, which ranges from 1,500 meters to about 4,000 meters above sea level, includes fragile highland ecosystems prone to degradation. Given that the specific location and nature of subprojects to be financed under Components A and B have not yet been determined (these will be decided by stakeholders during Project implementation), specific environmental impacts, location and magnitude cannot be ascertained. Possible impacts (mostly localized and temporary) in the areas where on-farm and off-farm irrigation schemes will be rehabilitated and/or modernized (the latter including the possibility of new and small infrastructure works - for a list of possible subprojects under component A, see table 4.2 in Annex 4) could include: (a) soil erosion; (b) partial destruction of landscape including deforestation of small spots of riparian vegetation, when existent; (c) surface and ground water pollution, from sediments, pesticide residues and fertilizers; (d) disrupting hydrological dynamics; (e) change in the environmental value of lagoons not considered as critical habitats; (f) damage to historic cultural heritage areas; and (g) noise, toxic waste, dust and air pollution from vehicular and construction activities. 6. No significant indirect or long term or cumulative impacts are foreseen. Subprojects under Components A and B would go through a screening process to ensure maximum socioeconomic and environmental benefits are accrued and any unintended negative environmental impacts are avoided or minimized, including those eventually associated to secondary or indirect and long term effects. In addition, to ensure conformity with Bank and Government's environmental policies beyond the life of project, the EA has identified eventual indirect and/or long-term and cumulative impacts induced e.g. by project-related increase in net 90 water consumption (decreasing irrigation return flows to the hydrologic system, while increasing net water consumption by crops), when put in a broader context of climate change, this may lead to impacts on downstream users, which suffer increasing water shortages and depend fully on the precipitation of upper parts of the basin. 7. Environmental Management Framework (EMF). The Project EMF includes strict subproject screening, evaluation, approval, and monitoring procedures. The EA reviewed the legal and institutional framework in the country and its relation to the Project as well as the environmental characteristics of the proposed areas of intervention. Consultations, including discussions regarding the potential environmental impacts and benefits associated with the proposed Project, were carried out in March 2008. Some of the key aspects that have been included in the EA/EMF are described below. The EA/EMF was disclosed "in-country" on 4/7/2008 and submitted to Infoshop on 5/29/2008. 8. Mainstreaming of EA procedures. The specific subproject investments and their locations will be defined during the implementation phase. The EMF includes screening criteria and procedures - including operating rules - that would be used during Project implementation to identify and avoid or minimize any adverse environmental impacts. Specifically, subprojects supported under Components A and B would go through a screening process to ensure maximum socioeconomic and environmental benefits are accrued and any potential negative environmental impacts are avoided or minimized. Preliminary subproject screening, evaluation, approval, and monitoring procedures have been incorporated into the Project design (i.e. subprojects cycle), so that mitigation measures proposed are cost-effective and not overly burdensome (for details on Project cycle, see Annex 4). These procedures, detailed in the EMF report, are included in the Project's Operation Manual. Depending on the nature and magnitude of their potential impacts, subproject proposals will be classified into a specific category of impact (according to the national legislation ­ see paragraph below), so as to determine related requirements to reduce or eliminate potential environmental impacts. Given that the 12 WUAs where subprojects will be implemented have been identified, the EA has identified the locations and types of natural habitats in these districts, and a preliminary list of critical habitats, including Ramsar sites26 and Protected Areas managed mainly for strict protection and ecosystem conservation ­ National Parks and National Sanctuaries ("Santuarios Nacionales"). The Project's Operation Manual includes the final/complete negative list of locations considered as critical natural habitats, so as to exclude those sites from Project financing. The EMF also includes the screening process related to the resettlement policy framework and the provisions related to safety of dams safeguards as detailed later in this Annex. The EMF is part of the Project's Operation Manual. 9. Potential mitigation measures would include, for example, support to the production and marketing of high value organic farm commodities and Integrated Pest Management approaches, hence reducing pesticide use; vehicles to comply with local municipality noise, air quality regulations and waste disposal; rejection of subprojects with pre-investment studies that lack environmental impact studies; terminating works whose technical drawings indicate they affect historic-cultural sites; rejection of subproject proposals included in the locations indicated in the above mentioned negative list; organization of community outreach and public awareness campaigns on environmental management issues; affected land and vegetation would be restored 26 Ramsar sites are areas under full protection by the international "Ramsar Convention on Wetlands". 91 by soil leveling and covering grass; and promoting the application of adequate agronomic practices and train farmers in pesticide management. 10. With respect to measures to mitigate eventual indirect and/or long-term and cumulative impacts induced e.g. by Project-related increase in irrigation net water consumption, when put in a broader context of climate change, the Project would seek to coordinate with on-going and planned initiatives, including the proposed World Bank financed, Water Resources Management Modernization Project and the GEF-SCCF/WB "Adaptation to the Impact of Rapid Glacier Retreat". The Water Resources Management Modernization Project supports integrated water resources management in three pilot river basins where water conflicts are particularly acute. In these three basins, the Project will support the formulation of water resources management plans, in a participatory manner, that will include both structural and non structural interventions aimed at closing the gap between water quantity and quality availability and needs in the short, medium and longer terms. The planning process will be informed by a water quality and water balance modeling exercise, taking into account the potential impacts of climate change. The "Adaptation to the Impact of Rapid Glacier Retreat in the Tropical Andes Project", will pilot climate change adaptation measures in agriculture, energy generation and urban potable water supply in two pilot river basins in two pilot basins, the Mantaro River Basin and the Vilcanota-Urubamba River Basin. 11. Category of environmental impact of Subprojects. Subproject proposals are expected to follow the provisions made by the Peruvian legislation (EIA Law 27446/2001 and its regulation contained in the Supreme Decree 019-2009-MINAM approved in September 2009), which foresees that subproject proposals be classified as Category/Level 1 if no or very low adverse impacts are foreseen and hence no mitigation measures are necessary; Category/Level 2 if low to moderate or non-significant impacts which can be easily mitigated; and Category 3 if they are likely to have significant environmental impacts. Component A subprojects classified as Level 1 will require a simplified environmental assessment report (Declaración de Impacto Ambiental í DIA). Component A subprojects classified as Level 2, would require a semi-detailed EIA (Semidetallado EIA-sd). Mitigation measures would be incorporated into subproject design before submission for approval. The Project does not foresee any subproject that would fall into Category/Level 3, which would require a detailed or full environmental assessment study (EIA Detallado í EIA-d). With the possible construction of small water regulation reservoirs to supply existing irrigation schemes, a few subproject proposals may be classified as Category/Level 2 by the concerned sector EA authority (Dirección General de Asuntos Ambientales del Sector Agrario ­ DGAASA - MINAG), following environmental protection criteria included in the aforementioned law and regulation. In addition to the aforementioned categories provided under the national legal framework, a negative list of locations within the 12 WUAs considered as critical natural habitats has been included in the Project EA to screen out potential Category "A" subprojects, with special attention to the small dams located in existing or proposed protected areas, being either wild lands or cultural heritage sites. Finally, all subprojects that would involve taking of land or other assets or would require physical relocation of populations would be excluded from Project financing. Subprojects for component B would not need to be submitted to DGAASA. However, according to the Project's internal environmental procedures, these subprojects would require a simplified EA report with emphasis on best on-farm irrigation practices and integrated pest management. 92 12. Responsibility for EA and institutional arrangements. The Project would build on the existing EA capacity established within PSI II, which would be strengthened with four staff to support subproject's EA review in the Sierra (one at the central level and three at the regional level). These four professionals, one of whom would be located in the PMU's environmental unit, would need to be certified/registered by the sector EA authority (DGAASA), as they would be responsible for assisting WUAs in preparing simplified EA reports, including those foreseen under Component A (Declaración de Impacto Ambiental ­ DIA) for submission to DGAASA. Under the coordination of an environmental coordinator posted at the central PMU (Lima), proposed subprojects would be categorized by the PSI environmental staff (at regional levels) that would also be accountable for recruiting and carrying out the overall supervision of EA studies (DIA/ Level 1 or EIA-sd/Level 2) before submitting subproject proposals to the concerned sector EA authority (DGAASA), if applicable. For subprojects requiring an EIA- sd/Level 2, PSI would recruit a specialized firm to carry out the study. PSI would also inform concerned local and regional environmental authorities that could also monitor the EA preparation process. Draft EA documents would be disclosed in-country and made accessible to subproject-affected groups and local NGOs. Upon EA approval (by DGAASA for component A and PSI for component B) and adequate budget allocated, PSI would issue authorization for subproject start-up. Compliance with Safeguard Policies 13. The proposed Project is designed to comply fully with the World Bank safeguard policies, as indicated below. O.P. 4.01--Environmental Assessment 14. The Project is classified as Category B, the appropriate classification for projects whose potential adverse environmental impacts on human populations or environmentally important areas are site-specific, reversible, and can be readily mitigated (OP 4.01, paragraph 8). The Project has been classified as Category B because it is not expected that any subprojects will be classified as Category A due to their size, location or expected impacts. The works undertaken as parts of component A and B are small to medium in scale. They would consist of community work for the rehabilitation and modernization of existing irrigation schemes, the rehabilitation and construction of small dams (less than five meters in height) to supply existing irrigation schemes. In accordance with this classification, an environmental assessment (EA), including an EMF has been prepared and reviewed by the Bank. The EA and EMF specify the criteria and procedures--including operating rules--that will be used during Project implementation to avoid or minimize adverse environmental impacts. The EA also includes a negative list of locations considered as critical habitats, within the jurisdiction of the 12 WUAs, so as to exclude those sites from Project financing. The EMF was disclosed "in-country" on 4/7/2008 and submitted to Infoshop on 5/29/2008. O.P. 4.09--Pest Management 15. This policy is triggered because on-farm irrigation improvement (component B) on an estimated 1,000 ha should lead to the intensification of agricultural production by shifting from low-value crops to higher value crops for exports and internal urban markets, which could lead to 93 increased use of pesticides. A Pest Management Plan has been developed by the Borrower, building upon the one for PSI II that was revised (April 2007) as the Project was extending its activities in three pilot areas in the Sierra. The PMP's preparation studies identified 10 Category Ib and 9 Category II pesticides commonly used in the Sierra, i.e. highly and moderately hazardous pesticides according to WHO classification. The proposed Project (as in PSI II) would not finance the procurement of pesticides. However, these agro-chemicals might continue to be used by farmers submitting on-farm irrigation subprojects in crops which do not involve organic farming. As a result, it was agreed (and included in the EMF and PMP) that irrigation subprojects would not be eligible if the concerned crop involves the use of WHO Category I; in the case of WHO Category II, the subproject design and its environmental assessment (informe ambiental preliminar) would describe a proposal for adoption of good practices, requiring the adoption of an IPM strategy to ensure that pest management activities are sustainable and that health and environmental risks of pesticide use are minimized and are of a level that can adequately be managed by the user. In addition, the Project (Component C) would promote training in good practices and IPM information dissemination. More specifically, in the case of farmers using WHO Category II pesticides, the Project will provide more intensive training on pesticides management and distribute protection equipment to the farmers and would promote alternatives such as biological control, through strategic alliances with large agricultural exporters and/or national with national research and extension institutions. The PMP was disclosed "in-country" on 3/5/2008 and submitted to Infoshop on 5/29/2008. O.P. 4.04--Natural Habitats 16. It is expected that the large majority of investments will take place in areas that have been traditionally dedicated to agriculture and will therefore not involve conversion of natural habitats. The Project foresees the possibility of a few subprojects including the rehabilitation, improvement or construction of small regulating reservoirs located upstream of the irrigation schemes. Three types of activities could be financed on small regulating reservoirs: (a) rehabilitation of existing dykes, without any changes in its height; (b) increasing the height of an existing dyke; or (c) constructing new dykes. In all cases, dykes would be of a small size, less than five meters in height. These subprojects could potentially lead to the inundation of high value ecosystems. In addition, in areas where the Project would support rehabilitation/modernization/construction of water intakes, there might be partial and or temporary destruction of landscape including deforestation of small spots of riparian vegetation, which have existent, and downstream aquatic ecosystems. The Project's environmental management rules explicitly forbid any Project activities in areas supporting critical natural habitats. This is included in the EMF and Project's Operation Manual. Any activity in the buffer zone of a protected area would be designed to help reduce pressure on the protected area itself. As mentioned above, the project EA has identified the locations and types of natural habitats in the 12 Project supported WUAs, and a list of critical habitats, which has been included in the Project's Operation Manual. OP 4.11--Physical Cultural Resources 17. This policy was triggered because of the prevalence of archeological and culturally significant sites and artifacts in the Sierra Region. The Project will finance small-scale works in already established agricultural zones where there is little likelihood of disturbing archaeological, 94 paleontological, or other culturally significant sites. In any case, such impacts will be avoided through application of the subproject eligibility criteria and the safeguard screening system, and inclusion of "chance find" procedures in the contracts for any subproject involving works. The EMF includes these screening procedures, incorporating mechanisms to mitigate these potential adverse impacts. OP/BP 4.12--Involuntary Resettlement 18. The Project does not trigger OP/BP 4.12 because it involves no taking of land or other assets and requires no physical relocation of populations. The subproject eligibility criteria and safeguard screening process will exclude any subproject that could involve such impacts. This was the approached followed under the previous PSI II project. The EMF includes these screening procedures. OP/BP 4.37 - Safety of Dams 19. This policy was triggered because: (a) some of the irrigation subprojects that will be implemented by the Project might depend on the storage and operation of existing dams for their water supply operation or might potentially be badly damaged if an upstream dam fails; and (b) some subprojects may include the construction, rehabilitation or elevation of small dams (height below five meters). 20. In line with OP/BP 4.37 on dam safety, PSI will identify existing dams over 10 meters in height that could potentially cause extensive damage to a subproject implemented by the Project or on which could depend the water supply of subprojects. For those dams, PSI will check whether an effective dam safety program is in operation and whether full-level inspections and dam safety assessments, satisfactory to the Bank, have already been documented and conducted. If this is not the case, PSI will inspect and evaluate the safety status of the existing dam and its performance history and will review and evaluate the owner's operation and maintenance procedures. Finally, PSI will provide a written report of findings and recommendations to upgrade the existing dam to an acceptable standard of safety. 21. In case there are substantial dam safety issues, necessary remedial works and measures will be carried out, using competent professionals for design and supervision. In areas affected by this situation, the Project will not implement any subproject until a commitment is secured from the responsible authority to carry out these remedial works and measures. 22. The Project will not intervene in dams more than five meters high. Rehabilitation and construction of dams of less than five meters high will comply with the Peruvian legislation and norms. 23. The EMF includes the provisions mention above regarding compliance with the dam safety safeguard. OP/BP 4.10--Indigenous Peoples 24. The irrigated areas targeted by the Project include farmers that are mestizos, indigenous people and criollos. This policy was triggered because some of the Project activities will have a 95 direct impact on indigenous people whose concentration is high in the Sierra. The main indigenous peoples groups living in the Sierra are Quechua and Aymara. 25. Since individual subprojects will only be identified during Project implementation, and because the Bank's screening process indicates that Indigenous People are likely to be present in the Project area, but their presence cannot be determined until the subprojects are identified, the Borrower has prepared an Indigenous Peoples Planning Framework (IPPF). The IPPF provides for the screening and review of subprojects in a manner consistent with Bank safeguards policy. When the subproject screening process indicates that Indigenous Peoples are present in the area of the subprojects, a rapid social assessment and Indigenous Peoples Plan (IPP) will be prepared in accordance with the requirements of Bank policy. The generic Terms of Reference for this social assessment and IPP have been included in the IPPF. The IPPF has been prepared based on a social assessment made for six of the 12 WUAs targeted for irrigation infrastructure improvement: Ayacucho (Ayacucho), Juliaca (Puno), Colca-Chivay (Arequipa), Mantaro (Junín), Mashcón, (Cajamarca) and Chonta-Cajamarquino (Cajamarca). The Borrower also developed a participatory and inclusive consultation process that accompanied the IPPF in four areas of the Project: Mantaro (Junín), Colca-Chivay (Arequipa), Juliaca (Puno) and Ayacucho (Ayacucho). Finally, the Borrower prepared an IPP as a reference to all the areas of intervention. For this IPP the area of Colca-Chivay (Arequipa) was selected for the report. 26. The IPPF was disclosed "in-country" on 3/5/2008 and submitted to Infoshop on 5/29/2008. Public Consultation and Disclosure 27. The EA proposes criteria and procedures to carry out the environmental analysis consultations for the specific subprojects and provides guidelines and questionnaires for in-depth interviews with stakeholders. Public consultations of the draft EA (including EMF and PMP) took place in February 2008. The final EA, including EMF and PMP, was disclosed in-country and at the World Bank's InfoShop and Public Information Center, prior to appraisal. More specifically, the IPPF was disclosed "in-country" on 3/5/2008 and submitted to Infoshop on 5/29/2008. The EA/EMF was disclosed "in-country" on 4/7/2008 and submitted to Infoshop on 5/29/2008. The PMP was disclosed "in-country" on 3/5/2008 and submitted to Infoshop on 5/29/2008. 28. GOP selected 12 WUAs to benefit from irrigation improvement subprojects and selected six WUAs to prepare the social assessment (SA) and the elaboration of an IPPF. SA were conducted in the Irrigation Districts of Colca-Chivay, Mantaro, Mashcón , Chonta-Cajamarca, Juliaca and Ayacucho, and detailed documentation of the extensive consultation process carried out in the SA process are available in the Project file and are posted on PSI website http://www.psi.gob.pe/inicioPSI.html. A communication plan was also developed for the selected districts. The plan foresees local media to disseminate information in Spanish and Quechua to promote participation in the Project. 29. Consultations with members of the WUOs, farmers and leaders representing a larger number of comunidades campesinas, were invited to attend the workshops to learn about the Project design and the IPPF. The discussions were fluid and captured the interest of the audience. 96 First consultation meetings included the water stakeholders in the irrigation districts of Mantaro, Chonta-Cajamarca, Mashcón and Colca­Chivay in Arequipa. A second consultation meeting was organized for the irrigation districts of Juliaca and Ayacucho. The consultation meetings included women, youth and adult men. The facilitation of the meetings permitted inclusive and participatory communication. The process and outcomes of the consultation meetings were recorded in a video. During the consultation, participants provided their signatures in order to confirm attendance and agreed with the Project. The signatures were filed in the Project's documentation. Summary of Social Assessment 30. The Project's target beneficiaries are irrigation farmers with good access to markets and capacity for the production of higher value crops. Most of them will not be very poor, will not be indigenous farmers or belonging to a comunidad campesina. However, PSI has prepared social assessments for a sample of six WUAs (out of the 12 targeted by the Project). Those are the areas of Colca-Chivay, Mantaro, Mashcón and Chonta, Juliaca and Ayacucho. Those social reports were used as an input to the preparation of the Indigenous Peoples Planning Framework (IPPF). Preparation of the IPPF builds also on PSI experience with the Colca Valley, for which it had already prepared a good practice Indigenous Peoples Plan (IPP) under PSI II. This IPP will be used as model for PSI Sierra. The paragraphs below provide a summary of the findings of the social assessment relevant to the IPPF and overall Project design. 31. The social objectives of the Project are: (a) Creation of opportunities for income generation for farmers, indigenous and non indigenous; by improving their irrigation services; and (b) Capacity building of WUO's and farmers' groups to improve irrigation schemes management and agriculture production and commercialization. Stakeholder groups. 32. The stakeholders in the Project are (a) farmers, individuals and groups ­ the project considered individuals and groups as beneficiaries of the financial support of the project; (b) associations or groups of producers and small micro enterprises, small producers who already have access to markets; the project will help promote rural business with access to markets; (c) comunidades campesinas, that will be active social actors in the irrigation districts of the project (they have a traditional structure, formed by a president of the community who is elected by the communal assembly); (d) regional governments will contribute financially to subproject investments; (e) civil society organizations, there are expert NGOs in the project topic for technical assistance to the beneficiaries and, the mesas de concertación de lucha contra la pobreza that can play a principal role in coordinating and planning at the irrigation district level; and (f) unions and farmers' federations. Main findings of the SA taken into account in the Project design 33. Considering the Project objectives and components, the social assessments emphasized the analysis of the legal framework related to access to water and land. Indeed, secured land and water rights are fundamental to encourage farmers' investments in on-farm irrigation technology and the conversion to higher value crops. Indeed, without secured access to water and ownership 97 to his plot of land, a farmer will be reluctant to invest in infrastructure, such as improved on-farm irrigation technologies or expensive seeds, seedlings and agrochemicals. For that reason, the Project includes a component dedicated to the formalization of water rights (PROFODUA). The Project, through PROFODUA, is also closely coordinating its activities with PETT (Proyecto Especial de Titulación de Tierras y Catastro Rural), the program in charge of land titling and registration. Indeed, for individual farmers land ownership is prerequisite to obtain a water license. In addition to catering to the special needs of the comunidades campesinas, which possess communal land, the Project, through PROFODUA, has designed a special methodology that grants a water license for the entire community, identifying within a water license the plots of land irrigated as well as the amount of water that could be allocated to it. 34. Another important finding of the SA relevant to Project design was the importance of traditional irrigation management practices in the Irrigation Districts of the Sierra. In particular, the mandatory participation in the form of community work (faenas) for the operation, maintenance and rehabilitation of the irrigation infrastructure is a fundamental element of irrigation management, and an ancestral practice. This explains the inexistence, or very low water tariff, in most of the irrigation districts of the Sierra, because most of the O&M activities rely on community work. This aspect of irrigation management has also been taken into consideration in Project design, as irrigators and water users' groups can make a large share of their investment contribution to the Project in-kind. A minimum cash contribution to investment has been maintained to ascertain ownership. As recommended by the SA, participation is very important element of Project design. Indeed, farmers and water users, in groups, participate in subproject design, supervision of works, financing and monitoring and evaluation. In addition, farmers and water users are fully responsible for the operation and maintenance of the infrastructure. 35. Other traditional irrigation practices include: (a) the community arrangements to calculate water fees and other contribution without following government's regulations; and (b) the practice of renting or selling traditional water rights, which is against Peruvian law. The capacity program for WUOs and farmers will take into account those traditional management practices; in particular it will recognize the importance of community work when explaining how to set water tariffs. 36. Another important aspect of irrigation management in the Sierra is the importance of traditional irrigation organizations, such as the Comités de Regantes. Those traditional organizations are informal and there is still a lot of confusion within farmer groups on the role and functions of the legally established water users groups that are the Comisiones de Regantes (CRs) and Juntas de Usuarios (JUs). The Project, through component C1, which is dedicated to the capacity building of water users groups, will clarify the role and functions of the CR and JU versus the more traditional Comités de Regantes. The capacity building program will be designed based on a thorough diagnostic of existing management practices and will provide tailored training program to informal and formal water users groups as required. 37. Women are generally excluded in the decision making process related to irrigation management and represent, in general, a small fraction of the water users. Among the six irrigation districts studied, Puno is an exception, where about 36 percent of water users are women. The Project will pay special attention to female farmers in the Sierra, learning from the 98 lessons in Puno, making sure that they benefit from the capacity building activities and promoting their participation in the decision making process. 38. Finally the SA helped identify potential partners for the Project. A list of potential partners prepared as part of the Social assessment is presented in Annex 2 of this document. 99 Annex 11: Project Preparation and Supervision Peru: Sierra Irrigation Project Planned Actual PCN review 04/03/2007 Initial PID to PIC 04/10/2007 Initial ISDS to PIC 04/10/2007 Appraisal 06/02/2008 Negotiations 06/11/2010 Board/RVP approval 07/27/2010 Planned date of effectiveness 01/01/2010 Planned date of mid-term review 06/30/2013 Planned closing date 12/31/2015 Key institutions responsible for preparation of the project: PSI and ANA. Bank staff and consultants who worked on the project included: Name Title Unit Senior Water Resources Management Marie-Laure Lajaunie LCSEN Specialist, TTL Douglas Olson Lead Water Resources Management Specialist LCSEN Erwin De Nys Water Resources Management Specialist LCSEN Fernando Pizarro Irrigation Specialist Consultant Katia Medeiros Environmental Specialist FAO-CP Elizabeth Dasso Senior Social Specialist LCSSO Evelyn Villatoro Senior Procurement Specialist LCSPT Nelly Ikeda Financial Management Specialist LCSFM Xiomara Morel Senior Financial Management Specialist LCSFM Amanda Schneider Program Assistant LCSEN Usaid El-Hanbali Peer reviewer ECSSD Rita Cestti Peer reviewer LCSEN Pierre Werbrouck Senior Agricultural Economist/Peer reviewer Consultant Fabiola Altimari Counsel LEGLA Francisco Rodríguez Procurement Specialist LCSPT Teresa Roncal Operations Analyst LCSAR Lara Chinarro Water Resources Management Specialist LCSEN Ana Núñez Sánchez Operation Analyst Consultant Bank funds expended to date on Project preparation: 1. Bank resources: US$481,113 2. FAO-CP: US$147,593 3. Trust Funds: US$54,802 4. Total: US$683,507 100 Estimated Approval and Supervision costs: 5. Remaining costs to approval: US$3,000 6. Estimated annual supervision cost: US$110,000 101 Annex 12: Documents in the Project File Peru: Sierra Irrigation Project A. Bank Staff Assessments - Project Aide-Memoires and Back-to-Office Reports - Financial Management Assessment - Procurement Capacity Assessment B. Other - Project Feasibility Study - Estudio de preinversión a nivel de prefactibilidad del programa subsectorial de irrigación Sierra (PSI Sierra), MINAG, 2009. - Irrigation Subsector Supplemental Project, Implementation Completion and Results Report, World Bank report # ICR1092, 2009; - Irrigation Subsector Project, Implementation Completion Report, World Bank report # 29838, 2004; - Plan Meris, Project Impact Evaluation #54, USAID, 1984. - Sierra Rural Development Project, Report No. 37733-PE - The Agricultural Research and Extension Program, Report No. 31389-PE - Poverty Alleviation Project, Report No. 15719-PE - Country Partnership Strategy for the Period FY07-FY11, Report No. 37913-PE 102 Annex 13: Statement of Loans and Credits Peru: Sierra Irrigation Project Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd P116929 2010 PE Safe and Sustainable Transport 150.00 0.00 0.00 0.00 0.00 150.00 0.00 0.00 P107666 2010 PE Water Resources Mgmt. 10.00 0.00 0.00 0.00 0.00 10.00 0.00 0.00 P101590 2009 PE 2nd Prg Fiscal Mgmt & Comp. 700.00 0.00 0.00 0.00 0.00 530.00 -170.00 0.00 DPL/DDO P101471 2009 PE First Prog. Environ DPL/DDO 330.00 0.00 0.00 0.00 0.00 310.00 -20.00 0.00 P101177 2009 PE-2nd Results & 330.00 0.00 0.00 0.00 0.00 310.00 -20.00 0.00 Accnt.(REACT)DPL/DDO P095563 2009 PE- (APL2) Health Reform Program 15.00 0.00 0.00 0.00 0.00 15.00 2.33 0.00 P079165 2007 PE Sierra Rural Development Project 20.00 0.00 0.00 0.00 0.00 17.00 10.10 0.00 P095570 2007 PE Decentralized Rural Transport Project 50.00 0.00 0.00 0.00 0.00 15.70 -2.64 0.00 P090116 2006 PE Rural Electrification 50.00 0.00 0.00 0.00 0.00 15.57 -6.09 0.00 P078894 2006 PE Real Property Rights II 25.00 0.00 0.00 0.00 0.00 13.00 10.66 0.00 P078813 2006 PE Regional Transport Decentralization 50.00 0.00 0.00 0.00 0.00 41.90 35.84 0.00 P088809 2005 PE Inst. Capacity for Decent. TAL 8.80 0.00 0.00 0.00 2.16 1.09 3.25 0.11 P082625 2005 PE Vilcanota Valley Rehab & Mgmt 4.98 0.00 0.00 0.00 0.00 2.72 2.72 0.00 Project P082588 2005 PE (APL2)Agric Research and Extension 25.00 0.00 0.00 0.00 0.00 2.35 2.35 0.00 P073438 2004 PE Justice Services Improvement 12.00 0.00 0.00 0.00 0.00 0.02 0.02 0.00 P035740 2004 PE LIMA TRANSPORT PROJECT 45.00 0.00 0.00 0.00 0.00 4.26 4.26 0.00 P065256 2003 PE NATIONAL RURAL WATER 50.00 0.00 0.00 0.00 0.00 19.96 19.96 5.18 SUPPLY AND Total: 1,875.78 0.00 0.00 0.00 2.16 1,458.57 - 127.24 5.29 PERU STATEMENT OF IFC's Held and Disbursed Portfolio In Millions of US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2006 Agrokasa 15.00 0.00 0.00 0.00 11.00 0.00 0.00 0.00 1999 Alicorp 0.00 0.00 20.00 0.00 0.00 0.00 20.00 0.00 2005 Corp. Drokasa 6.41 0.00 0.00 0.00 6.41 0.00 0.00 0.00 2004 EDYFICAR 1.92 0.00 1.00 0.00 1.92 0.00 1.00 0.00 2002 FTSA 5.89 0.00 1.50 0.00 5.89 0.00 1.50 0.00 2002 Gloria 23.64 0.00 0.00 0.00 17.64 0.00 0.00 0.00 103 2002 ISA Peru, SA 15.28 0.00 0.00 5.59 15.28 0.00 0.00 5.59 2003 ISA Peru, SA 0.20 0.00 0.00 0.00 0.12 0.00 0.00 0.00 2001 Inka Terra 4.75 0.00 0.00 0.00 4.75 0.00 0.00 0.00 2004 Interbank-Peru 40.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 Interseguro 0.00 4.00 0.00 0.00 0.00 4.00 0.00 0.00 2003 Interseguro 0.00 0.59 0.00 0.00 0.00 0.59 0.00 0.00 2005 Interseguro 0.00 0.60 0.00 0.00 0.00 0.00 0.00 0.00 2000 Laredo 4.29 0.00 5.00 0.00 4.29 0.00 5.00 0.00 2004 Laredo 0.30 0.00 0.00 0.00 0.08 0.00 0.00 0.00 1998 Latino Leasing 0.83 0.00 0.00 0.00 0.83 0.00 0.00 0.00 2002 MIBANCO 0.33 0.00 0.00 0.00 0.33 0.00 0.00 0.00 2006 MIBANCO 29.08 0.00 0.00 0.00 29.08 0.00 0.00 0.00 1999 Milkito 5.50 0.00 0.00 0.00 3.50 0.00 0.00 0.00 2005 Miraflores 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 2003 Norvial S.A. 18.00 0.00 0.00 0.00 5.90 0.00 0.00 0.00 1998 Paramonga 10.26 0.00 0.00 8.66 10.26 0.00 0.00 8.66 2001 Peru OEH 5.50 0.00 3.00 0.00 1.50 0.00 3.00 0.00 1993 Quellaveco 0.00 4.67 0.00 0.00 0.00 4.67 0.00 0.00 1996 Quellaveco 0.00 3.98 0.00 0.00 0.00 3.98 0.00 0.00 2000 Quellaveco 0.00 0.45 0.00 0.00 0.00 0.45 0.00 0.00 2001 Quellaveco 0.00 0.57 0.00 0.00 0.00 0.54 0.00 0.00 1999 RANSA 4.38 0.00 0.00 0.00 4.38 0.00 0.00 0.00 2005 RANSA 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 2001 Tecnofil S.A. 3.15 2.00 0.00 0.00 3.15 2.00 0.00 0.00 2005 USMP 9.00 0.00 0.00 0.00 4.50 0.00 0.00 0.00 1993 Yanacocha 0.00 0.33 0.00 0.00 0.00 0.33 0.00 0.00 Total portfolio: 223.71 17.19 30.50 14.25 150.81 16.56 30.50 14.25 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. 2004 UPC II 0.00 0.00 0.00 0.00 2005 Drokasa PCG 0.00 0.00 0.00 0.00 2004 CMAC Arequipa 0.01 0.00 0.00 0.00 Total pending commitment: 0.01 0.00 0.00 0.00 104 Annex 14: Country at a Glance Peru: Sierra Irrigation Project Peru at a glance 12/9/09 La t in Uppe r- P O V E R T Y a nd S O C IA L A m e ric a m iddle - Development diamond* P e ru & C a rib. inc o m e 2008 P o pulatio n, mid-year (millio ns) 28.8 565 949 Life expectancy GNI per capita (A tlas metho d, US$ ) 3,990 6,781 7,878 GNI (A tlas metho d, US$ billio ns) 1 1 5.1 3,833 7,472 A v e ra ge a nnua l gro wt h, 2 0 0 2 - 0 8 P o pulatio n (%) 1.2 1.2 0.8 Labo r fo rce (%) 2.6 2.2 1.7 GNI Gross per primary M o s t re c e nt e s t im a t e ( la t e s t ye a r a v a ila ble , 2 0 0 2 - 0 8 ) capita enrollment P o verty (% o f po pulatio n belo w natio nal po verty line) 53 .. .. Urban po pulatio n (% o f to tal po pulatio n) 71 79 75 Life expectancy at birth (years) 73 73 71 Infant mo rtality (per 1,000 live births) 22 22 21 Child malnutritio n (% o f children under 5) 5 5 .. Access to improved water source A ccess to an impro ved water so urce (% o f po pulatio n) 84 91 94 Literacy (% o f po pulatio n age 1 5+) 90 91 94 Gro ss primary enro llment (% o f scho o l-age po pulatio n) 1 13 1 17 1 10 Peru M ale 1 13 1 19 1 12 Upper-middle-income group Female 1 12 1 15 108 KE Y E C O N O M IC R A T IO S a nd LO N G - T E R M T R E N D S 19 8 8 19 9 8 2007 2008 Economic ratios* GDP (US$ billio ns) 12.4 56.8 107.5 129.1 Gro ss capital fo rmatio n/GDP 33.6 23.6 22.9 26.3 Expo rts o f go o ds and services/GDP 18.8 13.1 28.8 27.1 Trade Gro ss do mestic savings/GDP 29.8 18.2 29.4 26.9 Gro ss natio nal savings/GDP 20.0 17.9 23.7 22.6 Current acco unt balance/GDP -14.8 -5.9 1.1 -3.2 Interest payments/GDP 1.8 2.4 2.0 1.3 Domestic Capital savings formation To tal debt/GDP 147.3 53.7 26.9 22.1 To tal debt service/expo rts 9.5 26.1 24.7 1 1 .7 P resent value o f debt/GDP .. .. 33.4 21 .8 P resent value o f debt/expo rts .. .. 102.5 66.8 Indebtedness 19 8 8 - 9 8 19 9 8 - 0 8 2007 2008 2 0 0 8 - 12 (average annual gro wth) GDP 3.4 5.0 8.9 9.8 3.2 Peru GDP per capita 1.4 3.6 7.6 8.5 1.1 Upper-middle-income group Expo rts o f go o ds and services 8.2 8.4 6.2 8.2 1.8 S T R UC T UR E o f t he E C O N O M Y 19 8 8 19 9 8 2007 2008 Growth of capital and GDP (%) (% o f GDP ) 30 A griculture 10.3 9.0 7.0 7.2 25 Industry 33.4 29.7 37.0 36.2 20 15 M anufacturing 28.8 15.7 15.9 15.9 10 Services 56.3 61.3 56.0 56.6 5 0 Ho useho ld final co nsumptio n expenditure 59.8 71.4 61.5 64.2 03 04 05 06 07 08 General go v't final co nsumptio n expenditure 10.4 10.4 9.1 8.9 GCF GDP Impo rts o f go o ds and services 22.6 18.5 22.4 26.5 19 8 8 - 9 8 19 9 8 - 0 8 2007 2008 Growth of exports and imports (%) (average annual gro wth) A griculture 3.2 4.3 3.5 7.2 25 Industry 4.6 5.7 10.1 10.1 20 15 M anufacturing 3.0 5.8 1 1 .1 9.1 10 Services 2.6 4.8 9.6 9.6 5 Ho useho ld final co nsumptio n expenditure 2.7 4.4 8.4 8.7 0 General go v't final co nsumptio n expenditure 4.5 3.9 4.5 4.0 03 04 05 06 07 08 Gro ss capital fo rmatio n 8.5 6.7 26.1 24.8 Exports Imports Impo rts o f go o ds and services 1 1 .7 7.3 21.3 19.9 No te: 2008 data are preliminary estimates. This table was pro duced fro m the Develo pment Eco no mics LDB database. * The diamo nds sho w fo ur key indicato rs in the co untry (in bo ld) co mpared with its inco me-gro up average. If data are missing, the diamo nd will be inco mplete. 105 MAP SECTION IBRD 37679 80°W 75°W 70°W 0° 0° Arcadia COLOMB IA PERU E C U A DO R ap N o Putumayo Puerto Curaray Co rr i Tig en r te e s Tumbes ma A zona Santiago s Iquitos za Caballococha ta Pas i var Talara Ayar Manco Ya Sullana 5°S San Maraño 5°S li n ya Piura Ignacio Uc a Huancabamba Moyobamba Yurimaguas Tamánco Chachapoyas Tarapoto Chiclayo Cajamarca Río Mashcon B R A Z IL Río Chonta y Cajamarquino Cajabamba Hua 0 100 200 300 Kilometers ll ag Santa a Trujillo Lucia Pucallpa 0 100 200 Miles Sihuas PA C IF IC Chimbote OC E AN Tingo María Uc Huaraz ay Callejón de Huaylas ali Huánuco 10°S 10°S Goyllarisquizga Purús Cerro de Pasco Atalaya Huacho Sayán Tarma Ap Satipo uri La Uru mac Oroya Mantaro bam M Callao Huancayo ad r b LIMA ed a PERU eD ios Ayna Sintuya Huancavelica JURISDICTION OF Huancavelica Ayacucho Quillabamba Cusco Puerto Maldonado THE 12 WATER USERS' Pisco Cusco Lanlacuni Astillero Ayacucho ASSOCIATIONS Abancay Bajo In a Ica mb a ri PRIORITIZED BY THE Puquio 15°S PROJECT Caballas Nazca Alca Cailloma Juliaca 15°S San Juan Puquio Valle del Juliaca Colca Lago PROJECT WUAs Antiquipa Puno Titicaca Atico Arequipa Desaguadero CITIES AND TOWNS REGIONAL CAPITALS Moquegua NATIONAL CAPITAL Mollendo RIVERS BOLIVIA REGIONAL BOUNDARIES Tacna INTERNATIONAL BOUNDARIES CHILE 80°W 75°W 70°W MARCH 2010