Peru - Lima Metropolitan Development Project

Docun=t Of The World Bank FOx OmCIAL USE ONLY LA) - 2qsl5- pE Repwt No_ P-3839-PE REPORT AND RECOMIENDATION OF THiE PRESIDENr OF THE INrEItATIONAL BANK FOR RECONSTwCTION AND DEVELOPmEN TO 'IE EXECUTIVE DIRTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$82.5 lLLION TO THE REPUJBLIC OF PERU F OR IRE LIMA METROPOLITAN DEVELOPMENT PROJET June 1, 1984 Thi doeente w a resticted distribution ad my be used by reiit maly in the jefuane Of their otida dutieds Its coutents maY not othrwise be dissd witho_ World Buk auboriuatio.  CURRENCY EQUIVALENTS The exchange rate is being adjusted daily, roughly in line with the differen- tial between domestic and international inflation. The exchange rate and currency equivalents in 1983 and as of May 15, 1984 were as follows: Currency Unit = Sol (SJ.) 1983 Average !!ay 15. 1984 US$1 S/. 1,629 S/. 3,02.5 S/. 1 US$0.0006 US$0.0003 S/. 1,000 US$0.61 US$0.33 FISCAL YEAR January 1 to December 31 ABBREVIATIONS CmC - Comision Multisectorial Coordinadora (Multisectoral Coordinating Commission) ESMLL - Empresa de Servicios Municipales de Limpieza de Lima (Municipal Solid Waste Corporation) E.NMSA - Empresa de Mercados Mayoristas S.A. (Wholesale Market Corporation) GTZ - Gesellschaft fiur Technische Zusammenarbeit (German Technical Assistance Agency) IDB - Inter-American Development Bank INVEUMET - Fondo Metropolitano de Inversiones en Fideicomiso (Metropolitan Investment Fund) MUL - Municipalidad de Lima Metropolitana (Municipality of Metropolitan Lima) MTC - Ministry of Transport and Communications OxTU - Oficina Metropolitana de Transportes Urbanos (MXetropolitan Urban Transport Office) OPDM - Oficina del Plan de Desarrollo Metropolitano (Metropolitan Development Planning Office) PPF - Project Preparation Facility USAID - United States Agency for Interaational Development  FOR OFFICIL USE ONLY REPUBLIC OF PERU LIMA METROPOLITAN DEVELuPMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Peru * Beneficiaries: Municipality of Metropolitan Lima (MLM) and Wholesale Market Corporation (EMMSA). Amount: US$82.5 million equivalent, including a capitalized front-end fee. Termi; Repayable in 17 years, including four years of grace, at the standard variable interest rate. Relending Terms: For the market subproject, the Borrower would on-lend US$22.4 million equivalent for 17 years including six years of grace with the same interest rate as the Bank Loan. EMMSA would bear the dollar-sol exchange risk. Project Description: The proposed project would support (a) the progressive transfer of urban administration from national to local government, and specifically, more efficient metropolitan management in Lima, the capital of Peru, as well as (b) improvements in high priority infrastructure and services in the areas of urban transport, solid waste and whole- sale marketing. About 53 percent of benefits from the infrastructure and services improvements would accrue to low-income residents. Principal subprojects would be: (i) traffic management improvements throughout the city, paviug of about 100 km of streets in low-income areas and road rehabilitation and maintenance; (ii) construction of a new wholesale market; (iii) provision of vehicles, equipment and transfer station capacity and development of two landfill sites to meet dhe needs of the city's solid waste agency and the city districts; and (iv) institutional strengthening through studies, technical assistance and training of the agencies charged with each of the above activities as well as improvements in city planning, municipal finance and coordination of urban ir.vestments and project administration. Special Risks: Risk of local funding difficulties during a period of na- tional austerity would be addressed by relying mainly on local funding from an earmarked source (gasoline tax re- venues). Risk of inadequate professional staff within the Municipality would be mitigated by requiring con- tracting of implementation advisors initially for the largest subproject, transport, and by providing training for municipal staff. Any problems of coordination between national and municipal agencies would be eased by the Multisectoral Coordinating Commission. 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 wiLhout World Bank authorization.  - ii - Estimated Costs * Local Foreign Total ~~ - US$ million (a) Urban Transport 26.6 33.6 60.2 (b) Wholesale Market 15.4 9.3 24.7 {c) Solid Waste 2.0 7.4 9.4 (d) Urban Management and Project 2.2 4.2 6.4 Administration (e) Project Preparation Facility 0.0 1.0 1.0 Base Cost 46.2 55.5 101.7 Contingencies: Physical 5.1 4.7 9.8 Price 9.2 12.1 21.3 TOTAL PROJECT COST 60.5 72.3 132.8 Interest during construction of market 0.2 2.7 2.9 Front-End Fee on Bank Loan 0.0 0.2 0.2 TOTAL FINANCING REQUIRED 60.7 75.2 135.9 Financing Plan Local Foreipn Total i-US$ million - World Bank 13.3 69.2 82.5 Government, EMMSA and INVERMET 47.4 0.0 47.4 GTZ 0.0 1.0 1.0 Suppliers Credits 0.0 5.0 5.0 TOTAL 60.7 75.2 135.9 Estimated Disbursements bank FY 1985 1986 1987 1988 1989 1990 1991 1992 US$ million Annual 16.7 27.1 22.5 7.5 3.U 2.0 3.3 0.4 Cumulative 16.7 43.8 66.3 73.8 76.8 78.8 82.1 82.5 *1 Project costs include USS9.0 million in identifiable taxes and duties.  - iii - Rate of Return: The economic rate of return is estimated at around 70 percent for those parts of the project with directly quantifiable benefits. These represent 78 percent of total project costs. Staff Appraisal Report: Report No. 4781-PE, dated May Z9, 1984. . .  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMHENDATION OF ThE PRESiDEN1 OF TIE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF PERU FOR THE LIMA METROPOLITAN DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Peru for the equivalent of US$82.5 million to help finance the Lima Metropolitan Development Project. The proposed loan would have a term of 17 years, including four years of grace, at the standard variable interest rate. For the market construction, the borrower would on-lend US$22.4 million to the Wholesale Market Corporation for a term of 17 years, including six years of grace, at the same interest rate as the Bank loan. PART I - THE ECONOMY 2. An economic report entitled Peru-Major Development Policy Issues and Recommendations- (Report No. 3438-PE) was distributed to the Executive Directors on May 4, 1981. This part is based on the findings of that report, on that of an economic mission to Peru in July/August 1982 and of follow-up missions in February and September 1983. Country data sheets are attached as Anaex I. Natural and Human Resources 3. Peru, the fourth largest country in Latin America, is divided by the Andes mountains into three distinct regions: the coastal region (Costa), with 46 percent of the population and most of the country's modern economic acdivity; the mountain region (Sierra) with 44 percent of the country's popu- lation; and the sparsely populated tropical rain forests east of the Andes (Selva). Thne country's rugged topography limits trade among the three re- gions. 4. Peru's natural resources include large deposits of minerals-par- ticularly copper, iron, silver, and zinc-located mainly in the Sierra and the southern Costa. There are also large phosphate deposits, located in the northern Costa, and substantial petroleum resources in the Selva and off- shore, but their full extent has not yet been ascertained. Another major natural resource is the large fishing potential in coastal waters, although the catch is subject to sharp fluctuations. Only a small portion of Peru's total land area is arable, and most of the soils suitable for intensive agri- culture are already being farmed. 5. Although Peru's energy resource base is relatively diverse, with scope for expanding hydro and coal based power generation, petroleum is ex- pected to remain the major energy source through the rest of this century. After discovery of oil in the Selva, Peru's domestic oil production more than doubled between 1977 and 1982 to over 195,000 barrels per day (bpd), and it became a net exporter of about 62,00U bpd. To enable Peru to remain a net petroleum exporter, the Government has embarked on a strategy of accelerated secondary recovery and exploration efforts to increase production and of  rational pricing policies to contain demand growth. Prices for domestically consumed petroleum products have been increased at regular intervals. In addition, new legislation was enacted offering special tax incentives to do- mestic and foreign investors. 6. As a result of three decades of rapidly falling mortality rates, Peru's population growth accelerated during the 1930-1960 period. Since the early 19bOs, birth rates have fallen gradually, mainly caused by the urban- ization process and improved education. But with declining death rates, population has continued to grow at about 2.5 percent p.a. between 1972 and 1951 to 17 million. Preliminary 1981 census information indicates that fer- tility declined by 20 percent during the past decade and the current rate of population growth has dropped to 2.2 percent p.a. The census also indicates that the reduction in population growth is most marked among the 65 percent of the population living in urban areas. The Government is quite popula- tion-conscious and is now supporting a family planning program. Past Development Policies and Performance (1968-78) 7. Two successive military Governments, in office from October 1968 until July 1980, followed a development strategy aimed at premoting economic growth and improving distribution of income and wealth. The pattern of asset ownership in the economy changed drastically through nationalization of pro- duction and distribution activities, and through a sweeping land reform. however, many of the policies carried out after 1968 had an ex.cessive cost, and their implementation was inefficient. In particular, expansionary fiscal and credit policies between 1968 and 1977 produced strong inflationary pres- sures and expanded external borrowing, raising Peru's external debt to almost US$8.4 billion (including short-term indebtedness); about two-third's of GDP. By mid-1978, the country was in the midst of a severe financial crisis; inflation had accelerated to an annual rate of about 100 percent and the banking system's net international reserves dropped to a negative level of USS1 billion. Peru was no longer able to service its foreign obligations. 8. Beginning in May 1978, the Government adopted a number of important measures aimed at strengthening public finances, improving the balance of payments and curbing inflation. The Government also negotiated a stand-by arrangement with the IMF in support of tb- stabilization program, and carried out major debt-relief operations, postponing repayment of about US$1 billion due in 1979/80 to the 1982-1986 period. The Government then adopted a com- plementary Economic Recovery Program, which included measures to open up the economy, promote non-traditional exports, strengthen the tax system, and generally improve the efficiency of resource allocation in the private and public sectors. These policy changes-together with a declining domestic market because of the recession-resulted in a large increase in the value of manufactured exports, from about US$200 million in 1977 to the US$750-800 million range in 1980-81. The Government also drew up a public se^tor in- vestment program emphasizing projects of clear economic priority and with positive effects on production and employment. To support the program, the Bank approved a US$115 million Program Loan in Mlay 1979. 9. The Government's stabilizarion-cum-economic recovery program resulted in a strong improvement in public sector finances in 1979. The overall public sector deficit was reduced from 5.7 percent of GDP in 1978 to  - 3 - 1.7 percent in 1979, and the more careful management of public finances had a positive impact on the balance of payments. At the same time, an increase in petroleum exports and a substantial improvement of Peru's terms of trade gen- erated a surplus in the current account of the balance of payments in 1979 and equilibrium in 1980. At year end 1980, the net reserve position had im- proved to about US$1.3 billion. Growing incomes as a result of good external sector performance and, in 1980, a reacceleration of public sector expendi- tures, resulted in renewed growth of GDP, at an average rate of 3.9 percent in 1979-1980. However, the public sector deficit increased again to six per- cent of GDP in 1980, and inflation exceeded 60 percent. * 10. After a new constitution was written by a popularly elected con- stituent assembly, elections were held in May 1980, and the winner, President Fernando Belaunde, was inaugurated on July 28, 1980. lis Government faced a challenging situation with severe structural weaknesses which had been only temporarily attenuated by the improvements in the terms of trade and the re- sumption of growth. The new Government was committed to structural transfor- mation based on opening up the economy; encouragement of private sector ini- tiative and reduced public sector participation in economic activities; and improved efficiency in the remaining public sector activities. Its reliance on, and promotion of, private initiative, in particular, distinguish the pre- sent Government's philosophy and economic program from that of its immediate predecessors. 11. The Government was successful in accelerating import liberalization by eliminating non-tariff barriers and lowering tariffs, and in streamlining export incentives. At the same time, new legislation was enacted for the agricultural, mining and petroleum sectors, offering greater incentives to investors. Substantial changes were made in the financial sector, through upward adjustments of the interest rate, and reduction of legal reserve re- quirements. The Government also made progress in correcting major price dis- tortions by reducing food subsidies, eliminating some price controls and ad- justing periodically public utility and petroleum product prices. Finally, the Government endeavored to rationalize public investment and its financing- --an effort that was supported by a Bank-sponsored Consultative Group meeting in May 1981-and initiated actions to strengthen public sector institutions. Recent Developments and Outlook 12. Unfortunately, the 1981-83 world recession made Peru's adjustment difficult. In 1981, the first full year of the new Government, the world demand for Peru's main exports declined, interest rates on the country's ex- ternal debt increased to an all-time high, and the terms of trade fell by 10 percent as a result of lower export prices. The overall negative impact of these external events on Peru's balance of payments was estimated at US$740 million. A substantial recovery of agricultural output (with a growth rate of almost 12 percent) and an even faster growth of construction (mostly public) allowed GDP growth of near four percent. However, industrial output stagnated, mining fell by four percent, the public sector deficit increased to about eight percent of GDP and the current account of the balance of pay- ments closed with a deficit of US$1.7 billion. 13. By 19J2, economic activity was slowing down, world commodity prices continued to fall, and the public sector deficit had also increased. The G(verament adopted an austerity program designed to reduce the public sector  - 4 - deficit and regain external equilibrium. Peru's mini-devaluations were accelerated and exceeded domestic inflation by a wide margin, thus restoring part of the competitiveness lost in previous years. In June 1982, the IMF approved an SDK 850 million compensatory-cum-EFF arrangement to support Peru's stabilization ano structural adjustment efforts. The current account deficit in the balance of payments was reduced slightly (to USS1.6 billion) in 1982, in spite of lower export prices, but GDP growth slowed to less than one percent, industrial output fell more than two percent, the public sector deficit rose to 8.8 percent of GDP, and inflation continued at more than 70 percent. 14. The still sizeable public sector and current account deficits, com- bined with the reduced availability of external loans from international com- mercial banks, encouraged the Government to try to accelerate the adjustment process in 1983. The new measures included a large cut in public investment, acceleration of price adjustments of publicly supplied goods and services, and faster reduction of food subsidies. Also, the Government followed a resttictive monetary policy, and mini-devaluations from January to August 1983 again exceeded domestic inflation. 15. Peru's economic difficulties, ho-ever, were compounded by natural disasters suffered during the first half of 1983. Heavy rains flooded the northern part o: the country; there was also a severe drought in the south, massive landslides in the central area, and a reduction in the fish catch. Most of these were linked to a change in El Nino, a current in the Pacific Ocean off the Peruvian coast, which also affected weather in other parts of the world. These disasters were costly; replacing the damaged infrastructure may require over US$500 million (about 40 percent of the 1983 public invest- ment budget). Output losses were also substantial. Agricultural production was particularly hard hit in the north of Peru where cotton crops were de- stroyed. Flooding of the Talara oil fields and damage to the trans-Andean pipeline caused a 12 percent drop in oil produc:ion (to an average of 172,000 bpd), and a ten percent fall in petroleum exports. 16. The combined impact of the natural disasters, low commodity prices, limited access to external borrowing and the high debt burden produced a severe economic recession in 1983; GDP fell by about 1U percent, with all sectors showing a decline in output. At the same time, inflation accelerated to 125 percent, partly because of the natural disasters but also because of inflationary expectations fueled by the mini-devaluations. The current account deficit in the balance of payments was further reduced, but only because of much lower imports. Financing of even this reduced deficit re- quired a renegotiation of the commercial bank debt (in March 1983) and of the debt to Paris Club member countries (in July 1983). The commercial bank debt was rescheduled in the context of a "jumbo loan that also provided -or US$450 million of tresh money. Public sector revenues also declined sub- stantially in 1983 because of the recession, and the public sector deficit (about 10 percent of GDP) far exceeded the Government's programmed target. 17. By the eiidl or i983, it was clear to the Government that its EFF program could not be placed on track, so it negotiated with the IMF an 18- month standby to replace the final period of the EFF. The standby arrange- ment was approved by ,:he IMF Board in April 1984. As part of ics new pro- gram, the Government authorized advanced interest payments on deposits to  - 5 - allow effective rates to become positive in real terms. It also raised electricity and water rates in real terms and confirmed its tight monetary program. On the strength of the negotiated standby, Peru's commercial creditor banks agreed to a rescheduling of US$1.5 billion amortizatioa due them between January 1984 and July 1985. The standby also lays the ground for a Paris Club meeting, expected in early June, to reschedule 1984/85 maturities and interest payments. There of course, remains a continuing need for official development assistance, including local cost financing. Peru's economic recovery will depend greatly on recovery in the developed countries-the chief market for its important mineral exports and manufactured exports. Nevertheless, sound domestic policies are also critical for this recovery. Provided the Government maintains its new program, economic growth may resume after 1984. A medium-term growth of about four-five percent per year and a manageable balance of payments situation would then be possible, and Peru will remain creditworthy for Bank lending. PART II - BANK GROUP OPERATIONS IN PERU 18. The Bank has approved 56 loans to Peru for a total amount of US$1,559.4 million, net of cancellations. About 24 percent of the Bank's lending to Peru has been for transportation (mainly highways and ports', 27 percent for agriculture, 21 percent for the energy sector, 11 percent for mining and industry, about nine percent for education, health and urban development, seven percent for a program loan in support of the Economy Recovery Program in 1979, and one percent for a technical assistance oper- ation. 19. Annex II contains a summary statement of Bank loans and their dis- bursement status as of !Sarch 31, 1984. As of this date, US$732.8 million was undisbursed; this figure reflects many recently approved loans (11 in 1982- 83). Disbursements on Bank-financed projects moved slowly in the late 1970s, primarily because of weak project execution capacity and a shortage of coun- terpart funds that worsened as the economy deteriorated during this period. Disbursements have improved, however, with vigorous efforts by the Bank and Government to correct the situation by: inter alia, (i) opening a Bank resident mission in Peru; (ii) restructuring a number of slow moving pro- jects; (iii) Government provision of adequate counterpart funds; and (iv) Government creation of a special commission to monitor loan execution and re- solve administrative problems. These actions are bearing fruit. Disburse- ments on project loans amounted to US$44 million in FY80, US$70.5 million in FY81, US$75.8 million in FY82 and US$85.7 million in FY83. This compares with average yearly disbursements of US$27.5 million during FY77-79. 20. The main objectives of Bank lending to Peru are to assist in: (i) the expansion of productive capacity in crucial sectors, i.e., petroleum, agriculture and mining; (ii) the strengthening, through technical assistance loans and regular operations, of public sector management, including more effective economic policies; (iii) the creation of the physical infrastruc- ture needed to sustain and foster economic development; and (iv) the improve- ment of living conditions for the urban and rural poor. In the past, Bank lending concentrated on infrastructure in the transportation and power  sectors. More recently, the Bank's emphasis has shifted to more directly productive fields--petroleum, agriculture, mining, and industry-to help Peru to strengthen its balance of payments. Lending for social projects has also grown and will be stepped up further in the future. The proposed project addresses both the objectives of strengthening of public sector management and the improvement in living conditions of the urban poor. In addition, Peru has been approved as eligible for the Bank's Special Action Program (SAP) and seven projects are receiving support under that program. Future operations are being prepared in industry, education, water and power. 21. Bank loans constituted an estimated 6.0 percent of Peru's total public external debt outstanding and disbursed at the end of 1983, and ab- sorbed about nine percent of the country's public external debt service in 1983 (taking into account the effects of the rescheduling of 1983 principal and interest payments). Although Peru is expected to continue to seek long- term bilateral and multilateral aid, the Bank's share in the country's out- standing public foreign debt by 1985 should remain about six percent, with its share of debt-service around 4.5 percent, assuming the relatively modest Bank lending program expected over the next two years. 22. IFC commitments as of March 31, 1984 were US$41.2 million (includ- ing US$15 million to the Southern Peru Copper Corporation for the Cuajone Copper Mining Project) of which US$15.1 million is held by the Corporation. A summary statement of IFC investments as of March 31, 1984 is presented in Annex II. 23. The other principal lending agencies active in Peru are the Inter- American Development Bank (IDB) and the United States Agency for Interna- tional Development (USAID). Their total commitments as of December 31, 1983 were US$1.4 billion and about US$400 million, respectively, and their shares of public debt service as of end-1982 were estimated at 1.7 percent and 0.9 percent, respectively. In its future operations, IDB is expected to empha- size lending for agriculture, industry, energy, mining, roads, and small- scale irrigation. USAID is expected to stress rural and urban development and health. PART III - THE URBAN SECTOR Urbanization and the Primacy of Lima 24. The population of the Lima Metropolitan area grew from 3.2 million in 1972 to 5.1 million in 1983 and will probably reach at least eight million by the end of the century. Nevertheless, its 1972-1981 annual growth rate was under 3.8 percent compared to 6.1 percent between 1961 and 1972. Many secondary cities in Peru are now growing faster than Lima, so that the trend of the national urban system is toward greater balance. Still, Lima is more than double the size of all secondary cities over 100,000 population combined. It accounts for 28 percent of national population and 53 percent of total urban population (i.e., in centers above 20,000). The metropolitan area produces about half of GDP, including more than 90 percent of national output of capital goods, two-thirds of consumer goods and almost all finan- cial services.  - 7 - 25. While Lima's size suggests that it should have first priority in resource allocation, in the longer run, complementary public investments in secondary cities are also justified on equity and regional economic grounds. However, Lima, and the urban sector generally, have been deprived of public investment since 1968 because of Governments' rural bias and, more recently, budgetary constraints. This failure to invest in urban areas is now impair- ing efficiency and adversely afiecting household welfare, already reduced by falling real wages in recent years. 26. The concentration of economic activity in the Lima area makes it vital that the city be well managed and maintained, which is not presently the case. Furthermore, the capital's economic activity has not been associ- ated with improved incomes of its population. About 54 percent of its house- holds are absolutely poor (earning less than $167 per month in 1981 prices); 62 percent are relatively poor (with $225 per month). Over 60 percent live in slums in the city center (tugurios) or periphery (pueblos jovenes). Popu- lation is still growing faster than the expansion rate of public services. National Urban Policy 27. Various strategies have beeni proposed to discourage the growth of Lima. The 1975-1980 Administration backed a plan to integrate Lima with major towns in the country's Central Region. The present Government supports a "decongestion corridor" to promote urban growth north and south of Lima, but, except for a coastal highway and a new port, few actions have been taken to achieve this objective. In any case, the industrial potential of these poles is too limited to assure that such a strategy would have a real impact on decongesting Lima. To invest in either area is a high-risk strategy, because without a full range of incentives to draw the population away from Lima, there would be a probability of underutilized infrastructure. Moreover the spontaneous deceleration of Lima's growth makes strategies to disperse economic activity and population of dubious merit. The Bank has been discus- sing these issues with the country in the context of its sector dialogue. 28. Peru has one of the most centralized systems of urban management in Latin America. The local sector accounts for only two percent of consoli- dated public sector expenditures. The need to revise this system by trans- ferring responsibilities to local governments (devolution) was recognized in the 1979 Constitution. The development of a sound urban management and in- vestment strategy for Lima would be the core of a national devolution policy; the proposed project is an important element in this strategy. Lima Metropolitan Government 29. Metropolitan Lima is a province and the provincial government (Municipalidad de Lima Metropolitana-MLM) is headed by an elected metropol- itan council which sets policies for the metropolitan area ard has a munic- ipal coordination assembly made up of the 41 district mayors. The chief executive officer is the MLM Mayor, elected at three-year intervals. Because of the continued high degree of district administrative independence, however, coordination within MLM remains difficult. 3U. MLM controls a Municipal Investment Fund (INVERMET) and a city solid waste company (ESMLL) as well as 12 executive departments. INVERMET is MLM's trust fund set up to finance infrastructure improvements. Its main  - 8 - source of income is an earmarked transfer of national gasoline tax revenues, which totalled about US$7 million in 1983. Street maintenance is mainly a responsibility of the districts, although the Transport Ministry maintains some intercity roads. Retail markets are traditionally also a district res- ponsibility but wholesale markets are managed by a national body, the Whole- sale Market Corporation (DEMSA), under the Ministry of Agriculture with little coordination until now with other metropolitan activities. ESYML is responsible for transfer of solid waste and the landfills in the metropolitan area. The collection of solid waste is mainly done by the municipal dis- tricts; ESMLL collects only in the central business districts. National corporations are also in charge of city electricity, water, sewerage and telecommunications, and act independently. To handle the transfer of key functions from central to municipal government as mandated by the 1979 Con- stitution, a multisectoral commission was established. MIM has set up its own planning office to replace the o-ae which operated in the National Housing and Urban Development Ministry, and is also establishing a metropolitan urban transport office. They are thus in a position to assume responsibility for the planning and transport functions, which have been transferred to the local level. 31. Historically, MLM has had few autonomous budgetary resources, yet Ceentral Government transfers have been declining. Of MLM's total 1983 budget of US$56 million (a low US$11.00 per capita), 15 percent was financed fzom Central Government transfers compared to 22 percent in 1981. Most expendi- tures cover operating costs; only 11 percent went for capital outlays in 1983. In the absence of increased financial resources and stronger financial management, MLM's assumption of greater functional responsibilities is bound to proceed slowly. 32. Planning in Lima is presently limited to control of current devel- opment, based on the land use expectations of an obsolete 1912 comprehensive plan. Unanticipated growth of peripheral slums and the assumptions that an urban rail system would be built (which never materialized) have altered pro- posed patterns of land use and density. The need for a comprehensive strat- egy to guide land use and transport development is urgent. With regard to staffing, low municipal salary levels make it difficult to attract and retain qualified senior staff and managers, and no systematic training presently exists within MKM. The proposed project would provide training and technical assistance to staff involved in project execution. Urban Transport 33. All transport in Lima is by road. Traffic congestion, with resul- tant delays for passengers and goods and excessive fuel use, is common. Accident rates are high. The main cause of these problems is mismanagement and inefficient use of roadways, including poor signing and channelization and uncoordinated traffic signals. Provision of road and bus service has not kept pace with demand, particularly for densely-populated low-income neigh- borhoods in the city outskirts, where streets are generally unpaved. This is worsened by the deterioration of the existing road network, as a result of inadequate maintenance. 34. Buses are the main transport mode for low-income groups, but serious lack of capaci_y has caused excessive waiting times to travel on overcrowded buses. Recently, in an effort to correct this, the Government  - 9 - allowed importation of new buses; imports of 1,300 have been contracted so far. Route structure has evolved into a system of winding routes all enter- ing the central area. Fares have been control-Led and the leading private operator is reporting losses. While two sep.rate stud-es (1972 and 1982) recommended mass transit systems for the city (ucderground or light rail), available data do not permit proper evaluation of mass transit alternatives. Therefore, it was agreed that a study of such alternatives would be financed under the Bank's Public Sector Management Loan (2204-PE of December 16, 1982). The Government and MLM would furnish the bank an impact analysis of any resulting proposal to undertake a transport investment of over US$10 million in the Lima area during project execution, and allow the Banic. an op- * portunity to comment. Any such investment that would adversely affect the transport subproject of the proposed project would be an event for suspension of disbursements (Section 4.02 and 5.01(g) of the draft Loan Agreement). Wholesale Markets 35. Wholesale marketing of fruits and vegetables, managed by EMMSA, is mainly carried out in two markets located within two miles of the city center. The main market was built in the 1940s and subsequent growth of the city has created serious congestion problems as well as inadequate handling capacity for current consumption levels. Obsolete design also does not permit introduction of modern handling and storage methods. In consequence, trucks, retailers and wholesalers experience waiting times in excess of four hours. Wastage and pilferage generate loss of value, while the market's current location has generally led to public health hazards. A new market site at Santa Anita, four miles east of the city center, was selected fol- lowing a 1964 study and feasibility studies were prepared in 1972 and updated in 1982. The old markets should be closed down for wholesale operations, as modernization would be extremely costly (para. 43). Solid Waste Management 36. Refuse management throughout the city needs improvement. In cen- tral districts, trucks do not have efficient routes or schedules for ser- vicing collection areas. The lack of transfer station capacity means many collection vehicles have to deliver directly to landfills up to 40 km. away, which limits them to one collection round per day. Lack of equipment has prohibited adequate collection service in outer districts, while poor mainte- nance results in less than 60 percent of the fleet being available at any one time. Finally, most refuse is deposited in open, smoking, unsanitary dumps. Previous Bank Operations 37. In addition to the mass transit study mentioned above (para. 34), the Bank made an Urban Development Loan (1283-PE of October 12, 1976 for US$21.6 million) which focused on Lima and Arequipa. It included sites and services, water supply, sewerage, electrical connections, health facilities and industrial parks. After initial delays, the pace of execution picked up and the project was completed in early 1984. Because of inflation, negative real interest rates have developed -which will inhibit the achievement of the project's cost recovery objectives; however, the project has demonstrated the feasibility of low-cost shelter solutions. Discussions leading to a new national housing project center on the importance of a revised system to  - 10 - adjust interest rates for the sector. Complementary to the Urban Development Loan, the Bank is helping finance water and sewerage in Lima through Loan 2139-PE (of June 4, 1982 for US$40_6 million). Inadequate water tariffs and institutional weaknesses have kept this project from progressing at a satis- factory pace. However, during the first semester of 1984, the Government raised water tariffs 30 percent in real terms. It has also selected a management consultant to assist it in institutional improvements. The Cen- tral Government, rather than the Xunicipality of Lima, is responsible for the water agencies and sector policies through its Ministry of Housing and Urban Development. PART IV - THE PROJECT 38. This would be the second Bank-financed urban development project in Peru. The project was prepared by the multisecroral commission (para. 30) and by the Wholesale Market Corporation (EMMSA), in conjunction with the various offices and agencies expected to participate in the project. The Bank helped finance the feasibility study with funds provided under a Project Preparation Facility. A Bank mission visited Peru to appraise the project during April and May 1983. The appraisal mission's report entitled Staff Appraisal Report, Lima Metropolitan Development Project (No. 4871-FE, dated May 29, 1984) is being distributed separately to the Executive Directors. Annex III contains a Supplementary Project Data Sheet. Negotiations were held in Washington from May 7 to 11, 1984 and the Peruvian Delegation was headed by Mr. de Souza, the Ministry of Economy, Finance and Commerce rep-re- sentative on the Multisectoral Commnission. Lima's mayor also attended the negotiations. Project Objectives and Description 39. The proposed project would support the shift of administrative and financial responsibility for metropolitan management in Lima from national to local government through institutional strengthening of MLM as well as phys- ical improvements in the three critical sectors of transport, solid waste and wholesale marketing. Emphasis has been placed on rehabilitation and effec- tive utilization of existing transport and refuse systems, and on relocation of wholesale market activities to a new site permitting greater volui-n and ef'iciency. The process of devolution of urban management is a long-term one and the proposed project would represent a first stage in that process. 40. Specific subprojects within the project are: (a) improvements in "rban traffic management, paving of about 100 k1m. of unimproved streets in low-income areas, rehabilitation of roads, and technical assistance, studies and training for the Guardia Civil (police) traffic control unit, for MLM's urban transport office (OMTU) and for INVERMET, which would undertake procurement for inter alia the proposed transport investments; (b) construction of a new wholesale market to replace two existing markets and the provision of technical assistance to EMMSA;  - 11 - (c) provision of vehicles, equipment and transfer station capacity for refuse collection and development of two landfill sites for depositing solid wastes, plus technical assistance and training for ESMLL, the city's solid waste agency. and the districts' solid waste staff; and (d) technical assistance and training to HIM in metropolitan plan- ning, municipal finance and coordination between different government levels, and support for project administration. 41. The urban transport subprojec. accounts for 59 percent of total project costs (excluding contingencies). This subproject would be executed by HIM through INVERZIET and OMTU. Traffic management along nurthern and southern corridors would be improved by the construction of segregated bu>- ways or lanes, median strips, crosswalks, marking, sidewalks and pedestrian signals. For downtown, a traffic circulation plan would be developed, a traffic signal control system for some 500 intersections would be designed and a principal avenue (Alfonso Ugarte) would be reconstructed to provide an underpass and busways. Equipment would be installed for the Zirst stage (100 intersections) of the traffic control system designed under the project. Un- improved streets (about 10O km.) in low-income neighborhoods would be paved,- to integrate them with the corridor improvements mentioned above. Where deferred maintenance has caused some deterioration in the existing road net- work, patching would be financed to bring about 24 km. of streets back to the condition where regular maintenance could be performed. Road rehabilitation would be financed for about 26 km. where more major resurfacing and repair are needed. 42. A road maintenance study for MLM, to be undertaken by INVERMET, would be funded to define equipment and manpower needs, standards, proce- dures, programming and financing. The results of this study would be con- veyed to the Bank for review and comment by December 31, 1985 (Section 2.U8(a) of the draft MLM Project Agreement). Prior to that, INVERMET would develop a short-term plan for improving road maintenance activities in order to resolve some of the more urgent problems. Equipment and technical assis- tance needed to implement the maintenance program would be provided. A transportation survey of Lima's downtown (central) area would be funded, as could a route rationalization and tariff study for the public transport net- work. These would be carried out by OMTU, the Municipal Transport Office which would be established under the project. Motorcycles, radios and other equipment as well as technical assistance and training would also be provided to MLM for the traffic control unit of the Guardia Civil, to improve traffic enforcement and accident investigatiou and preveuticn. Vehicles, office machines, traffic counting and drafting equipment needed by OMTU and INVERMET to implement the transport subproject would be financed under the project, and these two offices would also receive technical assistance and training in procurement, supervision, traffic engineering, planning and public transport. 43. The wholesale market subproject would account for 24 percent of total project base costs. The new facility to be constructed in Santa Anita would provide a capacity for 1.7 million metric tons of fruits and vegetables on about 30 hectares of land, with another 9.5 hectares for administration, services and on-site access roads. An additional 43 hectares adjoining this first phase of the market would be available for future expansion. The  - 12 - design and construction of the market would be the responsibility of EHMSA but eventual transfer of ownership and operation to MUM would be foreseen. MLM and ENMSA would agree to cease operating the existing markets for whole- sale activities by December 31, 1986 (i.e., once the Santa Anita site was operating) (Section 2.12 of the draft MLM Project Agreement and 2.10 of the draft EMMSA Project Agreement). UH! would furnish the Bank with its recom- mendations for alternative use of installations at the old market site by October 31, 1985 (Section 2.08(c) of the draft MLM Project Agreement). Experts would be hired and training provided under the project to assist EMMSA in design, construction, supervision, market management and operation, including accounting, and the relocation of 1,200 wholesalers to the new site. Studies on long-term market location, alternative institutional arrangements and modern packaging would also be financed. EMMSA is currently just covering its operating costs, although it has quadrupled charges in recent years. As it is unable to further raise tariffs at this time because of binding contracts with wholesalers, it would provide a contribution to capital outlays by sale or lease of land it does not need for marketing ,ctivities. Interest and other charges during construction would be capitalized as a project cost. 44. The solid waste management subproject would represent nine percent of total project base costs. A central facility for ESMLL has already been completed. The proposed project would provide office and maintenance equip- ment, mobile repair vehicles, tow trucks and field supervision vehicles for the agency, as well as new collection vehicles, overhaul of existing vehicles and spare parts. A new transfer plant would be provided and the capacity of an existing plant expanded. Land for the new plant has already been obtained by the Housing and Urban Development Ministry. MIM would agree to obtain title to this land no later than December 31, 1984 (Section 2.10 of the draft MIM Project Agreement). Two sanitary landfills would be developed and equipped on sites already owned by the city. These would have sufficient capacity to receive Lima's solid waste for the next 20 years. The German technical assistance agency, GTZ, has already begun technical assistance to ESMLL. GTZ would continue this activity, and also provide assistance to the municipal districts not included in ESMLL's jurisdiction--together with training for local staff and pilot recycling projects-as a co-financed element of the overall project. 45. Urban Management and Project Administration (including project pre- paration costs) would account for about eight percent of total project base costs. A planning study, based on the 1972 comprehensive Lima development plan, would be undertaken to produce strategies to guide long-term urban development, particularly for land use and transport in Lima and Callao (the adjoining port). Technical assistance and training to strengthen MLM's plan- ning office, OPDM, is also included. A major effort to establish city-wide cadastral data and to assess cadaster and tax administration capacity is being financed under a separate French contract. The proposed project would provide funds for experts to help MLM complement the work under the French contract effectively and to develop MLM data management capability for cadas- tral work. Parallel efforts to establish guidelines for a betterment tax (legislated in 1981) and to review local taxation within the national system are being carried out with funding from the Bank's Public Sector Management Loan (2204-PE). Financing would be provided under the proposed project to carry out recommendations of these studies. MLM's existing consolidated financial planning system would be reviewed under the project in view of  - 13 - expanding investment responsibilities. Another study on measures to achieve municipal financial autonomy and a plan of action related to this would also be prepared and presented to the Bank (para. 59). Finally, funds would also be included (to supplement municipal funds on a transitional basis) to support hiring of incremental professional and support staff in MLM needed for project implementation. 46. Technical assistance, training and studies financed under the pro- ject would include 1,391 months of consultant services. All consultants financed under the loan would have qualifications acceptable to the Bank and would be hired in accordance with Bank guidelines under terms and conditions * acceptable to the Bank (Section 2.02 cf the draft MIM and -EMISA Project Agreements). Project Cost and Financing 47. Total project cost including US$1 million for refinancing two Pro- ject Preparation Facilities, is estimated at US$132.8 million (in June 1984 prices). Provision would be made for exemption from duties on equipment imported under the project. Other identifiable taxes and duties, totalling US$9 million, are included in this total project cost. The foreign exchange component of the project is estimated at US$72.3 million or about 54 percent of total project costs. A total of US$9.8 million has been included for physical contingencies, reflecting an average of fifteen percent of cost of civil works for the project. Price contingencies are calculated on US dollar base values on the assumption that variations in the exchange rate would approximately compensate for the difference between local and international inflation. Contingencies are estimated at three and a half percent for 1984, eight percent in 1985, nine percent in 1986 through 1988, seven and a half percent in 1989 and six percent thereafter. 48. Total financing required for the project (US$135.9 million) in cludes a US$206,000 front-end fee and US$2.9 million for interest during construction of the wholesale market. The proposed Bank loan of US$82.5 million equivalentwould represent about 65 percent of the estimated net-of- tax financial requirements for the project, including US$69.2 million in foreign costs, and US$13.3 million in local costs. Bank financing of local costs is justified by: (i) the importance of the projei, in improving the efficiency of municipal financial management, infrastructure and services; (ii) the need to improve social conditions in the city; and (iii) the current fiscal and balance of payments difficulties faced by Fee-i (psara. 17). 49. GTZ would provide the equivalent of US$1 million in technical assistance for the solid waste subproject. Road maintenance and traffic signal equipment (about US$5 million) would be financed through suppliers credits. The remaining US$47.4 million equivalent in project costs would be provided by the Government, EMMSA and MLM through INVERMET. The MLM would agree to contribute from INVERMET funds up to US$4 million p.a. during the period 1984 to 1990 up to a total of US$20.2 million (Section 3.01(b) (ii) of the draft Loan Agreement and 2.01(a) of the draft MIM Project Agreement) while the Government would provide any amounts in excess of INVERMET's US$4 million p.a. (Section 3.01(b)(iii) of the draft Loan Agreement). EMMSA would contribute US$2 million to the capital costs of the market. The Government's  - 14 - financial contribution is estimated at US419.4 million, with an additional US$5.8 million in-kind contribution in the form of the land for the market. Any shortfalls in financing from suppliers credits or EMHSA would be picked up by the Government under its general commitment to provide necessary funds for the project (Section 3.01(a) of the draft Loan Agreement). Project Execution and Coordination 50. The Republic of Peru would be the Borrower and would transfer funds to the M1M on a grant basis (Section 3.01 (b) of the draft Loan Agreement) and would on-lend US$22.4 million (through a US$ denominated subsidiary loan) to EMMSA at the Bank's standard variable interest rate, repayable in 17 years with six years of grace (Section 3.01(c) of the draft Loan Agreement). Satisfactory subsidiary agreements between the Ministry of Economy and Finance ou the one hand and MIM and ENHSA on the other would provide for the transfer of resources. Drafts of these agreements were reviewed at nego- tiations and their signature would be conditions of loan effectiveness (Sec- tion 6.01(a) and (b) of the draft Loan Agreement). 51. The MIM would execute the urban transport subproject through INVEWLMET and OMTU, the solid waste subproject through ESMLL, and the urban management subproject directly through its cadaster, revenues, planning and budget offices. EMHSA would undertake construction of the wholesale market and arrange for the assumption of its operation. The establisbment of OMTU, including the definition of general policy guidelines, would be a condition for loan effectiveness (Section 6.01(c) of the draft Loan Agreement). A Municipal Subproject Coordinator, satisfactory to the Bank, has been named to coordinate the urban transport, solid waste and urban management subpro- jects. He would report to the Mayor through the Municipal Director's office. Subproject directors for INVERMET and EMMSA hlave also been selec- ted. The appointment of a solid waste (ESMLL) project director would be a condition of effectiveness (Section 6.01(d) of the draft Loan Agreement). Appointment of four implementation advisors (in road mLintenance, highway design and procurement) for INVERMET would be a conditicn of disbursement for the municipal subprojects (para. 4(b) of Schedule 1 of the draft Loan Agree- ment). MLM and the Guardia Civil would agree to appoint a subproject director and that equipment under the project would be owned by MLM for use by the traffic safety unit of the Guardia Civil only for traffic management and safety (Section 2.11 of the draft MIM Project Agreement). For the urban management subproject, the coordination of the planning study would be under- taken through a steering committee comprising representatives from MLM, the Ministries of Transport, Finance, Interior and Agriculture, the Province of Callao, and the bus companies. This steering committee, to be set up by December 31, 1984, would be a working group of and responsible to the Multi- sectoral Coordinating Commission (para. 52) (Section 3:02 of the draft Loan Agreement). 52. Coordination of the overall project would be the task of the Multi- sectoral Coordinating Commission (CMC), set up to help with the process of devolution. The CMC has representatives of the Ministry of Economy and Finance (from which the head of the Commission is drawn), the Public Credit Department of that Ministry, MIM, and the Ministries of Transport and Agri- culture (the latter because of its role in wholesale marketing). The CMC itself would retain an oversight function to assure smooth project execution  - 15 - and financing and would prepare regular reports on project progress, based on reporting from the Municipal Subproject Coordinator and EMMSA. The Borrower would agree to maintain CIC for these functions during the period of project execution (Section 3.01(e) of the draft Loan Agreement). Loan funds would finance incremental staff salaries of CKC during that period. 53. Preliminary designs have been prepared for all physical components of the project. Final designs for the first year's program of paving, road rehabilitation and deferred maintenance programs have been completed as have final designs for the first year work on the market. Outline terms of refer- ence for technical assistance, training and studies have also been prepared. Disbursements and Procurement 54. The proposed loan would be disbursed over 7-1/2 years against the following eligible expenditures: (i) 60 percent initially and then 31 per- cent of expenditures on civil works for municipal subprojects and 84 percent of civil works for the market subproject; (ii) 100 percent of foreign and 85 percent of local expenditures for equipment and supplies; (iii) 100 percent of expenditures for consultant services and training; and (iv) a declining share (from 100 percent to 20 percent) of salaries of incremental staff. Interest and other charges during construction of the market, accrued through March 14, 1987 for up to US$2.7 million, would be financed. Costs of final designs some equipment and technical assistance incurred after January 1, 1984 would be financed retroactively, up to a total of US$1.1 million. For contracts under US$500,000 and local purchases under US$10,000, disbursements would be made against statements of expenditures. 55. Procurement would be in accordance with the following table: Procurement Method ICB LCB Other Total u$ss millions) Civil works 49.5 35.7 - 85.2 Equipment 11.8 2.6 - 14.4 Consultants 15.6 6.3 2.6 24.5 56. Government agencies in Peru have sometimes had difficulty in exe- cuting Bank projects in the past because they have not had the funds needed to pay contractors promptly while waiting to be reimbursed by the Bank. In order to permit more rapid provision of funds for the project, two dollar- denominated special accounts would be established, on terms and conditions satisfactory to the Bank, in the Banco de la Nacion into which funds from the proposed Bank loan would be advanced, one for municipal subprojects and one for the market (Section 2.02(d) and (e) and Schedule 5 of the draft Loan Agreement). These accounts are expected to contain an amount equal to an estimated three months of disbursements from the Bank loan at any given time. EMMSA and MLM would also establish two revolving funds-in the Banco de la Nacion and on terms and conditions satisfactory to the Bank--which wo- ld be used to pay the local contribution to project expenses. These  - 16 - revolving funds would consist of not less than two months estimated payment needs (initially USS400,000 in each case) and would be replenished by EMMSA and ML (through INVERMET) each time a payment was made (Section 2.01(b) of the draft MLM Project Agreement and 2.01(c) of the draft EIMSA Project Agree- ment). The Bank's initial deposit into the Special Accounts would not take place until EMHSA and M1M had established their respective revolving funds and deposited their advances (Schedule 5, para. 3 of the draft Loan Agree- ment). Financial Analysis 57. Extensive review of local revenue administration is to be under- taken in the context of the proposed project, particularly with regard to property taxes, which now represent only 15 percent of the operating budget. It is expected that significant improvements in revenues would occur as a result of better billing and enforcement of property taxes already underway and a revised cadaster being prepared under the French contract. Other cur- rent actions on municipal finance include an increase in rental tees for retail markets and better collection of charges to districts for use of the solid waste transfer plant. 58. ESMLL service charges for solid waste collection covered only about 27 percent of service costs in 1981. These charges were raised 25 percent in 1984. Further improvements are anticipated following installation of better service costing systems in ESMLL. This would be based on a review of the financial performance of ESMLL and solid waste activities of municipal dis- tricts. MIM would agree to (i) complete this review by December 31, 1984, (ii) prepare recommendations for strengthening ESMLL's operational efficiency and self-financing capacity, including a timetable, to be furnished to the Bank for review and comment by December 31, 1985, and (iii) carry out such recommendations (Section 2.08(e) and 2.09 of draft MLM Project Agreement). MIM would also furnish the Bank for review, by March 30 of each year, ESMLL's draft operating budget, and that of municipal districts, related to solid waste activities for that year to assure adequate cost recovery during pro- ject execution (Section 2.08(d) of the draft MIM Project Agreement). 59. Finally, MLM would prepare an assessment of measures proposed to improve municipal financial autonomy and would furnish this to the Bank for review and comment by December 31, 1984 (Section 2.08(f) (i) of the draft MLM Project Agreement). Fiscal autonomy here implies an increase in municipal revenues so that (a) real increases in operational Central Government trans- fers (in excess of 1984 transfers) are not required to fund recurrent munici- pal expenditures and (b) resources of INVERMET will be sufficient without further Central Government budget allocations, to cover any increase in the Municipality's investment program and debt service requirements. A plan of action and a consolidated timetable for achieving such financial autonomy would be formulated, endorsed by Government and furnished to the Bank by December 31, 1985 (Section 2.08(f) (ii) of the draft MLM Project Agreement). MLM would agree to carry out these recommendations (Section 2.09 of the draft MLM Project Agreement). Results of an MIM review to identify and implement system improvements in financial and investment planning would be furnished to the Bank for review and comment by December 31, 1986 (Section 2.08(g) of the draft MLM Project Agreement).  - 17 - 60. The new wholesale market would dominate EMKMSA's operations through the late 1980s. Once the Santa Anita market is operational in 1987, EMMSA would agree to increase user charges from existing levels in real terms so as to achieve rates of return on net fixed assets in operation of 8 percent by 1989 and 12 percent thereafter (Section 4.06 of the draft EMMSA Project Agreement). These new user charges are also expected to yield rates of return of six percent for the first two years of market operation. EMMSA would agree not to incur any debt unless estimated net revenues would be at least 1.1 times the estimated debt service requirements for the current fiscal year (Section 4.03 of the draft EMMSA Project Agreement). EMKSA owns the site for the Santa Anita market. The portion to be used for the first phase of the market (financed under this proposed project) is valued at US$5.8 million. Since the La Victoria district owns the existing market sites, MIM would present to the Bank by October 31, 1985 for review and com- ment, the plans for use of these sites after they were closed to wholesale marketing (Section 2.08(c) of the draft Ml* Project Agreement). EMMSA would establish a reserve fund to cover major periodic maintenance costs, com- mencing January 31, 1988, for on-site access roads and parking at the new market (Section 4.04 of the draft EMMSA Project Agreement), and would not undertake new capital investment in excess of US$1 million equivalent in any one fiscal year without prior consultation with the Bank (Section 4.05 of the draft EMMSA Project Agreement). Financial proje-tions indicate that on these bases, EMMSA would be able to recover investment costs (including land at its current value) and to repay its subloan to the Government, although it would require an extra two years of grace (making a total of six years) before revenues from the Santa Anita market would permit amortization. EMMSA would appoint a qualified financial executive by March 3U, 1985, to advise it on financial policies (Section 2.01(b) (ii) of the draft EMMSA Project Agree- ment). Project Benefits 61. The overall rate of return on project costs with quantifiable bene- fits (78 percent of total costs) is estimated at about 70 percent. The main quantifiable benefits which would occur as a result of the project are des- cribed in para. 62. Sensitivity analysis shows that if project costs were increased by 25 percent and project completion were delayed by up to three years, the economic rate of return would still exceed 23 percent. 62. The project would have a substantial influence on the efficiency of Lima's economy through infrastructure and service developments and the strengthening of metropolitan planning and management. The urban transport subproject would reduce vehicle operating costs and generate time savings. The solid waste subproject would allow transfer of loads from small trucks to large trucks at strategic points, causing substantial savings in travel costs to sanitary landfills. The market benefits would include reduced handling costs, lower wastage and reduced waiting time by truckers, wholesalers and retailers, as well as the release of valuable land at the existing market site. These savings would thus permit most beneficiaries to afford the in- creased market charges, although truckers might have to pass on some of the higher charges to the sellers. 63. Benefits would accrue to all income levels of the city's popula- tion. hiowever, about 53 percent of project benefits and 56 percent of pro- ject costs would accrue to the relatively poor (those households with monthly  - 18 - income under US$225 in 1981 prices). Moreover, road paving and improvements in the northern and southern corridors and expanded refuse collection ser- vices would serve directly the lower-income neighborhoods. The market would benefit some two-thirds of the low-income population of the metropolitan area. Improved metropolitan management would benefit all residents. The environmental impact on the city would be positive through cleaner streets and the closing of unsanitary existing markets. Project Risks 64. Because the project involves both Central Government Ministries and the MLM, coordination has been carefully provided for. The CMC's coordi- nating role has proven effective during the final stages of project prepa- ration and it should continue to provide the necessary liaison with all entities involved. The currently severe fiscal constraints of the Central Government and the weak revenue system of the MIM could mean a risk of inade- quate local fiuancial contributions. By basing local funding heavily on the earmarked revenues of INVERMET, this risk should be reduced considerably. Furthermore, for the municipal works, Bank loan disbursements have been front-loaded to minimize financial requirements from the Central Government during initial years, when resource constraints will continue to be severe. Finally, the possible difficulties in recruiting and maintaining adequate professional staff in the MLM should be kept to a minimum by providing substantial technical assistance and training, as well as support for the salaries of incremental staff through the proposed project. For the largest subproject--urban transport-additional assurances of execution capability would be provided through the contracting of advisors to OM4TU and INVERMET. PART V - LEGAL INSTRUMENTS AND AUTHORITY 65. The following documents (i) draft Loan Agreement between the Republic of Peru and the Bank; (ii) the draft Project Agreements between the Bank and the Municipality and the Bank and EMMSA; and (iii) the Report of the Committee previded for in Article III, Section 4 (iii) of the Bank's Articles of Agreement are being distributed to the Executive Directors separately. 66. Special features of the project are referred to in the text of this report and in Annex III. Special conditions of effectiveness would be (i) the signing of the subsidiary agreements between the Borrower on the one hand and MLM and EMSA, on the other; (ii) appointment of the ESMLL project director; (iii) establishment of OMTU, including preparation of satisfactory operation guidelines, and (iv) registration of the Loan Agreement by the Public Credit Department (a standard requirement in Peru). A special condition of disbursement for the MLM subprojects would be the signing of contracts for four implementation advisors for INVERMET. 67. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.  - 19 - PART VI -