Document of The World Bank Report No. 15497-PE STAFF APPRAISAL REPORT PERU SECOND SOCIAL DEVELOPMENT AND COMPENSATION FUND PROJECT JUNE 24, 1996 Country Department III Huuan and Social Capital Development Group Latin American and the Caribbean Region Currency Equivalent Current Unit = Nuevo sol (S/.) US$1.00 = S/.2.36 Fiscal Year January 1 - December 31 GLOSSARY OF ACRONYMS CONAM National Council for the Environment COOPOP National Office of Popular Cooperation DC Direct Contracting FONAVI National Housing Fund FONCODES Social Development and Compensation Fund GTZ German Technical Cooperation and Development Agency ICB International Competitive Bidding IDB Interamerican Development Bank lIP Peruvian Indigeneous Institute INFES National Institute for Infrastructure in Education and Health INRENA National Institute for Natural Resources KfW Kreditanstalt fur Wiederaufbau LIB Limited International Bidding NS National Shopping LSMS Living Standards Measurement Survey NCB National Competitive Bidding NGO Non-governmental Organization PAD Articulated Development Project PREDES Economic and Social Development Project PRIDER Integrated Rural Development Project PRONAA National Program for Food Assistance PRONAMACHCS National Program for the Management and Conservation of Water and Soil UNDP United Nations Development Programme UNICEF United Nations Children's Fund PERU Second Social Development and Compensation Fund (FONCODES) Project Basic Socio-Economic Indicators A. GENERAL COUNTRY DATA 1. Total area (thousands of square kilometres) 1285 (a) 2. Total population (millions) 23.1 (a) 1994 3. Urban population as a percentage of total population 70.5 (a) 1994 4. Population in capital city as a percentage of urban 39.9 (a) 1994 as a percentage of total 28.1 (a) 1994 5. GNP per capita (US dollars) 1,490 (b) 1993 6. Annual rate of inflation (percentage) 15.4 (c) 1994 B. POPULATION DATA 1. Crude Birth Rate (per 1,000 population) 29.1 (d) 1992 2. Crude Death Rate (per 1,000 population) 7.6 (d) 1992 3. Total Fertility Rate 3.5(d) 1992 4. Women of childbearing age as a percentage of all women 45.7 (d) 1992 5. Married women of childbearing age using contraception (percentage) 59 (d) 1992 6. Average annual growth of population 2.0 (d) 1992 7. Age structure of population (percentage) 14 and under 38 (d) 1992 15-60 54.8 (d) 1992 60 and older 7.2 (d) 1992 C. HEALTH DATA 1. Life expectancy at birth (years) 64.3 (d) 1992 2. Infant Mortality Rate (per 1,000 live births) 55 (d) 1992 3. Under-5 Mortality Rate (per 1,000 live births) 78 (d) 1992 4. Maternal Mortality (per 100,000 live births) 300 (c) 1992 5. Doctors per 10,000 population 10.3 (e) 1992 6. Nurses per 10,000 population 9.3 (e) 1992 7. Birth attended by health staff (percentage) 52.5 (d) 1992 8. Babies with low birth weight (percentage) 11 (f) 1990 9. Health expenditures as a percentage of total government expenditures 15.1 (c) 1995 D. EDUCATION DATA 1. Total Adult Illiteracy Rate 15 (b) 1990 2. Female Adult Illiteracy Rate 21 (b) 1990 2. Net Primary Enrollment Rate (as a percentage of age group) 90 (g) 1990 3. Primary pupil / teacher rate 28 (f) 1991 4. Gross Secondary School Enrollment (as a percentage of age group) 70 (g) 1990 5. Gross Tertiary School Enrollment (as a percentage of age group) 36 (g) 1990 6. Education expenditures as a percentage of total government expenditures 20.9 (c) 1995 Sources: (a) Instituto Cuanto, Retrato de la Familia Peruana: Niveles de Vida, 1994 (1995) (b) World Bank, [Vorld Development Report, (1995) (c) Peru, Ministry of Economy and Finance, Stabilization, Economic Reforms and Social Programs in Peru, (1995) (d) Peru, Demographic and Health Survey, 1991/92 (e) World Bank, Peru: Strategic Planningfor Health Sector Reform (1995) (f) World Bank, WVorld Development Report, 1994 (g) World Bank, Peru4: calidad, eficiencia, equidad, los desafios de la educacion primaria (1994) PERU SECOND SOCIAL DEVELOPMENT AND COMPENSATION FUND PROJECT Table of Contents PROJECT SUMMARY ............................................................................... i BASIC DATA SHEET .............................................................................. ii 1. POVERTY ALLEVIATION IN PERU .............................................................................. 1 A. THE E CONOMIC SETrING ...............................................................................1 B. POVERTY AND LIVING CONDITIONS IN PERU ............................................................................... I C. GOVERNMENT POVERTY ALLEVIATION STRATEGY ............................................................................... 3 D. BANK INVOLVEMENT IN POVERTY ALLEVIATION .............................................................................. 6 E. THE SOCIAL DEVELOPMENT AND COMPENSATION FUND (FONCODES) ............................... ................................. 6 2. THE PROJECT ............................................................................... 12 A. ORIGIN OF THE PROJECT ............................................................................... 12 B. PROJECT OBJECTIVES AND DESCRIPTION ............................................................................... 14 C. PROJECT COMPONENTS .............................................................................. 14 D. PROJECT COSTS AND FINANCING PLAN .............................................................................. 17 E. PROCUREMENT ............................................................................... 19 F. DISBURSEME NT, ACCOU NTING AND AUDITS .............................................................................. 22 G. ENVIRONMENTAL ASSESSMENT .............................................................................. 24 3. PROJECT IMPLEMENTATION .............................................................................. 28 A. PROJECT ORGANIZATION AND MANAGEMENT .............................................................................. 28 B. DECENTRALIZATION OF FONCODES ACTIVITIES . ............................................................................................. 30 C. PROJECT TARGETING .................................................................................... 31 D. STRATEGY FOR INCREASED PARTICIPATION OF INDIGENOUS PEOPLE AND WOMEN IN FONCODES PROJECTS .............. 33 E. BENEFICIARY CONTRIBUTIONS .......................................................................... 37 F. SELECTION AND PRIORITIZATION OF SUBPROJECTS ......................... ................................................. 38 G. CONTRACTING, PROJECT EXECUTION AND SUPERVISION ........................................................................... 40 H. OPERATIONS AND MAINTENANCE .......................................................................... 41 I. COORDINATION WITH LINE MINISTRIES AND MUNICIPALITIES .............................................................................. 42 J. MONITORING, REPORTING AND BANK SUPERVISION ............................................ 44 K. PROJECT BENEFITS, RISKS, AND SAFEGUARDS ........................................... 45 This report is based on the findings of a joint IDB-IBRD appraisal mission that visited Perui from February 20 to March 5, 1996. The World Bank team included Messrs./Mmes. Juliana Weissman (Task Manager), Norbert Schady (LA3HR), and Luis Secco (Consultant). The IDB team comprised Messrs. Walter Soto (Task Manager), Samuel Morley, Heraldo Laguzzi, Gregorio Arevalo, Mauricio Bertrand, Miguel Coronado and Juan Antonio Buzio (Resident Mission). Ms. Aracelly Woodall was responsible for the production of the report. Division Chief, Julian Schweitzer; Peer Reviewers, Alexandre Abrantes, Steen Jorgensen, and Julie Van Domelen; Projects Advisor, Robert Crown; Department Director, Mr. Paul Isenman. 4. AGREEMENTS TO BE REACHED AND RECOMMENDATION .................................................... 47 A. AGREEMENTS ......................................................................................................... 47 ANNEXES ..... 49 Annex 1: Project Cost Table Annex 2 Estimated Schedule of Bank Loan Disbursements Annex 3: Training Plan Annex 4: Performance Indicators Annex 5: Project Supervision Plan Annex 6: Annual Implementation Review Outline Annex 7: FONCODES Portfolio 1995-1998 Annex 8: Decentralization Plan Annex 9: FONCODES Organization Chart Annex 10: Evaluation and Follow up of the Decentralization Process Annex 11: Lessons Learned from Bank Involvement in Social Funds Annex 12: Inter-Agency Agreements Annex 13: List of Productive Projects Annex 14: List of Documents and Data Available in the Project File ii PERU SECOND SOCIAL DEVELOPMENT AND COMPENSATION FUND PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Peru Implementing Fondo Nacional de Compensaci6n y Desarrollo Agency: Social - FONCODES. Beneficiaries: Low income households, through community organizations, local governments, NGOs and other entities. Amount: US$150 million equivalent Terms: Variable lending rate for currency pool loan (VLR89), payable in 17 years, including five years of grace. The loan will be amortized in level payments of principal. Commitment Fee: 0.75 percent on undisbursed loan balances, beginning sixty days after signing, less any waiver. Net Present Value: Not applicable Financing Plan: See paragraph 2.18 Environmental Classification: B Staff Appraisal 15497-PE Report: Maps: IBRD Nos. 26572R and 26134RI iii PERU SECOND SOCIAL DEVELOPMENT AND COMPENSATION FUND (FONCODES) PROJECT 1. POVERTY ALLEVIATION IN PERU A. THE ECONOMIC SETTING 1.1 The comprehensive economic reform programs introduced by the Fujimori government in 1990, including the transformation of the country to a market economy and concurrent efforts to subdue terrorism have brought about a remarkable social and economic recovery in Peru. Inflation was reduced from 7600 percent in 1990 to an estimated 10 percent in 1995 and GDP increased by 20 percent between 1990 and 1994. The economic recovery and subsequent increase in public sector resources allocated to the social sectors have contributed to improved living conditions and a reduction of the population living in poverty from 55 percent in 1991 to 49.6 percent in 1994. During the same period, average consumption levels increased by 29 percent in all areas of the country. 1.2 These results are encouraging, however, the economic recovery to date has succeeded only in bringing per capita GDP back to its 1965 level. In 1994, only 17 percent of the economically active population was adequately employed while 74 percent was underemployed and 9 percent was unemployed. Although income distribution has improved during the past two years, it is still worse than the Latin America average. The major economic reforms of the 1990s have laid the framework for sustainable economic growth. These reforms will need to be complemented by investments in social and economic infrastructure which are targeted to the lowest income groups and poorest areas of the country if the benefits of the reforms are to reach all levels of Peruvian society. B. POVERTY AND LIVING CONDITIONS IN PERU 1.3 In 1994, almost half of Peru's population was classified as poor, that is, having an income not sufficient to purchase the equivalent of a food basket which would meet energy and protein requirements and satisfy the need for other basic non-food items. A fifth of the population was classified as extremely poor, unable to purchase even the equivalent of the food basket. Poverty and extreme poverty are not evenly distributed throughout Peru; almost two thirds of the rural population lives in poverty and 40 percent of the rural poor live in extreme poverty. Although only a third of Lima's population is poor and 4 percent are extremely poor, the highest concentration of poor, about 3.2 million people, reside in Lima. The reduction in poverty between 1991 and 1994 did not benefit all of the poor to the same extent. Poverty declined by 10 percent in Lima, by 6 percent in the rest of the urban coast, 12 percent in the urban Sierra and 4 percent in the rural Sierra (See Table 1.1). 1 Table 1.1 Poverty Levels in Peru, 1991 and 1994 Area 1991 (%) 1994 (%) Lima Metropolitana 47.6 37.6 Costa Urbana 54.9 48.9 Costa Rural (n.d.) 66.3 Sierra Urbana 53.2 41.6 Sierra Rural 72.7 68.3 Selva Urbana (n.d.) 38.9 Selva Rural (n.d.) 69.7 Source: LSMS, 1991 and 1994. 1.4 Twenty percent of Peru's population live in ten thousand rural settlements which have an average of 500 inhabitants each. Many have no electricity (86%), potable water (90%), school, or health facility. The average distance from these settlements to the nearest health services, schools, communications and markets was 7 kilometers in 1994. Roads and other transportation services which would provide a link with markets and other services outside the community are poor to nonexistent. The other services which would help these communities to end their isolation from the rest of Peru and work their way out of poverty such as adult literacy and agricultural extension, do not reach them. The rural Sierra has the largest number of extremely poor, 1.6 million, the highest proportion of poor, 66 percent, and extremely poor, 44 percent. The prospects for moving out of poverty are limited to a few economic endeavors, including livestock farming and production of handicrafts. About 60 percent of the labor force is employed in the agricultural sector, which has experienced positive growth since 1992 although production levels were still below 1986-89 averages for most crops. The productivity of the labor force engaged in agricultural pursuits is poor, and has improved only marginally over the past three decades. 1.5 Peru's poverty is accompanied by some of the worst social indicators in the LAC region; life expectancy, at 66 years, is lower than in the neighboring middle income countries of Ecuador and Colombia and infant and child mortality are higher (see Table 1.2). Only Haiti and Bolivia have a worse record of achievement in terms of raising life expectancy and lowering mortality. Mortality for all age groups is above average for the region and poor sanitary and living conditions have contributed to the spread of preventable diseases such as tuberculosis, cholera, other gastrointestinal and upper respiratory infections and malaria. Although 76 percent of Lima's population has access to piped water and 50 percent to sewerage services at least part of every day, more than 60 percent of the country's schools lack water and sewerage connections, and less than a third of residents of rural areas had piped water as recently as 1994. The effects of the poor sanitary environment are not limited to the poor; Peruvians of all income groups lose an average of two days of work per month because of inactivity precipitated by ill health. While the loss is greater in financial terms for the rich, who earn more money, the poor suffer more when wages are lost because they do not have the protection of regular salaries, sick leave benefits, and 2 savings to cushion the impact. Per capita incomes are estimated to be 3 percent lower than expected because of work days lost to illness. Table 1.2 Comparative Socioeconomic Indicators - 1993 GNP Per Capita Life Expectancy Infant Mortality Rate (in US$) (in years) (1000 live births) Peru 1,490 66 55 Bolivia 760 60 73 Chile 3,170 74 16 Ecuador 1,200 69 49 Colombia 1,400 70 36 Source: World Development Report 1994. 1.6 The above average size of poor families is reflected in the high prevalence of poverty - 60 percent - among children under 18 years of age. More alarming is the prevalence of extreme poverty - 30 percent - among children under 10 years of age. The families of these children are, by definition, unable to provide the basket of food needed to meet their nutritional requirements and satisfy the non-food requirements of the family. Food distribution programs, which should reduce some of the food deficit of the poor, are not always targeted to the poor; in some areas, only half the families receiving food aid are defined as poor or extremely poor. About twenty percent of Peruvian children 6 - 17 years of age work, primarily as unpaid family laborers in rural areas. Most live in the Rural Sierra; only 6 percent live in Lima. Although more than 90 percent are theoretically enrolled in school, attendance levels in some areas average only two days per week. The living conditions of the Peruvian poor reflect the uneven distribution of the benefits of development in the past. Expanding small-scale improvements in social and economic infrastructure and targeting them to the poor, especially in rural areas, represent a serious challenge for the Peruvian government. C. GOVERNMENT POVERTY ALLEVIATION STRATEGY 1.7 The Peruvian government is faced with the difficult task of resuming economic growth and reducing poverty on a sustainable basis after years of deterioration. In the decade between 1981 and 1991, the level of government expenditures was cut in half. Between 1987 and 1991, per capita GDP decreased by 25 percent and government spending fell to US$115 per capita, equivalent to 8 percent of GDP. Health and education expenditures declined far below the region's averages and infrastructure, including roads, water and sanitation systems are now in an advanced state of decay. Increasing public expenditure alone will not guarantee better coverage and quality of services. There are four elements which are critical to ensure sustainable improvements in public expenditures and the provision of services: (i) improvements in the efficiency of allocations; (ii) establishment of a well-defined relationship between the central, 3 regional and local governments; (iii) improvements in the management of human resources; and (iv) strengthening the public sector financial management process.' 1.8 The Fujimori government recognized the need to ameliorate the social costs of the economic adjustment program soon after the program was initiated. Analysis of the determinants of poverty based on the findings of the 1991 Living Standards Measurement Survey indicated that gains in income were positively correlated with investments in human capital, including education, health and nutrition interventions. Social programs to improve human capital needed to be complemented by physical capital accumulation to stimulate economic growth in order to reduce poverty. Nevertheless, the minimum needs of the poorest would not be satisfied in the medium term, even when the most optimistic assumptions related to the growth of the economy were considered. The government's second term commitment to reduce current levels of extreme poverty by 50 percent by the year 2000 will require not only an increase in social expenditures but also the development of mechanisms to stimulate economic growth, promote competitiveness, effort, solidarity, austerity and savings. 1.9 Public social expenditure has increased by a factor of four since 1990, from 21 to 41 percent of total public expenditure and from 3 to 7.5 percent of GDP (See Table 1.3). There are two major elements of the social expenditure program: the Social Expenditure Improvement Program which provides substantial budgetary allocations to those programs of the Ministries of Health, Education and Justice which benefit the poorest segments of the population, and the social emergency funds provided to several autonomous organizations within the Ministry of the Presidency including FONCODES, INFES, PRONAA, CoOPOP2 and others. Emphasis has been placed on programs and interventions that improve the quality of social expenditure so that an optimum trickle-down effect can be obtained and the scarce resources can be used to minimize the social gap between rich and poor. I Public Sector Expenditure Review, October 31, 1994, Report No. 13190-PE 2 FONCODES, Fondo de Compensaci6n y Desarrollo Econ6mico y Social; INFES, Infraestructura en Educaci6n y Salud; PRONAA, Programa Nacional de Ayuda Alimentaria; COOPOP, Oficina Nacional de Cooperaci6n Popular 4 Table 1.3 Public Social Expenditure: 1990-1995 (Millions of dollars) Public Social Public Social Expenditures as Expenditures as percentage of Public Social percentage of Total Public Year Expenditures GDP GDP* Expenditures 1990 980 30,319 3.2% 20.90/o 1991 1,877 41,995 4.5% 23.4% 1992 1,902 42,240 4.5% 27.3% 1993 2,036 40,954 5.0% 32.0% 1994 2,988 50,083 6.0% 35.3% 1995 4,264 56,532 7.5% 40.9% Includes Social Security Institute Source: Ministy of Finance 1.10 The Peruvian government has established a series of objectives for the medium term to maintain the pace of economic growth, reduce poverty and improve the social indicators associated with unsatisfactory living conditions. In order to attain its objective of an economic growth rate averaging 5 percent a year, a significant increase in public and private savings will be necessary. The prevalence of poverty is expected to decline from 49.6 percent in 1994 to 33.4 percent in the year 2000 with a 50 percent reduction in extreme poverty, from 19.5 to 9.8 percent, over the same period of time. Social expenditures will have to be well targeted and efficiently implemented if they are to be successful in delivering social services to the neediest. During the next few years, greater emphasis will be placed on cost-effectiveness in the assignment of resources, better targeting to the most vulnerable groups, closer monitoring of expenditures and results, and functional and financial decentralization of social programs. 1.11 The government has made an effort during the past five years to define the problems associated with inefficient and ineffective spending and is laying the groundwork for basic reforms in health, education, and food and nutrition programs, for which it is receiving considerable support from the international donor community. In the future, the line ministries expect to concentrate their efforts on policy formulation, legislation, the establishment of norms and standards for the provision of public services and transfer responsibility for the provision of many basic services to local governments. Many of these reforms have not been well defined. There are unanswered questions related to the formula to be used for financing and cost recovery, the degree of autonomy and accountability of individual facilities for the services provided, and the role of central, regional and local governments. Until the government has overcome the existing weaknesses in its public sector expenditure system and in the provision of social services, the Ministry of the Presidency will continue to complement the efforts of the line ministries and the regional and local governments. The role of FONCODES in the implementation of demand- 5 driven, small-scale projects is expected to remain unchanged for the next three to five years as its work is considered an important contribution to the government's effort to reduce poverty and improve living conditions in poor communities. D. BANK INVOLVEMENT IN POVERTY ALLEVIATION 1.12 The Bank resumed lending to Peru in 1991 with a strategy designed to support the macroeconomic and structural adjustment programs of the government. By 1993, the Bank's portfolio included loans for Trade Policy Reform, Structural Adjustment, Financial Sector Adjustment, Privatization Technical Assistance, and Privatization Adjustment. In 1993, there was a shift to investment lending intended to support the Government's long-term objectives of growth and poverty reduction through institution building, infrastructure development and poverty alleviation programs. In 1995, the portfolio included loans for the Social Development and Compensation Fund, Electricity Privatization, Lima Water Rehabilitation and Management, Rural Roads, Basic Health and Nutrition, and Primary Education. 1.13 Poverty reduction is the central objective of the Bank's involvement in Peru.3 Projects with FONCODES, in Basic Health and Nutrition, Basic Education, and Rural Roads Rehabilitation combine poverty alleviation with investments in rehabilitation and maintenance of public services which have been neglected and technical assistance in support of privatization and t.he development of the complementary regulatory and legal framework. The Bank's strategy for FY95-97 continues to pursue the long-term objectives of poverty alleviation, infrastructure development and institution building through investment lending in infrastructure and the social sectors. E. T1E SOCIAL DEVELOPMENT AND COMPENSATION FuND (FONCODES) 1.14 In December, 1993, the Bank's Board of Directors approved the first loan to the Peruvian government for the Social Development and Compensation Fund (FONCODES). The loan of US$ 100 million was complemented by parallel financing from the Interamerican Development Bank (US$100 million). A European donor consortium including Germany, the Netherlands, Spain and Switzerland financed a similar project4 for US$14 million equivalent in the Inka Region. Government financing (US$200 million) and beneficiary contributions (US$42 million) brought the total value of support for FONCODES to US$495 million. The Bank loan was to be implemented over a period of three years, from 1994 to 1996. 1.15 The objectives of the project were to sustain the government's poverty alleviation efforts, mitigate the social costs of macroeconomic adjustment and strengthen the institutional capacities of FONCODES. The project was to support a range of community-based, labor intensive projects, with a strong focus on education, health and nutrition, and other activities that would assist poor rural and peri-urban populations. The project menu included four broad categories of 3Country Assistance Strategy of the World Bank Group, October 28, 1994, Report No. 12997 PE 4PREDES, Proyecto de Desarrollo Econ6mico y Social 6 investment: social assistance, social infrastructure, economic infrastructure and income and employment generation. In addition to the locally generated small-scale demand driven projects, FONCODES financed a series of centrally planned and executed Special Programs to manufacture shovels for farmers, launches for community transportation in the Selva, school shoes, knapsacks, furniture, and school breakfasts. The Bank declined to finance these projects because they were not consistent with the demand-driven strategy of the Fund. The Bank project also provided support for the institutional development of FONCODES, which was considered essential if the project's other objectives were to be met. At the request of the Bank, FONCODES drafted environmental assessment guidelines acceptable to the Bank, incorporated them in the Operational Manual, and modified the Operational Manual to respond to other Bank concerns related to the definition of the project menu and provision of complementary inputs, including beneficiary contributions to ensure project sustainability. In addition, a Letter of Social Policy was prepared by the government and reviewed and approved by the Bank. The letter was followed by the development of the social sector strategy described in Paragraphs 1.8 - 1.1 1. 1.16 Unlike some other social fund projects, FONCODES was not established with World Bank or other international financing. FONCODES was created in 1991 by the Fujimori government to finance social investment projects prepared by the Fund (the Special Projects mentioned in the previous paragraph) and by local communities in poor areas of the country, to promote temporary employment, channel resources to the poorest areas of the country, and assist in emergency situations. Between 1991 and 1993, the only external support for FONCODES was a 1992 institutional development grant from the Interamerican Bank (IDB). The Fund had already learned a number of important lessons prior to the preparation of the project, including the need for effective targeting, clear definition of the project menu, establishment of objective criteria for project evaluation and approval, regular supervision of project implementation, and establishment of good project administration and financial management procedures. 1.17 The ongoing project has been monitored regularly by Bank project supervision missions, several of which have been carried out jointly with IDB staff. In addition, there have been numerous field visits to FONCODES projects by Bank managers and staff working with other projects in Peru, and three external ex-post evaluations which have examined more than 500 completed projects. Overall, the project has maintained a satisfactory or highly satisfactory rating since its approval. Projects have been well targeted to poor areas, demand-driven and executed locally. The technical quality of project appraisals has been good and largely free from political interference. Significant short term employment has been generated. FONCODES staff continue to improve its operations through an ongoing informal process of review and fine-tuning, implementing recommendations generated by FONCODES personnel in Lima and the 23 regional offices, by Bank missions and through lessons learned from other social funds. 1.18 Ajoint, World Bank-Interamerican Bank Midterm Review of the project and the work of FONCODES was initiated in March, 1995, and concluded in November, 1995, when the findings of the ex-post evaluation of projects were discussed with FONCODES. The Midterm Review consisted of two joint IDB-Bank missions, the third and largest external ex-post evaluation to date of 300 projects completed and an extensive beneficiary assessment, both of which were undertaken by a local consulting firm. The Midterm Review focused on targeting, selection and 7 prioritization of projects, project execution and supervision, project quality, sustainability and impact. Institutional development issues addressed included the overall management, administration and decentralization of FONCODES, improvement of the MIS, procurement and disbursement arrangements, relations with line ministries and local governments, training, consultant assistance and studies. In addition, the government provided an update on the implementation of the Letter of Social Policy and its overall poverty alleviation strategy. 1.19 Findings of the Midterm Review. Between 1991 and September 1995, FONCODES received more than 45,000 applications for projects and had financed 16,786 projects at a total cost of US$650 million equivalent. The 1994 LSMS revealed that 40 percent of improvements in infrastructure and services in poor rural communities had been financed by FONCODES. During 1994, the World Bank project financed 2,184 FONCODES subprojects with a total value of US$52 million. The average project size was US$25,000. The IDB project had financed 2,015 projects for US$63.8 million equivalent, with an average project size of US$32,000 equivalent. The review team found that FONCODES activities were notable for: (a) their innovativeness with respect to the nontraditional form of intervention in poor communities; (b) the adequacy of the targeting mechanisms, including census data, used to allocate resources, 80 percent of which were allocated to poor or extremely poor districts; (c) the degree of community participation, including women and indigenous groups, and decentralized implementation of projects; (d) the extensive territorial reach of FONCODES which financed projects in areas where the presence of the public sector was precarious to nonexistent; and (e) the management capacity of FONCODES as reflected in the mobilization and use of resources for the financing of projects. 1.20 The technical competence and high degree of motivation of FONCODES personnel at the central and regional offices was also noted. Some of the Lessons Learned from the Midterm Review are summarized below. Lessons learned from Bank involvement in other social funds are summarized in Annex 11. 1.21 Targeting and Prioritization of Projects. Project targeting has been good and is improving; in 1994, 66 percent of projects were targeted to poor and extremely poor departments. By 1995, more than 80 percent were targeted to poor districts. Targeting to the district level facilitates the identification of poor and extremely poor population groups within departments which are classified as not poor but which have significant poor populations such as Lima. The global prioritization and selection of projects by category (social assistance, social infrastructure, economic infrastructure, employment generation) is established by FONCODES in Lima. The need to rethink the process of establishing priorities in Lima rather than at the regional or local level is one of the lessons learned from the successful use of district development committees to determine priorities and coordinate projects in the Cusco and Cajamarca areas and from the implementation of a series of pilot integrated development projects in four other rural areas of the country. 8 1.22 Project Execution and Sustainability. The satisfactory quality of project execution and supervision has been confirmed in numerous site visits throughout the country and by four ex-post evaluations of over 500 projects. More than 80 percent of projects are judged sustainable, that is, staffed and equipped to operate as planned with arrangements made with the line ministries to cover recurrent costs such as personnel for schools and health posts, supplies and equipment. Operations and maintenance shortcomings are most common in water and sewerage projects, where commitments from local governments to assist in this area are not always backed up by the necessary technical expertise and budgetary resources. In 80 percent of projects in the Selva, 54 percent in the Sierra and 46 percent on the Coast, the community is participating in operations and maintenance efforts. With additional training during project preparation and execution, these numbers could be increased. One area of concern which has surfaced in the preparation of this second project is the actual application of the environmental assessment procedures. 1.23 Institutional Development. The investments in institutional development for a Social Fund which is defined as temporary must be designed to improve its performance and facilitate its work for the relatively brief period of time of its existence. In the case of FONCODES, these investments have been modest and have been well focused on the immediate requirements of the Fund. FONCODES offices have been rehabilitated, the information system is being expanded and improved, communications and computing equipment to support decentralized project management in 23 regional offices have been acquired, primarily with funding from the IDB. Technical assistance and training focused on the use of individual consultants to analyze the LSMS and Census data to develop improved targeting mechanisms and supervise project execution, staff training in the evaluation and supervision of projects, and the contracting of consulting firms to conduct external ex-post evaluations of projects completed. These investments have laid the groundwork for the second project and the continuation of FONCODES activities for another 3 to 5 years. 1.24 Coordination with Line Ministries and Local Governments. Relations of FONCODES with the line ministries and local governments have been uneven, despite continuing efforts to resolve issues at the local, regional and national level. The result has been that about 10 percent of schools and health facilities constructed with FONCODES financing have no staff, equipment and materials, or recurrent budget from the line ministry. In similar cases, extensions of water, drainage and sewerage systems to poor areas have been completed in municipalities which have no financial or material resources to assure operations and maintenance. Written agreements (convenios) have been executed with the municipalities and with the Ministries of Health, Education, Transport, Agriculture, and the other autonomous offices within the Ministry of the Presidency, including INFES, FONAVI and COOPOP. These agreements have not always been accompanied by the appropriate follow-up by FONCODES or the other parties to the agreements. FONCODES has completed a study which examines the coordination between the line ministries, local governments and FONCODES with a view to improving coordination in the future and developing criteria for the gradual transfer of responsibility for social infrastructure and programs currently supported by FONCODES. In addition, FONCODES managers have been meeting with representatives of the line ministries to review and update the agreements which govern their relationships in order to improve coordination in the future and provide for ongoing monitoring and periodic evaluation of the efficacy of the coordination mechanisms. At appraisal, 9 FONCODES provided the Bank with copies of the new convenios with the line ministries and identified the staff members who would be responsible for following up with each institution (See Para. 3.48-3.49). 1.25 Other Issues. The demand for FONCODES projects has far exceeded the resources of the Fund. This has led to the accumulation of a large backlog of project applications which have not been evaluated. The time between project presentation and evaluation has stretched from 57 to 192 days and the time between approval and the first disbursement of funds has increased from 36 to 55 days. In addition, 2,000 projects remained incomplete. FONCODES had reduced the number of incomplete projects to 425 by November, 1995 and will begin to address the project backlog during 1996. To reduce the project backlog, FONCODES has developed a simplified application form which will allow it to respond rapidly to applications before the community invests significant resources in project development. The disbursement delays have been caused by the need to use two different disbursement systems for the World Bank and IDB projects. This problem will be resolved in the second project, which will provide for the establishment of a local Bank account which will be used to disburse the proceeds of both loans. FONCODES has not worked extensively with NGOs in the past, as few NGOs were working in rural areas when FONCODES was established because of the security situation. Security has improved and more NGOs are now working throughout the country, which is expected to lead to greater NGO involvement in future FONCODES projects. 1.26 Government Social Policy. A Letter of Social Policy was prepared by the government as a condition for international financing of the first Social Development Fund Project. The social policy strategy includes the design of a Program of Targeted Social Expenditures and a proposal to develop a Plan for Social Stabilization. The Program of Targeted Social Expenditures uses public sector resources generated by economic adjustment and recovery and the proceeds of privatization of public enterprises to target expenditures for basic social services provided by the Ministries of Health, Education and Justice to the programs most likely to reach the lowest income groups and the poorest areas of the country. Public social expenditure for the targeted social programs tripled between 1994 and 1995, from US$88 million to US$263 million (See Table 1.4). Continued expansion of the targeted programs is anticipated. The plan for social stabilization addresses medium-term social policy and planning issues such as the role of the social ministries in the development and monitoring of norms and standards, decentralization of social programs to the local government, and coordination between local governments, the social fund and the line ministries. The Peruvian government has estimated that the cost of shifting its focus from the financing of short-run emergency actions to a medium-term program which meets the basic needs of the population will require additional external financing increasing from US$655 milllion in 1996 to US$970 million in 2000 (See table 1.5). 10 Table 1.4 Social Expenditure Improvement Program ("Programa de Mejoramiento de Gasto Social Bisico") (Millions of dollars) 1994 1995 Health 39 179 Nutrition 10 30 Education 30 35 Justice 9 19 Total 88 263 Source: Ministry of Finance 1.27 The Government's social policy program combines the use of targeted social expenditures with efforts to strengthen the line ministries so that they can concentrate on and expand their normative role and emphasize monitoring and control; use their resources more effectively; and work with local governments on the gradual decentralization of social services. Because of institutional weaknesses, the current ability of public sector social agencies to respond to the needs of the poor is limited. The reforms required to bring about the desired improvements in institutional capacity will take time to materialize. In the short term, the role of FONCODES will be to continue to respond to community-generated project proposals, work with the communities to strengthen their capacity to plan, execute and sustain small-scale investments in social and economic infrastructure and services, and coordinate their work with that of the line ministries and the local governments. Table 1.5 Expected Deficit in Social Expenditure: 1995-2000 Minimum Social Expenditure Required to Reach Population in Extreme Poverty* (Millions of dollars) Required Social Estimated Social Year Expenditure Expenditure Deficit 1995 2315 1797 519 1996 2559 1905 655 1997 2824 2100 724 1998 3107 2293 815 1999 3403 2504 899 2000 3704 2734 970 *Includes only current expenditure for basic education, nutrition, health and justice. Source: Ministry of Finance 11 2. THE PROJECT A. ORIGIN OF THE PROJECT 2.1 The positive results of the first Social Development Fund project financed by the Bank, continuing problems related to unsatisfactory living conditions, especially in rural areas and among the lowest income groups, the inauspicious short term prospects for a significant improvement in the capacity of the line ministries and local governments to respond to the needs of the poor, and the strong demand from Peruvian communities for additional projects financed through FONCODES (see Table 2. 1) provide a strong justification for the development of a second project to support the operations of FONCODES. The Peruvian government has estimated that over the next five years, there will be a substantial increase in the deficit in social expenditures required to ameliorate the living conditions of the poor and to achieve the government's goal to reduce extreme poverty by 50 percent by the year 2000. A 1995 survey of Peruvian communities documented the specific community requirements in basic social and economic infrastructure. The information in this survey is being used to determine priorities for FONCODES projects. Table 2.1 FONCODES Projects Requested, Approved and Pending, 1991 - 1995 Project Type Projects Projects Projects Projects Pending Submitted Appraised Approved Social Assistance 3,241 2,204 1,156 1023 Social 32,206 25,487 12,637 9,325 Infrastructure Economic 7,248 5,467 2,537 2,546 Infrastructure Productive 2,124 1,299 456 1,069 Activities Total 44,819 34,457 16,786 13,963 Source: FONCODES Office of Planning, September 1, 1995 2.2 The Social Development Fund should be regarded as a temporary solution to poverty reduction and improving social conditions in Peru, which needs to be accompanied by a broad- based social policy which is consistent in terms of its objectives and innovative in its methods. A gradual change in the role of government institutions is envisioned. The central government is expected to shift its emphasis to policy making, the establishment of norms and standards for the delivery of social services, monitoring, evaluation and regulation to ensure consistency, quality and coverage of the most vulnerable population groups. The local governments are expected to play a stronger role in the planning and execution of investments and delivery of basic services, using a combination of public financing and cost recovery where appropriate. The role of the regional governments has not been clearly defined, but some of the responsibilities which are being proposed include coordination between central and local governments and participation in planning, phasing and ensuring the complementarity of investments and other interventions. 2.3 FONCODES is expected to play a larger role in the evolution of government institutions, especially municipalities, in the future. It will work more closely with the local government entities to develop their capacity to plan, prepare and execute small scale investment projects, mobilize the community in support of these projects, and ensure their sustainability by participating in arrangements for operations, maintenance, and cost recovery. FONCODES projects have been executed in remote areas which the central government has not always been able to serve. The use of FONCODES to test new ideas on a limited scale using project designs adapted to local conditions and to reach remote areas will advance the government agenda to reduce extreme poverty, which is prevalent in widely scattered settlements in which only small projects are appropriate. 2.4 The Bank has made a commitment to support the government's poverty alleviation strategy as part of its effort to ensure the sustainability of the overall economic adjustment program. It is generally acknowledged that Peru has met successfully many of the challenges before it. Stable prices, stronger market mechanisms, and public order have increased productivity and improved the conditions for private investment. However, improving the quality of people's lives and capabilities will require a sustained effort to reduce poverty by building on the lessons of recent years and increasing the endowment of resources including human capital. Targeted investments in education, health, nutrition, economic and social infrastructure and programs will be needed to reach the poorest communities, many of which still lack basic social and economic infrastructure and services. FONCODES has played a prominent role in delivering public services and executing the kind of small scale investments in infrastructure and services in remote areas which have been most difficult for the line ministries and the central government to implement. 2.5 This project will build on the demonstrated capability of FONCODES to target its investments to the poorest areas of the country, to increase capacity for project planning and execution at the local level, and respond to the demands of the community. The ability of FONCODES to work more effectively in the poorest areas of the country and determine priorities within poor communities has been enhanced by the updated poverty map and a 1995 survey of basic needs in more than 18,000 of the country's poorest communities. 13 B. PROJECT OBJECTIVES AND DEscRPTiON 2.6 The project would continue to support the Government's poverty alleviation strategy to target its investments to the poorest areas and population groups in the country. It would contribute to the government's decentralization strategy by building local capacity in project planning, execution, operations and maintenance of small scale infrastructure and public services. It would contribute to the longer term goal of sustained poverty reduction through investments in productive projects designed to stimulate economnic activity in poor communities. It would focus on meeting priority needs for social and economic infrastructure and programs, through projects designed with the participation of poor communities in consultation with local governments and line ministries. The resources for projects would be allocated based on the poverty map and community survey of basic needs developed by FONCODES, both of which disaggregate data to the district or community level. The ability to target projects to this level permits a degree of precision in targeting which was not possible under the first project (See Para. 3.11-3.16). 2.7 The Bank project would finance: (i) a broad menu of small-scale projects in social infrastructure, social assistance, economic infrastructure and productive activities; and (ii) institutional development of FONCODES designed to support further decentralization of project management responsibilities, development of new promotion and project preparation strategies to increase the participation of women and indigenous communities; and evaluation of subproject costs, benefits and impact, and project sustainability. FONCODES would continue to emphasize transparency with respect to the participation of the beneficiaries in project management and supervision, and work more closely with line ministries and local governments to improve coordination and ensure project sustainability. A survey of basic needs in more than 18,000 communities revealed that only 32% had safe water and waste disposal systems, 13% had electricity, and 90% had a primary school. The second FONCODES project is expected to satisfy virtually 100% of the need for primary education infrastructure, about 50% of the need for water and sewerage systems, and approximately 20 % of the need for electricity. If local governments contribute to the satisfaction of these needs either through co-financing with FONCODES or through parallel projects, the basic needs identified by this survey could be satisfied more rapidly. C. PROJECT COMPONENTS 2.8 The project, with a total cost of US$430 million, would have two components: (i) Community-based subprojects in social infrastructure, social assistance, economic infrastructure and productive activities (US$420.7 million equivalent); and (ii) institutional development (US$7.8 million equivalent). The World Bank and IDB loans would finance the same menu of projects. 2.9 Community-based Subprojects (US$420.7 million). The first component would include two broad categories of community-based subprojects: social infrastructure and social assistance, and economic infrastructure and productive activities. As the need for basic social services is met and the capacity of the line ministries increases, community demand and the composition of FONCODES' portfolio is expected to shift gradually to economic infrastructure 14 and productive activities. The subprojects would continue to be identified by community groups and executed by the communities, local contractors, and non-governmental organizations in close cooperation with local governments and line ministries. 2.10 Social Infrastructure and Social Assistance. A broad range of subprojects designed to meet basic needs and improve social and living conditions would be financed. There would be a strong focus on primary education, family planning information and education. Water treatment and supply, waste disposal including sewage treatment systems, environmental sanitation, health post rehabilitation and equipment, primary school rehabilitation and equipment are being financed by the ongoing project and will continue under the new project. 2.11 Economic Infrastructure and Productive Projects. The project would provide support for the rehabilitation, extension and construction of wells and small scale irrigation systems, land rehabilitation and reforestation, small bridge, road and sidewalk rehabilitation, marketing infrastructure, secondary electrical supply systems, and productive projects designed to improve the economic potential of poor rural communities. FONCODES expects to build on its past experience with productive projects at first, and test new projects on a pilot basis prior to initiating a large scale commitment to this line of subprojects. 2.12 Two types of productive projects are envisioned: (a) projects which are designed to increase production for autoconsumption in order to improve the nutritional status of extremely poor families; and (b) projects designed to increase production for sale in local markets. Some of the productive projects which have proven successful and sustainable in the past include food storage and distribution centers, small animal production, bee-keeping and production of honey, fish farms, small food processing facilities, and livestock improvement schemes. The poorest areas of the rural Sierra and Selva are expected to be the primary beneficiaries of productive projects. FONCODES is developing criteria for the productive projects, including the type and size of project to be financed, the type of local organization required to plan and implement the projects, beneficiary participation guidelines, economic and financial analysis to be applied, and ex-ante and ex-post evaluation designs. A maximum of US$12.4 million equivalent, about 3 percent of project resources, will be available to finance productive projects (See Positive List, Annex 13), These projects would be targeted to very poor and extremely poor communities. The minimum rate of return required to qualify for FONCODES financing would be 12 percent for type B projects and at least 30 percent of the community members should be expected to benefit from both types of projects. At negotiatons, it was agreed that disbursements for these projects would be limited to US$4.3 million equivalent under the Bank loan (para. 4.1(a)). 2.13 Institutional Development (US$7.8 million). The focus of institutional development is expected to shift gradually to the regional offices, communities, and local governments. This component would finance further decentralization of FONCODES operations, including procurement of some vehicles and equipment for the regional offices; development of the MIS; training of FONCODES staff in the use of the MIS, the new Operations Manuals, participatory techniques designed to increase the involvement of women and indigenous groups in FONCODES projects, simplified project preparation methods, applications of the revised procurement and disbursement procedures, performance indicators, and environmental guidelines; 15 and training for local governments, NGOs and community leaders in the preparation and operations and maintenance of FONCODES projects, and the participation of women. Consultant assistance would be used for the preparation, supervision, and ex-post evaluation of subprojects, a series of special evaluations of innovative projects including productive projects, staff training, beneficiary assessments, audits of subprojects and financial audits. 2.14 Project Management. FONCODES administrative costs have tended to average about five percent of total operating costs. These expenses are expected to amnount to about US$21.5 million and will be borne by the Peruvian govemment as part of the counterpart financing. The administration of all community-based subprojects is governed by the instructions contained in FONCODES Operations Manuals which provide specific guidelines for project promotion, identification, prioritization, preparation, implementation, completion and liquidation. 2.15 The Operations Manual lays out standard operating procedures for FONCODES staff and a User's Guide explains FONCODES' operations to members of the nucleo ejecutor, other beneficiaries, local governments, and NGOs. Both the Operations Manual and the User's Guide were reviewed and approved by the Bank for the first project. For the second project, FONCODES has agreed to make adjustments to both documents to reflect changes in its operating procedures. FONCODES Operations Manual and User's Guide cover the following general areas: (i) the menu of projects which are eligible for financing by FONCODES which in the future will also include standard project designs to be used in the poorest communities where project preparation capacity is limited, and a positive list of the kinds of productive projects eligible for financing (See Annex 13); (ii) the project cycle, including promotion of FONCODES projects and technical assistance to extremely poor communities; prioritization and selection of projects, both by the communities, as they organize and prepare a project, and by FONCODES staff, who will use the new computerized system recently developed for this purpose; ex-ante project appraisal, including technical, economic, social and environmental criteria; requirements for environmental assessment (see para. 2.34 - 2.41), project execution, procedures to be followed for direct contracting or competitive bidding, accounting, financial management requirements and procedures for disbursements of funds to the nucleo ejecutor, the relationship between FONCODES, the nucleo ejecutor, and the inspector; project monitoring and supervision; project liquidation, project audits, and arrangements for operation and maintenance of projects including cost recovery mechanisms where applicable; (iii) community participation, including the process by which the nucleo ejecutor is elected, requirements for community meetings and recording of the minutes of all meetings; the minimum levels of beneficiary contribution 16 required for projects according to the poverty level of the community in question; (iv) guidelines to ensure the inclusion of vulnerable populations, especially indigenous peoples and women, in all stages of the project cycle; the Indigenous Peoples Development Strategy; (v) policies and practices to ensure effective cooperation between FONCODES and other actors, including line ministries, municipal governments and NGOs; the procedures to be followed for co-financing of investments; the responsibilities of FONCODES and other actors in the evaluation, execution, and operation and maintenance of projects. As a condition of effectiveness, FONCODES would adopt the revised Operations Manual, including the User's Guide acceptable to the Bank (para. 4.2(a)). D. PROJECT COSTS AND FINANCING PLAN 2.16 The total project cost is estimated at about US$430 million equivalent (see Table 2.2) . The estimated foreign exchange costs of US$81.4 million represent about 19 percent of total project costs. The Bank would finance 50 percent of foreign exchange costs and about 34 percent of local costs (see Table 2.3). The financing of local costs under the project is a consequence of the small foreign exchange component of the project and the targeting of the project to the poorest areas of the country. Since the Bank loan is used to finance subprojects and thus serves as a financial intermediary, and physical targets are not the principal objectives of the proposed project, no contingencies have been provided for subprojects. Any increase in the average subproject cost would be reflected in a smaller number of subprojects being implemented. Since most technical assistance and training activities as well as the procurement of equipment and vehicles will take place during the first year of the project, no price contingencies have been provided for these categories either. 2.17 The cost estimates and average size of community-based subprojects varies according to the type of project and reflects the experience accumulated by FONCODES based on the financing of more than 16,000 projects in 1991-1995 and the projected average cost and number of projects for 1996-1998. The project is expected to finance about 9,000 community-based subprojects over three years, about 3,000 projects per year. The costs of the institutional development component are based on the average cost of technical assistance, materials, equipment and vehicles financed by the EBRD, IDB, UN agencies and the market cost of consultants and training services in Peru. 2.18 The project costs would be financed by the World Bank, the Interamerican Bank, the beneficiaries, and the Government of Peru. The Bank loan of US$150 million equivalent would represent about 35 percent of total project cost, net of taxes and duties. The Borrower would finance US$130 million, which includes taxes and duties, the operating costs for FONCODES and beneficiary contributions. The Interamerican Bank would provide joint financing of US$150 17 million equivalent. The amount of local cost financing is in line with the first project and with other social sector projects elsewhere in Latin America. The Bank loan would be made to the Republic of Peru which would make the finds available to the Second Social Development and Compensation Fund (FONCODES) for the execution of the project. Table 2.2 Total Program Cost (millions of US$ equivalent) Local PROJECT COMPONENTS IBRD IIDB financing Total % 1. Community-based projects 146.1 146.1 128.5 420.7 97.8 1.1. Social and economic infraestractrure, 141.8 141.8 124.7 408.3 95.0 social assistance 1.2. Productive projects 4.3 4.3 3.8 12.4 2.9 II. Institution building 4.4 2.9 1.5 7.8 1.8 2.1. Equipment and rehabilitation 2.1 0.6 1.2 3.9 0.9 2.2. Skills development, performance 1.8 1.8 0.3 3.9 0.9 evaluation and consulting 111. Auditing and monitoring fund 0 1.5 0 1.5 0.35 TOTAL 150.0 150.0 130.0 430.0 100.0 Table 2.3 Financing Plan (millions of US$ equivalent) Local Foreign Cost Estimated Total cost % total currency currency excluding taxes costs (1) taxes (2) IBRD 109.3 40.7 150.0 150.0 34.9 IDB 109.3 40.7 150.0 150.0 34.9 Local 107.0 107.0 23.0 130.0 30.2 contribution (3) TOTAL 325.6 81.4 407.0 23.0 430.0 100.0 (1) Approximately 19% of the net project cost, estimate based on experience of the first project. (2) Includes the estimated taxes from civil works (5.4%) and from goods and services (18%). (3) Includes an estimated 5% of input from the final beneficiaries. 18 E. PROCUREMENT 2.19 Procurement of works, goods and services as well as the contracting of consultants would be carried out in accordance with the Bank's Guidelines for Procurement (January 1995) and the Guidelines for the use of Consultant Services. The project procurement arrangements are summarized in Table 2.4. The Midterm Review of the implementation of the first Bank loan to FONCODES has confirmed the adequacy of existing procurement and project management arrangements (See para 2.14 above). Weekly visits to all projects under execution by externally contracted consultants are an important element of FONCODES internal project supervision and quality control mechanisms. The high quality of subprojects completed has been confirmed by an external expost evaluation of 300 projects and by numerous field visits by Bank staff (See para 1.19). At negotiations, it was confirmed that all procurement arrangements were in compliance with Bank Guidelines (para. 4.1 (b)). 2.20 Procurement of Civil Works. Because of the small size of civil works financed by the project and the dispersed locations of many of the communities in which FONCODES works, no ICB or NCB is expected for civil works. Average project size through the end of 1995 was US$30,000 and the maximum project size is US$250,000. The project will finance some minor refurbishment of the 23 regional offices of FONCODES including rewiring to accomodate the MIS system, fire alarms, the installation of air conditioning or ventilation units, which are expected to cost an average of US$ 9,500 per office. Because of the small size and distribution of this work throughout the country, NCB would not be appropriate. (a) Lump sum fixed price contracts awarded on the basis of three quotations, would be used for small works estimated to cost between US$ 60,000 and US$ 250,000 equivalent each, up to an estimated aggregate amount of US$125 million equivalent, with standard bidding documents and standard contract forms agreed at negotiations; (b) In order to encourage community participation in project execution, employ appropriate local technologies, and ensure community commitment to project sustainability, Direct Contracting (DC) would be permitted for small works not exceeding US$ 60,000 each, up to an estimated aggregate amount of US$ 172 million. The use of three offers would continue to be encouraged in some locations in order to maintain a competitive element in the contracting process. However, where the three quotation procedure as described above is not feasible, direct contracting would be permitted either with the only available or interested contractor, a local NGO, or with the community as contractor, provided that the community has the legal capacity to enter into contracts or agreements and that no more than US$95,000 is awarded through direct contracting for goods and works for any one subproject (see para. 2.23(d)). 2.21 The nucleo ejecutor, which is a recognized legal entity formed by members of the community to support subproject implementation, has been widely used by FONCODES during the first project. The ex-post evaluation of projects found that the quality of the work performed 19 under this arrangement is good, that this contracting mechanism stimulates greater community participation in the subproject and has resulted in the mobilization of additional resources. All proposed works are supported by a technical proposal and budget which must be reviewed and approved by FONCODES. Construction costs are compared to a regional unit price index which is adjusted regularly. Projects executed through direct contracting are subject to weekly supervisory visits by independent supervisors on paid contract to FONCODES. 2.22 National shopping and direct contracting are justified because of the small scale and decentralized nature of FONCODES community-based projects which demand little, if any heavy equipment. Many works are executed in remote rural communities where domestic contractors are not interested in bidding for civil works. The system of standard regional unit prices was used by FONCODES for most of the 16,000 sub-projects implemented since 1991, and has been reviewed and confirmed by regular Bank and IDB supervision missions. At negotiations, the government agreed to maintain the unit price system, including labor costs, and review and adjust it on a regular basis as needed (para. 4.1 (c)). Table 2.4 Summary of Proposed Project Procurement Arrangements (millions of US$ equivalent) Procurement method PROJECT COMPONENT ICB NCB Other NBF Total Cost Works 0 0 297.22/ 0 297.2 (109.6) (109.6) Goods 0 0.4 104.7bl 2.3c/ 107.4 (0.4) (28.7) (29.1) Consultant services 0 0 11.3 12.6" 23.9 (11.3) (11.3) Auditing and monitoring 0 0 1.5 1.5 1.5 fund"' (0.0) (0.0) TOTAL 0 0.4 413.2 16.4 430 (0.4) (149.6) (150) at Direct contracting to be used only for community-based subprojects (US$172 million) and 3 quotations (US$125 million) b/ Direct contracting for community-based subprojects (US$63 million) and National and Intemational Shopping (US$42 million). Intemational shopping includes aproximately US$300,000 for computer equipment and software. " Vehicles financed bv IDB d/ Consulting services to be procured in accordance with IDB procedures. )IDB requirement to be financed by IDB. Note: Figures in parentheses are the respective amounts financed by the Bank loan. NBF: Not Bank-financed. 20 2.23 Procurement of Goods. The types of goods to be procured under the project consist primarily of basic construction materials, equipment and supplies for health posts and primary schools, medical supplies, small quantities of high quality seed, plants and breeding animals for rural and productive projects, vehicles (to be financed by IDB), training materials, operations manuals, office and administrative equipment, and some complementary inputs for the MIS which is being financed under the first project. The type of services financed by the project would include consultant assistance in the preparation of operations manuals and guidelines, project preparation, supervision, and evaluation of FONCODES operations, including the ex-post evaluation of projects completed and beneficiary assessments, audits, management services and training of FONCODES personnel, local government and NGO representatives and community participants in subprojects. Goods and services would be procured as follows: Default Method: (a) ICB, if any, for contracts estimated to cost US$250,000 equivalent or more; (b) NCB, if any, for contracts estimated to cost from US$50,000 to US$250,000 equivalent each, up to an aggregate of US$400,000; (c) National and International Shopping with at least three quotations, for contracts estimated to cost less than US$50,000 equivalent each, up to an aggregate amount of US$42 million equivalent; (d) Direct Contracting for community-based projects in remote rural locations, when shopping is not possible, for small items of equipment costing less than US$ 10,000 equivalent; and construction materials costing less than US$25,000 equivalent, up to an aggregate amount of US$63 million and not exceeding US$ 95,000 per subproject including direct contracting for both civil works and goods. 2.24 Procurement of Consulting Services. Consulting services would be procured following the Bank's Consultant Guidelines, using standard contracts. They are expected to include studies, training programs, the design of promotional and information materials for the beneficiary population, technical assistance, expost evaluations of subprojects, beneficiary assessments, and auditing services. 2.25 Procurement Review. Prior review by the Bank would include (a) procurement arrangements in accordance with Appendix 1, paragraph I of the Bank Guidelines; (b) all procurement by ICB; and (c) all contracts for goods and services equal to or above US$50,000 equivalent. Prior review by the Bank of the selection and hiring of consultants would not be required for (i) individual consultants when the contract value is less than US$50,000 equivalent; (ii) consulting firms when the contract value is less than US$100,000 equivalent. These prior review arrangements will result in ex-ante review by the Bank of approximately 10% of all Bank- financed contracts (by value). 21 2.26 Although the level of prior review would be low, this would be compensated for in several ways: (i) every six months, external auditors will conduct performance audits covering technical, environmental, managerial and procurement aspects on a sample of sub-projects satisfactory to the Bank and the IDB; (ii) audit of procurement aspects should include physical audits and should assess whether procurement procedures specified in the Loan Agreement are being followed so that the Bank can judge whether procurement implementation is satisfactory; (iii) the project information and monitoring system would be used to compare costs of similar sub-projects in order to detect possible discrepancies which might indicate procurement problems and the need for further analysis. Accuracy of the data in the project information system will be checked through the audits; and (iv) Bank and IDB supervision missions will conduct random reviews, including frequent field visits and reviews of procurement documentation. It is anticipated that both the IDB and Bank Resident Missions will play a key role in this regard. F. DISBURSEMENT, ACCOUNTING AND AUDITS 2.27 The project would be implemented over a period of three years and would be completed by June 30, 1999 and fully disbursed by December 31, 1999, the project closing date. The proceeds of the loan would be disbursed over a period of 3 1/2 years as shown in Table 2.6. The disbursement schedule reflects the experience with the first loan to FONCODES, which is expected to be fully disbursed by December 31, 1996, six months ahead of schedule. 2.28 Disbursements would be made against the following categories of expenditures: Table 2.5 Disbursement Categories and Percentages (millions of US$ equivalent) Amount of the loan Percent of expenditures to be financed allocated A. Community-based projects (1) Social and economic 141.8 35 percent of expenditures infrastructure, social assistance (2) Productive projects 4.3 35 percent of expenditures B. Institution building (3) Institutional development, 2.1 100 percent of foreign and 75 percent of goods and equipment local elegible expenditures (4) Technical assistance, 1.8 100 percent training, consultant services TOTAL 150.0 2.29 The proceeds of the IDB loan would be disbursed against the same categories and disbursement percentages under joint cofinancing. 2.30 At negotiations, the need for retroactive financing of up to US$15 million would be reviewed and agreed for eligible expenditures incurred since February, 1996. Funds would be 22 used to finance the backlog of eligible community-based projects approved by FONCODES in line with eligibility criteria acceptable to the Bank. 2.31 Special Account. Payments from the loan proceeds will be administered by FONCODES from a Special Account. The Special Account would be maintained in US dollars in a commercial bank acceptable to the World Bank. The authorized allocation, sufficient for about four months of financeable expenditures, will be US$15 million. FONCODES will control the use of the Special Account and be responsible for preparing the disbursement requests. These requests will be submitted monthly or when the Special Account has been drawn down by a third of the initial deposit, whichever occurs first. The current arrangements for the operation of the Special Account have been reviewed and judged satisfactory by the Bank. Disbursement will be based on Statement of Expenditures for contracts for: (a) civil works valued below US$250,000; (b) goods value below US$100,000; (c) consulting firm contracts valued below US$100,000 (d) individual consultant contracts valued below US$50,000; and (e) all training and subprojects. Documentation supporting SOEs will be retained by FONCODES headquarters in Lima and made available for examination by Bank staff during project supervision missions. All other disbursement requests will be fully documented. In addition, other technical and financial data regarding subprojects will be available from FONCODES data base. Table 2.6 Estimated Loan Disbursements In Bank Fiscal Years (millions of US$ equivalent) FISCAL YEAR FY 97 FY98 FY99 FY2000 Annual Disbursements 45 60 40 5 Cumulative Disbursements 45 105 145 150 Percentage 30% 70% 97% 100% 2.32 Local Currency Account. In addition to the Special Account in US dollars, FONCODES will continue to maintain a local currency account in which government deposits counterpart funds at the beginning of each month to cover the counterpart find needs for all payments anticipated for that month. All project accounts will continue to be managed in accordance with generally accepted international accounting standards, as confirmed by the first annual financial audit of the ongoing project. At negotiations, it was agreed that the Government will deposit counterpart funds in FONCODES local currency account at the beginning of each month to cover the counterpart fund requirements for all payments anticipated during that month. All project accounts will be managed in accordance with generally accepted international accounting standards (para. 4.1(d)) 2.33 Audits. The government will appoint independent auditors acceptable to the Bank to audit project expenditures, the Special Account, the project account, and the SOEs, in accordance with terms of reference acceptable to both Banks. Certified copies of the audit reports will be furnished to the Bank within six months after the close of the government's fiscal year. The audit reports will include a separate opinion by the auditor on disbursements against certified SOEs. In addition, auditors working with engineers would undertake semi-annual physical audits of a 23 sample of community-based projects financed by FONCODES, with the size of the sample acceptable to the IDB and the Bank, following acceptable accounting norms and procedures. Auditors would review individual contracts, ascertain compliance with the terms of the contracts, inspect progress of works and reconcile the physical progress with financial expenses incurred, and verify that procurement guidelines are being respected. The auditors would prepare semi- annual reports and an annual summary for the Board of FONCODES and the two Banks. G. ENVIRONMENTAL ASSESSMENT 2.34 The proposed Project is rated environmental category "B". FONCODES subprojects are small in size (in 1994 the average Bank-financed sub-project had a budget of less than US $ 25,000), and are concentrated in activities which are not expected to have an environmental impact (such as the construction and rehabilitation of classrooms). However, a minority of FONCODES subprojects, including the construction of sewerage and waste disposal systems, small irrigation schemes, and the rehabilitation and construction of rural roads, could have harmful effects on the environment unless appropriate mitigation measures are taken. 2.35 FONCODES uses an Operations Manual ("Environmental Assessment of the Projects to be Financed by FONCODES") and "field forms" (fichas de campo) to screen projects, conduct environmental assessments, and propose mitigation measures, where needed. Environmental concerns are currently incorporated at three stages in the FONCODES project cycle. First, staff at the regional offices initially mark project proposals as "A", "B", or "C", according to their likely environmental impact. Requirements then vary according to the category of the subproject: "A" subprojects must satisfy no further environmental criteria; applications for "B" subprojects need to include documentation to demonstrate that the appropriate mitigation measures detailed in the Operations Manual have been taken before the project file is considered complete; "C" subprojects require a full-fledged environmental assessment. Second, FONCODES evaluators must fill out a "field form" during the mandatory visit to the proposed project site. To complete this "field form", evaluators must assess the proposed site, the use of natural resources, and the operation and maintenance of the subproject in question. Subprojects cannot be approved unless problems identified in this "field form" are resolved. Third, prior to final approval, FONCODES staff in Lima or at the regional offices (depending on the size of the subproject and the responsibilities of the regional office in question, as outlined in paras. 3.7 - 3.10 below) review the subproject to assess whether it is conceptually sound. This review should verify that environmental concerns have been addressed. 2.36 According to a recently completed review, the main weakness in the environmental procedures followed by FONCODES has been the uneven implementation of the guidelines in the manuals. The concerns raised by the review include: (i) the practice of classifying virtually all proposals as "A" category subprojects. This occurs because proposals that are originally marked "B" or "C" are returned to the nucleo ejecutor until they include documentation to show that environmental concerns have been addressed. At this point, it is considered that the project in question has satisfied environmental requirements, and it is moved into the "A" category; (ii) the lack of an environmental specialist in the central office in Lima; (iii) insufficient training in environmental assessment in the field offices, especially given the high turnover rates of staff; (iv) the absence of effective indicators to monitor environmental procedures; (v) the absence of 24 environmental criteria from the supervision phase of the FONCODES project cycle; and (vi) the lack of ex-post evaluations of the environmental impact of FONCODES subprojects. 2.37 The project will address these concerns by acting in four broad areas: (i) incorporating a full-time environmental specialist to the staff at the central office in Lima; (ii) building up institutional capacity in Lima and at the regional offices; (iii) regularly evaluating the environmental impact of subprojects; (iv) incorporating an environmental awareness and education component into the promotion and training stages of the FONCODES project cycle. 2.38 Environmental specialist: FONCODES has hired an environmental specialist for the central office in Lima. During appraisal, the short list of candidates and the terms of reference for this specialist were reviewed and approved by the Bank. FONCODES' environmental specialist would oversee all environmental procedures and be responsible for the following tasks: (i) ensuring that FONCODES environmental guidelines comply with Bank regulations; (ii) making regular supervision visits to FONCODES project sites; (iii) ensuring that environmental criteria have been incorporated into the supervision phase of the FONCODES project cycle; (iv) developing performance indicators to monitor compliance with environmental guidelines at all stages in the project cycle, including promotion, evaluation, supervision, operation and maintenance of subprojects; (v) conducting regular ex-post evaluations of the environmental impact of FONCODES subprojects using indicators developed for this purpose; (vi) supervising staff training; (vii) designing and incorporating an environmental awareness and education component into the promotion and training stages of the FONCODES project cycle (see para. 2.41 below); and (viii) coordinating with other government institutions, especially CONAM (Consejo Nacional del Ambiente) and INRENA (Instituto Nacional de Recursos Naturales), to identify areas of the country which are considered "natural habitats" (as defined in OP 4.04), and to ensure that FONCODES' environmental guidelines conform with national legislation. At negotiations, it was agreed that FONCODES would maintain a full-time environmental specialist for the central office in Lima for the duration of the project (para. 4.1 (e)). 2.39 Technical assistance: The project will provide technical assistance and build up institutional capacity in FONCODES to ensure quality and consistency in the implementation of environmental guidelines. This would include: (i) making adjustments to the management information system to include information on environmental criteria, such as the environmental classification of subprojects, the status of on-going environmental assessments, and indicators of the environmental impact of FONCODES subprojects; (ii) training FONCODES staff on environmental procedures to build on the two-day "Workshop on Environmental Assessment and Management" conducted for FONCODES staff in June, 1994; (iii) standardizing environmental criteria, procedures and manuals used by the regional offices, and ensuring their appropriate dissemination; (iv) building up institutional memory by collecting all relevant documents in an environmental unit in the FONCODES office in Lima; and (v) ensuring that environmental guidelines have been incorporated into FONCODES' standard bidding documents and contracts. 2.40 Monitoring and evaluation: FONCODES will evaluate compliance with environmental guidelines on a regular basis and include environmental criteria in the ex-post evaluations of subprojects. Specifically, FONCODES would: (i) discontinue the practice of returning project 25 files ("expedientes") to the nucleo ejecutor until they can be classified as "A" category subprojects; (ii) evaluate the extent to which environmental procedures are being followed at the regional offices; (iii) include in its ex-post evaluations a review of the environmental impact of subprojects; (iv) consider conducting joint environmental assessments in those instances in which it expects to finance more than one subproject in a single community; and (v) evaluate the adequacy of environmental assessments conducted for "C" category subprojects and subprojects located in natural habitats. 2.41 Environmental education: FONCODES staff at the regional offices regard greater community participation as an indispensable step towards sustainably incorporating environmental concerns into the design, execution, and operation and maintenance of subprojects. In response to this, FONCODES will incorporate an environmental awareness and education component for beneficiaries into its project cycle. FONCODES will design environmental manuals for discussion and dissemination among communities preparing subprojects. These manuals will help beneficiaries identify the environmental risks and benefits of subprojects. In addition, FONCODES will include environmental concerns into the training provided to beneficiaries for the operation and maintenance of subprojects. The environmental education component should help communities screen their own project proposals, stimulate the demand for subprojects with a positive environmental impact, encourage a sound management of natural resources, and provide FONCODES with regular feedback on the acceptability of its environmental procedures. 26 Table 2.7 Environmental Issues in Project Design and Implementations Subcomponent/Activity Environmental Aspects Project Cycle Environmental concerns to be incorporated throughout the FONCODES project cycle: (i) promotion, including the dissemination and discussion of environmental manuals; (ii) initial screening of subprojects according to environmental criteria; all proposals categorized as "A", "B" or "C", according to their expected environmental impact. (iii) reformulation of project design, if necessary; (iv) evaluation of environmental impact, including compliance with proposed mitigation measures or environmental assessment, during required field visit by FONCODES evaluator, (v) monitoring of compliance with environmental guidelines during supervision of the subproject; (vi) environmental education to be included in beneficiary training package; (vii) regular ex-post evaluations of the environmental impact of subprojects. Project Execution Environmental guidelines included in standard bidding documents and contracts. Appropriate mitigation measures outlined in the Operations Manual required for all "B" category subprojects; environmental assessment required for "C" category subprojects and projects in areas considered "natural habitats", as defined in OP 4.04 (September, 1995). Project Operation and Maintenance Compliance with environmental guidelines for operation and maintenance of subprojects in the Operations Manual; monitoring during field visit; environmental education for beneficiaries. Supervision Regular evaluations of FONCODES staff compliance with environmental guidelines. Regular ex-post evaluations of the environmental impact of FONCODES subprojects. Regular evaluation of the adequacy of environmental assessments conducted for "C" category subprojects and projects in areas considered "natural habitats", including review of selected environmental assessments by the World Bank and IDB. Coordination with other institutions Environmental specialist at FONCODES headquarters to coordinate with other government institutions, especially CONAM and INRENA, to ensure that FONCODES' guidelines conform with national legislation. Institutional Development: (i) Management and Information System (i) Adjustments to be made to the management information system to include information on environmental criteria and environmental assessments. (ii) Staff Training (ii) Training on environmental procedures to be provided for staff in Lima and at the regional offices; refresher courses to be conducted, as necessary. 5Summary of guidelines to be included in the updated Operations Manual of FONCODES. 27 3. PROJECT IMPLEMENTATION A. PROJECT ORGANIZATION AND MANAGEMENT 3.1 FONCODES will have overall responsibility for project coordination and management. It was established in 1991 and has been operating as a decentralized public agency and financial intermediary for national social investments under the Ministry of the Presidency since 1992. It depends directly on the President of the Republic and has legal, technical, administrative and financial autonomy. It has financed over 16,000 small scale projects in poor areas of the country, and its managerial and technical capacity have been confirmed by IDB and Bank supervision missions, by a recent external evaluation and an unqualified annual financial audit for 1994. Projects financed by FONCODES are managed by community organizations with technical assistance from regional and municipal govemments, NGOs, the line ministries, and independent professionals. A Subsidiary Agreement between the Borrower and FONCODES making the proceeds of the loan available to FONCODES on terms acceptable to the Bank would be signed (para 4.2(b)). 3.2 The organizational structure of FONCODES is simple and sound. The President of the Republic appoints a five-member Board of Directors which is chaired by the Minister of the Presidency. The Board defines general policies, regulates and supervises the overall operation of FONCODES. It ratifies staff decisions on projects which would cost more than US$100,000 equivalent. One of the Board members is appointed Executive Director and is responsible for executing Board decisions and for the institutional representation of the Fund. 3.3 FONCODES has recently combined the functions of Executive Director with those of the Managing Director, who was responsible for planning, organization, coordination, supervision and evaluation of FONCODES operations in accordance with the statutes and policies established by the Board. The functions of the Executive Director and Managing Director have been combined in order to streamline administration and reduce the number of layers in the bureaucracy. This was made possible by the delegation of many routine administrative functions to the regional offices. A new Division of Projects incorporates the Departments of Project Evaluation, Supervision and Control, special units for Project Promotion and Quality Control, and a Department of Productive Projects. The Office of Operations oversees the budgeting and accounting systems, disbursements and personnel administration. In addition, an Office of Legal Affairs provides legal counsel for FONCODES management; Public Relations coordinates the work of visiting missions in addition to its traditional functions; Internal Control ensures compliance with procedures and accountability through regular audits and informal inquiries; the Office of Planning is 28 in charge of strategic planning and updating the targeting mechanisms used by FONCODES; and the office of Management Information Systems is responsible for the information networks used by FONCODES for internal control and project administration. 3.4 FONCODES has a core staff of about 200 individuals which is supplemented by about 250 external project evaluators and a small number of individuals who work on short term contracts as needed. There are 23 regional offices throughout the country which are staffed according to the size of region's project portfolio. The Regional Managers are responsible for promoting, selecting, appraising and supervising projects in their jurisdiction. The larger offices have been delegated some project evaluation and approval authority. FONCODES is not bound by the government's civil service regime. Its employees are hired on the basis of annual contracts and are paid salaries which are competitive with the private sector. Overhead costs represent about 5 percent of the Fund's annual budget. At negotiations, it was agreed that FONCODES would maintain an Executive Director and Line Managers with experience and qualifications satisfactory to the Bank (para. 4.1 (f)). 3.5 The staff of FONCODES is technically competent, dedicated, and generally overworked. The turnover of the managerial staff has been high (four Executive Directors in three years) and at times has resulted in disruptions in the work routines of the organization and some deterioration in performance. To date, these problems have been of short duration, and the recovery of the organization has been rapid. The stability of the mnid-level staff, personnel in the regional offices and external evaluators, all of whom have a clear idea of the mission of FONCODES, has been very important to the stability of the organization and has compensated to a large extent for the changes in leadership. There has been some lack of continuity in the institutional development of the fund in areas such as the Management Information System and research and evaluation, nevertheless, the renovation of FONCODES physical facilities has been accomplished and the decentralization of responsibilities to the regional offices has proceeded. One strategy which FONCODES has used to retain staff is to review and revise salaries on a regular basis and ensure that they are competitive with the private sector. 3.6 The overall environment of FONCODES is that of an organization which is very professional, has a strong sense of dedication to the alleviation of poverty in Peru, considerable capacity to identify, prepare and execute projects, identify and correct weaknesses in its operations. For instance, during the past year and a half, two important implementation problems have been addressed. A review of the project portfolio in 1994 indicated that more than 2,000 projects had been completed, but not liquidated. Many communities completed the project and inaugurated it, but never sent the final statements of expenditure to FONCODES. FONCODES established a rule that no project could be inaugurated until it had been liquidated. The problem with submission of final statements of expenditures was reduced rapidly. A similar review of projects approved identified 2,000 which had not been completed, either because the contractor defaulted or for other reasons. During the past ten months, FONCODES has focused on completing these projects. As of September, 1995, all but 425 had been completed. 29 B. DECENTRALIZATION OF FONCODES ACTIVITIES 3.7 A strategy, guidelines and specific recommendations for further decentralization of FONCODES were developed based on the findings and recommendations of a recently completed study "Reassessment of the Institutional and Operational Strategy of FONCODES." By 1995, FONCODES had gradually delegated some project management responsibilities to the 23 regional offices. Three regional offices (Cusco, Pucallpa, Trujillo) have the authority to approve projects costing up to US$45,000 equivalent and three others (Chiclayo, Ica and Iquitos) have the capacity to approve projects which cost up to US$25,000 equivalent. During 1996, 15 additional regional offices will be delegated authority to approve projects costing up to US$25,000 equivalent. In addition, the offices of Cusco, Chiclayo and Trujillo will be given the authority to approve projects costing up to US$75,000. In 1995, FONCODES regional offices had the authority to approve about 15 percent of all projects. Up to 50 percent of the projects will receive approval from regional offices by the end of 1996, and by 1997, 90 percent of projects will be approved outside of Lima. By the end of 1996, all regional offices will be able to approve payments for project evaluators and supervisors, and authorize the release of funds for minor project extensions and second disbursements on all approved projects. 3.8 The project will provide support for the decentralization process including the development of new methods to provide technical and logistical support from Lima, staff training in the use of the updated Operations Manuals and new promotional materials, and in beneficiary participation techniques with a special emphasis on women and indigenous groups. It will also finance the purchase of office equipment, vehicles, and minor renovations of some regional offices primarily to adapt them for the installation of the new MIS. In addition, FONCODES plans to transfer some staff from Lima to the regional offices. 3.9 FONCODES' new MIS is being designed with extensive input from the regional offices related to information requirements, user-friendliness, and the format of input and output tables. This new MIS is expected to be fully operational by the end of 1996. It should boost the capacity of the regional offices to approve, execute, and monitor projects, and allow the central FONCODES office in Lima to provide better oversight for the financial management and operations of the regional offices, improve project monitoring capability, and generate information on the effectiveness of targeting, project evaluation and completion, and project sustainability. 3.10 The project will periodically review progress in decentralization to the regional offices with the use of monitoring indicators, which will include: (i) quality of projects approved by the regional offices; (ii) average length of time between receipt of the project proposal by the regional office and appraisal of the project; (iii) average length of time between project approval and the first disbursement of funds; (iv) average length of time between the first and second disbursement of funds; (v) targeting, measured by the proportion of projects approved in districts which are "extremely poor", "very poor", and 30 "poor", as detailed in the poverty map currently used by FONCODES, and projects which include significant participation of women and/or indigenous groups; (vi) adequacy of the arrangements to ensure operation and maintenance of projects; (vii) correct use of the MIS (see Annex 4: Performance Indicators). C. PROJECT TARGETING 3.11 Since its creation in 1991, FONCODES has worked to design appropriate and transparent criteria to identify and reach the lowest income groups, especially those most in need of basic services. Two basic instruments have been developed for this purpose: (i) a Referential Resources Allocation System (RRAS); and (ii) the ex-ante evaluation of projects submitted to FONCODES. 3.12 FONCODES has generally assigned 60 percent of its resources to rural areas, and has then used the RRAS to pre-allocate resources to smaller geographic units. The RRAS is based on a series of poverty indices and poverty maps weighted by the size of the population in an area. Over the course of the last four years, FONCODES has perfected the RRAS by including a greater number of socio-economic variables to create a more sophisticated index to measure poverty. Using information from the 1993 [X Population and IV Housing Census, provincial-level poverty maps are now based on 11 socio- economic indicators, including illiteracy rates, the number of working children, and the lack of basic services. FONCODES has also used ever-smaller geographic units, and has recently constructed district-level poverty maps by weighting provincial indices with district-level information on the rate of chronic malnutrition. By pre-assigning resources to individual districts, FONCODES is now able to target investments at the level of the smallest political unit in Peru. Within the project cycle, the ex-ante evaluation carried out by FONCODES regional offices includes a socio-economic assessment, and a mandatory field visit to the community which has prepared the project proposal. This further ensures that projects are really targeted at poor communities and respond to their needs. 3.13 A review of the geographical distribution of FONCODES projects indicates that they have been well targeted. Between 1991 and 1995, 31 percent of all projects approved by FONCODES were located in extremely poor or very poor districts, 49 percent in poor districts, and 20 percent in regular or acceptable districts. A comparison of these figures with the population living in each one of these areas (see Table 3.1), suggests that FONCODES has been extremely successful at targeting poor districts but less successful at targeting very poor and extremely poor districts. This is consistent with earlier findings that the poorest communities do not always have the capacity to identify and prepare projects. There appears to have been relatively little leakage of FONCODES resources to the non-poor, especially since regular and acceptable districts often contain significant pockets of poverty. 31 Table 3.1 Adequacy of FONCODES' Targeting, 1991-1995 Extremely Very Poor Poor Regular Acceptable Poor Proportion of population, by 4.6% 19.7% 24.2% 41.2% 10.4% district Proportion of FONCODES 5.4% 25.7% 49.0% 19.0% 1.0% expenditures, by district Source: FONCODES 3.14 Targeting by FONCODES is affected by a number of considerations. FONCODES is expected to respond to national policies which prioritize investments in some areas, such as the border regions and regions which have been particularly hard-hit by terrorism. In addition, FONCODES makes an effort to coordinate its investments with those of other funds under the Ministry of the Presidency (FONAVI, COOPOP, INFES, PRONAA) and the line ministries, which influences the proportion of resources devoted to any particular geographic area. In 1991, 47 percent of FONCODES resources were allocated to projects generated at the national level which were targeted to poor areas without using a poverty map. The share of resources allocated to these centrally designed projects was reduced to 31 percent in 1993, and to 21 percent in 1994. FONCODES is a demand-driven institution, and most of its investment budget is now a function of the actual demand for projects. In 1995, the correlation coefficient between pre-assigned and approved budgets was very high, at 92 percent, an indication of the progress made since 1991 in responding to community concerns. 3.15 FONCODES has recently taken steps to increase the number of projects prepared by extremely poor and very poor communities. These include: (i) a modified project cycle so that communities must initially submit only a project "profile" rather than a full- fledged project proposal for pre-screening by FONCODES staff. If the profile is approved, FONCODES releases some funds to the nucleo ejecutor for preparation of the project. By reducing uncertainty and the up-front costs of project preparation, this change in the project cycle should stimulate the demand for FONCODES projects in the poorest areas of the country, including those where most of the indigenous population lives; (ii) creation of a Project Promotion Unit in the central offices in Lima. This Unit helps identify areas in which there is a shortage of project proposals, and assists communities in these areas with the technical aspects of project preparation. In addition, FONCODES intends to hire "promoters" for regional offices with a catchment area which includes a high proportion of very poor and extremely poor districts; (iii) a revision of the point system by which it assigns workloads to promoters, evaluators and supervisors so as to 32 encourage more frequent visits to FONCODES subprojects in isolated areas; (iv) a nation- wide survey conducted among those 16,000 of the 84,000 populated centers in Peru which have a population between 40 and 300 households and are identified as "rural". This survey has provided FONCODES with information about the availability of social and economic infrastructure in these populated centers, and will be the basis of FONCODES' targeting strategy in the future. FONCODES intends to devote a much greater amount of resources to the poorest among these rural settlements. 3.16 Evidence from other social funds and public works programs around the world suggests that the wage rate is an important determinant of the distribution of benefits. Wages that are below both the prevailing market wage and the minimum wage can help 6 self-target investments because the employment offered is only attractive to the poor. In the first project, the wage rate paid by FONCODES in urban and rural areas was based on the prevailing wage for the construction sector in urban areas (lornal de la construccion civil). For the second project, FONCODES will align wages more closely with the prevailing market wage, differentiating the wages paid to skilled and unskilled labor by region and by urban and rural location, and revising and updating them on a regular basis (para. 4.1 (c)). 3.17 The project would provide technical assistance to FONCODES to refine its application of the targeting mechanisms currently used. This technical assistance would include: (i) reinforcing the promotion strategy to support the weakest districts, including the provision of assistance in the preparation and submission of projects and strengthening community organization; (ii) strengthening the Project Promotion Unit within FONCODES to provide technical support and training to regional offices and selected districts where there are a large number of extremely poor communities or a high concentration of indigenous peoples; (iii) training regional office personnel to alter their approach to the evaluation of projects in the poorest communities and increasing their capacity to support these communities in preparing projects and organizing their participation; (iv) including within the monitoring system mechanisms to identify early on the actual budget allocations per district. This would facilitate the application of corrective measures, as needed; and (v) collecting regional information on market wages for skilled and unskilled labor. D. STRATEGY FOR INCREASED PARTICIPATION OF INDIGENOUS PEOPLE AND WOMEN IN FONCODES PROJECTS 3.18 Indigenous People in Peru: Peru has a large indigenous population which, according to various counts, comprises between 25 and 40 percent of the total population. On the basis of the 1994 LSMS, one quarter of all households--those who report a language other than Spanish, such as Quechua, Aymara, Campa, or Shipibo as their mother tongue--can be classified as indigenous. However, this is likely to be an 6 See, for example, Gaurav Datt and Martin Ravallion, Income Gains for the Poor from Public Works Employment: Evidence from tvo Indian lVillages, LSMS Working Paper No. 100, 1994. 33 underestimate of the real size of the indigenous population in Peru for at least two reasons: (i) given the low status awarded to indigenous people, indigenous Peruvians who also speak Spanish may choose to classify themselves as Spanish speakers; and (ii) the LSMS and other surveys may systematically undercount indigenous people, many of whom live in isolated areas of the rural Sierra and Selva. 3.19 Previous Bank studies, many of which were based on the 1991 LSMS, have shown large differences between the indigenous and non-indigenous populations of Peru. 50 percent of indigenous males work in agriculture, as compared to about 8 percent of non- indigenous males. At 68 per cent, the majority of indigenous workers are located in rural areas, whereas the majority, 52 percent, of non-indigenous workers are located in Lima. Indigenous workers are also half as likely to be self-employed and less likely to work in the public sector than are non-indigenous workers. 3.20 Indigenous people are seriously disadvantaged in Peru. The average earnings of indigenous workers are less than half those of non-indigenous workers. Empirical analysis suggests that these earnings differentials can be explained, in part, by the fact that indigenous people have much lower levels of schooling, and experience lower rates of return to education than does the non-indigenous population. However, labor-market discrimination may account for as much as 50 percent of the observed earnings differentials.7 3.21 Preliminary analysis of the 1994 LSMS suggests that households headed by an indigenous person continue to be seriously over-represented among the poor and extremely poor--as shown in Table 3.2. Indigenous people are also likely to have lower levels of access to and utilization of health services, and lower levels of access to potable water and sanitation. See especially Donna Macisaac. "Peru", in George Psacharapoulos and Harry Anthony Patrinos, eds., Indigenous People and Poverty in Latin America (The World Bank: 1994), and Donna Macisaac and Harry Anthony Patrinos, "Labour Market Discrimination against Indigenous People in Peru", The Journal of Developmnent Studies, Vol. 32, No. 2, December 1995, pp. 218-33. 34 Table 3.2 Households by Poverty Level and Ethnic Status Proportion of Proportion of Proportion of households households in households in poverty extreme poverty Quechua 21.3% 30.2% 37.8% Aymara 3.3% 5.0% 8.5% Campa or Shipibo 0.4% 0.8% 1.1% Other indigenous 0. 1% 0.3% 0.6% TOTAL INDIGENOUS 25.1% 36.3% 48% TOTAL NON-INDIGENOUS 74.9% 63.7% 52% TOTAL 100% 100% 100% Source: 1994 LSMS 3.22 The first FONCODES project: Indigenous peoples have benefited from FONCODES subprojects because these are well targeted to the poorest areas of the country, especially to the rural areas where most of the indigenous population lives, and because FONCODES involves beneficiaries at every step in its project cycle. Between 1991 and 1995, 80% of FONCODES subprojects were executed in extremely poor, very poor or poor districts, where most of the indigenous population lives. Also, FONCODES located numerous pilot integrated development projects, including PREDES, PRIDER, and the Proyecto Inka-Renom, in areas of the Sierra with very high concentrations of indigenous peoples, and has eased the requirements for project preparation for particularly isolated indigenous groups, such as the Ashaninka Indians of the central Selva. 3.23 The FONCODES project cycle is based on the participation of beneficiaries, organized in community-based nucleos ejecutores, during the selection, preparation, execution, and operation and maintenance of subprojects. FONCODES project preparation and execution therefore takes "frill consideration of the options preferred by the indigenous peoples affected by the project", as required in OD 4.20 (September, 1991). The beneficiary assessment conducted during the mid-term review of the first project, which included interviews with 688 Quechua speakers and 59 Aymara speakers, showed that there were very high levels of community participation at all stages in the FONCODES project cycle. 3.24 At present, in those regional offices which have a catchment area which includes a large proportion of indigenous peoples, a majority of FONCODES supervisors and evaluators speak Quechua, Aymara, or one of the indigenous languages spoken in the Selva. These supervisors and evaluators have also served as promoters for FONCODES. Where it has proven impossible to hire staff with knowledge of local languages, as in some particularly remote areas of the Selva where a multitude of different languages are spoken, FONCODES has been very creative and has worked with local schoolmasters, missionaries, or NGO's to assist them in the promotion, evaluation, and supervision of subprojects. A majority of supervisors and evaluators employed by FONCODES are hired locally, which makes it more likely that they are sensitive to conditions in the area, including the difficulties faced by indigenous peoples. 35 3.25 Strategy for the second FONCODES project: As part of the second project, FONCODES has developed an Indigenous Peoples Development Strategy which takes into account all aspects of the FONCODES project cycle, including promotion, targeting, project preparation, implementation, operation and maintenance, and monitoring and evaluation. 3.26 Promotion: FONCODES intends to give much greater importance to promotional activities in the second project in order to increase the number of proposals prepared by poor and indigenous communities. Specifically, FONCODES will: (i) continue to hire bilingual staff and train its personnel, as needed; (ii) hire "promoters" for regional offices with a catchment area which includes large concentrations of indigenous people; (iii) develop promotional materials which are appropriate for the illiterate population and include culture-specific material for the Sierra and the Selva; and (iv) identify and work with NGOs which have previous experience with indigenous people to ensure that non- Spanish speakers are aware and knowledgeable about the FONCODES project cycle. 3.27 Targeting: Targeting more resources to indigenous people is an important component of the Indigenous Peoples Development Strategy. FONCODES is taking the following steps to refine its targeting strategy: (i) devoting a much greater share of resources and giving preferential treatment to rural areas where most of the indigenous people live. The project "profile" used to pre-screen proposals has been revised to include information about the ethno-linguistic status of the community in question; (ii) coordinating with the Instituto Indigenista Peruano (IIP), a normative body within the Ministry of Agriculture charged with the oversight of development plans for Peru's indigenous population, to supplement the FONCODES poverty map with information on the distribution of the indigenous population throughout the country; (iii) developing more accurate community profiles based on the recent survey conducted in populated centers. 3.28 Project preparation and execution: FONCODES is taking the following steps to facilitate the preparation and execution of projects in the poorest communities, including those with a high proportion of indigenous people: (i) introducing the project "profile" to reduce the up-front costs of project preparation; (ii) providing technical assistance to communities in project preparation and community organization; (iii) facilitating cooperation between the nucleos ejecutores, local governments and NGOs; (iv) designing standard projects (proyectos tipo) which are appropriate for indigenous communities. FONCODES will cooperate with the IIP, NGOs and other organizations which have worked successfully with indigenous communities in the past to develop these standard projects; (v) including training in operation and maintenance for beneficiaries in the project costs to be financed by FONCODES; (vi) locating future pilot integrated projects in areas with a high concentration of indigenous people. The results of these pilot projects will be disseminated to FONCODES staff and successful elements will be incorporated in other FONCODES projects; and (vii) training FONCODES staff in beneficiary participation techniques. 36 3.29 Monitoring and evaluation: All of the measures described above will be included in the revised Operations Manuals. FONCODES will delegate to its Planning Office the responsibility for regularly liaising with the IIP, NGOs, and other organizations which represent indigenous peoples in Peru, coordinating all of the above-described components of the Indigenous Peoples Development Strategy, and monitoring compliance. Compliance with all of the measures described above will be monitored by the Bank during the life of the project, and the outcomes and impact of FONCODES projects on indigenous peoples will be analyzed during yearly ex-post evaluations. 3.30 Women: There are high participation levels of women in FONCODES projects. Women made up 41 percent of the sample of beneficiaries in the ex-post evaluation of projects conducted during the Midterm Review. 92 percent of those women who had participated in the community assembly at which a subprojects was selected felt that "women had been involved in the selection of the subprojects", and 60 percent of them felt that women had been "in the majority"; 49 percent of women beneficiaries stated that they had been involved in the execution, and 45 percent in the operation and maintenance of the subprojects in question; 92 percent of women beneficiaries felt that the subprojects executed by FONCODES was "that which was most needed by the community", and levels were even higher in communities which implemented subprojects in family planning, medicines and medical equipment, and electrification. 3.31 FONCODES has executed many subprojects which are specifically targeted at women. These include subprojects designed to improve the nutritional status of women, or disseminate information about family planning. In addition, most FONCODES subprojects have benefited women because they have provided services or built infrastructure in areas which are often seen as high priority by women, such as education, health, nutrition, sanitation, and community organization. 3.32 The project would provide support to FONCODES to ensure that women continue to participate fully in all stages of the project cycle and benefit from FONCODES subprojects. FONCODES would supplement its regular operations with the following measures designed specifically to encourage the participation of women: (i) give priority to productive projects which directly benefit women; (ii) include women in training given to beneficiaries in the operation and maintenance of subprojects; (iii) encourage communities to nominate women for leadership positions within the nucleos ejecutores, and give priority to project proposals that include at least one woman as a member of the nucleo ejecutor; (iv) include information about the role of women in promotional materials and in the Operations Manuals used by FONCODES; and (v) design a gender awareness module to be included in the training plan for FONCODES staff. E. BENEFICIARY CONTRIBUTIONS 3.33 FONCODES has generally paid beneficiaries for most of the unskilled labor required for the execution of subprojects. FONCODES has followed this policy for a number of reasons: (i) its objective is the alleviation of poverty, and the generation of 37 income, even if transitory, is regarded as an important benefit of the subprojects; (ii) many FONCODES investments, such as the construction of schools and health posts, do not raise the incomes of beneficiaries in the short run; and (iii) FONCODES investments have been targeted at extremely poor, very poor and poor communities, many of which do not earn enough income to satisfy the nutritional requirements of their families, and are therefore ill-suited to donate their labor for free. 3.34 However, FONCODES beneficiaries have generally contributed to the execution of subprojects by providing all of the required land, as well as part of the construction materials, cash, or unskilled labor. The Midterm Review indicated that levels of beneficiary participation in the first project had been high; 67 percent of beneficiaries reported that they had contributed during execution of the project. Participation came in the form of free labor (89 percent), cash (1 1 percent), or materials (8 percent). Fully 97 percent of beneficiaries stated that they "would be willing to contribute to the execution of another FONCODES project", 89 percent of them with free labor, 10 percent with cash, and 9 percent with materials. 3.35 FONCODES has recently developed a uniform system to establish the rninimum levels of beneficiary contribution mandated for the execution of subprojects. In order to increase the sustainability of subprojects, beneficiaries would be required to contribute 10 percent of the total amount of unskilled labor required for execution of the subproject, for all poverty levels and all project types. Voluntary contributions of land, labor, cash, and materials by the beneficiaries above this required 10 percent would continue to be will continue to be accepted and included in project accounting. At negotiations, the levels of beneficiary contribution required for FONCODES subprojects was reviewed and agreed (para. 4.1 (g)). 3.36 In some areas, notably irrigation, land conservation, and reforestation, FONCODES projects are identical to those of PRONAMACHCS, an agency of the Ministry of Agriculture. Duplication of efforts has been avoided by an interagency agreement in which geographic areas of work are defined and agreed upon. PRONAMACHCS does not pay beneficiaries in cash, and it requires that beneficiaries contribute all of the unskilled labor needed for the execution of the subprojects in exchange for a combination of food, seeds, and tools. This is not consistent with FONCODES guidelines with respect to beneficiary participation. FONCODES is currently negotiating a new agreement (convenio) with PRONAMACHCS to help coordinate their activities. At negotiations, it was agreed that projects in reforestation, land rehabilitation and irrigation shall not be eligible for financing until consistent criteria for beneficiary contribution have been agreed upon between FONCODES and PRONAMACHCS, and reviewed and agreed upon by the Bank. F. SELECTION AND PRIORITIZATION OF SUBPROJECTS 3.37 FONCODES' demand-driven strategy, which allows communities to select and execute their own projects, is an important step to ensure the sustainability of investments. 38 Projects are chosen at a community assembly, and are prepared and executed by an elected group of community members, the nucleo ejecutor. Because they rely on such grass-roots democratic processes, FONCODES projects tend to meet a priority need of the community: the Midterm Review indicated that 64 percent of beneficiaries participated in the community assembly at which the project was selected, that there was a majority agreement at 98 percent of these assemblies, and that the project executed by FONCODES was regarded as "that which was most needed by the community" by 90 percent of the beneficiaries. FONCODES projects promote community mobilization and organization, and thus help to strengthen the fabric of civil society. 3.38 FONCODES continues to search for the best way to combine grass-roots participation with a more structured approach to local development, and is currently reviewing three pilot projects financed by PREDES, PRIDER, and the mesas de concertaci6n in Cajamarca8 which have brought communities and local authorities together on a regular basis in an effort to prioritize and coordinate the selection and execution of development projects. Preliminary findings suggest that these pilot projects help build consensus, however, their decision-making process is cumbersome and slow compared to the regular FONCODES project cycle. 3.39 The project will continue to support innovative efforts to incorporate municipal governments, non-governmental organizations and community associations into the FONCODES project cycle. One promising approach would attempt to "articulate" subprojects. Communities, working through the elected nucleo ejecutor, would prepare a proposal for a first project in economic infrastructure or a productive activity. Once this project had been executed, communities would be encouraged to consult with local officials and NGOs, and prepare proposals for additional, complementary projects. This incremental process would give communities an incentive to continue to work together to meet the need for social and economic infrastructure and to identify and resolve problems related to the development of productive projects, in production, distribution, and marketing of goods, while making allowance for their limited absorptive capacity. 3.40 The project will cooperate with the Proyecto Inka y Renom, a 27.7 million ECU equivalent project funded jointly by the European Union and the Government of Peru, and administered by FONCODES, which has recently been approved. The Proyecto Inka y Renom will work exclusively in the rural highland areas of two of Peru's twelve administrative regions (Regi6n Inka and Regi6n Nor-Oriental del Marafi6n), where it will finance subprojects in agricultural extension, small-scale irrigation schemes, animal PREDES is the Proyecto de Desarrollo Econ6mico y Social financed by the European Community donors in the Inka Region. It was recently completed and all responsibility for the projects was transferred to the FONCODES regional office in Cusco. PRIDER is a series of four pilot projects, Proyectos Integrados de Desarrollo Rural, financed by FONCODES which supported the development of small-scale productive activities in rural areas. The mesas de concertaci6n, coordinating conmmittees, have been organized in Cajamarca to review and coordinate development projects in poor areas. The new project financed by the European community will support investments in this area, which is in the Nor-Oriental del Marafl6n Regi6n, and in the Inka Region. 39 husbandry, soil conservation, and reforestation. The Proyecto Inka y Renom proposes to work with District Development Committees (Comites Distritales de Desarrollo) in the Inka Region and with Mesas de Concertacion in the Nor-Oriental del Marafn6n Region. Both are structured decision-making bodies which include local officials and representatives of NGOs and other community organizations, (organizaciones de base). The proposed Bank project would co-operate with the Proyecto Inka y Renom in a systematic evaluation of the results of these initiatives and comparison with the results of other FONCODES initiatives in order to identify the most effective approaches to poverty alleviation and social and economic development for these areas of the country. G. CONTRACTING, PROJECT EXECUTION AND SUPERVISION 3.41 When a community-based project is approved, FONCODES signs a project agreement with the nucleo ejecutor, and initially disburses about 60 percent of the expected costs to a bank account opened for this purpose. The nucleo ejecutor can then begin to execute the project by hiring the community or a private contractor, NGO, or municipality to do so. In these instances, FONCODES has followed Bank guidelines for procurement of goods and services. 3.42 The nucleo ejecutor must also sign an agreement with an inspector acceptable to FONCODES. This inspector directly oversees project execution, and reports to the FONCODES supervisor on all technical, administrative and accounting issues. He or she is paid by the nucleo ejecutor out of the proceeds of the FONCODES grant. Funds in the project bank account are controlled jointly by the inspector and the treasurer of the nucleo ejecutor. 3.43 Project supervision is carried out by the Department of Projects. On-site supervision is done directly by FONCODES regional staff, or is contracted to intermediaries, such as the College of Engineers, with clear terms of reference. Supervisors' responsibilities include: (i) monitoring project execution; (ii) overseeing the work done by the inspector; (iii) authorizing disbursements; (iv) ensuring compliance with contract covenants concerning nucleos ejecutores, contractors, and suppliers; (v) verifying community participation and arrangements for the operation and maintenance and project sustainability; and (vi) signing the project completion report, checking accounts, and setting the final financial balance. 3.44 The Midterm Review confirmed that the execution and supervision of FONCODES projects generally works smoothly; 63 percent of the beneficiaries reported that there had been "no problems" in the execution of projects. Beneficiary assessments of the work done by nucleos ejecutores, inspectors, and FONCODES supervisors have also been positive; 68 percent of beneficiaries regarded the nucleos ejecutores as democratically elected bodies made up of community members; 61 percent of beneficiaries personally knew the project inspector, who was said to have visited the project site at least once every two weeks in 63 percent of the cases; 54 percent of beneficiaries reported that FONCODES supervisors had made suggestions that contributed to "a better execution of 40 the project". Only 8 percent said that they had made no suggestions, or that these had not been valuable. The most serious shortcoming of the project execution cycle appears to be the frequent delays with the second disbursement of funds; 14 percent of beneficiaries indicated that there had been "problems" as a result of such delays or a shortage in construction materials, and 42 percent of FONCODES projects were completed behind schedule. FONCODES is currently working with supervisors, who authorize the second disbursement of funds on the basis of project progress or completion, to address this bottleneck in the execution process. H. OPERATIONS AND MAITENANCE 3.45 To achieve sustainability, FONCODES has put in place some mechanisms for the operation and maintenance of projects. It has done this by: (i) coordinating with the line ministries or municipalities so that they assume the recurrent costs of completed FONCODES projects. This is the method used with social infrastructure projects (schools, health posts), and some economic infrastructure projects (roads, sewerage and waste disposal, potable water); (ii) organizing and training the beneficiaries in the operation and maintenance of projects. This is the method used with some economic infrastructure projects (small irrigation schemes, land rehabilitation); and (iii) cost recovery, by charging user fees. This is the method used with some economic infrastructure projects (secondary rural electrification, sewerage and waste disposal, potable water), and some social assistance projects (packages of basic medicines). 3.46 The Midterm Review indicated that sustainability continued to be an area of concern for some projects financed by FONCODES. Most beneficiaries (58 percent) were aware that they had agreed to be responsible for the operation and maintenance of the project in question, and the level of beneficiary participation in the operation and maintenance of FONCODES projects was reasonably high; 52 percent of beneficiaries had contributed, in most cases with their labor (84 percent), money (16 percent), or materials (8 percent). Only a third of beneficiaries, however, had received training in operation and maintenance of the project in question (40 percent for small irrigation schemes). The Midterm Review also indicated that beneficiaries appeared to be willing to pay for better services, especially in the areas of potable water (75 percent), electricity (72 percent), and health (66 percent). 3.47 The project would improve mechanisms for the operation and maintenance of FONCODES projects by: (i) improving coordination between FONCODES, the line ministries, and the municipalities (see Section I); (ii) making training in operation and maintenance mandatory in the execution of some subprojects (irrigation schemes, productive projects) and including the cost of training in the project budget; (iii) encouraging FONCODES to contract specialists in community organization to liaise with community groups, local governments and NGOs to assist communities in the preparation of sustainable projects; (iv) organizing communities on a more permanent basis through the articulated development projects and other pilot projects; (v) including cost recovery as one of the items to be discussed between FONCODES and counterparts in the areas of 41 health, potable water, and electrification; and (vi) ensuring that FONCODES promoters discuss the recurrent costs associated with various types of projects with communities during the process of prioritization and selection. The adequacy of mechanisms to ensure the operation and maintenance of subprojects will be a performance indicator for the project which will be reviewed during Bank supervision missions and annual reviews. I. COORDINATION WITH LINE MINISTRIES AND MUNICIPALITIES 3.48 Coordination between FONCODES, the line ministries and municipalities is indispensable and mutually beneficial for several reasons: FONCODES often finances projects which are complementary or parallel to those of other government agencies; FONCODES has the capacity to work with communities in remote areas which may be beyond the reach of the line ministries; local governments in rural areas are often weak and can benefit from the experience gained in working with FONCODES on the identification, preparation and implementation of small scale investment projects; FONCODES resources can be stretched further if they are combined with the Municipal Compensation Funds available to local governments. To promote smooth coordination, FONCODES has signed formal agreements, convenios,with the ministries of the Presidency (UTE- FONAVI), Health, Education (lNFES), Agriculture, Energy and Mines, Interior, and Transportation, with INEI and the Superintendencia of Aduanas at the national level, and with other agencies, such as local power authorities, at the regional or local level. These agreements stipulate that FONCODES will not, for example, initiate the construction of a school or health post unless the line ministry in question agrees to staff it and meet all additional recurrent costs in terms of personnel, supplies and maintenance. All project proposals presented to FONCODES must include an approval letter from the line ministry or agency in question. These are discussed and cleared with the relevant ministry in Lima. 3.49 Formal agreements between FONCODES, the line ministries and local authorities generally appear to be working well. The Midterm Review indicated that only 4 percent of completed FONCODES projects are not in use within a year after completion, and in only 10 percent of these cases because the relevant line ministry has not provided the required staff. The Midterm Review did suggest, however, that 21 percent of beneficiaries felt that "additional financing for equipment" was necessary in order for FONCODES projects to "operate adequately". 3.50 To address these and other concerns, FONCODES will create a working group which will meet regularly with counterparts from the ministries of Education, Health, Agriculture, and Transportation. This working group will be charged with ensuring that the agreements signed between FONCODES and the line ministries are properly implemented. In addition, FONCODES will include equipment in the budgets of some social infrastructure projects (construction and rehabilitation of classrooms), and conduct a comprehensive nation-wide survey through the regional offices to determine the proportion of FONCODES projects which are inadequately staffed. FONCODES is currently reviewing the guidelines for secondary electrification projects to ensure that they meet the technical criteria established by local electrification authorities. 42 3.51 In the future, FONCODES intends to target a greater share of its resources at rural communities in the Sierra and Selva, where the most abject poverty in Peru is found. FONCODES and PRONAMACHCS, an agency of the Ministry of Agriculture which works on small irrigation schemes, soil conservation, and reforestation projects in these rural communities, have signed an agreement to coordinate their activities. This agreement will standardize poverty criteria, coordinate work by geographic area, and establish incentives which would encourage FONCODES and PRONAMACHCS to work on rural projects which reinforce each other. FONCODES and PRONAMACHCS have not yet been able to reach agreement on their approach to the contribution of beneficiaries in support of projects, and are continuing to work together to resolve this issue. 3.52 To date, municipal governments have been involved officially in the preparation and execution of about 10 percent of FONCODES projects. Although more may have been involved informally, there is no documentation of their involvement. The project will encourage further cooperation between FONCODES and local governments by building on the recommendations of an ongoing study conducted by the Plan de Estabilizaci6n Social (PES). This study, "Participation of Local Governments in the Implementation of FONCODES Productive Projects", identifies ways in which local governments can assist communities to prioritize their needs, prepare project proposals, co-finance FONCODES projects using the Municipal Compensation Fund, and participate in their operation and maintenance. Cooperation between FONCODES and municipal governments is expected to increase as a program to train employees of local and regional governments, the Program for Decentralization and Municipal Training, administered by the Ministry of the Presidency, builds capacity at the municipal level. In addition, the training activities financed by the project will include training for representatives of local governments in the preparation of projects which are eligible for FONCODES support. 3.53 Two additional studies financed by the PES, "Re-assessment of the Institutional and Operational Strategy of FONCODES", and "Strategic Planning for FONCODES", propose a strategy for a future transfer of responsibilities for some social infrastructure and social assistance projects from FONCODES to other government bodies, such as the line ministries and municipalities. A third study, "Articulation Between FONCODES and the Line Sectors in Social Assistance and Infrastructure", reviews coordination between FONCODES and the ministries of Education and Health. These studies outline an overall coordination strategy; explore ways in which the some of the projects requested by poor communities, especially for education and health infrastructure, might be incorporated into the annual plans and budgets of the line ministries and/or the municipalities; and transfer know-how about efficient, low-cost, rapid execution methods from FONCODES to the line ministries and/or municipalities. Many of the recommendations of these studies have been incorporated in the updated Operations Manuals, the strategies for working with line ministries and local governments, and the decentralization plan. 3.54 The project will provide for ongoing evaluation of the coordination between FONCODES, the line ministries, and municipal governments. Progress will be measured 43 on a quarterly basis by the extent to which performance criteria and monitoring indicators have been met. These indicators will include: (i) adequacy of staffing and equipment of FONCODES projects; (ii) average time between project completion and beginning of operation; and (iii) adequacy of the arrangements to ensure operation and maintenance of projects; and (iv) participation levels of municipal governments in the development, co- financing, and operation and maintenance of FONCODES projects. J. MONITORING, REPORTING AND BANK SUPERVISION 3.55 FONCODES would continue to prepare semi-annual reports as it has for the first project. These reports would compare achievements with a set of agreed performance indicators. These reports would provide information on: (a) community-based projects presented, appraised, in execution, completed and evaluated, including the number and characteristics (gender, ethnic group) of beneficiaries, amounts committed and executed, costs per beneficiary and the number of workdays generated; (b) summary reports on the status of studies and technical assistance, an outline of the training courses, seminars, and numbers of staff trained, and progress on the installation of management systems; (c) full documentation on all projects which cost more than US$200,000 equivalent, regardless of the source of financing; (d) FONCODES costs and financing, including loan fund commitments and disbursements; (e) changes in FONCODES staffing and organizational structure and activities of the central and regional offices as described in Para. 3.2 - 3.10 (f) a summary of supervision visits; (g) the results of ongoing ex-post evaluations of a sample of completed projects which would be contracted to an independent organization such as a university or specialized research-oriented NGO. The evaluations would include information on the project cost, quality of works completed, procurement procedures, beneficiary assessment and environmental impact, social and economic benefits. 3.56 At negotiations, it was agreed that FONCODES would retain the services of an independent organization, under terms of reference acceptable to the Bank, for purposes of carrying out evaluations of community-based projects executed (para 4.1 (i)). 44 3.57 The Government of Peru would conduct two annual reviews to evaluate progress in the implementation of the project and the performance of FONCODES in which the Bank and the IDB would participate. The reviews would evaluate the experience of FONCODES at the operational level and in the context of the government's overall poverty alleviation strategy and social programs (see Annex 6). At negotiations, it was agreed that FONCODES will conduct two comprehensive annual reviews of project implementation under terms of reference acceptable to the Bank (para. 4.1 (). 3.58 The project would require about 30 staff weeks of supervision per year including about 15 weeks in the field. Supervision responsibilities would be shared with the IDB, as they have during the past year for the first project, so the Bank's contribution to the overall project supervision effort would average about 15 staff weeks per year. The supervision team would include the Task Manager and staff and consultants with expertise in the operation of similar social investment funds in Latin America. Their main areas of expertise would include operations, procurement, project evaluation, beneficiary assessment, environmental assessment, engineering, rural development, poverty mapping and targeting, health, education, nutrition, agriculture, economic and financial analysis (see Annex 5). The Bank has collaborated with other agencies during the implementation of the first FONCODES project and the preparation of this proposed second project, including UNDP, UNICEF,GTZ, KfW and the consortium of European donors which finance the PREDES and Inka Region projects, and would continue to do so during project implementation. K. PROJECT BENEFITS, RISKS, AND SAFEGUARDS 3.59 Project Benefits: The project would be an integral component of the government's poverty alleviation strategy and finance approximately 9,000 subprojects in low-income areas of the country. Expected benefits include: (i) generation of short- and long-term employment and income in poor areas; (ii) rehabilitation and construction of high-return social and economic infrastructure. A recent survey of basic needs in more than 18,000 poor communities indicated that only 32% had safe water and waste disposal systems, 13% had electricity, and 90% had a primary school. The project is expected to satisfy virtually 100% of the need for primary education infrastructure, about 50% of the need for water and sewerage systems, and approximately 20 % of the need for electricity; (iii) improvements in the availability and accessibility of social services; (iv) strengthening of local capacity to identify problems, establish priorities for community investments, design, and execute small-scale projects; (v) promotion of community participation and grass-roots democratic processes which help strengthen the fabric of civil society; (vi) creation and reinforcement of links between informal community groups, local governments and the line ministries, thus contributing to the formulation of a realistic national strategy for decentralization of public administration functions; (vii) additional investments in poor areas by central and local governments and the private sector which result from the construction by FONCODES of economic infrastructure; (viii) development of productive activities in low-income areas; (ix) enhanced capacity on the 45 part of FONCODES to target, appraise and monitor investments oriented to alleviate poverty, and transfer of these skills to other organizations in the public sector. 3.60 The project would give particular attention to extremely poor communities in rural areas, indigenous groups, and women. The Midterm Review of the first project indicated that women and indigenous groups participate in all stages of the FONCODES project cycle, and thereby benefit from the generation of employment and income, from additional social services, and from the social and economic infrastructure provided by FONCODES. 3.61 Project Risks: Project risks would include: (i) discontinuity and weakened management of FONCODES; (ii) political interference and excessive bureaucratization, which would compromise the effectiveness of targeting to the extremely poor, indigenous groups and women, project quality, and the autonomy, credibility and effectiveness of FONCODES; (iii) deterioration of targeting, appraisal, supervision and efforts to ensure sustainability, resulting in poor project quality; and (iv) lack of coherence and coordination with other organizations including the line ministries and local governments. 3.62 FONCODES is a mature organization which has a demonstrated capacity to mobilize resources on a large scale to identify, prepare and implement small scale projects in poor communities. To minimiize the risk of a deterioration in the quality of FONCODES work, assurances would be sought that the experience and qualifications of FONCODES managers continue to be acceptable to the Bank and that the Bank would be notified promptly of changes in the management staff. In addition, changes in the User's Guide or the Operational Manual would require prior Bank approval. Productive projects, which are expected to receive a larger share of FONCODES resources in the future, will be subject to disbursement limitations, specific guidelines related to their identification, preparation and implementation, and a series of ex-ante and ex-post evaluations to ensure their viability and appropriateness as part of the FONCODES project portfolio. Arrangements for project operations and maintenance, including community-based training, will be an integral part of the project design in the future; revised agreements with the line ministries and municipalities together with regular monitoring of coordination between the community-based nucleos ejecutores, the local governments and the line ministries are expected to contribute to greater project sustainability. In cooperation with the IDB, the Bank would provide continuous monitoring and evaluation of project inputs and outputs using an agreed set of project indicators, joint project supervision missions, periodic ex-post evaluations of a representative sample of all types of subprojects, and two annual reviews of FONCODES operations and accomplishments with terms of reference satisfactory to the Bank. 46 4. AGREEMENTS TO BE REACHED AND RECOMMENDATION A. AGREEMENTS 4.1 At negotiations, it was agreed that: (a) disbursements for the productive projects included in the positive list (Annex 13) will be limited to US$4.3 million equivalent under the Bank loan (para. 2.12); (b) procurement arrangements are in compliance with World Bank and IDB Guidelines (para. 2.19); (c) the Government will maintain the unit price system, including labor costs, and review and adjust it on a regular basis as needed (para. 2.22); (d) the Government will deposit counterpart funds in FONCODES local currency account at the beginning of each month to cover the counterpart fund requirements for all payments anticipated during that month. All project accounts will be managed in accordance with generally accepted international accounting standards (para. 2.32); (e) FONCODES will maintain a full-time environmental specialist for the central office in Lima for the duration of the project(para. 2.38); (f) FONCODES will maintain an Executive Director and Line Managers with experience and qualifications satisfactory to the Bank. (para. 3.4); (g) levels of beneficiary contribution to be required for FONCODES subprojects will be set as reviewed by and agreed with the Bank. (para 3.35); (h) FONCODES will retain the services of an independent organization, under terms of reference acceptable to the Bank, for purposes of carrying out evaluations of community-based projects executed (para. 3.56); and (i) FONCODES will complete two comprehensive annual reviews of project implementation under terms of reference acceptable to the Bank (para. 3.57). 47 4.2 Conditions of Effectiveness: (a) FONCODES will adopt the revised Operations Manual including the User's Guide, acceptable to the Bank. (para 2.15 (v)). (b) A Subsidiary Agreement between the Borrower and FONCODES making the proceeds of the loan available to FONCODES on terms acceptable to the Bank would be signed (para 3.1). 4.3 Recommendation: with the above agreements, the project is suitable for a currency pool loan of US$150 million, payable in 17 years, including five years of grace, at a variable lending rate (VLR89). 48 ANNEXES 49 Annex 1 Summary of Project Costs By Component Amount (USSMilIlons)(t) L. COMMUNITY BASED PROJECTS Social Assistance Family Planning 8.8 Social Infrastructure Health Posts 13.8 Classrooms 28.8 Potable Water & Sanitation 137.9 Economic Infrastructure Agriculture 87.6 Rural Roads 75.3 Electrification 41.7 Other 18.5 Productive Projects 8.4 SUBTOTAL 420.7 1l. INSTITUTIONAL DEVELOPMENT Equipment and Rehabilitation 3.9 Skills Development, Performance Evaluation and Consulting 3.9 SUBTOTAL 7.8 m. AUDITING AND MONITORING FUND(2) 1.5 TOTAL PROJECT COST(3) 430.0 (I) The allocation by project type is indicative; all project development will continue to be demand driven. These estimates are based on FONCODES' experience to-date, and the projects which have been requested by the communities. (2) IDB requirement to be financed by IDB. (3) Includes an estimate of foreign exchange cost of US$81.4 million based on experience with the first project. 50 Annex 2 Estimated Schedule of Bank Loan Disbursements Disbursements (US$ million) IBRD Fiscal Year and Semester Quarter Cumulative Percentage 1997 December 31, 1996 15.0 15.0 10% March31, 1997 15.0 30.0 20% June 30, 1997 15.0 45.0 30% 1998 September 30, 1997 15.0 60.0. 40% December 31, 1997 15.0 75.0 50% March31, 1998 15.0 90.0 60% June 30, 1998 15.0 105.0 70% 1999 September30, 1998 15.0 120.0 80% December 31, 1998 10.0 130.0 87% March31, 1999 10.0 140.0 93% June30, 1999 5.0 145.0 97% 2000 September 30, 1999 3.0 148.0 99% December 31, 1999 2.0 150.0 100% Assumptions Loan Signing Date August 1996 Effeciveness Date August 1996 Project Completion June 1999 Loan Closing Date December 31, 1999 1 Initial deposit into Special Account of US$15 million. 51 Annex 3 Training Plan 1. FONCODES has developed a two-pronged training strategy which includes: (i) training for FONCODES staff in Lima and the regional offices; and (ii) training for the beneficiaries, including women and indigenous communities, NGO's and local governments involved in the preparation, execution, operation and maintenance of community-based projects financed by FONCODES. 2. Training for FONCODES staff, including external promoters, evaluators and inspectors, is meant to familiarize them with the new operating principles and revised Operations Manuals; changes in the project cycle, in particular promotion in extremely poor and indigenous communities, the introduction of the project "profile", and increased emphasis on the operation and maintenance of sub-projects; quality control; new guidelines for environmental assessment and impact; the role of women in community development; and use of the new MIS for the selection and prioritization of projects. Personnel from the Indigenous Institute of Peru and teachers in the bilingual schools which serve these communities will be among the participants in the training activities. 3. Training for community leaders, members of the nucleo ejecutor, NGOs, local governments has the following objectives: (i) familiarize them with FONCODES operations, including the project menu, project cycle, and procedures to follow for the preparation of project proposals; (ii) emphasize empowerment of the community to set investment priorities and take decisions about investments; identify and discuss alternatives for the operation and maintenance of community-based projects; (iii) identify the best mechanisms for cooperation between FONCODES, community leaders, local governments, NGO's and the private sector; (iv) raise awareness of environmental concerns and the potential impact of sub-projects; (v) discuss the participation and leadership of women in FONCODES sub-projects, especially with regard to household food security and community organization; and 4. The total budget for training is US$2.9 Million. In 1996, FONCODES expects to train 631 of its staff, including external promoters, evaluators and inspectors, giving priority to those employed in the regional offices which are to assume more responsibility under the new framework for decentralization and deconcentration, 18,900 members of nucleos ejecutores and community leaders, and 2100 representatives from local governments. 52 Group Training Components Number of people trained in 1996 FONCODES staff I. Operations 631 FONCODES staff, including external (i) New organizational structure and functions promoters, evaluators, and inspectors attached to (ii) Revised project cycle the Lima central office and the regional offices. (iii) Projects in social infrastructure: health, education, potable water and sewage (iv) Productive projects (v) Quality control (vi) Environmental assessment and impact (viii) Women and community development II. Management (i) Use of the new MIS (ii) Participation and leadership of women (iii) Interpersonal relations (iv) Project preparation and evaluation (v) Field visit and case studies (vi) Strategic planning Community leaders, members of (i) FONCODES project cycle 18,900 members of nucleos ejecutores and the nucleo ejecutor, NGOs, local (ii) The project menu community leaders; 2100 representatives of local governments. (ii) Environmental awareness government. (iv) Child care and the rights of mother and child (v) Participation and leadership of women (vi) Household food security 53 Annex 4 PERFORMANCE INDICATORS 1. Project inputs 1.1. Number of projects: (i) presented (ii) evaluated (iii) approved (iv) requiring budgetary expansion (v) executed (vi) liquidated (vii) paralyzed (viii) requiring legal process 11. Project processing 11.1. Average amount of project processing time (in days): (i) between presentation of the project profile and its evaluation; (ii) between pre-approval of the project profile and the disbursement of funds for project preparation; (iii) between the disbursement of funds and preparation of the project proposal; (iv) between presentation of the project proposal and its evaluation; (v) between approval of the project proposal and the first disbursement of funds for execution of the project; (vi) between the first and second disbursement of funds; (vii) between approval of the project proposal and completion of works; (viii) between completion of works and liquidation of the accounts. 11.2. Time estimated for project execution vs. actual time Ill. Project outputs Roads: # of miles constructed Bridges: # of bridges Classrooms: # of classrooms renovated or constructed Health posts: # of health posts renovated or constructed Potable water: # of households served Sewerage: # of households served Electricity: # of households served Canals: # of miles of canals built Productive projects: # of production modules IV. Project costs IV.1. Cost per type of project: S/. per kilometer of road Sl. per meter of bridge SI. per classroom built SI. per classroom rehabilitated SI. per health post built 54 S/. per health post renovated S/. per mile of canal built S/. per production module S/. per day of skills development training IV.2. Unit wage costs, by region, and urban vs. rural: (i) skilled labor (ii) unskilled labor IV.3. Beneficiary contribution, by poverty level: (i) person-hours of unskilled labor programmed vs. actual (ii) other contributions (land, cash, materials) IV.4. Total budgeted cost vs. total actual cost V. Project outcomes and socio-economic impact V.1. Satisfaction of unmet basic needs: (i) education (ii) health (iii) potable water (iv) sewerage (v) electricity V.2. Targeting: (i) allocated budget (asignaci6n) vs actual expenditure, by poverty level (ii) employment generated, by poverty level V.3. Participation by vulnerable groups: (a) Institutional development: Women: (i) number of evaluators (ii) number of supervisors (iii) number of contracted inspectors (iv) number of resident inspectors (b) Beneficiaries: Women: (i) participation in the project selection (ii) participation in the nucleo ejecutor (iii) participation in the project execution (person-hours) (iv) number of beneficiaries (direct and indirect) Indigenous Groups: Participation and incidence analysis by ehnic group and language. 55 V.4. Coordination with NGOs and municipalities (i) Number of subprojects with NGO participation (ii) Number of subprojects with participation of municipalities V.5. Environment: Number of subprojects, by environmental classification (A, B, C) 56 Annex 5 Project Supervision Plan 1. Project supervision will be the joint responsibility of the World Bank and the Interamerican Bank. In the case of the World Bank, routine project monitoring and supervision will be shared between the Bank's Headquarters in Washington and the Resident Mission, with responsibility transferred gradually to the Resident Mission in Lima. There will be at least one full project supervision mission scheduled within every twelve months in addition to the annual implementation review (see Annex 5). These supervision missions will be joint IDB-WB missions with terms of reference and staffing agreed by the two Banks. The project would require about 30 staff weeks of supervision per year including about 15 weeks in the field, to be shared evenly with the IDB. 2. Supervision tasks would include the following: (a) review of targeting and promotion of sub-projects and participation of beneficiaries including women and indigenous groups; (b) sub- project ex-ante and ex-post reviews, quality and distribution of portfolio between and among categories, internal processing rates, project unit costs and procurement processes, participation of NGOs and local governments, problem projects; (c) progress in training program, the decentralization of FONCODES and installation of the MIS; (d) review of terms of reference, candidates for technical assistance and training and activities completed; (e) monitoring of performance indicators prepared by FONCODES; (f) coordination with the line ministries; (g) other routine supervision and internal administration. 3. Proposed Supervision Schedule 1996 Project Launch - Task Manager, IDB and WB Resident Mission staff, Procurement Specialist, Monitoring and Evaluation Specialist, Technical Specialists' to be determined. 1997 - 1998 Supervision Missions - Task Manager, RM staff, Technical Specialists to be agreed with FONCODES and IDB. Annual Implementation Reviews - Task Managers and Resident Mission staff of IDB and WB, consultants to be determnined by Task Managers and Resident Missions. Technical expertise might include any of the following: economists, financial specialist/accountant, management information systems, procurement, project evaluation, beneficiary assessment, environmental assessment, community participation, engineering, rural development, agriculture, health, nutrition, family planning, education, poverty mapping and targeting. 57 Annex 6 Annual Implementation Review Outline I. The overall objective of the annual implementation review is to examine FONCODES and its operations to determine what, if any, adjustments should be made to its organization and procedures to improve its work in the short term and as the basis for decisions regarding new funding and its future objectives and operations. The annual reviews will be conducted jointly with the Interamerican Development Bank under terms of reference prepared and agreed by the two Banks. Prior to each annual review mission, FONCODES will conduct an ex-post evaluation of a representative sample of completed projects, a beneficiary assessment, and an impact evaluation of projects completed in prior years. 2. The annual review will focus on the following: (a) The role of the social fund in the government's poverty alleviation strategy, the adequacy and appropriateness of its contributions to the strategy, and its future role. (b) Targeting and promotion of FONCODES sub-projects to the poorest areas and population groups and participation of beneficiaries, including women and indigenous minority groups. (c) Quality and distribution of the portfolio between and among categories, the adequacy and transparency of project selection and procurement processes, internal project processing rates, project monitoring and supervision, project completion and liquidation, project costs and the adequacy of arrangements for operations and maintenance including cost recovery mechanisms in use, failure rate of projects. (d) Coordination with local governments, NGOs and the line ministries in project identification, preparation and execution by sector and type of project, the consistency of FONCODES investments with sectoral priorities and adequacy of its contribution to the strengthening of local institutions. (e) Adequacy of the organizational structure and staffing of FONCODES in the central and regional offices, implementation of the staff and community training plans, installation of the MIS, progress in the decentralization of FONCODES operations and delegation of authority and responsibility to the regional offices and their contribution to the efficiency and effectiveness of FONCODES operations. 58 (f) Programming, budgeting, accounting and auditing capacity, transparency in administrative and project spending, regularity, rigor and independence of internal and external audits. (g) Administrative costs as a proportion of commitments and disbursements, comparability with similar agencies in Peru and other social funds in the regions (h) Adequacy, completeness and accessibility of data in the MIS and integration into daily operations; reports prepared and the adequacy of the information provided for monitoring FONCODES operations. (i) Environmental assessment, including compliance with FONCODES new environmental guidelines, the environmental impact of sub-projects, the adequacy of environmental assessments conducted for "C" category sub-projects, and the effectiveness of the program of environmental awareness and education for beneficiaries. (j) Beneficiary participation, contributions of cash, materials and unskilled labor made, and the extent and kind of community organization. (k) Pilot projects, such as the productive projects, the quality of ex-ante and ex-post indicators used, integration with other local investments, their impact and sustainability. (1) Economic evaluation of sub-projects, including the extent to which wages paid by FONCODES are in line with prevailing market wages, and the use of cost-benefit analyses for selected economic infrastructure and productive projects. 59 Annex 7 FONCODES Portfolio 1991-1995 FONCODES: Investment Structure, 1995-1998 70 01995 60 * 19 01997 El1998 40 - 50 30 - 140 ,30 6)~~~~~~~~~~~~~~6 Annex 8 FONCODES: Future Portfolio ACTIVITIES 95 96 97 PARTICIPATING Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Termr Term 2 OFFICES 1. PROFILES _ _.:.;: a S RS the Regional Offices 2; PROJECT APPROVAL <S/.50,000 Chiclayo, Ica R. .... ' Piura, Cajamarca, Huanuco, Huaraz, Lima, Puno Iquitos, Punoi Chachapoyas, Huancayo, Huancavelica, Ayacucho, Arequipa, Tarapoto Madre de Dios, Tacna, La Merced, Punoi <S/.90,000 Cuzco, Pucallpa Trujillo <S/.141,000 Chiclayo, Trujillo, Cuzco (60,000 USS) 3. BUDGET Chiclayo, Ica EXPANSION Iquitos, Cuzco . : Puno, Trujillo 4. PAYMENT AUTH. 11 B E RI Regional Offices SUPERVISORS 5. PAYMENT AUTH. ALL EVALUATORS 6. PAYMENT AUTH. All Regional Offices 2nd. INSTALLMENT O 7 BUDGET . lura, Cajamarca, Tarapoto, Huinuco, Huaraz, Abancay, Lima EXPANSION Chachapoyoas, Huancayo, Huancavelica, Ayacucho, La Merced, Arequipa, Puno __________________ _____________ Madre de Dios, Tacna 8. IGV & READJUST. All_ - . s Regional Offices 61 Annex 9: FONCODES: Organizational Chart BOARD OF DIRECTORS INTERNAL CONTROL OFFICE EXECUTIVE APPROVAL DIRECTOR COMMITEE SYSTEMS LEGAL OFFICE .SUPPORT OFFICE PUBLIC PLANNING RELATIONS __OFFI OFFICE FINANCE ADMINISTRATION PROJECT MONITORING PRODUCTIVE DEPARTMENT DEPARTMENT EVALUATION DEPARTMENT PROJECTS DEPARTMENT INFRASTRUCTURE DEPARTMENT PROJECTS 62 Annex 10 EVALUATION AND FOLLOW UP OF THE DECENTRALIZATION PROCESS Control mechanisms for the decentralization and deconcentration of functions. * Monthly visits by general supervisors to control and assist in the execution of the guidelines. * Monthly evaluation by the Regional Offices according to managerial, economic or impact indicators. Evaluation Quality: 1. Control Sheet before the Approval Committee. 2. Projects. ii = Proiects Submitted Projects Evaluated i2 = Projects Apnroved Projects Evaluated i3 = Executed Cost Approved Cost i4 = Approved Cost Final Cost 3. Targeting of investment expenditure by poverty level at the Regional Office. 4. Investment evaluation by poverty levels and lines. 63 Annex 11 Lessons Learned from Bank Involvement in Social Funds 1. The Bank's experience with more than 30 social investment fands (SIFs) in 24 countries is extensive and continues to grow. Lessons learned can be grouped in three broad categories: (i) staffing and procedures; (ii) the sub-project cycle, including targeting mechanisms and beneficiary participation; and (iii) cooperation with other actors in the public, not-for-profit, and private sectors. 2. Staffing and procedures: Innovative procedures for staffing and operations have allowed social funds to function with a high degree of efficiency and transparency. The most successful social funds have: (i) a high degree of autonomy, which has protected funds from interference in the project selection and approval process by political and other interest groups, given them credibility, and made them less dependent on the vagaries of the annual budget cycle and its cumbersome mechanisms for the transfer of central government funds to line ministries and municipalities; (ii) a cadre of highly qualified professional managerial staff, who are often recruited from the private sector, have a non-bureaucratic work ethic, and are paid salaries competitive with those of the private sector; (iii) exemption from government procurement and disbursement procedures; this has enabled funds to award contracts to private consultants and construction firms using simplified competitive procedures and greatly speeding up the preparation, appraisal, and execution of small investment projects; and (iv) accountability mechanisms which include well-defined project appraisal criteria, transparent procedures, and regular project supervision, operational and financial audits. 2 For comprehensive accounts of lessons learned see especially Phillip J. Glaessner, Kye Woo Lee, Anna Maria Sant'Anna, Jean-Jacques de St. Antoine, Poverty Alleviation and Social Investment Funds: The Latin American Experience, 1994; Mary Schmidt and Alexandre Marc, Participation in Social Funds, 1995; Alexandre Marc, Carol Graham, Marc Schachter, Mary Schmidt, Social Action Programs and Social Funds: A Review of Design and Implementation in Sub-Saharan Africa, 1995; Lynn S. Khadiagala, Social Funds: Strengths, Weaknesses, and Conditions for Success, 1995; and Soniya Carvalho, Social Funds: Guidelines for Design and Implementation, 1994. 64 3. The sub-project cycle: Social investment funds have generally been demand-driven institutions which have operated as financial intermediaries rather than as implementers. The sub- project cycles of successful funds have some or all of the following characteristics: (i) extra support in project identification, preparation, and community organization for the poorest isolated rural communities, especially indigenous peoples; (ii) targeting mechanisms which ensure that the poor are the principal beneficiaries. For this purpose, funds have generally used a combination of geographic targeting based on poverty maps constructed from a number of indicators of shortages of basic social services, means-testing, self- targeting, and beneficiary assessments; (iii) strong local participation of beneficiaries in all aspects of sub-project selection, preparation, execution and maintenance. High levels of beneficiary participation generally improve outcomes by ensuring that the sub-project is relevant to beneficiary needs, and generate commitment to sustaining project activities and benefits. Beneficiary participation is also valuable because communities which are given the responsibility and capacity to identify, implement, and supervise sub-projects are generally better prepared to involve themselves in future development activities; and (iv) adequate provisions for operations and maintenance after project completion. 4. Coordination with other actors: Social investment funds are vehicles for the alleviation of hardship caused by economic crisis and structural adjustment policies and, more recently, instruments for the long-term reduction of poverty. Coordination between social funds and other actors, especially line ministries and municipalities, is therefore indispensable to avoid duplication of efforts, ensure the sustainability of projects, and transfer know-how, operating methods, and responsibilities for the construction of small-scale infrastructure and the provision of social services. Successful social funds have: (i) a philosophy which is consistent with the general macroeconomic framework; (ii) a flexible institutional framework which has allowed funds to adapt to changing external circumstances. In some instances, social investment funds have been an important vehicle to promote decentralization by strengthening public sector management at the municipal level. After the passage of the "Ley de Participaci6n Popular" in Bolivia, for example, the FIS changed its operations in accordance with the new strategy for decentralization and worked much more closely with municipalities; 65 (iii) effective working agreements between the social fund and concerned line ministries to promote the integration of national and regional plans with locally generated investments; and (iv) willingness to engage in partnerships with local authorities, the private sector and NGOs, all of whom can be successful at mobilizing resources at the local level, delivering basic services at low cost, and finding innovative solutions to development problems. 66 Annex 12 INTER-AGENCY AGREEMENTS . ... . . .,.,.... ................. .................. ............... ........ ..... ................ .. ... ................ .............. I. EDUCATION Agreement * Establish cooperation terms among Ministry of Education, * Planning Office * Ruth Jeronimo Ministry of Education, INFES and FONCODES to develop education projects that benefit the population in most need. INFES and FONCODES * Projects Division * Rafael Charun No. 002-94 01/05/94 Agreement * Prevent the duplication of efforts and the * Projects Division * Ignacio Ibarguen INFES and FONCODES superposition of projects to be financed. No. VII-CI-94 03/21/94 * Optimize the state's resources geared to the social support in the education field. II. HEALTH Agreement * Establish cooperation terms between MINSA and * Planning Office * Ruth Jeronimo Ministry of Health, (MINSA) and FONCODES to develop projects. FONCODES * Projects Division * Ariel Olortegui * Establish mechanisms to set priorities in the No. 045-93 10/14/93 projects selected and financed by FONCODES. Proceedings * Establish mechanisms to guarantee the coverage of operation and maintenance expenditures. III. SANITATION Agreement Institutional cooperation to establish the terms of an Projects Division * Ignacio Ibarguen FONCODES and adequate and permanent coordination. UTEFONAVI * Carlos Maldonado * Serve the sectors with the least resources and give No. 020-95 07/95 priority to resource allocation. IV. ENERGY Agreement * Institutional cooperation to establish the terms of an * Projects Division * Ignacio Ibarguen FONCODES and adequate and permanent coordination. UTEFONAVI * Fulver Ortega * Serve the sectors with the least resources and give Ministry of Energy and priority to resource allocation. Mines, FONCODES * Define the shared responsibilities in the Proceedings electrification process. 1/10/96 * Improve coordination. 67 SECTOR SUSSCR ........ ........................ X X-l,ME T . .... .... .. V. TRANSPORTATION Agreement * Establish the competencies and the terms of cooperation * Projects Division * Rafael Charun Rural Roads Program between the Rural Roads Program (PCR) and FONCODES (PCR) and FONCODES to develop and implement road infrastructure projects No. 021-95 12/03/95 * Establish the coordination mechanisms between both institutions. * Share technical information. * Prioritize the projects which may be complementary in their operation. . _ VI. AGRICULTURE Agreement * Establish the terms of cooperation between FONCODES * Projects Division * Ignacio Ibarguen and PRONAMACHCS PRONAMACHCS and FONCODES * Jorge Filomeno * Establish the coordination mechanisms between both No. 026-CI-95 12/29/95 institutions. VIl. INTERIOR Agreement * Establish the terms and relations between the Ministry of * Planning Office * Ruth Jeronimo Ministry of Interior and Interior and FONCODES to minimize risks in the FONCODES implementation of projects financed by FONCODES. No. 019-95 06/22/95 VIII. INEI Agreement * INEI is committed to help and support FONCODES * Systems Office * Luis Alberto Mas National Institute of providing National Census statistics and information. Statistics (INE) and FONCODES No. 005-95 03/02/95 IX. CUSTOMS Agreement * Establish an optimal inter-institutional relationship. * Systems Office * Ruben Robles Customs and FONCODES * Encourage the cooperation modality most required. * Operations * Jorge Muguerza Division Oct-95 * Assist FONCODES in the automatization of its administrative procedures. * Establish both institutions in alternate locations in case any of the parts can not operate its computer science infrastructure. 68 Annex 13 Productive Projects Productive projects are described in paragraph 2.12 of this report. While it is possible to identify some specific types of projects based on the past experience of FONCODES and other donors, productive projects are expected to respond to needs and demand identified in local and regional markets, therefore it is not be possible to anticipate and list all projects which may be designed at the initiative of local communities. All productive projects will be expected to satisfy the project design criteria outlined in paragraph 2 12 and the more detailed requirements described in the updated FONCODES Operations Manual and User's Guide. They are expected to include, but not be limited to the following: Food storage and distribution facilities Small animal production Poultry production Bee-keeping and production of honey Fish farms Small-scale food processing and preservation facilities Livestock improvement Production and marketing of arts and crafts Small-scale projects in support of local tourism Production of house plants Greenhouse garden crops (vegetables, herbs, etc.) 69 Annex 14 List of Documents and Data Available in the Project File Documents Provided to the World Bank-Interamerican Development Bank Joint Project Appraisal Mission February 20 - March 3, 1996 1. Evaluaci6n Global de FONCODES: Periodo 1991-1995; Lineamientos Generalesy Politica Social del Gobierno para el Mediano Plazo, prepared by FONCODES, March, 1996. 2. La Situaci6n A ctual de la Pobreza en el Peru; Mapa de Pobreza. Principales Indicadores a Nivel de Provincia, Segin Regi6n. 3. El Ciclo de Proyectos 1991 - 1995 y El Nuevo Ciclo de Proyectos. 4. Sistema de priorizaci6n de Proyectos. 5. Promoci6n de Proyectos. 6. Indicadoras de Calidad, principales variables, indicadores de gesti6n, indicadores de impacto socioecon6mico. 7. Lineas de Corte (unit price limits per type of project). 8. Desarrollo Institucional de FONCODES; Programa de Descentralizaci6n y Desconcentracion de FONCODES; March, 1996. 9. Programa de Capacitaci6n. 10. Medio Ambiente. 11. FONCODESy las comunidades indigenas del Perui. 12. Evaluaci6n ex-post de los Proyectos Financiadospor el Fondo Nacional de Compensaci6n y Desarrollo Social, Informe sobre el ciclo del proyecto; Instituto APO YO, versi6n preliminar; 8 14. 95. 13. Evaluaci6n de Proyectos Orientados al Desarrollo de Fondos Solidarios, Ing. Juan Chu Manrique, Lima, 31 de Enero, 1996. 14. Evaluacion del Impacto Ambiental de los Proyectos de Infraestructura Socialy Econ6mica y de Desarrollo Productivo de FONCODES, Jenny Turkowsky Castagnola, Carlos A. Llerena Pinto. 70 15. Preparaci6n de la Segunda Etapa de FONCODES; Evaluaci6n de Proyectos de Infraestructura Econ6mica en el Campo de Redes Electricas Secundarias; Lima, January, 1996. 16. Convenios, FONCODES - Ministerio de Educaci6n; Ministerio de Salud, INFES, UTE- FONA VI, Ministerio de Transporte, Ministerio de Energia y Minas; Ministerio de Agricultura; PRONAMA CHCS, Ministerio del Interior; Instituto Nacional de Estadistica e Informatica; Superintendencia Nacional de Aduanas. 17. Supplement to Project Preparation Document, including, I. Estructura Organica del FONCODESy descentralizaci6n; II. Plan de Capacitaci6n; III. Lineas de Corte; IV Coordinaci6n Interinstitucional; V Paternidad Responsable; VI. Poblaci6n Vulnerable (Comunidades Campesinas y Nativas), April, 1996. 18. Evaluaci6n Ex-post del Desempeno de FONCODES, Instituto APOYO, August, 1995. 19. Segunda Etapa del Trabajo de Campo de Evaluacion Ex-post de Proyectos de FONCODES 1994, Analisis de Resultadosy Conclusiones, Instituto APOYO, Octubre, 1995. 20. Evaluacion Ex-post de FONCODES Respuesta a las Observaciones al Informe Final; Principales Conclusionesy Recomendaciones, Instituto APOYO, Octubre, 1995. 21. FONCODES Plan Operativo 1996, Officina de Planeamiento, Lima, Febrero de 1996. 71 MAP SECTION IBRD 26572R 80' 787 '4 72 C)~. C) '} ECUADOR s 0 COLOMBIA ! / I, 2 2-, / Zorun, 11 -+- / TU MX 0UL OTOS0 4C=no_ .A '- 1El Ailo Jfbl. T nZ I
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Peru - Second Social Development and Compensation Fund Project
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