Document of FILEeCtOP The World Bank E Cr FOR OFFICIAL USE ONLY Report No. P-3383-PE REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$10.2 MILLION TO THE REPUBLIC OF PERU FOR A PUBLIC SECTOR MANAGEMENT PROJECT September 1, 1982 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS The exchange rate is being adjusted daily roughly in line with the differen- tial between domestic and international inflation. The exchange rate and currency equivalents in 1981 and as of July 31, 1982 were as follows: Currency Unit = Sol (S/.) Calendar 1981 July 31, 1982 US$1 S/. 426.60 S/. 715.75 S/. 1 US$0.0023 US$0.0014 S/. 1,000 US$2.34 US$1.40 FISCAL YEAR January 1 to December 31 ABBREVIATIONS bpd - Barrels per Day COFIDE - Corporacion Financiera de Desarrollo (State Development Finance Bank, Subsidiary of CONADE) CONADE - Corporacion Nacional de Desarrollo (National Development Corporation) DGPP - Direccion General de Presupuesto Publico (Government's Central Budget Office) ERP - Economic Recovery Program ESAN - Escuela Superior de Administracion de Negocios (A private school of business administration) ICSA - INVERSIONES COFIDE S.A. (Holding Company for State-Owned Enterprises, Subsidiary of CONADE) IDB - Inter-American Development Bank INAP - Instituto Nacional de Administracion Publica (National Institute of Public Administration) INP - Instituto Nacional de Planificacion (National Planning Institute) MEFC - Ministerio de Economia, Finanzas y Comercio (Ministry of Economy, Finance and Commerce) SES - Senior Executive Service USAID - United States Agency for International Development FOR OFFICIAL USE ONLY REPUBLIC OF PERU PUBLIC SECTOR MANAGEMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Peru. Beneficiaries: INVERSIONES COFIDE S.A. (ICSA), the State-owned holding company, and--through CONADE--individual State-owned enterprises Relending Terms The Government would onlend in dollars part of the pro- ceeds of the loan to ICSA (US$0.5 million) and--through Corporacion Nacional de Desarrollo (CONADE)--to individ- ual State-owned enterprises (US$2.2 million) at the same interest borne by the proposed Loan for a term of five years, including one year of grace. The Government would assume the foreign exchange risk. Amount: US$10.2 million equivalent, including a capitalized front-end fee. Terms: Repayable in 17 years, including four years of grace, at the standard variable interest rate. Project Description: The project's main goal is to improve management through- out the public sector to make better use of Peru's scarce financial and human resources. The project would include the following components: (i) the design and implementa- tion of a program budgeting system for the Central Government; (ii) the design and implementation of an adequate compensation system, particularly for senior managers in the central administration; (iii) support for ongoing and/or new public sector management training pro- grams in two private higher educational institutions and the Central Bank; (iv) technical assistance in key policy areas such as debt management and evaluation of major investment projects; (v) institutional strengthening of INVERSIONES COFIDE; and (vi) technical assistance to individual State-owned companies. Project Risk: Although many of the proposed reform measures are diffi- cult and politically sensitive, the Government is firmly committed to implementing them. Moreover, the proposed carefully designed organizational arrangements for proj- ect implementation and the close Bank guidance envisaged for this operation would minimize administrative diffi- culties and help to get the project off to a good start. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Estimated Costs (net of taxes) Local Foreign Total US$ million ------ (i) Program Budgeting System (including project coordinator) 6.1 1.7 7.8 (ii) Compensation System 0.8 0.6 1.4 (iii) Technical Assistance in Key Policy Areas 1.3 1.3 2.6 (iv) Institutional Strengthening of INVERSIONES COFIDE (ICSA) 0.3 0.4 0.7 (v) Assistance to Critical State- Owned Companies 1.6 1.8 3.4 (vi) Training in Public Sector Management 0.3 0.8 1.1 Base Cost 10.4 6.6 17.0 Physical Contingencies 1.0 0.7 1.7 Price Contingencies 1.4 0.9 2.3 Total Cost 12.8 8.2 21.0 Front-end Fee on Bank Loan - 0.15 0.15 Total Financing Required 12.8 8.4 21.2 Financing Plan Local Foreign Total ------ US$ million ------ Government 9.3 9.3 ICSA, State-owned Companies 1.7 - 1.7 Bank 1.8 8.4 10.2 Total 12.8 8.4 21.2 Disbursement Estimates Bank FY 1983 1984 1985 ------ US$ million --- Annual 4.0 4.0 2.2 Cummulative 4.0 8.0 10.2 Rate of Return: Not applicable Staff Appraisal Report: None INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF PERU FOR A PUBLIC SECTOR MANAGEMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Peru for the equivalent of US$10.2 million to help finance a technical assistance project to strengthen public sector management. The proposed loan would have a term of 17 years, including four years of grace, at the standard variable interest rate. US$2.7 million of the loan's proceeds would be onlent to State-owned enterprises at the Bank's interest rate for a term of five years, including one year of grace, with the Government assuming the foreign exchange risk. PART I - THE ECONOMY 1/ 2. An economic report entitled "Peru-Major Development Policy Issues and Recommendations" (Report No. 3438-PE) was distributed to the Executive Directors on May 4, 1981. This part is based on the report's findings and on those of economic missions to Peru in June and September 1981 as well as in July/August 1982. Country data sheets are attached as Annex I. Natural and Human Resources 3. Peru, the fourth largest country in Latin America, is divided by the Andes mountains into three distinct regions: the coastal region (Costa), with 46 percent of the population and most of the country's modern economic activity; the mountain region (Sierra) with 44 percent of the country's population; and the sparsely populated tropical rain forests east of the Andes (Selva). The country's rugged topography limits trade between the three regions. 4. Peru's natural resources include large deposits of minerals-- particularly copper, iron, silver, and zinc--located mainly in the Sierra and the southern Costa. There are also large phosphate deposits, located in the northern Costa. Petroleum resources found in the jungle areas and offshore are also substantial, but their full extent has not yet been ascertained. Another major natural resource is the large fishing potential in coastal waters, although the magnitude of the catch is subject to sharp fluctua- tions. Only a small portion of Peru's total land area is arable, and most of the soils suitable for intensive agriculture are already being farmed. 5. Although Peru's energy resource base is relatively diverse, with scope for expanding hydro and coal based power generation, petroleum is expected to remain the major energy source in Peru through the rest of this century. Peru's domestic oil production more than doubled between 1/ This part is substantially unchanged from Part I of the Petroleum Production Enhancement Project President's Report of July 22, 1982 (Report No. P-3371-PE). -2 1977 and 1981 to over 190,000 barrels per day (bpd), and it became a net exporter of about 60,000 bpd. To enable Peru to remain a net petroleum exporter, the Government has embarked on a strategy of accelerated secondary recovery and exploration efforts to increase production and of rational pricing policies to contain demand growth. Prices for domestically consumed petroleum products have been increased at regular intervals. In addition, new legislation was enacted offering special tax incentives to domestic and foreign investors, and the response has been positive. The Government strategy is already bearing fruit with petroleum output expected to increase in 1982 to an average level of 207,000 bpd. 6. As a result of three decades of rapidly falling mortality rates, Peru's population growth accelerated during the 1930-1960 period. Since the early 1960s, birth rates have fallen gradually, mainly caused by the urbani- zation process and improved education. But with declining death rates, popu- lation has continued to grow at about 2.6 percent p.a. and is currently esti- mated at about 17 million. The country's urban population is increasing at 4.2 percent p.a., and about a quarter of all Peruvians live in the Lima area. Given the structure of Peru's population, the labor force is expected to grow in excess of three percent per year during the next 20 years. Over the same time frame, it is expected that overall population growth will fall only slightly to about 2.4 percent p.a. unless an effective population control policy is adopted. The Government is conscious of the need to slow down Peru's population growth rate and is now supporting a family planning program. Past Development Policies and Performance (1968-78) 7. Two successive military Governments, in office from October 1968 until July 1980, followed a development strategy aimed at promoting economic growth and improving distribution of income and wealth, not only between individuals but also between regions. The pattern of asset ownership in the economy changed drastically through nationalization and a sweeping land reform. The Government took direct control of key economic sectors and imposed complex legislation to control the private sector. Many of the policies carried out after 1968 had an excessive cost, and their implementa- tion was inefficient. 8. Between 1968 and 1977, Peru's Governments fol]lowed expansionary fiscal and credit policies. As a result, aggregate demand considerably exceeded aggregate supply resulting in strong inflationary pressures and widening external gaps. Inflation accelerated from five percent per year in 1970 to 38 percent in 1977. Interest rates, however, remained substantially negative in real terms, discouraging financial savings and stimulating capital flight. Moreover, the exchange rate remained practically constant between 1968 and 1975, thus contributing to the overall disequilibrium. 9. The growing disequilibrium was reflected in the balance of pay- ments. The current account deficit averaged US$1.1 billion per year in 1974-77, equivalent to nearly nine percent of GNP. To finance this deficit, Peru accumulated a massive external debt, which at year-end 1977 stood at almost US$8.4 billion (including short-term indebtedness), equivalent to two-thirds of GDP and almost four times annual exports of goods and non-factor services. -3- 10. Following the 1968-74 period of rapid expansion, during which GDP grew by more than six percent per year, the growth rate dropped progressively and became negative in 1977 and 1978. In this two-year period, GDP per capita dropped by over six percent, and unemployment and underemployment rose to almost 60 percent of the labor force, up from less than 50 percent during the early 1970s. Stabilization Policies and the Economic Recovery Program (1978-80) 11. Between 1975 and 1977, several unsuccessful attempts were made to cope with Peru's deteriorating economic situation. By mid-1978 the economic crisis had reached grave proportions, with a drop in real GDP and inflation approaching 100 percent on an annual basis. Moreover, the private sector was finding it increasingly difficult to open letters of credit for new imports, and the banking system's net international reserves had dropped to a negative level of US$800 million. 12. Beginning in May 1978, the Government adopted a number of important measures aimed at strengthening public finances, improving the balance of payments and curbing inflation. The Government also negotiated a stand-by arrangement with the IMF in support of the stabilization program. 13. Major debt-relief operations carried out through the Paris Club and with the Soviet Union and commercial banks in 1978 enabled Peru to reduce the debt service burden for 1979 and 1980 by postponing repayment of about US$1 billion to the 1982-1986 period. In view of the strong balance of payments performance in 1979 and 1980 (para. 15), the Government decided to forego parts of the rescheduling options in exchange for slightly better conditions for new loans from commercial sources. 14. To overcome the economic recession, in late 1978 the Government adopted a comprehensive Economic Recovery Program (ERP), which, in addition to the above-mentioned stablization actions, included measures to open up the economy, promote non-traditional exports, strengthen the tax system by broadening its base, and generally improve the efficiency of resource alloca- tion in the private and public sectors. These policy changes--together with a declining domestic market because of the recession--resulted in a major reorientation of industrial development, with a large increase in the value of manufactured exports from about US$200 million in 1977 to the US$750-800 million range in 1980-81 (equivalent to about eight percent of output). The Government also drew up a public sector investment program that aimed at redirecting investment towards projects of clear economic priority and with positive effects on production and employment. In support of the ERP, the Bank approved a US$115 million Program Loan in May 1979. 15. The Government's stabilization-cum-economic recovery program resulted in a strong improvement in public sector finances in 1979. Public sector current account savings rose from -0.5 percent of GDP in 1978 to about 3.7 percent of GDP in 1979, and the overall deficit was reduced from 5.7 percent of GDP in 1978 to 1.7 percent in 1979. In spite of Peru's improved fiscal performance, inflationary pressures remained strong with a consumer price increase of 67 percent in 1979. The more careful management of public finances also had a positive impact on the balance of payments. Moreover, an increase in petroleum exports and a substantial improvement of Peru's terms of trade contributed to high overall surpluses of the balance of payments in 1979 and 1980. At year-end 1980, the net reserve position had improved to about US$1.3 billion, equivalent to about four months of imports. Peru also made greater use of assistance from official bilateral and international sources, thus improving the structure of its external debt. Real GDP growth rebounded to 3.7 percent in 1979; in 1980, however, growth dropped to 3.1 percent owing, in part, to a drought which affected the agricultural sector. Because of a relaxation in fiscal discipline, the public sector deficit increased in 1980 to six percent of GDP, keeping inflation for the year at a high level--59 percent. Recent Developments and Outlook 16. In July 1979, the military Government promulgated a new constitu- tion, written by a popularly elected constituent assembly. Elections were held in May 1980, and following his electoral victory, President Fernando Belaunde was inaugurated on July 28, 1980. His Government faced a challenging economic and social situation with a number of acute problems which had been disguised by the apparently solid financial situation. These included: high levels of under- and unemployment, particularly in urban areas; higher underlying inflation than had been reported because of price controls and deferred price adjustments for public goods and services; a public sector deficit that had been reduced by freezing expenditures for economic and social services (including education, health and housing); a balance of payments with a substantial surplus, which, however, was partly due to unusually high commodity prices and to the fact that import levels were depressed and manufacturing exports high owing to the recession; and, finally, deteriorated income distribution over the past several years resulting in increased social unrest. 17. The Government named an economic team committed to economic effi- ciency, decontrol of the economy (including divestiture of some of the State-owned enterprises), promotion of the private sector (including foreign investment), and policies aiming at a more equitable sharing of the benefits of development through job creation and specifically targeted social programs. Its reliance on, and promotion of, private initiative, in parti- cular, distinguish the present Government's philosophy and economic program from that of its immediate predecessors. 18. The Government has made important headway in a number of areas. It was successful in accelerating import liberalization by eliminating non- tariff barriers and lowering tariffs. At the same time, export incentives were streamlined and revised to eliminate abuse and make the system more responsive to exports of products with high manufactured content. The Government also enacted new legislation for the agricultural, mining and petroleum sectors offering greater financial incentives to investors. Finally, it made significant institutional changes in the financial sector, revised the interest rate structure through substantial upward adjustments, and is preparing a new banking law which would allow further rationalization and liberalization of the financial system. - 5 - 19. In an effort to improve resource use, the Government made progressin correcting major price distortions. Food subsidies were greatly reduced and most controlled agricultural prices were adjusted to international levels. The marketing of agricultural products was liberalized, and public utility and petroleum prices were adjusted at regular intervals. Moreover, the Government endeavored to rationalize public investment and its financing -- an effort that was supported by a Bank sponsored Consultative Group meeting in May 1981. 20. The above efforts were complemented by measures to strengthen public sector institutions. The important public enterprise sector, for example, was granted greater autonomy by transforming these enterprises into State-owned limited liability corporations operating under private law. This measure gives these companies, inter alia, greater freedom in fixing staff compensation and, thus, helps them to recruit or to retain capable personnel. Many of the above measures have already had positive short-term effects, and they have laid the ground for medium-term structural adjustments of the Peruvian economy. 21. In spite of the above policy initiatives, economic performance in 1981 lagged behind expectations. GDP grew only at about four percent, and employment generation was also sluggish. The balance of payments deterior- ated substantially as a result of declining export prices, high interest rates on the country's debt with commercial banks, and a rapid expansion of imports. The loss in net reserves amounted to about US$580 million, equiv- alent to about 2.5 percent of GDP. A major factor in the deterioration of the balance of payments was the large public sector deficit which reached about eight percent of GDP. On the positive side, some progress was achieved in reducing inflation: while inflation on a December 1980-December 1981 basis reached 73 percent, during May-December 1981 it decelerated to an annual rate of about 50 percent, mostly because of the openness of the economy, the price dampening effects of an increase in imports, and--to some extent--to a deceleration of the mini-devaluations. During 1982, inflation is expected to reach 60 percent (which is also the average rate during the first five months of the year). The Government is aware that this level is still too high, however, and is following restrictive demand management which it expects will result in a further drop in inflation. 22. Reducing the public sector deficit has, once again, become the major challenge facing Peru's economic managers. While the deteriorated export situation has had a negative impact on tax revenues, the 1981 deficit was mostly the result of steep increases in expenditures and somewhat lagging adjustments of petroleum and rice prices. Excess expenditures over initial budget allocations were incurred mostly for investment projects of lesser priority. To tackle the difficult public finance situation, the Government is following a restrictive financial program for 1982 with tight credit ceilings and limits to foreign indebtedness. The Government also trimmed the public investment program in line with its investment priorities. The Bank has an ongoing and frank dialogue with the Peruvian Government on these issues. Moreover, in June, 1982 the IMF approved an SDR850 million compensatory-cum-EFF arrangement to support Peru's stabilization efforts. In spite of the difficult world economic environment, a slowdown in economic growth (projected to be about two percent in 1982) and increasing social tension, the Government is striving to adhere to the agreed-upon program and -6- to make the necessary adjustments in fiscal management to keep the economy viable over the medium term. Peru's total debt outstanding to the IMF as of June 30, 1982 amounted to SDR776.8 million. 23. Based on cautiously optimistic assumptions with regard to economic management, through the medium term the country is expected to have economic growth of about 4-5 percent per year and a manageable balance of payments situation. Peru's balance of payments could, however, become precarious if the exportable surplus of oil declines. While measures are being undertaken to speed up petroleum exploration and to increase manufactured exports, the results of these endeavors may not come in time to countervail the potential foreign exchange shortfalls. Against this background, there is a continuing need for official development assistance. Taking the above factors into account, considering an expected debt service ratio hovering around 35 per- cent of exports (which are relatively diversified) and assuming that the authorities continue the initiated course of economic policies, Peru is creditworthy for Bank lending. PART II - BANK GROUP OPERATIONS IN PERU 24. The Bank has approved 50 loans to Peru for a total amount of US$1,302.3 million, net of cancellations. About 28 percent of the Bank's lending to Peru has been for transportation (mainly highways and ports), 17 percent for agriculture, 25 percent for the energy sector, 14 percent for mining and industry, about seven percent for education and urban development and nine percent for a program loan in support of the ERP in 1979. 25. Annex II contains a summary statement of Bank loans and their disbursement status as of March 31, 1982 and notes on the execution of ongoing projects. As of this date, US$440 million was undisbursed. Disbursements on Bank-financed projects moved slowly in the late 1970s, primarily because of weak project execution capacity and a shortage of counterpart funds that worsened as the economy deteriorated during this period. Disbursements have improved, however, with vigorous efforts by the Bank and Government to correct the situation by, inter alia, (i) opening a Bank resident mission in Peru; (ii) restructuring a number of slow moving projects; (iii) Government provision of adequate counterpart funds; and (iv) Government creation of a special commission to monitor loan execution and resolve administrative problems. These actions are bearing fruit. Disbursements on project loans amounted to US$44 million in FY80, US$70.5 million in FY81 and US$75.8 million in FY82. This compares with average yearly disbursements of US$27.5 million during FY77-79. 26. The main objectives of Bank lending to Peru are to assist in (i) the creation of the physical infrastructure needed to sustain and foster economic development; (ii) the expansion of productive capacity in crucial sectors, i.e., petroleum, agriculture and mining; (iii) the strengthening through technical assistance loans and regular operations, of public sector management and of local capacity to prepare, implement and operate projects effectively; and (iv) the improvement of living conditions for the urban and rural poor. In the past, Bank lending concentrated on infrastructure in the transportation and power sectors. More recently, the Bank's emphasis has - 7 - shifted to more directly productive fields--mining, petroleum, agriculture and industry--to help Peru to strengthen its balance of payments. Lending for social projects has also grown and will be further stepped up in the future. The next operations that would be ready for the Executive Directors' consideration include projects in rural development, health, and education. As part of its assistance strategy, the Bank convened a Consultative Group Meeting for Peru on May 25-26, 1981 to help the Government arrange financing for its public investment program. 27. Bank loans constituted an estimated 6.4 percent of Peru's total public external debt outstanding and disbursed at the end of 1981, and absorbed about 3 percent of the country's public external debt service in 1981. Assuming increased recourse to long-term bilateral and multilateral aid by Peru, the Bank's share in the country's outstanding public foreign debt by 1985 could reach about 10 percent, and its share of debt-service would be around 4.5 percent. 28. IFC commitments as of March 31, 1982 were US$37.3 million (includ- ing US$15 million to the Southern Peru Copper Corporation for the Cuajone Copper Mining Project) of which US$18.9 million is held by the Corporation. A summary statement of IFC investments as of March 31, 1982 is presented in Annex II. In addition, a palm oil and a polymetallic mining project were recently approved, and a venture capital company is now being considered. 29. The other principal lending agencies active in Peru are the Inter- American Development Bank (IDB) and the United States Agency for Inter- national Development (USAID). Their total commitments as of December 31, 1981 were US$849 million and US$348.8 million, respectively, and their shares of public debt service as of end-1980 were estimated at 0.6 percent and 0.5 percent, respectively. In its future lending, IDB is expected to emphasize lending for agriculture, industry, mining, roads, and small scale irriga- tion. USAID is expected to stress rural development and health. PART III - THE PUBLIC SECTOR 30. Throughout most of Peru's history, the State has been an important agent in the country's economy. In the Inca Empire, the State owned all arable land, executed large public works programs, and developed a highly structured political and social system that permeated all aspects of life. During the colonial era (mid sixteenth through early nineteenth centuries) and also during the first hundred years after independence, the State--as owner of most of the country's non-agricultural natural resources--continued to play an important role, but mainly as rentier receiving royalties. With the emergence of new, large-scale technology in the mining, manufacturing, and transport sectors at the beginning of this century, most initiative was left to foreign investors, but the State lent active support by providing economic and social infrastructure. 31. After World War II, the State re-assumed an increasingly important role in the economy through expanded development expenditures, more economic planning, and the enactment of complex legislation regulating economic activities. The process accelerated during the 1960s and reached a peak - 8 - under the most recent military Governments (1968-80) when the State also assumed a major role as entrepreneur through nationalization of foreign-owned companies and establishment of new companies in strategic sectors (para. 7) with generally disappointing results in terms of their operating efficiency. The present Government, although committed to a large development program, is gradually reversing the process of ever increasing State involvement by stimulating the private sector and initiating the divestiture of some of the State-owned enterprises (para. 17). 32. The State's assumption of complex tasks beyond the granting of mining and other concessions and the enactment of legislation and other regulations is reflected by a gradually increasing share in the use of the country's resources. Public sector current and capital spending increased from some 10 percent of GDP in 1950 to about 30 percent in 1977; it declined thereafter as a result of stabilization measures (para. 15) but still amounted to about 28 percent in 1980. While the State's growth was accompanied by increased Government employment, remuneration of Government employees lagged far behind; it stagnated around nine percent of GDP during most of the 1970s and had declined to less than eight percent in 1980. These figures point to one of the main problems of Peru's public sector: an expansion of tasks which translated into higher overall expenditures but was not matched by an increase in personnel compensation. Most programs tended to suffer from inadequate staffing, particularly at the management level. The problem was exacerbated at the management level by a salary adjustment policy which was based on the same absolute amounts of increase at all pay levels, thus rapidly eroding higher salaries. The Central Government 33. The public sector in Peru--as usually defined--consists of the General Government and 42 non-financial public enterprises. The General Government, in turn, comprises the Central Government (including 25 regional development corporations), a number of decentralized institutions, the social security system, and numerous provincial and district governments. The proposed project addresses itself to the Central Government and to the para- statal sector, which--besides the 42 public enterprises--comprises about 100 other enterprises, which have been largely run like private enterprises, although totally or partially owned by the State. 34. Government structure and policies. The Republic of Peru has a unitary and representative form of government with complete separation of the executive, legislative and judiciary branches. Its executive branch--i.e. the Central Government--comprises 16 ministries, two entities with minis- terial rank (including the Planning Institute), several permanent inter- ministerial commissions, several entities attached to either the President of the Republic or the President of the Council of Ministers, and 25 regional development corporations. The Government is headed by the President of the Republic. The President of the Council of Ministers, who also must hold one of the 16 ministerial portfolios, is the cabinet's chief coordinator and, thus, plays a key role in the design and implementation of Government policies. 35. The executive functions--i.e., the responsibilities of the President, of the cabinet, etc.--are broadly defined in the Constitution of - 9 - 1979 and, more specifically, by Legislative Decree No. 217 of June 1981, as well as by a series of other Legislative Decrees referring to individual ministries and other entities. Although this legislation purported to redefine the organization and functions of the executive branch in the framework of the new constitution, the system remained basically unaltered, and changes were mostly confined to the retitling of existent positions. Significantly, however, the recent legislation, although intended to be comprehensive, did not cover the budgeting process--i.e., the Government's key management tool--nor the personnel structure and compensation system of the civil service, i.e., the Government's main resource. 36. After taking office in July of 1980, the present Government has undertaken sound policy action in many areas (paras. 17-19). For a number of reasons, however, actual performance so far has fallen somewhat short of expectations. On the one hand, the international environment over the last two years has not been favorable to Peru, and the present Government inherited a heavy burden in terms of both the nature of socio-economic problems and the limited margin of maneuver to tackle them (para. 16). On the other hand, within these constraints the Government has been only moderately successful in effectively implementing certain policy changes because of its lack of management tools and of adequate managerial talent. Some of the intended policy changes, thus far, have been limited to the political level and the conceptual stage; they have not been translated into concrete programs and budget allocations. Examples of this are given in para. 37. 37. In agriculture, while stated policies give highest priority to the revival of production through, inter alia, the rehabilitation of small and medium-scale irrigation schemes and an improved extension service, the imple- mentation of these initiatives has been slow, and the organization of an extension service is still in an early stage. In transport, the stated priority is road rehabilitation and maintenance, but maintenance efforts are lagging behind major reconstruction projects. In health, the Government attributes highest priority to preventive medicine and comprehensive primary health care, but has been slow in mounting a corresponding program and unable to make full use of available resources. Finally, in education highest priority is given to primary education in rural and marginal urban areas, but the corresponding construction component, which is relatively straight forward, has experienced substantial delays. The reorientation of curricula and teacher training lag even further behind. These difficulties can be traced, in great part, to the limited availability of resources, but mostly to inadequate management of available resources, i.e., the inability to make Government overall priorities operational through the setting of specific objectives, the corresponding allocation of financial and human resources, vigorous expenditure control, and the monitoring of physical results. 38. Resource constraints. During most of the 1970s, Government reven- ues hovered around 14 percent of GDP--a mark which falls somewhat short of the expected value for a country at a comparable stage of development. (Morocco, for example, collected 18 percent on average). As a result of tax increases and special tax administration efforts, revenues were pushed to 16 percent in 1979 and over 18 percent in 1980. However, with low commodity prices and a reduction in export taxes, Government revenues in 1981 again fell below the 17 percent mark and put a strain on public finances. The - 10 - rigid structure of expenditures (with about 50 percent of total expenditures allocated to general administration, defense, and interest payments) leaves relatively little margin for significant shifts in spending priorities and, therefore, constitutes an additional constraint to the Government's development policy. These constraints and the country's development needs, which were not adequately addressed in the past, make skillful management even more urgent. Yet, as already noted, the Government's planning and budgeting system as well as its personnel structure and compensation system are inadequate and limit efficient management of the public sector. 39. Planning and budgeting. The present planning and budgeting system dates back to the early 1960s. It is built around the National Planning Institute (INP) and the Government's Central Budget Office (DGPP) in the Ministry of Economy, Finance, and Commerce (MEFC). INP was established in 1962 (i) to formulate the Government's development plans and investment programs in collaboration with the sectoral and regional planning units; (ii) to provide an input to the annual budgets of the Government and State-owned enterprises; and (iii) to report periodically to the President and the Council of Ministers on the country's economic and social situation and on the execution of development plans and programs. For reasons spelled out in para. 41, INP was unable to discharge effectively its duties. The preparation of the Central Government budget is the responsibility of DGPP in collaboration with the budget units in the individual ministries. The budgeting process is formally ruled by the Budget Law of 1964, which introduced the program budget system. The system was predicated on close collaboration between INP and DGPP. INP was intended to provide the macroeconomic and sector orientation as well as the evaluation of investment projects. DGPP was intended to translate the Government's priorities into annual budget allocations. 40. While the planning and budgeting process was developed and grad- ually strengthened during the 1960s, it failed to become an effective management tool. The main reasons for this were that: (i) planning and budgeting did not fully determine the Government's decision-making process, which was often influenced by purely political considerations because of the lack of an appropriate institutional framework and power; (ii) owing to a lack of adequate monitoring of financial and physical results, the system's usefulness was limited; (iii) under the financial strain of the past few years, many problems were tackled on an ad-hoc basis, and the planning and budgeting system was largely bypassed; and (iv) a large portion of the most capable staff left the Government as a result of depressed salaries (para. 43). 41. The present planning and budgeting process--through which almost 30 percent of the country's GDP is channeled to different uses--suffers from a number of serious shortcomings. First, the system barely takes into consideration macroeconomic and policy inputs; while an attempt is made by the DGPP (in collaboration with the Central Bank) to determine the overall resource availabilities, policy options and development priorities are not adequately considered in the process and, therefore, not sufficiently reflected in the budget guidelines for the individual entities. Second, the allocation process is fragmented into largely separate and unrelated budgeting of recurrent and capital expenditures--two activities that at the ministerial level are handled by different units and according to different - 11 - criteria; the process is handled in a mechanical way, and the implementation of economically desirable programs and the achievement of certain targets are not the guiding principles. Third, INP has become an inflexible bureaucracy, with its largely eroded staff being tied up in functions not related to the planning of resource use. It is, therefore, not really integrated into the iterations of the budgeting process and is mostly seen as a bottleneck in the decision process rather than as an authority in defining development priorities and evaluating projects. As a result of this situation, INP has been increasingly bypassed, and important investment decisions have been made without any significant participation of INP. Finally, expenditures are not closely monitored. Reporting is limited to financial performance and comes too late to be useful for an active management of expenditures. Moreover, Government monitoring against physical targets does not exist at all. With all these shortcomings, Government control of spending is limited and--when under financial stress--the Government does not have the tools to make selective and sensible adjustments. 42. Personnel structure and compensation. The civil service in Peru, in the formal sense, does not have a long tradition. Since the foundation of the Republic, there were always isolated norms regulating State employment. It was not until 1950, however, that a civil service career was formally established by law. The civil service regulations and compensation were handled by a central office in the Ministry of Justice and by offices in the individual ministries. In 1969, the National Personnel Administration Office was established to introduce a new approach to public sector personnel management. However, it was not successful in reforming the civil service. Neither was its successor, the National Institute of Public Administration (INAP), which was set up in 1973 and reports to the President of the Council of Ministers. Although several changes in the personnel structure and compensation system were made over the years--the most recent one coming in 1979 and introducing the present grade structure--the expansion of the number of Government employees by about 40 percent during 1970-78 and the impact of the financial crisis of the late 1970s on civil service compensation left the civil service in a chaotic state. 43. At present, there are about 500,000 employees on the Government's payroll. Excluding the military and the police, total employment amounts to some 350,000. While the number of civil servants may be high--particularly in some offices--the number of qualified middle- and upper-level managers is deficient. Average monthly compensation amounted to about US$250-300 in 1981. This compensation is composed of about 20 different items (such as basic salary, supplements, family and school allowances etc.), with the basic salary only accounting for about 35 percent of total compensation. This makes the compensation system complicated and difficult to administer. Civil service remuneration is below compensation levels in the private sector where comparable jobs pay up to three or four times as much as in the public sector. This has resulted in substantial losses of talent, particularly at the managerial level, which has caused many of the problems discussed in paras. 39-41. 44. The present personnel structure is based on seven grades (each including seven subgrades) and six supergrades for managerial positions (with three subgrades reflecting the specific importance and responsibilities of individual Government institutions). This complex grade structure is built - 12 - upon the "basic unit of remuneration" which corresponds to the lowest grade and amounts to about US$80 per month in 1982. Some 150 to 200 percent is then added to basic remuneration to arrive at total compensation. Overallcompensation levels varied between US$150 and US$1,200 per month in 1981. In addition to this grade structure, there is a special salary scale for political posts ranging from the vice-minister level to the President of the Republic with monthly compensation of US$1,200-1,500. Their basic salaries are defined in terms of multiples of the minimum salary for the private sector. Although somewhat independent from public sector salary adjustments, these political salaries constitute a de facto limit to civil service salaries. 45. During the past few years when Peru experienced considerable fiscal difficulties, civil service compensation adjustments were consciously allowed to lag substantially behind inflation and real salaries of civil servants eroded. To some extent, this process was counteracted by an upward reclassification of staff within the existing grade structure: while in 1970 almost 80 percent of Government employees were at grade VII and only 0.1 percent at grade I, grade VII had virtually disappeared by 1981 and about five percent of employees were at grade I or at one of the supergrades. This upgrading process, however, did not take place in the same way throughout the public sector and has, therefore, resulted in great disparities. Moreover, since collective bargaining takes place at the level of separate unions within individual ministries, great salary differences have developed between comparable jobs in different Government entities. In parallel, another practice has emerged over the past few years: to get around the constraints of the civil service pay scale, employees in key Government positions have been put on the payroll of public entities like the Central Bank or the State-owned Industrial Bank, which are not subject to civil service regulations. This has added more complexity to an already complicated and uneven system. 46. Policy initiatives. The Government recently set up a national commission to overhaul the personnel structure and compensation system and to reclassify staff. This is expected to result in major upward adjustments throughout the public sector, but it would still not provide a satisfactory solution to the compensation problem at the managerial level. For fiscal reasons, the Government cannot afford the across-the-board salary increases needed to make salaries competitive with the private sector. Greater differentiation is, therefore, needed to make managerial salaries more competitive. The proposed project would tackle this issue through the establishment of a Senior Executive Service (SES) which would not be subject to the limitations of the civil service salary scale. More specifically, the Government would establish a Foundation for the Development of the Public Sector, which could formally hire managers for public sector assignments (paras. 60 and 62). The Foundation would be funded mainly by the Government. At the same time, it would be open to receive, on secondment, persons from the private sector, which could contribute to its broadening and strengthening. The Parastatal Sector 47. Structure and performance. The parastatal sector in Peru comprises about 140 enterprises. The State owns more than 90 percent of the shares in - 13 - 100 of these, between 50 and 90 percent in 15, and less than 50 percent in the rest. Traditionally, a distinction has been made between public enterprises, which were subject to public sector regulations, and other State-owned enterprises, which were run like private companies under private commercial law. This distinction is no longer meaningful. In 1981, virtually all public enterprises were transformed into limited liability corporations and made subject to private commercial law. Although formally these recently transformed companies are no longer subject to public sector regulations, they continue to be exposed to a higher degree of Government intervention than those State-owned companies that have always operated under private law (para. 53). 48. The parastatal sector increased substantially after the takeover by the military in 1968. The expansion was largely uncoordinated and unplanned, sometimes without clear objectives. Some of the companies were created by the State, but most were acquired through nationalization or takeover of bankrupt firms. The State often acquired title to shares of other, sometimes unrelated, companies that were held by the firms taken over. As a result, State-ownership is spread over a wide gamut of activities ranging from public utilities (traditionally operated by the State), to mining and basic indus- tries and even supermarkets and service industries. State-owned enterprises are active in virtually every sector of the Peruvian economy. Their size varies from the largest firms in the economy to some of the smallest firms, and their value added accounts for about 20 percent of Peru's GDP. The largest company, PETROPERU (the State-owned petroleum company) had sales of US$1.3 billion and a staff of about 8,700 in 1981. 49. Information on the parastatal sector's financial performance is sketchy. Generally speaking, the financial results suggest that the sector as a whole made small profits during the recent past but that its cash flow, which was affected--inter alia--by price controls and subsidies, was not sufficient to finance the sector's investment. The Government had, therefore, to provide equity and term financing (including guarantees for external loans or the assumption of debts incurred by individual companies), which constituted a heavy burden given the overall fiscal constraint. 50. Administration. The system for administering the parastatal sector is complex and often confusing. The shares of 46 companies are held directly by ministries, while those of the remaining companies are held by other State-owned enterprises such as the National Development Corporation (CONADE), the State-owned Banco de la Nacion or Inversiones COFIDE (ICSA). In many cases, several enterprises and a ministry may hold shares in a single company. They appoint the shareholders' board, which in turn appoints the board of directors, often with ministerial approval. To complicate things further, the President of the Republic has to approve all directors and to appoint the presidents of all boards of directors. These procedures often cause long delays and lend themselves to sending conflicting signals and confusing corporate policies. 51. There are no general and uniform guidelines for the administration of the parastatal sector. Government objectives are usually imposed on an ad-hoc basis by direct intervention in operations. Most of the problems encountered in individual enterprises can be traced to weak management, which, in turn, is the result of an environment characterized by the lack of - 14 - clearly defined objectives, multiple demands for information, overwhelming controls, and ill-planned intervention. Thus, companies are often expected to operate efficiently and make money, yet are subjected to price controls and are called on to expand employment and make politically motivated investments. The Comptroller General's intervention is particularly heavy-handed and pervasive, often creating an atmosphere of suspicion and fear that leads to timid management and over-extended reviews of decisions. Ill-conceived price controls and cross-subsidization as well as deferred payments among State-owned enterprises also affect financial performance negatively and in a way which is difficult to qualify. This situation has improved somewhat with the recent reorganization of the sector (paras. 47 and 54), the relaxation of price controls and more regular price adjustments. In particular, salary restrictions have been eliminated and State-owned companies are in a better position to attract better qualified managers. 52. Many of the less autonomous firms lack the administrative skills that could improve their efficiency. Information systems are generally poor, and few enterprises--mostly manufacturing and service companies--have detailed cost accounting systems. Many firms do not do any planning because they do not have clear objectives. For the same reasons, financial management is weak. Project evaluation is another weak area, and the lack of technical skill makes the decision-making process vulnerable to political pressures. Finally, some companies are facing technical problems because their operations are not balanced or are unnecessarily complex. A case in point is SIDERPERU, the State-owned steel company, which has excess rolling capacity and uses three different technologies in a relatively small plant. 53. Most of the problems related to the parastatal sector are concen- trated in companies like public utilities that have been subjected to exten- sive State involvement ("high-intervention companies"). Those companies that have experienced lower levels of Government interference ("low-intervention companies")--mostly manufacturing and service companies--have been run like private companies except for certain procedures like bidding and auditing and--to some extent--for certain corporate policies like pricing and financing. Many of these low-intervention companies are likely candidates for being sold to the private sector within the Government's divestiture strategy (para. 17), while the high-intervention companies are likely to be retained in State-ownership. While the common problems affecting the whole parastatal sector can be tackled through relatively minor policy changes--like streamlinig of bidding and auditing requirements--the deeper rooted problems of the high-intervention firms require more assistance on a company-by-company basis. The proposed project would concentrate on improv- ing management of the companies to be retained in State-ownership both through a holding-company approach (paras. 54 and 64) and individual tech- nical assistance at the company level (para. 65). 54. Policy initiatives. The Government is preparing the ground for streamlining the administration of the parastatal sector. In 1981, the National Development Corporation (CONADE) was established to coordinate and promote all Government activities in support of investment in private and State-owned enterprises. It has two fully-owned subsidiaries: COFIDE, the State development finance corporation, and INVERSIONES COFIDE (ICSA), an equity holding company. ICSA is an offspring of COFIDE. It was set up to promote investment through Government equity holdings and to take over all - 15 - equity investments previously held by COFIDE. It is planned that eventually all State shares will be transferred to ICSA, which will assume the role of a holding company providing general guidance for and exercising financial control over all State-owned companies. Most of the problems mentioned in para. 51 could be solved by granting greater autonomy to the individual firm. This would be achieved by the holding company approach which ICSA is embarking on and the selling of companies to the private sector. Obviously, this requires an upgrading of skills at the company level and firm guidance from ICSA, which itself needs to be strengthened. The problems mentioned in para. 51 need to be addressed on a company-by-company basis and following an in-depth analysis of specific problems, The proposed project would provide assistance for both (para. 60). Previous Bank Activities 55. Until now, the Bank has approached public sector management problems in Peru on an individual project basis. Recent project lending in petroleum, power, water, and transport has included technical assistance to tackle specific management issues in the corresponding sector institutions. The 1979 US$115 million Program Loan also included technical assistance on a somewhat broader scale, e.g., to strengthen tax administration, public investment planning, and--to some extent--debt reporting. The proposed loan, however, would be the first effort to address the management problem on a broad front, basically through the development of adequate management tools and of an adequate compensation system for managers. PART IV - THE PROJECT 56. To address Peru's economic development problems and particularly its needs in infrastructure, agriculture, mining, and the social sectors, the present Government drew up an ambitious development program, which calls for annual investment levels equivalent to eight-nine percent of GDP as compared to five-six percent in the recent past. Executing this program represents a challenge given not only the country's resource constraints and corresponding difficulties of overall economic and financial management but also the public sector's limited implementation capacity. As was mentioned in Part III (paras. 36 and 37), the Government has experienced difficulties in managing this expanded investment effort, particularly in sectors like transport, education, and health. In view of these problems and in light of the Bank's large contribution to the country's development efforts, in September of 1981 the Government requested technical assistance from the Bank to strengthen its management capacity throughout the public sector. The Bank explored with UNDP the possibility of UNDP financing--or at least cofinancing--for the proposed project. However, no UNDP resources were available for this purpose. 57. Preliminary discussions of the proposed project were held during the 1981 Annual Meetings in Washington, with follow-up discussions having taken place in Lima towards the end of October. The appraisal took place in November-December, 1981, with a post-appraisal in February 1982. There is no separate Staff Appraisal Report. Annex III contains supplementary project data. Negotiations were held in Washington from July 22-27, 1982. The Peruvian delegation was headed by Mr. German Suarez, Project Coordinator, of MEFC. - 16 - Project Objectives 58. The proposed project's main goal is to provide technical assistance which would result in improved management throughout Peru's public sector so as to enable the country to make better use of its scarce financial and human resources. While the project aims at providing the Government with more adequate management tools and managerial staff, the Government--in a parallel effort--intends to reduce the size of the public sector through sale of enterprises to the private sector and, thus, to release some managerial talent tied up in the control of these enterprises for alternative uses. 59. By tackling key management problems at the level of the Central Government and of State-owned enterprises and, thus, contributing to the improved use of a large share of the country's total resources, the project aims at more effective socio-economic development. Project Description 60. The project would consist of: (a) technical assistance to the Central Government for the design and implementation of a program budgeting system; for the design and implementation of an adequate compensation system for managers; and for improvements in key policy areas such as debt management, investment planning, and taxation; (b) technical assistance to the parastatal sector for upgrading and strengthening of ICSA to make it an effective holding company for State-owned enterprises and for improved management of a selected number of individual State-owned enterprises; and (c) training (including scholarships to foreign universities) for public sector managers through existing or newly developed courses at two private higher education institutions and at the Central Bank. 61. Technical Assistance to the Central Government. This component would account for about 69 percent of total project costs. It consists of three subcomponents. The first subcomponent deals with the design and imple- mentation of a program budgeting system for the Central Government. While the system would cover the whole Central Government, it would focus on the central budget office in MEFC (DGPP), on the presidency of the council of ministers, which is responsible for the implementation of large regional development projects, and on five other key development agencies, i.e. the ministries of agriculture, transport, health and education as well as cooperacion popular, the agency in charge of local public works projects with high labor intensity and the participation of the local work force. Under this subcomponent, a team of internationally recruited consultants, in collaboration with Peruvian staff in planning and budgeting-related positions, would design an improved planning and budgeting system and implement it while preparing and executing the 1983 budget. Particular emphasis would be given to monitoring and control of Government expenditures to ensure optimum resource use. - 17 - 62. The second subcomponent deals with the design and implementation of an adequate Government compensation system, particularly for senior man- agers. It would include: (i) advice to INAP and the national commission studying civil service salaries to support their efforts in overhauling the overall civil service compensation system (see para. 46); (ii) the design and establishment of a Senior Executive Service (SES) as a separate personnel and compensation subsystem not subject to the limitations of the civil service pay scale; and (iii) assistance in the recruitment of managers for SES posi- tions within the Central Government and its dependent agencies as well as for management positions in State-owned enterprises. The SES would be financed through a Foundation (para. 46), which would also recruit SES personnel and manage their placement within the public sector. 63. Under the third subcomponent, technical assistance would be extended to MEEC and the Central Bank in the following key policy areas: (i) debt management, through the design and implementation of a comprehensive and efficient computerized debt reporting system (including private-sector and short-term debt); public investment, through monitoring of project execu- tion and the evaluation of large and controversial projects to determine their soundness or, if not justified, to provide the Government with a rational basis to resist pressure groups lobbying for their execution; and macroeconomic and financial management, through such studies as the reform and opening up of the financial system, streamlining of tax incentives, rationalization of state and local taxes, strengthening of tax administra- tion, and short-term macro-economic indicators. 64. Technical Assistance to the Parastatal Sector. This second project component would account for about 24 percent of total project costs. It con- sists of two subcomponents. The first deals with the institutional strength- ening of ICSA. Through technical assistance to ICSA and training of its staff, a system of management by objectives backed by a computerized manage- ment information and monitoring system would be designed and implemented. This would allow ICSA to act effectively as holding company for the State- owned companies under its supervision and to provide effective guidance for and financial control of, these companies. The new management approach would essentially rely on close monitoring of performance against agreed targets as opposed to the present system of ad-hoc interventions by a multitude of supervisory institutions (paras. 50 and 51). ICSA's management information system would be designed in such a way that it could eventually be expanded to cover all State-owned enterprises. This subcomponent would also include a survey of all major State-owned enterprises to determine the most critical ones and their most pressing problems. This would be the basis for the second subcomponent. 65. The second subcomponent deals with technical assistance to a small number of critical State-owned enterprises, which would be retained in State- ownership. The firms would be selected following the results of the survey mentioned in para. 64, and the assistance would tackle the main weaknesses of these firms and improve their performance. To the extent necessary, the technical assistance would also include engineering advice to improve produc- tion facilities or provide a better balance between different production units within an enterprise. - 18 - 66. Training. This third and last project component would account for about seven percent of total project costs. It would support ongoing and/or new public sector management training programs (i) by financing foreign professors who would teach public administration in Peru; and (ii) by providing scholarships to management or public administration schools abroad. The assistance would be channeled through two private Peruvian higher education institutions, the Escuela Superior de Administracion de Negocios (ESAN) and the Universidad del Pacifico, as well as through the Central Bank. Both ESAN and Universidad del Pacifico have well established management training programs of good quality, which cater mainly to the private sector. Under the project, they would expand their programs and develop curricula--based on a survey of market needs--geared to strengthening the public sector. The Government would finance the studies for the development of the curricula, while foreign professors to teach selected courses would be provided with Bank financing. The Central Bank has a long standing overseas scholarship program for future managers in both the Central Bank and other public sector institutions. This program would be complemented by the project's scholarship component. 67. The programs and studies to be executed under the project are expected to help tackle the root problems of a public administration system that has historically developed in a largely unstructured way and in an intricate legal traditionwith countless laws, decrees, regulations and other rules, mostly with ad-hoc purposes. The system has built up considerable inertia and is suffering from the lack of competent staff at all levels. The implementation of the proposed changes will be difficult. However, the Government is fully committed to carry out the reforms included in the project. It considers Bank support for the proposed institutional changes essential to take advantage of outside experience and advice. Through its studies subcomponent, the project affords the Bank an opportunity to continue the policy dialogue in such important areas as public investment, tax system and administration, financial liberalization, and external debt management. Terms of reference agreed upon between the Government and the Bank for assistance under the most important components to be initiated immediately or already under way are contained in Annex VI; they supplement the project description contained in paras. 60-66. Project Execution 68. MEFC--represented by a project coordinator who reports to the Vice-Minister of Finance--would be in charge of overall supervision and coordination of project execution. The Central Government and training components of the project would be executed directly by MEFC given its key responsibility for economic and financial management, while the parastatal sector component would be executed by CONADE/ICSA in their roles as coordinator and holding company for State-owned enterprises, respectively (para. 54). Other public and private institutions would also participate in the project in subsidiary roles: the Presidency of the Council of Ministers, the Ministries of Agriculture, Transport and Communications, Health, Education, and Cooperacion Popular in the implementation of the program budgeting system; the Public Sector Foundation (para. 46) and INAP in the overhaul of the compensation system and the implementation of the SES; ESAN and Universidad del Pacifico as well as the Central Bank in the training component; and individual State-owned enterprises in the parastatal technical - 19 - assistance component. CONADE and ICSA would enter into a Project Agreement with the Bank to ensure efficient project execution. The other participating institutions except the Foundation--i.e. the Central Bank, INAP, ESAN, and Universidad del Pacifico--would enter into a Complementary Participation Agreement with the Borrower and the Bank which would spell out in detail their respective obligations under the project. The establishment of the Public Sector Foundation, in a manner satisfactory to the Bank, to support the SES would be a condition of loan effectiveness (Section 6.01(b) of the draft Loan Agreement). The entering of the Foundation into contractual arrangements with the Government, which would include, inter alia, a program of the Foundation's activities and provisions for its adequate funding in a way satisfactory to the Bank, to ensure the effective execution of the SES component, would be a condition of disbursement of this component (Section 3.02 and Schedule 1, paragraph 4 (iii) of the draft Loan Agreement). 69. To oversee the project's execution, the Government--following a Bank recommendation--appointed a capable full-time project coordinator who, in turn, is assisted by an advisory group. The project coordinator and advisory group, all satisfactory to the Bank, would be maintained under terms of reference, also acceptable to the Bank, for the whole period of project execution (Section 3.03 of the draft Loan Agreement). The coordinator reports to the Vice-Minister of Finance, is the prime contact for all concerned parties on project matters, and is responsible for the coordination of all actions necessary for project implementation such as the drafting of terms of reference, contracting of consultants, and the provision of logistical support for the consultants. The advisory group consists of senior officials of MEFC and CONADE who would rally the necessary institutional and logistical support for the project and help to resolve problems that might impede the successful implementation of the project, including the provision of counterpart personnel and funding. The proposed organizational set-up for project execution is charted in Annex IV. In addition, Bank staff would provide guidance for all critical decisions and closely follow project execution. 70. The overall project design would be kept flexible, and the scope and timing of each of the components would be periodically reviewed by the Government and the Bank. Should difficulties arise or Government priorities change, funds could be reallocated within the project to ensure achievement of its overall objectives. To ease project implementation further, extensive use is foreseen of experienced consulting firms which could take over complex assignments, thus reducing the number of contracts to about 15-20 and minimizing the burden of supervision. Moreover, standardized contracts and streamlined procedures would be used to facilitate administration. Nevertheless, it is expected that the proposed project would require intensive Bank supervision. 71. The execution of the project requires certain institutional changes. Planning and budgeting units in the key ministries referred to in para. 61 were recently merged into sectoral programming and budgeting offices. Moreover, the appropriate institutional setting and framework for the central budget office would be studied under the project considering alternative solutions within MEFC including the possibility of creating a new budgeting entity with ministerial rank. The Government and the Bank would review the consultants' recommendations, and agreed changes suggested by - 20 - these consultants, if any, would be put into effect by June 30, 1983 (Section 3.07(b) of the draft Loan Agreement). Project Cost and Financing 72. Total project costs (net of taxes) are estimated at US$21.0 million, of which US$8.2 million or 39 percent represents foreign exchange. This cost estimate includes physical contingencies amounting to ten percent of the base cost and price contingencies, which are based on expected international inflation, in dollar terms, of 8.0 percent in 1983, 7.5 percent in 1984, and 7.0 percent in 1985. Total financing required for the project is US$21.2 million, including a US$150,739 capitalized front-end fee. The proposed Bank loan of US$10.2 million would cover about 48 percent of the project's estimated total financial requirements, including all foreign exchange costs (US$8.2 million), subsistence expenses of foreign consultants in local currency (US$1.8 million), and the front-end fee. The bulk of local costs (US$9.3 million) would be covered by the Government, with the remainder (US$1.7 million) being provided by ICSA and the State-owned companies benefiting from the program. Bank financing of local currency expenditures is proposed for two reasons: (i) to facilitate the execution of consultants' contracts which include compensation for local subsistence expenses; and (ii) to increase the Bank's share in total financing to secure sufficient influence on project design and execution. 73. Consulting services account for almost 98 percent of the foreign exchange cost of the project. It is estimated that a total of 484 staff-months in external consulting services is needed to execute the project. The average cost per staff-month is estimated at US$16,300, including subsistence and travel. While this unit cost may appear high, it is reasonable considering that most of the jobs would be provided by leading international management consulting firms and investment-banks. Contracts were, for example, awarded to Management Analysis Center Inc. (MAC) of Cambridge, Mass. for the implementation of the program budgeting system and to Merrill Lynch of New York for the implementation of a debt-management system. 74. While the Government would be the borrower, the portion of the loan earmarked for the parastatal sector (US$2.7 million) would be onlent by the Government in dollars to ICSA (US$500,000) for institutional strengthening and--through CONADE--to other State-owned companies (US$2.2 million) for technical assistance. Onlending to ICSA, CONADE and the companies would be at the same interest as the proposed loan but on shorter maturity of five years, including one year of grace (Section 3.01(c)ii of the draft Loan Agreement). The Government would approve all technical assistance activities for the parastatal sector and assume the foreign exchange risk for these operations. The shorter maturities of these subloans are in line with the expected pay-off from the benefits of the technical assistance, i.e., improved financial performance. Repayments of the principal of the loans to ICSA and CONADE would be made to a special Government account earmarked for support of the Public Sector Foundation. 75. Retroactive financing to February 1, 1982 of up to US$1 million is proposed to start the program budgeting, studies, and ICSA components in a timely fashion (Schedule 1, paragraph 4(i) of the draft Loan Agreement). - 21 - Procurement and Disbursement 76. The proposed loan would mainly finance consultants' services and some computer software and office equipment as well as training by expatriate professors and overseas scholarships. Selection of consultants--whose qualifications and terms and conditions of employment would be satisfactory to the Bank--would be according to the Bank's "Guidelines for the Use of Consultants" (Section 3.04 of the draft Loan Agreement). To facilitate the contracting of consultants, standard contracts reviewed by the Bank would be used with terms of reference agreed upon by the Government and the Bank. Standard computer software packages and office equipment would be acquired based on a comparison of price quotations by at least three qualified suppliers (Section 2.03 of the draft Loan Agreement). 77. Loan disbursement is estimated to take about three years. Disbursements on a substantial scale are expected to start immediately after loan effectiveness, as several components--such as program budgeting and debt management--have already been launched and would be retroactively financed. The Bank loan would be disbursed 100 percent against services of internationally recruited consultants (including travel expenses and localsubsistence) and against directly imported goods and computer software, but only 70 percent against expenditures for imported goods purchased from local distributors. The proposed loan would also cover 100 percent of the foreign exchange expenses of the training component, i.e.,tfor foreign professors and scholarships. Project Benefits and Risks 78. The project intends to tackle public sector management problems on a broad front in some of Peru's strategically most important public sector institutions. Strengthened management of these units is expected to result in a better use of Peru's scarce financial and human resources and improved control of public sector activities in both financial and physical terms. With its policy study components, the project would also help to improve overall economic management. The project is further expected to improve the execution of public investment projects through better monitoring, as well as their improved preparation and planning in the future. It also aims at greater autonomy and more flexible management of State-owned enterprises, which should result in increased efficiency of this important sector of the economy. The project constitutes an important complement to the Bank's active lending program and the ongoing intensive policy dialogue with Peru. 79. The project would study and propose ways of tackling many of the root problems of Peru's public administration, which have developed over many years. This is a difficult task that entails the risk that the project might fail on political grounds. However, the project has awakened widespread interest and support within the country, and the Government is fully committed to it and determined to carry through on the reform measures proposed under the project. The project also enjoys the full support of the President of the Council of Ministers, who is also Minister of Economy, Finance and Commerce. This risk is, therefore, minimal. Moreover, the project's complexity and the involvement of a number of Government and private institutions constitute an implementation risk. The proposed project organization (para. 68 and Annex IV), however, is expected to minimize this - 22 - particular risk. Periodic reviews by the Government and the Bank of the project's scope and timing (para. 70) as well as close Bank supervision of the project should further help to keep its implementation risks manageable. PART V - LEGAL INSTRUMENTS AND AUTHORITY 80. The (i) draft Loan Agreement between the Republic of Peru and the Bank; (ii) draft Project Agreement between the Republic of Peru, CONADE, and ICSA; (iii) the draft Complementary Participation Agreement between the Republic of Peru, the Bank, the Central Bank, INAP, ESAN, and Universidad del Pacifico; and (iv) the Report of the Committee provided for in Article III, Section 4 of the Bank's Articles of Agreement are being distributed to the Executive Directors separately. 81. The main features of the draft Loan Agreement are referred to in the text of the report and are listed in Annex III. A special condition of loan effectiveness would be the establishment of the Public Sector Foundation. The entering by the Foundation into contractual arrangements with the Government, which would provide--inter alia--for its adequate funding, would be a condition of disbursement of the SES component. 82. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATIONS 83. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachments September 1, 1982 Washington, D.C. -23- ANNEX I Page 1 of 5 TABLE 3A PERU - SOCIAL INDICATORS DATA SHEET PERU RIEPEEC GROUPS (WEIHID AvE5ls STFOU9ANID SQ. Y11.) - lST RCET ESTIMATE) LOA12.2 MOST RECENT MIDDL InC KIDDLE INCCHE AGRICULTURAL 305.5 1960 /b 1970 /b zSTUEATE /b LATIN AMERICA 4 CARIBBEAN EOPE GNP PER CAPITA (US5) 290.0 470.0 930.0 1902.0 2323.9 ENERGY CONSUMPTION PER CAPITA (KILOGAXS OP CDAL EQUIVALENT) 417.3 662.7 716.1 1259.9 2107.4 POPULATION AND VITAL STATISTICS TOPULATION, HID-YEAR (THOUSADS) 10181.0 13461.0 17379.0 URBAN POPULATION (PERCENT Q TOTAL) 46.3 57.4 67.4 65.7 47.9 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 27.3 STATIONARY POPULATION (MLLIONS) 48.8 YEAR STATIONARY POPULATION IS EACHED 2080 POPULATION DENSITY PER SQ. KM. 7.9 10.5 13.2 35.2 83.3 PER SQ. KM. AGRICULTURAL LAND 33.3 45.0 55.5 92.5 155.4 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 43.6 44.3 42.9 39.7 31.1 15-64 YRS. 52.0 51.7 53.8 56.1 61.2 65 YRS. AND ABOVE 4.4 3.9 3.5 4.2 7.7 POPULATION GROWTH RATE (PERCENT) TOTAL 2.4 2.8 2.6 2.4 1.6 URBAN 5.1 4.9 4.2 3.8 3.5 CRUDE BIRTH RATE (PER THOUSAND) 46.5 41.5 35.9 31.4 23.6 CRUDE DEATH RATE (PER THOUSAND) 20.0 14.8 10.9 8.4 9.2 GROSS REPRODUCTION RATE 3.3 3.0 2.4 2.1 1.6 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. .. USERS (PERCENT OF MARRIED WOMEN) .. .. POOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 96.0 102.0 77.0 110.0 116.0 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 98.3 97.2 97.5/c 108.4 125.1 PROTEINS (GRAMS PER DAY) 64.0 60.1 59.27T 66.0 92.7 OF WHICH ANIMAL AND PULSE 28.0 25.1 24.07w 34.0 35.9 CHILD (AGES 1-4) MORTALITY RATE 37.8 20.2 9.5 5.6 9.2 HIIALTH LIFE EXPECTANCY AT BIRTH (YEARS) 47.4 53.1 58.1 64.2 67.6 INFANT MORTALITY RATE (PER THOUSAND) 162.9 119.7 87.7 64.2 65.1 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL 14.6 35.0 48.3 65.6 URBAN 30.2 58.0 60.0 78.9 RURAL 0.8 8.0 25.0 43.9 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. 36.0 34.0 59.3 URBAN .. 52.0 51.0 75.3 RURAL .. 16.0 .. 30.0 POPULATION PER PHYSICIAN 2011.7 1904.9 1532.4/c 1617.3 1105.4 POPULATION PER NURSING PERSON 2205.0/d 1000.5 676.17? 1063.5 634.4 POPULATION PER HOSPITAL BED TOTAL 425.1 469.6 538.3/c 477.4 286.8 URBAN 273.8/e 524.9 426.47T 679.8 192.0 RURAL .. 3055.2 5705.2/c 1903.4 ADMISSIONS PER HOSPITAL BED .. 19.0 23.0/c 27.3 20.0 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 4.9 4.8/f URBAN 4.8 4.97 .. RURAL 4.9 4.67?. AVERAGE NUMBER OF PERSONS PER ROOM TOTAL 2.3 1.9/f URBAN 2.0 1.77? RURAL 2.7 2.47? ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL 26.0 32.0/f URBAN 50.7 54.37/?f RURAL 4.2 2.77T - 24 - ANNEX I page 2 of 5 TABLE 3A PERU - SOCIAL INDICATORS DATA SHEET PERU REFERENCE GROUPS (WEIGHTED AVERA9ES - MOST RECENT ESTIMATE) - MOST RECENT MIDDLE INCOME MIDDLE INCOME 1960 /b 1970 /b ESTIMATE /b LATIN AMERICA & CARIBBEAN EUROPE EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 83.0 103.0 112.0 104.3 102.4 MALE 95.0 111.0 115.0/c 106.4 107.1 FEMALE 71.0 96.0 io8.0T 103.3 99.0 SECONDARY: TOTAL 15.0 30.0 50.0/c 41.3 60.2 KALE 18.0 34.0 53.07W 40.4 66.4 FEMALE 13.0 26.0 46.0/c 41.8 54.0 VOCATIONAL ENROL. (X OF SECONDARY) 19.9 17.1 18.3/c 33.7 31.6 PUPIL-TEACHER RATIO PRIMARY 33.6 35.5 40.2 29.9 25.8 SECONDARY 12.3 17.3 29.2 16.7 22.2 ADULT LITERACY RATE (PERCENT) 61.0 72.5/f 79.7 79.1 75.9 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 7.8 17.1 18.6/c 42.8 51.0 RADIO RECEIVERS PER THOUSAND POPULATION 108.0 135.1 147.5 270.5 157.2 TV RECEIVERS PER THOUSAND POPULATION 3.2 29.3 50.2 107.7 123.7 NEWSPAPER ('DAILY GENERAL INTEREST") CIRCULATION PER TNOUSAND POPULATION .. 123.3 51.4/c 63.7 112.3 CINEMA ANNUAL ATTENDANCE PER CAPITA 6.4 .. .. 2.7 4.0 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 3186.8 3891.8 5149.2 FEMALE (PERCENT) 21.2 20.8 23.2 24.4 36.6 AGRICULTURE (PERCENT) 52.5 48.0 40.0 31.3 38.7 INDUSTRY (PERCENT) 19.6 18.4 18.5 23.9 25.9 PARTICIPATION RATE (PERCENT) TOTAL 31.3 28.9 29.6 33.6 44.5 MALE 49.6 45.8 45.5 50.4 56.3 FEMALE 13.2 12.0 13.7 16.8 32.8 ECONOMIC DEPENDENCY RATIO 1.5 1.7 1.6 1.3 0.9 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS 39.0/g * HIGHEST 20 PERCENT OF HOUSEHOLDS 64.4ft 61.0/f LOWEST 20 PERCENT OF HOUSEHOLDS 2.5/g 1.97 .. LOWEST 40 PERCENT OF HOUSEHOLDS 8.O7 7.07 . POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 235.0/c RURAL .. .. l8o.07o 184.1 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 293.0/c 518.0 RURAL .. .. 200.07W 371.1 406.6 ESTIMATED POPULATION BELOW POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 49.0/c RURAL .. .. Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1978 and 1980. /c 1977; /d 1964; /e 1962; /f 1972; /g Personal income within labor force. May, 1982 - 25 - AINNEX I Ortw" mfct Page 3 of 5 V-o &I.Uft*m) rio 4-o ItO* oo Itate worll1y 7096.1 thOe mototfmtltfota anltlW l.it ab-ld llIl 004ra Ot 0 ft tatI-- oatoodt aampratoooao o I-Vat.o mtaodsrdford dotfaittir -a totpt toa by lit f-oo -otrfe ftroftto tiett. f-Oeb data Ite. The foaaoo 6opa or (1) the tae 0*00 grop of It... mbjt ro-tfy sod (2) a Iooootey potap atoP -4 smthot Ooto m-5og t,-o It- 'f. rorarr prop of Otto sob- ot o _opfoot fat "I0gb Lote Oil ttP-rto-" 3-oP taoo 0Kidtdl. Lacos Worh Attila mad atoddlo ftm f. tbom. omboam atfara tto-altatifotial ( ie~ cole-ot ooatt dlat rh -e mo. --otoo1smghe ttlasir tsar for moat tadfo.-a mm mim oty at oat todltooot 00 0 tiedr- a tt ft theh tLol-ty tad ro.tormobti t oopsC or tats otrrsa.morat ol kttlt faretaer t lI folow;1979 d.ta. Ibaoli-rota to-r.Roytlo..obLhob.aao. p. -ooatf stoOP by -t III.,ta pbpmtLOts. ortmitatraaiPrtatfpotl) tami- Ott? P70CfO 0$ COP Hpr -tapr totaa orr oso rr. -1o-t- Ita ta.- ata. trebled. tora h--ttma. etd,r iao .- bth totatd by oa- - --oto sabed to Woll tok ALI-e 11978-0 loaf.); L06O, aol matrot ctom ttperata jy troffs by I phatafeis tOo by liP7t, otot t98l -4r1 -La --tto. ors _idLt. stoo obiob afLt a-,atfs-a mo- dotta mad proald. 0 1..110 te-e of todol. foetlftt.a. Por t0000- iflz't Coh,lfPT lOf PER COPtA - o.aol .oao.r.. ofr.. to rop (too riti-7000 rortoptl tat-ad VW.prttptam lb pil. bootParl.aloo tIl-fmo tbaasola) A.h Of Jolt 1; 1960. 1970. tad 1960 ttSft llttror ltlollo ofotha sroo-y f fa t-ta -obblttay of oto soth AfaoOlomo, bo-to o bIgot -y orfy ta f toctajo to --U0 ooerle lol0. ItlO, aol 1904 loot oh. b-ombod faE- retolproo taoalooloo Peolrttoooo boetate toobMGto ofIoometta-oa. oho Mot1-org os totl, .o.oaltt topI too. ar arI bftrle ortllt too yfrottlt taf.. .rolog. optiot.Polog ald oa-p oata_a_ o --7tlo dtaorr ltmrtfa trId ot pols of altor% l_.l tato ....otr aco to -of a,ttoaL. a bltb- aeoot-a0 sloboatoope abatttomo OAttott lorot 7010 itilo) tto.obs a oa lotd a looa fe oreoeyaablrt0a 7. yta -orpradoaofaolboffaaatttbrritp-atrtgqorot s at-rg Sr.ttoo7yap..ooo,-,Isfoo lotarypop. -toatir 0It'all to ator too ao , moto- ` ol-t stta,ml modtoat tI (ii Fi bii otl ta ialot tat-a, ~u - itad aloatboogistao to.r-.r.lmota)i Ott atra .raytre opctr;m frmot fI 7t opaaetlyl Iot o trtoto or draot toabt ar a lote rIifr "I aeh of ptmtrlyb a ar-io a toib yea 2toh owlbti tart of roltar at iot-iltyrooo -ooat- F-Idoomobo - -aoat aaegdtmf - llaootd ta liar; me,edmo eret -ra.1ooolatormftoo a,amr tapaa pinty -toateerar abor oifl horahd olyo 17 to I? Y-at af ag; toafofottoaso.o..o ao-I 196 . lllao 1707 data Oat-fmheotf ptary olaat-oy-toa suooa rato... to~ fftlatoo ooOtrotor oattat -thOldtoa ((I-IA y-sr), -eaf o-ft.o (15-beryalaeooyot)advddy0tta fteceaoti Ilaiat; 1964, 1070. oaf 190t dora. Ooflttrtt - o ot) Liart-a adults tabl. to oaad ad o1tito lal-t fer 0050-60. loob,al110i.Pmrgrtoo Ute thomo. oalre7-Oaa.r taaaem aa proola 1060 1910. or 1980 dot.-oltrottlo tr-d0 Doarh boo (pt;, aom - )oooo (otto ea tload o&t-arjlaOotmo)tttoa.dpelto)-11 oppya at roottt for radi pooltaa bI. 10)0 to = 1000 dart.. bodaratarlohtopotaaod at -1 _oolrta ealde al r .a oallp fi-a-e-aataoaa sao to 00. 1707. aal 190. m roaodaaattlItwt0 roart~~~~~~~~ ofotdhotgao(5O ara b o tt-aro ttote taattataaota( thootdoooleio) - faa rh em oae al- rot arotd atotoIa tot at doop.toloioaof "atlygrasol atooar aaamsbea deho.eaaotetlabot POlO 0000 tolflltllt to ha 'laIty ft ~~~~~~~~~~~~~~~~~~~~~It "P,"atIt Loaa toot I10 eh rt -dapp roloel.0 A4grgah pt dota of- tbooar t oedaL-00 O oolatt -ti ldutr Odor atlhtm; t90bt'5, 1970, aOl 1910 d-fo. hao oe artlttoao)-foafatyato rooa all pa dy. A"oetlohlt aPltmoprit(tat praooot. tlorobo oa_-moalo; 1960. 1bIt aol Itadar rooro,odthoo to aaao Oat -aytta di0 fIr 0001bt- ,ae- o trol (ottof o to ao fotot om pa tttt- 5f attoa laor4 tot. eatstalo-ttod by PAD boot at taolf -ttol a -et-o ot-7 dthioRoUptao f tatoL obot 'feet 196._1070 ai 19th, .lot. Ifatl rr;1961-65. 1970 tad 1977 Oa 1161, 1'oI sad 1081 data. tot appy ofloa ytflay POc ootf oftoo fa deffod to iboa. to- attryttoatoMtt otoa,mat fatmoi tahar tore a allaoaooa of67 grao of ttal tootrto ea laoool 10toaaa t otfo 0001900. 170). ard fOft) dots. Thesear Itas 00M U,oe pat.I pet Is ot yotar Prora of ttol 10fa_ta ho bo 0010*1 P-otota. Thtaa otot - ofOotot oItV_ LIoto o b etoalo ollo -aed. A aaotloaoea aao cooafort- -ath. fop- at h.. d O otb ided Oooteooooo at P- htoo aaotro 15 oo. 05 ald o doatd .ooa locatyl 101-05. 1970 _ 000 tOll I (ot.t rht ot~tt lho foot. trla lot. Ooatod fart lift rbira; 100, 1010 tad 1980 Iota,o ththlo Ottt toataoy 0 tttttoero - ottttoant f yoa- aO life -emjelo Ob tilog totfoof- -r tro oteatoo toe f Patley lo-1I, at bierb; 1960. 1970 aol lWOf oot., a- oldh1 ha -oteprto4 atha -a.td-rat,irtto-t 1000tpao)y00 pa toaf)-too eab flfar rr atyo ot.st ooooeFoerlot oa-lot a totf-oia o oa ofotPar tb-.adIoaboh;16.27ao1)0dt.haooparpfatrttltrhtto-folblwtobaaom hataas Oa a at trota yylta)-011,otr 0 oa -to trtaal IdeOoo Ilt~ pi.. -m-earla -ot.O-d eL.rtoat art faort oroooothrtdfror ha70rtr raatto a r tt attt, odlot-ant fapbltb.or ooo ot, Ltota fto ooboo at ar tetaaaba aom atlld tooly tobat cotaoeOoraetoof tht h-oobad aai trl _- foot fPop tlota (tbo aol coof i oo0htt Ia ato boat to mttaO a do-poauotoat tf df E ,ft 40totl5 Sooetof Pro. (rt tIL. oetso 11 tato) atac by -t I.r -tp.ta I0 pitaao fobIr,optiaoiloa, aot diapa-alimy boololt lb allato ti i ieaa.abm at ett-aotece..a aaa rtt modeooo-mtfo byoato-btaooymtos 0 btoym of pifptetma ta ahyimS-L . tar tottallarsoas.-y = Paplofo pr taotooo- Ppoatoo1.10404 10 o*o ot pttitgohj-tooat o,oom ot e1fa PERU ANNEX I Page 4 of 5 ECONOMIC DEVELOPMENT DATA A CT UA L ESTIMATED PROJECTED GROWTH RATE (1 p.a.) 1977 NATIONAL ACCOUNTS 1965 1970 1975 1976 1977 1978 1979p 198op 1981 1985 1965-76R 1976-80 1980-85 1977 (rnilliosn of US dollars at 1977 prices) GDP Gross Domestic Product 8902.5 10693.6 13376.8 13647.1 13639.6 13570.8 14079.0 14516.4 15082.5 18792.5 3.9 1.6 5.3 100.0 Gains from Terms of Trade -610.9 130.0 -246.9 -179.4 0.0 -235.9 679.9 872.1 317.0 558.2 n.a n.a n.e 0 Groas Domostic Incoae (GDY) 8291.6 10823.6 13129.9 13467.7 13639.6 13334.9 14758.9 15388.5 15399.5 19350.7 4.4 3.4 4.7 100.0 Imports 1840.2 2190.1 2985.4 2697.7 2706.8 1888.7 2086.8 3004.6 3455.3 3724.7 3.5 2.7 4.4 19.8 Exports 2314.3 2616.8 1906.9 1908.8 2129.5 2431.2 2730.1 2578.5 2632.6 2979.6 -1.7 7.8 2.9 15.6 Exports, Term of Trade Adjosted 1703.4 2746.8 1660.0 1729.4 2129.5 2195.3 3410.0 3450.6 2949.6 3537.8 0.1 18.9 0.5 15.6 Resource Gap, Termas of Trade Adjusted (-: surplus) 136.8 -556.7 1325.4 968.3 577.3 -306.6 -1323.2 -446.0 505.7 186.9 n.0 n.a n.e 4.2 Total Consuoption 6461.3 8669.0 11313.3 11694.8 12172.2 11272.3 11633.5 12543.7 12990.5 15787.9 5.4 1.8 4.7 89.2 Investment 1967.1 1597.9 3142.0 2741.2 2044.7 1756.0 1802.2 2398.8 2914.7 3749.7 3.1 -3.3 9.3 15.0 Domestic Savings 1830.3 2154.6 1616.6 1772.9 1467.4 2062.6 3125.4 2844.8 2409.0 3562.8 -0.3 12.5 4.6 10.8 j/ prelimrinary PRICES IN US DOLLARS (1977 - 100) Export Price Index 32.9 46.5 87.4 90.6 100.0 97.7 148.6 175.4 164.3 243.4 Import Price Index 44.7 44.3 100.4 95.7 100.0 108.1 119.0 131.0 146.7 205.1 Terms of Trade Index 73.6 105.0 87.1 94.7 100.0 90.4 124.9 133.9 112.0 118.7 Annual Average Exchange Rate (Soles per S) 26.8 38.7 40.8 57.4 83.8 156.3 224.6 288.7 416.0 n.a GDP BY SECTOR LABOR FORCE LABOR PRODUCTIVITY OUTPUT, LABOR FORCE AND PRODUCTIVITY In Mil. of US Percent of Growth Percent of Growth Percent of Growth IN 1973 PRICES Dollars Total Rate In Thoosands Total Rate In US Dollars Av8' Rate 1970 1980 1970 1980 70-80 1870 1980 1970 1980 70'80 11 1980 1970 980 ____0 Agriculture (incl. fishing) 1534.2 1457.8 17.3 11.8 -0.5 2011.9 2248.0 48.0 40.0 1.1 762.6 648.5 36.1 29.4 -1.6 Industry (mining, mnof., electr., constr.) 3226.3 4712.4 36.5 38.1 3.9 769.1 1037.2 18.4 18.5 3.0 4194.9 4543.4 198.6 206.2 0.8 Services (all others) 4084.8 6198.1 46.2 50.1 4.3 1407.6 2328.3 33.6 41.5 5.2 2902.0 2662.1 137.4 120.8 -0.9 Total/Average 8845.3 12368.3 100.0 100.0 3.4 4188.6 5613.5 100.0 100.0 3.0 2111.8 2203.3 100.0 100.0 0.4 CENTRAL GOVERNMENT FINANCE ESTIMATED PROJECTED (as percent of Current GDP) 1965 1970 1975 1976 1977 1978 1979 1980 1981 1 82 Current Revenue 13.2 14.6 14.0 13.4 13.5 14.3 16.0 18.4 16.6 17.2 Current Expenditure 12.4 12.1 14.4 14.8 16.9 15.8 12.8 16.2 16.5 15.7 Current Savings 0.8 2.5 -0.4 -1.4 -3.4 -1.5 3.2 2.2 0.1 1.5 Capital Expenditures 3.9 3.7 4.5 4.5 3.5 3.1 3.7 4.7 4.6 4.1 External Assistance (Net) 1.0 0.5 2.3 1.8 3.0 0.4 -0.7 0.3 0.3 0 CURRENT EXPENDITURE DETAILS A C T U A L (as percent of Total Current Expenditure) 1968 1973 1976 1977 1978 DETAIL ON 1981/85 Development Plan PUBLIC SECTOR I__Tot_I Edocation 30.6 27.9 22.9 18.1 16.1 INVESTCMNT PROGRAM Million Health 9.0 6.3 6.2 4.7 6.0 1981 Prices Agriculture 3.6 4.4 1.8 1.3 3.4 Other Economic Services 3.2 4.0 5.2 3.2 2.7 Agriculture, Fishing 1557.2 14.1 General Services (including defense) 46.4 42.7 46.9 54.1 45.2 Industry, Tourism and Mining 924.1 8.3 Interest on Debt 5.4 11.3 10.8 15.1 24.1 Energy 2688.1 24.2 Other 1.8 3.3 6.2 3.5 2.5 Transport and Communication 2547.2 23.0 Social and Local Interest Projects 3367.6 30.4 Total Current Expenditures 100.0 100.0 100.0 100.0 100.0 T 0 T A L 11084.2 100.0 MONEY AND CREDIT 1973 1974 1975 1975 1976 1976 1977 1977 1978 1978 1979 1979 1980 1981 p (Bilioss of Soles outstanding at the end of period) Money end Quasi-Money 96.3 120.0 141.8 142.4 166.3 166.8 216.2 220.5 344.1 361.1 686.4 725.9 1305.1 1973.5 Bank Credit to Public Sector 27.2 26.9 49.7 60.3 101.4 115.3 149.3 198.9 262.2 303.7 204.1 237.0 371.5 682.2 Sank Credit to Private Sector 73.2 84.5 108.2 109.8 134.5 136.0 167.8 173.8 233.1 243.2 382.8 442.5 801.8 1521.8 Underlying Exchange Rate (S/. per US9) 38.7 38.7 38.7 65.0 65.0 85.0 85.0 160.0 160.0 225.0 223.0 390.0 390.0 390.0 Money as Percent of GDP 25.0 24.3 22.6 22.7 20.0 20.1 18.9 19.3 18.7 19.6 19.9 21.1 23.5 20.7 Conmer Price Indes in Soles (1977-100) 37.5 43.9 54.3 72.4 100.0 157.8 264.7 421.4 Annual Percentage Change In: Consumer Price Index in Soleei 9.5 16.9 23.7 33.5 38.0 57.8 67.7 59.2 75.4 Sank Credit to Public Sector 53.7 -1.2 84.8 68.2 29.5 31.8 -32.8 56.8 83.6 Rank Credit to Private sector 27.7 15.5 28.1 22.4 23.4 34.1 57.4 81.2 89.8 * * S.. 7: . r~~~ .. .. .. ANNEX II Page 1 of 6 THE STATUS OF BANK GROUP OPERATIONS IN PERU A. STATEMENT OF BANK LOANS (as of March 31, 1982) 1/ Amount Loan (less cancellations) Number Year Borrower Purpose Bank Undisbursed -- US$ million --- 27 loans fully disbursed 409.2 949 1973 Republic of Peru Education 24.0 1.9 1196 1976 Republic of Peru Transport 76.5 22.0 1215 1976 Republic of Peru Power 35.6 4.9 1281 1976 CENTROMIN Mining 39.7 4.7 1283 1976 Banco Vivienda Urban Dev. 21.6 9.6 1358 1977 COFIDE Industry 35.0 3.9 1403 1977 Republic of Peru Agriculture 25.0 21.3 S-11 1978 Republic of Peru Preinvestment 8.8 2.5 1771 1980 Republic of Peru Irrigation 56.0 51.1 1806 1980 PETROPERU Petroleum Prod. 32.5 27.0 1812 1980 Republic of Peru Rural Dev. 15.0 14.4 1888 1980 Republic of Peru Preinvestment 7.5 5.1 S-19 1980 SIDERPERU Technical Asst. 5.0 4.7 1963 1981 CORPAC Aviation 58.0 57.6 1968 1981 COFIDE Industry 60.0 60.0 2018 1981 ELECTROPERU Power 25.0 25.0 2064 1981 Central Reserve Bank Industry 26.0 26.0 2091 1982 Republic of Peru Transport 93.0 93.0 2117 1982 PETROPERU Industry 5.3 5.3 Total 1,058.7 of which has been repaid 183.5 Total now outstanding 875.2 Amount sold 18.3 of which has been repaid 18.3 - Total now held by Bank 875.2 Total undisbursed 440.0 1/ Since March, the Bank has approved four further loans to Peru: (i) US$40.6 million for a Lima Water Supply Project, presented to the Executive Directors on May 11, 1982; (ii) US$40.6 million for an Agriculture Research and Extension Project, presented to the Executive Directors on May 20, 1982; (iii) US$81.2 million for a Sixth Power Project, presented to the Executive Directors on June 15, 1982; and (iv) US$81.2 million for a Petroleum Production Enhancement Project, presented to the Executive Directors on August 10, 1982. - 29 - ANNEX II Page 2 of 6 B. STATEMENT OF IFC INVESTMENTS (as of March 31, 1982) 1/ Type of Year Obligor Business Loan Equity Total 1960 Ilidustrias Reunidas, S.A. Home Appliances 0.2 - 0.2 1960 Luren S.A. and Ladrillos Calcareos, S.A. Bricks 0.3 - 0.3 1960 Durisol del Peru, S.A. Building Materials 0.3 - 0.3 1960; 1962 Fertilizantes Sinteticos, S.A. Fertilizers 4.1 - 4.1 1962; 1968 Cemento Andino, S.A. Cement 2.3 0.2 2.5 1964; 1967 Cia. de Cemento Pacasmayo Cement 1.1 0.5 1.6 1975 Southern Peru Copper Corp. Mining 15.0 - 15.0 1978 Cia. de Minas Buenaventura Mining 2.0 0.5 2.5 1980 Cia. Minera San Ignacio de Morococha, S.A. Mining 2.7 0.5 3.2 1981 Sogewiese Leasing 3.0 0.1 3.1 1981 Consorcio Energetico de Power Huancavelica Transmission 4.5 - 4.5 Total gross commitments 35.5 1.8 37.3 less cancellations, terminations, repayments and sales 18.0 0.4 18.4 Total held by IFC 17.5 1.4 18.9 Total undisbursed incl. participants' portion 8.2 - 8.2 I/ Since March 31, 1982, IFC has approved a US$15.0 million loan investment in Palmas del Espino, a palm oil project located in the Ceja de Selva area of Peru, as well as a US$3.5 loan and equity investment in the mining company Gran Bretana, a polymetallic mining project located in the Sierra region. - 30 - ANNEX II Page 3 of 6 C. STATUS OF PROJECTS IN EXECUTION 1/ (As of March 31, 1982) Loan 949-PE: Education Project; US$24.0 million Loan of December 5, 1973; Effective Date: March 5, 1974; Closing Date: June 30, 1982. The project has experienced serious difficulties and is now about 40 months behind schedule owing to start-up problems including weaknesses in the project unit and cumbersome bureaucratic procedures. In order to resolve these problems, the project has been modified to reduce its scope, increase the Bank disbursement percentage, create a revolving fund and improve administrative procedures (see President's Memorandum R79-59 of March 27, 1979). As a result, the pace of project execution has improved substantially over the past year, and disbursements now stand at about US$22.1 million. Loan 1196-PE: Lima-Amazon Transport Corridor Project; US$76.5 million Loan of May 27, 1976; Effective Date: August 18, 1976; Closing Date: December 31, 1982. Construction of the project's river ports component is almost completed, although with some cost increases because of start-up difficulties. There were serious delays in contracting for civil works under the road component because of slow procedures and limited Government implementation capacity. These problems have been largely overcome and construction is now underway on all project components. The project has been modified so as to reallocate funds for the purchase of road maintenance equipment and eliminate improvement of those road sections which cannot be completed within a reasonable time (see President's Memorandum R79-88 of April 27, 1979). Loan 1215-PE: Fifth Power Project; US$36.0 million Loan of September 20, 1976; Effective Date: November 18, 1976; Closing Date: December 31, 1982. The slowdown of demand in ELECTROLIMA's market in the wake of economic difficulties as well as procurement problems, have delayed the project's power distribution component and completion is expected about a year behind schedule. Serious delays were also experienced in getting the technical assistance program of the loan underway; however, all consultants have now been retained, and with strong support from the current staff in the Ministry of Energy and Mines the program is now well advanced. Because of the delays, the Closing Date has been extended to end-1982. 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. - 31 - ANNEX II Page 4 of 6 Loan 1281-PE: CENTROMIN Mining Project; US$40.0 million Loan of December 6, 1976; Effective Date: May 24, 1977; Closing Date: December 31, 1982. Initiation of the copper mining component was delayed by about two years because of the lack of local counterpart funds owing to the recession of the late 1970s. CENTROMIN is now proceeding with the project with support from additional Government counterpart funds, as well as a supplementary IDB loan and commercial bank borrowing to cover inflationary cost increases. Engineering, procurement and mine development activities on this part of the project are well-advanced. The mine-water treatment plant has now been completed. Loan 1283-PE: Urban Sites and Services Developmer.t Project; US$21.6 million Loan of October 12, 1976; Effective Date: January 10, 1977; Closing Date: December 31, 1982. Administrative difficulties, particularly the need to reconcile Peruvian procedures with Bank guidelines for procurement, delayed the project by about one year. All components are now moving ahead well and disbursements stand at US$12.0 million. Because of past delays, however, the Closing Date has been extended to end-1982. Loan 1358-PE: Industrial Credit Project; US$35.0 million Loan of January 28, 1977; Effective Date: March 30, 1977; Closing Date: June 30, 1983. Peru's economic recession led to a contraction of investment and to lower than anticipated demand for the loan in the late 1970s. In view of this, the Borrower -- the National Development Bank (COFIDE) - agreed to finance projects identified by commercial banks and other financial institutions, which would also guarantee these loans and provide some loan servicing. With this action and improving economic conditions over the past two years, demand for the credit line has increased, and it is now almost fully committed. Loan 1403-PE: Irrigation Rehabilitation Project; US$25.0 million Loan of May 20, 1977; Effective Date: August 2, 1977; Closing Date: June 30, 1983. Because of the weakness of the project unit, there was a long delay in completing the designs for civil works in the six valleys where irrigation systems are to be improved. The unit has been substantially strengthened over the past few years, the design phase is now complete and construction has started. The project, however, is now several years behind schedule. Loan S-11-PE: Water Supply and Power Engineering Project; US$8.8 million Loan of December 22, 1978; Effective Date: June 27, 1979; Closing Date: December 31, 1982. The main components of this project consisted of the feasibility study for the Mantaro water transfer scheme and a master plan for Lima's water system. The Mantaro study has been completed, and all other components are being implemented satisfactorily. "age 5 of 6 Loan 1771-PE: Lower Piura Irrigation Rehabilitation Project; US$56 million Loan of February 4, 1980; Effective Date: May 28, 1980; Closing Date: December 31, 1985. Project execution is gaining momentum, 'rfle implementation of most of the Bank-financed components of the project has begun or is in the process of being started. Loan 1806-PE: Petroleum Rehabilitation Project; USF32.5 million Loan of April 28, 1980; Effective Date: September 30, 1983; Closing Date: January 31, 1983. The project got underway more slowly than expected because of the weak implementation capacity of PETROPERU. All project components, however, have now begun and execution should improve in the coming months. Loan 1812-PE: Puno Rural Development; US$15 million Loan of April 28, 1980; Effective Date: July 9, 1981; Closing Date: June 30, 1985. Although there was a delay in making this loan effective, project activities are now underway. Consultants for the extension program have been hired and irrigation system designs are being prepared. Loan 1888-PE: Bayovar Engineering and Technical Assistance Project; US$7.5 million Loan of August 21, 1980; Effective Date: December 22, 1980; Closing Date: June 30, 1983. Consultants have been contracted and the final feasibility report for the phosphate fertilizer project is being reviewed. Loan S-19-PE: SIDERPERU Technical Assistance Project; US$5.0 million Loan of December 15, 1980; Effective Date: April 16, 1981; Closing Date: June 30, 1985. A consultant's report evaluating SIDERPERU's expansion plans has been reviewed. A plan of action to deal with the findings of this report is being discussed with SIDERPERU.. Loan 1963-PE: Aviation Development Project; UO"Fq.0 million Loan of August 19, 1981; Effective Date: January 21, 1982; Closing Date: December 31, 1986. Procurement activities for equipment have begun. Loan 1968-PE: Second Industrial Credit Project; US$60.0 million Loan of August 19, 1981; Effective Date: February 25, 1982; Closin Date: June 30, 1985. About US$10 million of this loan has thus far been committed. - 33 - ANNEX II Page 6 of 6 Loan 2018-PE: Power Engineering Project; US$25 million Loan of August 19, 1981; Effective Date: February 25, 1982; Closing Date: June 30, 1985. Final design of a number of projects included in this loan, including the Yuncan hydroelectric project, are now underway. Loan 2064-PE: Small-Scale Enterprise Project; US$26 million of June 16, 1982; Effective Date: August 17. 1982: Closing Date: December 31, 1985. This loan was approved by the Executive Directors on December 8, 1981. Loan 2091-PE: Eighth Highway Project; US$93 million Loan of June 4, 1982; Effective Date: ; Closing Date: June 30, 1986. This loan was approved by the Executive Directors on February 16, 1982. Loan 2117-PE: Oil Refinery Engineering Project; US$5.3 million Loan of Effective Date: ; Closing Date: June 30, 1985. This loan was approved by the Executive Directors on March 25, 1982 and is expected to be signed shortly. Consultants are now being selected. - 34 - ANNEX III PERU PUBLIC SECTOR MANAGEMENT PROJECT SUPPLEMENTARY PROJECT DATA SHEET Section I: Timetable of Key Events (a) Time taken by country to prepare project: 2 months (b) Project prepared by: Ministry of Economy, Finance and Commerce with Bank assistance (c) First presentation to the Bank: September 1981 (d) Preappraisal of the project: October 1981 (e) Departure of Appraisal Mission: November 1981 (f) Completion of Negotiations: July 27, 1982 (g) Planned Date of Effectiveness: November 1982 Section II: Special Bank Implementation Actions None Section III: Special Conditions (i) As condition of loan effectiveness, the Government would establish the Public Sector Foundation so as to implement the SES. The entering of the Foundation into contractual arrangements, satisfactory to the Bank, with the Government to ensure the adequate execution of the SES component, would be a condition of disbursement of this loan component (para. 68). (ii) A project coordinator and the advisory group, satisfactory to the Bank and operating under terms of reference acceptable to the Bank, would be maintained during the whole period of project execution (para. 69). (iii) The consultants would make recommendations as to the appropriate institutional setting for the program budgeting system at the central level. The recommendations would be reviewed by the Government and the Bank, and the agreed institutional changes would be implemented by June 30, 1983 (para. 71). (iv) US$2.7 million of the Loan would be onlent by the Government in dollars to ICSA, CONADE and state-owned companies at the proposed loan's standard variable interest rate and for five years including one year of grace. Repayments would be made to a special Government acount earmarked for support of the Public Sector Foundation (para. 74). - 35 - ANNEX IV PEFU TECHNICAL ASSISIANCE PRDJECG 10 STENUIHEN PUBLIC SECIOR MANAGEMENT PRaJECT OIGANIZATION Vice-Minister of Finance Pro e | Advisory| - - - - - - - - - - - - -_, - - - - I Central Gjvernment Part i Parastatal Part NYSC Vice-Ministry ODE of Finanoe IINVERSLIOES Individual , _ I C~~~~~ ~ ~~~~~~OFILE State-Owned ] :_ ~~~~~~ ~ ~~~~~~~~(ICSA) Canparnies DGPP INAP Executives ESAN, DGAE MA (Compensation Fouidation Uni del DaI MIC System) (Senior Pacifico, DGCP ME Executive BCR BCR MS Service and (Ttaining) (Magement Cbop Pop Recruitment) Support (Prcgram Studies) Budgeting) BCR = Central Bank Coop Pop = Cooperacion Popular DGAE = Directorate of Econanic Affairs within MEFC DGCP = Directorate of Public Credit within YEFC DGI = Directorate of Investment within MEC DGPP = Directorate of Budget within MEFC Mk = Ministry of Agriculture ME = Ministry of Education MEFC = Ministry of Economy, Finance and Canmerce NS = Ministry of Health mm = Ministry of Transport and Canmunications - 36 - ANNEX V PERU TECHNICAL ASSISTANCE PROJECT TO STRENGTIIEN PUB.IC SECTOR MANAGEMENT COST - ESTIMAT. Unit Cost Total Cost IBRD Staff-Months (USS tbousand) (USs million) Financing COMPONENTS Foreign Local Foreign-/ Locald/ Foreign Local Total (US$ million) (1) Progran and Budgeting System (including project coordinator) 125 1,425 16.8 4.0 1.7 6.1 7.8 2.1 (2) Compensation System and SES 65 165 10.2 4.0 0.6 0.8 1.4 0.7 (3) Technical Assistance in Key Policy Areas (incl. office equipment of US$100,000) 140 200 12.2 4.0 1.3 1.3 2.6 1.8 (4) Institutional Strengthening of Inversiones COFIDE (incl. computer soft- ware of US$80,000) 30 40 15.1 4.0 0.4 0.3 0.7 0.5 (5) Assistance to Critical Companies to be Retained in State-Ownership 124 288 17.7 4.0 1.8 1.6 3.4 2.2 (6) Training in Public Sector Management 0.8 0.3 1.1 0.8 Base Cost 484 2,118 16.3 4.0 6.5 10.4 17.0 8.1 Contingencies 0.7 1.0 1.7 Price Escalation 13.5% 0.9 1.4 2.3 Total Cost 8.2 12.8 21.0 10.0 1/ Including travel and subsistence. 2/ Including support staff and logistical support for foreign consultants. ANNEX VI - 37 - Page 1 of 10 PERU TECHNICAL ASSISTANCE PROJECT TO STRENGTHEN PUBLIC SECTOR MANAGEMENT (February 1982) Terms of Reference for Major Project Components 1. Design and Implementation of a Program Budgeting System Background Peru introduced program budgeting in the mid-1960s and gradually expanded its application throughout the Central Government agencies. From its beginning, the system had serious shortcomings which prevented it from becoming a useful management tool to achieve policy goals and control Govern- ment expenditures. Planning and budgeting was not sufficiently integrated, and the analytical input was deficient and did not allow the translation of policy goals into meaningful operational targets which could be monitored. At present, the Government is facing considerable fiscal con- straints and is embarking on a financial program which would allow to keep public finances and the country's balance of payments manageable. An important element in this effort is the strengthening of public sector management, inter alia, through improved budget control in line with the Government's development priorities. While the Government already started a thorough review of the 1982 budget to accommodate the country's development needs within the limitations of available resources, a rational programming and budgeting process has to be institutionalized for the future which would allow the Government to manage its resources in line with its macroeconomic and sector priorities. Objectives of external assistance In an effort to improve its management system, the Government intends to implement a program budgeting system at the level of the Central Budget Office and in key Sector Agencies. The system would have to be adapted to the Peruvian reality to become fully operational and achieve its main purpose, which is to allocate the Government's resources in line with its development priorities and to adequately monitor and control this process. The external assistance solicited herewith would have to: (i) help define an appropriate institutional framework for the program budgeting system; (ii) implement an adequate programming and budgeting system while preparing the 1983 budget; (iii) set up a computerized information and monitoring system to support the budget preparation, execution, and control process; - 38 - ANNEX VI Page 2 of 10 (iv) train Peruvian staff in charge of programming and budgeting at both the central and agency level and provide general guidance during the year following the implementation of the new program budgeting system. Specific tasks Under the general supervision of the Vice-Minister of Finance and directly reporting to the Director General of the Budget (who will be assisted by an advisor not to be provided by the consulting firm), the consultants will perform the following specific tasks: (i) design--within the first month of the assignment--of an appropriate institutional framework for the su-cessful implementation and operation of a program budgeting system. The framework should provide flexibility for adjustments to changing needs and would be the basis for a general budget law; (ii) start of implementation of a new program budget based process along with preparation of 1983 budget both at the central level (within the Ministry of Economy, Finance and Commerce - MEFC) and at the level of key sector agencies (Ministries of Transport, Agriculture, Education, Health, and Cooperation Popular) (within the legal timeframe for budget preparation by the end of August 1983). This task would require the following: At the level of MEFC -- guidance and coordination for the preparation of a normative macro-economic and sector framework including overall resource availabilities and operationalization of macro and sector policy goals; -- guidance for the preparation of concrete budget guidelines for all sectors including budget ceilings (alternative levels to reveal agencies' priorities); At the level of the five key sector agencies -- guidance for the preparation of current and capital budgets within alternative spending ceilings; -- guidance for the operationalization of sector policy goals in form of quantitative targets against which sector performance can be monitored; - guidance for the analytical justification of budget requests; (iii) implementation of a computerized information system to facilitate the budgeting process and the financial and physical mDnitoring of budget execution. The system will have to be adapted to the Peruvian reality and be sufficiently flexible to accomodate more complete and complex information as the program budgeting system progresses. Initially the information requirements would have to be as modest as possible to provide for expeditious reporting and to allow close monitoring; - 39 - ANNEX VI Page 3 of 10 (iv) training of Peruvian staff in programming and budgeting techniques through continuous guidance in day-to-day operations and occasional seminars and workshops. The objective of the training is to enable Peruvian staff to prepare the 1984 budget as well as to execute and monitor the 1983 budget with only minor, sporadic guidance during key events from external advisors. Training (by senior advisors) should also be extended to the members of the Joint Budget Commission of the Peruvian Parliament to facilitate the dialogue between the Executive and Legislative Branches; (v) guidance mentioned under (iv) as needed during 1983 when preparing the 1984 budget and executing the 1983 budget. Logistics, timing and manpower The consultants will work as advisors in MEFC and the sector agencies previously mentioned. Formal report writing will be kept to a minimum, and most of the services will be provided in the form of accompanying advice and training. Secretarial and other support staff will be provided as needed by the Government. Most of the assistance would be required between April 1982 (when the preparation of the 1983 budget will be initiated) and January/February 1983 (when the approved 1983 budget will have to be translated into operational budgets at the sector level, and the final information on the execution of the 1982 budget will have to be processed). Some general assistance will be required throughout 1983. It is estimated that a total of about two staff-months would have to be allocated to task (i), about 80 staff-months to tasks (ii) and (iv), about 25 staff-months to task (iii) and about 12 staff-months to task (v). 2. Design and Implementation of a Senior Executive Service (SES) Recruitment of Managerial Staff - Terms of Reference Background Peru's civil service was established in its present form in 1950. It has developed into a complex system with some 350,000 employees, a large number of regulations, and an exceedingly complicated personnel structure and compensation system consisting of an excessive number of hierarchical layers, career streams, and a large number of pay components. During the recent past, when Peru experienced considerable economic and fiscal strain, civil service compensation lagged substantially behind inflation, and real salaries were eroded. The erosion was particularly marked at the higher pay levels in spite of the recently introduced supergrade structure for managerial positions. With a maximum of about US$1,200 per month, Government compensation is clearly out of line with the private sector, and the resulting loss of managerial talent has had negative effects on the quality of administration throughout the public sector. ANNEX VI - 40 - Page 4 of 10 To overcome the most acute problems the Government appointed a limited number of managers to key positions at close to market salaries with funding provided by public sector agencies that are not subject to the limitations of the civil service salary scale. This solution, however, is inorganic, partial and uneven. At present, the Government is embarking on a financial program aimed at impr^ving public finances and the country's balance of payments. An important element in this effort is the strengthening of public sector management through inter alia, the implementation of an improved personnel structure and compensation system to attract and retain adequate managerial talent. Objectives of external assistance The requested external technical assistance should help the Peruvian Government to design and implement a personnel structure and compensation system for management positions within the Central Government and its dependencies which would allow them to (i) attract and retain qualified managers at senior levels; (ii) provide incentives to senior managers to perform in line with the government's program objectives; and (iii) reward and promote managers based on an evaluation of their performance. Moreover, assistance is requested for setting up and operating a recruitment system for managers throughout the public sector (including State-owned enterprise-) based on appropriate selection criteria. While the compensation system should be compatible with the general principles of civil service compensation, the Government plans to establish a Senior Executives Service (SES) as an independent subsystem which will be administered outside the civil service through the newly established and autonomous Executives Foundation. By operating the SES outside the civil service, it will not be subject to the limitations of the civil service pay- scale. However, it would be highly desirable in the longer run to integrate the SES as a supergrade structure with particular features into the overall compensation system of the civil service so as to make it part of the overall personnel structure and career path of the Government. Specific tasks The consultants will work under the general supervision of the Vice-Minister of Finance and in close coordination with the Director General of INAP--the National Institute of Public Administration, which--in a parallel effort--is working on a review and homologation of the civil service compensation system. They will perform the following specific tasks: (i) design and implement a SES as a personnel structure and compensation system separate from, yet compatible with, the civil service system; (ii) build up a minimum administrative capacity at the Executives Foundation to operate the SES effectively; ANNEX VI -41- Page 5 of 10 (iii) determine the appropriate scope of the SES, i.e. sectors and institutions as well as number of hierarchical levels to be included, balancing management needs with fiscal constraints; (iv) design the appropriate structural features for the SES, including entry criteria for both incumbents and people outside the public sector, as well as a compensation package commensurate with private sector compensations; in this context, consideration should be given to the feasibility of a young professional entry level into the SES for promising university graduates; (v) design a performance evaluation system based on specific and objective performance criteria as well as a corresponding system of merit pay increases, promotions and appeals. In addition to the above tasks, the consultants would--over a period of at least two years--assist in the recruitment of managers both for the Central Government's SES and for other management positions in the public sector. They would also train Peruvian staff in personnel administration and provide the necessary institutional support for the newly established Executives Foundation to ensure that the SES would be effectively operated. Logistics, timing and manpower The consultants will work as advisors in the Ministry of Economy, Finance, and Commerce and in close coordination with the staff of the Executives Foundation and INAP. The design of the SES would have to be fully documented in form of a manual, with particular emphasis on the evaluation procedures. Secretarial and support staff will be provided as needed by the Government. With regard to private sector compensation, Price Waterhouse con- ducts regular surveys of compensations in key management and non-management positions in Peru's private sector. The consultants would have to reach an agreement with Price Waterhouse to have access to this information. Most of the assistance would be required during the second half of 1982 while the training could go into 1983 and recruitment assistance would be considered through 1984. It is estimated that a total of about 25 staff-months would be allocated to tasks (i)-(v), some five staff-months to training through workshops and seminars, another five staff-months to accompany the actual implementation of the SES, and about two staff-years to assistance in recruitment. 3. Strengthening of Debt Management Terms of Reference Background During the recent past, Peru has incurred a large external debt, the servicing of which constitutes a heavy burden for the country's balance of payments. Most of the debt is long term and public or publicly guaranteed, A_NTNEX VI - 42 - 7Page 6 of 10 but private and short-term debt are also important. At present, several control mechanisms are in place to keep the public and publicly guranteed long-term debt manageable. Private and short-term debt are handly monitored at all. Several institutions are involved in the control of public and publicly guaranteed debt at the level of both the establishment of priorities and overall ceilings for debt contraction and the review of individual loan agreements. The main responsibilities are with the Directorate General for Public Credit (DGCP) and the Interagency Debt Committee. The present system suffers from several shortcomings, in particular (i) fragmented responsibilities; (ii) inadequate control of short-term and domestic public credit which often require subsequent consolidation in the form of long-tern external loans; (iii) incomplete and late reporting; (iv) inadequate monitoring of current transactions; and (v) insufficient knowledge of private sector external indebtedness. Objectives of External Assistance The Government is embarking on a major project to strengthen management throughout the public sector. One of the key elements is the implementation of a program budgeting system and improved monitoring of Government spending. As part of this overall effort management of the country's external debt will also be strengthened. Improved debt management essentially depends on the achievement of the following objectives: (i) the establishment of an adequate and responsive institutional setting for the effective control of all transactions that involve actual or potential obligations of the country with respect to the rest of the world; (ii) the establishment of an effective and computerized debt reporting and monitoring system; and (iii) the training of staff in charge of managing and monitoring external debt. Specific tasks Under the general supervision of the Vice-Minister of Finance and directly reporting to the Director General of Public Credit, Lhe consultants will perform the following specific tasks: (i) assess the present debt management and reporting system including the specific responsibilities of DGCP, Debt Committee, Central Reserve Bank, Banco de La Nacion, and COFIDE; (ii) design an optimum institutional setting to achieve full control of all public sector indebtedness (both long and short tern); (iii) design and implementation of an effective reporting, monitorIng and projection system to cover all external debt transactions with adequate classification, both at the central level (DGCP) and at the level of individual agencies (particularly state-owned enterprises and financial institutions); - 43 - ANNEX VI Page 7 of 10 (iv) design a system that would allow effective statistical coverage of private sector external debt transactions; (v) computerization of the debt reporting and monitoring system to provide for timely information to management; (vi) provide the basis for meaningful analysis of debt information, particularly in view of the public sector's and country's ability to pay; and (vii) on-the-job training of DGCP staff and training through workshops and seminars to allow it to operate the new systems effectively. Logistics, timing and manpower The consultants will work as advisors in the Ministry of Economy, Finance and Commerce, and--as needed--with other public sector agencies. Reporting will include a full description of institutional responsibilities, flow of information and full documentation of the computer software. Ideally all reporting should be summarized in an external debt manual for future guidance and reference. Secretarial and other support staff will be provided by the Government as needed. It is estimated that the tasks can be executed within about six months and that a total of about 20 staff-months would be required (including training of Peruvian staff). 4. Review of tax incentive system Terms of reference Background As in many other countries, tax incentives for a number of different purposes have been introduced in Peru over time without following a coherent design pattern. The rather inorganic growth has resulted in a tax incentive system which is (i) fisically enerous; (ii) difficult to administer; and (iii) not very effective with regard to the achievement of overall policy goals. Because of its complexity the incidence of the system is not transparent and side effects on employment, income distribution, etc. are hardly known. Objective of the study The 1982 budget law gave a mandate to the Government to reform and streamline the existing system of tax incentives. To pursue this general goal, the study should: (i) provide a clear and comprehensive picture of the existing tax incentive system with an assessment of its costs and benefits; (ii) based on the Government's macro and sector policy goals, design alternative systems which are easy to administer and cost- effective; and ANNEX VI - 44 - Page 8 of 10 (iii) design a monitoring system to allow the continuous evaluation of the system's costs and benefits and to provide a basis for the continuous adaptation of system to changing realities and policy goals. Specific tasks Under the general supervision of the Vice-Minister of Economy and directly reporting to the Director General of Taxation, the external advisors would work, together with an appropriately staffed Peruvian team to: (i) draw up a full inventory of all existing tax incentives with a complete description of underlying policy goals and of the mechanisms of operations; (ii) analyze the system of underlying policy goals with regard to their mutual compatibility; (iii) assess the cost and benefits of the existing tax incentives system based on an analysis of tax incidence; (iv) based on a consistent system of policy goals (which would have to be checked with all relevant policy makers), design alternative systems of tax incentives. The most important design criteria would be the following: -- cost effectiveness with regard to the achievement of policy goals taking side effects on employment, income distribution, and international transfers (compatibility of different tax systems) explicitly into account; -- easiness of administration and safeguards against abuse; -- compatibility with obligations under international agreements; (v) design a computerized information system that allows close monitoring of any new system. The system would have to provide information on the fiscal costs (revenues foregone or direct expenditures) of the incentives and on the net benefits (in terms of the incentivated actions' degree of achieving the Government's multiple policy goals). The system should be adapted to the Peruvian reality and be flexible to accomodate more complete and complex information as experience grows. Initially the information requirements would have to be as modest as possible to provide for expeditious reporting and allow close monitoring. Reporting The consultants would have to prepare interim reports on tasks (i) to (iii), as well as on task (iv) and (v) and a full report with all findings and recommendations. The recommendations resulting from the performace of task (iv) would constitute the basis for new legislation. Some assistance would, therefore, be required in translating the recommendations into draft legislation. ANNEX VI - 45- Page 9 of 10 Logistics, timeframe, and manpower The study should start as soon as possible but not later than _ The final report should be ready within six months after initiating the study. The external consultants will be supported by a team of qualified Peruvian professionals and support staff. Access to all necessary and relevant information will be provided by the Government including support for the contacts in the private sector. The external consultants should have strong microeconomic backgrounds and previous experience in the assessment and design of tax incentive systems. Some support by a systems specialist may also be required for the setting up of the computerized monitoring system. 5. Institutional Strengthening of INVERSIONES COFIDE Terms of Reference Background INVERSIONES COFIDE S.A. (ICSA) was established by Legislative Decree No. 206 of June 12, 1981 as State-owned corporation under private commercial law. Its fundamental goal is to contribute to the country's development through equity participation in companies and thus promote productive capital formation. ICSA is an offspring of COFIDE, the State-owned Development Finance Corporation. COFIDE in its original form (prior to Decree 206) performed the role of a development bank both through lending and equity participation. All of COFIDE's equity holdings were transferred to ICSA, thus separating the two functions. ICSA now holds the State's share in 30 companies and may--in due time-- take over all State shares in any company. Both COFIDE and ICSA are fully-owned subsidiaries of CONADE, the National Development Corporation. ICSA is a recently created institution with still very limited administrative capacity and human resources. To face its responsibility as a holding company of State-owned enterprises it will need considerable expansion and strengthening. This would apply even more if its responsibilities were rapidly expanded to cover the whole parastatal sector, including large and complex operations like PETROPERU, SIDERPERU or ELECTROPERU. Objectives of external assistance The requested external technical assistance should help (i) to define ICSA's role within the framework of the State entrepreneurial activity, (ii) to develop ICSA into a viable institution capable of assuming the role of a holding company for State-owned enterprises and providing guidance to these enterprises as well as effectively controlling their operations, and (iii) to build up ICSA's role in the preparation and promotion of the sale of certain State-owned enterprises. In accordance with the Government's new approach to State-entrepreneurial activity, these ANNEX VI - 46 - Page 10 of 10 companies would be granted as much autonomy as possible within the overall framework of Government's economic and sector policies and priorities and within a set of agreed performance targets. ICSA would, therefore, have to build a capacity to monitor and evaluate the enterprises' performance within this framework. Specific tasks Under the general supervision of the President of CONADE, and closely working with the General Manager of ICSA, the consultants will perform the following tasks: (i) define ICSA's role in operational terms within the legal framework of the State's entrepreneurial activities; (ii) design and implement an adequate organization structure to allow ICSA to cope effectively with its role as holding company for State-owned enterprises, as well as to prepare and to promote the sale of selected companies; (iii) design and implement a system for managing the companies held by ICSA by objectives (within the framework of the Government's economic and sector policies); (iv) design and implement a computerized management information and monitoring system in line with management by objectives and assist the companies in improving their information systems so as to provide ICSA with adequate information; (v) train ICSA staff to allow them to manage companies effectively in line with Government objectives and to make effective use of the computerized monitoring system; and (vi) conduct a survey of about State-owned enterprises to identify their main weaknesses. The results of the survey would help to define specific needs for in-depth assistance to a number of individual enterprises--a task that would be performed under separate contracts. To the extent possible, the management information and monitoring system should be designed so as to allow the use of standard computer soft- ware packages. Logistics, timing and manpower The consultants will work as advisors in CONADE in close coordina- tion with staff of the Ministry of Economy, Finance, and Commerce, other ministries and individual companies as appropriate. The management informa- tion and monitoring system would have to be fully documented. Otherwise, formal report writing will be kept to a minimum. Secretarial and support staff will be provided as needed by CONADE. Most of the assistance would be required during the second half of 1982 while some training, and possibly the company survey, could be performed in 1983. It is estimated that a total of about 20 staff-months would be needed for tasks (i)-(v) and an additional ten staff-months for task (vi).
Groupe de la Banque mondiale · President's Report
Peru - Public Sector Management Project
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