Peru - Urban Sites and Services Development Project

The World Bank FOR OFFICIAL USE ONLY Peport No. 6331 PROJECT PERFORMANCE AUDIT REPORT PERU URBAN SITES AND SERVICES DEVELOPMENT PROJECT (LOAN 1283-PE) June 30, 1986 Operations Evaluation Department 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. ABBREVIATIONS BVP u Banco de la Vivienda del Peru ELECTROLIMA - Electricidad de Lima EMADI = Empresa de Administracion de Inmuebles (MVC) ENACE - Empresa Nacional de Edificaciones (MVC) ESAL = Empresa de Saneamiento de Lima ESAR m Empresa de Saneamiento de Arequipa MITI - Ministerio de Industria y Turismo MS - Ainisterio de Salud MVC = Ministerio de Vivienda y Construccion ORAMS - Oficina Regional de Apoyo a la Movilizacion Social PCR - Project Completion Report by LAC Regional Staff PCRBVP = Project Completion Report by BVP SEAL = Sociedad Electrica de Arequipa SEDAPAL m Sistema de Agua Potable y Alcantarillado de Lima SEDAPAR = Sistema de Agua Potable y Alcantarillado de Arequipa "* W LD 6N0 F OFFMCAL in3 ONLY TIE WORLD SANK Wastwlon.DC 30433 U..A Opesetum lushsmM June 30, 1986 MEMORANDUM TO THE EXECMTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Audit Report on Peru Urban Sites and Services Prole'.t (Loan 1283-PE) Attached, for information, is a copy of a report entitled "Project Performance Audit Rep6rt on Peru Urban Sites and Services Project (Loar 1283-PE)" prepared by the Operations Evaluaticn Department. A::a :c._ .: ! This document has a resticted distnbution and may be used by recipients only in the performance of their official duties Its contents may not otherwise be disclosed without World Bank authorizatin FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT PERU URBAN SITES AND SERVICES DEVELOPMENT PROJECT (LOAN 1283-PE) TABLE OF CONTENTS Page No. Basic Data Sheet............................................. 11 Evaluation Summary............................ v PROJECT PERFORMANCE AUDIT MEMORANDUM I. BACKGROUND .................... . . . . . . . . . . . . . . . 1 - The Economic Context .................... ............... 1 - Urban Development ..................................... 2 II THE PROJECT .. . . . . . .. . . . ............. ........... 3 III. PROJECT IMPLEMENTATION AND ACHIEVEMENTS ... ................. 5 - General . . . . . . . . . . . . . . . . . . . . . . . .. 5 - Physical Accomplishments and Their Impact .....,........ 6 IV. POINTS OF SPECIAL INTEREST ....oo............. 10 - Procurement ......................................... 10 - Project Costs, Financing and Disbursements .....*....... 10 - Cost Recovery . . . . . . . . . . . . . . . . . . . . .. 11 - Econonic Evaluation *..o.......o.....e... ......... 12 - Sustainability .. ...... ..,,.............. 13 V. THE ROLE OF THE BANK ....... .. ... , ,................... 13 VI. CONCLUSIONS AND LESSONS TO BE LEARNED ...........ose....... 14 CHART - Disbursements Profile - Estimated and Actual ............ 17 ANNEX Borrower Comments ........... .......... ................. 18 PROJECT COMPLETION REPORT I. Introduction ************************ **** *** * * * 19 II. Project Identification, Preparation and Appraisal....... 19 A. The Process ...........**********************. ********* 19 B. Objectives and Description of Project ...............,* 20 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, Project Completion Report (Cont'd.) Pge No. A. History....................................... .. . 20 B. Completed Project .................................... 22 C. Implementation Schedule............................... 23 D. Reporting ......... ............................... . 23 E . Pr o curement ...................... 23 F. Cost and Financing ................................... 23 IV. Physical Performance.....................,,.........,. 27 A. Water Supply and Sewerage ............................. 27 B. Electrification .................... 28 C. Access Roads .......................................... 28 D. Health Centers ....................... 29 E. Industrial Parks .................................... 29 F. Shelter .... .. .9... .. .. . .. .. .. . . .. .. . 29 G. Supervised Credits in Arequipa ........................ 30 H. Technical Assistance ............................... . 30 V. Institutional Analysis ......................... A. Implementing Agencies .............................. 31 VI. Financial, Social and Economic Performance ................ 32 A. Cost Recovery ........................................ 32 B. Description of Benefits and Rate of Return ............ 32 C. Affordability ............. ......... ... ... .... ... 33 VII. Bank Performance .......... ......... .......... ......... 33 VIII. Conclusions .......... ......... ......... .... ... ... .. 34 ANNEXES 1. Economic Reevaluation ............................. 35 2. Institutional Changes ............................ 39 3. Cost Recovery .... ......... . .......... .. ......... 40 MAP IBRD 17478 PROJECT PERFORMANCE AUDIT REPORT MERU URBAN SITES AND SERVICES DEVELOPMENT PROJECT (LOAN 1283-PE) PREFACE This Project Performance Audit Report (PPAR) constitutes a perfor- mance audit of the Peru Urban Sites and Services Development Project for which Loan 1283-PE for US$21.6 million equivalent was made in October 1976 and final disbursements were made in September 1984. The PPAR consists of a Prolect Performance Audit Memorandum (PPAM) prepared by the Operations Evaltation Departent (0ED) and a Project Completion Repcrt (PCR) dated July 19, 1985, prepared by the Latin America and Caribbean Regional Office. Th*, audit included reviews of the PCR, Appraisal and President's Reports, the transcript of the Executive Directors' meeting when the project was considered, Project Completion Report prepared by the Banco de la Vivienda del Peru (PCRBVP) dated August 1984, Bank files and records, and field inspections and discussions by OED staff with officials of the Government during an audit mission in March 1986. The audit found that the PCR covers many important aspects of the project and agrees generally with its substance. On the basis of further analysis of the available data, however, the audit has drawn some additional conclusions concerning the performance of the project. The draft audit report was sent to the Borrower for comments. The Borrower's comments are attached as an annex to the PPAM. PROJECT PERFORMANCE AUDIT REPORT PERU URBAN SITES AND SERVICES DEVELOPMENT PROJECT (LOAN 1283-PE) BASIC DATA SHEET Key Project Data Original Actual/ Item Plan Reestimate Total Project Cost (US$ million) 43.2 62.3 Cost Overrun (2) - 44% Loan Amount (US$ million) 21.6 21.6 Disbursed - 21.6 Cancelled - - Repaid (US$ million) ) Outstanding (US$ million) ) Date Physical Components Completed 8/31/79 8/31/84 Proportion Completed by Above Date (%) 11% 100% Financial Performance - Fair Institutional Performance Fair Proportion of Time Overrun - 167% Economic Rate ot Return (%) 29.7 31.5 STAFF INPUT Staff-Weeks 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 TOTAL Identification/ Preparation 59.3 45.3 104.6 Appraisal 81.1 81.1 Supervision .2 24.8 .12.1 17 19.2 18.3 11.6 8.7 9.6 11.0 132.5 Total 59.3 126.6 24.8 12.1 17 19.2 18.3 11.6 8.7 9.6 11.0 318.2 Cumulative Estimated and Actual Disbursements (US$ million) FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 (i) Estimated 8.3 19.2 21.6(3/79) (ii) Actual 0.1 1.0 1.63 5.70 9.51 12.45 17.90 21.59 % of (ii) to (i) 0.5 4.6 7.6 26.4 44.0 57.6 82.9 100/a /a Except for US$10,000 consultant's fee that was paid in September 1984 - iii - Other Project Data Original Item Plan Actual First Mention in Files - 11/08/74 Government's Application - 05/03/72 Negotiations - 05/10/76 Board Approval - 06/08/76 Loan Agreement - 10/12/76 Effectiveness - 01/10/77 Closing Date 06/30/80 12/31/83 Borrower BVP BlP Executing Agency ESAL/SINAMOS SEDAPAL ESAR SEDAPAR ELECTROLIMA/ ELECTROLIMA SINAMOS SEAL/SINAMOS Department of Energy & Mines/ ENACE Ministry of Ministry of Health Housing/ENACE Ministry of Housing ENACE EMADI ETADI/ENACE Ministry of Industry EMADI ETADI/ENACE Ministry of Industry SINAMOS/ Ministry of ORAMS IX Housing/ENACE Ministry of Ministry of Housing - Housing - EMADI, ESAR ENACE and Ministry of BANVIP Health and BANVIP Fiscal Year of Borrower Jan. 1- Dec. 31 Follow-on Project None - iv - MISSION DATA Month/ No. of No. of Date of Performance Item Year Weeks Persons Staff-Weeks Report Rating Preidentification 11/74 2 3 6 01/10/75 Identific. tion 05/75 3 4 12 Preappraisal 08/75 3 4 12 09/08/75 Appraisal 11/75 3 6 18 12/05/75 Postappraisal 02/76 1 3 3 02/27/76 Supervision I 08/76 1.5 2 3 09/21/76 - Supervision II 01/77 1.5 2 3 03/15/77 1 Supervision III 05/77 0.5 3 1.5 - - Supervision IV 12/77 1 1 1 02/16/78 2 Supervision V 04/78 2 2 4 05/25/78 2 Supervision VI 09/78 1 2 2 10/13/78 2 Supervision VII 01/79 1 3 3 02/16/79 2 Supervision VIII 11/79 1 3 3 11/30/79 3 Supervision IX 06/80 1 2 2 06/23/80 3 Supervision X 09/80 2 4 8 09/22/80 2 Supervision XI 01/81 2 1 2 02/26/81 2 Supervision XII 05/81 0.5 1 0.5 06/04/81 2 Supervision XIII 11/81 0.5 2 1 11/18/81 2 Supervision XIV 04/82 1.5 2 3 04/29/82 2 Supervision XV 09/82 1.5 2 3 09/24/82 1 Supervision XVI 06/83 0.5 1 0.5 06/10/83 1 Supervision XVII 12/83 0.5 1 0.5 01/09/84 1 Supervision XVIII 07/84 0.5 1 0.5 07/23/84 1 Total 92.5 COUNTRY EXCHANGE RATES Name of Currency (Abbreviation) Sol de Oro (S/.) Year Exchange Rate Dec. Appraisal Year (1975) US$1 = 45.0 Intervening years (1976) US$1 = 69 (1977) US$1 - 130 (1978) US$1 - 196 (1979) US$1 - 250 (1980) US$1 - 342 (1981) US$1 - 507 (1982) US$1 - 990 (1983) US$1 - S/.2,271 Completion year (July 1984) US$1 - S/.4,067 -v - PROJECT PERFORMANCE AUDIT REPORT PERU URBAN SITES AND SERVICES DEVELOPMENT PROJECT (LOAN 1283-PE) EVALUATION SUMMARY The Project reviewed in this report was the first urban development project in Peru. The Project was identified in 1974 and appraised one year later. The Bank loan of US$21.6 million equivalent to thr Banco de la Vivienda del Peru (BVP), approved in 1976, was to finance 50 percent of total project costs. The project had a broad scope that included serviced sites, provision og urban services (water, sewer and electricity), access roads, industrial and comercial serviced sites, credit, health centers, and techni- cal assistance to the key implementing agencies. The Project involved some eight different agencies, with overall coordination entrusted to BVP, in two citiess Lima and Arequipa. Oblectives The main objectives of the project were to provide the urban poor with basic facilities and employment opportunities to increase their capacity to be productively absorbed in the urban economy. The project focused on three areas of assistance to achieve these objectives: (a) basic and produc- tive support infrastructure, (b) directly productive investments, and (c) technical assistance. The project was expected to be completed by December 31, 1979. Implementation Experience Implementation of the Project was delayed, mainly due to delays in signing subsidiary loan agreemens with the various implementing agencies, a lack of counterpart funds from the Covernment, and changes in the institu- tional arrangements for project implementation brought about largely by changes in the Government. Other than the standard conditions, the only specific covenants in the Loan Agreement dealt with the Government's contribu- tion to the share capital of the Banco de la Vivienda del Peru (BVP) and the establishment of a revolving fund by the Government and BVP; both conditions were met. The closing date for the Project was extended twice, which resulted in an expansion in the implementation period from 3 to 7-1/2 years. Results The Project was successful in providing services to the urban poor in Lima and Arequipa; in fact the project far exceeded the targets establisbed at appraisal for electric, water and sewer connections, as well as the number of sites and services provided in Lima. The industrial site in Arequipa was fully built and sold and is 50 percent occupied. The industrial site in Lime was fully built; less than 50 percent of the plots have been sold and only 5 percent are occupied. 0aly one of the five health centers in Lima was com- pleted, with the other four at various stages of completion; due to a lack of - vi - equipment which was never procured, none have been utilized. The access roads componeat was deleted halfway through the iProject. Only a small portion of the technical assistance envisaged under the Project was provided due to institutional and economic changes anc the funding of some activities with bilateral grant funds. The Project fell short of its objective with respect to cost recovery, because of negative real interest rates. Sustainability Reliance on an established institutional framework for the implemen- tation of the project has proven effective for the achievement of physical targets which far exceeded the targets set at appraisAl. However, the infla- tionary economic condition and the Government's unwillingness to diminish the resulting heavy subsidy of interest rates resulted in the cancellation of plans to finance a proposed second urban project in 1982 which would have replicated this project's experience on a ccuntry-wide basis by providing urban services to some 57,000 low-income urban families in several cities. Conclusions and Lessons to be Learned I (a) The project vas successful in strengthening a delivery system for the provision of urban services to low-income areas. While the a-tes and services component provided a net increase in the quantity of Lima's housing stock by providing additional units, slum improvement in both Lima and Arequipa raised substantially the average quality of the existing stock. The project also brought about a significant shift in emphasis in existing shelter policies by encouraging low-cost solutions aimed at low-income urban dwellers. The political commitment to slum improvement at both the central and local level, and the ready understanding of the technical solutions proposed under the project contributed to this achievement. However, the clear focus- ing on one area (lowering of service standards and costs for shelter and urban services) to the exclusion of attention to cost recovery mechanisms results in a failure to be able to adapt the project to changing economic circumstances; when there is a severe economic deterioration, the sustainability of the project, as i this case, can be totally compromised. (b) The project fell short of its objective in the development of indus- trial sites and the employment opportunities for the urban poor which these industrial sites were expected to create. Employment creation and industrial site development components require much more detailed preparation than was accorded in this project, particularly in terms of market demand analysis, financial analysis, and institutional and managerial arrangements. The fact that this type of devel- opment was a high priority of the Government at the time should not have precluded objective analysis of the viability and risks of such an investment. (c) The project fell short of its objectives in the area of cost recov- ery, and reliance on the institutional model established by the project for the provision of urban and shelter services, in the absence of significantly higher cost recovery achievements, will not lead to sustainability for this type of project. - vii - Although full cost recovery was in accordance with the declared economic objectives of the Government, the macroeconomic conditions prevalent in Peru at the time made it difficult for the Government to implement these policies. Nonetheless, more attention could have been paid to this issue dur- ing supervision which would have led to greater policy dialogue between the Government and the Bank regarding cost recovery; this was apparently not the case as the proposed second project foundered on the issue of cost recovery prior to appraisal. (d) Supervision needs to be tailored to the needs of the project in terms of emphasis, staffing and frequency. The problems that arose in project implementation should have resulted in both more Bank supervision and Bank supervision specifically focused on the financial issues. (e) The economic reevaluation of the project shows an overall economic rate of return which does not reflect the serious financial effect of negative interest rates on the borrower, BVP. In such a case it is therefore necessary to analyze the financial rate of return for BVP, which in this case is nega- tive. 1 PROJECT PERFORMANCE AUDIT MEMORANDUM PERU URBAN SITES AND SERVICES DEVELOPMENT PROJECT (LOAN 1283-PE) I. BACKGROUND A. The Economic Context 1. Preparation and appraisal of the first Bank assisted urban develop- ment project in Peru in the mid 1970s coincided with a period when the govern- ment adopted an inward-looking development strategy and greatly extended the role of the state in economic activity. The central government, the military and the public exterprises greatly increased their claims on the country's resources. However, these events took place against a bi.ckground of economic growth (GDP growth of 4.5% per year between 1970 and 1975), low inflation and stable exchange rates. As pointed out in the Bank's Country Economic Memorandum (CEM) dated December 17, 1985, (Report No. 5806-PE), the 1975 world recession resulted in stagnating exports, tightening monetary condi- tions, and a severe cutback in both public and private investment while con- currently Peru faced a severe balance of payments crisis. This coincided with the early years of project implementation and accounted for the lack of avail- ability of counterpart funds which hindered project start-up, a situation which lasted until the Belaunde Government took office in mid-1980. The new Government espoused a liberal, pro-market philosophy and aimed at the gradual deregulation and structural transformation of the Peruvian economy. Shortly after taking office, the Government was confronted with the 1981-83 world recession, accompanied by declines in metals prices and export volumes. 2. Partly due to adverse economic conditions, but also because of powerful political opposition and inconsistencies between policies, few of the Government's intended policy reforms were carried far into effect and a number of those that were, were subsequently reversed. However, due to the President's personal interest in shelter, this project received a strong impetus at this point. Although as a result of the severe recession, manage- ment limitations, and inconsistent policies, the Belaunde Government was unable to make inroads into resolving public social service deficits through the public sector as it intended, substantial progress was made in expanding the stock and improving the quality and availability of low-income shelter and urban services. The deterioration in incomes (according to the above-men- tioned CEM, real wages in Lima fell 45% from December 1973 to February 1984) and vital Government services exacerbated the plight of the poorest segments of society in particular. The lack of normal job opportunities forced Peru's poor, particularly the Indian urban pcor, to turn increasingly to the informal economy. The plight of the urban poor can be readily seen when one compares the deterioration in real household income between 1971/72 and 1983. Accord- ing to a memorandum from the World Bank resident mission in Peru during pre- paration of the CEM in 1985, "when average real household income dropped by 2 about 19 percent, that of the lowest 25 percent of households fell by 29 percent while that of the highest 10 percent dropped by only 14 percent." This meant that it was politically difficult for the Government to respond to growing inflation by raising interest rates on shelter and services; this fact seriously compromised cost recovery (see para. 33). R. Urban Development 3. Urbanization in Peru has increased rapidly over the last forty years in association with industrialization, modernization and higher rates of economic growth. Rural-urban migration has been the main force fueling urban growth; outmigration from the rural Sierra (highlands) to the urban coast, particularly Lima, has been the most rapid. 4. The Lima metropolitan area, with a population of 4.4 million, accounts for 60 percent of the total urban population and is expected to reach over 9 million by the year 2000. Most of the rural migrants have settled-- often by squatting--in desert areas on the outskirts of Lima, creating new slum settlements (Pueblos Jovenes) where housing conditions are very poor and urban services highly deficient. As described in the President's Report, dated May 27, 1976, these new slum settlements are "established by organized occupation of public land, generally in the outskirts of the cities. (In general, prior to land occupation, a group of squatters form an association to organiLe the settlement, plan the land use, and allot to each family a plot of land. The association represents its members before government agen- cies for the legalization of the settlement and for the installation of urban services and community facilities)." It was against this background that the project's objectives evolved: to establish an institutional mechanism to provide the flow of shelter and services needed to meet the growing demand and to promote income-generating activities for the urban poor to enable them to afford adequate shelter services. 5. In the 1980s, a decline in rural urban migration, combined with a stronger decline in urban than in rural fertility rates, has slowed the growth of metropolitan Lima to about 3.5 percent per year, as compared to over 5 percent in the 1960s and 1970s. The previously expected flood of rural migrants into Lima and the subsequent rapid growth of the area will thus be on a somewhat reduced scale and total urban population growth is expected to average 2.7 percent yearly to the end of the century, thus far less than anticipated at the time of project preparation and early implementation. Although the urgency with which these problems were viewed in the mid 1970s may have diminished somewhat, there is still a need to continue to expand shelter and urban services and the project's objectives remain valid. 6. The Belaunde Government, which coincided with implementation of the greater part of the project, in an attempt to meet some of the country's enormous housing needs, devoted a significant share of its public sector investment program to the housing sector. A large part of this program--which represented about 5 percent of public investment--consisted of the construc- tion of units affordable by middle income families only. The selling prices of these units have been subsidized aitd the Government also provided highly 3 subsidized mortgages (17-22 percent interest during a period when inflation averaged 89 percent per year). During this period the resources available for housing construction by the public sector were provided mainly by FONAVI, a special Government fund that received the proceeds of an earmarked payroll tax. As a result of the high use of the subsidies for the housing being constructed, relatively few units have been built and FONAVI resources, which amount to about US$100 million annually, have benefitted only a very small fraction of its contributors. In addition, because of the very low interest rates charged, FONAVI resources are subject to rapid decapitalization. At the same time, the savings and loan associations, which in the past financed the bulk of housing, virtually stopped lending for construction and turned to the financing of consumer durables, as the high rates of inflation and the resulting high nominal interest rates increased annual payments on mortgages from commercial banks and drastically reduced their affordability. II. THE PROJECT 7. This was the Bank's first urban development project in Peru and was prepared in response to a request made by the Peruvian Government for assis- tance in implementing .n urban project aimed at alleviating urban needs and developing employment opportunities. A Bank reconnaissance mission reviewed the Government's urban development program in November 1974 and found that its objectives and strategies for developing urban areas were basically consistent with Bank policies. (A review of the Bank's policy documents from that period shows that the clear focus was on appropriate standards and cost reduction.) A preappraisal mission in August 1975 reviewed Government sponsored plans and feasibility studies (prepared under the coordination of the Ministry of Housing and Construction (MVC) and the Housing Bank (BVP). Appraisal of the project took place in November 1975, within one year of the reconnaissance miszion. 8. The objectives of the project as presented in the SAR (para. 3.01) were as follows: to provide the urban poor with basic facilities and employ- ment opportunities to increase their capacity to be productively absorbed in the urban economy. 9. Schedule II of the Loan Agreement describes the project as consist- ing of the following components: Part A: Sites and Services (a) The preparation of, and provision of the necessary infrastructure such as water supply, sewerage facilities, electrical connections, public lighting, access roads and green areas for about 706 plots for dwellings and 161 plots for shop-dwellings in the Funda Vasquez area in Lima. (b) The development of about 50 hectares of land in the Villa El Salvador area in Lima and 13.5 hectares of land in Arequipa for indus- trial sites by providing the necessary infrastructure such as water 4 supply, sewerage facilities, electrical connections, public lighting, access roads and green areas, and the construction of a few standard factories and common services buildings. Part B: Credit Program (a) The provision of about 870 loans for self-help construction of dwellings and shop-dwellings to individuals having acquired plots referred to in Part A. (b) The provision of about 1,000 loans to low-income individuals who own in Arequipa plots in Pueblos Jovenes or in other areas approved by SINAMOS, to enable them to erect or upgrade modest shelter units through a program of mutual aid, 50% of such loans to be in building materials rather than cash. Part C: Community Facilities The construction and equippping of about seven community facilities in the Fundo Vasquez sites and service area of Lima. Part D: Primary Infrastructure (a) Construction of water supply and sewerage facilities in four Pueblos Jovenes in Lima and eight Pueblos Jovenes in Arequipa, consisting of the extension of water trunk lines, on-site water and sewerage reticulation and individual dwelling connections. (b) Construction of electric facilities, including distribution networks and individual dwelling connections, and primary 10 kv networks, where necessary, te provide electricity to about 12,400 lots in Pueblos Jovenes in Lima and 3,900 lots in Pueblos Jovenes in Arequipa. (c) Improvement of about 86 kilometers of existing secondary road net works in eight Pueblos Jovenes in Lima. (d) Construction and equipping of three health and nutrition centers and expansion (including equipment) of two existing health and nutrition centers and expansion (including equipment) of two existing health and nutrition centers in Pueblos Jovenes in Lima. Part E: Technical Assistance The provision of technical services to: (a) BVP to assist it in carrying out the Project and in strengthening its capacity to promote future projects in the urban sector; (b) the Technical Assistance Unit, with regard to Parts A(a) and B(a) of the Project; 5 (c) EMADI, with regard to Part A(b) of the Project; (d) ESAR, for assisting it in the review and preparation of a project that shall meet the future needs for water supply and sewerage in metro- politan Arequipa; and (e) the Ministry of Health with regard to Part D(d) of the Project. 10. The Project was to be wholly financed by the Bank loan (50%), by BVP (44%) and by downpayments from beneficiaries (5%). BVP, as executing agency for the project, had overall management responsibi.lity for the execution of the project. Responsibility for execution of the various components lay rith some eight other agencies (see Annex 2, PCR) and subsidiary loan agreements which were subject to prior Bank approval were to be entered into between BVP and these agencies. 11. Procurement conditions did not differentiate between civil works and equipment. ICB was required for all ci-il works and equipment except for locally manufactured equipment up to $80,000 in Lima and up to $160,000 in Arequipa. 12. The project was expected to be completed by December 31, 1979. III. PROJECT IMPLEMENTATION AND ACHIEVEMENTS General 13. Although the Loan was signed in 1976, project start was delayed due to a lack of counterpart funds from the Government, delays in signing the subsidiary loan agreements with the various executing agencies, changes in the institutional arrangements for project implementation (see Annex 2, Table 6, PCR), and a lack of political support until the beginning of the Belaunde Government in 1980. In March 1980, the loan closing date was formally extended to December 31, 1982. During the '980-82 period, the new Government gave high priority to the urban sector, particularly reflected by the commit- ment of the Ministry of Housing and Construction (MVC) and BVP officials to the implementation of the projeit. 14. Restructuring of the project in 1981 resulted in: an increase in the number of serviced plots in Lima and Arequipa which was financed by savings which resulted from the deletion of 86 km paved access roads to the Pueblos Jovenes; an increase from 1,000 to 1,500 supervised self-help con- struction loans, a change in procurement conditions which modified ICB requirements to contracts of US$1 million or more and Bank review of contract and procurement documents was raised from US$150,000 to US$1 million. The project's closing date was further extended to December 1983 and a realloca- tion of loan proceeds resulted in the construction of an additional 3,500 serviced sites in Lima and an increase in loan disbursement percentages for civil works. 6 15. Implementation of the project lasted 7-1/2 years instead of the 3 years envisaged at appraisal. This 150% increase in implementation period can be ascribed to a number of causes: an overly optimistic implementation sched- ule, delays in signing subsidiary loan agreements, insufficient counterpart funds, lack of government support during the initial years of the project and changes in the institutional arrangements for implementation of the different components. Cost overruns in US dollars amounted to 44 percent, caused in part by cost overruns for the Lima industrial site but primarily by the expanded scope of the project for water, sewerage and electricity connections in the Pueblos Jovenes and sites and service plots and core units in Lima. Physical Accomplishments and Their Impact (a) Sites and Services in Lima 16. The original component was to develop the second phase of the Fundo Vasquez site in Lima providing 867 serviced plots, supervised credits for self-help construction for dwelling and shop core units. This component was plagued with numerous problems: in addition to the delay in start-up of the project as a whole, there were additional delays in the pceparation of detailed designs; the institutional arrangements for implementation of the component envisaged the creation of a technical assistance unit which did not occur, due to a Government austerity decree which discouraged the use of consultants paid in foreign exchange. By March 1980 title to the land was returned to its original owners as the expropriation period had elapsed; the shelter component could therefore not be executed on the land originally envisaged. A Loan Agreement amendment dated January 16, 1981, pro7ided for the substitution of 3,200 dwelling and shops-dwelling plots at Vi1la El Salvador in Lima for the Fundo Vasquez site. In fact, by reducing the st&n- dards of services, some 7,059 plots were serviced on this site (eight times more than targeted at appraisal), of which 3,170 were financed by the Bank under the project and the others by BVP utilizing the same development cri- teria established under the project. The execution of the component by ENACE provided a means for institutionalizing the provision of serviced shelter sites for low income dwellers in Lima. Based on an average family size of 5 persons, this component benefited more than 35,000 low income dwel- lers. However, a serious handicap to the replicability of this experience has been the high interest rate subsidy provided to the beneficiaries (see para. 37). (b) Industrial Sites in Lima and Areguipa 17. The physical accomplishments of this component comprise the develop- ment of 109 industrial sites (of a smaller size than the 65 sites targeted at appraisal) in the Villa El Salvador area in Lima and 25 in6ustrial sites as an expansion of an existing industrial zone in Arequipa, providing them with the necessary infrastructure such as water, sewerage, electricity, public lighting, and access roads suitable for industrial use. The site in Lima was selected because of its close proximity to the Pueblos Jovenes and the expec- tation that it would become a primary source of new employment in the Lima 7 metropolitan region. This component was slated to be a pilot area of 50 ha. which constituted an initial phase of a 175 ha. new industrial area to be established in the southern part of Lima. Enterprises operating under a new framework of Social Property (similar to the Yugoslavian model of worker-owned enterprises) were expected to establish their activities in this zone. The site in Arequipa was selected as a third phase expansion of 13.5 ha. located adjacent to an existing industrial site. It wai expected that the industrial site in Lima would generate some 3,000 new jobs while the site in Arequipa would generate some 1,000 new jobs. The general coordination and promotion of the two industrial sites was entrusted to EMADI, a government agency under the Ministry of Housing and Construction (MVC) which was responsible for adminis- tering all government properties. 18. These two sites suffered the start-up delays experienced by the project as a whole. A Bank supervision mission in May 1981 found that while 67% of the Lima industrial park was completed, the contract for off-site electrical infrastructure had as yet not been signed with Electrolima and technical assistance in sales and development promotion to EMADI had not been provided. In 1981 EMADI was replaced as implementing agency by ENACE, an agency also under MVC responsible for regional and decentralized development; by new legislation in May 1982 ENACE was replaced by the Ministry of Industry. 19. By completion of the project, all the plots of the Arequipa site had been sold. The audit shows that over 50% are occupied and 60% have been all paid off. It is expected that by the end of 1986 all will be paid off. The purchasers were not under any real obligation to develop the plots purchased; once the plots are totally paid off the owner, under Peruvian law, may do whatever he wants with it--the purchasers have therefore not been committed to develop the plots they purchased. The audit ascertained that the indus- tries which have already established themselves in this industrial zone and seek to purchase more plots for expansion of their industries have no choice but to purchase the plots from an existing non-user owner who holds onto his plot for speculative purposes. 20. The Lima industrial site has fared less well. By completion of the project some 46 of the 109 plots had been sold; since then less than five more plots have been sold. Auditor's site visit, however, found that only five percent of these plots were occupied. The reasons given for the slowness of sale and the non-occupancy are several: plots are too large (10,000 m2) and not suited to demand (1,000-2,000 m2), economic recession in the country as a whole, lack of necessary utilities (water is apparently available only 6 hours per day), frequent changes in institutional arrangements, non-participation of the Ministry of Industry in the preparation and implementation of this compo- nent, and poor location with respect to port accessibility. These ptoblems could have been averted through adequate markct analysis and sales promotion, sale contracts conducive to the development of the plots, and a time limit by which the site must be developed or returned to the developer for sale to another user, and institutional leadership which would be more development oriented. 8 21. The audit found that the Lima industrial site component, which at appraisal represented 14 percent of total base cost of the project, lacked the level of detailed market demand and financial analysis generally associated with the development of an industrial site. Minutes of the Bank Board meeting of June 9, 1976, show that some Executive Directors had concerns in his area. One speaker in particular stated that the job creation part of the pZoject was the weakest and that there was a considerable lack of precision about how the job creation would come about. The audit ascertained that a detailed analysis of the industrial sites component had been carried out by a Bank consultant at the time of appraisal. However, none was found in the project files nor is referred to in the appraisal documents. A memo to files after a Bank review of the bidding documents for this site in April 1978 noted that: "the plans call for some fully-paved four-lane roads, asphalted parking areas, and con- crete curbs. A progressive or staged development approach to the urbanization of the site with somewhat lower standards would not have affected the project negatively. However, to change the project now would not only result in serious delays in its implementation but would even be rather difficult to do, for the following reasons: (a) We agreed to the project in the appraisal report--although it was appraised on the basis of only very preliminary plans; (b) We did not provide adequate supervision that would have allowed us to make improvements at a more convenient time; (c) We have recently approved the Arequipa Industrial Park with similar standards and made no comment." Fur- thermore, it is the audit's view, given the experience in the development of such sites in other countries, that this component suffered from the non-par- ticipation of the Ministry of Industry during preparation and early implemen- tation. According to the Ministry of Industry, some 450 new jobs were created in the Arequipa industrial site; no estimates were available for the Lima site, and the audit estimates that less than 50 new jobs were created. Hence, at a cost of US$8.9 million for this component, the cost per job created amounted of US$17,800. 22. Overall, while taking into account the effect that the recession in Peru may have had on this component, the fact that this component failed to achieve its objectives may be traced directly to inappropriate identification, and inadequate preparation and supervision (see para. 38). (c) Credit Program 23. The project was to provide some 1,000 loans to low-income plot owners in Arequipa to enable them to erect or upgrade modest shelter units through a program of mutual aid with 50% of the loan made in building materi- als rather than cash. An increase in the number of loans was approved in 1981 to 1,500. By project completion, a total of 1,281 loans had been made or 13 percent more than targetted at appraisal. The project was also to provide sone 870 loans for self-help construction of dwellings and shop-dwellings in Lima. As stated in the PCR, 3,150 core units were sold in January 1983 and 3,889 were sold in 1985, or a total of 7,039 core units, a 700 percent increase over the target set at appraisal. These core units, built on the Villa El Salvador site, provided housing for an estimated 35,000 low-income urban dwellers at a time when almost no credit opportunities existed for 9 low-income housing in Peru. However, as pointed out in par&. 33, the provi- sion of thia low-income shelter was at a negative interest rate and represents a windfall gain to the lucky beneficiaries; hence, the replicability of such a program is doubtful. (d) Health Centers 24. The project provided for the construction and equipping of three health and nutrition centers and the expansion (including equipment) of two existing health and nutrition centers in Pueblos Jovenes of Lima. It was envisaged at appraisal that one of the health centers would be equipped with training facilities for "health promoters" who were volunteers from the commu- nity and would be trained as paramedical personnel. Technical assistance funds were provided under the Project to finance this training. The Ministry of Health decided not to proceed with this training program (see para. 28). Delays occurred in the construction of the health centers; this issue is alluded to throughout project supervision and was apparently due to ineffi- ciencies in implementation by the Ministry of Health. By project completion only one of the health centers had been completed, with the other four in various stages of construction; none were equipped. (e) Primary Infrastructure 25. The component consisted of (i) he construction of water supply and sewerage facilities in four Pueblos ^venes in Lima and to eight Pueblos Jovenes in Arequipa consisting of the exL,; don of water trunk lines, on-site water and sewerage reticulation and indivi . dwelling connections; (ii) the construction of electric facilities, including distribution networks and individual dwelling connections and primary 10 kv networks, where necessary, to provide electricity to about 12,400 lots in Pueblos Jovenes in Lima and 3,900 lots in Pueblos Jovenes in Arequipa; and (iii) improvement of about 86 kilometers of existing secondary road networks in eight Pueblos Jovenes in Lima. 26. Two main trunk lines were built in Lima; the number of water and sewerage connections in Lima far exceeded appraisal estimates. As shown in Table III-1 of the PCR, over 44,000 individual connections were made, repre- senting an increase of more than 170% of appraisal estimates. In Arequipa, the data provided to the audit mission shows that more than 3,200 individual connections were made, representing an increase of 27% over appraisal esti- mates. The electrification component also far outpaced appraisal estimates in terms of individual connections made in both Lima (197% greater) and Arequipa (170% greater). 27. The secondary access roads component expected that the beneficiaries in the Pueblos Jovenes would make a down payment of 10% of project costs, which was similar to the down payment for other services such as water, sewer- age and electricity. The residerts of the Pueblos Jovenes viewed road con- struction as a public service to be provided by the government and were unwil- ling to make the downpayment. The government, having tried for several years 10 during the early part of project implementation to modify this view, but to no avail, requested the Bank to cancel this component from the project; this was done in 1981 when the project was restructured. (f) Technical Assistance 28. This component consisted of a total of 95 man-months of consultant services to the Ministry of Housing and Construction in the execution of the sites and services component in Lima, to EMADI for implementation of the industrial zone component in Lima, to BVP for planning and studies, to the water and sewerage agen,y in Arequipa (ESAR) to prepare a water and sewer project in Arequipa, and to the Ministry of Health regarding the health and nutrition component. Only a small amount of the technical assistance envis- aged at appraisal was provided. BVP established an international affairs department responsible for the coordination and appraisal of all foreign financed projects. This measure strengthened BVP's ability to implement the project. The audit ascertained a number of key reasons for the non-utilization of technical assistance funds: in particular, during a period of high infla- tion and devaluation of the Sol, consultant fees paid in dollars were viewed as too costly, a German bilateral grant was used to finance the water and sewer study in Arequipa, and the details for implementation of the technical assistance were vague--no terms of reference were made available at appraisal for any part of the support. IV. POINTS OF SPECIAL INTEREST Procurement 29. The project called for contracts for all civil works and goods under the project to be on the basis of ICB with the exception of (i) water and electric meters and other locally manufactured materials for the residential and industrial sites costing up to US$80,000; (ii) building materials pur- chased for the self-help construction credit component; and (iii) civil works related to electric facilities in Arequipa costing up to US$160,000 which would be awarded on the basis of local competitive bidding. Bank review of all bidding and contract documents was required for all contracts above US$150,000. Early implementation experience demonstrated that bids were not received from international contractors. The PCR points out that procurement requirements caused problems with the numerous implementing agencies and delays; however, these were not q',antified. Upon restructuring of the loan in 1981, ICB requirements were ra'sed to contracts of US$1 million or more and prior Bank review of biddin,- and contract documents was raised to contracts of US$1 million or more. According to the PCR, these two measures were instru- mental in speeding up execution of the project. Proipct Costs, Financing and Disbursements 30. As pointed out in the PCR, the total cost of the project exceeded appraisal estimates by 44 percent in US dollars. A thorough breakdown of the 11 appraisal and final costs is well documented in Tables 111-3 and 111-4 of the PCR. (As a result of the high inflation at this time, cost comparisons are clearer in US dollars.) The cost overruns are due primarily to the expanded scope of the project in the provision of sites and services with core shelter and urban services (water, sewer and electric connections) but also to a 39% cost overrun !n the Lima industrial site component. 31. Due to a lag of some three months between expenditure by BVP and Bank reimbursement at a time when the Sol was being devalued by approximately 6% per month, Bank loan disbursements against the project were well below the 50% determined at appraisal. On August 9, 1983, the Bank disbursement percen- tages were increased to 76% for civil works, credit and local consultant expenditures. However, this modification in the Bank disbursement percentages came at the close of the project when most of the expenditures had been made. A comparison of the actual and proposed financing of the Project shows that BVP financed 56% of total project costs as compared to 44% targeted, benefici- ary downpayments amounted to 9% instead of 6% and Bank financing amounted to 35% instead of the 50% planned at appraisal (see Table 111-5, PCR). 32. The disbursement profile shows a significant lag between estimated and actual disbursements, as might be expected from the overly optimistic appraisal estimates of project implementation (see Chart 1). Cost Recovery 33. Recovery of costs of the project was to be based on a deposit of 10% of the total cost of works and monthly charges to final users for water, sewerage and electrification in the Pueblos Jovenes and sites and services. Supervised credits would be recovered by monthly payments by beneficiaries. The households in the Pueblos Jovenes were to pay a 10% deposit on roads, the balance to be recovered by the Government from user charges. Recovery from the industrial sites would be made by the sale of plots. Health and nutrition centers and technical assistance would be recovered from general tax revenues. It was expected at appraisal that 65% of the total project costs would be recovered directly and the remaining 35% recovered indirectly through tax revenues. According to the Loan Agreement, beneficiaries "were to repay their proportional costs of the improvements in ten to twenty years with annual interest rates of not less than 12% per annum and with a down payment of not less than 5%". During implementation, the interest rate charged amounted to 25% per annum; however, this could hardly offset inflation rates which approx- imated 80% per annum. As pointed out in the PCR, therefore, while cost recov- ery has followed appraisal objectives in nominal terms, in real terms cost recovery has been negative. The macroeconomic instability which reigned in Peru during implementation of the project seriously jeopardized cost recov- ery. As inflation increased, the real wages of the urban poor decreased. Although the cost recovery mechanisms could have been better designed and more clearly expressed in a loan covenant, it is unclear, given the declining real wages of the project beneficiaries, to what extent the Government could have raised interest rates to compensate for the high rate of inflation. As it stands therefore, the project provided large subsidies to a significant number of beneficiaries--the large industries which benefited from these subsidies 12 would probably have participated without the subsidy 3iven the speculative benefits which they stood to gain--for this group receipt of these large subsidies may be termed inequitable. For the large number of low-income beneficiaries who obtained urban services and shelter at a high subsidy, this represe.ited a Government giveaway which does not allow for replicability. Economic Evaluation 34. The economic evaluation carried out at appraisal and the reevalua- tion by BVP and the PCR followed the same methodology for estimating the economic rates of return of the various components. The methodology is based on the following: total costs are calculated as all capital costs, including land and maintenance costs. Benefits are calculated as: the estimated value of the shelter units for the sites and services and supervised credits; esti- mates of the savings in the consumption of alternative means of illumination for electrification; the differential price of water and the average rate of the water consumed for water and sewerage; the revenues from selling the serviced sites for the industrial site component; time savings and reduction in operating cost of vehicles for the access roads component. All components were deemed to have a 20-year life. This methodology had been adopted under previous similar projects elsewhere. While the appraisal did not take account of foreign exchange scarcity, the reevaluation has done so which is appropri- ate in view of the over-valuation of the Sol by some 20% to 25%. The apprai- sal and reevaluated economic rates of return (ERR) are provided below: Appraisal Reevaluation Sites and Services 32.2% 31.1% Water & Sewerage 16.9% 62.8% Electricity 23.7% 25.4% Industrial sites 34.4% 4.8% Access Roads 29.2% - Overall Project 29.7% 31.5% 35. The overall ERR at project completion appears to compare favorably to that obtained at appraisal. However, a closer comparison of the individual EP for each of the components shows a significant difference. The water and sewerige component has an ERR of 62.8% which is far greater than originally anticipated due to tne much larger number of connections than originally targeted and the reduction in average cost of connections. Given these rates of return, higher prices could have been charged to the beneficiaries, hence a greater scope existed for cost recovery; however, as pointed out in para. 37, the Government was unwilling to do so. The industrial sites component how- ever, has an ERR of 4.8% which is far below the appraisal calculation. 36. In view of the negative interest rates charged by BVP on all compo- nents (see Table 8, Annex III, PCR), for BVP the financial rate of return (FRR) on this project is negative (see para. 47). 13 Sustainability 37. The project was prepared during a period of growth and economic stability in Peru and was implemented under recession and macroeconomic insta- bility. The project's success can be clearly noted in a large scale reduction of physical standards for shelter and the provision of urban services for slum upgrading. Reliance on an established institutional framework for the implementation of the project has proven effective for the achievement of physical targets which far exceeded the targets set at appraisal. However, the project, which focused on the reduction of standards to make shelter and services affordable to the urban poor, did not lay the groundwork for coping with inflationary economic conditions. BVP would not be able to sustain this type of activity because of the impact of the disparity of interest rates charged by them and the resulting decapitalizatioL of their funds. Govern- ment's unwillingness to diminish the heavy subsidy of interest rates has significantly compromised the replicability of the project's achievements. V. THE ROLE OF THE BANK 38. The Appraisal devoted considerable efforts to the establishment of a delivery system which would enable the Government to provide shelter and services to the urban poor. These efforts were continued throughout implemen- tation. Bank supervision of the project was significantly lower than the supervision coefficients for other urban projectG in the Latin America region (for fiscal years 1977 through 1983, supervision of the project never ex- ceeded 10.5 btaffweeks/year and averaged less than 6 staffweeks/year compared to approximately 20 staffweeks/year for other urban projects in the region). Furthermore, with the exception of one sapervision mis&ion in September 1980, during which time one economist and one financial analyst participated in the mission, all other missions were staffed exclusively by architact/urban plan- ners and engineers. A report prepared by the financial consultant following the September 1980 mission analyzed the financial condition of BVP and high- lighted two main reasons for BVP's deteriorating financial situation: "the effect of devaluation on its equity position and its inability to invest the funds from its external loans in a timely manner." Bank preparation missions for the proposed second project carried out detailed analysis of the financial implications of the investment program being envisaged in light of the eco- nomic problems which Peru faced; this is borne out by thorough reports in this area on file. 39. Given the enormous macroeconomic problems which Peru faced during implementation and their clear repercussion on the project as a whole, the audit is left with the following observations: (a) the project was under- supervised; (b) the focus of supervision lay on the implementation of the physical aspects of the project; (c) supervision did not take account of the significant macroeconomic issues and their effect on the financial and econo- mic viability of the project as a whole; and (d) restructuring was not carried out with the objective of introducing changes in the financial viability of the project. 14 VI. CONCLUSIONS AND LESSONS TO BE LEARNED 40. (a) The project was successful in strengthening L delivery system for the provision of urban services to low-income areas. While the sites and services component provided a net increase in the quantity of Lima's housing stock by providing additional units, slum improvement in both Lima and Arequipa raised substantially the average quality of the existing stock. The project also brought about a significant shift in emphasis in existing shelter policies by encouraging low cost solutions aimed at low-income urban dwellers. 41. The political commitment to slum improvement at both the central and local level, and the ready understand!ng of the technical solutions proposed under the project contributed to this achievement. However, the clear focus- ing on one area (lowering of service standards and costs for shelter and urban services) to the exclusion of attention to cost recovery mechanisms results in a failure to be able to adapt the project to changing economic circumstances; when there is a severe economic deterioration, the sustainability of the project, as in this case, can be totally compromised. 42. (b) The project fell short of its objective in the development of indus- trial sites and the employment opportunities for the urban poor which these industrial sites were expected to create. 43. Employment creation and industrial site development components require much more detailed preparation than was accorded in this project, particularly in terms of market demand analysis, financial analysis, and institutional and managerial arrangements. The fact that this type of devel- opment was a high priority of the Government at the time should not have precluded objective analysis of the viability and risks of such an investment. 44. (c) The project fell short of its objectives in the area of cost recov- ery, and reliance on the institutional model established by the project for the provision of urban and shelter servi:es, in the absence of significantly higher cost recovery achievements, will not lead to sustainability for this type of project. 45. Although full cost recovery was in accordance with the declared economic objectives of the Government, the macroeconomic conditions prevalent in Peru at the time made it difficult for the Government to implement these policies. Nonetheless, more attention could have been paid to this issue during supervision which would have led to greater policy dialogue between the Government and the Bank regarding cost recovery; this wts apparently not the case as the proposed second project foundered on the issue of cost recovery prior to appraisal. 46. (d) Supervision needs to be tailored to the needs of the project in terms of emphasis, staffing and frequency. The problems that arose in project implementation should have resulted in both more Bank supervision and Bank supervision specifically focused on the financial issues. 15 47. (e) The economic reevaluation of the project shows an overall economic rate of return which does not reflect the serious financial effect of negative interest rates on the borrower, BVP. In such a case it is therefore necessary to analyze the financial rate of return for BVP, which in this case is nega- tive. 一／ご－ メぐ・，がいぐ多応ノグ PERU URBAN SnS AND SERVICES PROJECT DISBURSEMENTS: LOAN 1283-PE KUCENT 100- so- 60- 40 20- o i ii iii iv i 11 1;1 1ý i ii in iv i 11 111 1ý i ii iii 1ý 11 111 Iv l 11 111 Iv l 11 111 Iv l 11 111 Iv l 1976 1977 1978 1979 1980 1981 1982 1983 1984 1965 - 18 - E-997/86 June 23, 198b Spanish (Peru) OEDD3 ENMcM:bas Translation of incomiql telex Lima, June 20, 1986 Telex 2819/DCRF From: BANVIP Mr. Otto Maiss Acting Director Operations Evaluation Department International Bank for Reconstruction and Development (World Bank) Washington, D.C. Reference: Your letter of May 21, 1986 Sub ect: IBRD Project Performance Audit Report on Loan 1283-PE Dear Mr. Maiss: As the document in question indicates, the Project Performance Audit Report on the Urban Sites and Services Development Project (Loan 1283-PE) is based on the sources of information listed in that report including, inter alia, the appraisal report, the project completion report dated July 19, 1985 prepared by the Latin America and Caribbean Regional Office, and the project completion report prepared by Banco de Ia Vivienda del Peru--BANVIP (BVP) dated August 1984. We wish to stress that the BANVIP project completion report was prepared in compliance with an instruction communicated by IBRD in a telex dated January 20, 1984 reading as follows: "Mr. Federico Melo, Banco de Ia Vivienda del Peru. Ref.: Loan 1283-PE. The Bank hereby officially confirms the request made by the most recent supervision missions regarding preparation of the project completion report for the referenced project. This report should be submitted to the Bank before June 30, 1984. The Bank bases its request on the provisions of Section 3.10 of the Loan Agreement. Regards, ran Scott, Chief, Urban Projects Division, Latin America and the Caribbean. INTBAFRAD." As you know, BANVIP is a state development bank that gears its : tions to the economic and financial policies of the Min:stry ot Economy indt F iance, in harmony with the housing policy determined by the Ministry at Rousing and Construction. Accordingly, our institution tc'uses primarily >n Low-income families. Current inflation rates stemming from the interest rate policy being pursued in Peru and in BANVIP have brought about situations differing trom those that obtained during the period the project under review was being implemented. We cherish the hope that we may in due *ourse De ible to .ubtmit a new project to IBRD, when the Peruvian authorities ind tnuse or HANVIP deem this appropriate. We again express our gratitude tor the upport extended to us by IBRD under Loan 1283-PE which enabled both 1BRD and BANVIP to adopt the measures the economic situation required. We also take this opportunity to inform you that, in continuing our policy Of serving low-income families, between August 1985 and June 1986 we made loans to finance electrification and/or water and/or sewerage wor&s to approximately 125,)00 families; this was in addition to Lending under BANVIP's :ommercial line of credit, the housing cooperatives (mutuales de vivienda) and FONAVr operations. Vtry truly yours, Os.ar Bauer Cotrina Federico Melo Vega General Manager Manager 19 PERU - LOAN 1283-PE SITES AND SERVICES DEVELOPMENT PROJECT Completion Report I. Introduction 1. Loan 1283-PE for the Peru Sites and Services Development project was the Bank's response to the request made by the Peruvian Government for assistance in implementing an urban sites and services program. The objectives of the project were aimed at alleviating the urban needs and developing employment opportunities. Bank missions had found, prior to this request, that the Government's objectives for developing urban areas were consistent with Bank policies. 2. Urban growth in the city of Lima is one and one-half times larger than the national average, but on the city's outskirts the rate of growth of low-income areas, called pueblos jovenes (young settlements), it is almost three times larger than that of the city itself. These low-income areas are characterized by a major lack of basic urban services (such as piped water, sewers and trash collection) and the absence of community facilities, (such as schools and health centers). 3. This report covers the history of the project and analyzes its outcome particularly in regard to the stated project focus on three areas of assistance: "basic and productive support infrastructure, directly productive investments, and technical assistance"; 1/ and the institutionalization of "a delivery system for urban services to low-income areas". The report is based on information in the Staff Appraisal Report (Report No. 1065a-PE), the project files (including a completion report prepared by Banco de la Vivienda del Peru (BVP)), and data gathered by a project completion mission which visited Peru in October 1984. The report was prepared by Antonio Zuniga with assistance from Sandra Joss and Donald Stout (Consultant). II. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL A. The Process 4. At the request of the Government of Peru, a Bank reconnaissance mission reviewed the Government's urban development program in November 1974 and found that its objectives and strategies for developing urban areas were basically consistent with Bank policies. A preappraisal mission of August 1975 reviewed Government sponsored plans and feasibility studies (the preparation of which was coordinated through the Ministry of Housing and Construction (KVC) and the Housing Bank (BVP), and confirmed these findings. Appraisal of the project took place within a year of the reconnaissance 1/ All quotes in Section I are from the Appraisal Report 20 mission, in November 1975, followed by a post-appraisal mission in February 1976. No,gotiationaves held in May 1976 and the Board approved the loan on June 8, 1976, which became qffective in January 1977. The relatively short time (1 1/2 years) elapsod botweer the reconnaissance mission and Board presentation could be attributd lbo the Government's firm commitment to its own formulated objectives and to the consistency between the Bank's policies and the Government's oblectives and strategies. B. Objectives and Description of Project 5. The project's major objectives were the establishment of an institutional capability for the delivery of basic services to the urban poor, generation of employment opportunities for the low-income workers and improvement of the productive capacity of residents in pueblos jovenes. To achieve these objectives the proposed components were: (a) Basic and productive support infrastructure in pueblos jovenes in Lima and Arequipa: water, sewerage, electrification, upgrading existing roads, and construction of new access roads and health centers. (b) Directly productive investments in Lima and Arequipa: industrial, commercial and residential sites and services and supervised credits. (c) Technical assistance for the: - establishment of a unit in the MVC to assist settlers in self-help construction; - provision of advice in the planning, management and monitoring of the industrial sites and services in Lima; - review of plans and in the preparation of water supply and sewerage components in Arequipa; - provision of advice as well as related vehicles and equipment for training programs for community health and nutrition in pueblos jovenes; and - assistance to the BYP in overall project implementation, financial planning and related studies for the mobilization of additional resources for urban development and future projects. III. IMPLMENTATION A. History 6. The project got off to a slow start (1976-1979) in part because there was a lack of political support from the new Government and due to a weak management in BVP, the borrowing agency. The main contributing factor to many of the delays during this period was the lack of counterpart funds from the Government. in addition, the initial start-up period was hampered by the delay in government ratification of the loan agreement and decree enabling BVP to proceed with the project as well as delays in approving and signing the contracts with the executing agencies (ELECTROLIMA, ESAL, ESAR, MVP, EMADI, STNAMOS, ORAMS and MS). It is interesting to note that the purchase and titling of the land for this project was never a problematic factor, which is more often the case. 21 7. As implementation progressed some inconsistencies arose between local tendering and procurement procedures via a via Bank requirements which resulted in some delays. In addition, difficulties arose between the consultant seconded by the Bank to EMADI and EMADI, which finally resulted in termination of the consaltant's contract. It appears these difficulties were caused by the Government's reluctance to engage in very costly technical assistance at a time of great financial difficulties in Peru. 8. In the latter part of the start-up period delays in the implementation of the health centers and the access roads caused some concern. The delays in the construction of the health centers was an issue throughout implementation of the project; this was due in part to initial financing uncertainties, changes in policies and the inefficient management of this component by the Ministry of Health. Due to the unwillingness of the pueblos jovenes' residents to make any contribution towards the access roads component, it was finally dropped and replaced by additional housing units. 9. The project did not really get the necessary political support until the beginning of the Belaunde Government 2/ in 1980. After the first project restructuring (para. 10), construcTion substantially increased. During the 1980-1982 period the new Government gave high priority to the urban sector particularly reflected by the commitment of new MVC and BVP officials to the implementation of the project. MVC moved quickly to complete lagging components of the sites and services, industrial parks, supervised credits, and health centers. The Government hoped this action would open the doors for a second urban loan which was requested in mid-1978, but the Bank did not proceed with its identification until further progress could be made on this project. In March 1980 there was a formal extension of the loan closing date to December 31, 1982. 10. In 1981 a formal restructuring of the project took place which resulted in 3200 lots for the sites and services component (replacing 900 lots in Villa El Salvador); deletion of the paving of 86km of access roads for the pueblos jovenes; supervised credit program for self-help construction was increased from 1000 to 1500 loans; ICB was required only for contracts of $1 million or more; and Bank review of contract and procurement documents was to be raised from $150,000 to $1 million. 11. The restructuring of the project led to an improved rate of execution of the project during this period. Apart from difficulties in the contracting of technical assistance for the management of the industrial parks, construction of the health centers, and procurement of their equipment, the project components encountered no major problems. 12. At some point during this perioe the Bank proceeded with the identification and preparation of a possible second project as a result of the improvement in implementation program of this project. To this effect, funds available in the Technical Assistance diabursement category of this project were used to finance the production of practically all the final designs of the sites and services plots that were to be included in the contemplated second project. However, the second project was never appraised as agreement cculd not be reached with the Government regarding interest rates to be charged to beneficiaries. 2/ The Belaunde Government 2cisidered the shelter component a priority to provide experience for future expansion of this program under a future second project. 22 13. In January 1983 the Bank agreed to the Borrowers' request for a second extension of the loan closing date to December 31, 1983, and a reallocation of loan proceeds (finalized in October 1983). This reallocation was to result in the construction of an additional 3500 sites and services units and the increase of the percentage of disbursement for civil works (all equipment had been included in the civil works contracts and practically no use had been made of Category 3 for vehicles and equipment). B. Completed Project 14. With the exception of the Access Roads project component all the original physical targets of the project were either met or are in the process of being met. In fact, in most cases these targets were substantially surpassed. The exceeding of target of urban solutions is the result of the utilization of the loan proceeds that were originally earmarked for the Access Roads project component (dropped after the first restructuring of the loan), and a larger investment on the part of the BVP. Table III-1 shows the comparison between the original estimate and the actual physical targets. PERU - LOAN 1283-PE SITES AND SERVICES DEVELOPMENT PROJECT Table III-1: Physical Targets Number of Solutions Increase (Decrease) Component Appraisal Actual Number Water and Sewerage in Lima 16,500 44,685 28,185 170.8 Water and Sewerage in Arequipa 2,600 3,053 453 17.4 Electrific ation in Lima 12,400 36,760 24,360 196.5 Electrification in Arequipa 3,900 10,523 6,623 169.8 Access Roads in Lima 86km 0 1/ (86km) (100%) Health and Nutrition Centers in Lima 5 1 j/ (4) ( 80%) Industrial Site in Lima 65 In9 3/ 44 67.7 Industrial Site in Arequipa 25 25 0 0 Sites and Services in Lima 867 7,059 4/ 6,192 714.2 Supervised Credits in Arequipa 1,000 1,281 - 281 28.1 Total 37,362 103.496 66,134 177.0 1/ This component was excluded from the project in the January 16, 1981 Amendment to the Loan Agreement. 2/ Only one of the Centers is completed, the other four are at various stages - (from 59% to 96%) of completion and their equipmen, was never procured. 3/ Only 60 lots have been sold and none has been improved. 4/ Of this total 3,170 sites were fully financed to completion by the project and the others were partially financed with proceeds from the loan and completed with BVP financing. 23 C. Implementation schedule 15. The project was scheduled to be completed in 3 years (see Figure 111-2), however, implementation took 7 1/2 years. The time overruns were caused principally by the following: an overly optimistic implementation schedule at appraisal, delays in signing the inter-institutional agreements, lack of support by the Government for the project at the beginning, insufficient counterpart funds, and governmental restructuring that shifted responsibilities between agencies. D. REPORTING 16. Semiannual progress reports, which were received rather regularly particularly after 1980, assisted the Bank in following progress on the project, and were also used by the project unit for internal management purposes. Annual audited reports of BVP and for the project account, as required by the Loan Agreement, were also satisfactorily submitted to the Bank. Although not expressly required by the Loan Agreement, BVP has done a good job in reviewing the project experience through the preparation of a completion report that save for the guidance of a consultant, expressly hired for this purpose, was produced entirely by BVP personnel in its Foreign Borrowing Department. E. PROCUREMENT 17. With a few minor exceptions international competitive bidding (ICB) was to be used for all works and equipment purchases. Initially BVP encountered seriou3 problems in getting the executing agencies to follow Bank procurement procedures, particularly with the MVC. There were therefore some procurement delays while the BVP ironed out these problems. Thus, BVP is to be credited with having succeeded in ensuring that all parties involved carried out procurement under the project as stipulated in the loan documents. However, during three years of inviting international competitive bidding not one single foreign contractor showed any interest in participating. Given this situation, the Bank agreed to a ceiling of US$1 million below which bids could be invited according to the local competitive bidding compatible with the Bank's guidelines and also raised the ceiling for procurement decisions from $150,000 to $1 million. Both of these decisions by the Bank were instrumental in speeding up execution of the project. F. COST AND FINANCING 18. Total project cost exceeded the appraisal estimate by 44% in US dollars 3/ (see Table 111-3). The cost overrun was caused primarily by the fact thaT the project financed many more solutions than were originally estimated. As there were some changes when the project was restructured, the causes for cost overrun can be more clearly appreciated in Table 111-4, were the actual project costs have been scaled down in the same ratio as the division of the number of solutions estimated at appraisal over the actual number of solutions attained. As this table shows, if the project had been stopped once the appraisal physical targets were reached a cost under-un of nearly 27% (or US$ 9 million) would have been achieved. 3/ Due to the very high inflation that affected the country throughout almost the entire project duration, cost comparison between appraisaL estimate and actual cost is clearer in US$ (the corresponding figure in Soles is 2526%) 屆．寫寫••．••，,,,,& 調間同d勿令馴H磚◆馴H磚◆◆ 寥口唱開留口 虜華鳥口 ，一區甚巨日哥羹才作劍 一目由華辯月 不而i兩「面神而面面神痲三祈仔寫，•二 面藪瀾「面面崗面面蒲面面可面兩面 萬兩涵面面面兀耐涌 25 w SIM AND SMCM twma4m PRwEgr TARZ 111-3: Fiml-bpLwt Costs Appvisal Estimates al Actual b/ % Chwo between aod Actual Calpment S/.m Us$ m % S/.m Us$ m % S/.m M Water and Samm4p in Lin 657.7 14-62 33 9975.3 18.4 30 1,01 26.0 Water and Severvp in Arequipa 75.5 1.68 4 171.0 0.7 1 126 (58-0) Electrification in Lira 183.3 421 10 9,251.6 9.6 15 4,947 1 28b Electrification in Arequipa 46.2 1.03 2 3,013.8 2.9 5 6,423 162.0 Access Roads 246.3 5.47 13 - - 0 - - Health Centers 93.8 2.08 5 1,113.9 1.0 2 1,089 (52.0) Shelter Units 187.1 4.16 10 19,629.2 15.0 23 10,391 261.0 Industrial Park Arequipa 47.4 1.05 2 657.1 1.1 2 1,286 5.0 Industrial Park Lim M8.2 6.40 15 3,165.9 8.9 14 999 39.0 Supervised Credits 80.8 1.80 4 3,461.3 4.1 7 4,184 128.0 Tedwdcal Assistance 31.5 0.70 2 713.1 0.6 1 2,164 (14-0) Total 1,943.8 43.2 100 51 052.2 62.3 100 2,526 44.0 a/ IncludIng Contim&ncies ' / Actual expenditum including portions finwiced exclusively by BVP 26 ! - IMAN 12E3-PE SM AND SEICES ZLOPMR PROJE TWE 111-4: Adjlad Project Costs / Cost Appraisal Actual Increase (Decrease) Cpoment Total U.Cost per Total Scale Down U.Cost per US$ m solution US$ m S m. 2/ solution % US$ US$ Water and Semerae in Lim 14.61 886 18.4 6.79 412 (53.6) Water and Swere in Arequipa 1.68 646 0.7 0.60 231 (64.3) Eeetrification in Lim 4.21 339 9.6 3.24 261 (23.0) Electrification in Arequipa 1.03 264 2.9 1.07 274 3.9 Access Roads in Lim (5.47) (63,605Am) - - - - Health Centers in Lim 1.20 3/ 240,000 1.0 1.25 4/ 250,000 4.2 Shelter Units 2.175/ 2,500 15.0 2.32 6/ 2,676 7.0 Industrial Park Arequipe 1.05 42,000 1.1 1.10 44,000 4.8 Indtstrial Park Lim 6.40 98,460 8.9 5.31 7/ 81,692 (17.0) Supervised Credits 1.80 1,800 4.1 3.20 3,200 77.8 Tednical Assistance (0.70) - (0.6) - - - Total 34.15 - 61 .70 24.88 - (27.1) 1/ Adjusted as per foot-notes to obtain realisticaly cmpamble figures 2/ Scaled down in the ratio of rumber of solutions estimated at appraisal divided ty actual number of solutions attained. 3/ Deducting equipoent and vehicles emnts as th were never pardhased (2.080.88) 4/ Increased by 0.25 to accour. for estimted amont needed for coppletion. 5/ Deducting budpt allocations for ComuniVy facilities (1.99) that were not constructed. / Including proportional allowance for shelter conetruction to caupensate for the units sold as norupgraded sites and services. 7/ Does not include additional expences needed to decrease the size of lots to met maiket denand for saller lots. 27 19. Practically all of this amount of cost underrun comes from the lower unit of the water and sewerage in Lima and Arequipa and the Lima electrification com- vonents. As stipulated in the SAR all the pueblos jovenes to be upgraded were taken care of and as the additional ones that were added had similar characteristics, it is clear that, at least in part, the lower costs attained were duo to over-estimation of the construction costs at appraisal time. For the water and sewerage components two additional considerations also explain the savings: (a) as more solutions were implemented in Lima, the influence that the cost of the trunk mains had on the unit cost of the individual solution diminishee; and (b) as more solutions were added the ratio of water/sewerage solutions changel drastically and so did the unit cost of the individual solutions. 20. At the same time the Bank's portion of financing fell from the anticipated 50% to under 35% (as shown in Table 111-5). At least two reasons explain this lower Bank participation: (a) a lag of three months between capital investments by the BVP and reimbursements by the Bank was not atypical; with the dollat rate of exchange varying practically in parallel with the differential inflation rates (between Peru and the USA) this represented during the years of higher disbursements a shortfall in the order of 20% in dollar equivalent figures 4/ and; (b) towards the end of the project a number of contracts were aot financed in their entirety by the Bank (notably Lima electrification and housing contracts) as the loan proceeds were exhausted. The creation of a special account (as done elsewhere in countries with similar inflation problems) would have been very instrumental in maintaining the anticipated share of Bank financing. Table 111-5: Financing Source Appraisal Actual US$ % US$ % IBRD 21.6 50.0 21.6 34.7 BVP 19.1 44.0 35.0 56.2 Down Payment 2.5 6.0 5.7 9.1 43.2 100.0 62.3 100.0 IV. PHYSICAL PERFORMANCE A. Water Supply and Sewerage 21. In Lima, in addition to providing water connections to 16,500 households, the component covered the construction of two trunk mains, both 4/ A typical disbursement request whose expenditures were made when the rate of exchange was Soles 600. to US$1 was reimbursed by the Bank at the rate of exchange of Soles 750 to US$1. 28 of which were constructed by ESAL/SEDAPAL 5/. The target of household connections was substantially exceeded as 44685 household connections were actually constructed (or 271% of the original target). In Arequipa, although at a more modest scale, the original target of 2,600 household connections was also exceeded by 17%, as 3,053 household connections were constructed. It is important to highlight the fact that in both cities all the pueblos jovenes initially considered for upgrading were taken care of, and that the increases in household connections were attained in developments similar to those originally appraised 22. The Financing of this major increase in physical targets can be attributed to the lower unit cost of this component, (see para. 19 and Table 111-4), but also to the elimination of the access roads component, whose allotted funds were in part utilized in financing the increases in this component. B. Electrification 23. As was the case with the water and sewerage component the execution of the electrification components in Lima and Arequipa was suocressful. In Lima 36,760 household connections were constructed and 10,523 in Arequipa which represent an increase in the physical targets of 197% and 170% respectively. In Lima the unit cost was obtained substantially lower than initially contemplated which, together with additional funds from the eliminated access roads component, account for the financing of the increases. Similarly, as with the water -d sewerage component, 4)l the pueblos jovenes considered for upgrading at appraisal were developed a..i6 the additional ones had similar characteristics. C. Access Roads 24. Similar to the other components for the upgrading of pueblos jovenes, beneficiaries (residents of the pueblos jovenes) in this component were expected to make a down payment towards the construction costs of the component. The down payment for access works to improve pueblos jovenes was to be 10% of project costs which would have represented the entirety of the beneficiaries financing--this requirement was (in contrast with the acceptance in the case of the other components) never accepted by the residents. It appears that the residents considered such works should be financed entirely by the government in tha same fashion as are schoolc or health centers. In addition, they did not percive the construction of the access roads as having the same level of priority as did the water, sewerage and electrification components. 25. The Government's efforts to obtain a solution to this situation spanned several years until a clear realization of the impasse was reached. The Government then requested and the Bank accepted the cancellation of the component and the utilization of the allotted funds to expand the execution of the two additional components mentioned in paragraphs 10 and 13. 5/ See paragraph 40 where the Institutional changes of the executing agencies throughout the project years are discussed. 29 D. Health Centers 26. This component was to finance the construction of three new health ceters and the expansion of two existing ones, all of them in the southern portion of Metropolitan Lima. One of the new centers was to have particularly innovative fef,tures in that it was to be closely coordinated with the needs and prioritie of the community as defined by the people themselves. This center was also to be outfitted through the project, with equipment and vehicles to carry out the proposed program of training to over 900 health promoters for paramedical training. 27. As mentioned in para. 8 delays in the construction of the centers was an issue throughout the project's implementation, Although all of them may eventually be completed o/, it is also clear that the Ministry of Health has changed its policies and all five centers will be operated in the conventional fashion and the paramedical training program will not be implemented. E. Industrial Parks 28. This component met with varied degree of success. In Arequipa, not withstanding considerable delays, the park w: s completed an' the lots promptly sold. At present all lots have been upgraded and industrial concerns have been operating in the new installations since 1983. On the other hand, the park in Lima has been everything but successful. Only 49 lots out of 109 have been sold and less than 5 have been upgraded. The Government is convinced that the most important reason for the lack of demand hinges on the size of the lots being offered. A program to correct this situation was proposed in 1984, but dropped for lack of the needed funds necessary to adapt the constructed infrastructure to the smaller lot size to meet the public demand. Given the current fiscal situation of the country, it is not at all clear when said program can be implemented. F. Shelter 29. The original component was specifically oriented to the development of the second phase of Fundo Vazquez in Lima, the first stage of which had originally been developed by MVC. The project component consisted of 867 serviced lots, supervised credit for the construction of dwelling units and the necessary community facilities. All kinds of problems hindered the implementation of this component. To the slow start-up of the overall project (para. 6), for this component in particular there were additional number of circumstances resulting in delays: tardiness in the production of final engineoring drawings, indecision in the creation of the technical assistance group that was to coordinate the work, and the emergency austerity decree, that in the end, prevented the contracting of the consultants that were to integrate it. 30. With all these delays, in March 1980 the Fundo Vazquez expropriatiou decree was prescribed and the land title was returned to its original owners, thereby prvventing the --ecution of the shelter component in the land originally contemplated. 6/ As noted in Table III-1 only one of the five Health Centers is completdd, the other four are at various stages of completion. 30 31. With the Belaunde Government, low income shelter programs received clear Government support and BVP proposed and the Bank agreed to substitute the now unavailable fundo Vazquez with developments in the "Cono Sur de Lima". 32. In the Loan Agreement modification, the construction of 3,200 shelter solutions was stipulated. In the end, 7,059 solutions were implemented of which 3,170 were fully financed to completion by the Bank and the others were only partially financed with proceeds from the loan and completed with BVP financing. G. Supervised Credits in Arequipa 33. The original target of 1,000 loans that constituted this component was increased to 1,500 in the same Loan AgreemerL modification mentioned in the previous paragraph. Finally only 1,281 loans were granted or 13% more than originally targeted. H. Technical Assistance 34. In general, this component of the project was not particularly successful. Nevertheless, at least some of the benefits expected were indeed obtained through actions that were not financed by the project. 35. As stated in para. 29 the Technical Assistance Unit to be established within the MVC in support of the development of Fundo Vazquez was never implemented. And when the Fundo's expropriation decree was prescribed and the component was restructured (para. 30) there was no further need of it. 36. The technical assistance to ESAR to review future water supply and sewerage needs for Arequipa's metropolitan area was successfully obtained as a grant through a bilateral agreement reached with the Federal Republic of Germany, and as such was not financed by the project. 37. The termination of the consultant's contract that advised EMADI on the subject of the Industrial Park in Lima (para. 7) was the end of the technical support for said component that as presented in para. 28 produced the worst results of the entire project. 38. The Ministry of Health never implemented the paramedics training facilities that were to be incluaed in one of the Health Centers and consequently the assistance in preparing the training program was never provided (para. 26). Finally, the advisory assistance to the BVP for overall project implementation was never provided. It should be pointed out, nevertheless, that the BVP improved its performance tremendously since the creation of its Foreign Borrowing Department that took place at the beginning of the Belaunde Government (para. 9). 39. Although as expressed in para. 13 the contemplated second project was never appraised, the final engineering drawings financed with the first project's loan have been (in its majority) used by ENACE in its ongoing shelter program. To the extent that the Bank's criteria regarding service standards had been incorporated in those designs, at least some benefits of technical assistance have been extended to the country's housing sector. 31 V. INSTITUTIONAL ANALYSIS A. Implementing Agencies 40. During the life of the loan many Government changes took pi-ce as the country was undergoing a transition period.7/ .n some instances the changes were more apparent than real but in some others they were real and had an important impact on the project's implementation. 41. The initial phaseout of SINAMDS begun at loan effectiveness and its final disappearance had quite an impact on the project. SINAMOS was to be in charge of the promotion and negotiation of the agreements to be signed with the beneficiaries of five of the project's components: water and sewerage in Lima, electrification in Lima and Arequipa and supervised credits in Arequipa. 42. Unquestionably, SINAMDS' disappearance was one of the reasons for the delays in the execution of the mentioned components but, at least in some respect, this probably turned out to be a blessing in disguise if one is to judge by the end results. At first, the agencies that ended up promoting the components were handicapped by not having the experience nor the needed staff to promote the projects at the beneficiaries' level. However, once this obstacle was overcome, the promotional function became institutionalized within the organization and is presently operating in great form and in a more direct and simplified manner that it would ever have been possible had SINAMOS not disappeared. 43. With the administrative changes undergone by the Government, the actual construction responsibility for the Health Center was shifted from the Ministry of Health to ENACE (under MVC). ENACE is now the Government's constructing agency. Nevertheless, the poor performance of the Health Centers component is not due to this change but rather to changes in the Ministry of Health's policies and inefficient management (para. 8), although this change did create some further delays. 44. EMADI, who was in charge of the execution of the Industrial Parks components, performed with mixed results. The Arequipa component, although with delays, was implemented reasonably well while the one in Lima was not properly handled. When EMADI disappeared, its assets and liabilities were transferred to ENACE. Unfortunately, if the proper actions had been taken when this transfer took place the Lima component probably could have been corrected. ENACE, reasonably unwilling to accept responsibilities until after all financial and accounting matters had been clarified, failed to act promptly on the issues. In fact, the said transfer was never perfected. Towards the end of the loan's life, before it was completed, a further administrative change transferred the responsibility for all the Industrial Sites of the couintry to the Ministry of Industry. By this time, the additional investment needed to alter the infrastructure in order to acommodate smaller size lots was unavailable (para. 28). 7/ Annex 2 shows a comparative table for executing agencies at appraisal and actual for the various components. 32 45. In the early years of the project MVC was not efficient in discharging its responsibilities for execution of the shelter component (Fundo Vazquez). This situation was corrected once the Belaunde Government was in charge and the shelter component restructured to produce shelter units in the Cono Sur de Lima where the MVC and ENACE performed reasonably well. VI. FINANCIAL, SOCIAL AND ECONOMIC PERFORMANCE A. Cost Recovery 46. Recovery of costs for the project were to be made from charges to final users with the exception of sub-projects on access roads,8/ health centers, and technical assistance, all of which would be recovered from general tax revenues. It was, therefore, expected that about 65% of original investments would be directly recovered and the remaining 35% ricovered indirectly through tax revenuee 47. For those components that were to be directly recovered, the individuals participating in the project were to repay their proportional costs of the improvements in ten to twenty years with annual interest rates of not less than 12% per annum and with a down payment of not less than 5%. 48. In the project as executed, these criteria for cost recovery were adhered to and implemented in all cases. However, the interests charged were never sufficiently high to offset the very high inflation rate that afflicted the country practically throughout project implementation. The unwillingness on the part of the Government to diminish the interest rate subsidy was at the heart of the negotiations during the preparation of the second project. The failure to reach a satisfactory agreement on this issue brought the second project initially to a halt and eventually to its dismissal. 49. The impact that inflation had on cost recovery can be appreciated in detail in the two tables attached in ANNEX 3. As measured in million of soles of 1975, total project costs were 1,689.6 of which it is estimated that only 510.1 (or 30%) would be directly recovered. This situation was brought about by the fact that the average nominal interest rat, charged to final beneficiaries was 25% while, at the same time, inflation rates reached levels as high as 80-100% per annum. Consequently, it is estimated that the real average interest rate will be around -70%. B. Descripti-, of Benefits and Rate of Return 50. The project as a whole continues to appear to be economically worthwhile. Some factors which could not easily have been foreseen at the time of appraisal have prejudiced the project; others have had offsetting beneficial effects. The overall project IRR at the time of appraisal was estimated to be 29.7%. The current estimate of the overall project IRR is 31.5%. This is well within the sensitivity analysis rrnge of 26.1% - 36.1% at the time of appraisal. Details of the economic reevaluation are given in Annex 1. 8/ Residents of the upgraded pueblos jovenes were expected to pay 10% of the costs of the access roads component. 33 51. Novertheless, there were major changes in some components of the project. Tle access roads component was dropped because of the lack of effective demand by the target group. That money, together with additional funds provided by the BVP, was used to finance a much greater number of solutions for water, sewerage, electrification, shelter units in Lima and supervised credits in Arequipa. 52. The water and sewerage components served 47,738 families (or 2.5 times the number anticipated at appraisal) and the IRE we much higher (62.8%) than estimated at appraisal (16.9%) 9/. On the othor hand the industrial parks component now appear to havi an uneconomically low IRR of 4.8%. The reasons for the failure of the industrial parks component lie in the delays in implementing the Lima industrial park and the lack of effective demand for the size of lota in said park. Changes in Government policies and in the agency responsible fo execution also contributed to the failure. The benefits (non quantified at appraisal) of expected employment generation by the industrial parks component as a whole have not been realized, although in Arequipa it can be said that they were met. C. Affordability 53. The target groups contemplated at appraisal were in all cases reached as all the pueblos jovenes listed in the SAR were improved and the new ones added to the project had the very same socio-economic characteristics. On the other hand, as discussed before (para. 19 and Table 111-4), construction costb resulted lower than that estimated at appraisal, therefore requiring no bigger share of the household budget to meet payments than was estimated at appraisal. In fact, inflation and subsidized interest rates have reduced the proportion that mortgage payments represent of the household budget. Therefore, interest rate subsidies should be reduced if Peru is to produce shelter solutions for the majority of its residents through programs that are congruent with the resources of the country. VII. BANK PERFORMANCE 54. At the time of appraisal neither the Bank nor the Government could have foreseen the inflationary economic environment in which the project had to be executed. Similarly, it would have been impossible for the Bank to predict the drastic institutional changes that the Government underwent.With the benefit of hindsight, on the other hand, it is clear today that the project's execution schedule considered at appraisal was overly optimistic, as was the Bank's perception of the time needed to produce the final designs (needed for most of the components) and for the review and approval of the contracts BVP had to enter with the executing agencies. 55. The frequent supervision missions were thorough and contributed substantially to improvements in the implementation of some components once the project received Government support. On the other hand, hard as it tried and inspite of having - in numerous cases - escalated the issues to the Ministerial level, the Bank was unable to resolve the issues that affected some of the components, notably Lima's Industrial Park and Health Centers components. 9/ See paragraph 5 of Annex 1 34 56. Although it could probably have been done earlier, the Bank reacted with reasonable promptness to restructuring the loan once the rejection of the road component by the beneficiaries was presented by the BVP. The same can be said in regard to the Fundo Vazquez issue and the amendments to the procurement schedule. VIII. CONCLUSIONS 57. The original rationale for the project was the institutionalization of "a delivery system for urban services to low-income areas". Although with delays and changes and not through the original agency contemplated (SINAMOS primarily), the project has accomplished the appraisal's main goal. 58. At present, the installed capacity to promote and manage, at the beneficiaries' level, subprojects for the delivezy of basic infrAstructure services in the low-income areas exist in all executing agencies. 59. Lessons learned from this project reaffirm those learned elsewhere, many of which have already been applied in the later projects of the Bank's ten years of experience with urban projects. Nevertheless, some specific points of interest are: (a) much time and effort was expended in trying to resolve the impasse reached with the access roads component. This could possibly have been prevented (with the consequent savings) if the heart of the issue (usuaries rejection) had been predetermined and assessed at appraisal as it has been done in several recent Bank projects. (b) the restructuring of the loan agreement's procurement schedule was instrumental in speeding up project <xecution. In most of the recent Bank urban projects ceilings allowing for LCB and ex-post review by the Bank have been incorporated. 60. The replicability of the project was prejudiced by the inflationary economic situation (this hampered the project through basically all its life and still is present in the country) and the Government's unwillingness to diminish the heavily subsidized interest rates. 61. In summary, the achievement of the appraisal's goal to establish an institutional capability for the delivery of basic services to the urban poor has been successful. As a matter of fact, many more lower income families were helped through the project than anticipated at the time of appraisal. On the other hand, considering that all components were heavily subsidized by charging negative real interest rates, they are only replicable (due to budgetary reasons) in as much as and to the extent that the Government can keep making free funds available to BVP. Therefore, the Government cannot, given the country's realities, make a major impact on shelter services for the poor until it adopts a viable financial policy for the sector. 35 ANNEX I Page 1 of 4 PERU SITES AND SERVICES DEVELOPMENT PROJECT ECONOMIC REEVALUATION Introduction 1. The economic reevaluation in this Project Completion Report (PCR) uses the same methodology that was used in the Staff Appraisal Report (SAR). Except where noted in the text, the basic assumptions are those used in the SAR. Financial costs and benefits were used in the SAR. The internal rates of return (IRRa) ranged from 16.9% to 34.4% and was 29.7% for the project as a whole at the time of appraisal. Sensitivity of the project to change in projected costs and benefits produced a range of 26.1% - 36.1% for the IRR. These are all well above the opportunity cost of capital in Peru.1/ 2. A reestimation of the IRRs confirms that the project as a whole was worthwhile. The total project IRR is slightly higher (31.5%) than estimated in the SAR (29.7%) because of the much higher IRRe on the water and sewerage components. Sensitivity of the project to changes in benefits for the remaining useful life of the project ranged from 28.3% (for a 15% decrease in benefits) to 35.2% (for a 25% increase in benefits). This is despite the disappointment in the implementation of the Lima industrial park component, which decreased the SAR ertimate of a 34.4% IRR for the combined Lima and Arequipa industrial parks components to 4.8%. Each component is examined briefly below. 3. Table I at the end of this Annex summarizes the principal quantifiable aspects of the project.2/ The total projeot ..jat in constant Soles of December 1975 exceeded the SAR estimate by about 25%, and the component for access roads in Lima was eliminated. All of the cost overrun plus the money released by abandoning the access roads were used to finance greater-than-expected number of solutions of electrification, sites and services in Lima and supervised credit in Arequipa. These components accounted for 64.7% of the larger total actual cost compared with 32.4% of the smaller cost in the SAR. Table II: Project Cost(%) Increase % Component SAR PCR (Decrease) % Water and Sewerage (Lima and Arequipa) 29.6 19.9 (33) Electrification (Lima and Arequipa) 14.6 32.5 123 Access Roads 17.8 0 (100) Industrial Sites (Lima and Arequipa) 20.2 15.4 (24) Sites and Services (Lima) and Super- vised Credit (Arequipa) 17.8 32.2 (81) Total 100.0 100.0 1/ The use of economic costs and benefits would have increased the IRRs of each component and of the project as a whole. 2/ All monetary figures in the Economic Reevaluation are in December 1975 Soles. 36 ANNE 1 Page 2 of 4 4. The income distribution implication of the changed project composition is that many more lover-income families were helped than anticipated in the SAR. Nearly 3 times as many families received electricity and more than 4 times as many were benefitted by the sites and services and supervised credit components than was anticipated in the SAR. Individual Components 5. Water and sewerage in Lima and Arequipa The combined net benefit stream produces a new estimate of 62.8% for the IRR on these components. The Lima component was responsible for the high IRR. The IRR for Arequipa actually now appears to be 0.2%. The informal source of water without the project is much cheaper in Arequipa than in Lima (mostly wells rather than tanker trucks); and the transport distances are less in Arequipa. This translates into a much smaller measure of benefits per family with the project in Arequipa than in Lima.3/ As of now, the Arequipa water and sewerage component can be justTfied only on the grounds of political judgment to cross subsidize between Lima and Arequipa. The very high cost of informal water (tanker trucks) on the one hand, and the relatively low investment (mostly distribution lines of small diameter without any real major mains) account for the high IRR of the Lima component. 6. The sharply higher than expected IRR for the water and sewerage components as a whole can be attributed to several factors. a. The unit cost was a third (33.6%) of the SAR estimate. b. A higher percentage of the components was water rather than sewerage (52.6% versus the SAR estimate of 37.7%). Since sewerage benefits are not quantified, the PCR quantifies a higher percentLge of the total subproject benefits. c) A higher percentage of the components was in Lima than projected in the SAR (93.2% versus 83.3%); and the IRR is much higher in Lima than in Arequipa. d) The surveys of water consumption in the pueblos jovenes which were done for the PCR produced somewhat different results from the surveys which were done for the SAR. Monthly water consumption for the households which were surveyed were (cubic meters per month): PCR SAR Lima Arequipa Without project 4.6 9 13 With project 22.8 15 17 Since most of the quantified benefits are due to the difference in price with and without the project on the amount of water consumed without the project, the PCR benefits are substantially greater than those estimated in the SAR.4/ e. The BVP also points out that infrastructure costs are about 50% higher per connection for sewerage than for water. The higher proportion of water solutions in the water/aewerage mix would decrease the unit average fixed costs. 3/ Benefits per family in Arequipa are estimated to be 21% of the benefits per family in Lima. 4/ In Lima, for example, 72% of total water benefits are due to the price differential; 18% to the increased consumption effect. 37 ANNEX 1 Page 3 of 4 7. Electrification in Lima and Arequipa The IRR for these components is nearly identical to that in the SAR (25.4% and 23.7% respectively). Although the number of families benefitted increased from 16,300 to 48,283, the costs and benefits per family are nearly identical to those in the SAR. SAR PCR Benefits per year 2,883 2,815 Capital cost 10,730 10,300 8. The PCR estimate of the IRR is hirher for Lima (28.9%) than for Arequipa (16.4%). The cost of illumination (candles) used is higher in Lima than in Arequipa. The benefits per family, therefore, are greater in Lima; unit capital costs are less in Lima; and the number of families benefitted is three times greater in Lima. These considerations explain the higher IRR for Lima. 9. As in the case ni' water, the minimum monthly consumption charge subsidizes low-income families; the project target population. This would tend to decrease the IEhR both in the SAR and in the PCR. Contrary to expectations, the electricity tariffs are more heavily subsidized now than in 1976 at the time of the SAR. 10. The SAR and the PCR quantify only the price differential effect on benefits with and without the project. No benefits are included for increased consumption of illumination nor for the improved quality of it. To this extent, the IRR is understated. 11. Industrial Parks in Lima and Arequipa. The lots in the industrial park in Lima are not yet totall.y sold or in use. It is expeu.ed that sales will produce benefits beginning in 1986 and reach a stable peak in 1989. If this occurs, the present PCR estimate of the IRR for Lima is 3.6%. Similarly, the IRR is 15.9% for the Aroquipa industrial park. 12. On the other hand, the benefit streams in these components are significantly understated because of the heavily subsidized interest rates charged (2% commission plus 40% in Lima and 22% in Arequipa). These are severely negative real interest rates. The going market rates in Lima are about 112%. The financing terms for the Lima industrial park (20% down, 7 years amortization) require a monthly payment S/.442.7 per S1.1,000 of mortgage at 42% compared with S/.1,120.6 at 112%. The monthly payments (and hence benefits) would be multiplied by about 2.5 times in calculating an IERR. 13. The IRR calculations for these components are less meaningful than for the other components. They only demonstrate what is evident from the implementation experience. Arequipa is a good project, as expected. The difficulties in Lima -changing governments, institutions, and policies- rendered the Lima industrial park an unsuccessful undertaking.5/ 5/ This does not imply, of course, that the Lima Industrial Park component should be discontinued at this point. Since almost all of the capital costs already have been incurred and must be considered sunk costs, the marginal 'RR of completing the project is some 490%. 38 ANNEX 1 Page 4 of 4 14. Sites and Services in Lima and Supervised Credit in Arequipa. 3,150 units of the core houses (nucleos basicos) were sold in January 1983. The remaining 3,889 are to be sold in 1985. The size of the basic unit is smaller than provided for in the SAR but many more units were built than planned (867). Unit costs are about 46% of the projected unit costs. 15. The IRR for the Lima component is calculated to be 30.7%. This is higher than the reconstructed IRR in the SAR (24.4%). The Arequipa IRR for supervised credits (32.4%), on the other hand, is well below the implicit, reconstructed IRR in the SAR (50.5%) which can be explained by the Larger size of the individual loans. The combined net benefit streams for Lima and Arequipa produce an IRR (31.1%) very close to that in the SAR (32.2%). Conclusions and Observations 16. The project as a whole continues to appear to be economically worthwhile. Some factors which could not easily have been foreseen at the time of appraisal have prejudiced the project; others have had offsetting beneficial effects. They largely wash out in the overall project IRR. 17. All subprojects are heavily subsidized by charging negative real interest rates.6/ The subprojects are not replicable for budgetary reasons. The Government cannot make a major impact on shelter services for the poor until it adopts a viable financial policy for the sector.7/ To some extent this has diluted the potential value of the learning experience in implementing the project. 18. Project costs were increased and benefits were delayed by the longer than expected implementation periods. This is most dramatically illustrated by the Lima industrial sites subproject. 6/ The inability to persuade the Government to accept a policy of less subsilized interests was a major consideration in the decision of the Bank to suspend preparation of a second urban development project in Peru. 7/ A policy which included cross subsidies, as for water and electricity, can be compatible with a sound sector financial policy. 39 ANNEX 2 Page 1 of I PERU LOAN 1283-PE SITES AND SERVICES DEVELOPMENT PROJECT Table 6: Institutional Changes EXECUTING AGENCY Component Appraisal Actual Water and Sewerage in Lima ESAL/SINAMOS SEDAPAL Water and Sewerage in Arequipa ESAR SEDAPAR Electrification in Lima ELECTROLIMA/SINAMOS ELECTROLIMA Electrification in Arequipa SEAL/SINAMOS Direccion Regional de Energia y Minas /ENACE Health Centers Ministry of Health ENACE Industrial Park in Lima EMADI EHADI/ENACE/Ministry of Industry. Industrial Park in Arequipa EMADI 3MADI/ENACE/Ministry of Industry Shelter Units MVC/EMADI MVC/ENACE Supervised Credits SINAMOS/ORAMS MVC/ENACE 40 ANNEX 3 Page 1 of 2 PERU LOAN 1283-PE SITES AND SERVICES DEVELOPMENT PROJECT Table 7: Cost Recovery (in millions of soles of Dec. 1975) Total Payments Accounts Cost Component Costs Received Receivable Recovery Water and Sewerage in Lima 489.8 - 65.3 65.3 Water and Sewerage in Arequipa 21.7 11.2 0.6 11.8 Electrification in Lima 317.8 76.2 69.6 145.8 otrification in Arequipa 116.5 7.8 31.9 39.7 Vealth Centers 30.8 - - . Industrial Park in Lima 207.2 - 22.8 22.8 Industrial Park in Arequipa 23.9 5.3 3.9 9.2 Shelter Units 338.1 - 141.7 141.7 Supervised Credits 126.7 6.8 37.2 44.0 Technical Assistance 17.1 - M Total 1,689.6 107.3 373.0 480.3 41 ANNEX 3 Page 2 of 2 PERU LOAN 1283-PE SITES AND SERVICES DEVELOPMENT PROJECT Table 8: Interest Rates Charged to Beneficiaries INTEREST RATE Component Nominal() Real() Water and Sewerage in Lima 23.5 -86.7 Water and Sewerage in Arequipa 22.5 -45.6 Electrification in Lima 27.0 -54.1 Electrification in Arequipa 26.0 -65.9 Health Centers n/avail -29.2 Industrial Park in Lima n/avail -89.0 Industrial Park in Arequipa 14.4 -61.5 Shelter Units 26.5 -58.1 Supervised Credits 25.0 -65.3 Technical Assistance 32.0 -53.2 Total 30.0 -69.8 4- T&ør x I- , - -- I i i I5 ~C9 .PHYSICkILREGIONSr ¼uno .A~0''. L-JCOSTA /¯,oSøE RR- tÅC nCb *L -____＿な“