Peru - Sierra : Natural Resources Management and Poverty Alleviation Project

Document of THE WORLD BANK Report No. 15719-PE STAFF APPRAISAL REPORT PERU SIERRA - NATURAL RESOURCES MANAGEMENT AND POVERTY ALLEVIATION PROJECT December 12, 1996 Natural Resources Management and Rural Poverty Division Country Department III Latin America and the Caribbean Regional Office  CURRENCY EQUIVALENTS Currency Unit - Soles (S/.) Official Exchange Rate Effective June 1996 US$1.00 = SI. 2.35 WEIGHTS AND MEASURES 1 metric ton (m ton) 2.205 pound (lb) 1 hectare (ha) 2.47 acres 1 kilometer (kmn) 0.62 miles (mi) I meter (m) = 3.28 feet (ft) FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS COFIDE - Development Finance Corporation (Corporaci6n Financiera de Desarrollo) CONAM - National Environmental Council (Consejo Nacional del Medio Ambiente) FEAS - Project for Strengthening the Agricultural Extension Project FONCODES - National Fund for Social Compensation and Development (Fondo A'acional de Coompensaci6n y Desarrollo) GDP - Gross Domestic Product ICR - Implementation Completion Report IFAD - International Fund for Agricultural Development INIA - National Agrarian Research Institute (Instituto Nacional de Investigaci6n Agricola) INRENA - National Natural Resources Institute - (Instituto Nacional de Recursos Naturales) lIP - Indigenous Institute of Peru (Instituto Indigenista Peruano) MAG - Ministry of Agriculture (Ministerio de Agricultura) MP - Ministry of the Presidency MTR - Mid-Term Review NGOs - Non-Governmental Organizations PETT - Special Project for Land Titling PRONAMACHCS - National Project for the Management of Watershed Basins and Soil Conservation PRONASOL - National Solidarity Fund SENASA - Nationial Agrarian Sanitation Service SINAMA - National Environmental System (Sistema Nacional del Medio Ambiente) SOE - Statements of Expenditure USAID - U.S. Agency for International Development Acting Vice President: Mr. Gobind Nankani Director: Mr. Paul Isenman Acting Division Chief: Mr. Jonathan Parker Task Manager: Mr. Pierre Werbrouck  PERU SIERRA - NATURAL RESOURCES MANAGEMENT AND POVERTY ALLEVIATION PROJECT TABLE OF CONTENTS Page No. LOAN AND PROJECT SUMMARY 1. INTRODUCTION 1 2. BACKGROUND 2 A. The Macro-Economic Situation 2 B. The Rural Sector 3 C. Rural Policy and Strategy 3 D. Institutions 4 3. BANK STRATEGY AND OPERATIONS 6 A. Bank Assistance Strategy 6 B. Bank Group Operations 6 C. Rationale for Bank Involvement 6 D. Lessons from Experience 6 E. Environmental Issues 9 P. Indigenous People and Poverty 9 4. THE PROJECT 10 A. Project Objectives 10 B. Project Description, Scope and Strategy 10 C. Project Components 11 5. PROJECT COSTS AND FINANCING 18 A. Project Costs 18 B. Proposed Financing Plan 19 C. Financial Implications for Government 19 D. Procurement 19 E. Disbursements 22 F. Auditing and accounts 25 6. PROJECT MANAGEMENT AND IMPLEMENTATION 25 A. Project Management 25 B. Project Implementation 26 C. Project Monitoring and Supervision 27  7. ECONOMIC AND FINANCIAL EVALUATION 28 A. Methodology 28 B. Rural investment component 29 C. Project analysis 31 D. Sensitivity analysis 31 E. Benefits 32 F. Risks 32 G. Gender issues 33 H. Indigenous people 33 L Environment 34 J. Poverty alleviation 34 8. AGREEMENTS 35 ANNEXES 1 - Rural Investments 37 2 - Rural Community Strengthening 45 3 - List of PRONAMACHCS Branches 53 4 - Technical Assistance, Extension And Training 54 s - Project Costs 57 6 - Disbursements 62 7 - Economic And Financial Evaluation 63 8 - Implementation Plan 74 9 - Environmental Impact and Mitigation Measures 82 10 - Terms of Reference of Legal Assessment of Indigenous Peoples 85 11 - List of Working Papers 87 MAP IBRD No. 26572R  PERU SIERRA - NATURAL RESOURCES MANAGEMENT AND POVERTY ALLEVIATION PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Peru. Implementing Agency: PRONAMACHCS (National Project for the Management of Watershed Basins and Soil Conservation under the Ministry of Agriculture). Beneficiaries: Farmers in the Sierra and PRONAMACHCS. Poverty: Program of Targeted Intervention. Loan Amount: US$51 million. Terms: LIBOR-based floating rate single currency loan in US dollars, payable in 17 years, including a four year grace period, at the standard variable interest rate. The loan will be amortized in annuity payments of principal. Commitment Fee: 0.75 percent on undisbursed loan balances, beginning 60 days after signing, less any waiver. Financing Plan: IBRD US$ 51.0 million. GOP US$ 14.3 million. Beneficiaries US$ 27.9 million. Total US$ 93.2 million. Internal Rate of Return: Economic Internal Rate of Return 12 percent. Financial Internal Rate of Return 8 percent. Map: IBRD 26572R. Project Identification Number: PE-PA-42442.   PERU SIERRA - NATURAL RESOURCES MANAGEMENT AND POVERTY ALLEVIATION PROJECT 1. INTRODUCTION 1.1 Peru's twenty-three million people live in an area of 1.3 million km2. About 10 percent of the land area is located along a narrow desert-like coastal strip (Costa) between the Pacific Ocean and the foothills of the Andes; 30 percent is mountainous (Sierra), made up of the valleys and western plateaus of the Andes; and 60 percent lies in the Amazon watershed (Selva), comprised of the valleys and eastern plateaus of the Andes and the Amazon jungle. The coastal desert holds 53 percent of the population, including the capital Lima which accounts for about a third of the population. 1.2 From the late 1960s until about 1990, economic and agricultural policies in Peru were characterized by heavy Government intervention. Since 1990, the Government has taken measures to liberalize the economy. Price controls, negative interest rates and preferential exchange rates have been eliminated. The agrarian reform law has been repealed to allow for the opening of a land market. Import duties for agricultural products are being reduced. The Government has embarked on a massive land titling process scheduled to be finalized by the year 2000. The land and water law, proposed to Congress, would give private property rights to water and other natural resources. The financing of the rural sector would be channeled through COFIDE (as second-tier bank), the private banks and the loan and savings societies. 1.3 In November 1994, the Government requested the Bank to prepare and finance part of an overall plan tackling the water and natural resources management problems in the Sierra. The proposed project would focus on the seven most poverty stricken departments in the country, leaving room for other donors to finance similar activities in other departments. A parallel project would be financed by the Overseas Economic Cooperation Fund of Japan. The Swiss Government and CARE are also financing parts of the program. Project preparation missions took place in August and October 1995, pre-appraisal in February/March 1996 and appraisal in May/June 19961. The loan was negotiated in November 1996. This project has been prepared by Mr. P. Werbrouck (Sr. Agricultural Economist - LA3NR), Mr. I. Marzall (Agronomist - FAO/CP), Mrs. M.E. Castro (Social Scientist - LA3HR), Mr. M. Asad (Economist - LA3NR), Mrs. S. Raswant (Financial Analyst - Consultant) and Tng. J. Escurra (Consultant). The project has been appraised by Messrs. P. Werbrouck, I. Marzall and J. Escurra. Ms. G. Sakata and Ms. A. Domenech assisted with the production of the report. Mr. J. Parker is the acting Division Chief and Mr. P. Isenman is the Department Director.  - 2 - 2. BACKGROUND A. THE MACRo-ECONOMIC SITUATION 2.1 Over the last five years, the orientation of the Peruvian economy has dramatically changed from the dominance of the state to the private sector, with the state retaining and strengthening its role as regulator. Reforms included: a sweeping privatization program, trade liberalization, the removal of most state intervention in banking services, and elimination of price controls and public monopolies. The economy has reacted positively to the reform program. Inflation decreased from a high of 7,650 percent in 1990 to 12 percent in 1995. The economy grew by 12.9 percent in 1994 but economic growth declined to 7 percent in 1995. Population living in poverty declined from 55 percent in 1991 to 49.6 percent in 1994. Although the income distribution has improved during the past two years, it is still worse than the Latin American average. The 1994 income per capita is estimated at US$1,890. 2.2 Much remains to be done to ensure that the benefits of economic reforms continue. Further steps are needed toward trade liberalization. Public institutions need to be further restructured and strengthened at the central level to act as promoters and regulators of the provision of public services. Local governments need further autonomy in decision-making, with adequate financial arrangements that match responsibilities for service provision. Structure and enforcement of tax collection need to be further improved. Public sector accountability need to be further increased. And greater efforts in human capital development through education and health are necessary to sustain private sector development and decrease poverty. 2.3 Poverty is still widespread in the Sierra and in urban slums. In the face of overwhelming problems in the social sectors, particularly for the indigenous community, the Government established in 1990 a social emergency program to provide direct food and health assistance to the poor. The program was replaced in 1991 by FONCODES (the National Fund for Social Compensation and Development), a mechanism for channeling Government and donor resources to labor-intensive projects. FONCODES has become Government's main instrument to reduce rural poverty from 20 to 15 percent in 1995. The results of FONCODES and the Bank-financed Social Development and Compensation Fund Project are encouraging: projects have been targeted to poor areas, demand-driven and executed locally. 2.4 The incidence of rural poverty is the highest in the rural Sierra, which is estimated to contain the largest number of the poor (1.6 million people).2 Two-thirds of the Sierra households are poor and 47 percent are extremely poor. Poorer households in the Sierra tend to be involved in agriculture. Land titling, small-scale irrigation works, and measures to increase crop and livestock productivity have yielded strong contributions to poverty alleviation. 2 Peru, PovertyAssessment and Social Policies and Programs for the Poor, World Bank, May 5, 1993, Report No. lll91-PE, page xii.  B. THE RURAL SECTOR 2.5 Agriculture is not the main engine of growth in Peru. The potentially cultivable area is estimated at only six percent of the total area. Per capita availability of cultivable land is only 0.13 ha, less than one-third the average in South America. An additional 14 percent is suitable for livestock and 38 percent for forestry. The remaining 42 percent is either desert, mountains or protected land. The coastal area has only 21 percent of the cultivable land but produces 60 percent of the agricultural GDP. 2.6 Peru's most important crops, in terms of production value, are rice, cotton, sugarcane, coffee, meat, eggs and milk. Coffee, sugar and cotton are exported. They amount to eight percent of total exports. Agriculture and livestock represent about 13 percent of GDP, employ 35 percent of the active population and grow at an annual average rate of 2.8 percent since 1980 (13 percent in 1994 and 7.4 percent in 1995). 2.7 Production in the Sierra consists mainly of potatoes, corn, quinoa cereals and livestock (cattle and llamas). Productivity is very low because of the erratic climate, steep topography, irregular rainfall and traditional production technologies. C. RURAL POLICY AND STRATEGY 2.8 The main rural policy objective of the Government is to convert the present subsistence agriculture into a modern and competitive sector to stimulate rural income and economic growth. To achieve this objective, the Government intends to encourage the integration of the farming community in the market economy by attracting private investment in agriculture and stimulating creation of rural communal enterprises. Government would fulfill a normative role, in directing and promoting agricultural investment, and creating a stable juridical framework with clear rules to promote productive activities, intervening with transparency and punctually only when the market does not operate adequately. 2.9 To implement this policy Government has adopted the following economic principles: (i) macroeconomic stability; (ii) flexible labor markets; (iii) restructuring of the financial system including development finance; (iv) elimination of all subsidies and state intervention in the produce and input markets; (v) liberalization of imports and exports and elimination of tariffs on international trade; (vi) elimination of state monopolies in produce and input marketing; and (vii) repeal the Agrarian Reform Law. 2.10 The Government has elaborated a strategy to prepare the sector for the next century3. In broad terms, it would: (i) promote producer-owned commercial organizations (Empresas Comunales y Multicomunales), savings and loan associations, marketing and service cooperatives and similar organizations; (ii) title and register land properties and create an active land market; (iii) create rural finance mechanisms on 3 La Agricultura Peruana en el Siglo XXI, Retos y Oportunidades, Ing. A bsal6n Vdsquez Villanueva, Ministerio de Agricultura, May 1995.  - 4 - commercial terms involving the savings and loan associations providing credit to medium-sized entrepreneurs, community revolving funds as social compensation mechanisms and production support through credit in kind; (iv) reprogram public investment in irrigation projects to reduce costs and promote private investment, and reorient public expenditure towards works which have clear social or external benefits and can increase productivity and efficiency of the existing infrastructure; (v) strengthen the national research system, rural extension and technology transfer with a strong participation of the private sector; (vi) assist the Sierra communities to take responsibility for natural resource management and reforestation; (vii) implement agricultural policy taking into account environmental concerns and Natural Protected Areas; (viii) create a national system to improve phyto-sanitary conditions of crops and livestock; and (ix) direct support to producer Organizaciones Empresariales through training in management and credit lines for operation and consolidation. D. INSTITUTIONS 2.11 Rural development institutions involved in rural development in the Sierra include institutions related to the Ministry of Agriculture (MAG), the Ministry of the Presidency (NP) and private organizations (NGOs, training institutes). 2.12 Ministry of Agriculture. MAG has central headquarters in Lima and directorates in 11 regions and sub-directorates in all geographical departments. MAG's central structure is duplicated in each of the Directorates. MAG staff (including project staff) amounts to about 4,300 including 577 managers, 1,381 professionals, and 2,169 technicians. In addition to its normative role, MAG controls three projects: the Special Project for Land Titling (PETT), the National Project for the Management of Watershed Basins and Soil Conservation (PRONAMACHCS) and the Project for Strengthczning Agricultural Extension Services in the Sierra (FEAS). The Peruvian Indigenous Institute (IIP) is also integrated into MAG. Four public organizations are part of MAG: (i) the National Agrarian Research Institute (INIA); (ii) the National Agrarian Sanitation Service (SENASA); (iii) the National Natural Resources Institute (INRENA); and (iv) the National Council for the production of South American Camels. 2.13 PRONAMACHCS was created in 1981 as a soil conservation project financed by USAID. Since 1986, it is-being financed by the National Treasury and since 1994 it also implements small-scale irrigation and reforestation community projects. It has a staff of 1,100 people and 66 branches operating in 16 of the 24 departments and reaches more than 2,000 communities in the Sierra. Since 1990 it has carried out 40,760 ha in soil conservation, 523 small-scale irrigation works (180,000 ha), and 57,000 ha of forest plantations. Its 1996 budget amounts to US$67 million, US$42 million of which are to be financed by the Treasury. PRONAMACHCS operating costs amount to US$16 million (25 percent of the total planned budget).4 4 The 1995 budget amounted tovUS$53 million but only US$20 million has been realized because of fund shortages at the Treasury.  - 5 - 2.14 IIP. The Peruvian Indigenous Institute has operated since 1947 and has been part of MAG since 1993. It carries out the governmental indigenous people policy, studies and socioeconomic research of the problems and needs of the indigenous people. IIP is the official agency for all actions the Government undertakes in favor of indigenous people. It is tied to the Instituto Indigenista Interamericano of the Organization of American States. Among its achievements are: (i) the ethno-linguistic map of Peru; (ii) the community poverty map; and (iii) a directory of indigenous communities. IIP would carry out monitoring studies of the project impact on indigenous people. 2.15 INRENA promotes the sustainable use and conservation of natural resources. It carries out soil degradation and soil rehabilitation studies, natural resource assessments, and produces natural resource and land use maps. INRENA is also in charge of environmental assessments of projects in the agrarian sector and monitors the implementation of environmental mitigation measures. INRENA would study the productive potential of the micro-catchments in the project. 2.16 FEAS is financed by IFAD and promotes the development of a private agricultural extension sector. It operates mainly in the departments of Piura, Cajamarca, Puno, Moquegua and Tacna until 1999. FEAS finances technical assistance to rural communities on a declining basis (90 to 50 percent) over a period of three years. FEAS is providing technical assistance to communities in the project area. 2.17 FONCODES operates under the Ministry of the Presidency and finances on a grant basis investment projects in the education, health and basic infrastructure sectors. Since 1995 it is involved in the productive sectors. In 1994 it carried out 4,760 projects for a total of US$171 million. It receives financing from the National Treasury, the Inter-American Development Bank, the World Bank and other donors. FONCODES and PRONAMACHCS have a cooperation agreement to complement each others programs. 2.18 Non-Government Organizations. The number of NGOs active in the rural sector are estimated between 750 and 1,250. The NGOs active in the rural areas provide education, training, technical assistance, and marketing. They have little experience in natural resources management and some have a paternalistic approach to rural development. NGOs would be involved in the institutional strengthening of the communities in the project area. 2.19 Community Enterprises. MAG has promoted the creation of community and multi-community enterprises since 1993. Their number has increased to 600 in 1995 and they are mainly involved in processing of agricultural products. MAG fosters an intensive training program in small enterprise management directed to the leaders of these enterprises. The project would further support to the development of these entities.  - 6 - 3. BANK STRATEGY AND OPERATIONS A. BANK ASSISTANCE STRATEGY 3.1 The Bank resumed lending to Peru in 1991 with a strategy designed to support the Government's macro-economic and structural adjustment programs. Since 1993, poverty reduction has become the central objective of the Bank strategy in Peru. To achieve this objective, the Bank concentrates its investment lending in infrastructure and the social sectors. Projects with FONCODES, in Basic Health and Nutrition, Basic Education and Rural Roads Rehabilitation combine poverty alleviation objectives with investments in rehabilitation and maintenance of neglected public services. The Bank also finances technical assistance in support of privatization and development of a complementary regulatory and legal framework. B. BANK GROUP OPERATIONS 3.2 Before 1993 the Bank had financed 64 loans for a total of US$2.2 billion. Up to November 1996, the Bank had financed another US$1.35 billion, US$400 million (30 percent) of which were destined to privatization adjustment loans, US$430 million (32 percent) to social sector projects, US$180 million (13 percent) to standard privatization loans, and US$240 million (18 percent) to the transport sector. In FY97 the Bank has also approved an irrigation rehabilitation loan (US$85 million). IEFC operations amount to US$112 million. C. RATIONALE FOR BANK INVOLVEMENT 3.3 As per the Bank's Country Assistance Strategy for Peru5, poverty reduction is the central objective of the Bank's involvement. This is to be achieved through both private sector-led and environmentally sustainable growth and investments in public goods and services which directly benefit the poor. The proposed project approach supports these objectives by emphasizing poverty reduction in the poorest areas of the country through investments in small-scale infrastructure and promotion of sustainable natural resource management practices. Direct involvement of communities in the project is also consistent with the objective of reducing the role of the State in productive activities. Finally, technical assistance and technological support would strengthen public institutions and communities, supporting the Bank's institution building objectives. D. LESSONS FROM EXPERIENCE 3.4 Past Experience. Past development efforts in Peru were highly centralized and rarely met the real needs of the rural population. These top-down projects have been alien to the beneficiaries, administratively complex, costly to maintain and not sustainable. Experience from FONCODES in Peru also shows that successful development efforts tend 5 Country Assistance Strategy of the World Bank Group, October 28, 1994, Report No. 12997-PE.  - 7 - to be those administered at the local level close to the beneficiary communities. Experience of the past twenty years in rural development indicates that effective rural projects have been relatively small and built upon existing traditional social structures, and have been designed, formulated and executed with considerable beneficiary participation. They have sufficiently taken into account the role of women in the household and community, and integrated women in project development and implementation. 3.5 Lessons in Natural Resources Management in Peru. Among the lessons learned in soil conservation in Peru are the following: (i) there is an inverse relationship between farm size and the implementation of soil conservation measures--the smaller the property the higher the incentive to apply soil conservation; (ii) soil conservation measures have a higher positive impact on productivity than agricultural inputs, but soil conservation without improved agronomic techniques have low economic returns; (iii) irrigation projects need to be complemented by technical assistance in organization, water distribution and agricultural practices; (iv) participation of beneficiaries in identification, design, implementation and maintenance of all soil conservation works is a necessary condition for project success; and (v) payment of salaries to communities for carrying out works for their own benefit discourages the practice of communal works and the traditional organization of the people and is a disincentive for future communal operation and maintenance activities. 3.6 FONCODES. The lessons learned through experiences of FONCODES and other funds in Peru indicate the importance of: (i) transparent and well-defined subproject eligibility and evaluation criteria to speed up the implementation process; (ii) targeting mechanisms based on poverty data to reach the poor; (iii) promotional activities and technical assistance to stimulate a demand-driven approach among the poorer communities; and (iv) the degree of community participation, including women and indigenous groups, and decentralized implementation of projects. 3.7 Regional Experience in Demand-Driven Development. A recent Bank Review of demand-driven development funds in Latin America6 revealed that, first, by encouraging the active involvement of community groups, the projects were much more likely to meet the community's needs than if they were chosen to reflect the priorities of a government agency. Second, once the communities developed a sense of ownership of a project, they were more willing and interested in sharing in its costs and ensuring its maintenance. Third, when a community group was given responsibility for implementing a project that it had helped to choose and prepare, it had greater interest in ensuring that private contractors executed the project well and honestly. 6 Glaessner, Philip, Lee, Kye Woo, Sant'Anna, Anna Maria, and de St. Antoine, Jean-Jacques, PovertyAlleviation and Social Development Funds: The Latin American Experience, World Bank Discussion Paper 261, Washington, D.C., 1994.  - 8 - 3.8 Demand driven projects have potentially conflicting objectives7. These are: (i) poverty targeting versus economic imperatives; (ii) demand driven subprojects versus feasibility and sustainability; (iii) efficiency and accountability versus poverty targeting. The project would resolve these conflicts as follows: (a) Poverty Targeting and Economic Imperatives. The project would only be active in those micro-catchments which are poor, but have physical potential to improve the natural resource base in a sustainable way. The productive potential in each micro-catchment would be studied by the National Institute for Natural Resources - INRENA. The sustainability of the subprojects would be assured by the beneficiaries' commitment to operate and maintain the subprojects in which they have invested significant time and effort in the investment period. Moreover, operation and maintenance of the projects is part of agricultural work during land preparation and harvest. (b) Demand-driven and Feasibility. To avoid non-economic subprojects PRONAMACHCS has worked out a technical strategy. It would not only examine the technical feasibility of the subproject, but also its integration into a natural resources management strategy in the micro-catchment. This would avoid the financing of subprojects on a stand alone basis which may be uneconomic and cause environmental damage, if not properly integrated. Moreover, communities would only be able to benefit up to a financial ceiling per family, and maximum project support amounts per ha or per investment would be introduced. This would avoid the financing of overdimensioned subprojects and increase the probability that subprojects would be economic. The significant contribution in unpaid labor by the communities would encourage them to choose the most cost efficient type of investments. The project monitoring unit would include cost efficiency indicators to measure the effectiveness of this strategy. (c) Accountability and Poverty Targeting. The low skills of communities in handling procurement and disbursement would be resolved by double signature investment accounts of PRONAMACHCS with the beneficiary community. Where communities lack the minimum management skills, the local branch of PRONAMACHCS would continue to provide assistance with local procurement. Moreover, the project would provide training to communities in the management of their investment accounts and input revolving system. The Government is also considering to provide additional working capital to PRONAMACHCS in the amount of US$2 million which would be used to prefinance procurement in beneficiary communities. 7 Tom Wiens and Maurizio Guadagni, The Design ofRulesfor Demand-Driven Rural Investment Funds: the Latin American Experience, Second Draft, May 10, 1996  E. ENVIRONMENTAL ISSUES 3.9 Peru's main environmental problems include the general degradation of its natural resource base because of a rapidly growing population, poverty, regional migration and terrorism. Poorly managed irrigation schemes, modernization and expansion of agriculture, industrialization, intensive mining and fishing add to the problems. Inadequate institutions for enforcing property rights, inability to implement existing environmental legislation, erratic swings in public policy, and fiscal difficulties impede a quick solution of these problems. In the Sierra, deforestation is almost complete. The Eastern slopes have lost 60 percent of their forest cover. Slash and burn agriculture, abandonment of over one million hectares of Inca terraces and overgrazing have left half of Peru's surface area with moderate to serious erosion. Small mining operations create river pollution. Poor management of commercially oriented irrigation systems on the coast has lowered yields and led to the salinization of one third of the area under cultivation. 3.10 The Giovernment does not require environmental impact studies of projects. There is no Narional Environmental Action Plan. Nevertheless, in 1990 the Peruvian Congress enacted the Environment Law which still needs to be implemented. The law establishes a National Environmental System which is not yet operating. A National Environmental Council (Consejo Nacional delMedio Ambiente--CONAM) has also been established. The Government also created the National Institute of National Resources (INRENA) within the Ministry of Agriculture. INRENA carries out assessment of environmental and natural renewable resources, monitoring and control of activities in which environmental risk is evident and establishment of effluent standards for agricultural activities. F. INDIGENOUS PEOPLE AND POVERTY 3.11 The indigenous population, defined by individuals that speak only Quechua, Aymara and other indigenous languages, represent about 11.3 percent of the total population. Peru is a mestizo country, however, and this definition understates the share of the indigenous population by not counting individuals that speak both Spanish and an indigenous language. The indigenous population mostly resides in the Sierra and the Selva. The indigenous people of the Sierra (called campesinos) live in close attachment to their natural resources, have their own customary social and political institutions and live primarily from subsistence-oriented production. They do not always identify themselves as a distinct cultural group because the word "indigenous" has a negative connotation in Peru. 3.12 According to a 1991 household survey8, 80 percent of the non-Spanish speaking households are poor and 55 percent are extremely poor--they are 1.3 times more likely to be poor than the rural Spanish-speaking population. Their educational attainment and unemployment are higher, they have less access to public services such as running water, sewerage and electricity, and infant mortality is more than double. Significant gains Poverty Assessment and Social Policies and Programsfor the Poor, World Bank, 1993.  - 10 - were made during the past administration in the establishment of indigenous land reserves and other legislation protecting indigenous peoples. 3.13 The Government has an indigenous development policy. The main aspects of this policy are contained in the Ley General de las Comunidades Campesinas, Ley de Deslinde y Titulaci6n de Territorios de las Comunidades Campesinas, Ley de Comunidades Nativas, and Reglamento de Comunidades Nativas. The Peruvian Indigenous Institute, within MAG, is in charge of implementing this policy. It promotes actions to improve the living conditions of the indigenous people, such as community enterprises and small agriculture initiatives. It also ensures application of the norms and regulations in favor of indigenous people, including registration of indigenous communities, demarcation and titling of indigenous lands. It addresses environmental concerns, technology transfer, linguistic development, ecotourism, a diverse ethnic and cultural development, and carries out studies in linguistic, ethnic diversity, and poverty issues. 4. THE PROJECT A. PROJECT OBJECTIVES 4.1 The general project objective is to help alleviate the poverty of rural Sierra people. Specific project objectives are to assist the poor to: (i) improve sustainable management of natural resources through soil conservation measures and reforestation at the micro-catchment level; (ii) increase rural production and productivity through introduction of irrigation and improved agricultural practices; and (iii) strengthen their rural organizations so that they can become autonomous and sustainable entities. B. PROJECT DESCRIPTION, SCOPE AND STRATEGY 4.2 The project would finance: (i) demand-driven productive rural investments in the Sierra on a grant basis matched by community labor; (ii) the participatory process by which rural investments are identified, formulated and implemented; (iii) institutional strengthening of rural communities; and (iv) goods, consulting services and training for PRONAMACHCS assisting communities to carry out the above. 4.3 The project would be implemented over a period of six years in about 125 micro-catchments above 2,000 m altitude in the seven poorest administrative departments of the Sierra. It would benefit an estimated 1,250 communities or 75,000 families. The target population would be selected amongst the poorest communities on the basis of established rural poverty statistics within micro-catchments with potential for productive improvement through soil conservation and rural productive infrastructure. Rural investments would include: (i) soil conservation activities (construction of terraces, water infiltration furrows, live barriers); (ii) small-scale irrigation; (iii) reforestation and  - 11 - agroforestry; (iv) improvement of soil conserving agronomic practices; and (v) construction of community seed storehouses. 4.4 The project's overall strategy consists of a participative community natural resource management and land use planning. Implementation of participatory plans at community level would lead to natural resources management planning and implementation at the micro-catchment level (microcuenca), involving communities, municipalities and other representative organizations. In general, the beneficiary rural communities will be comunidades campesinas, which are public interest organizations with legal status. When no comunidades campesinas exist, rural associations of at least twenty farmers' family units may be eligible for rural investments. Detailed eligibility criteria for beneficiary communities would be included in the Project operational manual (para 8.2). 4.5 The geographical unit for planning and implementation is the micro-catchment. Such micro-catchment covers on average 10,000 ha for 600 families (or ten communities). The technical strategy aims at: (i) adjusting land use to soil characteristics; (ii) increasing production on fertile lands and, where not possible, convert marginal and erosion-prone soils into stable agricultural soils through terracing; (iii) opening the soil structure to maximize water infiltration through introduction of adequate soil preparation and cultivation techniques; (iv) increasing soil cover through agricultural and (agro) forestry practices which at the same time increase income; and (v) optimizing water use for productive and other purposes through construction of small irrigation schemes. 4.6 The operational strategy consists of a rural extension system, organized by PRONAMACHCS, which would help the communities prepare and implement the rural investments, and finance the rural investment costs (contractors, materials, tools, inputs) with the proceeds of the project. The communities would contribute in unpaid labor. The project would train the rural communities to foster self management. C. PROJECT COMPONENTS 4.7 The project has four components: (i) participative identification and formulation of rural investments in micro-catchments; (ii) rural investments; (iii) strengthening of rural community institutions; and (iv) logistical support and training to the implementing agency (PRONAMACHCS). L. Participatory Identification and Formulation of Rural Investments (Costs US$466,000) 4.8 This component aims to promote active participation of project beneficiaries in identification, planning, design and implementation of rural investments, taking into account the potential of soil and water resources in a micro-catchment. The project would be implemented in seven Departments: Cajamarca, Huanuco, Ancash,  - 12 - Huancavelica, Junin, Ayacucho, and Apurimac. These Departments are amongst the poorest of Peru and do not yet benefit from significant assistance in natural resources management. 4.9 Selection of Project Area. To select the 125 micro-catchments in which the project would intervene, PRONAMACHCS would, firsts consider all micro-catchments of at least 1,000 ha above 2,000 m altitude with populations living in extreme poverty and misery as defined by the Peruvian Indigenous Institute (IIP)9. Second, INRENA would evaluate the development potential of the selected micro-catchments. It would carry out a study in each of the retained micro-catchments to identify the productive potential. Each study would include a summary report on land use, land vulnerability and capabilities and a base map at a 1/25,000 scale covering topography, water resources, roads, and population. 4.10 The order of priority in which the micro-catchment would be assisted would depend on the interest of the population in natural resources management and the degree in which other institutions are involved in overlapping activities. Project involvement during the first project year would also be determined by the proximity of the micro-catchments to PRONAMACHCS offices. 4.11 The project would finance land use and capability studies for about 125 micro-catchments including the purchase of satellite imagery, recruitment of specialized agencies (INRENA), computer equipment and software. 4.12 Participatory Planning. Participatory planning of project-financed activities in the selected micro-catchmnents would take place in seven steps. Step 1: A PRONAMACHCS extension agent would contact the local authorities and the communities living in the micro-catchment to explain the program objectives, procedures, the intervention methodology and commitments the communities and PRONAMACHCS would have to make. Step 2: After approval by the community Assembly to participate in the program, a committee selected by the Assembly would, jointly with the extension agent, work out a chronogram of participatory planning activities (the Participation Agreement). Step 3: Participatory Diagnostic. The committee would carry out a diagnostic of the community situation and the natural resources following the rapid rural appraisal methodology and would also involve all institutions active in the micro-catchment. The main output of the diagnostic would include a sketch of the micro-catchment indicating the actual and potential use of natural resources 9 This definition corresponds to the classification by FONCODES at the district level. IlIP's classification is more detailed and considers the communities in the district.  - 13 - in the catchment, an assessment of the social situation, and an evaluation of the community institutions. Step 4: Participatory Planning. During this rapid rural appraisal process the committee would elaborate a communal natural resources management development program which could include soil conservation measures, small-scale irrigation, forestry and agroforestry, agricultural practices, technical assistance and extension, seed storage warehouses, and strengthening of the community institutions. This program would be discussed and agreed upon by the whole community Assembly. The committee would then proceed with the prioritization of activities and establish an implementation program, chronogram and budget which includes the participation of the community. This final plan would then be submitted again to the whole community for final approval. Following this approval, PRONAMACHCS and the community would sign an agreement (the Subproject Agreement) containing the first year program and the commitments of both parties. Step 5: Implementation of the first year program. Step 6: Monitoring and Evaluation. Periodic meetings between the committee and the extension agent would take place to discuss the program implementation and correct mishaps. The agent would write brief quarterly reports on program implementation for every community. A standard activity monitoring sheet would be included in PRONAMACHCS' monitoring system. Step 7: The planning for the second and following years would follow first year implementation. The same planning procedures as mentioned in steps 4, 5 and 6 would be followed. 4.13 To carry out participatory planning in 125 micro-catchments the project would finance PRONAMACHCS' incremental operating costs, including incremental staff, office supplies and expenditures related to the organization of field workshops. II. Rural Investments (Costs US$77.4 million) 4.14 The project would finance works, materials and tools, agricultural inputs, and consulting services to prepare and implement primarily five types of rural investments: (i) soil conservation works; (ii) small-scale irrigation; (iii) reforestation and agroforestry; (iv) introduction of improved production technology; and (v) community seed storage warehouses. Full technical details of the rural investments are included in Annex 1. (a) Soil Conservation Works would include construction and rehabilitation of soil terraces, water infiltration furrows, and live erosion barriers as well as agricultural inputs to increase working capital for farming activities. It is estimated that the project would help to put 27,000 ha of marginal land into production.  - 14 - (b) Small-Scale Irrigation Structures would include the construction and rehabilitation of irrigation canals, water reservoirs for productive and human water consumption, irrigation and livestock, pressure irrigation, river bank protection structures and small dams. Total area to be put under irrigation would be about 10,000 ha. (c) Reforestation and Agroforestry would include the installation of 540 communal tree nurseries, production of 20 million seedlings, planting of 17 million trees and maintenance of 2,600 ha of communal (agro) forests. (d) Improved Production Technology would include the introduction of improved seeds and pastures as well as cultivation techniques such as contour plowing and planting to reduce soil erosion and increase yields. Improved technologies would be introduced in three selected micro-catchments. The introduction of these techniques would be validated through intense monitoring and spread through contests between communities, demonstration fields, study tours and other extension techniques. (e) Community Seed Storage Warehouises: 430 warehouses would be constructed. (f) Preparation Studies and Consulting Services for non-standardized investments in some particular small-scale irrigation systems and environmental impact analyses where necessary. Eligibility Criteria and Beneficiary Contributions 4.15 The above investments would be eligible for financing under the project if: (i) they are included in the Participation Agreement between the community and PRONAMACHCS as described in para. 4.12; (ii) they benefit the community as a whole; (iii) the cost of total project contributions (in materials, tools, equipment, agricultural inputs and skilled labor) in a single community does not exceed US$100,000 per investment type (soil conservation, irrigation and forestry) over the project period with an overall maximum of US$ 1,000 per family; and (iv) the value of community contribution in unpaid labor for the total investments in each community is at least 20 percent. 4.16 This project focuses on small investments, carried out by the beneficiaries, and it aims to achieve a minimum financial return of ten percent on these investments. Project financial analysis has determined that the expected benefits of particular investments will not justify unit inputs exceeding a certain amount to be applied as a financial ceiling for project contributionsl0. Thus the contribution in the form of materials for the construction of absorption terraces would not exceed US$750 per ha, for slow formation terraces US$375 per ha and for water infiltration US$150 per ha. In irrigation, the project contribution per ha would not exceed US$1,500. Project contributions to 10 Investments exceeding these ceilings have a lower return.  - 15 communal tree nurseries would not exceed US$400 per nursery, to tree planting US$230 per ha and maintenance US$540 per 10 ha. The project contribution to warehouses would not exceed US$3,500 per unit. Table I - Eligibility Criteria and Beneficiary Contributions Maximum Project Minimum Beneficiary Subproject type Contribution in US$ Contribution equivalent All subprojects in a $100,000 per category and 20 % in unskilled labor community $1,000 per family(a) Absorption terraces $750 per ha all unskilled labor Slow formation terraces $375 per ha all unskilled labor Water infiltration furrows $150 per ha all unskilled labor Irrigation $1,500 per ha all unskilled labor Tree nurseries $400 per nursery all unskilled labor Tree planting $230 per ha all unskilled labor Tree maintenance $540 per 10 ha all unskilled labor Warehouse $3,500 per unit all unskilled labor (a) To be reviewed during mid-tern review 4.17 The eligibility criteria and beneficiary contributions would be contained in the project operational manual. They would be reviewed on the basis of the project monitoring and evaluation. The preparation of a project operational manual including eligibility criteria and beneficiary contributions --all acceptable to the Bank-- before loan effectiveness has been agreed upon during negotiations (para. 8.2). m. Institutional Strengthening of Community Organizations (Costs US$3.6 million) 4.18 This component would finance training and technical assistance by PRONAMACHCS and Non-Governmental Organizations to rural communities: (i) in participatory planning; (ii) to establish 50 micro-catchment management committees which would design and implement participatory soil conservation plans; and (iii) in financial management so that they are able to manage an investment account and a small in-kind revolving stock for agricultural inputs. 4.19 The project would finance the following activities. (a) Participatory planning promotion through: (i) the production of 30 different bilingual pamphlets on participatory planning and community strengthening to be distributed in the communities; (ii) radio broadcasts to  - 16 - promote participation; and (iii) 125 courses in participatory planning at the micro-catchment level. (b) Establishment of 50 natural resources management committees at the micro-catchment level through financing of 125 annual seminars, 1,250 workshops at the community level and 40 courses in micro-catchment natural resources management. (c) Financial management courses to train 1,250 communities in the management of their investment account and agricultural input revolving stock in 250 courses. (d) Small enterprise management courses in 625 communities which show most potential to benefit from these courses. 4.20 In addition, the project would finance 1,250 small initiatives for the exclusive benefit of rural women. Each initiative would not exceed US$1,500 per community. They would include community projects in small livestock, wood conservation stoves, medicinal plants, food processing, and gardening. For each project, the beneficiaries would participate for at least 20 percent of the cost. IV. Project Operation, Management, Monitoring and Evaluation (Costs US$11.7 million) 4.21 To improve PRONAMACHCS' management capacity and enable smooth project implementation, this component would: (i) introduce a coherent management information system as well as a project monitoring system; (ii) train PRONAMACHCS staff in management and natural resources conservation techniques; and (iii) complement Government financing for the administration of PRONAMACHCS. 4.22 PRONAMACHCS' three cumbersome management information systems would be integrated and simplified. The existing information systems do not provide sufficient financial data to allow efficient monitoring of subproject costs and impact. To overcome these deficiencies the project would finance management information and monitoring consultants, software and computer equipment. 4.23 To improve PRONAMACHCS' technical capacity, the project would finance training for professional and managerial staff. This training would include: (i) management courses in Peru; (ii) managerial seminars and workshops for mid-level managers; (iii) technical and environmental analysis training for extension staff, (iv) national and departmental workshops; (v) study trips to learn about natural resources management experiences in the region; and (vi) short term international consultants to provide advice in specialized fields. 4.24 The project would also strengthen the departmental and branch offices and finance: (i) 20 vehicles, 200 motorcycles, 20 sets of office equipment, 100 incremental fixed-term extension staff and incremental operational costs for 20 PRONAMACHCS branches within the project area; (ii) 7 sets of audiovisual and data processing equipment  - 17 - and 7 community institution building promoters at the Departmental level; (iii) two incremental staff to improve the accounting, control and management information system at PRONAMACHCS; (iv) consultants to monitor and evaluate the impact of project activities (including consultants for IIP); and (v) independent financial auditors. Relationship with FONCODES II Project 4.25 FONCODES and PRONAMACHCS have worked out a formal agreement on April 22, 1996 to divide responsibilities for an efficient implementation of subprojects and avoid overlaps. The agreement provides that FONCODES would orient its productive rural investments to those sectors which are complementary to PRONAMACHCS' core program, as defined in the agreement. To avoid inconsistency in approach, FONCODES would finance projects such as implemented by PRONAMACHCS under the same conditions and eligibility criteria, and not remunerate unskilled labor for those types of subprojects which are also financed by PRONAMACHCS. 4.26 PRONAMACHCS would: (i) analyze the demand for rural investments in a participatory way; (ii) prepare the technical dossiers for FONCODES subprojects in soil conservation, small scale irrigation and reforestation projects in those areas where both institutions intervene; (iii) participate with the beneficiaries in the implementation of FONCODES subprojects as works supervisor; (iv) provide technical assistance to FONCODES; (v) enhance the sustainability of FONCODES subprojects which fall under the agreement; and (vi) provide a priority program to be financed by FONCODES while PRONAMACHCS is awaiting the availability of project funds.  - 18 - 5. PROJECT COSTS AND FINANCING A. PROJECT COSTS 5.1 Total project costs are estimated at US$93.2 million including taxes and duties. Base costs are US$81 million and contingencies are US$12.2 million (15 percent). Taxes and duties are estimated at US$7.2 million. The foreign exchange component is US$20.2 million, or 22 percent of project costs. Project costs are estimated at March 1996 prices. The breakdown of costs by component is shown in Table 3. Detailed cost tables are presented in Annex 5. Physical contingencies are estimated at five percent of investment costs. Price contingencies (averaging ten percent of base costs) were calculated on the basis of the following domestic and international inflation rates. Table 2 - Annual Estimated Inflation Rate (%) International Domestic Exchange Year Inflation rate Inflation Rate % % ~~~~~SI. per US$ 1996 3.3 10 2.5 1997 2.3 7 2.6 1998 2.4 5 2.6 1999 2.4 5 2.7 2000-3 2.5 5 2.8 Table 3 - Project Cost Summary (in US$ million) Foreign Total Base Project Components Local Foreign Total Exchange Costs Demand Identification 0.2 0.2 0.4 44 Rural Investments 52.6 14.6 67.2 22 83 Community Strengthening 2.7 0.4 3.1 14 4 Project Implementation 7.6 2.7 10.3 26 13 Total Baseline Costs 63.1 17.9 81.0 22 100 Physical Contingencies 3.1 0.9 4.0 22 5 Price Contingencies 6.8 1.4 8.2 17 10 Total Project Costs' 73.0 20.2 93.2 22 115 1 Including duties and taxes of US$7.2 million.  - 19 - B. PROPOSED FINANCING PLAN 5.2 The Bank would finance about 55 percent of project costs. These would consist mainly of works, goods (materials, tools and agricultural inputs) and equipment. Government would finance the incremental recurrent costs of PRONAMACHCS (15 percent) and parts of goods, inputs, equipment, training and technical assistance. The farmers would contribute about 30 percent of the project costs in unpaid labor. Table 4 - Financing Plan (in US$ million) Expenditure Category Bank Government Farmers Total Rural investments Goods and works 34.8 4.0 - 38.8 Agricultural inputs 8.4 2.3 - 10.7 Subtotal 43.2 6.3 - 49.5 Goods and Equipment 1.3 0.3 - 1.6 Training and technical assistance 4.7 0.5 - 5.2 Unskilled labor - - 27.9 27.9 Incremental salaries - 5.3 5.3 (PRONAMACHCS) Incremental Operating Costs 1.8 1.9 - 3.7 TOTAL 51.0 14.3 27.9 93.2 C. FINANCIAL IMPLICATIONS FOR GOVERNMENT 5.3 Government would contribute approximately US$14.3 million towards the project. This contribution includes the costs of all farmer field training programs (US$465,000), a percentage of all investment costs which covers taxes and duties (US$7.2 million), recruitment (on a fixed-term basis) of 100 additional extension agents and 7 departmental promoters, and about 50 percent of PRONAMACHCS' incremental operating costs. This amount would add approximately 15 percent to the PRONAMACHCS annual operation budget of US$15 million during the project period. D. PROCUREMENT 5.4 The table below summarizes the project elements, with cost estimates, and proposed procurement methods. All procurement under the project would be carried out in accordance with Bank guidelines dated January 1995.  - 20 - Table 5 - Procurement Methods (US$ million) Expenditure Category ICB NCB Other NBF Total Rural Community Investments Works 8.6(a) 8.6 (7.7) (7.7) Goods and Equipment 4.5 25.7(b) 30.2 (3.8) (23.3) (27.1) Agricultural Inputs 2.3 8.4(b) 10.7 (1.9) (6.5) (8.4) Equipment and Goods (PRONAMACHCS) 1.2 0.4"b) 1.6 O.1l) (0.3) (1.4) Consulting Services 1.5 1.5 (1.2) (1.2) Unskilled Labor 27.9 27.9 Training 3.7 3.7 (3.4) (3.4) Incremental Operating Costs Salaries 5.3 5.3 Other 3.7(C) 3.7 (1.8) (1.8) TOTAL 1.2 6.8 52.0 33.2 93.2 (1.1) (5.7) (44.2) (0.0) (51.0) Note: Figures in parenthesis are the respective amounts financed by the Bank Loan (a) Small civil works under lump sum fixed price contracts; ( National Shopping, International Shopping for computers; (c) Not subject to procurement. 5.5 The Bank would finance: (i) civil works, tools, materials, equipment and agricultural inputs for rural investments; (ii) vehicles and office equipment for PRONAMACHCS; (iii) training; (iv) consulting services; and (v) non-salary incremental operating costs. During negotiations, it has been agreed that PRONAMACHCS would use Bank standard bidding documents for International Competitive Bidding procurement and bidding documents acceptable to the Bank for National Competitive Bidding (para. 8.1). 5.6 Procurement would be carried out by PRONAMACHCS and rural communities under the guidance of PRONAMACHCS, which would be strengthened by a local consultant, a specialist in Bank procedures. PRONAMACHCS employs an  - 21 - administrative officer in charge of procurement in every branch office who would train community leaders in purchasing tools, equipment, agricultural inputs at the local level through shopping. PRONAMACHCS has gained experience in Bank procurement through the management of a Japanese Grant. It has been agreed during negotiations that, prior to the issuance of any invitations to prequalify for bidding or to bid for contracts, PRONAMACHCS would forward a project procurement plan to the Bank for its review. Procurement of all goods and works shall be undertaken in accordance with the Bank approved procurement plan. The procurement plan would be included in the project operational manual (para 8.2). Civil Works, Tools, Materials and Equipment for Rural Communities 5.7 Procurement for community-based civil works, tools, materials, agricultural inputs and equipment totaling US$49.5 million (US$43.2 million of which would be financed by the Bank) would follow practices in accordance with PRONAMACHCS' operational guidelines which are acceptable to the Bank. Procurement for community based projects would be done by the communities themselves with technical assistance of PRONAMACHCS. Works under the project are small works not exceeding US$100,000 per subproject and are scattered over the seven Departments. Therefore, all works would be procured under lump sum, fixed price contracts awarded on the basis of quotations obtained from at least three qualified domestic contractors in response to a written invitation. Goods for communities (including tools, materials, agricultural inputs and equipment) costing US$50,000 or less per contract and up to an aggregate amount of US$34.1 million would be procured through national shopping at the local level. Goods and agricultural inputs for communities not available at the local level and costing less than US$200,000 per contract may be procured by PRONAMACHCS at the departmental level up to an aggregate amount of US$6.8 million through National Competitive Bidding. 5.8 Standard Bidding Documents (SBDs) acceptable to the Bank would be used for National Competitive Bidding (NCB) and these SBDs would be included in the project operational manual (para 8.2). Goods and Equipment for PRONAMACHICS 5.9 PRONAMACHCS would purchase vehicles, motorcycles and computer equipment for an amount of US$1.6 million equivalent, US$1.4 million of which would be financed by the loan. Procurement of vehicles and motorcycles would be done through International Competitive Bidding. Procurement of computer equipment, not exceeding US$50,000 per contract, up to the aggregate amount of US$400,000, will be done through international shopping among suppliers with established service and maintenance facilities in Peru. Consulting Services 5.10 Consulting Services under the project would amount to US$1 million (US$0.9 million of which would be financed by the Bank). The services consist of:  - 22 - (i) consulting assignments for individuals and firms providing direct technical assistance and consulting services to INRENA, IIP and PRONAMACHCS in the baseline studies and monitoring; and (ii) technical assistance services, training, and studies by individuals, NGOs or firms to rural communities. Consulting and management services would be procured in accordance with the 1981 Bank Guidelines for the Use of Consultants. All assignments would be small and straightforward. PRONAMACHCS would recruit individual consultants from a shortlist of at least three candidates for each post. A sample letter of invitation, award criteria and a sample contract, all acceptable to the Bank, would be included in the Project operational manual (para. 8.2). 5.11 Review Procedures. Although the prior review arrangements described below will result in a relatively low level of prior review by the Bank, this is acceptable in light of the large size of the sample of projects which will be subject to ongoing review under the auditing arrangements described in paragraph 5.13. 5.12 Review of Procurement by PRONAMACHCS. The Bank would conduct a prior review of: (i) each contract for vehicles; (ii) the first two contracts for other goods costing more than US$100,000; (iii) all procurement for goods exceeding US$200,000 per contract; (iv) consultant selection documentation (terms of reference, shortlists, contract, etc.) for consulting services directly recruited by PRONAMACHCS with an estimated contract amount of US$100,000 or more for firms and US$50,000 or more for individuals; (v) terms of reference for all consulting services contracts; and (vi) all consultants contracts based on a single source or of a critical nature. 5.13 Review of Procurement by Communities. Bank officials would carry out a post-review of procurement by communities on a small sample basis during supervision. PRONAMACHCS would recruit auditors who would not only examine financial implementation but also procurement procedures and physical implementation in the field. These auditors would carry out six-monthly audits on the basis of a sample not lower than 60 percent of the Bank-financed investments in the first project year, 50 percent in the second and 40 percent in the last years. Terms of reference of these auditors, acceptable to the Bank, would be included in the Operational Manual (para 8.2). E. DISBURSEMENTS 5.14 The Bank loan of US$51 million is expected to be disbursed over a period of 6.5 years, beginning the third quarter of FY97 through the end of the second quarter of FY2003. The project completion date would be December 31, 2002 and the closing date would be June 30, 2003. The disbursement schedule is presented in Annex 6. The disbursement pace is similar to the historical disbursement profile for agricultural projects in Peru. The disbursement pace would depend on the quality of subproject preparation and PRONAMACHCS's administrative capacities. PRONAMACHCS would be strengthened by a specialist in Bank disbursement procedures. Employment of a  - 23 - disbursement specialist by PRONAMACHCS before March 31, 1997 has been agreed upon during negotiations (para 8.1). 5.15 Rural investments would include civil works, skilled labor, goods, tools, materials and equipment for eligible beneficiaries. Training includes the cost of the trainers' and trainees' fees, rental of training facilities, per diem of trainees and materials required for the training activities. Consulting services include contracts to carry out: (i) training; (ii) technical assistance including by NGOs; (iii) follow-up on participatory planning; (iv) cartographical services; (v) pre-investment studies and (vi) accounting, control and management information studies. Incremental operating expenditures include expenditures for travel, office rental, office materials and supplies, utilities, office and equipment maintenance, field materials and per diems. The term agricultural inputs means seeds, fertilizers and a positive list of chemicals to be included in the project operational manual (para 8.2). 5.16 Table 6 - Summary of Disbursement Schedule Amount Category Expenditures Allocated Bank Financed % US$ 000 I1 Rural Investments 90% (a) Agricultural Inputs 9,000 (b) Goods and Works 32,000 2 Goods and Equipment 1,300 85% (PRONAMACHCS) 3 Consulting Services 1,300 100% 4 Training 3,000 50% 5 Incremental Operating 1,600 60% until December 31, 1999 Costs and 40% thereafter 6 Unallocated 2.800 Total 51,000 5.17 Documentation of Expenditures. Disbursements would be made on the basis of full documentation for all expenditures made under contracts requiring prior Bank review and amendments to contracts raising the value of such contracts above the prior review limits. These contracts are: (i) all contracts for vehicles, the first two contracts for goods exceeding US$100,000 and all contracts exceeding US$200,000; and (ii) consultant service contracts directly procured by PRONAMACHCS with an estimated contract amount of US$100,000 or more for firms and US$50,000 or more for individuals. For all other expenditures disbursements would be made against Statements of Expenditure (SOE) for which supporting documents would be maintained by PRONAMACHCS and would be available for Bank staff review. Because of the large volume of disbursements  - 24 - expected to be claimed under SOEs, special efforts would be made for the selective review of SOE documentation by visiting Bank missions and auditors. Table 6: Documentation Requirements for Disbursements Full Documentation Statement of Expenditures Vehicles All None Goods First two contracts Other >US$100,000 All contracts >US$200,000 <US$200,000 Consulting Services >US$ 100,000 for firms All other >US$50,000 for individuals 5.18 Special Account. A Special Account in US dollars would be opened at a commercial bank in Peru. The account would have an authorized allocation of US$3 million and would cover four months of project expenditures. The authorized allocation would be limited to US$1 million until the withdrawals have reached US$5 million. Withdrawals from the Special Account would be done by PRONAMACHCS. The Bank would replenish the Special Account for the amount of withdrawals on account of eligible expenditures at the request of the Borrower. 5.19 Project Account. PRONAMACHCS would create a subproject financing fund or project account of US$2 million equivalent, which would allow it to put small advances into community bank accounts and to be used to purchase tools and materials purchases at the local level. Eligible expenditures would be reimbursed to the project account through the Special Account. 5.20 Retroactive Financing. Reimbursement of up to US$5 million would be permitted for eligible expenditures made in accordance with procurement procedures agreed under the project from July 1, 1996, provided that the loan is signed not later than July 1, 1997. If the loan is signed at a later date, the initial date for eligibility of expenditures for retroactive financing would be modified so that the period covered by retroactive financing would be no more than one year. Retroactive financing is recommended to ensure that the selection and studies of micro-catchments, the participative planning of the demand for soil conservation investments and bulk procurement can go ahead before project effectiveness.  - 25 - F. AUDITING AND ACCOUNTS 5.21 PRONAMACHCS would maintain separate accounts for project expenditures as well as a register of assets purchased with project funds. The present accounting system has been analyzed and found to be adequate. It needs now to be enhanced to include the project accounts. The accounting plan would be included in the project implementation manual (para 8.2). PRONAMACHCS would hire independent auditors satisfactory to the Bank to audit on an annual basis the financial statements, the Special Account and SOEs. In addition the auditors would prepare a (long-form) report on project management. Copies of the audited statements would be sent to the Bank within six months of the end of the fiscal year. With respect to SOEs, the auditor's reports would include an opinion (and comments and recommendations, as necessary) on the methods employed in compiling the SOEs, their accuracy, the relevance of supporting documents, their eligibility for financing under terms of the loan agreement, the standards of record keeping and intemal controls related to the foregoing. Terms of reference of the auditors would be included in the project operational manual (para 8.2). 6. PROJECT MANAGEMENT AND IMPLEMENTATION A. PROJECT MANAGEMENT 6.1 The project would be carried out by the Ministry of Agriculture through PRONAMACHCS which would be strengthened by two local consultants, specialists in Bank procurement and disbursements working within the Planning and Administration Departments. Twenty branches would be involved in the project"1. The branches, now only containing soil conservation specialists, would be strengthened by incorporating promoters and agriculturists. 6.2 PRONAMACHCS has an executive director assisted by an administrative and financial office, a planning office, a legal and an internal audit office. There are three technical directorates: soil conservation, reforestation and infrastructure. At the regional level there are 16 departments and 66 branches. 6.3 The planning office would be responsible for preparing the annual operational plan and the internal monitoring and evaluation of the activities financed under the project. The administrative office would be responsible for the project accounting and disbursements. PRONAMACHCS is familiar with procedures of international institutions. The procurement officer and financial manager of PRONAMACHCS have received training in Bank disbursement procedures and would undergo Bank procurement training. 1 The list of branches is in Annex 3.  - 26 - 6.4 Seven departments would be involved in project implementation. PRONAMACHCS central structure is also reflected at the departmental level. Considering the multiplicity of training and community institutional strengthening activities under the project, seven specialist promoters would be recruited to coordinate and support the training activities. Recruitment by PRONAMACHCS of one specialist in promotion and organization of rural communities per department before March 31, 1997 has been agreed upon during negotiations (para 8.1). Terms of reference of the specialists would be included in the Project operational manual (para 8.2). 6.5 Each of the branches involved in the project would have three specialists responsible for coordination, planning, training and supervision. This team would consist of a soil conservation engineer, an agricultural engineer, and a forestry specialist. Specialists in the promotion and organization of rural communities would be recruited when activities in this sector require it. The team would be strengthened by one agronomist for each five extension agents. 6.6 At the micro-catchment level the branches have one extension agent per five communities. This would allow the extension agent to spend one day per week per community and undergo regular training. The extension agent would be trained in all PRONAMACHCS activities through an intensive technical training program. About 100 fixed-term extension agents would be recruited under the project. Figure 1: Organigram PRONAMACHCS IMINISTER OF AGRICULTURE I |EXECUTIVE DIRECTOR PRONAMACHCS |ADMINISTRATION | IPLANNING I LPROMOTION ILEGAL I I NTER NAL AUDII SOIL CONSERVATION IRRIGATION FOREST DIRECTORATE DIRECTORATE DIRECTORATE I BDEPARTMENTAL I DIREC TO0RAT ES r I ~BRANCHES BRANCHES BRANCHES BRANCHESI  - 27 - B. PROJECT IMPLEMENTATION 6.7 Implementation Plan. The overall project implementation plan is in Annex 8 and includes a detailed first year implementation plan. During the lead-in period of the project, PRONAMACHCS and INRENA would carry out the studies on the micro-catchments and the branches would carry out the participatory planning sessions for the first project year. The micro-catchments (79) for the first year have been identified. The general plan of action is to start in 1996 with the 300 communities already working with PRONAMACHCS and to gradually add 400 communities in 1997, and 550 in 1998. 6.8 The pace of the rural investments has been estimated on the basis of PRONAMACHCS' implementation experience. Although the institution has the capacity to drastically increase its activities, implementation of rural investments has been hindered by lack of funds. The implementation plan, however, provides for a gradual increase in PRONAMACHCS activity. The project would be carried out in accordance with the implementation plan including a detailed first year implementation plan, annual revisions of the plan to be made by PRONAMACHCS and to be submitted to the Bank for review (para. 8.1). C. PROJECT MONITORING AND SUPERVISION 6.9 The project would be monitored by: (i) PRONAMACHCS' monitoring and evaluation unit; (ii) the MAG project coordinating unit; (iii) IIP; (iv) Bank supervision missions; and (v) external audits. 6.10 PRONAMACHCS would set up.an in-house monitoring and evaluation unit which would collect qualitative data on participatory planning, physical and financial data on rural investments and their impact on poverty and development, data on progress in institutional strengthening of the communities and efficiency data on PRONAMACHCS' management and operation. PRONAMACHCS would be strengthened by a project monitoring specialist. Employment of the monitoring specialist by PRONAMACHCS before March 31, 1997 has been agreed upon during negotiations (para 8.1). Terms of reference of the specialist would be included in the Project operational manual (para 8.2). 6.11 The monitoring indicators would be divided into: (i) project activity progress indicators; (ii) result indicators; and (iii) project impact indicators. Project activity indicators include measurements of progress in procurement, recruitment of staff, studies, training programs, disbursements, the number of rural investments approved, under implementation and implemented, hectares of terraces built and under irrigation, the number micro-catchment committees formed, etc. Result indicators would include production and yield increases, areas with agro-forestry protection, participation of women, efficiency of the community organizations, and increased management capacity of PRONAMACHCS. Impact indicators would measure the development impact on revenue, improvements in local diet, sustainability of the works, entrepreneurial activities  - 28 - and the local organizations. A list of monitoring indicators is presented in Annex 8 and would be included in the project operational manual (para. 8.2). 6.12 The MAG project coordinating unit would monitor the project through regular progress reports. IIP would carry out yearly evaluations in ten percent of the communities to measure project impact on indigenous people. 6.13 The Bank would monitor and supervise the project through six-monthly progress reports and two supervision missions per year, in which the Borrower would participate. These supervision missions would cover project progress in: (i) participatory planning; (ii) physical implementation; (iii) community strengthening; and (iv) operation and monitoring. They would also review compliance of procurement and disbursement procedures and statements of expenditure. The supervision plan is in Annex 8. 6.14 Project Launching Workshop. At the outset of the project, Government would organize a project launching workshop. The Government would invite representatives of all institutions involved, possible partners in project implementation and farmers organizations and explain the project objectives, methodology and field of action. The workshop would also cover (for a more limited public) procurement, disbursements and project monitoring aspects. 6.15 Mid-Term Review. Thirty months after loan effectiveness, the Bank and the Government would jointly carry out a mid-term review (MTR) (para 8.1). The review would cover progress in the physical project achievements and community strengthening on the basis of the project monitoring indicators. In particular the MTR would look at: (i) the necessity to expand the eligible investments into artesanal agricultural processing related activities; (ii) the impact of the improved technology activities in the five selected micro-catchments; (iii) the need for reallocation of funds; (iv) the eligibility criteria and beneficiary contributions; and (iv) the development impact. 6.16 Implementation Completion Report (ICR). Not later than six months after the project closing date, the Government and the Bank would carry out a joint project completion review and produce an Implementation Completion Report. Following this review, the Government would present to the Bank a plan for the future operation of the project, furnish the plan to the Bank for comments, and carry out the plan taking into account the Bank's comments thereon. 7. ECONOMIC AND FINANCIAL EVALUATION A. METHODOLOGY 7.1 A financial and economic analysis has been carried out for the rural investment component and for the project as a whole. The underlying analysis is based on  - 29 - a financial analysis for the rural investment component completed during project preparation 2. The financial analysis has been adjusted to account for economic prices and transfer payments to arrive at an economic analysis. Overall project financial and economic analysis has been prepared by building models based on the component analysis and detailed costs estimated for the overall project. A detailed description of these analyses is provided in Annex 7. The methodologies, assumptions, and results are summarized below. 7.2 Under the rural investments component, subprojects would be implemented in a variety of agroecological zones throughout the Sierra, where sub-regions have significantly different climates due to varying altitudes. Additionally, individual subprojects would be financed largely as the result of a demand-driven, community participatory process. 7.3 Rather than conducting financial and economic analysis for a set of pre-defined specific subprojects, several types of subprojects have been analyzed to define economically viable investment parameters. These subproject types have been selected on the basis of PRONAMACHCS implementation experience. They are indicative not only of subprojects expected to be implemented under the project but also of sub-regions in the Sierra where they are likely to be carried out. 7.4 The analysis has been done on the basis of 12 farm models which are representative of the principle agroecological zones in the Sierra. The models focus primarily on crop development since data on grazing and other activities are scarce and the project is oriented towards agricultural improvements. For each subproject, farm models represent farm families who benefit primarily from improvements in soil and water management. Increased production value results from reducing losses due to soil erosion, increasing irrigated areas while maintaining relatively constant cropping patterns, and reducing seed or crop losses due to poor storage capacity. 7.5 For each model, with and without project scenarios have been analyzed on a per ha basis. This yields an incremental benefit per hectare which serves as the basis for estimating benefits resulting from each subproject type. In general, benefits have been estimated for a period of twenty years considering that the type of subprojects envisioned under the project are of a long term investment nature and several years may pass before tangible benefits are realized. With these benefit flows, using discount rates of 8, 10, and 12 percent, (acceptable levels of) investment cost parameters have been estimated on a per hectare basis. These parameters serve as the basis for the investment limits defined in paras. 4.15-16 above. These limits are generally at or below PRONAMACHCS average subproject investment costs. 12 Detailed studies were conducted by a team of international and local consultants. Under FAO and Bank supervision, the results of these studies were later adjusted during project pre-appraisal. The studies and adjusted results are located in the Project Files.  - 30 - B. RURAL INVESTMENT COMPONENT 7.6 Financial Analysis. Using the above methodology, a financial rate of return for the rural investment component has been estimated. Additionally, the financial impact of subprojects on beneficiary families has been estimated. The assumptions and results for this financial analysis are the following: 7.7 Assumptions for the financial analysis are: (a) commodity prices are based on farmgate prices for the Sierra; (b) only agricultural activities are taken into consideration; (c) the cost of unskilled labor is estimated at five soles per day; (d) maintenance costs are estimated at three percent of investment costs; (e) taxes and duties are included; and (f) physical contingencies are estimated at five percent of investment costs. 7.8 The financial impact analysis for beneficiary families also assumes that: (a) inputs provided under the subprojects are treated as short term in-kind loans without financial cost; (b) tools provided under the subprojects are treated as donations, (c) unskilled labor is an in-kind contribution provided by beneficiaries during the non-farming season; and (d) income taxes on beneficiaries are not included since families at the poverty level found under the project are typically exempt from these taxes. 7.9 The results show that the subprojects are financially viable. Without maintenance costs, all subprojects show average financial internal rates of return at 12 percent or better, except for subprojects with just agronomic improvement activities (where the return is estimated at ten percent). The financial return for the overall component is estimated at just over 11 percent. Factoring in maintenance costs, the returns for subprojects generally fall by two to three percent and the return for the overall component falls to ten percent. However, the financial impact of subprojects on beneficiary families can be measured not only in terms of financial returns but also in terms of the value of inputs and tools ("incentives") received. This can range from about US$10 to US$50 per family for each subproject. Combined with the aforementioned subproject financial returns, this translates into incremental income per family of about US$60 to US$250 for each subproject. While the incremental income is spread over several years, for families with annual incomes of less than US$1,000, it can have a significant impact, especially since families often participate in more than one subproject during a given year. 7.10 Economic Analysis. The economic analysis for the component has been carried out using the same methodology applied for the financial analysis. However, several adjustments have been made to convert, where applicable, financial prices into economic prices and to account for transfer payments. 7.11 The same assumptions used for the financial analysis have been used for the economic analysis, except: (a) economic prices have been estimated for international commodities such as wheat and corn; (b) the economic opportunity cost of unskilled labor  - 31 - is estimated at three soles per day (or 60 percent of the financial wage cost); and (c) taxes and duties for investments are excluded. 7.12 The results show that economic returns improve significantly relative to financial returns, primarily due to the reduced cost of unskilled labor assumed in the economic model, as well as the reduction of taxes and subsidies. The unskilled labor is a weighty factor, particularly in soil conservation subprojects. The economic internal rate of return is higher than the financial internal rate of return by over five points. Economic returns for the other subprojects generally improve by about two to three points above financial returns, although for subprojects such as warehouses, where there is relatively little unskilled labor involved, the economic and financial returns are about the same. For the overall component, the economic return is 14 percent, about 4 points higher than the financial return, after factoring in maintenance costs. Additionally, there are several positive externalities which, while difficult to quantify, would also yield significant benefits. These include: reduced urban migration, reduced soil erosion downstream in the more commercial lower watershed areas, enhanced security and pacification in rural areas, and enhanced solidarity and social cohesion among rural communities. C. PROJECT ANALYSIS 7.13 Building on the above financial and economic evaluation, and taking into consideration project investment costs, financial and economic analysis for the overall project has been carried out. The assumptions underlying the component analysis remain the same for the overall project analysis. The principle differences are: (a) costs for additional components planned under the project are incorporated into the financial model, and (b) for the economic model, these same additional costs are largely excluded since associated benefits are non-quantifiable and thus the economic value can not be incorporated in the benefit stream. 7.14 Financial Analysis. After adding in additional costs for institutional strengthening, training, and logistical support to PRONAMACHCS, the financial internal rate of return for the overall project naturally falls by a couple of points. However, the return remains reasonable at eight percent, still at or above Government's cost of capital, and arguably an acceptable rate of return for any project oriented towards poverty alleviation in the Sierra. 7.15 Economic Analysis. The economic internal rate of return for the overall project is 12 percent. This is again a function of the value of unskilled labor and transfer payments factors described above, as well as the exclusion of additional component costs whose benefits can not be quantified. The economic return for the overall project does not take into consideration the significant positive externalities described above. D. SENSITIVITY ANALYSIS 7.16 Sensitivity analysis has been carried out for the rural investment component and overall project financial and economic analyses. Changes in investment costs and  - 32 - benefits have been tested to determine the impact of such shifts on the internal rate of return (IRR). Changes of specific line item costs have also been tested, particularly those that are weighty in the financial and economic models, such as unskilled labor. 7.17 The results show that the IRR is sensitive to movements in the overall investment costs and benefits, as well as the cost of unskilled labor. This is also a function of the timing of investments and benefits, where costs are heavily front-loaded and benefits more back-loaded. A ten percent shift in costs or benefits yields more than a one percent shift in the IRR. A ten percent shift in unskilled labor cost yields nearly a one-half percent shift in the return rate. Investment costs, including for unskilled labor, can and should be monitored closely to ensure they do not overly exceed investment limits established by the above analysis. At the same time, since benefits have been estimated conservatively (they neither include benefits from grazing and other non-farm activities, nor externalities), there is little concern that these will shift significantly in the wrong direction. E. BENEFITS 7.18 It is estimated that the project would ultimately benefit about 75,000 poor families in about 1,250 communities throughout the Sierra. These families are very poor or extremely poor, maintaining subsistence lifestyles on an average of one half or one hectare of marginally cultivable land. Incomes are typically less than US$1,000 per family and opportunities for alternative livelihoods are few. 7.19 As noted, subprojects are financially beneficial, with returns generally at or above 12 percent. These returns combined with in-kind assistance to subprojects yield incremental income per family of about US$60 to US$250 for each subproject. The IERR does not take into account major externalities which include: (i) reduced urban migration, (ii) reduced soil erosion downstream in the more commercial lower watershed areas, (iii) enhanced security and pacification in rural areas, and (iv) enhanced solidarity and social cohesion among rural communities. While these externalities are difficult to quantify, anecdotal evidence suggests that their economic value is significant. For example, it is estimated that PRONAMACHCS projects have helped generate about 30,000 jobs per year and reduce destruction of some 75,000 ha of cultivable coastal land in five years. Even using conservative estimates of the economic value of such benefits, the savings to society are in the tens, if not hundreds, of millions of dollars. F. RIsKs 7.20 The major risks in this project are as follows. The first risk is that communities insufficiently participate. This can be caused by PRONAMACHCS staff imposing on communities to carry out non-economic rural investments or by a lack of free labor in the communities. This risk would be mitigated by the requirement to have participative planning agreements with the communities before disbursement of project proceeds, courses in participative planning and a ceiling to the total investment amount per family. This would reduce incentives to choose non-economic activities and take on more activities than the community can carry out. The monitoring system would provide data  - 33 - on subproject implementation, including community labor participation. The second risk is that soil conservation works would not be followed by improved agronomic practices. This would reduce the economic profitability of the project. This risk would be mitigated by providing the communities with extension services and agricultural inputs on a grant basis for the first year. The community would also receive training to learn how to manage a revolving system by which the inputs can be yearly replaced. The third risk would be the lack of funding for PRONAMACHCS. In the past, shortages of funds have hampered PRONAMACHCS' investment activities, but not its operation. The additional project-related expenditures would be included in the Government's annual budget. This is already the case for the 1997 estimated expenditures. The risk of shortages of counterpart funds would be further mitigated through an ongoing dialogue between the Bank and the Ministry of Economy and Finance on the adequate provision of counterpart funds to Bank-financed projects. G. GENDER ISSUES 7.21 Women carry out major parts of the work in the Andes. They do not participate sufficiently, however, in the decision making at the community level and in training. To improve participation by women PRONAMACHCS would: (i) encourage rural community committees to integrate women so that at least ten percent of the committee members are women; (ii) recruit more female extension agents so that 20 percent of the extension agents in the project area would be women by the end of the project; (iii) schedule training programs to involve more women so that every year at least 20 percent of the project training beneficiaries are women; and (iv) carry out 1,250 specific project activities aimed at increasing the revenues of women and improving soil conservation. These actions would be closely monitored during implementation. H. INDIGENOUS PEOPLE 7.22 All project beneficiaries can be categorized as indigenous people of the Andes. The project activities fit within the strategy of the Peruvian Indigenous Institute which aims at involving the traditional communities in development activities. A pre-appraisal beneficiary assessment to involve indigenous people in project design has been carried out. Participatory planning during implementation would continuously involve indigenous people in the decision-making process. This would be monitored by IIP. The Government's land registration campaign also ensures that indigenous people can register titles to their lands. Moreover PRONAMACHCS would finance language training for non-quechua speaking extension agents and translation of project manuals in Quechua. IIP would also participate in project impact and monitoring studies to ensure that indigenous people effectively participate in decision-making and benefit from the project. 7.23 The activities carried out under the project would fully comply with the Bank's Operational Directive on indigenous peoples (OD 4.20) for the following reasons. Indigenous people have been involved in the project design through a beneficiary  - 34 - assessment. The Ministry of Agriculture has the social, technical and legal skills to carry out the project. The implementation arrangements would involve the local communities (comunidades campesinas) in the preparation and implementation of the rural investments. Local customs (such as community labor) would be widely used during implementation. The development activities financed under the project would support, revive and try to improve the ancient production technologies and techniques used by these communities during centuries. The project would include training in management skills for indigenous people to avoid over-dependency on PRONAMACHCS. A pilot program in three micro-catchments would try to improve certain traditional agronomic practices of the indigenous population. Finally, as part of an effort to comply with OD 4.20 para 15 (a) and (c), an additional assessment of the legal status of the campesinos and their communities - as reflected in the country's constitution, legislation and subsidiary legislation--and their ability to obtain access to and effectively use the legal system would be carried out before March 31, 1997 and an action plan in agreement with the Bank would be prepared before June 30, 1997 to implement the study's recommendations in connection with the project (para 8.1). The assessment would also include the land tenure rights of the communities. Draft terms of reference of the study are in Annex 10. I. ENVIRONMENT 7.24 The project would have long term beneficial environmental effects on water and soil resources at the micro-catchment level. These beneficial effects include soil and water conservation, reduced sedimentation in streams and improvements in water quality. The project would also reduce sedimentation to the coastal river basins, thereby reducing inputs of nutrients from fertilizers, pesticides, and herbicides to downstream areas. A positive list of chemicals to be financed under the project would be established and included in the operational manual. The integration of environmental considerations into the construction and operation of small irrigation projects and other off-farm activities at community levels would mitigate some localized negative environmental impact. Since there would be numerous subprojects implemented within the micro-catchments, the overall project would provide cumulative beneficial effects on water quality and environmental quality. PRONAMACHCS staff would also be trained in environmental analysis and mitigation. The mitigation and enhancement measures suggested in Annex 9 should ensure the attainment of the benefits. These mitigation measures would be included in the project operational manual in the form of an environmental checklist (para 8.2). J. POVERTY ALLEVIATION 7.25 The chief objective of the project is to increase rural household incomes and alleviate poverty through sound and sustainable natural resources management, irrigation and forestry. The micro-catchments selected under the project are almost all situated in the higher Sierra areas where possibilities for productive development without outside assistance are rare. In Peru, geography is the indicator with the greatest value as  - 35 - targeting mechanism: by directing resources to the rural Sierra, one in every two extremely poor households in the country can be reached. 3 The beneficiary communities would be selected on the basis of poverty criteria. All project beneficiaries are categorized as poor, and many are extremely poor. Improved natural resources management would increase their production and revenue over time and increase food security. 8. AGREEMENTS 8.1 Agreements reached during negotiations: (a) PRONAMACHCS would use Bank standard bidding documents for International Competitive Bidding procurement and bidding documents acceptable to the Bank for National Competitive Bidding (para. 5.5); (b) PRONAMACHCS would employ a specialist in Bank disbursements before March 31, 1997 (para 5.14); (c) the recruitment by PRONAMACHCS of one specialist in promotion and organization of rural communities per department before March 31, 1997 (para 6.4); (d) the project would be carried out in accordance with the implementation plan including a detailed first year implementation plan, annual revisions of the plan to be submitted to the Bank for review (para 6.8); (e) the recruitment by PRONAMACHCS of a project monitoring specialist before March 31, 1997 (para 6.10); (f) the project monitoring and supervision arrangements including the content of the Mid-Term Review (para 6.15); and (g) the carrying out of a legal assessment of the indigenous peoples rights before March 31, 1997 and preparing an action plan before June 30, 1997 (para 7.23). 8.2 As a condition of loan effectiveness, PRONAMACHCS will approve the project operational manual. Such manual to contain procurement procedures and bidding documents; sample letters for invitation and procedures for evaluation of consulting services; standard terms of reference for consultants; a procurement plan; selection and eligibility criteria for micro-catchments; eligibility criteria for rural organizations; eligibility criteria and beneficiary contributions of rural investments; draft agreements with communities; a positive list of chemicals to be 13 Peru, Poverty Assessment and Social Policies and Programs for the Poor, World Bank, May 5, 1993, ReportNo. 11191-PE, page xvi.  - 36 - procured under agricultural inputs; monitoring indicators; terms of reference for auditors; terms of reference for the departmental specialist in promotion and organization of rural communities and monitoring specialist; plan of accounts; and an environmental checklist, all acceptable to the Bank (paras. 4.4, 4.17; 5.6, 5.8, 5.10, 5.13, 5.15, 5.21, 6.4, 6.10, 6.11 and 7.24). Recommendation. 8.3 Based on the above, the proposed project is suitable for an IBRD loan of US$51 million to the Republic of Peru.  - 37 - ANNEX 1 PERU SIERRA - NATURAL RESOURCES MANAGEMENT AND POVERTY ALLEVIATION PROJECT RURAL INVESTMENTS A. TECHNICAL STRATEGY 1. The predominantly semi-arid upper Sierra (above the 2,000 above sea level) covers about 350,000 km2 and can be divided in three agroecological zones: (i) valley bottoms - characterized by slopes under 12 percent, deep, fertile soils, abundant surface water and smooth temperatures; (ii) steeplands - characterized by steep slopes (average 25-30 percent), shallow soils, limited access to irrigation water, and temperatures varying from smooth in the lower parts to cold and windy in the upper slopes; and (iii) high plateaus (above the 4,000 m.a.s.l. line) - characterized by a smooth topography, poor soils, relatively abundance of water and a cold, windy climate. 2. Valley bottoms have generally been developed into intensively cropped, irrigated oasis, with relatively minor soil management problems. They cover about five percent of the Sierra. Steeplands, covering about 75 percent of the land, are characterized by extensive, severely eroded and poorly managed rainfed cropping areas. In sites with better soils and favorable water-access conditions, terrace systems have been constructed since Inca times, for the establishment of more stable, irrigated farming patterns. Terraced areas cover about one million ha (0.3 percent of the Sierra), many of them abandoned and others severely degraded. High plateaus (20 percent of the area) are used mainly for extensive grazing and are too cold for crops. 3. The most significant types of natural resource degradation in the Sierra include severe soil deterioration associated with continuous soil losses, nutrient and organic matter depletion, gully formation and increased downstream river silting, caused by water-induced soil erosion and uncontrolled water runoff during the rainy season, resulting from extensive removal of the natural vegetation, inadequate land use and poor soil management. This is compounded by uncontrollable natural erosion mainly in the sparsely vegetated slopes of the steepest Andean areas. Wind erosion is far less significant. 4. Water-induced erosion starts when the bare soil is exposed to erosive rainfall. The impact of rain seals the surface (rainsplash effect). Rain which cannot infiltrate is lost as surface runoff, carrying away more soil particles and causing sheet an gully erosion damages, silting of river beds and flooding. To prevent water-induced soil erosion, a land management strategy must achieve three objectives: (a) minimize rainsplash effect by protecting the soil surface; (b) minimize excess runoff by maximizing the amount of infiltration; and (c) minimize water runoffs ability to flow and form gullies  - 38 - by limiting its accumulation and velocity. A series of land/water management and soil conservation techniques are used. 5. The first step is to adjust land use to land suitability. In the Sierra, where most land is technically inappropriate for crops due to the steep slopes, fanning suitability usually needs to be generated by upgrading unsuitable to suitable soils, through terracing and irrigation. On slopes not exceeding 12 degrees, soil conservation can be achieved through agronomic practices. Above this gradient, however, physical barriers against erosion are required. In the Sierra, construction of terraces, contour trenches and live barriers will constitute the leading strategy. In any circumstance, the strategy will be oriented to maximizing production from the best land and minimizing the use of marginal land, which translates into developing areas with high potential soils, and designing poor soils for reforestation and livestock. In areas where the average slope is below the 10-12 percent line, the project would introduce an expanded, comprehensive land management strategy, with stress on agronomic practices. 6. To minimize rainsplash effect and excess runoff, farmers would rely on reduced- or no-tillage techniques, associated with deep ripping, contour cropping, soil amendments, and raising nutrient and organic matter levels, to stimulate crop biomass production and productivity; crop diversification and cropping rotations to include green manure crops, selected seeds, intensified crop density and optimal use of crop residues; windbreaks to reduce surface evaporation; adequate pasture and herd management; and use of low-cost vegetative contour barriers with fodder crops or other erosion-control plants. Generally these practices result in quick improvements in yields and attractive financial returns. 7. Water harvesting is an additional objective to be considered as a means to prevent runoff and soil sliding and store irrigation water for the dry spells. Since the handling of excessive runoff implies a collectively agreed control plan, the success of the technical strategy would depend on the involvement of all land users within a micro-catchment. 8. In areas unsuitable for improvement, reforestation will be encouraged, both for conservation and exploitation purposes. The project's technical strategy is based on land and water management practices detailed in the Technical Manual to be prepared by PRONAMACHCS. Some of these technologies are readily available for diffusion; others need to be adapted before being transferred to the farmers. B. PROJECT INVESTMENTS 1. Soil Conservation Infrastructure Works 9. Soil conservation structures create a stable agroecological environment for sustainable farming in the Sierra and constitutes the project's central strategy. Three main types of structures are envisaged: bench terraces, slow-formation terraces and infiltration furrows.  - 39 - (a) Bench Terraces or Absorption Terraces (Terrazas de Absorci6n) 10. Bench terraces are earth embankments constructed in a series of levels like the steps of a stair, traversing the slopes to prevent erosion and generate suitable soil for cropping, generally on very steep slopes. Each step is separated from the next by almost vertical stone walls (or earth risers). Earthen risers may be stabilized with a vegetal cover, introduced preferably with selected native brush species. 11. Soil Conservation Impact. The construction of bench terraces upgrades unsuitable land to first-class cropland. Bench terraces are very effective against erosion. The deep, leveled soil accumulated in the bench efficiently absorbs rain water and prevents runoff. Non-absorbed water is conducted to a drainage network. In addition, bench terraces permit irrigation schemes to increase soil moisture, extend cropping periods and expand production possibilities. Bench-terrace soils can be improved through organic matter and fertilization, creating the basis for sustainable production systems. 12. Targets and Costs. The project's final target over five years is to improve about 2,350 ha of unsuitable slopes with the construction of hand constructed bench terraces. The construction costs include labor, tools and local materials (mainly stones and earth). Total construction cost depends essentially on the amount of labor required. This varies with the slope, soil depth and the presence of stones. Total costs (including labor) may vary from about SI. 4,300 to S/. 11,400 per ha, 76 percent of which accounts for labor. The maximum cost (including labor) allowed under the project is S/. 7,000/ha, beyond which the activity becomes economically unviable. The total cost of this activity is estimated at US$6.8 million. The total contribution of the communities, calculated at a S/. 5/person-day, is estimated at US$5.1 million. (b) Slow Formation Terraces (Terrazas de Formacion Lenta) 13. Used generally on less pronounced slopes, slow-formation terraces (SFT) are formed by constructing level-contour barriers with stones or earth embankments across the slopes, to control runoff, favor water infiltration, and convey the accumulation of runoff-carried soil. Over the years, these sediments stabilize and form smooth-graded platforms between terraces. The efficiency of SFTs can be increased with the establishment of vegetated contour rows along the embankments. Where soil depth permits, live barriers associated with infiltration furrows may replace the embankments. 14. Soil Conservation Impact. SFT constitute a low-cost, efficient erosion-control solution for slopes under the 12 percent gradient line. Like bench terraces, SFT favor water infiltration, allow plowing, and facilitate the use of irrigation. However, SFT soil conservation effect is slower and stabilization usually requires a period of 10 years or more. During the formation period, erosion is maintained within the boundaries of each platform, controlled by the barriers. Erosion is the main formation factor of this type of terrace. In its final stage, the gradient of the terraced slope would be flat, and any sheet erosion can be controlled through appropriate agronomic soil management practices and the inclusion in the system of a proper drainage network. SFT  - 40 - is an efficient long term technique for transforming soils originally unsuitable for crops into productive, sustainable farmlands. 15. Targets and Costs. The target is to improve a total area of about 10,000 ha with slow-formation terraces. SFTs require less labor and tools than bench terraces. Average total costs vary between S/. 1,350 and S/. 5,080 per ha. The highest values correspond to extreme situations in which works are spread over a period of three to five years. In each year the barriers are lifted with a new stone layer to raise the level of the sediment platform. PRONAMACHCS estimates average labor requirements varying between 390 and 710 person-days, while tools requirements vary between S/. 680 and 780 per hectare. The financial analysis carried out during preparation shows that, to obtain a profitability of ten percent, construction costs per ha must not exceed: S/. 5,400 in the upper Sierra; S/. 3,600 in the central band; and S/. 1,300 in the lower areas. The project would supply the required tools at an estimated total cost of US$3.5 million over five years. Communities will contribute 4.5 million person-days, estimated at about US$9.7 million. (c) Infiltration Furrows (Zanjas de Infiltraci6n) 16. Infiltration furrows (IF) are level contour trenches crossing the slopes controlling runoff and collecting rain water to increase infiltration and soil moisture. IFs are constructed in the grassland areas of the upper catchments for pasture improvement or reforestation. 17. Soil conservation impact. The impact of IFs on local erosion is negligible, as their command areas are generally protected by a permanent grass cover. However, by intercepting runoff, they contribute to reduced downhill runoff volumes and erosiveness, thus protecting downstream croplands from intensified degradation. IFs main conservation impact, however, is increasing soil moisture. This contributes to improve plant growth conditions in the treated areas and raise overall soil moisture and ground water volumes at micro-catchment level, multiplying the availability of irrigation water. 18. Targets. The project will construct IFs in a total area of about 14,800 ha. The labor required for the construction of IFs varies, according to the slope, distance between furrows and the depth of the trenches, from 190 to 325 person-days per ha, and the demand for tools from S/. 350 and S/. 430 per ha. Total ha costs vary from S/. 800 to S/. 1,500. The total cost for the construction of IFs over five years has been estimated at US$2.6 million. Beneficiaries would contribute US$7.1 million equivalent. 2. Agricultural Inputs 19. To ensure higher yields and revenues from these investments and optimize the use of conservation and irrigation works, the project would promote adoption of simple, higher performing technological packages comprising mainly improved seeds, fertilizers and agrochemical. These inputs will be distributed to farmers who completed  - 41 - the construction of bench terraces and slow-formation terraces as incremental working capital to farming activities. 20. Soil Conservation Impact. Quality seeds combined with the use of fertilizers and proper pest control will contribute to increased crop vigor and, consequently, to increased soil cover. Higher yields and revenues should encourage farmers to extend and maintain their soil conservation structures. 21. Targets and Costs. Delivery of agricultural inputs would start operating in project-year two, after completing the first-year conservation target. The project would assist 1,500 ha in years two and three; and 3,000 ha in years four and five. The crops to be benefit are mainly potatoes (50 percent); maize (25 percent) and barley (25 percent). The total cost of this component over five years is estimated at US$9 million. Per-ha costs are as follows: (in Soles) Crop Seeds Fertilizer Agrochemical Total Potatoes 2,250 800 700 3,750 Maize/barley 70 380 100 585 Average Cost - - - 2,160 3. Small-Scale Irrigation Works 22. In the semi-arid environment of the Sierra, the use of conservation structures can be optimized with the introduction of irrigation, reducing risks and increasing land productivity. The project would finance construction and/or rehabilitation of small irrigation works aimed at expanding and improving crop production efficiency. These works include construction of small reservoirs, improvement of weirs and diversion structures and the construction and or/lining of water distribution canals. The project would also promote pressure irrigation by gravity, and supply the corresponding pipes and sprinklers for its implementation. Most irrigation schemes would benefit the areas treated with bench (absorption) terraces as well as valley bottoms with a smooth topography. Sprinkler and drip irrigation will be promoted on slow-formation terraces. 23. Soil conservation impact. Impact of irrigation on soil conservation is indirect. It contributes to improve crop vigor, generating increased soil cover (to protect it against rainsplash and wind erosion) and increased organic matter in the soil through expanded root systems and a more voluminous aerial vegetation. This improves soil fertility, increases yields, fosters sustainability, and provides farmers with means to improve crop husbandry.  - 42 - 24. Targets and Costs. The project would construct/rehabilitate small irrigation works to benefit a total area of about 10,000 ha. This would include the construction/rehabilitation of: (a) 50 water reservoirs; (b) 17 small dams; (c) 80 km of irrigation canals; and the supply of PVC pipes, hoses and drip-irrigation gadgets, and sprinklers. Total costs of the irrigation component are estimated at US$22.9 million. Maximum per hectare costs with irrigation works (including labor, tools, materials and equipment) have been estimated at US$1,500 in the upper Sierra; US$2,600 in the central areas; and US$3,100 in the lower catchment zones. Considering the extreme diversity of such irrigation works, the unskilled labor component is estimated at seven percent. 4. Reforestation and Agroforestry Activities 25. There are in the Sierra about 20 million ha of land suitable for forestry, most of which is bare land exposed to accelerated erosion. About 350,000 ha (2.5 percent of that area) have already been reforested over the last 15 years, part of which under the PRONAMACHCS' soil conservation program. These forests are becoming an important source of firewood and timber for construction materials and furniture in the Sierra. About 15 percent of the country's sawn timber is being supplied by these forests. However, for lack of adequate forest management knowledge, local processing facilities and sound marketing arrangements, timber extraction is not producing the expected returns. As reforestation is a key soil conservation factor, and the country's demand for forest products is increasing, forestry development is an important project component. It would include, besides the production of seedlings and establishment of forest and agroforestry plantations, actions to improve forest management. 26. Impact on soil conservation. Forest stands would be planted in areas not suitable for crops, but good for forestry activities. Forest plantations will be a complementary activity in the overall micro-catchment system. Forest stands provide a permanent soil cover and protection against erosion. They absorb and store rain water in the micro-catchment and reduce the impact of downhill runoff affecting croplands in lower bands. Forests improve the soils on which they are planted, by incorporating organic matter and nutrients extracted from the lower soil layers and deposition of leaves and branches. Agroforestry activities include particularly: (a) windbreaks - to protect soils against wind erosion and crops against evapotranspiration; (b) live barriers - to control runoff and establish slow-formation terraces; and (c) alley-cropping - the establishment of wide-spaced soil-enriching perennial trees, intercropped with annual crops. The best adapted species for the Sierra have already been established through tests with eucalyptus, conifer and native species. 27. Activities and targets. The Agroforestry component, designed to address the various phases of the activity, includes the following investments: (a) Tree Nurseries. Includes the establishment on farmers' land of infrastructure for production of forest seedlings. Investment items include fencing, preparation of seed-beds and transplanting platforms, installation  - 43 - of an irrigation system, tools, plastic bags, and labor. The project would help establish 540 nurseries. (b) Seedling production. The community would, with PRONAMACHCS assistance, carry out: preparation of seed-beds, seeding, transplanting, watering, seedling management and selection. Nurseries would produce an average of 10,000 seedlings per year. The project would help produce about 20 million seedlings. (c) Forest establishment. The accomplished seedlings will be transplanted to areas established by the participatory micro-catchment planning. Land preparation previous to planting includes the construction of infiltration furrows, pegging, and holing. Most plants will be used for agroforestry and sylvo-pastoral activities, alternated with crops and/or pastures, through alleys, windbreaks, live fences and vegetated barriers. The remaining seedlings will be planted for conservation and economic exploitation. The project would help establish an equivalent of 17,000 ha of forest (trees). (d) Forest management. Aimed at ensuring plant survival, it includes: pest control, protection against damages by domestic animals and cattle, pruning, thinning, regrowth management, etc., spread along the forest cycle up to maturity. 28. Costs. The component's total cost is estimated at US$11.9 million. The project would finance all requirements for tools, materials, seeds and other inputs, at a total cost estimated at US$6.9 million, or about 60 percent of the component's total costs. The communities will supply about 160,000 person days of voluntary labor, rated at a total cost of about US$3.4 million), or 40 percent of forestry total costs. 5. Seed and Input Storage Rooms 29. Construction of small community storage rooms is an efficient complement to soil conservation investments and has contributed to the sustainability of the farmers production systems. They are extremely useful for storage of seeds, their maintenance in good planting condition, and the upkeep of inputs and crop products. The construction of storage houses is recommended when the quantity of inputs and products exceeds 20 metric tons. They are semi-rustic structures with a very simple design, and constructed mainly with community labor, using local materials (lumber, bricks, tiles). The project would finance the complementary construction materials, tools, and the qualified labor. 30. Soil conservation impact. Well preserved quality seeds will contribute to produce vigorous crops end ensure good soil cover, protecting soils against erosion, favoring infiltration and incorporation of increased organic matter in the soil. The resulting economic gains through reduced risks and increased average yields and revenues are expected to motivate farmers to adopt improved soil management practices.  - 44 - 31. Targets and Costs. The project would finance construction of 430 small storage houses with an average capacity of 25 m.t. The average unit cost is estimated at S/. 11,742, which includes: qualified labor; construction materials (S/. 5,300); tools (S/.315); and 750 person-days of unskilled labor. The project would finance US$1.6 million. The communities would supply labor, estimated at US$800,000. C. INTENSIVE-MANAGEMENT PILOT MICRO-CATCHMENTS 32. Introduction. While bench terracing has been successful for upgrading originally unsuitable soils to productive farmland, and slow-formation terraces have been introduced by PRONAMACHCS as an efficient low-cost solution for reducing average slopes, no comprehensive strategy has yet been developed to prevent soil degradation in these terraces and ensure its sustainability on the long run. 33. The difficulty of ensuring soil cover after harvest is a major constraint. Crop residues are eaten by animals and fallow growth is constrained by lack of moisture. This leaves soils exposed to splash erosion at the first rains of the subsequent season. Erosion combined with damage by animals and lack of maintenance have degraded most old terrace systems, and caused low productivity and abandonment. To prevent degradation, improved soil management practices, not yet systematically tested, need to be introduced. They include, particularly, adequate soil preparation, fertilizing and manuring, adoption of efficient irrigation-water distribution, use of ecological band-specific crop varieties, proper crop densities, and soil conservation effective rotations. 34. Project Action. To trigger the process of introducing an amplified soil management strategy in the Sierra, extrapolating the current conventional approach which concentrates on the construction of physical structures, the project would introduce an extended, intensified soil management strategy in three pilot micro-catchments to be defined at appraisal. These micro-catchments are to be selected on the basis of their agroecological representatives, communities' willingness to participate, and dynamism of the local PRONAMACHCS technical teams. In these pilot micro-catchments, the integrated land management strategy will be tested in full. 35. Participatory planning will follow the same overall methodology adopted by the project. In addition to the conventional strategy (terracing, reforestation, irrigation), project implementation could put particular emphasis on: (a) introduction of improved agronomic, zootechnical and agroforestry practices in both terraced and non-terraced areas; (b) adaptive research in soil management technologies; (c) water monitoring to determine project impact on water flows and transport of soil sediments; (d) realignment and maintenance of feeder roads to neutralize road-born erosion impacts; and (e) socioeconomic monitoring to determine impact on production and revenues. 36. Implementation Arrangements. Research and monitoring activities will be carried out through agreements with relevant public or private specialized institutions such as INIA, INRENA, Universities, etc. Two pilot micro-catchments would be started in PY1 and the third in PY3.  - 45 - ANNEX 2 PERU SIERRA - NATURAL RESOURCES MANAGEMENT AND POVERTY ALLEVIATION PROJECT RuRAL COMMUNITY STRENGTHENING 1. During project preparation the Government has carried out a beneficiary assessment in 144 communities located in 30 micro-catchments of eight departments. This annex provides a summary of the conclusions of this assessment and describes the community strengthening component. The full report is included in the working paper. A. BENEFICIARY ASSESSMENT CONCLUSIONS Profile of the Target Communities 2. Most peasant communities in the Sierra are basically groups of families living in a territory where property rights are vested in the extended family. Decisions are generally taken in a communal assembly and are carried out by community authorities or elected community boards. Peasant communities have legal recognition and are legal entities before the law. 14 3. Women. According to some estimations women are responsible for 60 percent of agricultural activities. They are usually unaware of their rights and usually do not participate in management positions within their own communities. Women have made important labor contributions to PRONAMACHCS activities. 4. Land Tenure. There are two types of land ownership. Family plots are exploited without obligation of a contribution to the community. More than 50 percent of the families own around two hectares of land. Community lands are collectively used by the whole community under three modalities: (;) natural pastures for the use of all "comuneros" for livestock purposes; (ii) community agricultural land for common benefit; (iii) miscellaneous and non cultivated lands (eriazas) including forest lands. Community Organizations 5. Community peasant organizations are stable, long term organizations that enjoy credibility and respect among peasants and its characteristics offer several advantages for project sustainability. Community organizations in the Sierra evolve 14 Peru Political Constitution recognizes these communities and their ownership of communal land; Civil Code, according to Decree of July 24, 1984 protects their legal status; Law 24656 of Peasant Communities declares them of national interest to support their development.  - 46 - around land ownership and cultural traditions. Top authority lays with the General Assembly where the main decisions are taken; a board of managers integrate a "Junta Directiva" including a President, a Vice-President, a Treasurer, Deputy and a Supervisor; this organization also incorporates municipal authorities related to the political structure of the country such as the "Teniente Gobernador" and the "Agente Municipal'. All members are elected democratically in a general assembly attended not only by all "comuneros" but by their families, including young people and children. Traditional organizations have proven to respond to requirements of different public and private programs. The community creates special committees of elected members in charge of each particular program; such as: conservation, irrigation, water and electricity committees. 6. Community Enterprises (Empresas Comunales) have been promoted according to a model provided by MAG. In the last three years more than 700 such "empresas" have been developed but not all are functioning successfully. According to the beneficiary assessment, many peasants participation in empresas comunales has been out of interest in obtaining public funds rather than just the advantages of incorporating a modem entrepreneurial management. Community Willingness to Participate and to Provide Labor 7. An important aspect of the beneficiary assessment was to identify potential beneficiaries' willingness to participate in the project; this was measured through participation levels in PRONAMACHCS activities. Almost 95 percent of peasants interviewed found the activities very useful for their communities because of the soil conservation impact. Seventy percent of peasants confirmed that most works were finished and operating. These works have contributed to recover solidarity and mutual support rooted in community traditions. Thirty percent mention subprojects with some level of difficulty; mainly because of conflicts within the community itself 8. To promote participation PRONAMACHCS has provided four types of incentives: (i) tools; (ii) seeds and fertilizers; (iii) training; (iv) and eventually, food support. These incentives are a key factor for ensuring community participation. Ninety-five percent agreed with the PRONAMACHCS approach, mainly because of the provision of agricultural inputs and tools (35 percent), although an important group considered soil conservation, tree nurseries and training also very important. Twenty percent mentioned that they would not participate without incentives. Seventeen percent would not be interested if they did not receive food. 9. The decision on labor commitment are taken by the community assembly. Each committee establishes its own work program deciding on specific days and times to carry out different tasks as well as sanctions when members fail to accomplish their obligations. Penalties include payment of fines and/or additional labor contributions.  - 47 - 10. Each family contributes, on average, 48 days of free labor per year. When benefits of conservation are better understood, the yearly contribution can raise to 144 days per family. On average, 50 percent of families in each community participate in PRONAMACHCS work. The departments with higher number of indigenous population are also the ones with higher rates of participation because of their cultural tradition of free labor contributions (minka). Community Participation and Training 11. Participation is the key element to achieve all project's objectives. Participation is necessary to: (i) implement a participatory planning system and undertake investments that respond to community priorities; (ii) carry out conservation activities requiring organized participation of communities; (iii) set up a natural resources management system based on the introduction of participatory research programs; and (iv) transform community organizations into a more business management oriented organization. 12. Training was one of the main requests of communities during the consultation process. Technical training provided by PRONAMACHCS concerns conservation works, maintenance and operation of rural infrastructure. Sixty percent expressed their satisfaction with this effort; however, they also requested a more aggressive and systematic training program. Peasants expressed their doubts about the effectiveness of training of "community promoters" and insisted on the need of direct training through the extension agents to major groups. Twenty-one percent agreed with the advantages of promoters training and 25 percent preferred a combination of both training methods. The use of the local language was suggested by 18 percent of peasants. Moreover, 36 percent mentioned the need for more practical than theoretical courses. B. COMMUNITY STRENGTHENING COMPONENT 13. Objectives. The project would include a component to enhance community participation, increase awareness of advantages of conservation and better community organization. The component's objectives would be to: (i) make communities conscious of the need of preserve natural resources and promote their participation in PRONAMACHCS conservation activities; (ii) promote creation of micro-catchment management committees to increase conservation impact; (ii) strengthen the managerial capacity of peasants community organizations; and (iv) enhance women participation. 14. Strategy. To achieve these objectives four action lines have been considered: (i) promotion and participatory planning; (ii) micro-catchment management committees; (iii) strengthening managerial capacity of community organization; and (iv) support to women participation.  - 48 - 1. Promotion and Participatory Planning 15. This action builds on the PRONAMACHCS experience of community work but promotes a more organized participation of communities. Two activities would be implemented: a promotion campaign and participatory planning. 16. Promotion. A yearly promotion campaign woi.ld take place to incremse participation and disseminate results. This would include: (a) preparation of bilingual pamphlets: a set of 30 pamphlets per community would be prepared relating to: (i) the participatory approach of the project; (ii) the need to improve community organization; and (iii) free labor contributions; and (b) radio broadcasts would be organized in each branch to respond to local conditions and interest, languages and education and cultural levels. 17. A participatory planning process would be implemented to ensure community participation in all stages of the project according to the following cycle: (a) initial approach of PRONAMACHCS with community authorities to explain project objectives, procedures and conditions; (b) agreement to participate by community assembly and designation of special committee members; (c) each community, with the support of the PRONAMACHCS extension agents would: (i) identify the community's potential and needs; (ii) diagnose the socioeconomic conditions; (iii) assess the organization capacity; (iv) identify of possible conflicts and risks to introduce preventive measures; (v) estimate free labor contributions, by gender and age; and (vi) identify needs to strengthen community organization and training; (d) preparation of a participatory plan including: (i) soil conservation activities; (ii) rural infrastructure; (iii) forestry and agroforestry; (iv) technical training and assistance; (v) community organization strengthening; (e) implementation directly controlled by community through its special committee; (f) monitoring and evaluation through periodic meetings of special committee and PRONAMACHCS; and (g) preparation of plan for following year. 18. The community would receive practical training when preparing participatory plans. This would be reinforced by more formal training for communities  - 49 - grasping this approach and able to incorporate it as part of decision-making. Training would initiated in the third project year, once the participatory planning process is general practice. Training would be provided to the most advanced communities; coverage would begin with 40 micro-catchments in the third year to reach 125 the last year. By the end of the project, at least 20 percent of the communities involved would be able to prepare participatory plans on their own. 2. Micro-catchment Management Committees 19. Ninety percent of the peasants agreed on the need to organize activities at micro-catchment level. Peasants mentioned as main advantages of such organization: (i) a more integrated execution of investment works; (ii) an increase in management capacity; (iii) sharing experiences; (iv) marketing improvements; and (v) better land use. Peasants consider as main obstacles to create micro-catchment committees: (i) the lack of experience to undertake such organization and thus the need of training; (ii) distance between communities. Other important problems mentioned were conflicts in some miicro-catchments and differences in natural resources availability and development level that might raise conflicts. 20. These results show the importance of supporting communities creating organizations larger than their boundaries and point out areas where potential conflicts might occur. Therefore, it is necessary to initiate the process of organization at community level to ensure community ownership. Peasants themselves suggested a consultation process as a first stage to create a steering committee to promote the idea and define a strategy. This process should also involve other entities, public and private, acting at the micro-catchment level as well as municipal authorities. 21. This process would include the following steps: (i) promotion to create this committee and consultation among grass root organizations and authorities in each community to reach an agreement on the subject; (ii) periodical meetings to initiate common resolutions; (iii) annual meetings of community representatives, leaders, and authorities to prepare a formal agreement to create the committee and prepare a common action plan; (iv) concertation with public and private organizations, as well as local authorities to decide upon complementary activities; (v) support to formalize the organization of the committee; (vi) preparation of medium and long term programs at the micro-catchment level; and(vii) training of participant members in each committee to be able to prepare, implement and manage agreements on an accountable basis. 22. The project would finance a gradual process including community workshops, micro-catchment concertation meetings and training. (a) Community Workshops: Extension agents would introduce the concept of micro-catchment organization, helping communities to identify actions to be executed at the micro-catchment level; all 1,250 communities would  - 50 - carry out a yearly workshop to define such proposal; this process would ensure active community participation instead of top-down decisions. (b) Micro-catchment Concertation Meetings: Although informal meetings can be organized, PRONAMACHCS would ensure that at least once a year communities in each micro-catchment would meet to reach agreements on common actions and mechanisms to organize a micro-catchment management committee. (c) Training to Organize and Manage Micro-catchment Committees: It is expected that by the third year consultation and concertation processes would be consolidated and that formation of committees would be in process; to support these results participants in committees would receive training in aspects such as: legal mechanisms and procedures, administration and management; management for services provision, etc. 23. As a result of this process it is expected that at least 50 of such committees would be created and operating on sustainable basis; also 250 agreements of coordinated actions and training of all participants in these committees are project goals. 3. Strengthening the Managerial Capacity of Community Organizations 24. This training aims at efficient management of investments, business leaders, a more efficient organization of communities and emerging of local initiatives. Three main lines of training would be developed. (a) Training in Management of Revolving Stock of Agricultural Inputs. Fund Committees are in charge of provision of agricultural inputs. Presently their operational results have been mixed and training would provide skills to improve performance and a more transparent management. This training should ensure: (i) adequate integration and operation; (ii) autonomous management by the community; and (iii) higher recovery levels. Through this training, communities should be able to manage independently and select the best alternative to recover inputs. At the end of the Project, at least 1,000 revolving stocks would be operating properly with average recovery levels of 70 percent. (b) Training in Management of Rural Investment Accounts. A special committee manages the community works and resource administration through an account administered jointly by this special committee and PRONAMACHCS. Although this mechanism has been successfuil, it is important to enable the committee to manage the account with decreasing PRONAMACHCS supervision. (c) Training to Develop the Communities Managerial Capacity. This training would be provided on demand to respond to particular needs of  - 51 - each community. A special menu of basic training would be prepared to target community authorities and leaders and "promoters" designated by communities. As a result of this training it is expected that each community would have at least three promoters per community. 4. Support of Rural Women Participation 25. As a recognition of the important role played by women in the Sierra and their contribution to PRONAMACHCS efforts, a special program would support women participating in the project with small productive projects, including: (i) small livestock development; (ii) family food gardens; (iii) medicinal plant production; (iv) basic processing of agriculture products. The general rules to obtain this incentives are: (i) beneficiaries would contribute with al least 20 percent of the total cost; (ii) support is subject to actual participation in conservation activities; (iii) activities should be sustainable; (iv) beneficiaries are committed to disseminate their experiences in their communities; and (v) investment is limited to US$1,500 per community. 5. Implementation 26. Implementation of this component builds on PRONAMACHCS' existing capacity. A specialist in Promotion and Community Development would be hired at department level to guide implementation. This specialist would have: (i) experience in community development and organization; (ii) knowledge about socioeconomic and cultural conditions of Sierra communities; (iv) experience with PRONAMACHCS activities; and (v) knowledge or training to be able to communicate in native languages. The main functions would include to: (i) overlook implementation ensuring adequate coverage and impact; (ii) coordinate design, execution and results of community training; (iii) promote and coordinate different activities to implement micro-catchment management committees; (iv) coordinate and evaluate component impact. 27. The existing Promotion Unit in PRONAMACHCS would support component implementation through activities such as: (i) design and preparation of bilingual pamphlets; (ii) design and preparation of radio broadcast; (iii) support to execute community workshops; (iv) support micro-catchment meeting organization; (v) design and support of execution of Rural Women Participation Program; and (vi) promote agreements with other public and private organizations. 6. Monitoring and Impact Evaluation 28. Promotion and Participation. These actions have a quantitative dimension that can be measured with two indicators: (i) coverage of promotion, for instance, number of communities reached by radio broadcasts and pamphlets distributed; and (ii) number of beneficiaries reached by the project. The qualitative dimension of participation is more difficult to measure, nevertheless, the following results can provide some valuable information: (i) free labor contribution per gender; (ii) attendance to workshops and training courses; (iii) community representatives attending  - 52 - micro-catchment meetings; (iv) number of committees created an working on a sustainable basis; (v) number of participatory plans prepared by the communities themselves. 29. Micro-catchmentManagement Committees. The simplest measure is to account for the number of such committees integrated under the project; however, the impact of such organization should consider real changes in the management of activities at the micro-catchment level. The following indicators would be useful to both purposes: (i) community workshops celebrated at the micro-catchment level; (ii) number of micro-catchment annual meetings carried out; (iii) number of agreements signed and implemented; and (iv) participation and support provided by municipal authorities. 30. Strengthening Communities Managerial Capacity. Training and experience would strengthen community management capacity. Such result can only be measured in the medium or long term. However, it is important to monitor: (i) the number of beneficiaries trained; (ii) success of different courses, measured by sustained attendance and trainees evaluation of courses; and (iii) analysis of failures. To capture the qualitative dimension of the project's impact on community traditional organizations the following aspects can be useful: (i) number of input revolving stocks operating with rates of recovery bigger than 70 percent; (ii) number of entrepreneur promoters working per community; and (iii) emerging community initiatives in relation to conservation, productivity improvements, marketing and/or entrepreneurial activities. 31. Enhancing Women Participation. Women participation should be monitored in all aspects of project implementation in quantitative and qualitative aspects. Following indicators are recommended: (i) labor contributions; (ii) number of women attending training courses; (iii) number of women appointed at any committees created under the project; (iv) women attending micro-catchment meetings and/ or appointed as community representatives; and (v) female entrepreneur promoters. Additionally, programs implemented to be an incentive for women participation should be monitored and evaluated considering aspects such as: (i) number of programs implemented and beneficiaries (ii) replication of the programs in the community; and (iii) programs operating on sustainable and self-sufficient basis.  - 53 - ANNEX 3 PERU SIERRA - NATURAL RESOURCES MANAGEMENT AND POVERTY ALLEVIATION PROJECT LIST OF PRONAMACHCS BRANCHES Department Branch Micro-Catchments Apurimac Chalhuanca 6 Cotabambas 3 Andahuaylas 5 Ayacucho Lucanas 6 Huancavelica Churcampa 6 Ticrapo 4 Huaytara 2 Ancash Cabana 4 Huacaybamba 5 Piscobamba 5 Antonio Raymondi 3 Huanuco Huanuco 7 Dos de Mayo 4 Junin Tarma 6 Huancayo 7 Cajamarca to be determined  - 54 - ANNEX 4 PERU SIERRA - NATURAL RESOURCES MANAGEMENT AND POVERTY ALLEVIATION PROJECT TECHNICAL ASSISTANCE, EXTENSION AND TRAINING Rural Extension 1. Organization. Practically all project components will be handled through the extension structure. Extension will be coordinated, and to a large extent carried out, by PRONAMACHCS, through its existing structure. An extension coordinator, assisted by three professionals, will be responsible for extension coordination. The field structure will consist of 20 PRONAMACHCS branch offices. Each office will cover about seven micro-catchments, and will include a nucleus team of subject-matter specialists (SMS), covering soil conservation, irrigation, forestry, and community strengthening aspects. These teams will be responsible for project promotion, micro-catchment selection and planning, and technical and administrative project support. 2. Extension agents. Permanent technical assistance to the farmers will be ensured by field extension agents - one per about seven communities. They will be selected amongst PRONAMACHCS and MAG technical staff, according to their professional profile and language proficiency, and deployed to the project after receiving pre-service training. The current staff of PRONAMACHCS's 20 branches includes 60 SMS professionals (three per office) and 120 extension agents (six per office). The foreseen incremental number of extension agents to be re-deployed to the project is estimated at 100. This will raise the total number of project extension agents to 400, and ensure an average staff of 14 extension agents per office by year three. 3. Subject matter specialists. The SMS teams will be responsible for the selection of micro-catchments and will coordinate rapid rural appraisals and preparation of micro-catchment development plans. They will be further select, train, help and supervise the field extension agents. They will also supervise the implementation of the project-funded community investment accounts. Field extension agents will participate with the SMS teams in the rapid rural appraisals and participatory planning of the micro-catchments to which they are deployed. They will promote the organization of the communities and interest groups and assist these groups to prepare land management farm plans and implement the planned activities. 4. Promoters. In each assisted community, extension agents will train two or more local soil conservation promoters, elected by the community to help implementation and assist farmers to adopt the recommended soil conservation technologies. Extension agents will be permanently backed up in all these tasks by the regional SMS teams. A field extension agents will visit an average of two communities per day. This will allow him to  - 55 - pay a weekly visit to each community, and dedicate one day per week for studies and office work. Once a week, he will be accompanied by an SMS member. 5. Costs. The costs of the extension component are estimated at US$4.3 million. Training 6. Intensive training and periodic updating on soil and water management, group dynamics, production technologies and economics will enable SMS and extension agents to carry out their mandate. The training program will include the following main activities: (i) pre-service training; (ii) seminars, workshops and short courses; (iii) exchange of experiences; and (iv) technical visits to natural resources management projects in other countries. A. Pre-service Training 7. The central objectives of pre-service courses are to familiarize the technical staff with the project and supply them with the essential technical and operational information for project implementation. The basic structure of these courses will include elements on: (i) main natural resources degradation problems in Peru; their social and economic context, and impact, past experience in addressing these problems; (ii) project objectives, strategy, scope and design; (iii) participatory surveys and soil conservation planning at micro-catchment level, the use of maps and images; (iv) technologies for implementing the project's technical strategy; (v) operational strategy, extension methodology, group dynamics, community organization; micro-catchment management; revolving stock; and (vi) elements of rural economy applied to the Sierra. 8. The above structure will be adapted, respectively to professionals (graduates) and extension agents (technicians), in a differentiated manner, taking account their previous training and experience with natural resources management in the Sierra. The courses will have a duration of six days for professionals and ten days for extension agents, will be administered by PRONAMACHCS specialists, national experts and international consultants, and organized for groups of about 25 participants, covering a total staff of 125 professionals and 250 extension agents. B. Seminars and Workshops 9. Their objective is to complement pre-service training and update the staffs knowledge on technical and operational matters, with an important practical training component with conspicuous field activities. They will be divided in national workshops, and regional workshops. 10. National workshops are designed to deepen the technical training of the project's SMS professionals. They will also be used for evaluating the achievements of the previous year and programming the activities of the subsequent year. National workshops will generally be organized by specialty, including respectively soil conservation (physical  - 56 - structures and agronomic aspects), irrigation, and forestry. Three yearly national workshops are foreseen, one by group of 20 professionals of each specialty (one professional per regional office). The 7 Department directors would also participate, totaling 27 participants by workshop. Each workshop will have an average duration of three days. 11. Regional workshops objectives are similar to those of national workshops, but focused on Department-level aspects, and will involve all SMSs and extension agents of each Department. During the first three years of the project, regional workshops will aim essentially at complementing pre-service training, with practical courses scheduled according to the seasonal cycle of field activities. In project years four and five, the courses would focus on technical updating and improvement, essentially addressed to department-level problems. The courses will have an average duration of two days. C. Exchange of Experiences 12. This training modality would stimulate the extension of successful local experiences to the rest of the project area, through technical visits of project professionals and extension agents to the areas of other PRONAMACHCS offices. Once a year two representatives of each project office will spend one day visiting a conspicuous land management experience in another jurisdiction, participating in field days or other events especially organized for this purpose. The yearly number of participants would be 40. D. Study Tours 13. They envisage the exchange of experiences with natural resources management projects in other countries, mainly in Latin America. It is envisaged to offer each project-related professional the opportunity to participate in one such visits abroad, over the five years of the project. The average number of professionals per group/year will be 14 (total 70). Average duration is eight days per study tour.  Peru Sierra Natural Resources & Poverty Alleviation Project Components Project Cost Summary (Soles) (US$) % % Total % % Total Foreign Base Foreign Base Local Foreign Total Exchange Costs Local Foreign Total Exchange Costs A. Evaluaci6n de los Recursos Agua y Tierfas 587,880 453,380 1,041,240 44 1 244,950 188,900 433,850 44 1 B. lnvOrslones Rurales Consernaci6n de Suelos 62,378,170 17,988,059 80,364,229 22 41 25,990,904 7,494,191 33,485,096 22 41 Obras de Riego 38,674,339 9,600,209 48,274,548 20 25 16,114,308 4,000,087 20,114,395 20 25 Desarrllo Forestal 18,246,423 6,600,115 24,846,538 27 13 7,602,676 2,750,048 10,352,724 27 13 Manejo lntensivo /a 1,317,819 865,461 2,183,279 40 1 549,091 360,809 909,700 40 1 Almacenes 4,995,142 56,536 5,051,677 1 3 2,081,309 23,557 2,104,866 1 3 Servciosde Consultoria 550,000 550,000 229,167 - 229,167 U' Subtotal Inverslones Rurales 126,161,893 35,108,379 161,270,272 22 83 52,567,456 14,828,491 67,195,947 22 83 4 C. Fortlecimiento de las Comunidades 6,344,520 1.027,701 7,372,221 14 4 2,643,550 428,209 3,071,759 14 4 D. Apoyo Logistieo y Administracl6n del Proyeeto Agenciasde PRONAMACHCS 13,803,884 5,560,279 19,364,183 29 10 5,751,618 2,318,783 8,068,401 29 10 PRONAMACHCS Direcciones Central y Departamentales 3,404,623 237,195 3,641,819 7 2 1,418,593 98,831 1,517,424 7 2 Capacitaci6nyAsistenciaTecnica 985,902 625,058 1,810,960 39 1 410,793 260,441 671,233 39 1 SubtotalApoyoLogisticoyAdministraci6ndelProyecto 18,194,410 6,422,532 24,616,942 28 13 7,581,004 2,676,055 10,257,059 26 13 Total BASELINE COSTS 151,288,703 43,011,972 194,300,675 22 100 63,036,960 17,921,855 80,958,615 22 100 Physical Contingencies 7,564,435 2,150,599 9,715,034 22 5 3,151,848 896,083 4,047,931 22 5 Price Contingencies 33,271,502 8,100,433 41,371,934 20 21 6,747,873 1,405,833 8,153,511 17 10 Total PROJECT COSTS 192,124,640 53,263,003 245,387,643 22 126 72,936,681 20,223,378 93,160,056 22 115 ba 5 microcuencas z X m a'  Peru Sierra Natural Resources & Poverty Alleviation Project Components by Financiers (US$) World Bank Campesinos The Government Total Local (Exci. Duties & Amount % Amount % Amount % Amount % For. Exch. Taxes) Taxes A. Evaluaci6ndelosRecursosAguayTierras 466,174 100.0 - - - - 466,174 0.5 201,628 264,546 S. Inversiones Rurales Conservaci6ndeSuelos 13,309,410 34.3 21,991,240 567 3,454,519 89 38,755,169 41.6 8,541,309 26,759,341 3,454,519 Obras de Riego 20,150,819 87.8 1,680,578 7.3 1,110,696 4.8 22,942,093 24.6 4,472,830 17,358,566 1,110,696 Desarrollo Forestal 6,913,759 57.8 3,452,198 28.9 1,592,749 13.3 11,958,706 12.8 3,121,606 7,244,352 1,592,749 Manejo Intensivo la 910,123 88.7 - - 115,989 11.3 1,026,112 1.1 400,737 5095386 115,989 c-r Almacenes 1,658,200 67 8 780,948 31.9 6,605 0.3 2,445,753 2.6 26,644 2,412,504 6,605 03 ServiciosdeConsultorla 264,101 1000 - - - - 264,101 03 - 264,101 - Subtotl Inverslones Rurales 43,206,413 55.8 27,904,964 36.1 6,280,558 81 77,391,935 831 16,563,126 54,548,250 6,280,558 C. FortalecimientodelasComunidades 3,109,017 87.0 - - 463,011 13.0 3,572,028 3.8 485,288 3,086,740 - D. Apoyo Logiet y Administracl6n del Proyecto AgenciasdePRON4AMACHCS 2,785,064 30.2 - - 6,441,317 69.8 9,226,381 9.9 2,575,014 5,817,005 834,362 PRONAMACHCSDireccionesCentral yDepartamentales 719,552 41.3 - - 1,022,375 587 1,741,926 1.9 107,021 1,597,442 37,464 Capacitaci6n y Asistencia Tcnica 699,082 91.8 - - 62,530 8 2 761,612 0.8 291,299 469,714 600 SubtotalApoyoLogtcoyAdministracl6n del Proyecto 4,203,698 35.8 - - 7,526,222 64.2 11,729,920 12.6 2,973,334 7,884,161 872,425 Total Disbursement 50,985,302 547 27,904,964 30.0 14,269,791 153 93,160,056 100.0 20,223,376 65,783,698 7,152,983 \a 3 microcuencas  Peru Sierra Natural Resources & Poverty Alleviation Project Project Components by Year - Totals Including Contingencies (US$) Totals Including Contingencies 1997 1998 1999 2000 2001 Total A. Evaluaci6n de los Recursos Agua y Tierras 466,174 - - - - 466,174 B. Inversones Rurales Consevacidn de Suelos 3,007,508 7,513,197 7,976,753 9,340,747 10,916,964 38,755,169 Obras de Riego 4,184,620 5,159,442 6,351,887 4,162,958 3,083,186 22,942,093 Desarrollo Forestal 1,247,049 1,893,873 2,458,182 3,196,471 3,163,130 11,958,706 Manejo Intenswivo a 241,875 297,432 189,173 119,344 178,289 1,026,112 Almacenes 264,294 438,760 565,650 580,668 596,381 2,445,753 Servicios de Consultorla 49,500 51,366 52,982 54,390 55,864 264,101 co Subtotal Invesiones Rurales 8,994,845 15,354,070 17,594,627 17,454,579 17,993,814 77,391,935 C. Fortalecimiento de las Comunidades 273,396 601,416 820,446 936,031 940,739 3,572,028 D. Apoyo Logitico y Administracion del Proyecto Agencias de PRONAMACHCS 1,488,553 2,192,561 1,800,951 1,847,704 1,896,612 9,226,381 PRONAMACHCS Direcciones Central y Departamentales 386,441 315,984 343,189 334,500 361,813 1,741,926 Capacitacidn y Asistencia Tecnica 159,630 173,200 183,142 121,245 124,395 761,612 Subtotal Apaoy Logistico y Administraci6n del Proyecto 2,034,624 2,681,745 2,327,282 2,303,449 2,382,820 11,729,920 Total PROJECT COSTS 11,769,039 18,637,231 20,742,356 20,694,058 21,317,373 93,160,056 \a 3 microcuencas  Peru Sierra Natural Resources & Poverty Alleviation Project Expenditure Accounts Project Cost Summary (soles) (USS) % % Total % % Total Foreign Base Foreign Base Local Foreign Total Exchange Costs Local Foreign Total Exchange Costs I. Investment Costs A. Rural Investments Goods&WWodcs 58,658,416 22,780,821 81,439,237 28 42 24,441,007 9,492,009 33,933,015 28 42 Agricultural Inputs 9,897,162 12,327,558 22,224,720 55 11 4,123,818 5,136,483 9,260,300 55 11 Subtotal Rural Investments 68,555,578 35,108,379 103,663,957 34 53 28,564,824 14,628,491 43,193,316 34 53 B. Goods and Equipment Vehicles 473,155 1,892,619 2,365,774 80 1 197,148 788,591 985,739 80 1 Other Goods& Equipment 234,870 808,618 1,043,489 77 1 97,863 336,924 434,787 77 1 Subtotal Goods and Equipment 708,025 2,701,238 3,409,263 79 2 295,010 1,125,516 1.420,526 79 2 C. Unskilled Labor 57,606,315 - 57,606,315 - 30 24,002,631 - 24,002,631 - 30 D. Training & Technical Assistance Training 7,320,672 1,479,958 8,800,631 17 5 3,050,280 616,649 3,666,930 17 5 Consulting Services 1,800,050 188,400 1,988,450 9 1 750,021 78,500 828,521 9 1 Subtotal Training & Technical Assistance 9,120,722 1,668,358 10,789,081 15 6 3,800,301 695,149 4,495,450 15 6 Total Investment Costs 135,990,641 39,477,975 175,468,616 22 90 56,662,767 16,449,156 73,111,923 22 90 11. Recurrent Costs A. lncremental Salaries 11,010,696 - 11,010,696 - 6 4,587,790 - 4,587,790 - 6 B. Other Incremental Operating Costs Other Operating Costs 4,287,366 3,533,997 7,821,363 45 4 1,786,403 1,472,499 3,258,901 45 4 Total Recurrent Costs 15,298,062 3,533,997 18,832,059 19 10 6,374,193 1,472,499 7,848,691 19 10 Total BASELINE COSTS 151,288,703 43,011,972 194,300,675 22 100 63,036,960 17,921,655 80,958,615 22 100 Physical Contingencies 7,564,435 2,150,599 9,715,034 22 5 3,151,848 896,083 4,047,931 22 5 PriceContingencies 33,271.502 8,100,433 41,371,934 20 21 6,747,873 1,405,638 8,153,511 17 10 Total PROJECT COSTS 192,124,640 53,263,003 245,387,643 22 126 72,936,681 20,223,376 93,160,056 22 115  Peru Sierra Natural Resources & Poverty Alleviation Project Local/Foreign/Taxes by Financiers (US$) World Bank Campesinos The Government Total Amount % Amount % Arnount % Amount % J. Foreign 20,214,470 100 - - 8,906 - 20,223,376 22 II. Local (Excl. Taxes) 30,770,832 47 27,904,964 42 7,107,902 11 65,783,698 71 III. Taxes - - - - 7,152,983 100 7,152,983 8 Total Project 50,985,302 55 27,904,964 30 14,269,791 15 93,160,056 100 Disbursement Accounts by Financiers (US$) World Bank Campesinos The Government Total Local (Excl. Duties & Amount % Amount % Amount % Amount % For. Exch. Taxes) Taxes A. Rural Investments Goods & Works 34,806,167 90 4,019,117 10 38,825,284 42 10,693,522 24,112,646 4,019,117 Agricultural Inputs 8,400,245 79 - - 2,261,441 21 10,661,686 11 5,869,605 2,530,641 2,261,441 Subtotal Rural lnvestments 43,206,413 87 - - 6,280,558 13 49,486,971 53 16,563,126 26,643,286 6,280,556 B. Goods& Equipment 1,258,196 82 - - 270,716 18 1,528,912 2 1,211,000 47,196 270,716 C. Training & Technical Assistance Consulting Services 937,322 100 - -- 937,322 1 87,148 850,175 Training 3,716,501 88 - - 532,963 13 4,249,464 5 696,377 3,552,488 600 Subtotal Training & Technical Assistance 4,653,824 90 - - 532,963 10 5,186,787 6 783,525 4,402.662 600 D. Unskilled labor - - 27,904,964 100 - - 27,904,964 30 - 27,904,964 - E. Salaries - - - - 5,318,683 100 5,318,683 6 - 5,318,683 - F. Incremental Operating Costs 1,866,870 50 - 1,866,870 50 3,733,740 4 1,665,725 1,466,905 601,109 Total 50,985,302 55 27,904,964 30 14,269,791 15 93,160,056 100 20,223,376 65,783,698 7,152,983  - 62 - ANNEX 6 PERU SIERRA - NATURAL RESOURCES MANAGEMENT AND POVERTY ALLEVIATION PROJECT DISBURSEMENTS Estimated Schedule of Disbursements (US$ million) Bank FY and Disbursement by Cumulative Cumulative Standard Cumulative Semester Semester Disbursement Disbursement Disbursement Standard as % of Loan Profile Disbursement 1997 11 2.0 2.0 3.9 6.0 3.1 1998 1 5.0 7.0 13.7 8.0 7.1 11 5.0 12.0 23.5 12.0 13.3 1999 1 5.0 17.0 33.3 4.0 15.3 11 5.0 22.0 43.1 16.0 23.5 2000 1 6.0 28.0 54.9 12.0 29.6 11 6.0 34.0 66.7 12.0 35.7 2001 1 5.0 39.0 76.5 12.0 41.8 11 5.0 44.0 86.3 12.0 47.9 2002 1 4.0 48.0 94.1 4.0 50.0 11 2.0 50.0 98.0 2.0 51.0 2003 1 1.0 51.0 100.0 Total 51.0 Disburseffent Profile 60.0 50.0 40.0 04o E 30.0 'A 10.o 1997 1999 2000 2001 2002 2003 Years and Senester -+--Cumulative Disbursement -U--Standard Profile  - 63 - ANNEX 7 PERU SIERRA - NATURAL RESOURCES MANAGEMENT AND POVERTY ALLEVIATION PROJECT ECONOMIC AND FINANCIAL EVALUATION 1. Introduction. Financial and economic analysis has been carried out for the major project component, the Rural Investment Component, as well as for the project as a whole. The underlying analysis is the result of consultant studies completed during preparation of the project'5, and is essentially a financial analysis for the Rural Investment Component. The underlying analysis has been adjusted to account for economic prices and transfer payments to develop an economic analysis for the Component. Finally, overall project financial and economic analysis has been prepared by building models based on the Component analysis and detailed costs estimated for the overall project. The results of these analyses are summarized in the attached Tables 1 through 4. The methodologies and assumptions utilized are described below. 2. Target Population. It is estimated that the project would ultimately benefit over 75,000 poor families in about 1,250 communities throughout the Sierra. These families are very poor or extremely poor, maintaining subsistence lifestyles on an average of one half or one hectare of marginally cultivable land. Incomes are typically less than US$1,000 per family and opportunities for alternative livelihoods are few. 3. Methodology. Under the rural investment component, a large number of various types of subprojects would be implemented in a variety of agroecological zones throughout the Sierra. For example, these include three or four different types of soil conservation projects, a half-dozen or more types of irrigation projects, construction of seed warehouses, various reforestation activities, and improved agronomic techniques. Furthermore, these subprojects would be implemented throughout the Sierra, where sub-regions have significantly different climates due to varying altitudes and weather conditions. Finally, individual subprojects would be selected for financing largely as the result of a demand-driven, community participatory process. 4. In light of the above, rather than conduct financial and economic analysis for a set of pre-defined specific subprojects, several types of subprojects have been analyzed, with the objective of defining economically viable investment parameters. These subproject types have been selected on the basis of PRONAMACHCS twelve years of experience. They are indicative not only of subprojects expected to be implemented under the project but also of sub-regions in the Sierra where it is likely they will be carried out. 15 Detailed studies were conducted by a team of international and local consultants. Under FAO and Bank supervision, the results of these studies were later adjusted during project pre-appraisal. The studies and adjusted results are located in the Project Files.  - 64 - 5. The analysis has been carried out on the basis of 12 farm models representative of the principle agroecological zones. The models represent the present and future agriculture scenarios of the different project areas. They focus primarily on crop development since data on grazing and other activities are scarce and the project is in any case oriented towards agricultural improvements. Cropping intensity and water use efficiency at the outset of the project reflect current practice. With few exceptions, the specific crop models assume a constant input/output relationship. While this is a conservative assumption, it allows to focus on project benefits related to subproject enhancements and not speculative advances in agriculture development. 6. For each subproject, farm models represent farm families who benefit primarily from improvements in soil and water management. Increased production value results from reducing losses due to soil erosion, increasing irrigated areas while maintaining relatively constant cropping patterns, and reducing seed or crop losses due to poor storage capacity. In some cases, the potential for enhanced agriculture development in higher value crops (e.g., onions) is currently hindered primarily by poor irrigation. Thus, it is assumed that the development of such potential under the project is directly related to irrigation improvement (as opposed to new agriculture development practices). The models show an evolution over a twenty-year period, the expected useful life of the subprojects (except for reforestation where only a one-time benefit is expected about ten years after the initial investment). Most subprojects have a lag of about two to four years before benefits begin to accrue and full development is only reached about eight years after initial investments are made. Each model differs based upon current and expected cropping patterns for a given area and its size. 7. The models represent four different agricultural/technological approaches in three different sub-regions of the Sierra. The agricultural approaches are: traditional dry agriculture, dry agriculture with improved agronomic techniques, traditional irrigation agriculture, and irrigation agriculture with improved agronomic techniques. While climatic and soil conditions are extremely diverse throughout the Sierra, to simplify the analysis, three primary agroecological zones have been identified. These are the High Sierra (3,400 - 4,000 meters), the Middle Sierra (2,700 - 3,400 meters) and the Lower Sierra (2,000 - 2,700 meters). Each zone has a representative set of crops, many of them highly localized and produced strictly for the internal market, with potatoes being the most commonly produced among all three regions. Wheat and corn are the only potentially international commodities and they are produced predominantly in the Middle and Lower Sierra zones. Onions are also commonly produced in these two zones. 8. For each model, with and without project scenarios have been analyzed on a per hectare basis. This yields an incremental benefit per hectare which serves as the basis for estimating benefits resulting from each subproject type. In general, benefits have been estimated for a period of twenty years considering that the type of subproject types envisioned under the project are of a long term investment nature; that is, several years may pass before tangible benefits are realized. With these benefit flows, using discount rates of 8, 10, and 12 percent, (acceptable levels of) investment cost parameters have been estimated on a per hectare basis. These parameters serve as the basis for the investment limits defined in para. 4.15 of this Staff Appraisal Report. Due to the highly localized nature of the subprojects, it is difficult to compare these limits to "standard" or "internationally acceptable" investment levels. However, they are generally at or below PRONAMACHCS average subproject investment costs.  - 65 - 9. The types of subprojects analyzed for each of the farm models are: absorption terraces (TA), slow-forming terraces (TFL), ditches, reforestation, irrigation, intensive watershed management (IWM) (agronomic improvements) and warehouses. For TA, TFL and irrigation subprojects, for each sub-region of the Sierra, an incremental benefit per hectare has been calculated. However, subprojects such as TA and TFL would be predominantly implemented in the Middle and Upper Sierra where technical and economic viability of these subprojects is the greatest. Similarly, irrigation subprojects would be implemented largely in the Middle and Lower Sierra. As such, for TA and TFL subprojects, the incremental benefit per hectare used in the financial and economic projections reflects the average of the benefit estimated for just the Middle and Upper Sierra. For irrigation, the incremental benefit per hectare used in the projections is the average of that estimated for the Middle and Lower Sierra. For ditches, the incremental benefit per hectare is assumed to be only about 60 percent of that for TFL since, while the two are technically usually implemented jointly, most of the benefits come from TFL. In the case of reforestation and warehouses, benefit estimates are based on case experiences and data regarding the sale of wood and reduction in seed losses respectively. The specific benefit estimates are provided in the attached Tables 1-4 under the sections on Notes and Assumptions. Rural Investment Component: Financial Analysis 10. Using the above methodology, a financial rate of return for the Component has been estimated. Additionally, drawing on documented experience from specific subproject cases, sirnilar to those defined in the above farm models, the financial impact of subprojects on beneficiaries has been estimated. Assumptions and results for this financial analysis as follows. 11. Assumptions: (a) agricultural commodity prices are estimated using farm-gate prices for the Sierra, averaged over the past several years to eliminate the impact of significant positive price movements in the fourth quarter of 1995; (b) only agricultural activities are taken into consideration since agriculture is the primary means of income/livelihood in the rural Sierra and the investments under the project are oriented primarily towards improvements in agricultural output; as such, benefits do not reflect improvements in grazing and trading activities which could occur; (c) the cost of unskilled labor is estimated at 50 percent of the urban minimum wage, yielding a cost of five soles per day; (d) recurrent costs following the project are primarily for operation and maintenance of some of the investments; these costs are estimated yearly at 3 percent of investment costs; (e) taxes and duties for investments are included in the investment costs;  - 66 - (f) physical contingencies, estimated at 5 percent of investment costs, are included in total costs; however, price contingencies are not since the impact of movements in prices is demonstrated in the sensitivity analysis described below; and (g) for analyzing the financial impact of subprojects on beneficiary families: (i) inputs provided under the subprojects are treated as short term in-kind loans without financial cost; (ii) tools provided under the subprojects are treated as donations; (iii) unskilled labor an in-kind contribution provided by beneficiaries during the non-farming season; and (iv) income taxes on beneficiaries are not included since families at the poverty level found under the project are typically exempt from these taxes. 12. Results. The results show that the subprojects are financially viable, particularly before taking into consideration ongoing operation and maintenance costs. Without operation and maintenance EM costs, all subprojects show average financial internal rates of return at 12 percent or better, except for subprojects with just agronomic improvement activities (where the return is estimated at ten percent). Returns for reforestation are notably high (28 percent) but these returns cannot be realized until eight to ten years after the initial investment, so significant demand for these subprojects is not expected. The financial return for the overall Component is estimated at just over 11 percent. 13. Factoring in operation and maintenance costs, the returns for subprojects generally fall by two to three percent and the return for the overall Component falls to ten percent. However, the financial impact of subprojects on beneficiary families can be measured not only in terms of financial returns but also in terms of the value of inputs and tools received. This is particularly true since beneficiaries make no financial contributions under the subprojects and, while they do contribute significant amounts of unpaid labor, this is done mostly in the off season when alternative opportunities (particularly for cash) are few or non existent. The financial value of these inputs and tools ranges greatly depending on the subproject type. Soil conservation (and some reforestation) subprojects usually include more of these "incentives" than irrigation related subprojects. Other subprojects, such as warehouses, with higher financial returns, include few incentives. In any case, the financial value of these incentives can range from about US$500 to US$2,500 per subproject/community - with about 50 families per community, this translates into a financial value of about US$10 to US$50 per family for each subproject. This combines with financial returns of around 10 to 12 percent for subprojects, which translate into incremental income per family of about US$50 to US$200 for each subproject. Such incremental income is of course spread out over several years, since subproject benefits only begin to flow after two to four years in most cases, and only reach full development about eight years after the initial investments are made. Nonetheless, for families with annual incomes of less than US$1,000, this incremental income can have a significant impact, especially since families can and do often participate in more than one subproject during a given year. Rural Investment Component: Economic Analysis 14. The economic analysis for the Component has been carried out using the same methodology applied for the financial analysis. However, several adjustments have been made to  - 67 - convert, where applicable, financial prices into economic prices and to account for transfer payments. The same assumptions used for the financial analysis have been used for the economic analysis, except as follows: 15. Assumptions: (a) most agricultural commodities in the Sierra are non-tradable; as such farm prices for these products are the same as economic prices; for internationally marketable products, wheat and corn, economic prices have been estimated taking the CIF price plus the cost of shipping to the Sierra - the resulting economic prices are slightly higher than the financial prices; (b) the economic/opportunity cost of unskilled labor is substantially less than the financial cost since there are few work opportunities in the Sierra during the non-farming season - this cost is estimated at three soles per day; and (c) taxes and duties for investments are excluded since they are transfer payments. 16. Results. Economic returns improve significantly relative to financial returns, primarily due to the reduced cost of unskilled labor assumed in the economic model, as well as the reduction of taxes and subsidies. The unskilled labor is a weighty factor, particularly in soil conservation subprojects. This impacts costs both on the investment side and in terms of operation and maintenance. As such, taking this impact combined with the effect of eliminating taxes and subsidies, the economic internal rate of return is higher than the financial internal rate of return by over five points. Economic returns for the other subprojects generally improve by about two to three points above financial returns, although for subprojects such as warehouses, where there is relatively little unskilled labor involved, the economic and financial returns are about the same. For the overall component, the economic return is about four points higher than the financial return, after factoring in operation and maintenance costs. 17. These results are favorable, although they may be skewed somewhat by the cost of unskilled labor factor. Notwithstanding this factor, the economic results still do not incorporate external benefits which are difficult to quantify. These include: reduced urban migration, reduced soil erosion downstream in the more commercial lower watershed areas, enhanced security and pacification in rural areas, and enhanced solidarity and social cohesion among rural communities. 18. While these benefits are essentially non-quantifiable, some anecdotal evidence can provide an idea of the potential magnitude of these benefits. For example, detailed studies have shown that, at its current implementation level, PRONAMACHCS activities result in generating approximately 65,000 jobs per year16. The proposed project would support at least this current level of implementation on an annual basis, if not expand PRONAMACHCS implementation capacity. As such, given a project life of five years (although implementation activities would likely continue beyond this period), about 325,000 jobs could be generated. If urban migration is 16 Source: MAG, V.Palonino.  - 68 - reduced by only half that amount, assuming the social cost of maintaining a rural immigrant in Lima is just half the minimum wage, this yields a savings of over US$80 million. 19. Similarly, detailed studies have shown that, since about 1990, nearly 300,000 hectares of cultivable land in the coast have been lost to soil erosion17. One of the principle causes of such soil erosion in the coast has been poor natural resource management in the upper watershed areas of the Sierra. Naturally, poor agricultural practices in the coast are also important factors leading to the same negative impact. Nevertheless, if poor resource management in the Sierra is responsible for just 25 percent of the lost cultivable land, or 75,000 ha, the economic loss is substantial. Taking coastal land values at just US$1,000/ha (and irrigated land values up to 10 times higher), the economic losses would be about US$75 million. Project Analysis 20. Building on the financial and economic evaluation described above for the Rural Investment Component, and taking into consideration detailed investment costs estimated for the project, financial and economic analysis for the overall project has been carried out. The assumptions underlying the Component analysis remain the same for the overall project analysis. The principle differences are: (a) for the overall project financial analysis, the costs for additional components planned under the project are incorporated into the financial model; and (b) for the overall project economic analysis, costs for additional components planned under the project are largely excluded since associated benefits are non-quantifiable. 21. Financial Analysis. After adding in additional costs for institutional strengthening, training, and logistical support to PRONAMACHCS, the financial internal rate of return for the overall project naturally falls by a couple of points. However, the return remains reasonable at eight percent, still at or above the Government's cost of capital, and arguably an acceptable rate of return for any project oriented towards poverty alleviation in the Sierra. 22. Economic Analysis. The economic internal rate of return for the overall project is again several points higher than the financial rate. This is again a function of the unskilled labor and transfer payments factors described above, as well as the exclusion of additional component costs with unquantifiable benefits. The economic return for the overall project is estimated at 12 percent, without taking into consideration the significant positive externalities described above. Sensitivity Analysis 23. Sensitivity analysis has been carried out for the Rural Investment Component and overall project financial and economic analyses. Switching values are not calculated, since the internal rates of return already reflect values assuming a net present value of zero and these return rates are near the Bank standard opportunity cost of capital. Rather, movements in investment costs and resulting benefits have been tested to determine the impact such shifts would have on 17 Source: MAG, Preparation Study for Land & Water Management Project, Shaner, et al.  - 69 - the internal rate of return. Movements of specific line item costs have also been tested, particularly those that are weighty in the financial and economic models, such as unskilled labor. 24. The results are shown in the attached Tables 1 through 4. In general, the internal rate of return is somewhat sensitive to movements in the overall investment costs and benefits. A 10 percent shift in costs or benefits yields more than a 1 percent shift in the rate of return. This is the result of analyzing a select number of representative cases, with somewhat similar patterns, rather than developing hundreds of models needed to represent the great diversity found in the Sierra. It is also a function of the timing of investments and benefits, where benefits are heavily front-loaded and benefits more back-loaded. Smoothing the investment costs and front-loading more of the benefits would yield less sensitivity. However, that would be unrealistic since in practice most of the subprojects do not yield results until after several crop rotations. 25. Among specific cost items, unskilled labor is by far the most sensitive to movements. A ten percent shift in unskilled labor yields nearly a one-half percent shift in the return rate. As mentioned above, this is a function of the weightiness of this factor in the overall cost model. This begs the question, are the unskilled labor cost assumptions reasonable. The financial price of five soles per day is reasonable since it is representative of what has been occasionally paid to unskilled workers under programs other than PRONAMACHCS. It is also half the minimum wage paid in the urban sector, not unreasonable considering the cheaper living costs in the Sierra relative to say Lima. On the other hand, FONCODES pays unskilled laborers ten soles per day. This, however, tends to distort the rural labor market. First, cash payments for unskilled labor in the Sierra are rare. Second, the level of payment is equal to or higher than what a laborer would normally earn through his/her own traditional farming activities. As such, FONCODES payments draw workers away from their normal activities for temporary work. This provides an incentive for the local population to choose to work on Government projects just because of the relatively high wages. It also creates an incentive for workers to promote projects with higher labor requirements, regardless of their utility, because of the same wage factor. 26. In sum, while the financial and economic models are somewhat sensitive to shifts in key factors such as investment costs, benefits, and unskilled labor costs, the models are reasonably reflective of reality and appropriately address distortions. As such, they serve as a useful tool for monitoring movements of these key factors. In particular, investment costs, including for unskilled labor, can and should be monitored closely to ensure they do not overly exceed investment limits established by the above analysis. At the same time, since benefits have been estimated conservatively (they do not include benefits from grazing and other non-farm activities, nor externalities), there is little concern that the rates of return will shift in the wrong direction.  - 70 - PERU SIERRA NATURAL RESOURCES POVERTY ALLEVIATION PROJECT RURAL INVESTMENT COMPONENT FINANCIAL RATE OF RETURN ANALYSIS PROJECT COSTS (soles) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006-2015 A. Evaluacton de Recursos Agua y Tierra 0 0 0 0 0 B. Inversiones Rurales Conservacxon de Suelos 6,656,600 16,128,904 17,758,840 20,096.840 21,486,800 Obras de Riego 9,009,555 9,977,400 11,480,000 8,487,500 5,996,900 Desarrollo Forestal 2,744,250 4,022,400 5,073,250 6,430,250 6,199,250 Manejo Intensrva 460,000 575,000 287,500 172,500 230.000 Almacenes 587,100 939,360 1,174,200 1,174,200 1,174,200 Subtotal Inversiones 19,457,505 31,643,064 35,773,790 36,361,290 35,087,150 C. Fortalecimlento de Comunidades 0 0 0 0 0 0. Apoyo Logistico y Administracion Departamnentos 0 0 0 0 0 Agencias 0 0 0 0 0 Central 0 0 0 0 0 Capacitacion Tecnica 0 0 0 0 0 Subtotal Apoyo Logistlco 0 0 0 0 0 Total Base Costs 19,457.505 31,643,064 35,773,790 36 361,290 35,087,150 Physical Contingencies 972.875 1,582,153 1,788,690 1,618,065 1,754,358 Price Contingencies 0 0 0 0 0 Total PROJECT COSTS 20,430,380 33,225.217 37,562.480 38,179,355 36,841,508 Less Dutles and Taxes 0 0 0 0 0 Net PROJECT COSTS 20,430,380 33,225.217 37,562,480 38,179,355 36,841,508 INCREMENTAL BENEFITS FROM RURAL INVESTMENTS (soles) Conservacion de Suelos 0 0 212,000 635,000 2,173.000 4,674,600 7.176.200 9.640 700 12,105,200 121,052,000 Obras de Riego 0 1,270,516 2,617,511 4,167,761 5313,568 6,123,143 6,123,143 6,123,143 6,123,143 61,231,430 Desarrollo Forestal 0 0 0 0 0 0 0 0 0 148,665,000 Manejo Intensiva 0 34,450 103.350 137,800 172,250 206,700 206,700 206,700 209,700 2,067,000 Almacenes 0 99,375 258,375 457,125 655,875 854,625 854,625 854,625 854,625 8,546,250 Total BENEFITS from Rural Investments 0 1,404341 3,191,236 5,398,686 8,314,693 11,859,068 14,360,668 16,825,168 19,269,668 344,476_680 Net Benefits -20,430.380 -31,820,876 -34,371,244 -32,780,669 -28,526,815 11,859,068 14,360,668 16,825,168 19,289,668 344,476,680 Less Recurrent Costs Conservacion de Suelos 0 0 0 0 34,381 103,144 291,643 587,833 884,023 13,928,521 Obras de Rlego 0 0 0 196,389 404,599 644,228 821,340 946.479 946,479 9,464,788 Almacenes 0 0 0 13