Peru - Urban Rehabilitation and Management Project

Report No. PIC931 Project Name Peru-Urban Rehabilitation and(@+) Management Project Region Latin America and Caribbean Sector Urban Development Project ID PEPA8052 Borrower Government of Peru Implementing Agency Ministry of Transport, Communication, Housing and Construction Address: Avenida 28 de Julio 800 Lima, Peru Tel: 51-1-432-1277 Fax: 51-1-433-6622 Date PID Prepared March 31, 1997 Projected Appraisal October 1997 Projected Board Date March 1998 Background 1. Country and Sector Background About two thirds of Peru's population, 85t of its GDP and 50t of its poor are concentrated in urban areas. This represents a growing trend as evidenced by the fact that while only 47T of the population was urban in 1961, in 1993 about 70t of the Peruvian population was concentrated in urban areas. Hence, the availability and quality of urban services play a major role not only in economic development but also directly in poverty alleviation. Over the past decade, urban services in Peru have deteriorated as maintenance of existing assets was neglected and investments did not keep pace with the growth of urban populations. This has hampered the growth of the urban economy and impeded efforts to reduce urban poverty and improve urban environmental conditions. This discouraging performance is in part the result of a succession of economic crises, but it is also due to problems in the institutional and financial arrangements for urban service delivery Peru's urban population is distributed among 187 provincial municipalities and 1787 district municipalities. Constitutionally, municipalities are assigned a key role in the provision of urban services in Peru. Actual institutional arrangements, however, have not evolved in accordance with the legal assignment of responsibilities. Existing inter-institutional division of roles and responsibilities between the central and local governments are characterized by ambiguity and overlap of functions, and intergovernmental relations that encourage dependency, conflict and lack of accountability. Central regulations, for example, severely limit municipality's authority to raise local revenues. Sources of long term financing for municipal capital works are controlled by the central government and allocated on a discretionary basis. In response to the weakness of local governments, community based  organizations have intervened to fill these gaps, particularly in low income neighborhoods. While such alternatives are often very effective in executing small capital works, the multiplicity of independent actors, each with separate links to the central government or to donors impedes the coordination and prioritization of urban investment decisions. The Bank's sector study (Peru: Issues in Urban Management, Report No. 14515PE, June 29, 1995) has assessed the problems of service delivery in Peru, and recommends a basic strategy. To strengthen municipal governments, it argues for increasing local autonomy over own source revenues, improving the targeting of intergovernmental transfers, establishing a transparent, financially sustainable mechanism for financing long term capital investments, and reforms in internal management. It also recommends that Peru build on its unique tradition of community based service provision, by institutionalizing a system of collaborative planning and management of urban services among municipalities, CBOs, NGOs, as well as the private sector and central agencies at the municipal level. 2. Objectives The overall goal of the World Bank/IDB project is to improve the level and quality of public service delivery in medium to large urban municipalities in Peru. The project breaks down this overall goal into four principal objectives, which are: 1) enhanced municipal fiscal autonomy and greater municipal access to financial resources; 2) improved administration and municipal management of available resources; 3) increased infrastructural investments and provision of public services; and 4) development of financing mechanism which would be used to onlend project funds to municipalities. 3. Description The project design envisions a number of phases, each containing a group of five to ten municipalities. Each phase involves the preparation of an investment plan and an institutional development plan for each of the participating municipalities. The municipal authorities must commit to benchmark targets in these plans to become eligible for participation in the project and to receive capital investment under the project. Five municipalities have been tentatively selected for the first phase based on a qualitative and quantitative screening process. 4. Financing The Bank loan of approximately US$40 million, combined with a parallel cofinancing by the IDB of US$ 40 million, would finance two thirds of total costs and all foreign exchange costs. The Government of Peru would finance another US$ 40 million, approximately. 5. Implementation The Borrower would be the Republic of Peru. The administration of - 2 -  funds and the technical assistance would be done by the Ministry of Transport, Communications, Housing and Construction -- the ministry responsible for local governments -- through a Project Coordination Unit. A funding mechanism is being designed through which the Government will onlend funds to participating municipalities both during and beyond the life of the project. It is expected that at least initially a blend of loans and grants shall be provided to municipalities depending on the revenue generating capacity of the subprojects. 6. Sustainability The project design explicitly includes the establishment of institutional mechanisms in the project structure which would enhance the sustainability of project activities over the long term. Municipalities participating in the project would be selected on a competitive basis, thus ensuring that the municipalities which are most inclined to undertake necessary management reforms would be selected. This type of reward system founded on the degree of inclination and willingness to undertake management reforms provides an incentive structure which guarantees project sustainability. 7. Lessons learned from past operations in the country/sector The Bank's sector study on Issues in Urban Management in Peru has recommended the adoption of a strategy whereby municipalities can have greater autonomy over their own source revenues coupled with reforms in internal management. Two other studies on municipal finance and administration which were performed to aid in project design also recommended, among other things, a financially sustainable mechanism for funding long term capital investment. 8. Poverty Category This project is not included in the program of targeted intervention. However, investment in basic infrastructure should mostly benefit the poor in participating municipalities. 9. Program Objective Categories This project addresses and seeks to further two program objective categories. First, the project will complement the existing program of FONCODES, which is aimed at alleviating rural poverty, providing a parallel focus on urban poverty through the improvement in urban infrastructure and services which will improve the living conditions of the urban poor. Second, the project will address environmental degradation through improvements in basic infrastructure services and increased local participation in municipal decision making, monitoring and enforcement. Contact Point: Public Information Center - 3-  The World Bank 1818 H Street N.W. Washington, D.C. 20433 Telephone No: (202) 458-5454 Fax No: (202) 522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending April 4, 1997 - 4 -  Annex Environmental Aspects Infrastructure deficiencies have imposed heavy burdens on the urban environment with serious implications for public health and productive activities. The project would address this problem by financing investment and rehabilitation of environmental infrastructure in participating municipalities. Additionally, participating municipalities will be required to meet technical, financial and environmental criteria for subprojects to be financed, and therefore, those subprojects requiring stricter environmental assessments shall be required to undergo such assessments in order to be appraised and approved for funding. The project is classified as category B for environmental purposes. Because the project consists of a line of credit that will be used to finance municipal subprojects which cannot be anticipated in advance, and thus, separate environmental analyses for individual subprojects cannot be carried out prior to appraisal. Rather, project preparation will emphasize: (a) a review of environmental guidelines and procedures used by relevant licensing agencies; (b) ensuring that the agency responsible for project implementation has the capacity to carry out environmental screening and EA review as part of subproject selection; and (c) the inclusion of funds for technical assistance to help municipal institutions develop their capacity to implement mitigation measures in connection with specific subprojects in priority cases, with such funds being allocated in accordance with an annual work plan. Analysis of the environmental assessment and licensing guidelines and procedures will be reviewed during project preparation and will be reported in a section of the project documentation.