Peru - Urban Property Rights Project

Document of The World Bank Report No: 18245 PE PROJECT APP]RAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF U:S$38 MILLION EQUIVALENT T O THE REPUB:LIC OF PERU F'OR AN URBAN PROPERTY RIGHTS PROJECT July 15, 1998 Poverty Reduction and Economic Manage]ment Unit Bolivia, Paraguay, Peru Country Managernent Unit Latin America and the Caribbean Region  CURRENCY EQUIVALENTS (Exchange Rate Effective July 1998) Currency Unit = Nuevo Sol (S/.) S/.1.0 = US$0.34 US$1.00 = S/.2.98 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS AC Advisory Committee AAHH Asentamientos Humanos/Human Settlements CAS Country Assistance Strategy COFOPRI Comisi6n de la Formalizaci6n de la Propiedad Informal/Commission for the Formalization of Informal Property CRS Customer Relations and Services ERR Economic Rate of Reform FRR Financial Rate of Return IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding IDA International Development Association IDB Inter-American Development Bank IGN National Geographic Institute ILD Instituto Libertad y Democracia/Institute of Liberty and Democracy INEI Institute for Statistics and Information Technology LCS Least Cost Selection LIB Limited International Bidding MAG Ministry of Agriculture NCB National Competitive Bidding NFP National Formalization Plan NPV Net Present Value PCD Project Concept Document PETT Proyecto Especial de Titulaci6n de Tierras/Special Project for Rural Land Titling PMS Process Management control System PPD Project Preparation Document QBS Quality Based Selection QCBS Quality and Cost Based Selection RP Registro Predial RPI Registry of Immovable Property /Registro de Propiedad Inmueble RPU Registry of Urban Property/Registro Predial Urbano SUNARP National Superintendency of Public Registries TF Trust Fund TOR Terms of Reference UUPP Urbanizaciones Populares de Interes SociallHousing Associations Vice President: Shahid Javed Burki Country Director Isabel Guerrero Sector Director Guillermo Perry I'ask Manager Elena Panaritis  PERU Urban Property Rights Project TABLE OF CONTENTS Project Financing Data A. Project Development Objective ........................................................1 1. Project development objective .1 B. Strategic Context ..1 1. Sector-related CAS goal supported by the project .1 2. Main sector issues and Government strategy ..................................................... ..1 3. Sector issues to be addressed by the project and strategic choices ...............................2 C. Project Description Summary ........................................................3 1. Project components ........................................................3 2. Key policy and institutional reforms supported by the project .....................................4 3. Benefits and target population .5 4. Institutional and implementation arrangements .......................................................6 D. Project Rationale ..........................................................................................................7 1. Project alternatives considered and reasons for rejection .7 2. Major related projects financed by the Bank and/or other development agencies .7 3. Lessons learned and reflected in proposed project design ............................................8 4. Indications of borrower commitment and ownership ............................................8 5. Value added of Bank support in this project .8 E. Summary Project Analyses ............................. ..9 1. Economic ..9 2. Financial Assessment ...............................9 3. Technical Assessment ..9 4. Institutional Assessment ............................................................................................10 5. Social Assessment ............................. 11 6. Environmental Assessment ............................ . 12 7. Participatory Approach ..12 F. Sustainability and Risks . . .12 1. Sustainability ............................. 12 2. Critical Risks ..13 3. Possible Controversial Aspects ..14 G. Main Loan Conditions ............................ 15 1. Effectiveness conditions .................................................................................15 2. Other ............................ 15 H. Readiness for Implementation ............................ 16 I. Compliance with Bank Policies .16  Annexes Annex 1. Project Design Summary ......................................................................................18 Annex 2. Project Description ............................................................. 21 Annex 3. Estimated Project Costs ............................................................ 26 Annex 4. Cost Benefit Analysis Summary ............................................................. 27 Annex 5. Project Monitoring Indicators ............................................................ 30 Table A5. 1. Proposed Indicators ............................................................. 31 Table A5.2. Input and Registration Targets ............................................................ 32 Table A5.3. Recaudaci6n Proyectada ............................................................ 33 Annex 6. Summary of Social Assessment ............................................................ 34 Table A6.1. Total Informal Urban Lots and Project Target ...................................................... 35 Annex 7. User Fees ............................................................ 38 Table A7. 1. Estructura Actual y Propuesta de Aranceles por Servicios Individuales ... 40 Table A7.2. Estimated Unit Cost of Titling and Registration ................................................... 41 Annex 8. GOP Letter of Sector Policy ............................................................ 42 Annex 9. Financial Summary ............................................................. 46 Annex 10. Procurement and Disbursement Arrangements ........................................................... 47 Table Al. Project Costs by Procurement Arrangements ........................................................... 48 Table A2. Consultant Selection Arrangements ............................................................. 49 Table B. Thresholds for Procurement Methods and Prior Review ......................................... 49 Table C. Allocation of Loan Proceeds ............................................................. 50 Annex 11. Project Processing Budget and Schedule ............................................................ 51 Annex 12. Documents in Project File ............................................................ 52 Annex 13. Statement of Loans and Credits ............................................................ 54 Annex 14. Country at a Glance ............................................................. 55 Map  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Latin America and the Caribbean Region Bolivia, Paraguay, Peru Project Appraisal Document P]ERU Urban Property Rights Project Date: July 15, 1998 Task Team Leader/Task Manager: Elena Panaritis Director Country Management Unit: Isabel Guerrero Director Management Unit: Guillermo Perry Project ID: 39086 Sector: Public Sector Managerment Program Objective Category: PD Lending Instrument: Technical Assistance Loan PTI: [ ] Yes [XI No Project Financing Data [x I Loan [] Credit [] Guarantee [] Other [Specify] For Loans/Credits/Others: Amount (US$m/SDRm): US$38.0million Proposed terms: [] Multicurrency X Single currency, specify Grace period (years): 5 [] Standard Variable [ Fixed X LIBOR-based Years to maturity: 17 Commitment fee: 0.75% Financing plan (US$): US$66.3 million Source Local Foreign Total Government 24.3 0.0 24.3 Beneficiaries 4.0 0.0 4.0 IBRD 27.7 10.3 38.0 Total 56.0 10.3 66.3 Borrower: Republic of Peru Guarantor: NA Responsible agency(ies): Comisi6n de Formalizaci6n de la Propiedad Informal (COFOPRI), Registro Predial Urbano (RPU) Estimated disbursements (Bank FY/US$M): 1999 2000 2001 2002 2003 Annual 12.13 13.14 8.29 3.70 0.74 Cumulative 12.13 25.27 33.55 37.26 38.00 Project implementation period: 4 years Expected effectiveness date: November 30,1998 Expected closing date: June 30, 2003  Project Appraisal Document Page: I Country: Peru Project Title: Urban Property Rights A: Project Development Objective 1. Project development objective and key perl'ormance indicators (see Annex 1 for key performance indicators and Annex 5 for project imonitoring indicators): The principal objective of this project is to create a system assuring formal and sustainable rights to real property in selected, predominantly poor, settlements in larger urban areas. Greater security of ownership will enhance the welfare of the owners. To this end, the project would support a national program for formalizing urban property rights (issuing and registering titles). Through legal and institutional improvements, training, and the development of long-term strategies, it would also strengthen the organizations responsible for this program. B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1): CAS document number: 16796 PE Date of latest CAS discussion: July 22, 1997 The overriding objective of the Bank's assistance program for Peru continues to be to support the Government's efforts to combat poverty. The Government recognizes that growth, macroeconomic stability, and the completion of economic reforms, while essential, are not in themselves sufficient for poverty reduction. Poverty remains deep and widespread, with large disparities in incomes and in access to economic opportunities across regions, among social groups and between genders. As indicated in the CAS, the Government's programn to integrate the poor into Peruvian society places special emphasis on raising the quality and improving the access of the poor to: (a) education and health services; (b) effective property ownership and full enjoyment of property rights; and (c) basic infrastructure. To achieve these goals will require more attention to institutional strengthening and reform, which are inherently more complex and have not proceeded as rapidly as policy reform. Several significant gaps also remain in the legal/regulatory framework needed to stimulate private investment on which sustained growth will depend. With its central focus on property ownership, attention to the legal and institutional context, and to the downstream impacts on private investment, the project directly supports the Bank's Country Assistance Strategy. 2. Main sector issues and Government strategiy: Main sector issues. Informality in urban Peru is the result of inadequate institutions (i.e. legal and other rules of the game) and organizational arrangements. Urban migration since the 1940s (further impelled by the 1968 Agrarian Reform) radically altered the structure and size of cities, tuming Peru from a country that was two-thirds rural to one that is two-thirds urban. The formal rules and organizations were not equipped or designed to absorb effectively this new reality. For over a century, Peru has had a system to provide formal recognition to real property rights. But this system has only worked for a richer, mostly urban minority, and has done little for the poor majority. The system has complex and demanding procedures to establish ownership. Poorer and informal owners cannot afford these or are simply unable to comply with them. Government agencies are inefficient and slow in issuing private titles to publicly owned land. Similarly, the courts have rarely been able to resolve conflicts, facilitate mediation, or validate these titles, as the law requires. The traditional  Project Appraisal Document Page: 2 Country: Peru Project Title: Urban Property Rights system is constituted by: the agencies responsible for issuing titles for example municipalities, courts -which resolve disputes and issue first titles-, and the Registro de Propiedad Inmueble (RPI) -which registers them-. The migrants and urban poor have responded by establishing informal human settlements in defiance of the formal law. 1997 estimates measured around one million informal urban properties, representing poor people's "dormant" assets whose real value in terms of re-sale, investment potential, and access to credit was not being realized. Government Strategy. The process of reform - of establishing a new system for formalizing property - began in the late 1980s with a series of studies and participatory exercises carried out by a private research institute, Instituto Libertad y Democracia (ILD). This work culminated in 1988 laws that effected, on a pilot basis, an institutional reform to alleviate bottlenecks to property registration and titling and the establishment of a new property registry, Registro Predial (RP). With the help of a Japanese-financed World Bank grant, a pilot project applied the reforms in selected urban and rural areas in 1992-1994 with big success (more than 150,000 properties registered until the end of 1993). Subsequently, the Bank maintained a strong policy dialogue with the Government. In a note on real property rights (part of the report, Peru: Policy Notes, July 21, 1995, 14824-PE), the Bank characterized the new formalization system as comprised of a new legal framework (i.e. the institutional reform) recognizing community-sanctioned ownership norms; a pro-active field campaign approach which used the local community to promote formalization, gather ownership- related information, and gain the benefits of titling whole areas at once; an inexpensive information system using simplified procedures and based on universal parcel-based indexation; and the use of an autonomous agency (RP) free to manage effectively. The note recommended that, through a national program for property formalization, this system be progressively adopted for all informal urban and rural areas, be given strong political backing, and be executed by an autonomous agency. A Law to Promote Access to Formal Property "Ley de Promocion del Acceso a la Propiedad Formal" (Decree Law 803) was passed in March, 1996, which, in essence, applied the new system to all of Peru's informal urban settlements. (The Government had already decided to handle rural areas through a previously existing IDB loan -- see section D.3.) This Law was to be implemented by a new autonomous agency, Comisi6n de Formalizaci6n de la Propiedad Informal (COFOPRI). At the same time, Registro Predial Urbano (RPU) was separated from RP (that part of RP dealing with rural areas in the Department of Lima was separated, while the remaining rural part of RP now resides in the national registry system). Having assumed the functions of about 14 separate agencies that previously regulated the titling process, COFOPRI has the function of issuing titles on the basis of legal and physical verification in the field. RPU, working in close cooperation with COFOPRI, then registers these titles engaging into a National Formalization Plan (NFP). Thus the proposed project, which supports the urban formalization work of COFOPRI and RPU, is not the beginning of a reform process. Instead, the project continues a longer, decade-old reform process in which the Bank has been involved for some five years and which the Government has now fully "owned" for over two years. A Letter of Sector Policy (see Annex 8) expresses the Government's commitment to the NFP, the project and the underlying principles of formalization. 3. Sector issues to be addressed by the project and strategic choices: The proposed project aims to apply the new property formalization system on a large scale in urban Peru. This system, reflecting the experience of the last decade, is underpinned by three sets of principles, which relate to the project's three components.  Project Appraisal Document Page: 3 Country: Peru Project Title: Urban Property Rights First, under the legal and institutionalframework: laws should adapt, where possible, to reality on the ground (for instance, about proofs of ownership and solutions to new informality problems), which requires a participatory/consultative approach to designing rules; procedures should be simple; and property information in the new system is best administered through a universal, parcel-based system (and does not require expensive investmrents in creating cadastres). Conflict resolution mechanisms through development of arbitration and mediation, as well as land administration and a strategy to avoid further invasions, are addressed under this principle. Second, under new organizational arrangements: new, independent titling (COFOPRI) and registration (RPU) agencies overcome the resistance to change encountered in Peru's traditional system and channel strong political support for formalization. Third, under a nationalformalization program: area-wide titling (i.e. mass, rather than sporadic, titling) generates, through community participation and education, a demand for formalization, reduces the unit cost of formalization, and rapidly generates a minimum critical mass of beneficiaries. Strate2ic Choices. Within this framework of principles, strategic choices were largely limited to issues of project scope and implementation. First, the proposed project only addresses informality in urban areas, not rural areas. While the new formalization system works equally effectively in urban and rural areas, the Government asked the Bank only to work in the former since IDB already had a project for rural areas. Second, to maintain a feasible agenda, the project will only be implemented in eight urban areas (accounting for an estimated 89 percent of all informal urban properties), chosen according to a formula based on city size, density of informal settlements, and distance from commercial centers. Third, to scale up COFOPRI' s staffing for the National Formalization Plan, a mixture of output-based shorter-term contracting (for supply of base mapping, computer programming, and process audits, for instance) and regular long-term contracting (for other functions) is proposed. Fourth, to upgrade RPU' s data base at the national level, the project proposes that each regional office has its own decentralized database, which can be remotely accessed. (This solution is preferred to a centralized, on-line database, which would be more high-risk and high- cost.) C: Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): -~~~~Comnn rocuemet Cs i. % ofX5Uh Bank. % of 2XKs sS 2 2 0 2 = 0 y Categoy Co n .nfencie : 22;y s Total Finac .an 1. Urban Property Market Reformns: Support for a series 1.16 1.74 0.93 2.45 of legal, regulatory, and institutional reforms to sustain and deepen the existing market reforms. 1.1 Legal and Institutional Framework: introduces * Consulting 0.34 0.51 0.27 0.71 mechanisms for COFOPRI and RPU to define new issues in Services the formalization process and develop sustainable solutions. 1.2 Investment Promotion: recommends mechanisms to * Consulting 0.28 0.42 0.22 0.58 enhance the market use of property rights. Services  Project Appraisal Document Page: 4 Country: Peru Project Title: Urban Property Rights 0 Comnonnent PrcrOaemn