Peru - Health Reform Program Project

Document of The World Bank Report No: 19901-PE PROJECT APPRAISAL DOCUMENT ONA PROPOSED ADAPTABLE PROGRAM LENDING IN THE AMOUNT OF US$80.0 MILLION TO THE REPUBLIC OF PERU FOR A FIRST PHASE OF THE HEALTH REFORM PROGRAM (Mother and Child Insurance and Decentralization of Health Services) November 22, 1999 Human Development Department Bolivia, Paraguay, Peru Country Management Unit Latin America and the Caribbean Region  CURRENCY EQUIVALENTS Current Unit = Nuevo Sal Sl.) USSl.0 = S/2.36 FISCAL YEAR Januarv I to December31 ABBREVIATIONS AND ACRONYMS AIDS Acquired Immuno-deficiency Syndrome APL Adaptable Program Lending ARI Acute Respiratory Infections CAS Country Assistance Strategy CIS Comite de Inversi6n de Salud CLAS Community-Managed Health Facilities (Comile Local de Administraci6n de Salud) DFID Department for Intemational Development (Government of Great Britain) DGSP OtfLce of the General Director of Health DIGESA Office of the General Director of Environmental Health (Direccidn General de Salud A mbiental) DISA Direcci6n de Salud (Regional Health Board) EDA Acute Diarrheal Disease (Enfermedad Diarreica Aguda) ENAHO National Household Surv ey (Encuesta Nacional de Hogares) ENDES Demographic and Health Survey (Encuesta Nacional de Demografla y Salud) ESSALUD Peruvian Social Security Institute (Formerly known as IPPS) ESW Economic and Sector Work FARAH Financial Accounting, Reporting and Auditing Handbook FONCODES Social Investment Fund (Fondo de Compensaci6n y Desarrollo Social) HNP Health, Nutrition and Population Sector IDB Inter-American Development Bank IMR Infant Mortality Rate INEI National Statistics Institute (Instituto Nacional de Estadistica e Infornatica) INFES Instituto Nacional de Infraestructura Educativa.y de Salud INS National Health Institute (Instituto Nacional de Salud) LHP Local Health Plans MCH Matemal and Child Health MINPRE Ministry of the Presidency (Ministerio de la Presidencia)- MINSA Ministry of Health (f.inisterio de Salud) OGA MINSA's General Administration Office (Oftcina General de Administraci6n) OGEI MINSA Office of Statistics and Information (Oficina General de Estadistica e Informatica) OGP MINSA's Planning Office (Oficina General de Planificaci6n) OPEC FUND Organization of Petroleum Exporting Countries PAAG-PAC Programa de Acuerdos de Gesti6n - Programna de Administraci6n Compartida PACFO Complementary Food Program (Programa de Alimentaci6n Complementaria para Grupos en MVayor Riesgo) PAHO Pan American Health Organization PARSALUD Health Reform Program (Programa de la Reforma del Sector Salud) PFSS Strengthening Health Services Program (Programa Fortalecimiento de los Servicios de Salud) PSNB Basic Health and Nutrition Project (Proyecto Saludy Nutrici6n Bdsica) PSPBT Basic Health for All Program (Programa Salud Bdsica para Todos) SAL Structural Adjustment Loan SEPS Superintendencia de Entidades Prestadoras de Salud SERUM Intern Service in Rural and Urban Marginal Areas (Servicio Ruraly Urbano Marginal) SMI Maternal-Child Insurance (Seguro Materno Infantil) SOE Statement of Expenses UNOPS United Nations Operations Services PMR Project Management Reports Vice President: David de Ferranti Country Manager/Director: Isabel Guerrero Sector Manager/Director: Xavier Coll Team Leader: Evangeline Javier  Peru Health Reform Program CONTENTS A. Program Purpose and Project Development Objective .........................................................2 1. Program purpose and program phasing ................................................................. 2 2. Project development objective .................................................................3 B. Strategic Context .................................................................4 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project .........4 2. Main sector issues and Government strategy .................................................................4 3. Sector issues to be addressed by the project and strategic choices .................................9 C. Project Description Summary ................................................................ 10 1. Project components ................................................................ 10 2. Key policy and institutional reforms to be sought ........................................................ 11 3. Benefits and target population ................................................................. 12 4. Institutional and implementation arrangements ............................................................ 12 D. Project Rationale ................................................................ 17 1. Project altematives considered and reasons for rejection .............................................. 17 2. Major related projects financed by the Bank and/or other development agencies ........1 8 3. Lessons learned and reflected in project design ............................................................ 18 4. Indications of borrower commitment and ownership .................................................... 19 S. Value added of Bank support in this project ................................................................ 19 E. Summary Project Analysis ................................................................ 19 1. Economic .......................................................... 20 2. Financial .......................................................... 20 3. Technical .......................................................... 21 4. Institutional .......................................................... 21 5. Social ......................... ; 21 6. Environmental assessment .22 7. Participatory approach .22 F. Sustainability and Risks .23 1. Sustainability .23 2. Critical Risks .23 iv  G. Main Loan Conditions ........................ 24 H. Readiness for Implementation ........................ 25 I. Compliance with Bank Policies ........................ 25 Annexes Annex I Project Design Summary Annex 1 a: Trigger Indicators Annex 2a. Project Description Annex 2b. Project Management and Operational Manual Annex 3 Structure of the MINSA Budget Annex 4 Communicable Diseases in the Regions Annex 5 Estimated Project Costs Annex 6 Financial Summary Annex 7 Procurement and Disbursement Arrangements Table A. Project Costs by Procurement Arrangements Table B. Thresholds for Procurement Methods and Prior Review Table C. Allocation of Loan Proceeds Annex 8 Benefit Incidence of Health Expenditures Annex 9 Participation and Social Communication Strategies Annex 10 Letter of Sector Policy from the Government of Perui Annex 11 Project Processing Schedule Annex 12 Documents in the Project files Annex 13 Statement of Loans and Credits Annex 14 Country at a Glance v  PERU First Phase of the Health Reform Program (Mother and Child Insurance and Decentralization of Health Services) Project Appraisal Document Latin America and the Caribbean Regional Office Bolivia, Paraguay and Peru (LCC6C) and Human Development Department (LCSHD) Date: November 22, 1999 Team Leader: Evangeline P. Javier Country Manager/Direc6or: Isabel Guerrero Sector Manager/Director: Xavier Coll Project ID: P062932 Sector: HNP Lending Instrument: APL Theme(s): Human Development Poverty Targeted Intervention: [XI Yes [ ] No Program Fincing'DaE APL IndicativeFinancing Plan Estimated Implementaon .orrower _______________ ________ _____ __ Period (13ank mY) _ _ _ _ __i IBRD Others Total Commitment Closing US$ m Perce US $ m US $ m Date Date ntI APL I 80 33 159.3 2393 FY2000 FY2004 Republic of Peru Loan/ Credit APL 2 50 30 122.0 172.0 FY2004 FY2007 Republic of Peru Loan/ Credit ___ L__ APL 3 50 40 78.0 128.0 FY2007 FY201O Republic of Peru Loan/ Credit___________________________________________ Project Financing Data [ X] Loan For LoanslCredits/Others: Amount (US$m): US$80 m for APL l; US$180 m for full program Proposed terms: [X] Single Currency D Grace period (years): 5 Years to maturity: 17 Commitment fee (%): 0.75 Service charge: Front-end Fee (%): 1 Financing plan: Source Local Foreign Total Government 52.5 11.8 64.3 Bank 64.0 16.0 80.0 Other: IDB, DFID, OPEC FUND 78.0 17.0 95.0 Total: 194.5 44.8 239.3 Borrower: Republic of Peru Guarantor: N/A Responsible agency(ies): Ministry of Health Estimated disbursements (Bank FYIUS$M): FY 2000 2001 2002 2003 2004 Annual 3.0 22.0 30.0 18.0 7.0 Cumulative 3.0 25.0 55.0 73.0 80.0 Project implementation period: 3 1/2 years Expected effectiveness date: February 2000 Expected closing date: December 2003 Implementing agencies: Ministry of Health Contact person: Mr. Alvaro Gaillour, Director, PARSALUD Address: Avenida Salaverry, Cuadra 8, Jesus Maria, Lima-Peru Tel: (511) 424-9228 Fax: (511) 432-6177 E-mail: agaillour@minsa.gob.pe OCS APL PAD Form: November 4, 1998  Peru: Health Reform Procram (PARSALUD) Page 2 A: Program Purpose and Project Development Objective 1. Program purpose and program phasing: (see Annex 1) The medium-term goals of the 10 year Health Reform Program are to: (a) improve maternal and child health (i.e. reduce peri-natal, infant and child morbidity and mortality); and (b) help reduce morbidity and deaths of the poor from communicable diseases and inadequate environmental conditions. These goals will be achieved through increasing the access of the poor to, and improving the quality and efficiency of, health systems in Peru. Health Reform Vision. At the end of the ten year reform period it is envisioned that the Peruvian population will have universal access to health services through better targeting of public health expenditures, more efficient utilization of resources, prioritization of cost-effective interventions and better articulation of public and private health insurance systems and service provision. The reform vision is encapsulated in the table below: CATEGORIES l , 2HE;LuALTh }.SUBI ED- GRU 'O~RBTN GROUPSiEi d'0| Population Universal Poor population Population with the ability to coverage pay (dependent workers and retirees, independent workers, and professionals) Benefit plan Public health Guaranteed Health Plan Social and private Insurance interventions (public (which starts with Seguro requiring individual or family well-being, interventions Materno Infantil and contribution. The Social with high externalities) Seguro Escolar) Security Modernization Law offers the basis for a competitive social insurance environment Financing Health Public Treasury Public treasury and own Contribution of affiliates Demand revenue. Possible evolution of a National Health Fund Provision of Health Responsibility of the Public & private establishment, including community- Supply State which can managed health services (CLAS) organized in a service delegate the execution network operating by means of contracting mechanisms to other entities (contracts or management agreements) The Health Reform Program is proposed to be supported by a ten-year Adaptable Program Loan (APL). Other agencies such as the IDB and bilateral donors will also be contributing to the financial requirements of the reform program. During the ten-year period, the APL will help finance the design, pilot-testing and launching of policy and institutional reforms, as well as investments necessary to pursue the following strategies: i. guarantee the access of the poor population groups to a wide range of health promotion and disease prevention programs and services including women's reproductive health, child health, nutrition, clean water and sanitation, food safety, and appropriate interventions to prevent/treat communicable diseases; ii. reduce economic and cultural barriers to utilization of, and participation in, the health system; iii. improve the quality and efficiency of health care services by developing integrated health care networks; stimulating community participation in the management of health promoting programs; and progressive optimization of the use of public and private health financing and service provision; and  Peru: Health Reform Program (PARSALUD) Page 3 iv. assist in the decentralization of primary care services to the municipalities and communities, as well as develop and pilot-test other policy and institutional reforms incorporated in the govemment's APL policy letter to the Bank. Program Phasing. The APL would have three phases, lasting approximately three years to three and half years each. Each phase will tackle progressively more complicated issues in the sector and will adjust the path of systemic reforms based on lessons of experiences of previous phases and other operations in Peru. Phase I (FY2000-FY2004, US$80 million equivalent): This phase will highlight the policies and instruments that will improve the access of the poor to health-promoting programs and services while preparing the analytical work and sensitizing stakeholders to more complex systemic reforms. Focus will be on developing a system for "health subsidies to follow the demand" of poor mothers and children, strengthening decentralization through participation of municipalities and communities in health decisions, and streamlining overlapping health programs. Phase II (FY2004-FY2007, US$50 million equivalent): Apart from continuing/adjusting Phase I reforms, this phase will tackle the issues of health insurance (public and private), health manpower, and autonomy of hospitals. Recommendations of preparatory studies and sensitization workshops from Phase I will be implemented. Strengthening of municipalization of primary health services administration will likely be an issue that will continue from Phase I actions. Phase III (FY2007-FY2010, US$50 million equivalent): This phase will consolidate the lessons of experience from previous two phases. Issues to tackle will likely consist of: continued public hospital reforms; continued strengthening of health care networks; unification of various health insurance schemes; and chronic adult health problems. The Govemment's health reform objectives and strategies are presented in the attached APL policy letter (Annex 10). The medium-term development targets, as well as the trigger indicators to initiate Phase II are presented in more detail in Annexes I and 1 a. 2. Project development objective: (see Annex 1) Phase I of the APL aims to contribute to the above medium-term health goals of the Reform Program specifically by increasing the access of the poor to better quality health programs and services. The focus of Phase I will be on empowering the poor - i.e. strengthening the demand side - while improving the quality of the supply side of health programs and services. At the operational level, this objective translates to the following sub-goals: (a) reducing the economic barriers to utilization of health services primarily through the implementation of Seguro Matemo Infantil (SMI); (b) enhancing the decentralization of the health system through: (i) increased participation of communities (through the CLAS), municipalities and local health entities in planning, management and monitoring of health programs and services; and (ii) redefining the role of the Ministry of Health (M1NSA) including streamlining its mother, child and environmental health programs; and (c) adapting investments to local health problems particularly to cultural aspects of health promotion, and service utilization, as well as prevalence of communicable diseases and environmental health problems;  Peru: Health Reform Proaram (PARSALUD) Paae 4 The proposed APL will complement a Poverty Structural Adjustment Loan (SAL), presently under preparation, which seeks to strengthen the reform dialogue in most of the social sectors. The Poverty SAL ensures that policy decision makers at the macroeconomic level become actively involved in the decisions being sought in the social sectors. The health conditionalities in the Poverty SAL will be implemented with the financing of this APL. 3. Key Performance Indicators: (See Annex 1) The program goal indicators include reduction in infant and peri-natal mortality rates between 2000 to 2010. The key intermediary outcome indicators for the first phase include: the number of births in the project area attended by skilled health personnel, number of pregnant women with 4 or more pre-natal care, number of intended beneficiaries receiving care in the primary care facilities of MINSA, as well as a few indicators related to the health status of children (e.g. coverage of DPT3 immunization, number of child cases of acute respiratory infection and acute diarrhea attended). Specific targets are shown in Annex 1. The sector reform strategies to achieve these goals are described below. The indicators and targets of the program goals are shown in Annex 1. B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1): CAS document number: R97-161 Date of latest CAS discussion: -July 22, 1997 The proposed project would support the CAS' objective of reducing poverty and improving Peru's human capital base. As envisaged in the CAS, the medium-term sector reforms to be supported by the APL would help to reconfigure the health system, promote integration of public and private services within a decentralized context, and reallocate health expenditures to basic health care for the poor. The proposed project is also fully consistent with the World Bank's Strategy in the HNP Sector as set forth in the Sector Strategy Paper: Health, Nutrition and Population Sector (HNP SAS) of September, 1997. Specifically, the policy advice and financial support to be provided under the proposed project would help operationalize approaches to the three major HNP development priorities described in the SAS: (i) improve the health, nutrition and reproductive outcomes of the Peruvian poor, and protect other segments of the population from the effects of illness, malnutrition, and high fertility; (ii) enhance the performance of health care systems by promoting equitable access to preventive and curative care, particularly maternal and child health care, that are affordable, effective, efficient, of good quality, and responsive to clients; and (iii) secure sustainable health care financing by mobilizing adequate levels of financial resources and by improving resource allocation and utilization. The proposed project is an operational follow-up to the recommendations of the health sector report entitled "Peru: Improving Health Care of the Poor" (Report No. 18549-PE) as well as MINSA's analytical work on the reforms needed in the health sector. 2. Main sector issues and Government strategy: Main Sector Issues:' Among the many challenges facing the Peruvian health sector today, this project (Phase I) will address specifically the following: (a) low health status of the poor; (b) inequitable access to health; (c) limited financing and weak targeting of health expenditures; and (d) sector fragmentation. Policy and institutional reform decisions to address these issues (discussed in more detail below) are incorporated in the Poverty SAL and financial assistance to implement the changes will be provided by the proposed ' Information in this section was taken from the sector report entitled Peru: Improving Health Care for the Poor.  Peru: Health Reform Program (PARSALUD) Page 5 project. Specific issues related to health insurance, health manpower and hospital subsector efficiency are all important elements in improving equitable access and efficient delivery of services. However, because of their complex nature and political sensitivity especially in a presidential election period, these reforms will be fully addressed in Phase II. Preparatory analytical work and sensitization workshops with stakeholders will be carried out under Phase I. a. Poverty and Low Health Status: Peru is a country of 23.7 million people, half of whom are poor, with a growth rate of 1.9 percent and strong rural to urban migration. In 1993, the country was 70 percent urban. However, of the 11 million estimated poor in Peru, 60 percent reside in the primarily rural sierra and jungle regions. Peru's infant and child mortality indicators showed notable progress since 1990 due to increased incomes, significant investments in water and sanitation, complemented by improved immunization and effective control of diarrheal infections. Malnutrition rates have decreased substantially in urban and rural areas. Stunting of children under age five has fallen in rural areas from 53percent in 1991 to 40 percent in 1996, and from 26 percent to 16 percent in urban areas.2 However, Peru's very high infant mortality rate (IMR) is still an outlier in Latin America for a country with its level of income. Peru's IMR in 1996 (43 per 1,000 live births) is among the worst in the region: Ecuador, Guatemala and Nicaragua at 47 per 1,000 live births, and Bolivia at 75 per 1,000 live births. Progress between 1990 to 1996 was achieved mostly in post-neonatal mortality (35percent drop from 1990-1996); much less was achieved in neo-natal3 (1 7percent drop) or in maternal mortality (1 Ipercent drop). The chief causes of infant mortality are: perinatal4 illnesses (31.8 percent) and infectious diseases (including ARIs, EDAs, and other bacterial illnesses), which together account for one-third of the deaths of children under one year of age. The maternal mortality rate for 1990-95 of 265 deaths for 100,000 births is almost one and half times higher than the LAC average and is 15 times the average for developed countries. The chief causes of maternal mortality-hemorrhage (23 percent), mishandled abortions (22 percent), infections (18 percent), and hypertension (17 percent) --- suggest that much of the problem lies in inadequate conditions at the time of birth, both at home and in the hospital. Coverage of births by skilled health workers remains at around one-half of the total; in rural areas, professional birth attendance is only 22 percent. Perinatal mortality is related in large part to inadequate conditions in labor and delivery, but also to poor maternal obstetrical, medical, and nutritional antecedents that result in prematurity, low birth weight, or other severe morbidity in the newborn if needed interventions are not available. Over the last decade there has been a resurgence of communicable diseases which affect the poor to a greater extent than the rest of the population (see Annex 4 for discussion of communicable disease problems in the regions). On the increase are: malaria of the Falciparum variety; the development of multi-drug resistance to tuberculosis; yellow fever, dengue, cholera, rabies and the appearance of HIV/AIDS. Peru's diverse geographic, climatic, social and cultural conditions make the country particularly vulnerable to many of these diseases. This vulnerability has also increased because of long- term structural change in the environment and in the economy (e.g. ecological changes created by deforestation; increased migration into the Amazon in search of new economic opportunities; increased contacts with the population of neighboring countries; misuse of antibiotics and other anti-microbial drugs; and cyclical changes in climate and weather (especially as regards the spike in vector-born and infectious diseases in 1998 related to the El Nino phenomena). b. Inequitable Access to Health: A large gap between the health status of the poor and that of the non- poor continues to exist in Peru. The highest mortality rates are concentrated among the poorer 40 percent ' ENDES 1991 and 1996. ENNIV, using a different methodology also found a substantial improvement in malnutrition between 1994 and 1997. 3 Neo-natal refers to conditions affecting an infant during the first month after birth. ' Peri-natal refers to conditions affecting an infant around the time of birth  Peru: Health Reform Program (PARSALUD) Paae 6 of the population, where almost 60 percent of child deaths occur. Poor households are handicapped by a combination of low education and worse environmental conditions. They also have less access to some key health services. Studies also showed that communicable diseases account for almost half of deaths inF the poorest quintile compared with about a fifth of deaths for the richest quintile. Non-communicable diseases are correspondingly less important for the poor. Access to key child health interventions, which are provided free of charge and with monitored target coverage, such as vaccinations and appropriately treated diarrhea, have expanded and is fairly homogeneous across income levels. By contrast, the poor continue not to have access to services provided on demand. These services are more complex in terms of equipment, supplies, technical capability, counseling needs, and continuing patient follow-up, such as safe obstetrical and postpartum interventions, which impact on maternal and perinatal mortality. The extremely low levels of use of health services by mothers are partly a reflection of high economic barriers, ethnic and cultural barriers, combined with low levels of female education. The cost of medical attention is a deterrent for the poor. While tariffs for services in public establishments are generally affordable, drugs and medical inputs are charged to the user at full cost plus a mark-up. Among the poorest 20 percent these items represent more than 80 percent of out-of-pocket health expenditures. The cultural barrier in rural areas is heavily reinforced by staff that remain unprepared to deal with poor indigenous women, who especially object to unaccommodating birthing conditions and fear various other aspects of institutional care. While the coverage of modem contraception has increased from 33 percent to 44 percent, little progress has been made among women with low levels of education who have the highest fertility rates and associated highest risk of maternal death. Many of the poor live in rural areas and the vulnerability created by poverty and poor nutrition is accentuated by the problems of access to health services and by the environmental challenges in these areas. Despite some progress in expanding rural water and sanitation, only 22 percent of the rural population has access to safe water, as compared to 78 percent of the urban population. Unsanitary conditions for food, waste and other forms of pollution are rapidly rising in peri-urban and rural areas and there is no concerted effort to confront this. c. Low Level and Weak Targeting of Health Expenditures: Peru continues to allocate fewer resources to health than most of its neighbors. The proportion of GDP assigned to health, -4. 1percent in 1997- is about two thirds of the Latin American average. Per capita expenditures in health, at U$90 per capita in 1997, are also about half of the Latin American average. The ratio of physicians to the population, -10 per 10,000- is only 70 percent of the Latin American average. Total health expenditures are around US$2.7 billion per year divided in equal parts between the private and public sectors. Approximately half of the public expenditures are channeled by M1NSA, which assigns about a fifth of that to primary health care. There is also great inequality in the consumption of health goods and services. Per capita consumption of health goods and services is approximately 4.5 times higher among the richest 20 percent of the population than among the poorest 20 percent. Whereas much of that difference is to be explained by greater amounts of private expenditure on health care by the rich, it is only partially offset by MINSA, which should be serving the poor. A benefit incidence analysis using household surveys for 1997 show that MINSA expenditures per capita benefit households of higher and lower incomes to a similar degree, instead of concentrating on the poor. Likewise, the poor receive a larger proportion of the expenditure in primary health clinics than they do from hospital services. To date there have been no attempts to direct the public hospitals, which at present function in a semi-commercial way, to provide more services to the poor. MINSA operates special health programs which are fairly well targeted to the poor (based on their geographic allocation and strong focus on communicable diseases) and compensate partially for the pro- rich bias of the core public health budget (see Annex 3 for structure of MINSA budget). These special programs include: (i) Proyecto Salud Basica Para Todos (PSBPT) - with a budget of US$100 million per  Peru: Health Reform Prooram (PARSALUD) Paae 7 year - to pay for health workers in most of the primary health clinics; (ii) the SERUM program to encourage doctors and nurses to work in low-income neighborhoods; (iii) PACFO (Programa de Alimentacion Complimentaria) channels around US$35 million per year for food supplements to 5 of the- 7 poorest departments; (iv) family planning with funding of about US$15 million; (vi) Seguro Escolar created in 1997 with a budget of about US$35 million to reimburse services to school children according to demand; and (vii) foreign-financed health projects (such as the Bank's PSNB and the IDB's PFSS). d. Sector Fragmentation: Peru's health system is a complex amalgam of several public programs and a private sector, each of which tends to go its own way, with little coordination or competition between program providers, in either financing or delivery of services. The main public programs are: MINSA, financed by tax revenues and co-payments by users; and the Social Security Institute (formerly known as IPSS, currently ESSALUD), financed by a 9 percent payroll tax and theoretically covering all the health care needs of its formal-sector contributors. The private sector is financed almost entirely by out-of-pocket expenditures by households, as private insurance coverage is very small and the public programs (with very few exceptions) do not purchase services from private providers. Except for the Lima region, where MINSA's central office is responsible for the financing and provision of health services, regional health authorities are appointed by and accountable to the Ministry of the Presidency (MINPRE). The regional health budgets are included in the MINPRE budget (see Annex 3). In practice, despite its normative role, MINSA has little influence over activities financed through MINPRE. Special health programs, as described above, have provided a way to influence the regions to follow national priorities, but the solution is only temporary. However, this situation shall change beginning the year 2000 when the MINSA budget will incorporate all of the DISA annual budget. There is also fragmentation and duplication within MINSA. The problem is especially acute for interventions in maternal and child health, nutrition, and environmental health, none of which has a clear structure for policy or planning. In July 1999, the Direcci6n General de Salud de las Personas (DGSP) completed a draft plan to streamline eight national programs related to mother and child health (immunizations, child growth and development, diarrhea and cholera, acute respiratory infections, matemal-perinatal health, family planning, school-age/adolescent health, micronutrient deficiency prevention, and HIV-AID/STD). The implementation of this plan will be supported by the proposed project. A plan to clarify the roles of various agencies involved in environmental health is also being prepared. The weakness of the information on health service production in Peru is striking. There is no attempt to consolidate information about financial flows or production services for the public sector. No agency collects or monitors information about expenditures incurred by all MINSA providers, or by all MINSA programs, or even by all externally funded programs.5 Production statistics are no longer collected and published regularly. There is no official source for inpatient consultations. Each program produces its own data and there are few serious attempts to consolidate it in a way that would allow monitoring of activities at an aggregate level (e.g. vector control activities, nutrition activities, even laboratory production are measured by different programs in ways that cannot be aggregated or compared). e. Misalignment of Hospital Service Utilization. Unmet needs and congestion of some services coexist with a surprisingly low level of hospital utilization. Nationally, only 52 percent of bed-days are utilized. Much of this problem arises from duplication, as MINSA's underutilized hospitals stand along side ESSALUD's underutilized hospitals in 20 departmental capitals. Eleven of these areas also have a military or police hospital. Despite these figures, however, most high-complexity hospitals are busy, such as ESSALUD's highest complexity hospitals in Lima which average over 90 percent occupancy, and MINSA's highest complexity hospitals (such as Lima's Cancer hospital). Some hospitals requiring long- s There exists an ongoing effort to produce national health accounts attempting to overcome the technical weaknesses of previous efforts.  Peru: Health Reform Program (PARSALUD) Page 8 term stay remain busy (e.g., MINSA's mental illness and rehabilitation hospitals), as do emergency hospitals and Lima's maternity hospital. Government Stratey: Central to the Government's medium-term strategic vision for the health sector is to guarantee a basic health care package for all, with particular focus on the high-risk poor populations. In line with this vision, the Government has initiated some reforms intended to increase access to, as well as the quality and efficiency of health programs. A package of legal reforms and other recent actions are introducing separation of financing from the provision of basic services, decentralization of health service provision, and incentives for private competition in the provision of health insurance. Legal Reforms. In 1997 the Government passed two laws to launch formally the sector reforms, i.e., the Ley General de Salud and the Ley de Modernizacion de Seguridad Social en Salud. The Ley General de Salud provides the normative scope for the sector, and includes the establishment of users' rights, so that they are recognized by the public and respected by service providers. The Ley de Modernizacion de Seguridad Social eliminates ESSALUD's monopoly on service delivery, instead allowing competition with other providers, including the private sector, and a greater degree of user selection. This law also created SEPS (Superintendencia de Entidades Prestadoras de Salud), one of the five decentralized public organisms under MINSA, and the one responsible for regulating health care providers-processing authorizations and processing information related to their organization and operation. The challenge is now to translate all these legal measures into actions. Overcoming Economic Barriers. IMINSA has begun to launch some initiatives to increase access of the poor to health services. The Seguro Escolar was created in 1997 to provide free health services and medicines for all children who attend public schools (around 6 million). MINSA has also piloted a Seguro Materno Infantil (SMI) - a reimbursement mechanism that will pay providers for a package of essential services for mothers and children under 3 years of age (those between 4 and 17 are covered by the Seguro Escolar) in Tacna and Moyobamba. The results of this pilot have been taken into account in refining the design of the SMI as described in Annex 2a. These seguros publicos provide the seed for a guaranteed basic health package for the poor in the future. Decentralization and Community Participation in Health Provision. To quickly respond to primary care needs of communities, MINSA plans to expand the implementation of the Shared Administration Program through CLAS (Comites Locales de Administracion de Salud) all over Peru, thus providing a good start for progressive decentralization of basic health care. CLAS, initiated in 1994, are private, non- profit entities which, by virtue of a contract with the DISA, receive, and administer public treasury funds to provide health services through a health center or post (see detailed description and analysis of CLAS in Annex 2a). Their functions are to work with health providers to develop a local health plan (LHP), define the budget to implement the plan, and monitor expenditures and the provision of health services to the community. The objective of CLAS is to improve the quality and coverage of ambulatory services at the primary health level through greater participation by the community in planning, administration, management, and supervision of public resources. The DISA-CLAS contract holds the CLAS liable for implementation of the LHP, a responsibility that empowers it to exert social control over budget allocations within the health facility. This also allows social control over the day-to-day work of health personnel in terms of quality of care and completion of other work requirements. Since its inception in 1994, the program has grown to incorporate about 14 percent of all primary care facilities in the country (855 of approximately 6000 health centers and posts), and has proven itself to be a viable and advantageous form of health care organization. In July 1999, President Fujimori announced the Government's decision to transfer the responsibility of primary health care service delivery to the municipalities within the next four years. The Decentralization law is in the process of being drafted and thus, scanty details of what it would contain currently exist. In  Peru: Health Reforrn Program (PARSALUD) Paae 9 the meantime, MINSA will require technical assistance to learn from the experiences and lessons already learned by other Latin American countries in the decentralization of health services. This assistance will need to be initiated soon before MINSA begins to draft the regulatory measures of the municipalization of- primary services. 3. Sector issues to be addressed by the project and strategic choices: The project, i.e., the first phase of the APL, will provide technical assistance and investment financing support to address the following issues: (a) the economic and cultural barriers to increased utilization of health services; (b) the need to raise the quality of basic health services and to adapt them to local health priorities; (c) the need to strengthen the normative role of MINSA (including streamlining the MCH and environmental health programs) and the local entities' service administration and delivery; and (d) the need to better understand the issues and required reforms related to MINSA/ESSALUD provider/purchasing functions; insurance schemes, and health manpower skills problems. The first phase of the APL will thus focus on issues related to the poor health outcomes of mothers and children and the poor who have higher exposure to the risks of communicable diseases and limited access to effective medical care. It will assist in implementing interventions (such as the SMI and CLAS- managed local health plans) that will increase the effective demand and empowernent of women, especially of indigenous women, to seek appropriate health care. It will help develop an investment allocation mechanism that will put high priority on interventions adapted to local health needs and cultural practices. Eligible investments will include not only those related to health facilities but also those that will promote better health and prevent diseases prevalent in the local area. Integrated health care networks will be developed in place of the fragmented delivery of health care programs with MINSA exercising a normative and supervisory role. The acceleration of transforming public primary clinics to community-run CLAS in the project areas will be some of the immediate key activities to be carried out under the project. Cognizant of the multidimensional and cross-sectoral approach necessary to improve and maintain the population's health, the Bank's assistance strategy to Peru for the next three years includes operations in rural education, rural water supply, rural roads, and an indigenous population development project. The APL activities will be closely coordinated with these operations as well as those currently under implementation (such as FONCODES). In the case of water and sanitation, a three-pronged strategy will be adopted: (a) the rural water supply project under preparation will put priority on providing investments in the project areas receiving the SMI interventions (discussions along this line are in progress with the water supply team); (b) finance under the investment component of the proposed APL the quality improvement of existing water supply systems (e.g. chlorination) in the households and health establishments in the project areas; and (c) finance, on an exceptional basis, community level water and sanitation projects in rural areas not reached immediately by other projects or donor financing. The financing of community water and sanitation investment, when needed, will be guided by eligibility and selection criteria spelled out in the Operations Manual. As mentioned earlier, other challenges facing the health sector (health insurance issues, hospital internal inefficiencies and health manpower, among others) will be subject of analysis in Phase I. Piloting, and as appropriate, nationwide implementation of required reforms addressing these issues will be implemented in Phase II of the APL.  Peru: Health Reform Program (PARSALUD) Paae 10 4. Program Description and Performance Triggers for Subsequent Loans: The program description and phasing are described in paragraph 1 above. The performance triggers for subsequent loans are described in Annex 1 a. C: Project Description Summary 1. Project components: (see Annex 2a for a detailed description and Annex 5 for a detailed cost breakdown) The total cost of the first phase of the reform program is estimated at US$239 million of which the Bank would contribute US$80 million ( 6 for financing breakdown). The first phase of the APL will finance the following project components. I. Strengthening Health Demand: The main instrument will be the implementation of the Seguro Materno Infantil (SMI) to benefit the low income mothers and children especially from the poorest rural areas of Peru. The Loan will finance: (i) the reimbursements for services provided by eligible health facilities under the Seguro Materno Infantil in the project areas; (ii) SMI administration at the central level (MINSA) and at the local level DISAs; and (iii) monitoring/evaluation of SMI implementation activities. XI. Strengthening Decentralization, Policy Development and Institutional Modernization: (i). Technical Assistance for Decentralization: (a) CLAS Expansion and Empowerment of Communities: The Loan will finance community orientation to facilitate democratic election processes for CLAS formation; strengthening of CLAS management; strengthening of community capabilities to participate in all phases of development, implementation and monitoring of local health plans, among others. (b) Strengthening Capacity of Municipalities and DISAs: The Loan will finance actions required to support the formulation and implementation of the regional health plans, elaboration of investment proposals, and strengthening of municipalities' role in primary health care administration. (ii). Reorientation of the Role of M1NSA and Public/Private Health Providers: The Loan will finance the improvement of DGSP's normative role including. streamlining of mother and child health programs; strengthening strategic planning and budgetary process in OGP; streamlining of environmental health programs; and development of studies, workshops and action plans related to second generation reforms - (e.g. payment mechanisms and contracting of services between MINSA and ESSALUD facilities, public/private insurance schemes articulation, as well as health manpower skills mix and incentives to better serve poverty-oriented programs). (iii). Monitoring and Evaluation : The Loan will support the conversion of MINSA's information system to an effective instrument for monitoring and evaluation, including the distributional effects of health programs and services. Activities will include financing of ENDES and the ENAHO health modules. DFID will finance the design and implementation of related social monitoring activities.  Peru: Health Reform Program (PARSALUD) Page 11 III. Improving the Quality of Health Programs and Services: The main instrument will be investment support for the regional/local health plans. This will consist of financing investment subprojects addressing the health priorities of the regional departments (such as investment and technical assistance for integrated health interventions to support the SMI; health education; improving quality of existing water and sanitation services; community water provision in areas where there are no other sources of financing; area requirement for diagnostic and testing of vector- borne diseases of malaria, yellow fever, and dengue, HIV/AIDS, hepatitis and tuberculosis. IV. Project Coordination Support: The loan will finance part of project administration which includes operating costs of the Unidad de Coordinacion del Proyecto (Project Coordination Unit, UCP) Component Indicative % of Total Bank- % of Costs financing Bank- (US$M) fUS$M) fmancine I. Strengthening Health Demand: 149.0 62.3% 55.0 68.8% Implementation of the Seguro Materno Infantil (SMI) IL Strengthening Decentralization, Policy Development 22.8 9.5% 7.0 8.8% and Institutional Modernization A. Technical Assistance for Decentralization: (i) CLAS Expansion and Empowerment of Communities; (ii) Strengthening Capacity of Municipalities and DISAs: B. Reorientation of the Role of M1NSA and Public/Private Health Providers C. Monitoring and Evaluation 49.0 20.5% 16.0 20.0% III. Improving the Quality of Health Programs and Services : Investment Support for the Regional/Local Health Plans IV. Project Coordination 8.0 3.3% 1.2 1.5% LoAN FEE 10.51 4.4% 0.8 1.0% TOTAL PROJECT COST 239.3 100.0% 80.0 100.0% US$9.7 million ot this amount is interest payment for IDB Loan 2. Key policy and institutional reforms to be sought: In line with the government's strategic vision for the sector, the project (Phase I of the APL) will support the implementation of the following policy decisions: (a) creation and implementation of the SMI; (b) improvement of maternal and child health services in health facilities and hospitals where the SMI will be implemented; (c) expansion of the CLAS; (d) streamlining of the mother and child programs; and (d) streamlining of the environmental health programs. In fact, the ongoing Poverty SAL dialogue has already resulted in front-loading some policy decisions from MINSA. Ministerial Resolution No. 448-  Peru: Health Reform Proaram (PARSALUD) Paae 12 99-SA was issued on September 15, 1999 creating the SMI in MINSA and expanding the SMI implementation to seven health departments. Plans for expansion of the SMI and CLAS to different regions in the country have been submitted to the Bank. And, the streamlining plans for the mother and child programs, as well as for environmental health programs in MINSA have also been sent to the Bank. The APL will finance the investments and technical assistance required to implement these plans. Assurances were obtained during negotiations that the Task Force that will guide the implementation of the streamlining plan for the mother and child prograns in MINSA will be established no later than one month after the loan effectiveness date. 3. Benefits and target population: The bulk of the Bank loan during the first phase of the APL will finance the implementation of SMI and its corollary investment requirements in 10 geographic areas. During the period 2000-2003, the direct beneficiaries of the SMI are estimated to total 815,000 pregnant mothers and 1,990,000 under-4 year old children in the 10 departments covered by the Bank Loan. The Bank project areas are the Departments of Puno, Apurimac, Cajamarca, Cuzco, Lambayeque, Piura, Tumbes, La Libertad, Madre de Dios, Lima 6 Norte and Lima Sur. Most of the technical assistance for policy and institutional development, which will have a national scope and will reinforce the decentralization process, will benefit municipalities, local health departments, and communities participating in CLAS expansion. 4. Institutional and implementation arrangements: (see Annex 2b for a detailed description) Implementation period: 3 1/2 years (APL I) Executing agencies: The Ministry of Health (MINSA) and the Health Departments in the regions (Direcciones de Salud or DISAs) would carry out the project in accordance with Operations Manuals satisfactory to the Bank. MINSA will carry out project activities through its existing units, in accordance with their area of responsibility, including the SMI Unit which has been created under the project (see Annex 2a for description of these units' project responsibilities). MINSA will enter into implementation contracts (contratos de ejecucion) with participating DISAs and with other eligible entities (INEI) to carry out project activities. The contracting arrangements are set out in the Operations Manual. Project Coordination. The Ministry would be assisted by a UCP responsible for overall coordination, supervision and monitoring of project implementation. The Unit would be directly accountable to MINSA's Alta Direccion (the Minister of Health and the Vice Minister of Health). The Unit will be headed by a General Coordinator (Director) and will count on an Administrative-Financial Coordinator, a Technical Coordinator and a total staff of not more than ten. The Unit's General Coordinator was appointed by the Minister in time for the negotiations of the Loan. Assurances were obtained during negotiations that the UCP will be maintained with a streamlined organizational structure satisfactory to the Bank. The Unit would supervise the procurement processes for goods, services and civil works that would be carried out at the DISA level and other eligible entities. The Unit would also carry out procurement of goods and services if these are not subcontracted to DISAs or any other agency for execution. As appropriate, the Unit would carry out the invitation and evaluation of bids or may subcontract the process to a qualified procurement agents which would be chosen through a competitive process. Similarly, it may use the services of INFES, the state civil works agency, for the procurement of large national civil works. Detailed procedures for each case would be specified in the Operations Manual. Regardless of size, contracting would be undertaken for civil works, goods, and consultants, using procurement procedures and standard bidding documents satisfactory to the Bank. The Unit may retain the services of PAHO for quality control and supervision in the delivery and installation of medical equipment procured under the project. 6The IDB financing will benefit a similar total number of mothers and children in 17 other departnents of the country in the next three years.  Peru: Health Reform Proaram (PARSALUD) Page 13 SMI Implementation. An SMI Unit has been established within MINSA to coordinate and supervise the implementation of the SMI. Regional SMI offices would be established in each of the- participating departments to carry out local administrative functions. The SMI central unit will be responsible for assuring that participating health facilities have the necessary equipment, stocks of supplies and pharmaceuticals covered under the benefits package, for guaranteeing the quality and provision of services presented for reimbursement and for presenting reimbursement requests to the UCP. Each health care provider - either individually such as in case of CLAS or in groups through the head of the service provider network or through the DISAs - would be responsible for procuring own inputs which are widely available at the local level throughout Peru. The SMI regional offices would be responsible for receiving, reviewing, and sending to the SMI central office the monthly reimbursement requests and for solving any discrepancies on behalf of health facilities in their jurisdiction. Guidelines on the quality control functions of the SMI regional offices are elaborated in the SMI regulations and administrative manual. The SMI central unit would be responsible for consolidating requests at the national level and instructing MINSA's OGA to send the reimbursements to the health care providers or the DISA. The SMI central unit would also carry out the necessary start-up promotional activities, training of DISAs and supervision of the SMI services in the field, including technical and financial audits. The technical, normative functions (including training, supervision, monitoring, evaluation) for mother and child health services will remain in the Ministry. The SMI Unit will have autonomy to plan, program, supervise, control and monitor SMI budget and expenditures similar to the flexibility and autonomy of the Seguro Escolar to carry out its operations. The Unit would have a lean financial and service reimbursement structure composed of a central office in Lima and a network of small offices located in each region of the country. The detailed functions and responsibilities of the SMI central and regional offices are elaborated on in the SMI administrative manual. The SMI will be headed by a Director appointed by the Minister of Health. It was agreed during negotiations that the SMI Unit will be maintained with organization and functions satisfactory to the Bank. Technical Assistance for Decentralization, Policy Development and Institutional Modernization. The technical assistance to be provided under this component to different entities within MINSA, to the municipalities, DISAs, and CLAS networks or facilities will be coordinated by the UCP. Terms of reference and decision on the consultant services or other types of technical support will be prepared and/or decided by these entities. The UCP will carry out the contracting procedures in accordance with Bank procurement norms. PAHO will provide technical assistance to selected DISAs in the formulation of regional health plans, and as needed, in the supervision of these plans' implementation. With regard to the monitoring and evaluation surveys, MINSA will sign an agreement with INEI to carry out the DHS surveys in 2000 and 2003 and to include the health module in the quarterly household survey (ENAHO). It was agreed during negotiations that MINSA will sign the agreement with INEI no later than one month after the loan effectiveness date. Investment Support for the Regional/Local Health Plans: The DISAs will be responsible for the implementation of the health investment subprojects within the total indicative amount allocated to each of them at the beginning of the project year. This indicative amount is set based on a targeting formula which takes into account social and economic exclusion and maternal-infant mortality indicators (see Annex 2a). The implementation agreement to be entered into between M1NSA and each of the DISA, as well as the DISA's annual operating plan (based on the regional health plan) are conditions of disbursement for health investment subprojects. Depending on project cost, the review and approval of subprojects will either be at the central level (MINSA) or at the DISA level. Subprojects above the DISA limits will be reviewed and approved by the Comite de Inversion de Salud (CIS) of MINSA. To carry out project activities, each DISA will appoint at least a technical coordinator and a financial administrator. Additionally, two technical specialists financed by the project will be assigned to each DISA to provide  Peru: Health Reform Proaram (PARSALUD) Page 14 assistance in the preparation of local/regional investment plans and the formulation of investment subprojects. Detailed procedures for these actions are elaborated on in the Operations Manuals. Financing requests for an integrated set of health activities (proyectos integrales) identified in the regional/local health plans will be given priority. It is expected that investment financing would be required but not limited to the following types of subprojects: a. Support for SMI: Rehabilitation and equipment of health posts and centers, rehabilitation of obstetric services in first and second level referral facilities, training of health personnel to raise their capacity, IEC, social communication campaigns and other types of promotional activities to ensure beneficiary participation in the program and its cultural adequacy. b. Nutrition: Community outreach programs and integrated nutritional education packages for children and mothers to complement clinical services provided under the SMI program c. Prevention and Treatment of Prevalent Communicable Diseases in the Local Area . Equipment, inputs, training and social communication to increase the ability of local facilities for the early detection and control of top priority communicable diseases identified in the health plans. d. Environmental Health. Stationary and mobile laboratory equipment and inputs to increase the ability for the early detection and control of food and water contamination in their communities, particularly in food markets; purchase of hipochlorite 'production equipment and chlorine measuring kits, training for their proper use by communities identified within the local health plan as being at higher risk due to the incidence of gastrointestinal diseases; community water subprojects in exceptional cases where there is no other immediate source of financing. Eligibility criteria for investments would reflect both project development objectives and local and sector priorities in these areas and be specified in the Operations Manual, along with appraisal criteria (technical, economic, financal, social, environmental). Operations Manuals. Th._ project would use Operations Manuals covering all aspects of project implementation, including but not limited to: project components, organizational and management structures, supervision and evaluation mechanisms; targeting and other criteria for resource allocation; a menu of eligible investments; appraisal criteria for health subprojects, including measures to be taken to ensure that the environment will not be negatively affected; procedures for the formulation of annual operating plans; financial, accounting and auditing procedures; procurement procedures and standard bidding documents. The draft Operations Manuals were reviewed during appraisal and negotiations. The official adoption of the Operations Manuals (including the SMI administrative manual) by MINSA is a condition of loan effectiveness. The first year draft annual operating plan (Plan Operativo Annual) and a draft procurement plan reflecting the first year activities were also submitted to the Bank during negotiations. Monitoring and Evaluation Arrangements. Project monitoring and evaluation will measure not only procedures but also results, thereby allowing the project to learn. A monitoring and evaluation component will be developed as part of the project (see Annex 2a) to measure especially the project intermediate and final outcomes. The UCP will be responsible for project monitoring and evaluation. Progress reports, including monitoring indicators, will be sent by the UCP to the Bank every six months. Monitoring of the coverage of health interventions will combine the use of administrative data and of annual coverage surveys. The administrative data will be based on the existing information system. This system is weak and will be modified and strengthened with project support (see monitoring and evaluation component). As a complement to the administrative data, and in view of the proposed renovation of the information systems, annual coverage surveys will also be supported by the project.  Peru: Health Reform Program (PARSALUD) Page 15 The quarterly ENAHO (Encuesta nacional de hogares) includes a social sector module on the second quarter of each year. This module will be strengthened with project support to provide annual information on the coverage of key interventions. ENAHO includes data on incomes and will be used- inter alia to produce yearly analysis of the distributional incidence of the impact of the project. The administrative data covers exclusively the provision of services by MINSA, while the household surveys cover services from all sources (the targets in Annex I use the administrative baseline and data). The ENAHO survey will be implemented by INEI. As mentioned earlier, MINSA and INEI will sign agreement satisfactory to the Bank to carry out a revised social sector module in the quarterly ENAHO. Evaluation of the impact on health outcomes will be based on the Demographic and Health survey (ENDES). There will be two surveys, the first, in 2000 will provide a baseline for project impact. The second in year 2003 will measure progress in health conditions, including infant and maternal mortality. This survey will also be implemented by INEI. The agreement between MINSA and INEI will also cover the implementation of this survey. With regard to the investment subprojects, annual ex-post evaluations using random samples of concluded subprojects, as well as beneficiary assessments will be carried out. These annual ex-post and beneficiary evaluations will include physical audits of a sample of investment subprojects, with size and characteristics acceptable to the Bank. Project funds will be utilized for this purpose: recommendations and lessons learned will be included in the following annual operating plan. With the assistance of DFID, a participatory monitoring and evaluation approach (P&ME) will also be established in the project. This approach would complement other evaluation and monitoring activities and strengthen the capacity and skills of health providers and other stakeholders in participatory methodologies for evaluation and monitoring. It will allow to bring stakeholders together to undertake a process of analysis of the performance of maternal and child health activities, aid in the identification of solutions mutually acceptable and responsive to the needs of beneficiaries. It will also provide feedback about areas in which the project could be failing to achieve stakeholders expectations. Furthermore, these skills will enhance future developments of the decentralization of health sector. Procurement The procurement of works, goods and consultant services would be carried out in accordance with the Bank's Guidelines for Procurement (dated January 1995, revised January and August, 1996, September 1997 and January, 1999), and the Guidelines for Selection and Employment of Consultants (January 1997, revised September 1997), as well as by the provisions stipulated in the Loan Agreement. These procedures are detailed in Table A of Annex 7. The UCP will supervise all procurement action under the project, based on agreed procurement procedures as defined in the Operations Manual. The procurement section of the Operations Manual will include, in addition to the procurement procedures, the Standard Bidding Documents to be used in each case, as well as contracts to be awarded on the basis of quotations. Where no relevant standard contract exists, other standard forms acceptable to the Bank shall be used. The supervision of procurement and hiring processes would be the responsibility of the executing agencies (e.g. DISAs) and, as appropriate, by the UCP. UNOPS, PAHO and other eligible procurement agents may be retained competitively by the UCP for the purposes of carrying out international procurement actions on behalf of the project or for the provision of specialized technical assistance services, and INFES, the state agency responsible for public works, may be retained for carrying out the procurement of large national civil works, all under terms and conditions acceptable to the Bank. For the SMI component, small goods and sundry items to be used by non-public service providers would be procured in accordance with established private sector practices; and those to be used by public service providers shall be procured, as far as practicable, from qualified suppliers either in bulk or through regional or local procurement procedures and in accordance with the SMI regulations. A capacity assessment with an analysis of legal aspects, project management, organization and functions, support and control systems, record keeping, staffing, general procurement environment, private sector assessment, and overall risk assessment was conducted for the proposed project. The assessment included  Peru: Health Reform Pro-gram (PARSALUD) Paae 16 meetings with the UCP and with other officials from the Ministry of Health, the SMI, and the DISAs. The project has been rated as "average risk" with respect to procurement aspects. Specific recommnendations from the capacity assessment have been incorporated in the Operations Manuals (see Annex 2b for details). On the SMI component, it was agreed that an additional comprehensive review of the institutional procurement procedures relating to the SMI program would be carried out during the first six months of project implementation and that an action plan to strengthen these procedures would be agreed upon as a result of that review. Both the comprehensive procurement review and the implementation of the action plan will be financed under the project. It was agreed also that periodic independent medical audits would be carried out to monitor and evaluate the reimbursement applications submitted by eligible health establishments and to determine whether the obligations of said establishments under the SMI regulations have been fully complied with. Accounting, Financial Reports, and Auditing For the purposes of carrying out the project an Special Account would be opened and maintained in US Dollars at a commercial Bank on terms and conditions satisfactory to the Bank with an authorized allocation of US$8.0 million. The advance to the Special Account would be limited to US$3 million until disbursements from the loan would have reached US$7.0 million. Most of disbursements, including SMI reimbursements and investment subprojects, are expected to be disbursed through SOEs (eventually through PMRs). For all other expenditures, e.g., contracts fo; consultant services over threshold levels of US$50,000 with individuals or $80,000 with firms, full supporting documentation would be required. The Special Account should be maintained in a commercial bank in a way that satisfies the requirements. The UCP would be responsible for preparing Withdrawal Applications (Was), and in charge of the Special Account. Documentation supporting SOEs and WAs would be retained by the UCP in Lima and made available for examination by Bank staff during project supervision missions. Documentation would also be made available to the independent auditors. The UCP has gained sufficient experience in the requirements of traditional Bank disbursement and financial reporting requirements through the implementation of the ongoing Basic Health and Nutrition Project. With regard the SMI component, the sequence of the principal disbursement steps would be as follows: * Health care providers, through the DISAs, will submit reimbursement requests for services to the local SMI office on a monthly basis. * The local SMI office will verify and consolidate the reimbursement requests from providers in its jurisdiction, review, approve them and forward them to the SMI central office. Local SMI offices are also responsible for quality supervision and control of services provided. * The central SMI office will verify and consolidate all reimbursement requests and issue payment authorizations (ordenes de pago) to the OGA (Oficina General de Administracion) in MINSA. * The OGA will then request the UCP to transfer resources (in local currency) from the Special Account to the SMI-designated account in the OGA to cover payment authorizations and in turn will deposit them, in the account of the respective health care providers, the same day. The entire process is expected to be completed within 30 days from start to finish. Confirmation of each deposit will be forwarded to the UCP as a receipt from each transaction. It was agreed during negotiations that MINSA will furnish the Bank an action plan, satisfactory to the Bank, for strengthening the SMI's accounting and internal control systems prior to Loan effectiveness. Assessment of Project for PMR-Based Disbursements. During the preparatory phase, a Bank's Financial- Management Specialist evaluated the financial management system relating to this project to determine whether the project is in compliance with OP.BP 10.02. The project satisfies the Bank's financial requirements but does not have in place an adequate project financial management system that can provide, with reasonable assurance, accurate and timely information for the requirements of the PMR- based disbursements. An action plan for setting up a PMR-based system has been agreed with MINSA (see Annex 2b). It was agreed that migration to PMR will take place no later than 18 months after Loan  Peru: Health Reform Program (PARSALUD) Page 17 effectiveness. Upon moving to the PMR system, both the Bank and the Borrower would make sufficient funds available to finance Project operation based on a six month rolling budget revised quarterly. The Bank's advance into the special account covering a six month period of operation cannot exceed US$16.0 million. Replenishment of the Bank's portion of these expenses would be contingent upon satisfactory advancement of the Project as indicated by quarterly PMR submitted to the Bank by Government. Audit Arrangements. The Project accounts, including contracts and their modifications and amendments, as well as the deposits and withdrawals from the Special Account would be audited each year by an independent auditing firm acceptable to the Bank and under terms and conditions satisfactory to the Bank. In addition to the annual financial statements conforming to International Standards on Auditing (IFAC Standards), the audit report would include comments on the internal control, the accuracy and propriety of all expenditures and the extent to which supporting information could be relied upon as a basis for requesting disbursements from the loan using PMRs. The auditors would issue an opinion on the internal control structure at mid-year for each year of project execution. The first such opinion would be submitted within three months of loan effectiveness. Annual audit reports with the related statements would be submitted to the Bank within six months of the end of the Borrower's fiscal year. The Borrower would also submit to the Bank unaudited quarterly financial statement prepared by the auditors starting four months after effectiveness. All supporting records would be maintained at the Project site for at least one year after the completion of the Project. The Bank's Financial Accounting, Reporting and Auditing Handbook (FARAH), published in January 1995, would be used by auditors, in accordance with existing World Bank procedures. The Borrower agreed during negotiations to complete the selection of the external auditing firm as a condition of Loan effectiveness. D: Project Rationale 1. Project alternatives considered and reasons for rejection: The proposed project is designed to implement the recommendations of the health sector report (Peru: Improving Health Care for the Poor) and is closely linked to the health policy conditionalities in the SAL under preparation. In fact, as mentioned earlier, MINSA has already front loaded some major decisions during the preparation phase of the APL which coincided with the continuing dialogue on the Poverty SAL. The complementarity of the SAL and APL instruments and the utilization of the ESW results constitute a unique process for providing immediate and medium-term assistance to the reforms in the sector. The interest generated by the SAL in the Ministry of Finance to focus on the reforms of the health sector (and the other social sectors) presented MINSA an opportunity to accelerate the reforms in these sectors. The alternative of designing a traditional operation instead of an APL was considered. An APL was preferred because it offers greater flexibility for implementation. Recent history of sector reforms in Latin American countries showed that complex reforms require incremental changes which in turn require flexibility. Flexibility is especially important in a sector where there will be an increasing change in the role of MINSA and the regional/local health service providers. The recent announcement of municipalization of primary health care delivery, for instance, would imply increasing need for technical and investment assistance which could not be anticipated in a pre-designed traditional operation. The flexibility and openness offered by an APL to change course mid-way of the reform program would be valuable.  Peru: Health Reform Proaram (PARSALUD) Paae 18 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned): Sector issue Project Latest Supervision (Form 590) Ratings (Bank-financed projects only) Implementation Development Progress (IP) Objective (DO) Bank-financed Basic Health and Nutrition S S Project Reduce poverty FONCODES II S S Education Improvement S S Rural Education (under preparation) Rural Water and Sanitation (under preparation) Rural Roads (under preparation Other development agencies Address immediate investment IDB - Fortalecimiento de requirements of health facilities Servicios de Salud Strengthen primary care USAID- Proyecto 2000 DFID - Reproductive Health Project DFID - Proyecto INCA Reform Health Sector IDB/OPEC Fund - Proyecto de Desarrollo del Sector Salud.(recently approvedO Government Need to strengthen primary care in poor Proyecto Salud Basica para areas Todos (PSBPT) IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in proposed project design: The project design builds upon the experience of relevant operations financed by the World Bank group over the past decade, including the ongoing Basic Health and Nutrition project in Peru, as well as other international experiences. Key lessons incorporated into the project design are: (i) project objective and scope should be linked to a clear policy framework; (ii) strong government and stakeholder commitment should be obtained, particularly from regional, municipal, and community organizations; (iii) a flexible approach is required for launching sector-wide or incremental reform program, as it enables the public and interest groups to debate specific issues prior to large-scale implementation; (iv) subproject design should be simple, focused, with modest objectives; (v) financing of critical investments should be linked to the implementation of policy and/or institutional reform; (vi) provision of support systems and human resources development is important to increase decision making and management capacity of the MINSA; (vii) a adequate monitoring and impact evaluation system should be developed to allow adjustments to be made in project design and implementation arrangements during the life of the project;  Peru: Heafth Reform Proaram (PARSALUD) Page 19 and (viii) decentralization should be accompanied by measures to ensure accountability and equity among decentralized entities. The Basic Health and Nutrition (PSNB, Proyecto de Saludy Nutricion Basica) project's experience has been useful in informing the development of the proposed new project, as well as in identifying areas requiring increased attention. The PSNB's implementation has demonstrated that MINSA needs to exercise stronger leadership in the coordination of integrated health projects and donor financing. PSNB has involved department health entities and communities in identifying health priorities in the local areas. This notable but limited experience can be expanded under the APL. PSNB has started some of the basic actions that will be used by DGSP in the streamlining of mother and child programs, i.e. the clinical protocol for mother and child integrated health attention; the establishment of family history in primary health posts/clinics; the health communication strategy; and the lessons learned in the pilot of some integrated health networks in selected project areas. 4. Indications of borrower commitment and ownership: This project supports the Government's reform objectives for the health sector. The Govemment approved two laws in 1997 which established the general principles of the sector reform: the General Health Law (Ley General de Salud) and the Social Security Modernization Law (Ley de Modernizacion de la Seguridad Social). To pursue the implementation of the measures under these laws, the Government established the UCM and the COMSSS (Comision Monitora de la Seguridad Social en Salud); staff of both committees are actively involved in the preparation of this operation. The Ministry of Finance (MEF) reiterated its commitment and support to the reforms in the sector during the 1999 Annual Meetings with Bank regional management. MEF emphasized the Government's commitment to assume increasingly the budget requirements of the SMI. 5. Value added of Bank support in this project: * Ability to bring to Peru worldwide knowledge on health development and reform issues; * Assistance to MINSA to leverage project objectives and results in the country's quest for poverty reduction; * Push for coordination of interventions across sectors and a holistic view of health development; * Mobilization of high-quality technical assistance for institutional improvements; * Mobilization of resources and stimulation of donor coordination. * Flexibility of APL instrument allows the change of reform course when necessary E: Summary Project Analysis: The design of the health reform program in Peru has been supported by various analytical work which includes the study Peru: Improving Health Care of the Poor and MINSA commissioned papers. Hence, the choices made in the project design counted on the following specific analysis: * The identification of national health care priorities based on the epidemiological profile of the population; * A prioritization exercise to develop a package of publicly-financed services based on the health care needs of the poor, the cost-effectiveness of interventions and public good analysis; * Sector efficiency analysis; * Distributional analysis using income-specific epidemiological data and a benefit incidence study of public expenditures in health  Peru: Health Reform Proaram (PARSALUD) Page 20 1. Economic: The project is designed to improve the efficiency and equity of public spending on health by: * Increasing the share of public resources directed to providing an essential services package to the poor. This will be achieved by adding new resources directed to address the health care needs of the poor and by providing incentives to shift existing resources towards attending to the health care needs of the poor. A benefit incidence analysis of 1997 data identified who benefits from the current health system (see Annex 4). The poorest was shown to receive less of the government subsidy than do other groups. The SMI was designed, based on the findings from the demand- and benefit incidence analysis, to expand access to services that are today accessible to all but the poor. * Allocating public financing for services with clear externalities. The services to be provided --a subset of the package of services identified in the WDR93-- are justified for public financing because of strong elements of a public good or clear positive externalities (e.g. communicable disease control, child health, behavior change communication). Further, these services target diseases associated with the poorest in Peru and are delivered at regions and at facilities most likely to serve the poor. Some services, such as reproductive health interventions, address historic gender inequalities in accessing the services. * Improving the efficiency of existing health sector resources (including staff) by increasing utilization ofpublic health facilities. Analysis of expected efficiency gains focused on increased outputs at the same level of staffing and infrastructure. The large build-up of facilities and the expansion of staffing that took place in 1994-97 was accompanied by low levels of utilization of many public facilities due to the high cost of user-fees that prevented many of the poor from getting access to key services. MINSA health workers produce on average 1-2 consultations per day, health centers about 16 and health post around 3. The elimination of the economic barrier with the implementation of the SMI and the planned interventions to improve use of the facilities by indigenous people are expected to increase utilization. Most of the increase in demand is likely to take place in health centers and hospitals. Based on the projections for increased coverage (Annex 2a) and on the Bolivian experience, some of these facilities could multiply utilization by a factor of 3 or 4 during the initial 18 months of implementation of the SMI. 2. Financial: Health expenditures in Peru, at 4 percent of GDP, are relatively low compared with a Latin American average of about 6-7 percent. Correspondingly, the public sector effort assigned to health measured by public sector expenditures (excluding the social security) at about 1I.1 percent of GDP or 6 percent of the public budget in 1997 are about two thirds of what other Latin American countries assign to health. Table E-1 below projects the estimated fiscal cost associated with the project. MINSA has estimated the likely fiscal impact of the PARSALUD during the years 2000 to 2002 assuming a phased expansion of the SMI program. The whole reform program would increase the public health sector expenditures by US$62 million in 2000, US$98 million in 2001 and US$109 million in 2002 and would then stabilize at about US$70-US$80 million once the upfront capital investments have been completed and only recurrent reimbursements remain. In percentage, the program would imply an expansion of 8 percent in sector expenditure in 2000, 14 percent in 2002 and about 10 percent in subsequent years. At the macroeconomic level, this would not be significant (a net addition of about 0.1 percent of GDP in relation to a without project projection). In terms of the public sector budget, it would raise the share of health from 7.2 percent to 8.3 percent. These are all manageable figures, and the increased figures would be closer to the Latin American standards that the alternative without project projections. They will however require a political determination to strengthen public expenditures in health. Table E- I also shows the sources of financing for the additional expenditures. In year 2000, only 15 percent of the additional cost would be financed by the Treasury, with the difference financed by external credits. External financing would be progressively reduced, reaching about half of the total by the end of  Peru: Health Reform Program (PARSALUD) Pane 21 the first phase of the APL. It is expected that once the current tight fiscal position of the Peruvian government is overcome, it will fully finance the SMI. Table E-1 PUBLIC HEALTH EXPENDITURES (MILLION US $) 1997 1998 1999 2000 2001 2002 With Project' A Sector2 697,400 765,989 733,972 731,691 753,642 776,251 Without Project B Sector2 697,400 765,989 733,972 793,869 852,096 885,167 Increase 62,178 98,454 108,916 Credit and cofinancing 53,249 74,275 60,476 Treasury 8,929 24,179 48,440 Memo GDP 66,033,840 63,393,793 65,295,606 66,560,386 72,674,009 77,034,450 Govemnment Budget (GB) 11,249,397 9,935,558 10,142,002 9,533,279 10,105,275 10,711,592 Without Project A/GDP 1,1% 1.2% 1.1% 1.1% 1.0% 1.0% AIGB 6.2% 7.7% 7.2% 7.7% 7.5% 7.2% With Project B/GDP 1.2% 1.2% 1.1% B/GB 8.3% 8.4% 8.3% I/Without Project assumes a real increase of 3% per year (less than the official projected growth in GDP). This projection is based on an extrapolation of the recent year evolution of public expenditures and the effect of the closings of the ongoing loans and frants from the IDB, the World Bank, USAID and DFID. 2/lncludes the budget of DISAs. 3. Technical: The appropriateness, among others, of (i) the benefit plan, coverage, payment mechanisms and expansion strategy of the SMI; (ii) the expansion plan of the CLAS; (iii) the streamlining strategy for the mother and child and environmental health programs were analyzed and found to be satisfactory. Details are in Annex 2a and relevant working papers are in the project files. 4. Institutional: Effective mechanisms for the decentralization of resources to the DISA level and their monitoring have been developed during the Basic Health and Nutrition Project and will be employed again by PARSALUD. Project management capacity at the Central level has been strengthened by the Fortalecimiento del Sector Salud Project financed by IDB and will be built upon under the proposed project. Departmental level planning and management capacity will be strengthened as needed; and technical assistance will be provided to build the capacity of the DISAs, Redes and CLAS to prepare, appraise and supervise subprojects under PARSALUD. Intersectoral coordination, especially with environment, water and sanitation and education and FONCODES will be monitored closely during implementation. 5. Social: A Social Assessment (SA) has been carried out to detect the relevant cultural patterns of users and of providers of health care (stakeholders), and to understand the gaps that impede the improvement and use of health services in general; and the adequate participation of beneficiaries in the proposed health insurance scheme, in the formation and operation of CLAS-type organizations, and in the formulation of local health plans, in particular The SA includes: (a) the identification and analysis of relevant  Peru: Health Reform Program (PARSALUD) Paae 22 stakeholders, (b) a bibliographic review of similar prior work carried out in Peru; and (c) surveys, and (d) the results of a Participatory Rural Appraisal exercise among the most excluded groups in four representative regions of Peru. The recommendations of the SA have been incorporated in the Socialr Communication strategy (Annex 9) and in project design especially in adapting investment and training to local area needs. A project strategy for the Indigenous People has been prepared and presented to the Bank for review before negotiations. The strategy has identified all the indigenous groups potentially benefited by the project, specific barriers for their participation in its benefits and actions to be undertaken under project implementation that will ensure that these groups have adequate and informed participation in the project, its recommendations have also been included in Annex 9 and in the project Operations Manual. Additionally, a national Indigenous Peoples Development Plan is now being prepared by the Borrower and its implementation will be financed by a Learning and Innovation Loan whose activities will be coordinated with this project. 6. Environmental assessment: Environmental Category [ ] A [X ] B [ ] C Justification/Fundamental reason for the classification by category: Although the project does not present any significant environmental risk, an Environmental Assessment (EA) was conducted as part of project preparation activities. The EA includes a bibliographic review of existing national or sector enviromnental standards and a technical analysis of the components and activities proposed for Bank funding to determine environmental risks and propose appropriate mitigation measures. Subprojects eligible for financing will be subject to an environmental assessment as part of their technical evaluation and will be required to comply with measures to minimize environmental impact. The Operations Manual for the project will include criteria for an environmental technical assessment of investments and the specific steps to minimize impact for each type of subproject, as appropriate. Procedures for Environmental Evaluation. The UCP would carry out the technical evaluation of large investment subprojects and will employ Environmental Evaluation Specialists with capacity and terms of reference acceptable to the Bank. These specialists would carry out environmental evaluations for large subprojects. Additionally, health facilities submitting subprojects to the DISAs for financing would fill out an environmental checklist for project preparation, which should be used as a guide. The checklist will center around environmental matters and raise any issues of potential environmental impact. In cases in which the proposed subproject has a potential environmental impact, it will be sent to the EA Specialist at the UCP who would review the subproject and recommend actions to be taken by the beneficiary organization or the DISAs, to carry out: (i) a project environmental impact analysis, along with a methodology to identify the impact; (ii) a discussion of existing options to minimize adverse impacts and adapt the project to its environment; (iii) an analysis of the trade-offs between different options; and (iv) a general vision of any doubts arising from the information. Other aspects of environmental control. The project includes environmental health activities: subprojects for chlorination of water and corresponding training of beneficiaries; solid waste management in local hospitals, etc.; ); training for personnel at the local level in the use of environmental evaluation criteria and streamlining of environmental health programs in MINSA. 7. Participatory Approach: The DISAs, health care personnel and CLAS-type organizations (health facilities with community participation) in key target areas were consulted during project preparation, particularly on the proposed arrangements for the insurance scheme and on their needs for local capacity building. Primary beneficiaries are being consulted through focus groups and through satisfaction surveys as part of the Social Assessment activities. These instruments, and others that will be designed under the DFID- financed P&ME (see section 4 above) will be used annually to monitor satisfaction with the services supported by the project. As part of the project launch, communities, municipalities, departments, donors and NGOs will be invited to participate in meetings and other promotional activities where the objectives and proposed implementation of the project will be discussed.  Peru: Health Reform Program (PARSALUD) Pace 23 F: Sustainability and Risks 1. Sustainability: The major issue for sustainability will be the financing of the SMI reimbursement. The Government requested that both the Bank and the IDB loans finance the SMI reimbursements on a declining basis with MEF increasingly absorbing the financial responsibility over the 10 year reform program. The fiscal sustainability of the additional public expenditures implied by the SMI program and other aspects of the project was reviewed and found to be manageable (see Financial Section - paragraph E-2 - above). 2. Critical Risks: (reflecting assumptions in the fourth column of Annex 1) The first year of implementation of this project - 2000 - is envisioned to be a period of critical changes in Peru. The Presidential elections in April 2000 may imply changes in sectoral policy making authorities and public health officials at the local level. In order to minimize risks of disruptions, if and when these changes occur, the first phase of the proposed APL was designed to finance activities that will have a high probability of survival because of their direct benefits to poor families and communities. Along side the SMI, the project support to CLAS is envisioned to strengthen social control from communities of the use of project funds in the health services. Furthermore, open discussions of health issues involving the Congressional Health Committee, academics and NGO representatives have been initiated during the dissemination of the health sector report which was partly the technical basis of this operation. During Phase I implementation, various workshops and training sessions of communities through the CLAS and the DISAs (department health leaders) will be carried out for the preparation of regional and local health plans. Likewise, periodic consultations with other stakeholders such as the medical college will be undertaken. These sessions also provide opportunities to discuss developments and possible changes for the second generation of reforms in the sector. The decentralization of health services also faces a high risk. The municipalization of primary health services announced in July 1999 would require substantial clarifications on the role, financial capacity and technical capability of various municipalities to assume transferred responsibilities. The project's support for strengthening decentralization of health services delivery aims to plant the seed for greater participation of sub-national government and community stakeholders in health program decisions. To be realistic, the institution-building needed by this decentralization will require continued support during the reform period. The APL presents an opportunity for the Government and the Bank to work together on ensuring that incremental changes in the decentralization effort become sustainable.  Peru: Health Reforn Program (PARSALUD) Page 24 Lack of political support for policy and institutional H Involvement of the Ministry of reforms at central and subnational levels Finance in the reform decisions; Changes in Ministry authorities that would disrupt Involvement of middle reform course management in MOH, local health departmental authorities, Slow implementation of service delivery decentralization municipalities and more importantly the communities in reform decisions and implementation. Open dissemination of reform objectives and plans Administrative and political instability at the S Capacity building and creation of departmental level. interest of local authorities and community organizations in health expenditure decisions. Inadequate regional and local capacity to prepare and S Capacity building and creation of implement health plans interest of local authorities and community organizations in health expenditure decisions Resistance of some stakeholders from the institutional 5 Involvement of stakeholders in changes being sought (consolidation of health programs reform process in M1NSA) Ability of MOH to obtain adequate fiscal resources for S Agreement with Ministry of SMI implementation Finance on plan for efficiency gains in other reform areas in the future al Ability of SMI Unit to quickly respond to SMI S reimbursement request and/or ability of department-level public health facilities to provide services required under the benefit package Need to strengthen project financial management S Timne bound action plan to strengthen this area has been agreed with MINSA and is under implementation. Additional actions to ensure continued strengthening of the system especially of the SMI will be incorporated in an Action Plan to be agreed with the Bank prior to Loan effectiveness. Overall Risk Rating S Flexibility of APL instrument should allow adaptation of project design Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk) G: Main Loan Conditions: Special Effectiveness Conditions: (i) Adoption of Operations Manual satisfactory to the Bank; (ii) Selection of an auditing firm satisfactory to the Bank; (iii) Submission of action plan for the continued strengthening of SMI's accounting and internal control systems. Special Loan Covenants: (i) Assure the autonomy of operation of the SMI within MINSA; (ii) Assure the streamlined operation of the UCP; (iii) Signing of implementation agreements between MINSA and each  Peru: Health Reform Proaram (PARSALUD) Page 25 of the DISAs in the project area; (iv) Submission by each DISA of an annual operating plan based on its regional health plan; (v) Signing of agreement between MINSA and INEI; (vi) Establishment of the MOH Task Force to guide the implementation of the streamlining of the mother and child programs; (vii)- Carrying out of periodic independent medical audits to evaluate the reimbursement applications submitted by eligible health establishments and to determine whether the obligations of said establishments under the SMI regulations have been fully complied with. I. Readiness for Implementation - 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. X 1 b) Not applicable _2. The procurement documents for the first years activities are complete and ready for the start of project implementation. X 3. The project implementation plan has been appraised and found to be realistic and of satisfactory quality. X 4. The following items are lacking an are discussed under loan conditions (section G): (a) Annual operating plan by each DISA which will be the basis to prepare specific procurement documents. (b) Signed implementation agreements between each DISA in the project area and MINSA. H: Compliance with Bank Policies The project complies with all relevant Bank policies. flask Tea Lea geline Javier Sec r Xavier Coll, LCSHD Coun DirectoCC6C  Peru: Health Reform Program (PARSALUD) Page 26 LIST OF ANNEXES Annex I Project Design Summary Annex la Trigger Indicators Annex 2a Project Description Annex 2b Project Management and Operations Manual Annex 3 Structure of the MINSA Budget Annex 4 Communicable Diseases in the Regions Annex 5 Estimated Project Costs Annex 6 Financial Summary Annex 7 Procurement and Disbursement Arrangements Table A Project Costs by Procurement Arrangements Table B Thresholds for Procurement Methods and Prior Review Table C Allocation of Loan Proceeds Annex 8 Benefit Incidence of Health Expenditures Annex 9 Participation and Social Communication Strategies Annex 10 Letter of Sector Policy from the Government of Peru Annex 11 Documents in the Project files Annex 12 Statement of Loans and Credits Annex 13 Country at a Glance  Peru: Health Reform Program (PARSALUD) Page 27 Annex 1 Project Design Summary Peru: Health Reform Program Narrative Summary Key Performance Indicators Monitoring and Evaluation Critical Assumptions Sector-related CAS Goal: Expand access to and improve * Accelerated reduction in ENDES Surveys * Stable quality of health and nutrition infant and peri-natal Beneficiary Assessments macroeconomic services (CAS dated 6/26/97) mortality framework * User satisfaction increased * Continuity and as verified by appropriate consistency in the social and beneficiary development of surveys health policy Program Development Objective - Targets for 2010: * Infant mortality rate ENDES Surveys; * Political support for reduced from 43 to 20 per MINSA health statistics; project policy and The medium-term goals of the 10 1000 live births by 2010. Evaluation of impact of institutional reforms, year Health Reform Program are regional and local health plans. at central and local to: (a) improve matemal and * Peri-natal mortality levels. child; and (b) help reduce reduced by 50 percent * Allocation of morbidity and deaths of the poor between 2000 to 2010; sufficient resources from communicable diseases and to implement critical inadequate environmental health programs conditions. (Financial support * Maintenance of from IBRD, IDB and bilateral reform course in donors) case of changes in Ministry authorities Project Development Objective - Targets for 2003 The first phase of the project * 60 percent increase in the ENDES Surveys; * Political and (2000-2003) aims to contribute to number of pregnant ENAHO Surveys; financial support for the above health goals in Peru women with 4 or more MINSA health statistics; project policy and through increasing access of the prenatal care visits Evaluation of impact of institutional reforms, poor to better quality health * 33 percent increase of regional and local health plans at central and programs and services. births in project area municipal levels. attended by skilled health * Administrative and personnel political stability at * At least 3.7 million cases the departmental of acute respiratory level; infections (IRA) in children under age 5 attended * At least 780,000 cases of acute diarrhea (EDA) in children under age 5 attended * Coverage of DPT3 immunization in 95% of the children under age I I  Peru: Health Reform Program (PARSALUD) Paae 28 maintained. * 44% increase in municipalities with DPT3 coverage for children under age 1 * At least 80 percent of yellow fever cases attended * At least 17 million beneficiaries receive care in the primary facilities of MINSA annually * At least 80 percent of the health departments (DISAs) are implementing regional and local health plans that respond to communicable diseases and environmental health problems prevalent in their ______________________ _ = respective localities Project Components: (FY2000-20003) I. Strengthening Health * 25 percent increase in the SMI M & E; * Ability of MOH to Demand: Implementation of the number of pregnant PARSALUD M & E; obtain adequate fiscal Seguro Materno Infantil (SMI). women attended in their ENAHO Surveys; financing for an first two trimester of MINSA health statistics; expanded pregnancy Evaluation of impact of implementation of the * 95 percent of newborn regional and local health plans SMI children covered by SMI weighted within the first 24 hours of birth * 80 percent of facilities have the minimum * Effective standard package of coordination, equipment required for complementarity and child delivery cross fertilization corresponding to their arrangements with level of resolution capacity IDB-financed project. * Maximum of 25 days interval between the submission of reimbursement request to SMI and actual receipt of reimbursement by health facility 90 percent of SMI annual programmed budget actually spent IL Strengthening * Adequate regional Decentralization, Policy * At least 33 percent of and community Development and Institutional MlNSA health posts and ENDES Surveys; capacity to prepare Modernization centers are administered ENAHO Surveys; health plans  Peru: Health Reform Program (PARSALUD) Paqe 29 by CLAS by 2003 MINSA health statistics; * Resistance of some * 80 percent of DISAs Evaluation of impact of stakeholders for the provide adequate support regional and local health plans institutional changes to the operation of CLAS being sought * Effective implementation (consolidation of of Local Health Plans by individual health at least 60 percent of programs in MINSA; CLAS accelerated * At least 60 percent of the implementation of CLAS implement CLAS) effectively their local health plans * The streamlining plan for the mother and child programs fully implemented in all DISAs * The streamlining plan for the environmental health program fully implemented in all DMSAs III. Improving the Quality of Health Programs and Services: Investment Support for the * 100 percent of DISAs have PARSALUD M&E; * Adequate regional Regional and Local Health submitted investment Beneficiary Assessment; capacity to prepare Plans projects for financing User Satisfaction Survey and implement * 60 percent of subprojects subprojects in approved were adequately accordance with implemented after one year priorities set in the of submission local and regional * At least 30 percent of health plans subprojects approved are integrated subprojects. IV. Project Coordination * UCP stays streamlined PARSALUD M&E; * Monitoring reports are issued twice a year * The monitoring and evaluation unit produces an analysis of the distributional incidence of project results annually Project Components/Sub- Inputs: (loan financing for Project Reports: components: each component) I. Strengthening Health Demand - Implementation of the SMI * SMI Reimbursement and SMI M&E TA for SMI Unit: US$55 M II. Strengthening Decentralization, Policy * TA for CLAS, DISA and PARSALUD M&E Development and Institutional municipalities: US$7 M Modernization:  Peru: Health Reform Program (PARSALUD) Page 30 III. Improving the Quality of Health Programs and Services: . Civil works, equipment, PARSALUD M&E goods and services to implement priority investment subprojects in the regional and local plans: US$16 M IV. Project Coordination . Operating costs of the PARSALUD M&E UCP: US$1.2 M  Peru: Health Reform Program (PARSALUD) Page 31 Annex la PERU: Health Reform Program Trigger Indicators under the Adaptable Program Loan The critical performnance milestones of the principal activities of the project are defined as triggers to determine appropriateness and readiness for launching Phase II of the APL. Areas for policy focus for tCe second and third phases of the APL are also listed below. Trigger Indicators Means of verification Performance Milestones under First Phase * SMI monitoring and evaluation indicators Project monitoring and evaluation reports * SMI expansion plan implemented in all health * Project Annual Review Reports departments by June 2003 * At least 30 to 33 percent of health posts and health centers are administered by CLAS by 2003 * Mother and child programs and environmental health programs streamlined according to plan agreed with the Bank * Distributional impact studies of Phase I health activities concluded and recommendations ready for consideration for Phase II * 100 percent of loan committed and 80 percent disbursed by June 2003 * Satisfactory performance of complementary projects in the sector which have relevance to the achievement of the health reform development objectives. Readiness for Second Phase (Policy Focus) * Adequate legal framework and actions defined to delineate the services to be provided by the ESSALUD and MINSA hospitals * Recommendations of policy studies on separation of financing and service provision in ESSALUD available for consideration * Recommendations of policy studies on health manpower issues available for consideration Readiness for Third Phase (Policy Focus) * Satisfactory performance of measurable health indicators as targeted under Phase II * Recommendations of policy studies on the autonomy issues of national hospitals * Recommendations of policy studies on adult health problems in Peru  Peru: Health Reform Program (PARSALUD) Page 32 Annex 2a: Project Description Peru: Health Reform Program By Component: Component 1 - Strengthening Health Demand: Implementation of the Seguro Materno Infantil (SMI) (US$149.0 million) Objectives and Rationale of the SMIl The main objective of the SMI is to help reduce infant and maternal mortality in Peru, which are still among the highest in Latin America. The SMI program - in its initial phase - will improve access to poor pregnant mothers and small children to quality health provided by primary health facilities and matemities nationwide. The SMI will reimburse health providers for services rendered free of charge, including medicines and required laboratory exams, to selected beneficiaries. This is expected to eliminate the economic barriers, which is a strong impediment to access of pregnant mothers and small children to adequate care. By the year 2003, the SMI program is estimated to cover annually about 500,000 pregnant mothers and about 1.2 million children under 4 years of age. At present, MINSA provides mother and child services in a wide network of primary health care centers and maternities nationwide. MINSA attends to about 225,000 deliveries of the estimated 660,000 total deliveries in the country per year. An estimated 131,000 deliveries are attended by other institutions and the private sector, leaving over 303,000 deliveries (46 percent) unattended by professional workers. The SMI program seeks to reduce maternal and child mortality by reducing the unattended births and paying for the cost of deliveries of poor women. Recent studies indicated that many women do not seek adequate pre-natal, child delivery and post-partum care due to their high cost (especially of medicines) relative to household incomes. The following is an estimated number of beneficiaries to covered by the SMI program in the period 2000 to 2003 in all health departments: Table 1. Beneficiary Population of the SMI, CY2000-2002 (Thousands) Year Pregnant Women Children Less Than 4 Years of Age 2000 148 445 2001 281 760 2002 446 1,140 2003 503 1,254 Source: Estimates by the SMI group at the Ministry of Health (Scenario 1 figures). Benefit Plans of the SMI Program The SMI is an "insurance" program (a reimbursement mechanism) that pays for services rendered to eligible population in public health posts, centers and hospitals. Eventually, the program aims to reimburse services provided at private establishments certified and approved by the SMI Board of Directors. The program will also introduce premiums for medium- and high- income families as it progressively expands to selected urban areas. The SMI payments for services rendered will be made according to an established benefit plan and fee schedules. Fee schedules are calculated on the basis of variable costs of services (including inputs,  Peru: Health Reform Program (PARSALUD) Page 33 laboratory exams, medicines, etc.). They exclude the cost of personnel and infrastructure, which are already paid for by the MINSA. In order to participate, health posts, centers and hospitals need to meet service quality requirements established by the Ministry of Health and the SMI and to follow strict service protocols established for the different complexity levels. Benefit Plan for Beneficiary Pregnant Women. SMI's benefit plan for pregnant women includes a generous wide range of health care controls and treatment of sicknesses detected during the pre-natal period, delivery and postpartum-up to six weeks after delivery. During the pre-natal period, the SMI includes pre- natal controls, laboratory exams, nutrition fortification, vaccination, dental care, and early detection of cancer, among others. All forms of delivery of babies are included-normal, cesarean--and any complication arising therefrom. The plan also includes treatment of sicknesses detected during pregnancy that are unrelated to that condition, such as diabetes, anemia, appendicitis, etc. Finally, the SMI includes postpartum controls and all the complications that occur during the six-week period after birth (See Annex 2a, Table 4). Excluded from the SMI package are treatment of accidents and trauma caused by third parties, such as vehicle accidents, treatment of cancer detected during pregnancy, birth and postpartum, and treatment of AIDS. These conditions will be treated separately under MINSA and/or reinsurance schemes currently under preparation and discussion in the Ministry of Health. Benefit Plan for Children Under 4 Years of Age. The benefit plan for children under four years of age also includes a generous wide-ranging battery of well-baby care controls and treatment of all conditions occurring to children in this age group. The package includes well-baby care controls and growth monitoring, vaccinations, nutrition supplements, treatment of EDAs, IRAs, and infectious diseases, among others (See Annex 2a, Table 1). The SMI package excludes treatment of congenital malformations, accidents produced by third parties, such as car accidents, AIDS, neoplasis and others, which will be treated by MINSA or under a reinsure scheme currently under preparation by MINSA. Costs of the Benefit Plans. The estimated costs of the benefit plans for pregnant women - from the moment of conception to 6 weeks after delivery--of all care, and of children less than 4 years of age, are as follows: Table 2. Per Capita Cost Estimates of the Benefit Plans for Pregnant Mothers and Children Less Than 4 Years of Age Beneficiary Population Per Capita Cost Per Year (in US $) Cost of Pregnant Mother 61.40 Children Less than 1 year of age 40.04 Children 1-2 years of age 36.47 Children 2-3 years of age 29.69 Children 3-4 years of age 28.09 Source: Estimates by MINSA-SMI group based on approximate variable costs (excluding labor, cost of utilities and maintenance of infrastructure and equipment) and the frequencies of treatments included in the package. SMI Pilot in Tacna and Moyobamba With the purpose of testing institutional and logistical arrangements in the delivery of a basic package of primary health care services a pilot SMI program was implemented in two provinces at the end of 1998. The pilot included a predominantly urban area, Tacna, and a rural area, Moyobamba. The beneficiary population  Peru: Health Reform Proaram (PARSALUD) Paae 34 in those two provinces included children younger than 4 years of age and uninsured poor pregnant women, totaling 19,000 in Tacna and 8,000 people in Moyobamba. The benefit plan included a basic health care package for small children including care of the new born, well-baby care (growth monitoring, vaccinations) and simple inpatient and outpatient child care. For the pregnant mother the package included checks ups and health care for delivery -normal or complicated-and attention during postpartum for up to six weeks after delivery. The total cost of the pilot program lasting 12 months was estimated at US$ 1.2 million or 45 per person per year. After six months of operation of the pilot projects, the government decided to adjust the design of the SMI based on preliminary evaluations of those experiments. The first was to eliminate the small charge beneficiaries had to make when enrolling in the program in rural areas. The SMI will pay health centers or NGOs for affiliating rural people into the program, to help address the slow progress in affiliation in Moyobamba. The second was to increase the benefit package to make it more comprehensive and more attuned to beneficiaries needs. The new package will increase better coverage of new born child care (to better address neonatal mortality), and better coverage of mother health needs-not only those related to pregnancy-and an extended period of prenatal care. On average, the cost of the benefit plan for pregnant mothers increased to about US$ 60 dollars per year, while that of the children over US$ 36 dollar per year. Finally, the third modification was to realign some relative prices for reimbursement to health providers and to increase reimbursements as to reflect cost more accurately. Health care providers were complaining that reimbursements were too low and did not reflect the variable cost of services provided. Labor costs are not included in fees since they are paid out of the Ministry's health budget. Affiliation Mechanism Affiliations to the SMI are made by primary health care networks, including public health posts and centers, and health centers and posts under shared administration between the Ministry of Health and Communities (CLAS). When needed non-government organizations and organized communities will be authorized to affiliate in remote areas to increase enrollment of the poor. The SMI will pay health posts, centers and NGOs and communities a small fee for affiliation. Although affiliation is made at centers and posts, beneficiaries are free to choose any health post, center or hospital to obtain their services. Hospitals will attend to those people referred by lower level establishments, except in cases of proven emergencies and are not allowed to enroll beneficiaries to the SMI. This will decongest maternities of hospitals freeing them of all pre- natal and well baby care that can be provided by lower level establishments. Beneficiary lists will be updated at the region's SMI Office with the information provided by health centers and posts which has been previously audited. Lists will be free from duplications and people not meeting program requirements, such as women who have completed their postpartum free care, children over 4 years of age, and women and children not belonging to the target poor population. All children over four years of age attending public education are beneficiaries of the Seguro Escolar program. In the case of urban areas, people who are classified as non-poor will be out of the beneficiary lists and will be charged market prices of services, following directives from the Ministry of Health. The Organization of the SMI An SMI unit will be established within MINSA to coordinate and supervise the implementation of the SMI. The SMI unit will also carry out the necessary start-up promotional activities, training of DISAs and supervision of the SMI services in the field. The Unit will have autonomy and flexibility to plan, program, supervise, control and monitor SMI budget and expenditures. The Unit will have a lean structure composed of a central office in Lima and a network of small offices located in each region of the country whose role will be primarily to ensure quality control, supervise the SMI implementation in the health facilities, as well as review,  Peru: Health Reform Prooram (PARSALUD) Paae 35 process and transmit to the DISA and the SMI central unit requests for reimbursements. The SMI will be headed by a Director appointed by the Minister of Health. Payment Mechanism Learning from the lessons of the Tacna and Moyobamba pilots, the SMI will introduce a simple but efficient payment scheme. Reimbursement of SMI services will be provided upon approval by regional SMI staff of services provided according to SMI's benefit plans and fee schedules. Regional SMf offices will consolidate all the region's information and accounts that will be sent for payment to the central SMI. The MINSA general administration office (OGA) will deposit in accounts of regional health services or directly to health providers, including the CLAS the amount of reimbursements authorized by the SMI Unit. Appropriate payment and control mechanisms (including the specific forms to be used in the payment process) have been designed and pilot-tested. These processes are described briefly in Annex 7 and are elaborated in more detail in the SMI Operations Manual. To encourage early enrollment to the SMI of pregnant mothers and small children, the SMI will pay 40 percent of the costs of required prenatal and well baby care visits at affiliation time (the first visit). The remainder will be paid at the time of the last pre-natal visit or yearly control for children. Other medical consultations will be paid according to an established fee. To reduce any possible abuse of the system, only 2 consultations per month will be provided free of charge in the SMI package for pregnant mothers and children. Treatment requiring inpatient care will be paid according to a fee schedule that groups several diagnostics and treatments included in the SMI mother and child plans. Loan Finance The Bank will finance the SMI program on a declining basis. It is expected that the government will assume full financing of the SMI program on the fifth year of the SMI implementation. The loan will also finance the establishment of the SMI Unit at the central level and the small offices at the regional level.  Peru: Health Reform Program (PARSALUD) Paae 36 Annex 2a, Table 3 MATERNAL-CHILD INSURANCE Benefit Plan for Mothers PREGNANT AND PARTURIENT WOMAN A. PRENATAL CARE FOR NORMAL PREGNANCY: Prenatal examination Laboratory tests: blood profile, haemoglobin, blood group and Rh typing, urine test, VDRL or similar, ELISA (for HIV), and blood glucose. Tetanus toxoid vaccination. Ferrous sulfate and folic acid supplements. Dental examination: filling of caries, tooth extractions (up to 3). Detection of cervical cancer: Papanicolaou test. Prenatal counseling: information on and recognition of danger signs and signals, obstetrical risk rating, breastfeeding, nutrition, and healthy lifestyles. Preparation for breastfeeding. Psychoprofilaxis for labor and delivery. B. PRENATAL CARE FOR HIGH-RISK PREGNANCY: Prenatal exam for high-risk pregnancy according to protocols. Additional tests according to protocols: *Laboratory tests. *Image diagnoses. C. CARE OF PRENATAL COMPLICATIONS, INCLUDING ANY COMPLICATION FOR EXAMPLE First trimester hemorrhage: Hypertensive disease of pregnancy Hydatiform mole Hyperemesis gravidarum Ectopic pregnancy Premature labor Abortion and related complications Multiple pregnancy Threatened abortion Polyhydramnios/Oligohydramnios Second and third trimester hemorrhage: Premature rupture of membranes Placenta previa Transportation* Premature separation of the placenta Fetal distress Uterine rupture Antepartum hemorrhage due to clotting defects D. CARE OF NON-PREGNANCY RELATED COMPLICATIONS, INCLUDING ALL CONCURRENT MEDICAL AND SURGICAL CONDITIONS, FOR EXAMPLE: Urinary infection Diabetes mellitus Anemia Acute appendicitis Malnutrition Asthma E. NORMAL DELIVERY: Professional attendance + medicines and supplies (birth package for mother and newborn) One day of hospitalization As previously indicated, there is a group of pathologies that are considered catastrophic that will be channeled by the SMI to a supplementary insurance plan. SPECIAL BENEFIT PLAN FOR MOTHERS Trauma and/or accidents caused by third parties. Breast, uterine, and ancillary cancer detected during pregnancy. AIDS detected during pregnancy, birth, and postpartum. Transportation*. SPECIAL BENEFIT PLAN FOR CHILDREN Congenital malformations. Accidents caused by third parties. Innate errors of metabolism. AIDS Neoplasms Transportation*.  Peru: Health Reform Program (PARSALUD) Pane 37 To a specialized facility. If necessary, air transportation outside the department will be covered (also covers the cost of an accompanying health provider). ABOUT TRANSPORTATION In rural areas (health centers and posts), the SMI covers costs of necessary transportation so that the beneficiary can accede to a health facility from her/his home in case of emergency. F. CARE OF HIGH RISK DELIVERY: Professional attendance. Auxiliary tests and procedures according to the case. G. CESAREAN DELIVERY: 4 DAYS OF HOSPITALIZATION ACCORDING TO PROTOCOLS H. CARE OF ALL DELIVERY COMPLICATIONS, FOR EXAMPLE: Uterine rupture Hypovolemic shock Transportation*. I. NORMAL POSTPARTUM CARE Postpartum examination (minimum 2). Ferrous sulfate, folic acid, and vitamin A supplementation. Family planning. J. CARE OF ALL POSTPARTUM COMPLICATIONS, FOR EXAMPLE: Postpartum hemorrhage. Retained placenta. Puerperal infection. Breast and/or nipple infection.  Peru: Health Reform Proaram (PARSALUD) Paae 38 Annex 2a, Table 4 MATERNAL-CHILD INSURANCE Benefit Plan for Children NEWBORNS A. Care of the normal newborn: Immediate care BCG vaccination Ocular prophylaxis (silver nitrate) 1 Vitamin K administration Polio vaccination | Blood group and Rh typing B. Care of the newborn with problems, for exampl : Newborns affected by maternal delivery Respiratory distress syndrome and other respiratory problems of complications. the newborn. Prematurity and low birth weight. Neonatal emergencies: Intrauterine hypoxia and neonatal asphyxia. Surgical Neonatal ichtericia. Non-surgical Hemorrhagic illness. Neonatal transportation* CHILDREN UNDER FOUR YEARS OF AGE A. Integrated basic child care: Monitoring of growth and development: Anti-hepatitis B **(3) 5 visits the first year Anti-yellow fever ***(I) 4 visits the second year Prevention of micro-nutrient deficiencies (ferrous sulfate and I visit the third year vitamin A supplements). Immunizations: AIDS detection in children at risk. Polio (3) Counseling: identification of danger signs and signals, DPT (3) nutrition, personal hygiene. Measles (1) Anti-hemophyllus influenzae (3) B. Care of the child with pathology, for example: Diarrheal disease Infectious diseases, for example: Watery diarrhea Diptheria Dysentery Tetanus Persistent diarrhea Pertussis Measles Respiratory illness Chicken pox Pneumonia Hepatitis Severe pneumonia Urinary tract infection Very severe respiratory illness Conjunctivitis Non-pneumonia (cold, bronchitis) Meningo-encephalitis Streptococcal pharyngitis Typhoid fever Acute otitis media Malaria Bronchial obstruction syndrome Dengue Leishmaniasis Skin diseases Chagas Atopic dermatitis Tuberculosis Acarus Yellow fever Pediculosis Pio-dermatitis Emergencies: Diaper rash Surgical Skin mycosis Non-surgical, for example: Convulsions Intestinal parasites Trauma and bums Congenital hip dislocation Intoxication and poisoning  Peru: Health Reform Proaram (PARSALUD) Pane 39 Micro-nutrient deficiencies (anemia, vitamin A Shock deficiency) Accidents not caused by third parties. _ Transportation* *To another facility by referral within the departmnent by land or water. **In endemic zones (Ayacucho, Cuzco, Apurimac, Amazonas, Loreto, Madre de Dios, Ucayali, Hudnuco, Junin, Cerro de Pasco, San Martin) ***In endemic zones (Loreto, Junin, Puno, Madre de Dios, Pasco, Ayacucho, Cuzco, San Martin, Huanuco). Component 2 - Strengthening Decentralization, Policy Development and Institutional Modernization (US$22.8 million) A. Technical Assistance for Decentralization: (i) CLAS Expansion and Empowerment of Communities Objectives and Rationale of the CLAS The Shared Administration Program, initiated in 1994, has served as a means for the Ministry of Health to provide improved primary health services with the participation of civil society in private, non-profit entities called CLAS ('Comite Local de Administracion de Salud') which, by virtue of a contract with the DISA, receive and administer public treasury funds to provide health services. Each CLAS has seven members: three are elected by the community, three are selected directly by the health facility manager. The seventh member is the health facility manager, usually the chief physician, who participates in all decisions of the CLAS and completes the scheme of co-management. The basis of the DISA-CLAS contract is the local health plan (LHP) which establishes community health needs and goals, describes in detail the activities needed to reach these goals, and provides an assessment of human, material and financial resources required to implement the plan. An annual community health survey (censo comunal) serves as the basis for identifying local health needs and provides true denominator data for more realistic planning. Local health planning based on community epidemiology represents a major change in MINSA programming methods, which have historically been controlled by the central level. The DISA-CLAS contract holds the CLAS liable for implementation of the LHP, a responsibility that empowers it to exert social control over budget allocations within the health facility. This also allows social control over the day-to-day work of health personnel in terms of quality of care and completion of other work requirements. CLAS have the capacity to improve equity in health care delivery since they are able to identify which families in the community are the most needy of exonerations and special attention. CLAS members make decisions on how funds (whether transferred public treasury funds or fees-for-services paid by patients) should be utilized. They therefore tend to use resources more effectively, since they can better determine the needs and priorities of their own community and have an incentive to obtain more for less. Citizen participation in CLAS improves the production of health services, and therefore cost efficiency, through several mechanisms: improvements in the quality and variety of services offered by the health facility, oversight by CLAS of implementation of the LHP, and promotional efforts of CLAS in the community to promote utilization of preventive, as well as curative, services. As a permanent local institution, CLAS helps to ensure the sustainability of health and other social development programs in the community. The administrative flexibility provided by the private, non-profit status of the CLAS allow a myriad of ways to potentiate the public sector investment in health services that is limited only by their level of creativity.  Peru: Health Reform Proaram (PARSALUD) Paae 40 Challenges for CLAS Strengthening Since its inception in 1994, the program has grown to incorporate about 14 percent of all primary care facilities in the country (855 of approximately 6000 health centers and posts), and has proven itself to be a viable and advantageous form of health care organization. Several qualitative evaluations of the Shared Administration program have been conducted since 1996, which have identified some of the principal obstacles and needs for the development of CLAS, including the following: At the central level: (i) the need for on-going systematic analysis of CLAS to identify key problems that could be solved with central level support, (ii) the need to provide basic funding to DISAs for costs of supervision and TA for community development activities for the establishment and support of CLAS, (iii) the need to move toward standardization of programming requirements and information systems for CLAS and non-CLAS health facilities, without regressing on the advances made in CLAS in terms of community diagnosis and integrated local health programming, monitoring, and evaluation. In the DISAs: (i) the need for clarity on the role of the DISA in relation to CLAS, (ii) the need for greater budget allocations for supporting CLAS, especially for their initial organization (thereby to ensure better representation in each community), for provision of training to health facility managers, health personnel, and CLAS members on a continual basis on a variety of issues including how to conduct community health diagnoses, develop local health plans and budgets, administer primary health facilities, work with the community and other sectors for integrated development, etc, and for continual supervision and monitoring. In health facilities: (i) a need for greater training/preparation of health facility managers and CLAS members regarding public health practice, especially community epidemiology and local health planning and evaluation, (ii) a need to acquire knowledge in basic personnel and financial management as they relate to private sector law, (iii) a need for more support for initial community organization and motivation to ensure the democratic election of CLAS members who truly represent community interests. Community participation in health cannot be assumed to develop simply by the creation of a CLAS. Rather, CLAS is a component of community participation that, through its conferred authority and responsibilities, facilitates empowerment of the community. The empowerment, in tum, creates a more favorable environment for the community to act in a wider protagonist role in collective and individual health activities and behaviors. The level of empowerment achieved in a community through CLAS has been shown to depend on a constellation of variables. The factors of primary importance include: (i) the extent to which CLAS members are democratically elected so that true leaders are chosen, (ii) the personal capability and leadership characteristics of the health facility manager; and (iii) the effectiveness of efforts to orient and/or motivate the community. Other factors of importance are: (iv) the permanence of health personnel in a particular community (so that personal relationships between patients and provider can be established), and (v) the consistency of supervisory and administrative support from DISA and other mid-level health officials. Operational Plan for 2000. The CLAS operational plan for 2000 is oriented toward the expansion, renovation and strengthening of CLAS, primarily through training, supervision and evaluation, and support for local health planning and other selected locally identified needs. Specific objectives and activities of the year 2000 plan are: i) Promote the strategy of the Shared Administration Program and support the expansion, renovation and strengthening of individual CLAS -- Regional and local teams will be trained to develop and implement IEC plans to promote the Shared Administration (SA) Program; community leaders and members will be informed about the advantages of the CLAS model. DISAS and health networks will have the resources necessary to supervise, monitor, and evaluate each CLAS.  Peru: Health Reform Program (PARSALUD) Page 41 ii) Strengthen the process of participatory planning -- A manual on how to implement and analyze a community health survey will be developed, and training on the manual will be provided to regional and local CLAS-support teams. Workshops will then be provided to individual CLAS on community diagnosis with resulting production of local health plans. iii) Develop mechanisms for continual quality improvement within the framework of integrated care within CLAS and health care networks -- "Model CLAS" will be identified and assisted to develop innovative and simplified management and service delivery models for horizontal training of other CLAS members. Local and regional CLAS teams will be trained on strategies for quality improvement and how to assist individual CLAS to develop proposals and budgets for local quality improvement projects. Loan Finance The loan will finance the technical assistance required for: (i) community motivation and orientation activities to facilitate democratic election processes for CLAS formation; (ii) legalization processes for the conformation of new CLAS; (iii) conduct of annual community health surveys and diagnoses by each CLAS, (iv) training for CLAS in general concepts and methods of public health in order to strengthen community capabilities to participate in all phases of development, implementation and monitoring/evaluation of local health plans, through direct assistance from the DISA CLAS-support team or through the contracting of a local organization (NGO, university, church), (v) strengthening of selected successful CLAS to serve as 'Model CLAS' for observational training and for research and experimentation of new community health. methodologies7; (vi) visits of CLAS members to Model CLAS for up to two weeks for horizontal learning and interchange; and (vii) bi-annual department-wide (DISA) workshops for representatives from all CLAS for cross-fertilization of experiences. The loan will also finance the investments that will be identified in the local health plans in accordance with the eligibility and priority criteria established in the Project Operations Manual. Implementation of this component will be directly supervised by the MINSA PAAG-PAC group in coordination with PARSALUD. (iH). Strengthening Capacity of Municipalities and DISAs The DISAs are responsible for providing technical and administrative support to health facilities to improve productivity and quality of primary health care, public health programs, IEC activities, environmental health and other actions to improve the health of the population they serve. This support depends on adequate information systems for health and management data, well-functioning financial accounting and logistic systems, human resources management systems, adequate communications and transportation systems, effective supervision, monitoring and evaluation systems, and others. It also depends on development of appropriate models of care and of health facility management (i.e. integration of services, organizational and cultural adaptation of health services, referral and counterreferral mechanisms, emphasis on community- oriented prevention and promotion). The health sector reform has placed new demands on the DISAs with regard to change in roles and expansion of responsibilities through the on-going decentralization process. Significant technical assistance and training support is therefore needed for the DISAs to continue developing the necessary skills to carry out their functions in an optimal manner. In pursuit of further decentralization, President Fujimori announced In July 1999 the Government's intention to transfer the responsibility of primary health care service delivery to the municipalities. The regulatory measures of this transfer are being worked out in MINSA at this time. 7This activity will be modeled after the proposal described in: Community-Based Sustainable Human Development: A Proposal for Going to Scale with Self-Reliant Social Development by D. Taylor-Ide and C.E. Taylor, UNICEF Environment Section, New York, 1995.  Peru: Health Reform Proaram (PARSALUD) Paae 42 Loan Finance The Loan will provide technical assistance to DISAs to improve their ability to manage the delivery of preventive/promotional and curative health services in their jurisdiction, including: (i) strengthening the organizational and managerial capability of primary health facility personnel (and CLAS community members in the case of CLAS facilities) especially in regard to the development and implementation of local health plans, (ii) supporting studies and meetings/workshops that contribute to policy development and operational models in DISAs and Redes, (iii) support for operational costs of the DISA to carry out supervision, monitoring, and evaluation of local health plans in CLAS and non-CLAS facilities, and other management functions specific to CLAS and non-CLAS facilities; and (iv) elaboration of appropriate investment proposals. The Loan will also finance technical assistance to assist municipalities to better understand and carry out their new role in the delivery of primary health care services. C. Reorientation of the Role of MINSA and Public/Private Health Providers Much fragmentation and duplication exist within MINSA. The problem is especially acute for interventions in maternal and child health (MCH), nutrition, and environmental health, none of which has a clear structure for policy or planning. In theory, MCH policy and planning is one of many responsibilities of the Direcci6n General de Salud de las Personas (DGSP). Within DGSP, this responsibility is split into 8 national programs (for immunizations, child growth and development, diarrhea and cholera, acute respiratory infections, matemal-perinatal health, family planning, school-age/adolescent health, micronutrient deficiency prevention, and HIV-AID/STD), which are spread among various dependencies of DGSP. Two large and many small externally financed projects also finance MCH activities. Each of these projects are "vertically integrated": they have independent planning offices and each has components of institutional development (policy design, health sector financing, information systems), components to develop health care "software" (typically development of medical protocols and training, sometimes IEC) and components to invest in "hardware" for the public network (mostly equipment, in a few cases also construction). In environmental health, there are overlaps and often duplications in food quality control (DIGESA, INS and the municipalities duplicate actions in some areas and leave many areas uncovered) and vector control (DIGESA, INS, DGSP). In nutrition, overlap in functions occurs between DGSP, INS and many other public and private sector institutions outside MINSA. Duplication is underpinned by a fragmented budget system (see Annex 4). The treasury finances some of the fixed costs (labor costs, MINSA's large pension payments for retirees-included in MINSA's budget, and some goods and services). Discretionary expenditures are financed by "projects" and by revenues from tariffs. These resources are managed separately from the funds provided by the treasury and are spent according to different rules and often by different decision-makers. Each project reports loosely to the MINSA Office of International Financing, Investment, and Cooperation (OFICE) and to the Ministry of Economy and Finance (MEF) through the MNINSA Office of General Planning (OGP). Two separate units in MEF monitor the health projects. One for Salud Basica and another for the projects financed with foreign loans. No public agency has aggregated information about the financial flows or progress indicators of the projects financed by bilateral donors (some of which are large). The project will support the reorientation of the role of MINSA as principally those of: (a) provision of health norms and supervision of their implementation by public and private health providers; (b) ensuring equitable access to health services to low income population; and (c) promotion and maintenance of public health. This reorientation is in line with the increasing decentralization of health service delivery to the municipalities, DISAs and the communities. Specific lines of actions to be supported will be: (i) improvement of DGSP's normative and supervisory roles including streamlining of mother and child health programs;  Peru: Health Reform Program (PARSALUD) Page 43 (ii) strengthening OGP's strategic planning and budgetary process; (iii) streamlining of environmental health programs; and (iv) development of action plans related to payment mechanisms and purchasing issues of MINSA and ESSALUD health services DGSP's Role and Streamlining of Mother and Child Health Programs MINSA has elaborated a plan for DGSP restructuring and a complementary plan for streamlining the mother and child health programs under the direction of DGSP. These plans are in the project file. The basic thrust of these plans is to revitalize DGSP's normative and supervisory role in accordance with MINSA's legal statutes and to integrate the policies, supervision and communication strategies for the 8 national subprograms currently existing for mothers and children in MINSA. The plan for streamlining of the mother and child programs include activities and instruments that have been piloted or are in the process of development by the Basic Health and Nutrition Project (World Bank), Project 2000 (USAID), Project for Generation of Capacities (DFID), and the Shared Administration Program-CLAS. The plan calls for a 'Task Force' headed by the DGSP, with a general manager, and five management support specialists (administrative support, monitoring, organization of events, instrument development, and communications). Functions are specified in the plan for each of these positions. The plan states that it would be convenient for these personnel to come from the Projects that are directly supporting this process. The establishment of the Task Force for the implementation of the streamlining plan will be a condition of loan disbursement. Strengthening DGSP's normative and supervisory role will require assistance in the following areas, among others: (a) development of protocols for vector-bome diseases to improve on the procedure manuals that DGSP currently has ; (b) development of methodologic guides to be used by DISAs for the preparation of regional plans; (c) establishment of Geographic Information System (GIS) in relation to communicable and vector-borne diseases with corresponding training of personnel in its use; and (d) training of regional personnel to conduct investigation and epidemiologic surveillance. The PAHO regional office has offered to provide additional technical assistance to DGSP in the elaboration of some of the above mentioned areas. The loan will finance the consultant services, the workshops with the DISAs, and the follow-up studies/action plans needed for the strengthening of DGSP's normative and supervisory role OGP's Strategic Planning and Budgetary Process With the assistance of Proyecto 2000 financed by USAID and a small contribution from the Bank- financed PSNB, OGP has started restructuring MINSA' programming and budgeting system. Within the budgetary programming framework of the Ministry of Economy (MEF), OGP is in the early stage of implementing a programming and budgeting methodology based on estimated costs of producing the health services (Sistema de Programacion Presupuestal, SPP). Efforts are underway to implement the SPP in 34 DISAs and the plan is to expand its implementation down to 110 "unidades ejecutoras" (cost centers) in the country. Budgeting committees formed in the 34 DISAs are receiving assistance from OGP trainers. The project, together with USAID's Proyecto 2000 (phase II), will continue the PSNB contribution to the expansion of the SPP implementation in OGP and the DISAs. The assistance to the DISAs will be especially important for the latter's role in consolidating and overseeing the implementation of regional health plans. Assistance to OGP will include training for its current staff, hiring of consultants to upgrade OGP's ability to respond to respond to MEF's and the DISA's requirements, support for training workshops and related travel to the DISAs, and purchase of computers.  Peru: Health Reform Proqram (PARSALUD) Page 44 Streamlining of Enviromental Health Programs The streamlining of the following environmental health programs will focus on the following areas: i) food safety, ii) malaria control, and iii) basic sanitation. The streamlining plan, a draft of which has been submitted to the Bank, will specify the distinction of DIGESA's role in these areas. The major change will be that DIGESA will focus on its regulatory, surveillance and enforcement roles. The APL project will provide technical assistance to strengthen DIGESA's capacity to carry out the following: Food Safety - regulation and certification of food quality, as well as ensuring that local govermments enforce these regulations; Malaria- fumigation and vector surveillance; Basic Sanitation - enforcement and supervision of environmental norms. MINSA and ESSALUD Health Services Duplication of MINSA and ESSALUD's health services in some regions have resulted in under- utilization and inefficient deployment of financial and human resources. The project will assist in the analysis needed to understand better the underlying issues, including financing studies and workshops related to: (a) the payment mechanisms in hospitals; (b) the contracting of services between M1NSA and ESSALUD facilities; (c) the articulation of public health reimbursement mechanisms with the ESSALUD and private health insurance schemes; and (d) the separation of financing and provision within ESSALUD insurance function; and (e) the appropriate human resource skills mix and incentives to better serve poverty-oriented programs. D. Monitoring and Evaluation The Health Information System (HIS) developed in the 1980s has become dysfunctional and outdated, it is also not Y2K compliant. Data on the production of services is widely perceived as unreliable. Annual statistics have not been published for several years. Each vertical program in the Ministry has now developed parallel information systems, which overburden the providers with duplicate requirements of data with inconsistent presentations. In response to this situation, the Ministry has prepared a Strategic Master Plan for the development of information systems. As part of the implementation of this Master Plan, the project will support the development and implementation of a new unified information system for service production (this is one of 107 information systems identified by the Master Plan as being currently in place). A flexible modular system is under development to monitor service production and will begin implementation in 2000. Key hardware and connections have already been acquired with financing from the PFSS for MINSA headquarters and all DISAs. The project will complement this investment with the purchase of key equipment for the first data entry point (cabezas de redes), technical assistance for software development for production statistics, training for data inputing and processing, and for data analysis. Social monitoring activities will also be designed and implemented to complement the above activities. DFID through its Reproductive Health Project is taking responsibility for assisting M1NSA in the social monitoring design. Key primary stakeholders representing lowest quintiles in the social strata and other social actors directly benefited by the project will be identified. Areas where the PM&E will be performed will be defined by the MOH. Agreements in how each stakeholder wants to be involved will be made and a review of what each stakeholder is already evaluating and monitoring will be performed. Rights and responsibilities of each stakeholder in the PM&E will be defined and agreed as well as the level where PM&E will operate. Areas and activities of the three components of the project that will be subject to M&E will be identified and agreed by stakeholders and base-line qualitative and quantitative indicators for each of these areas will be determined as well as appropriate participatory methods for data collection. Timing of data collection will be  Peru: Health Reform Proaram (PARSALUD) Page 45 defined collectively for the beneficiary assessment and information provided by the PM&E will be analysed by key stakeholders. Recommendations towards the improvement of activities will be documented and shared with decision-makers at different levels as to make necessary adjustments to local health plans and other activities. For the implementation of the three components of the project, the CLAS will be the area where the PM&E will take place. In places where CLAS do not exist and responding to cultural and organisational differences, key primary stakeholders and DISAS will define areas where the PM&E will be carried out. In order to guarantee sustainability of the PM&E, critical activities of the Mother and Child Health program will also be considered as subjects of PM&E. Potential areas for evaluation for the first component could include among others, users satisfaction with quality service provision in its different dimensions and equity in provision of services. The UCP will co-ordinate the PM&E process at the central level with the support of structures within the MOH with experience in participation in health. It is suggested that the Executive Direction of Community Participation of the DGSD implements and follow-up the PM&E process at regional and municipal level will be determined by the MOH as to enhance the institutionalisation of PM&E after the conclusion of the project. Implementation will be done in two stages. In a first stage a pilot DISA will be selected according to criteria defined by MOH. Functionaries at the central and regional level co-ordinating, implementing and following-up the process will be trained in PM&E as to carry out workshops with stakeholders where indicators will be defined and a work-plan established for the implementation of PM&E in the selected CLAS. Parallel to implementation, an operational research will be undertaken to document lessons and adjust the process for its extension to other project areas. This research can examine and systematise indicators emerging from the process, the value added of the approach in bringing about changes in service performance and the impact of recommendations in influencing decision-makers. Manuals to guide the process in other DISAs will be produced at this stage. In a second stage the PM&E process will be extended to other departments drawing from the lessons identified in the pilot experience. Loan Finance The project will also finance two types of household surveys. A large Health and Demographic Survey will be undertaken in 2000, producing estimates on health outcomes (including infant and maternal mortality). A yearly module to measure the coverage of key interventions will also be financed. This module will piggyback on an existing quarterly household survey (ENAHO) which INEI has been implementing since 1995. Component 3 - Improving the Supply and Quality of Health Programs and Services: Investment Support for the Regional/Local Health Plans (US$49.0 million) This component will be a key operational instrument to implement the policy objectives of the SMI, the community participation and service quality strengthening of CLAS and the decentralization of investment choices at the local level. The component will finance investment projects (such as integrated health interventions to support the SMI; health education; quality improvement of existing water and sanitation services; area requirement for malaria/tuberculosis/AIDS diagnosis and testing), as well as social communication, training or management strengthening activities addressing the health priorities of the regional departments.  Peru: Health Reform Proaram (PARSALUD) Paae 46 Types of Health Investment Subprojects A key instrument that will be used to identify the investment priorities in the regions will be the Local Health Plans (produced by CLAS) and the regional health plans produced by the DISA in consultation with the municipalities, CLAS, health facilities managers and community organizations. Financing requests for an integrated set of health activities (proyectos integrales) identified in the regionalllocal health plans will be given priority. It is expected that investment financing would be required but not limited to the following types of subprojects: a. Support for SMI: Rehabilitation and equipment of health posts and centers, rehabilitation of obstetric services in first and second level referral facilities, training of health personnel to raise their capacity, IEC, social communication campaigns and other types of promotional activities to ensure beneficiary participation in the program and its cultural adequacy. b. Nutrition: Community outreach programs and integrated nutritional education packages for early childhood and mothers to complement clinical services provided under the SMI program c. Prevention and Treatment of Prevalent Communicable Diseases in the Local Area . Equipment, inputs, training and social communication to increase the ability of local facilities for the early detection and control of top priority communicable diseases identified in the health plans (See Annex 4 for background information on prevalent communicable diseases in the regions). d. Environmental Health. Stationary and mobile laboratory equipment and inputs to increase the ability for the early detection and control of food and water contamination in their communities, particularly in food markets; treatment of water supply and latrines; and rehabilitation of water supply and solid waste treatment in health facilities implementing the SMI program. Targeting Resources for Health Subproiects. Investment resources for subprojects would be allocated during the first year of implementation for each participating department and DISA using annual budgetary ceilings; priority would be given to local requirements to support the SMI implementation. An indicative department allocation criteria has been made on the basis of priority maternal and child mortality indicators, the geographical distribution of the target population, national and departmental poverty indicators and availability of health sector human resources in the target areas. To ensure that funds are not underutilized, and to provide an incentive for effective implementation, if despite reasonable support from the PARSALUD Unit the participating departments or DISAs do not program their full allocation or are not capable of executing fully the programmed resources, upon review, funds can be reallocated to stronger performers. Subprojects can be requested by DISAs, CLAS and municipalities. The allocation criteria, formula, review and reallocation procedures are discussed in part in Annex 2b and details are incorporated in the Operations Manual. Component 4 - Project Coordination (US$8.0 million) A PARSALUD project coordination unit (UCP) will be established to coordinate project implementation (see Annex 2b for organization and function).  Peru: Health Reform Program (PARSALUD) Paae 47 Annex 2b: Project Description Peru: Health Reform Program Project Management and Operations Manual Executing Agencies. The Ministry of Health (MINSA) and the Health Departments in the regions (Direcciones de Salud or DISAs) would carry out the project in accordance with Operations Manuals satisfactory to the Bank. MINSA will carry out project activities through its existing units, in accordance with their area of responsibility, including the SMI Unit which will be created under the project (see Annex 2a for description of these units' project responsibilities). MINSA will enter into implementation contracts (contratos de ejecucion) with participating DISAs for the provision of services in their jurisdiction under the SMI and with other eligible entities (INEI) to carry out project activities. The contracting arrangements for the implementation of each of the project components are discussed below. Project Coordination. The Ministry will be assisted by a PARSALUD project unit (the UCP) responsible for overall coordination, supervision and monitoring of project implementation. The Unit will be directly accountable to MINSA's Alta Direccion (the Minister of Health and the Vice Minister of Health). The Unit will be headed by a Coordinator (Director) and will count on an Administrative-Financial Manager and a Technical Manager. The Administrative-Financial Coordinator will be responsible for the coordination of the financial, physieal and human resources aspects while the Technical Coordinator will be responsible for coordinating the specialized technical support that would be required each component. The Unit' responsibilities will include the following: * Promote the project nationally and locally; Maintain a monitoring system for physical progress and financial management and prepare implementation reports twice a year; * Supervise the execution of the investments component (health subprojects) to be carried out by the DISAs; * Advice, as needed, the SMI Unit on Bank loan requirements * Review the terms of reference submitted by executing entities and MFNSA units, for the hiring of consultants who will assist in implementing the project components (other than the subprojects), and channel them to the Bank for prior review, as needed. * Ensure compliance with Bank procurement guidelines; * Ensure the auditing of project accounts and other audits required by the Bank (including the DISA's); * Coordinate Bank supervision missions, and * Organize the impact evaluation of the project. The UCP would be responsible for procuring goods and services procurement not subcontracted for DISAs nor any other agency for execution. The Unit itself would carry out the invitation and evaluation of bids or may subcontract the process to a qualified procurement agents which will be chosen through a competitive process. Similarly, it may use the services of INFES, the state civil works agency, for the procurement of large national civil works. Detailed procedures for each case will be specified in the Operations Manual. The UCP will supervise the processes for goods, services and civil works procurement that will be carried out at the DISA level. Regardless of size, contracting would be undertaken for civil works, goods, and consultants, using procurement procedures and SBDs satisfactory to the Bank. The Unit may retain the services of PAHO for quality control and supervision in the delivery and installation of medical equipment procured under the project.  Peru: Health Reform Program (PARSALUD) Paae 48 SMI Component. An SMI Unit will be established within MINSA and strengthened under the project to coordinate and supervise the implementation of the SMI, regional offices would be established in each of the participating departments to carry out local administrative functions. The SMI central unit will be responsible for assuring that participating health facilities have the necessary equipment, stocks of supplies and pharmaceuticals covered under the benefits package, for guaranteeing the quality and provision of services presented for reimbursement and for presenting reimbursement requests to the UCP. Health care providers would be responsible for procuring their own inputs, local procurement will start immediately after they receive their reimbursement for services provided. The regional offices would be responsible for receiving and processing monthly reimbursements and for solving any discrepancies on behalf of health facilities in their jurisdiction. The SMI central unit will also carry out the necessary start-up promotional activities, training of DISAs and supervision of the SMI services in the field, including technical and financial audits. The Unit will have autonomy and flexibility to plan, program, supervise, control and monitor SMI budget and expenditures. The Unit will have a lean structure composed of a central office in Lima and a network of small offices located in each region of the country whose role will be primarily to ensure quality control, supervise the SMI implementation in the health facilities, as well as review, process and transmit to the DISA and the SMNI central unit requests for reimbursements. The SMI will be headed by a Director appointed by the Minister of Health. The technical, normative functions (including training, supervision, monitoring, evaluation) for mother and child services will remain in the Ministry Investment Component. The DISAs will be responsible for coordinating the implementation of the Health Investment Projects within the total indicative amount allocated to each of them at the beginning of the project year. The allocation criteria have been made on the basis of priority health indicators, the target population, poverty indicators and availability of health sector human resources. in the target areas. To ensure that funds are not underutilized, and to provide an incentive for effective implementation, if despite reasonable support from the Project Management the participating departments or DISAs do not program their full allocation or are not capable of executing fully the programmed resources, upon review, funds can be reallocated to stronger performers. The allocation criteria, formula, review and reallocation procedures will be part of the Operations Manual. Depending on project cost, the review and approval of each subprojects will either be at the MINSA central level or at the DISA level in accordance with the Operations Manual. Subprojects above the DISAs limits will be reviewed and approved by the Comite de Inversion de Salud (CIS) of MINSA. Each DISA will appoint at least a technical coordinator and a financial administrator for PARSALUD among the existing DISA staff. Additionally, two technical specialists financed by the project will be assigned to each DISA to support provide assistance in the preparation of local/regional investment plans and the formulation of investment subprojects. Detailed procedures for these actions are included in the Operations Manual presented to the Bank before negotiations. Promotion. The implementation of the investment component will be kicked off by a national communications campaign to inforrn the target population about the overall project objectives, activities and components. Concurrently with the campaign, the UCP, through a team of consultants, health specialists and NGOs, carefully selected and trained to assist participating DISAs, Redes and CLAS-type organizations, would aid in the identification of eligible subprojects or investment ideas in accordance with project objectives and the menu contained in the Operations Manual. The DISAs and Redes would use as a starting point the local health plans or, when applicable, the regional health plans. Representatives from the Unit working closely with the DISAs and representatives of local health facilities would visit project areas to transmit and explain subproject eligibility and appraisal criteria. The promotional activities will be started in the last quarter of 1999. Technical Assistance for Decentralization, Policy Development and Institutional Modernization. The technical assistance to be provided under this component to different entities within MINSA (OGP, DGSP,  Peru: Health Reform Program (PARSALUD) Page 49 OIE, DIGESA, PAAG-PAC), to the municipalities, DISAs, and CLAS will be coordinated by the UCP. Terms of reference and decision on the consultant services or other types of technical support will be_ prepared and/or decided by these entities. The UCP's will carry out the contracting procedures in accordance with Bank procurement norms. With regard to the monitoring and evaluation surveys, MINSA will sign an agreement with INEI to carry out the DHS surveys in 2000 and 2003 and to include the health module in the quarterly household survey (ENAHO). Project Supervision. Technical supervision would be contracted out to specialized consultants (individuals or firms) or local NGOs. The UCP would supervise the execution of project and guide project implementation through annual plans, budgets, and reports. The Unit would carefully monitor the utilization and transfer of technical and financial resources, using a Management Information System. This system will be used as the basis for operational decision making, and for assuring the timely and efficient compliance with project objectives. It would also assure that relevant information is available for any adjustment of procedures, strategies, or resource use during project implementation, or for future investments. Specific procedures and mechanisms will be part of the project's Operations Manual. Annual Review of Project Implementation. The project will require extensive and detailed supervision by the Bank, particularly during the first year. The Bank's supervision schedule for the project will include a minimum of three missions during the first year of implementation, of which one will be the Annual Review of Project Implementation, to be carried out in conjunction with the Ministry, PARSALUD and the DISAs. During the second and third years of project execution, at least two missions will be carried out; one of which will be the Annual Review. The Annual Review for the third year will also include a review of trigger indicators, an evaluation of the entire project as part of the APL Program, and the preparation of recommendations for the commencement and execution of Phase II of the Reform Program. Day to day supervision support from the Bank Resident Mission will be arranged. Project Monitoring and Evaluation. Project monitoring and evaluation will measure not only procedures but also results, thereby allowing the project to learn. A monitoring and evaluation program will be developed as part of the project to measure especially the project intermediate and final outcomes. With regard to the investment subprojects, annual ex-post evaluations using random samples of concluded subprojects, as well as beneficiary assessments will be carried out. These annual ex-post and beneficiary evaluations will include physical audits of a sample of investment subprojects, with size and characteristics acceptable to the Bank. Project funds will be utilized for this purpose: recommendations and lessons learned will be included in the following annual operating plan. To measure subproject impact, a baseline and control group would be established during the first year of implementation. In the last year of execution, a representative study would be carried out for the different types of subprojects, randomly selected, to measure the impact of investment on selected indicators. The preparation of the baseline would take into account: (i) ethnicity and gender; (ii) recommendations of impact evaluations of the SMI and CLAS; and (iii) studies of coverage and quality in service delivery and service demand carried out during project preparation. With the assistance of DFID, a participatory monitoring and evaluation approach (P&ME) will also be established in the project. This approach would complement other evaluation and monitoring activities and strengthen the capacity and skills of health providers and other stakeholders in participatory methodologies for evaluation and monitoring. It will allow to bring stakeholders together to undertake a process of analysis of the performance of maternal and child health activities, aid in the identification of solutions mutually acceptable and responsive to the needs of beneficiaries. It will also provide feedback about areas in which the project could be failing to achieve stakeholders expectations. Furthermore, these skills will enhance future developments of the decentralization of health sector.  Peru: Health Reform Program (PARSALUD) Paae 50 Annex 3 Structure of MINSA Budget Peru is divided into political Regions responsible for the provision of most public services, including health care. MINSA's central office is only responsible for the financing and provision of services in the Lima Region which includes Metropolitan Lima (the city of Lima and the port of Callao) and the Department of Lima. The regional authorities are appointed to the Ministry of the Presidency (MINPRE) in consultation with MINSA. Their budgets, including the requirements for the regional health services, are included in the MINPRE budget. While MINSA in theory is responsible for policy and planning nationally, in practice it has little influence over activities financed through MINPRE.8 While the deconcentration of budgets to the regions had been expected to lead to an adaptation of expenditures to local needs, over the years the regional authorities have reinforced the traditional structure of the health sector they inherited. Most of their funding is assigned to the payment of staff in regional hospitals and in the regional administration. Negligible amounts are assigned by the regions to primary health clinics or to environmental health. The existing budget structure is described in Box 3-1. Box 3-1 Structure of the Ministry of Health's Budget * MINSA Headquarters (HQ). Its budget finances the health providers in the Lima Region and the central administration. * MINSA Regions. The regional health budgets are included in the budget of the Ministry of the Presidency (MINPRE) as part of the overall budget for each region.' Funds are provided for the payroll and some fixed costs. Allocation of additional funds for discretionary expenditures is a decision of the Region. Payments to the regions are made directly from MEF. MINSA does not have any participation in the budget process. It is not even informed of regional budget execution. * The National Hospitals. Each of these Hospitals (which include the specialized hospitals and the old and prestigious hospitals that used to belong to the Beneficencia) is budgeted independently. Although the budget entry is registered as part of the Lima budget, in practice the budget for the National Hospitals is managed independently by each hospital. * The Targeted programs. These programs have independent offices in MINSA HQ which make transfers for specific activities caffied out by the regions. s A 1998 law (Ley Marco de Descentralizaci6n) eliminated this organization, which had been in place for a decade and was based on regions consisting of several Departments, making all public health services dependent on MINSA and centralizing all budget planning and monitoring in MINSA. This lasted for a few weeks, after which the previous system was reestablished by Congress (but with Regions consisting each of a single Department).  Peru: Health Reform Program (PARSALUD) Paqe 51 Annex 4 Communicable Diseases in the Regions Transmittable diseases, especially malaria, AIDS, tuberculosis, yellow fever, among other vaccine-preventable and non-vaccine preventable diseases are increasing in importance in localized ecological niches of the country, even though control efforts have been effective for some of them in recent years. Malaria - Vivax malaria has been reduced in certain zones, but overall its prevalence has increased dramatically since 1992, notably in Loreto, Junin, and eastern Ayacucho. More worrisome is the increase since 1993 of the more lethal strain of malaria, Falciparum, which in 1998 reached 36percent of all malaria cases in Peru, occurring mainly in Piura, Tumbes, and Loreto. Vector control needs to be strengthened, according to M1NSA officials, as well as epidemiologic surveillance and education of the public to ensure prompt seeking of treatment when symptoms occur. Stronger links and coordination on malaria control are needed among DGSP, DIGESA, INS, and OGE (Oficina General de Epidemiologia). STD/HIV/AIDS control efforts have been effective among the MSM population since the epidemic began over a decade ago, but the infection is increasing among sex workers and the heterosexual population, especially young adults. There are 5,960 AIDS cases in Lima and Callao. Ica, Loreto, and Ancash follow in prevalence with 169 to 193 cases each. The National STD/IIIV/AIDS Control Program (PROCETS) is remarkably well-organized with four operational units: (1) Integral Health Unit - to eliminate congenital syphilis provides RPR and treatment to pregnant and postpartum women; to decrease vertical transmission provides counseling and free Elisa testing (if desired) to pregnant women, AZT to the infected mother and her child, and a 3-month supply of artificial milk to the infant (budget limitations restrict the amount given); provides care to seropositive patients (INH for I year and cotrimoxazole for infection prophylaxis); and to control STD operates 21 STD Referral Centers (CERETS) nation-wide which provides education, diagnosis and treatment for sex workers. (2) Management Strengthening Unit - carries out actions to strengthen management and training in clinical syndromic management, counseling, and in-service training for the 21 CERETS. (Training is underbudgetted). (3)Epidemiologic Intelligence Unit - is responsible for a national information system; conducts sentinel surveillance among sex workers, pregnant women, MSM, and in prisons. (4) Interventions for Behavioral Change Unit (Intervenciones para el Cambio de Conducta-ICC) - a public education campaign with a series of four television spots were planned, of which two have been implemented; peer-education interventions are being implemented with 120 trained to intervene with sex workers, 200 with MSM, 240 with young adults, and others to work with prison inmates and drug dependents. STD/HIV/AIDS program needs include the following: medicine purchases for HIV/AIDS and STD patients, funds for supervision-monitoring-evaluation, ICC, more artificial milk for infants of seropositive mothers. Priority DISAs for STD/HIV/AIDS control are Lima, Callao, in addition to Ica, Loreto, Ancash, and Arequipa.  Peru: Health Reform Proaram (PARSALUD) Paae 52 Tuberculosis - The National Tuberculosis (TB) Program in Peru is recognized worldwide for its effective strategies for diagnosis and treatment of cases. TB has been reduced by 30-40percent since 1993-94 when national norms were first established. Even so, Peru still ranks among the top 22 countries in the world with high TB prevalence. The areas with highest rates of cases per inhabitant are Madre de Dios, Lima, Callao, Tacna, Ica, and Ucayali, while by far the largest number of TB cases are in Metropolitan Lima and Callao. The goal of MINSA is to provide sustainability to the program over the next 20 years to bring Peru into the ranks of moderate prevalence countries,, then eventually to low prevalence. Yellow Fever - Despite the availability of an effective vaccine, yellow fever is endemic in the upper Amazon river basins due to the persistence of Aedes aegypty and other strains of mosquitoes. Although "only" 165 cases were reported in 1998, this illness is lethal with a 30percent case-fatality rate, causing serious problems with the economic development of the Amazon region. Most cases occur to migrants from the mountains who have no natural immunity to the disease. Madre de Dios and San Martin are the two areas most affected by yellow fever. Control efforts are focused on immunization. The ideal would be mass immunization of the entire Peruvian population (costed at US$24 million plus IGV), or a second-level strategy of supply a single lifetime dose of vaccine to the entire population outside of Lima (about 7 percent of the population). Other immunopreventable diseases - The new vaccines for Hemophylus influenza B (HiB) and Hepatitis B are currently being provided by MINSA in selected areas. HiB vaccine is given to the 36percent poorest of the population, according to a measure of Insatisfied Basic Needs (NBI), and Hepatitis B vaccine is being provided in prevalent areas in the Amazon river basins to abut 30percent of Peru's population. Both vaccines are available in combination with DPT vaccine so that five vaccines can be provided in one shot to infants at 2, 3, and 4 months of age. Due to the importance of HiB vaccine to the reduction of pneumonia and meningitis deaths in children, it is desirable to extend coverage of the quintuple vaccine to 1 OOpercent of all infants. (Cost estimate is US$5 million plus IGV). Project Strategy. The persistence of transmittable diseases requires implementation of diverse prevention and control strategies that are congruent with regional and departmental epidemiological and social-cultural profiles. Strengthening of local and regional responsiveness is needed in the areas of program development, surveillance, laboratory diagnosis, personnel training, IEC, and community participation. MINSA funding for transmittable diseases has emphasized diagnosis and provision of medicines. Less funding has been available for program support activities such as IEC and training. The investment subproject component of the project would prioritize financing for program support activities in DISAs and CLAS, especially in regard to malaria, tuberculosis, and AIDS, including: (i) development and testing of specific strategies for disease control in specific high risk areas, (ii) IEC activities for health education and promotion among high risk populations, and (iii) continuous training (tied to supervision and evaluation) due to permanently high rates of personal turn-over in MINSA health facilities.  Peru: Health Reform Program fPARSALUD) Pace 53 Annex 5 Estimated Project Costs Local 2. FOREIGN Total Project Cost By Component US S million 1. Strengthening Health Demand 140.0 8.0 148.0 2. Strengthening the Decentralization, Policy Development 15.4 6.0 21.4 and Institutional Modernization 3. Improving the Quality of Health Programs and Services 29.0 17.5 46.5 4. Project Coordination 6.0 1.5 7.5 Total Baseline Cost 190.4 33.0 223.4 Physical Contingencies 2.0 .6 2.6 Price Contingencies 2.1 .7 2.8 4. LOAN FEES' 10.5 10.5 3. TOTAL PROJECT COSTS 194.5 44.8 239.3 4. TOTAL FINANCING REQUIRED 239.3 1 USS9.7 million of this amount is interest payment for IDB Loan Local 5. FOREIGN Total Project Cost by Category US S million Works 10.0 4.0 14.0 Goods 19.5 10.0 29.5 Technical Assistance (includes training and 28.5 10.7 39.2 capacity building, audits/evaluation and consulting services SMI Reimbursements 130.0 8.0 138.0 Administration Costs 3.9 1.0 4.9 Recurrent Cost 2.6 .6 3.1 Loan Fees 10.51 10.5 6. TOTAL PROJECT COSTS 194.5 44.8 239.3 1 uZo9. / million ol uIns amount is interest payment for IDB loan  Peru: Health Reform Proaram (PARSALUD) Paae 54 Annex 6 Financial Summary Years Ending o 2000 2001 20 2003 l2004 Total Total Finaning Required Project Costs Investient Costs 15.0 67.1 70.3 51.3 22.0 225.7 Recurrent Costs 0.7 0.7 0.7 0.7 0.3 3.1 Loan Fees' 2.8 2.0 2.0 2.0 1.7 10.5 Total Project Costs 18.5 69.8 73.0 54.0 24.0 239.3 Financing IBRD 3.0 22.0 30.0 18.0 7.0 80.0 BID 5.5 25.0 28.0 20.0 8.5 87.0 OPEC 4.0 4.0 8.0 Govemment 6.0 18.8 15.0 16.0 8.5 64.3 Total Project Financing 18.5 69.8 73.0 54.0 24.0 239.3 I US$9.7 million of this amount is interest payment for IDB Loan  Peru: Health Reform Program (PARSALUD) Paae 55 Annex 7 Procurement and Disbursement Arrangements Peru: Health Reform Program Procurement Works, goods and services as well as the contracting of consultants will be carried out in accordance with the Bank's Guideline for Procurement (January 1995, revised in January and August 1996, September 1997 and January 1999), the Guidelines for Selection and Employment of Consultants (January 1997, revised in September 1997 and January 1999), and the provisions stipulated in the Loan Agreement. Procurement arrangements are summarized in Table A. The UCP will supervise all procurement action under the project, based on agreed procurement procedures as defined in the Operations Manual. The Procurement section of the Operations Manual will include, in addition to. the procurement procedures, the Standard Bidding Documents to be used in each case, as well as contracts to be awarded on the basis of quotations. Where no relevant standard contract exists, other standard forms acceptable to the Bank shall be used. The supervision of procurement and hiring processes would be the responsibility of the UCP and the DISAs (in the case of the health investments). UNOPS, PAHO and other eligible procurement agents may be retained competitively by the UCP for the purposes of carrying out international procurement actions on behalf of the project or for the provision of specialized technical assistance services, and INFES, the state agency responsible for public works, may be retained for carrying out the procurement of large national civil works, all under terms and conditions acceptable to the Bank. Procurement of Civil Works (a)National Competitive Bidding, NCB: will be used for all contracts, for the rehabilitation of health facilities, in an amount greater than US$100,000 equivalent. NCB procedures must not discriminate against foreign bidders; (b)Price comparison: at least three quotations will be used for contracts in an amount less than U$100,000 equivalent up to an aggregate limit of US$1.5 million. Procurement of Goods (a) International Competitive Bidding, ICB: contracts for medical equipment and/or instruments in an amount equal or greater than US$250,000 equivalent will be awarded using ICB; (b)National Competitive Bidding, NCB: contracts for computers, printers, software, office furniture and equipment, educational materials, furniture, video-cameras, syringes, and miscellaneous in an amount less than US$250,000 equivalent but equal or greater than US$100,000 equivalent will be awarded using NCB up to an aggregate limit of US$2.0 million. (e)Price comparison (local and international shopping, LS, IS): contracts for medical equipment and/or instruments, computers, printers, software, office furniture and equipment, educational materials, furniture, video-cameras and miscellaneous items in packages costing more than US$50,000 equivalent but less than US$100,000 will be awarded using international price  Peru: Health Reform Proaram (PARSALUD) Paae 56 comparison up to an aggregate limit of US$1.0 million, with quotations obtained from several suppliers, and contracts less that US$50,000 equivalent will be awarded using local price. comparison up to an aggregate limit of US$700,000, with quotations from at least three qualified suppliers. Procurement of Services Contracts for services, including technical assistance, capacity building activities and training will be procured following the Bank's Guidelines and using standard contracts, as follows: (i) Procurement for IEC (Publicity and preparation of education programs), Information Systems, Design and Revision of Norms and Protocols equal or above US$80,000 will be selected using Quality and Cost-Based Selection procedures; (ii) feasibility studies, work supervision, financial and procurement audits, impacts and training below US$80,000 but higher than US$50,000 will be selected using Selection under a Fixed Budget or Least Cost Selection procedures up to an aggregate limit of US$4.0 million; (iii) other consulting services below US$50,000 may be procured using Consultant Qualifications procedures up to an aggregate limit of US$500,000; (iv) consulting services including long-term consultants in the Unit equal or below US$50,000 but higher than US$7,000 will be awarded using Short Lists, and for amounts under US$7,000 using Individual Consultants' Qualifications, as described in chapter V of the Guidelines. Institutional Capacity Assessment A capacity assessment with an analysis of legal aspects, project management, organization and functions, support and control systems, record keeping, staffing, general procurement environment, private sector assessment, and overall risk assessment was conducted for the proposed project. The assessment included meetings with the UCP and with other officials from the Ministry of Health, the SMI, and the DISAs. The project has been rated as "average risk" with respect to procurement aspects. Specific recommendations from the capacity assessment have been incorporated in the Operational Manuals. Procurement under the SMI. The largest project component, the Maternal-Child Health Care Insurance (SMI) has been under a pilot program since November 1999 in two regions: Tacna and Moyobamba. The assessment included a visit to the pilot program in Tacna and a review of the ongoing implementation of the SMI. By design, this project would not finance directly the procurement actions under the SMI reimbursements. The SMI will reimburse all final health services providers in monetary value (local currency) and not in-kind with supplies. Health services providers will organize themselves for the provision of medical services, medical equipment and medicines to beneficiaries of the SMI according to specific technical and quality criteria established and monitored by the SMI. The SMI Operational Manual elaborates on the mechanisms and procedures for procurement, as well as on a permanent auditing system that reviews the: procedures for beneficiary affiliation, the quality of medical services provided, the number of medical controls and clinical history of beneficiaries, the provision of medicines (including purchases and stocks), cost of services provided, and overall services rendered and presented for reimbursement by health providers. During negotiations it was agreed that small goods and sundry items for the SMI reimbursement program to be used by non-public service providers would be procured in accordance with established private sector practices; and those to be used by public service providers shall be procured, as far as practicable, from qualified suppliers either in bulk or through regional or local procurement procedures and in accordance with the SMI regulations. Likewise, it was agreed that a comprehensive review of the institutional procurement procedures relating to the SMI program  Peru: Health Reform Proaram (PARSALUD) Paae 57 would be carried out during the first six months of project implementation and that an action plan to strengthen these procedures would be agreed upon as a result of that review, both the_ comprehensive procurement review and the implementation of the action plan will be financed under the project. It was agreed also that periodic independent medical audits would be carried out to monitor and evaluate the reimbursement applications submitted by eligible health establishments and to determine whether the obligations of said establishments under the SMI regulations have been fully complied with. Procurement under other project components: health investment subprojects and technical assistance will consist of procurement of small civil works for physical rehabilitation and expansion of primary health care facilities; purchase of medical equipment, furniture, educational materials, computers; and consulting services for specific studies and training to strengthen the capacity of municipalities, DISAS and CLAS. Bank-trained and experienced staff from the Basic Health and Nutrition Project (PSNB) financed by the Bank will carry out some of these functions at the Central level but the bulk of the activities will be conducted at the local level by the DISAs. The Procurement Specialist who conducted the capacity assessment prepared and agreed with the Borrower on an action plan to strengthen the procurement capacity of the DISAs and other local actors and made specific recommendations for monitoring of their actions by the UCP. Recommendations of the capacity assessment included in the Loan Agreement and/or Project Operational Manuals: * Special provisions to address discrepancies between the National Law and Bank Procurement Guidelines * A project launching seminar on Procurement, at the beginning of the project, to train staff at MINSA, the DISAs, the health establishments and the UCP. * Close scrutiny of initial bidding documents prepared by the DISAs for procurement of civil works and goods, combined with technical assistance * Comprehensive review of the institutional procurement procedures during the SMI program to be carried out during the first six months of project implementation * Improvement of the filing system for record keeping at the UCP * Careful selection and follow-up training for procurement staff at the DISA level * Execution of periodic independent medical audits to monitor and evaluate the reimbursement applications submitted by eligible health establishments and to determine whether the obligations of said establishments under the SMI regulations have been fully complied with. Procurement Review Prior review by the Bank (Table B) will include: (i) all International Competitive Bidding; (ii) the first two contracts in works and goods awarded on the basis of NCB every year; (iii) the first contract in works under Quotations procedure every year and simplified prior review for the first two works contracts by the DISAs every year; (iv) simplified prior review for the first contract of goods using International Shopping (IS), and the first two contracts using NCB procedure every year; and (v) procurement arrangements in accordance with Appendix 2 of the IDA Guidelines. The rest of the procurement of works and goods will be subject to ex-post review by the Bank. Regarding review of consultant services: (i) all Terms of Reference and contracts greater than US$80,000 equivalent for consultant services provided by firms and financial and procurement audits will be subject to prior review, and (ii) for individual consultants less than US$50,000 equivalent twice yearly program and based on the program selection of TORs to be reviewed, (iii)  Peru: Health Reform Program (PARSALUD) Page 58 for individual consultants and personal services less than US$7,000 equivalent twice yearly program. To facilitate the process, the Unit will submit to the Bank a plan for the contracting of consultants with relevant TORs and cost estimates as part of the Operation Plan every six months. A procurement plan for the first year of the project, indicating the needs, procurement methodology, time frames and other relevant details will be presented during negotiations. Such a plan will be updated on an annual basis "every January" during the entire life of the project, and whenever it is considered necessary by the Bank. Under these arrangements, the prior review of approximately 34 percent of the estimated value of project items is expected. Additionally: (i) as part of the annual ex-post review of subprojects, external procurement auditors, contracted by the Unit under the loan, will conduct quarterly performance audits covering technical, environmental, managerial and procurement aspects of a sample of subprojects satisfactory to the Bank; (ii) this audit of procurement aspects will include both physical audits and the procurement procedures used, so that the Bank can judge whether procurement implementation is satisfactory; (iii) the project information and monitoring system will be used to compare costs of similar subprojects in order to detect possible discrepancies which might indicate procurement problems and the need for further analysis; accuracy of data in the project information system will also be checked through the audits; and (iv) the Bank's supervision missions will conduct random reviews, including frequent field visits and review of procurement documentation. The systematic review of the first two contracts for NCB, and the first contract for other methods, every year will help monitor quality and consistency in the application of Bank Guidelines and procurement procedures agreed for the project. Efforts would be made for a procurement specialist to be part of the supervision missions, which are expected to be a minimum of four the first year. Financial management Disbursement: A four year period for loan disbursement is estimated with effectiveness expected on March 1, 2000, a Project Completion Date of June 30, 2003, and a Loan Closing Date of December 31, 2003. An amount of up to US$5.0 million of eligible expenditures made after July 31, 1999, may be financed retroactively from the loan account. Table C shows the allocations of the proceeds of the loan. Semi-annual plans would be the mechanism for making disbursement estimates and measuring disbursement performance. Disbursements would be made against the following categories: 1. Civil Works - Expansion and rehabilitation of health services, micro drinking water systems, solid and liquid waste disposal systems for health service centers and markets (85 percent). 2. Goods - Computers, medical instruments and equipment, general furmiture, administrative and educational equipment, fumiture and vaccines (100 percent foreign expenditures and 85 percent local expenditures). 3. Consulting Services and Training - Expenditures for: technical studies related to the reform program, consultants of the UCP, SMI and CLAS support units, the comprehensive review of institutional procurement relating to the SMI program, the independent financial and medical audits, the INEI agreement for the monitoring and evaluation indicators, and training expenditures (i.e. information, education and communication (IEC), reform dissemination workshop and seminars, project evaluation, capacity building and study tours) (100 percent).  Peru: Health Reform Program (PARSALUD) Paae 59 4. SMI Program (Reimbursements) - Reimbursements to health facilities for the provision of services rendered under the SMI. Reimbursements will be carried out on declining rate: 90 percent until withdrawals reach an aggregate amount of US$12 million, 75 percent until withdrawals reach an aggregate amount of US$30 million, and 60 percent thereafter. 5. Project Administration. Operating costs for the UCP including rental of office space, office supplies services of public utilities and travel expenses (85 percent). This Project would comply with the principles and concepts of the Loan Administration Change Initiative (LACI), whereby quarterly Bank disbursements are tied to financial statements, project progress reports, and procurement management reports. Initially the Unit will follow the traditional disbursement system, but would move onto Quarterly Project Management Reports (PMRs) as it completes the action plan recommended by the Financial-Management Specialist and agreed with the Borrower, and gains famniliarity with Bank project operating procedures and receives required training. The move onto PMR-based disbursement would be expected to be no later than 18 months after Loan effectiveness date. Until PMR-based disbursement procedures are adopted, a Special Account in US Dollars would be established at a commercial bank on terms and conditions acceptable to the Bank with an authorized allocation of US$8.0 million. The advance to the Special Account would be limited to US$3 million until disbursements from the loan would have reached US$7.0 million. Most of disbursements, including SMI Reimbursements and investment subprojects, are expected to be disbursed through SOEs and, eventually, through PMRs. For all other expenditures, e.g., contracts for consultant services over threshold levels of US$50,000 with individuals or $80,000 with firms and contracts for goods valued above $250,000, full supporting documentation would be required. The Special Account should be maintained in a depositary bank in a way that satisfies the requirements listed in Annex A of OP 12.2. Bank statements would show all transactions in and out of the account, including amounts advanced and reimbursed by the World Bank, and the balance at the end of each month. Upon moving to the PMR system, both the Bank and the Borrower would make sufficient funds available to finance the first six months of Project operation. The Bank's initial deposit into the Special Account (SA) covering a six month period of operation should not exceed US$16.0 million. Replenishment of the Bank's portion of these expenses would be contingent upon satisfactory advancement of the Project as indicated by quarterly Project Management Reports (PMR) submitted to the Bank by Government. Government would maintain full documentation of Project expenses available for periodic review by the Bank and independent auditors. Operation of the Special Account and the SMI disbursement. The UCP will operate and maintain the Special Account and will process reimbursement requests for the SMI as follows: * Health care providers, through the DISAs, will submit reimbursement requests for services to the local SMI office on a monthly basis. * The local SMI office will verify and consolidate the reimbursement requests from providers in its jurisdiction, review, approve them and forward them to the SMI central office. Local SMI offices are also responsible for quality supervision and control of services provided. * The central SMI office will verify and consolidate all reimbursement requests and issue payment authorizations (ordenes de pago) to the OGA in the Ministry of Health.  Peru: Health Reform Program (PARSALUD) Page 60 * The OGA will then request the UCP to transfer resources (in local currency) from the Special Account to the SMI-designated account in the OGA to cover payment authorizations and in_ turn will deposit them, in the account of the respective health care providers, the same day. The entire process is expected to be completed within 30 days from start to finish. Confirmation of each deposit will be forwarded to the UCP as a receipt from each transaction. For all other project activities and components, the UCP will issue payments directly from the Special Account. The detail for the above procedures has been examined by Bank financial- management staff and are included in the respective Project Operations Manuals. Accounting, financial reporting, and auditing arrangements. The UCP will benefit from the long experience gained in project accounting and internal control procedures used during the implementation of the ongoing Basic Health and Nutrition Project. For this project, the UCP is in the process of fine-tuning the establishment of a financial department headed by a qualified financial officer and sufficiently staffed by accountants to keep adequate records specific to the project and prepare the financial statements and auxiliary staff to execute financial operations and provide control over project assets. It is expected that the financial staff who worked with both the ongoing Bank and IDB projects in the past five years will continue to work with the PARSALUD UCP. The UCP is also in the process of installing a project-specific general ledger which will provide the basis for government reporting and will support the preparation of the Report 1 of the PMR. This system will have a double-entry automated accounting system comprising a general ledger and supporting subsidiary records (check register, journal ledger and individual asset records). The account structure used to record expenditures will comprise three classifications: the government budget classifications, the component and sub-component of the Project document, loan categories, sources of funds, and contracts. The automated accounting system would be Y2K compliant and contain required security features. The project will develop and document the detailed procedures for all financial operations of the Project. These should include descriptions of the following: job descriptions, cash receipts, disbursements, control over advances, replenishment procedures, account reconciliation and controls, and reporting requirements. The unit would include these in the Operations Manual. The financial management system has been evaluated by a Bank Financial-Management Specialist and is deemed not adequate yet to PMR requirements. However, it does have an adequate accounting, record-keeping and reporting system for an SOE-based operation, especially considering that the project is already a follow-up to an existing Bank health loan in MINSA. For the purposes of carrying out the Project, deposits into the Special Account and their replenishments will be made on the basis of cash withdrawals statements based initially on Statements of Expenditure. Similarly the Unit will execute an action plan to develop the capacity to produce all components of the quarterly PMR, as required under LACI, no later than 18 months after Loan Effectiveness. An Action Plan for setting up a PMR-based system has been agreed to and includes the following: (a) preparation of a revised project chart-of-accounts, (b) establishment of a format for periodic and annual reporting, (c) a revised project Operational Manual incorporating satisfactory financial and accounting policies for the project, (d) installation of a PMIR compatible computerized system, (e) a training program on PMR for all project senior staff, and (f) selection of a private firm to carry out the project external audit. Following conversion to PMR-based disbursements, replenishments to the Special Account would be based on cash forecasts contained in quarterly Project Management Reports. Each of these reports would: (i) show actual sources and applications of funds for the Project, both cumulatively and for the period, and projected sources and applications of funds for the Project for the following six-months; (ii) list separately expenditures financed out of the credit during the period covered by  Peru: Health Reform Program (PARSALUD) Page 61 the report and expenditures proposed to be financed during the following six-month period; (iii) describe physical progress in Project implementation, both cumulatively and for the period covered, and explain variances between the actual and previously forecast implementation targets-, and (iv) set forth the status of procurement under the Project and expenditures under contracts financed from the credit for the period covered. Audit Arrangements. The Project accounts, including contracts and their modifications and amendments, as well as the deposits and withdrawals from the Special Account would be audited each year by an independent auditing firm acceptable to the Bank and under terms and conditions satisfactory to the Bank. In addition to the annual financial statements conforming to International Standards on Auditing (IFAC Standards), the audit report would include comments on the internal control, the accuracy and propriety of all expenditures and the extent to which supporting information could be relied upon as a basis for requesting disbursements from the loan using PMRs. The auditors would issue an opinion on the internal control structure at mid-year for each year of project execution. The first such opinion would be submitted within three months of loan effectiveness. Annual audit reports with the related statements would be submitted to the Bank within six months of the end of the Borrower's fiscal year. The Borrower would also submit to the Bank unaudited quarterly financial statement prepared by the auditors starting four months after effectiveness. All supporting records would be maintained at the Project site for at least one year after the completion of the Project. The Bank's Financial Accounting, Reporting and Auditing Handbook (FARAH), published in January 1995, would be used by auditors, in accordance with existing World Bank procedures. The Borrower agreed during negotiations to complete the selection of the external auditing firm as a condition of Loan effectiveness.  Peru: Health Reform Program (PARSALUD) Paae 62 Annex 7, Table A: Project Costs by Procurement Arrangements for Bank-Financed Purchases (in US$million equivalent) Total cost Expenditure Category ~~~Procuemen lmeio (including 1. Works 1.61 1.15 11.24 14.0 (1.4) (1.0)9 (2.4) 2. Goods 2.3 1.73 25.47 29.5 (4.6) (2.0) (1.5)'