Peru - Lima Metropolitan Development Project

Document of The World Bank FOR OFFICIAL USE ONLY FILE COPY Report No. 478lb-PE STAFF APPRAISAL REPORT PERU LIMA METROPOLITAN DEVELOPMENT PROJBC T May 29, 1984 FILE COPY( Projects Department Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Equivalent Currency Unit = Sol (SI.) March 1983 May 15, 1984 US$1 = S/1,172 US$1 = S/3,025 S/.1 = US$0.00085 S/.1 = US$0.0003 S/.1,000 = US$0.85 S/.1,000 = US$0.33 System of Weights and Measures Metric 1 kilometer (km) = 0.62 mile (m) 1 metric ton = 2,205 pounds Fiscal Year January 1 - December 31 LIST OF ACRONYMS AND ABBREVIATIONS CAF Corporacion Andina de Fomento Andean Development Corporation CM Comision Multisectorial Multisectorial Commission CMC Comision Multisectorial Coordinadora Multisectorial Coordinating Commission CMP Coordinador Municipal del Proyecto Municipal Subprojects Coordinator DGR Direccion General de Rentas Revenue Office ESMLL Empresa de Servicios Municipales de Limpieza de Lima Municipal Solid Waste Corporation EMMSA Empresa de Mercados Mayoristas S.A. Wholesale Marketing Corporation ENATRU Empresa Nacional de Transportes Urbanos National Urban Transport Corporation FAO Food and Agriculture Organization of the United Nations GTZ German Technical Assistance Agency INVERMET Fondo Metropolitano de Inversiones en Fideicomiso Metropolitan Investment Fund MEFC Ministerio de Economia, Finanzas y Comercio Ministry of Economy, Finance and Commerce MH Ministerio de Vivienda Ministry of Housing MLM Municipalidad de Lima Metropolitana Municipality of Metropolitan Lima MTC Ministerio de Transporte y Comunicaciones Ministry of Transport and Communications  FOR OFFICIAL USE ONLY OMC Oficina Metropolitana de Catastro Metropolitan Cadaster Office OMTU Oficina Metropolitana de Transportes Urbanos Metropolitan Urban Transport Office OPDM Oficina del Plan de Desarrollo Metropolitano Metropolitan Development Planning Office PPF Project Preparation Facility UP Unidad de Presupuesto Budget Unit of MLM This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disciosed without World Bank authorization.   STAFF APPRAISAL REPORT PERU LIMA METROPOLITAN DEVELOPMENT PROJECT TABLE OF CONTENTS Page No. I. LOAN AND PROJECT SUMMARY ........................ 1 II. METROPOLITAN LIMA AND THE URBAN SECTOR ...................... 3 A. Urbanization and the Primacy of Lima ....... 3 B. National Urban Policy ....... 4 C. Lima Metropolitan Government ....... 5 D. Institutional Development .. ......... . 5 E. The Issues of Metropolitan Management ....... 6 (i) Municipal Finances . 6 (ii) Planning ....................................... 6 (iii) Staffing ........................................ 6 F. Other Sectoral Issues in the Lima Metropolitan Area ....... 7 (i) Urban Transport ................................... 7 (ii) Wholesale Markets .... ................... ...... 9 (iii) Solid Waste Management ... ............ ........... 10 G. Bank Involvement in the Urban Sector ....... 10 III. THE PROJECT ............... . . 11 A. Project Rationale and Objectives ...................... 11 B. Main Features of the Project ........ . . 12 (i) Urban Transport Subproject ....................... 12 (ii) Wholesale Market Subproject ...................... 14 (iii) Solid Waste Management Subproject ................ 15 (iv) Urban Management Subproject ...,................. 16 IV. COST ESTIMATES AND FINANCING PLAN ............**.o....... 18 A. Cost Estimates ... ,.18 B. Financing Plan . ... . 1 C. Flow of Funds ....... 20 D. Procurement ....... 21 E. Disbursements ... 22 Fo Accounts and Audits . ... e.. ... oe.. o.... o..o.........o 23 This report is based on the findings of an appraisal mission and a post-appraisal mission that visited Peru during April and May 1983 and February 1984 respectively. The appraisal mission comprised Messrs. C.-H. Mumme (Mission Leader), S. Alber, LCPUR; G. Menckhoff, ASP; D. Arbour, S. Cointreau, G. Kroll, R. Paraud, and M. Thomson, Consultants. The post-appraisal mission consisted of Messrs./Mmes. C-H. Mumme (Mission Leader); J. Flora, S. Whitehead; G. Yabrudy, LCPUR, and S. Cointreau (Consultant). Miss Martha Behar assisted in the production of the report, which has been edited by Miss Virginia Foster, IDF2.  Table of Contents (Continued) Page No. V. PROJECT IMPLEMENTATION ....................... 24 A. Institutional Arrangements ............ ....... 24 B. Status of Project Preparation ......................... 26 C. Implementation Schedule ..... ......................... 26 D. Monitoring and Evaluation ............................. 27 VI. FINANCIAL ANALYSIS .......................... . . e..... 27 A. Metropolitan Finances: An Overview . .................. . 27 B. Action Program . . . ............. 27 C. Fondo Metropolitano de Inversiones (INVERMET)..ET. 29 D. Empresa de Mercados Mayoristas S.A. (EMMSA) ............ 29 (i) Financial Performance on Existing Operations ... 29 (ii) Proposed Market ................................ 30 (iii) Financial Management .............. ............. 30 VII. ECONOMIC AND SOCIAL ANALYSIS c... 31 A. Economic Justification ................... ............. 31 B. Distribution of Project Benefits . ................ 32 C. Environmental Impact . ................................. 33 D. Project Risks ............................ .......... 33 VIII. AGREEMENTS REACHED AND RECOMMENDATION ..................... 34 TEXT TABLES 4.1 Project Cost Summary ................................ 18 4.2 Financing Plan ....... ........ a..... 20 ANNEXES 1. Organization Chart of the Municipality of Lima ............ 38 2. Detailed Cost Table ....* .... .. . ..... . ................... 39 3. Procurement Arrangements ..... ..................... . . 40 4. Disbursement Schedule ............................... . .... *41 5. Details of the Management System .......... ................ 42 6. Implementation Schedule/Physical Indicators ............... 45 7. Key Institutional Actions ................................. 46 8. Key Evaluation Indicators ... ... . ......... .............. 51  -iii- Table of Contents (Continued) Page No. Annexes (continued) 9. Consolidated Statement of Income and Expenditures for Lima Metropolitan Area ....................... . .. . .. . 54 10. Comparative Historical Financial Statements - INVERMET., 55 11. Projected Revenue and Funds Flow - INVERMET. 57 12. Comparative Financial Statements - EMIMSA ......... 59 13. Projected Financial Statements - EMMSA .......... 62 14. Key Assumptions Used in Economic Analysis .................. 65 15. Results of Economic Evaluation ............................ 67 16. Sensitivity Tests ...................... . 68 17. Distribution of Project Benefits .... .... .. .. 69 18. Selected Documents and Data Available in Project File . 70 MAP IBRD - 17613 Lima Metropolitan Development Project   PERU LIMA METROPOLITAN DEVELOPMENT PROJECT I. LOAN AND PROJECT SUMMARY Borrower: Republic of Peru Beneficiaries: Municipality of Metropolitan Lima (MLM) and Wholesale Marketing Corporation (EMMSA). Amount: US$82.5 million equivalent, including a capitalized front-end fee. Terms: Repayable in 17 years, including four years of grace, at the standard variable interest rate. Relending Terms: For the market subproject, the Borrower would on-lend US$22.4 million equivalent for 17 years, including six years of grace, with the same interest rate as the Bank Loan. EMMSA would bear the dollar-sol exchange risk. Project The proposed project would support (a) the progressive Description: transfer of urban administration from national to local government and, specifically, more efficient metropolitan management in Lima, the capital of Peru, as well as (b) improvements in high priority infrastructure and services in the areas of urban transport, solid waste and wholesale marketing. About 53% of benefits from the infrastructure and services improvements would accrue to low-income residents. Principal subprojects would be: (a) traffic management improvements throughout the city, paving of about 100 km of streets in low-income areas and road rehabilitation and maintenance; (b) construction of a new wholesale market; (c) provision of vehicles, equipment and transfer station capacity and development of two landfill sites to meet the needs of the city's solid waste agency and the city districts; and (d) institutional strengthening through studies, technical assistance and training of the agencies charged with each of the above activities as well as improvements in city planning, municipal finance and coordination of urban investments and project administration. Special Risks: Risk of local funding difficulties during a period of national austerity would be addressed by relying mainly on local funding from an earmarked source (gasoline tax revenues). Risk of inadequate professional staff within the Municipality would be mitigated by requiring contracting of implementation advisors initially for the largest subproject, transport, and by providing training for municipal staff. Any problems of coordination between national and municipal agencies would be eased by the Multisectoral Coordinating Commission.  -2- Estimated Costs* Local Foreign Total ------------US$ million---------- (a) Urban Transport 26.6 33.6 60.2 (b) Wholesale Market 15.4 9.3 24.7 (c) Solid Waste 2.0 7.4 9.4 (d) Urban Management and Project Administration 2.2 4.2 6.4 (e) Project Preparation Facility 0.0 1.0 1.0 Base Cost 46.2 55.5 101.7 Contingencies: Physical 5.1 4.7 9.8 Price 9.2 12.1 21.3 TOTAL PROJECT COST 60.5 72.3 132.8 Interest during construction of market 0.2 2.7 2.9 Front-End Fee on Bank Loan 0.0 0.2 0.2 TOTAL FINANCING REQUIRED 60.7 75.2 135.9 Financing Plan World Bank 13.3 69.2 82.5 Government, EMMSA and INVERMET 47.4 0.0 47.4 GTZ 0.0 1.0 1.0 Suppliers Credits 0.0 5.0 5.0 TOTAL 60.7 75.2 135.9 Estimated Disbursements Bank FY 1985 1986 1987 1988 1989 1990 1991 1992 ----------------------US$ million ---------------- Annual 16.7 27.1 22.5 7.5 3.0 2.0 3.3 0.4 Cumulative 16.7 43.8 66.3 73.8 76.8 78.8 82.1 82.5 Rate of Return: The economic rate of return is estimated at around 70% for those parts of the project with directly quantifiable benefits. These represent 78% of total project costs. * Project costs include US$9.0 million in identifiable taxes and duties.  - 3 - II. METROPOLITAN LIMA AND THE URBAN SECTOR A. Urbanization and the Primacy of Lima 2.01 The population of the Lima Metropolitan Area grew fram less than 3.2 million in 1972 to 5.1 million in 1983 and will probably reach at least 8.0 million by the end of the century. Nevertheless, its annual growth rate slowed to less than 3.8% in the 1972-1981 intercensal period compared with 6.1% between 1961 and 1972. Thus, earlier fears of a Lima of more than 12 million in the year 2000 are no longer justified, even if recent natural disasters (i.e., the floods in the north and the drought in the south) lead to increased migration to Lima in the short run. 2.02 Many secondary cities in the three major ecological regions of Peru (Coast, Mountains and Jungle) are now growing faster than Lima, so that the trend of the national urban system is toward greater balance. Nevertheless, there are fewer than a dozen cities with more than 100,000 population, and Lima is more than double the size of all of them combined, accounting for 28% of the national population and 53% of the total population in cities and towns with more than 20,000 population. 2.03 The slowing down in the rate of urbanization and the faster autoncmous growth of secondary cities justify a strategy for allocating resources both to Lima and to other selected cities. The logic of numbers dictates that Lima should be the first priority, although, in the longer run, a public investment strategy for Lima should be complemented by investments in secondary cities. Such an approach would be consistent with strengthening the economy of Lima, with the development of strong regional economies based on secondary cities, and with distributive equity (the greatest concentration of poor people being in Lima). 2.04 The urban sector has been deprived of public investment since 1968, initially because of the Government's rural bias and, more recently, because of tight budgetary constraints. The failure to invest in urban areas is now impairing their economic efficiency and adversely affecting household welfare levels, already reduced in recent years by falling real wages. 2.05 An inefficient Lima implies an inefficient Peru because the Metropolitan Area produces more than 90% of the national output of capital goods, two-thirds of national consumer goods and almost all of the country's financial and business services. As a result, the Lima Metropolitan Area accounts for almost half of Peru's GDP. It is therefore vital that the city should be well managed and maintained; this, at present, is not the case.  - 4 - 2.06 The concentration of economic activity in the capital has not been associated with improvements in real incomes or in their distribution. About 54% of the households are absolutely poor, while about 62% are relatively poor (para. 7.11). More than three-fifths of the population live in central city slums (tugurios) or peripheral squatter settlements (including illegal invasions or pueblos jovenes). Moreover, despite the slowdown in Lima's growth, population continues to grow faster than the rate at which public services are being expanded. B. National Urban Policy 2.07 Recent governments have proposed various strategies to discourage the growth of Lima. During 1975-1980, the government backed a National Urban Development Plan to integrate Lima with the major towns of the Central Region, especially those in the Sierra, but left office before any attempt was made to implement the Plan. The present government has supported a "decongestion corridor" plan to promote urban growth north of Lima (at Huacho-Barranca) and south of Lima (at Pisco-Chincha Alta). Few actions have been taken to implement this strategy other than the partial completion of a coastal expressway and the development of a new port near Pisco. The northern pole has negligible potential while industrial potential near Pisco is too small to have much prospective impact on the growth of the Metropolitan Area. To invest in either area instead of Lima would be a costly and high-risk strategy, probably resulting in underutilized infrastructure and minimal impact. Moreover, the spontaneous deceleration in the growth of Lima revealed by the 1981 census makes any strategy to disperse economic activity and population within a much larger coastal region of dubious merit. The Bank has been discussing these issues with the country in the context of its sector dialogue. 2.08 Even in the absence of a shift in the balance of concentration between Lima and the rest of the urban system, a major issue of national urban policy is that Peru has perhaps the most centralized system of urban management of any country its size or larger in the region. The fact that the local sector accounts for only 2% of consolidated public expenditure is one measure of the fact that the management of cities, including Lima, is strongly concentrated in the National Government. The need to revise this system and to transfer responsibilities to local governments was recognized in the 1979 Constitution, and, while the effects of this new Constitution apply most obviously to Lima, they are also relevant to other cities. This revised framework recognizes an urgent need to improve the efficiency of urban management and, concomitantly, of most urban networks and services. The development of a sound urban management system and public investment strategy for Lima is therefore crucial and must be the core of any national urban policy for Peru. The proposed project is an important element in the evolution of this strategy.  - 5 C. Lima Metropolitan Government 2.09 Metropolitan Lima is the most populous of Peru's provinces and is divided into 41 districts. The provincial government, the Municipalidad de Lima Metropolitana (MLM), is headed by an elected Metropolitan Council which sets policy for the metropolitan area and has a Municipal Coordination Assembly made up of the districts' mayors. The province does not include the port of Callao, which is constitutionally independent, with special provincial status. The chief executive officer is the MLM Mayor, elected at three-year intervals. The Mayor of MLM is also the Mayor of Lima Cercado, the historic center of the city. Because of the continued high degree of district administrative independence, however, coordination within MLM remains difficult. D. Institutional Development 2.10 MLM controls the Fondo Metropolitano de Inversiones (INVERMET) (para. 6.05) and the Empresa de Servicios Municipales de Limpieza de Lima (ESMLL) (para. 6.03) as well as 12 executive departments (social communication, planning, legal administration, police, revenue, public works, private construction, population and human affairs, education, culture and sport, health and environmental sanitation and product marketing). INVERMET is MLM's trust fund to finance municipal infrastructure works. ESMLL is responsible for the transfer of solid waste and the landfills in the Metropolitan Area. The collection of solid waste has been a traditional function of the districts, and ESMLL is responsible only for the collection of solid waste in Lima Cercado. Maintenance of main roads, except for some intercity roads maintained by the Ministry of Transport and Communications (MTC), is primarily the responsibility of the districts. Retail markets remain a district responsibility, but wholesale markets are managed (until now with little coordination with other activities in the Metropolitan Area) by a national body (Empresa de Mercados Mayoristas S.A.--EMMSA) presently under the Ministry of Agriculture. The proposed project would ensure that the wholesale market would be closely coordinated with other activities in the Metropolitan Area and would analyze the institutional framework for an eventual transfer of the wholesale market to MLM. National corporations are responsible for electricity, water and sewerage and telecommunications. These organizations undertake their own project planning and implementation, largely without consultation with the municipal authorities. The organization chart of MLM is given in Annex 1. 2.11 As noted in paragraph 2.08, the new Constitution of 1979 mandated the transfer of key functions, particularly in the transport and planning fields, from the central to local governments. The initial transfer of power in Lima was handled by a Comision Multisectorial (CM), which consisted of members of MLM, MTC, and the Ministry of Housing (MH). Beginning in late 1983, the Comision Multisectorial Coordinadora (CMC), established by decree (Decreto Supremo), replaced CM. MLM is setting up an Oficina Metropolitana de TransEortes Urbanos (OMTU) for urban transport  -6- (para. 5.04) and has already established a Metropolitan Development Planning Office (OPDM) to replace the,old Plan Lima Office which operated within MH. Responsibility for metropolitan planning was transferred to the local level in 1981/82, and the control and regulation of public transport and the installation and maintenance of traffic control devices were formally transferred in December 1983, although details of the transfer are still being worked out. E. The Issues of Metropolitan Management 2.12 The outstanding needs for improved management capacity in Metropolitan Lima may be summarized in terms of three main issues: municipal finances, planning and staffing. (i) Municipal Finances 2.13 Historically, MLM has had very few autonomous budgetary resources, and inflation in recent years has reduced the real value of local revenues by about 30%, and of Government grants by about 50%, for 1983. The consolidated operating and capital budgets for all 41 districts amounted to about US$56 million equivalent (US$1i per capita) of which Lima Cercado, the central area, accounted for about 30%. This figure probably represents the lowest per capita expenditures for any large city in Latin America. All but a small part of total resources finance operating costs, capital outlays being on the order of US$6 million in 1983. In the absence of substantial increases in financial resources, and of stronger financial management at the metropolitan level, the transfer of new functional responsibilities is bound to proceed slowly. (ii) Planning 2.14 Planning in Lima is presently limited to the control of current development. This control is exercised by zonal offices of MLM, whose task is to handle development applications. These offices have achieved some success in regulating land use through standardized zoning practices. However, the comprehensive plan (Plan Lima) being used as a framework for land use regulation is obsolete (it was prepared in 1972) and is based on assumptions which have proved to be incorrect. The unanticipated growth of pueblos jovenes has altered the patterns of proposed land use and density. The transport strategy which envisioned the development of a rail system has not become a reality. Neither have the development of a proposed road network nor a Central Area plan. The need for a compehensive strategy to guide decisions affecting land use and transport development in the Metropolitan Area is urgent. (iii) Staffing 2.15 There is a serious shortage of skilled city management staff, and the situation has been aggravated by recently imposed austerity measures. The municipal departments are all subject to municipal terms of employment and salary levels. The disparity between the public and private sectors  makes it difficult to attract and retain qualified senior staff. There is currently no systematic training within MLM, and career development is nonexistent. As a result, the quality of staff engaged in various aspects of metropolitan management is generally inadequate. F. Other Sectoral Issues in the Lima Metropolitan Area (i) Urban Transport 2.16 Rapid growth of population, of car ownership and of the urbanized area has placed tremendous demands upon the metropolitan transport system and upon the resources - financial and organizational - to expand and improve it. Every aspect of the network is in need of expansion or improvement; there is, however, both a lack of funds and a lack of capacity to plan, implement and manage the needed projects. 2.17 All transport in Lima is by road. Traffic congestion, with resultant delays in the movement of people and goods and excessive use of fuel, is common in the central area and on major approaches to the city. Accident rates are high. These conditions are less a result of inadequate space devoted to roadways than to their mismanagement and inefficient use. Signing and channelization are generally poor or non-existent, and street vendors encroach on many major streets. Traffic signals are outdated and uncoordinated and, in some places, contribute more to the problem than they help to reduce it. 2.18 The performance of the transport system must be evaluated in conjunction with the land use pattern of the city. Lima has expanded outward at rather low densities, with little high building and little coordination of housing, employment and shopping. Journey distances are often long, and neither the quality of the existing road system nor the level of available bus services have kept pace with demand. A major problem has developed in supplying transport facilities to the huge numbers of lower income people on the city outskirts, particularly in the Cono Norte and Cono Sur areas. Environmental conditions along the main roads are generally deplorable. 2.19 In the older, built-up areas, all main roads and most side roads are paved, but in the outlying low-income neighborhoods, the majority of side roads are not paved and are generally in a poor state, discouraging the entry of buses, refuse collectors and other service vehicles. 2.20 Lack of personnel, equipment and financial resources, and poorly defined institutional arrangements have resulted in severely inadequate maintenance activities. As a consequence, the road network is deteriorating (surface and base failures), resulting in rising operating costs for the public transit fleet and for private and commercial vehicles.  - 8 - 2.21 Taxis are plentiful and cheap and provide an effective service for those who can afford them, although mechanical and operational standards are generally poor. For those in lower income groups, however, buses are the only available transport. As of December 1983, 1,148 buses were registered by 20 companies or cooperatives, and another 6,900 buses-- known as microbuses but covering a range of sizes-- were registered by individuals or associations. A further 560 colectivos (shared taxis on fixed routes) were registered. The largest organization is ENATRU, the state-owned company, with 808 buses. Owners of micros and colectivos are formed into committees for the purpose of organizing route operations. The route structure has gradually evolved on the basis of a flat fare and is characterized by highly circuitous routes, all entering the Central Area. Fares are established by the Transport Tariff Regulatory Commission within MTC; they are based on operating costs developed by the Commission. Route structure is also determined by a commission (Conision Tecnica Mixta) within MTC. 2.22 An outstanding problem regarding bus service is lack of capacity. Long queues and excessive waiting times to travel on overcrowded buses are common. Conditions are particularly bad in the Cono Sur. The shortage of buses contributes to the reluctance of bus owners to extend services to outlying areas, so that many people have a long walk to reach the nearest bus route. 2.23 The shortage of available buses is attributable partly to the lack of spare parts. Furthermore, the bus fleet is too small and the average age of vehicles is excessive, reflecting the impact of import controls and import taxes. There may also have been insufficient incentives (in terms of profit and security) to invest in buses. Fares have been controlled during a period of rapid inflation, and the leading private operator is currently reporting large operating losses. The Government is now, however, permitting the importation of 3,000 new buses in two contracts for 1,300 and 1,700 units respectively. During 1983, all necessary agreements were signed for the delivery of the initial 1,300 units, and the first buses arrived at the beginning of 1984. It appears, however, that only 260 of the additional 1,700 units will be ordered by microbus operators. A bus maintenance agreement, part of the contract for the 1,300 buses, has been signed with Volvo. Moreover, the proposed route rationalization and tariff study (para. 3.14(b)) would make more efficient use of the existing bus fleet. 2.24 A 1972 study, undertaken by experts financed by the Federal Republic of Germany, recommended the construction of a metro. A more recent study (1982) called for a surface light rail system along an available right-of-way between Villa El Salvador in the south and Comas in the north of the city. During the preparation of the proposed project, it became obvious that available data and analysis do not permit a proper evaluation of the mass transit alternatives. Therefore, in September 1983, it was agreed that a study of mass transit alternatives would be financed through the Bank's Public Sector Management Loan (Loan 2204-PE). A first phase would result in the identification of the most feasible  - 9 - alternative(s), while a second phase would involve a detailed study of those alternative(s). Assurances were obtained during negotiations that the Government and MLM would (a) inform the Bank of any proposal to undertake major transport investments in the Lima Metropolitan Area in excess of US$10 million during the project implementation period; (b) provide information on the impact of such investment on the Bank project; (c) give the Bank an adequate opportunity to comment on the technical, economic, financial and institutional aspects of the proposed investment; and (d) agree not to execute any investment that would adversely affect the urban transport subproject of the proposed project (para 8.03(a)). (ii) Wholesale Markets 2.25 Wholesale marketing of fruits and vegetables in Lima is mainly carried out in two markets located in the La Victoria district, about two miles from the city center. The main market was built in the 1940s when the population of the city was about one-fifth its present size. The congestion problem now encountered results partly from its design and partly from the subsequent growth of the city. Consumption of fruits and vegetables has increased roughly in proportion to the population and is now about twice the efficient handling capacity of the wholesale markets (700,000 tons). In addition to the inadequate size of the markets, their design and facilities are obsolete and do not permit the introduction of modern handling and storage. 2.26 The present wholesale markets are grossly congested, and clients are obliged to devote long periods of time to completing their transactions. The city has spread around and beyond the markets, and access roads have become crowded with local traffic and pedestrians. Trucks have difficulty in approaching the markets and must queue for long periods before entering. Total waiting times, in and out of the markets, typically exceed four hours. Wastage and pilferage and the loss of value due to damage, deterioration and theft are high, while the unplanned growth of low-income residential streets around the market area has led to public health hazards and marked social deterioration. 2.27 The markets are managed by EMMSA, but the sites and facilities belong to the district La Victoria. In 1964, a study to find a suitable location for a new market was commissioned, and a site at Santa Anita in the Ate district near the Carretera Central was selected and acquired. A feasibility study was undertaken in 1972 by a local consulting firm. The study was updated in 1982 by EMMSA with the assistance of the Food and Agriculture Organization (FAO). 2.28 There is no question that the existing markets should be replaced and closed down. Modernization would be extremely difficult and expensive if carried out while the markets continued in operation. A major  - 10 - enlargement of capacity would require multilevel operation, which would be costly. The site could never accommodate adequate parking and is unsuitable from the point of view of access and environment. (iii) Solid Waste Management 2.29 Improvements in refuse management are needed throughout the city. In the central districts, trucks do not have efficient routes or schedules for servicing their collection areas. The lack of transfer station capacity means that many collection vehicles have to deliver directly to the landfills, involving journeys of up to 40 km each way. Consequently, these vehicles usually can make only one collection round, and collect less than a full load per shift. In the outer districts, the major reason for low service levels is the lack of equipment. While the outer districts generate almost the same amount of refuse as the central districts, they are served by only about 25% of the number of vehicles. 2.30 These problems are aggravated by inadequate maintenance and repair service, which result in less than 60% of the fleet being available at any one time. In addition, most of the refuse of Lima is presently deposited in open dumps, which are smoking, unsanitary areas. Because of their poor access and condition, the dumps are a major cause of equipment failures. G. Bank Involvement in the Urban Sector 2.31 In addition to the mass transit study mentioned above (para. 2.24), the Bank made an Urban Development Loan (1283-PE of October 12, 1976 for US$21.6 million) which focused on Lima and Arequipa. It included the provision of sites and services, water supply and sewerage networks as well as the expansion of electric connections and health facilities in low income areas and industrial parks. After initial delays, the pace of execution picked up, and the project was completed in early 1984. Because of much-higher-than-expected inflation, negative real interest rates have developed which will inhibit the achievement of the project's cost recovery objectives; however, the project has demonstrated the feasibility of low-cost shelter solutions. Discussions leading to a new national housing project are being centered upon the importance of a revised system to adjust interest rates for the sector. Complementary to the Urban Development Loan, the Bank helped to finance water supply and sewerage systems in Lima through Loan 2139-PE (of June 4, 1982 for US$40.6 million). Inadequate water tariffs and institutional weaknesses have kept this project from progressing at a satisfactory pace. However, during the first semester of 1984, the Government raised water tariffs 30% in real terms. It has also selected a management consultant to assist it in institutional improvements. The Central Government, rather than the Municipality of Lima, is responsible for the water agencies and sector policies through its Ministry of Housing.  - 11 - III. THE PROJECT A. Project Rationale and Objectives 3.01 The proposed project is fundamentally conceived as an instrument to support a shift of administrative and financial responsibility for metropolitan management in Lima from national to local government, in furtherance of the 1979 constitutional reform described in paragraph 2.08. 3.02 This constitutional amendment was designed to promote local autonomy but it will take considerable time, perhaps 10 to 15 years, and great determination, to replace a tradition of centralized management of urban areas with effective local government since the skills required for metropolitan planning and coordination must be acquired, and this cannot be achieved quickly. The proposed project, through providing institutional support for administrative decentralization as well as tangible improve- ments in three of the basic urban systems, should thus be regarded as the first stage of a gradual process and the first step in a program of continuous metropolitan development. 3.03 The proposed project has been developed in the context of the financial and institutional constraints which affect Lima and in the absence of a long-term strategy for metropolitan development, but in the setting of a firm political commitment to devolution and more efficient urban planning and management. In designing the proposed systems improvements, the emphasis has been placed on short and medium-term schemes and on the effective utilization, maintenance and rehabilitation of existing capacity rather than on new investments except where, as in the case of the proposed market, there is no alternative. 3.04 The proposed project has been appraised and would be implemented while long term policy decisions articulating a program of devolution on urban management and administration, staffing, funding, local resource mobilization and revenue-sharing with the Central Government are being made. An important opportunity exists for the Bank to participate in the shaping of these decisions and to help guide the process along sound lines. 3.05 The primary objectives of the proposed project are to: (a) support the progressive transfer of urban administration to MLM as mandated in the 1979 constitutional amendment; (b) develop land use, transport and investment planning capability within MLM and to assist it in developing greater autonomy in tax administration and in increasing its revenue base to gradually assume new responsibilities; (c) strengthen the institutional capacity of MLM in the urban transport, wholesale markets and solid waste sectors and in metropolitan management; and  - 12 - (d) implement selected high priority improvements in infrastructure and services in the urban transport, wholesale markets and solid waste sectors, which would have a major impact upon the functional efficiency of the metropolitan area and would directly improve the living conditions of the urban population and, particularly, of the low income population. B. Main Features of the Project 3.06 The project would include four subprojects: urban transport, wholesale market, solid waste management and metropolitan management (Map IBRD 17613). (i) Urban Transport Subproject 3.07 Cono Norte. This component involves detailed design, supervision, and construction of traffic management schemes along the major roads in this corridor, linking the predominantly low-income areas in the north to the Central Area. Elements include the construction of segregated busways and improvements to access control and intersection geometrics. Safety features include median barriers, pedestrian signals, sidewalks, crosswalks and signing, and marking. 3.08 Cono Sur. Traffic management improvements similar to those in the Cono Norte would be made to the major roadways in the southern corridor connecting the low income suburbs to the Central Area. Bus lanes would be introduced rather than segregated busways. 3.09 Central Area. To improve traffic circulation, the operational efficiency of buses and pedestrian safety, four major elements are included in the Central Area component: (a) Central Area Study. This study would develop a traffic circulation plan and provide detailed feasibility analysis and functional designs for (i) an area traffic signal control system (approximately 500 intersections covering the central and outlying areas), (ii) traffic management measures, and (iii) reconstruction of Avenida Alfonso Ugarte. (b) Traffic Control System. Based on the analysis and functional design developed in the Central Area study, this element would include final design, supervision, and implementation of the first stage of a coordinated traffic signal control system; would cover approximately 100 intersections in the Central Area. (c) Avenida Alfonso Ugarte. Based on recommendations included in the Central Area study, this peripheral road would be reconstructed within existing rights-of-way to provide segregated busways and an underpass at Plaza Dos de Mayo. Detailed design, supervision and construction would be included.  - 13 - (d) Traffic Management Measures. Following the proposals developed in the Central Area study, a program of low-cost traffic management actions would be implemented to support the traffic improvement system. Final design, supervision and construction of this program would be included. 3.10 Paving in Low Income Areas. This component involves the design, supervision and implementation of a program to pave about 100 km of unimproved streets in low-income areas. The program is designed to integrate with the corridor improvements. 3.11 Road Rehabilitation and Maintenance (a) Deferred Maintenance. Limited resources have caused many routine maintenance activities to be postponed. This component would represent a "catching-up" activity to bring many major roadways back to a condition where routine maintenance can be performed. It involves patching and repairs to the surface (but not complete resurfacing) of approximately 24 km of roadway. (b) Road Rehabilitation. As a result of inadequate maintenance, many sections of roadway have deteriorated to the point where routine maintenance and periodic maintenance are no longer feasible. This component provides for the patching, resurfacing, and repair to the base of approximately 26 km of roadway where major failure has occurred. (c) Road Maintenance Program. The previous two components are necessary to correct physical problems resulting fran the lack of a coordinated and effective maintenance program. To correct this organizational inadequacy, the proposed project would fund a study to develop recommendations for a road maintenance program including its institutional framework, organizational and manpower needs, standards and procedures, required equipment, programing and financing. Agreement was reached during negotiations that MLM would present the results of this study, covering the institutional framework, budget requirements and proposed financing, to the Bank for review and comment by December 1985 (para. 8.03(b)). (d) Equipment. Based on recommendations of the maintenance study, equipment would be purchased to assist in the implementation of the recommended program. (e) Technical Assistance. To improve maintenance practices during the period prior to the outcome of the maintenance study and to assist in implementing the recommendations of the study, technical assistance would be provided to the districts. 3.12 Enforcement Program. Technical assistance and training as well as motorcycles, radios and other equipment would be provided to the traffic  - 14 - control unit of the Guardia Civil (police) to improve mobility and effectiveness in traffic control, traffic law enforcement and accident investigation and prevention. 3.13 Equipment. Equipment essential for project implementation would be purchased for OMTU and INVERMET using loan proceeds. Such equipment would include vehicles, office equipment, drafting and measuring equipment, traffic counting equipment, calculators and microcomputers. 3.14 Technical Assistance, Training and Studies. A major objective of the proposed project is to address existing weaknesses in INVERMET and OMTU, the offices which would be most directly involved in implementing the transport subproject and which would have long term responsibility for Lima's transport system. This institutional strengthening would occur principally through technical assistance and training activities for both INVERMET and OMTU during project implementation. Elements of the technical assistance, training and studies, in addition to those already discussed for the road maintenance and enforcement programs, would include: (a) INVERMET. Consultants would be hired to work with INVERMET counterpart staff in project implementation. There would be two specialists in procurement, a highway design engineer, and a street maintenance specialist. Short courses in the development of specifications, contracts, and procurement, as well as in project inspection and control, would be provided. (b) OMTU. Consultants would be hired to work with OMTU counterpart staff in traffic engineering, transport planning and public transport. Training in the form of work-study grants and short courses (to be taught in Lima) would be provided. Several studies would be carried out, including the development of a strategic land use transport plan (executed in conjunction with OPDM as a part of the development plan), a Central Area Study, and a Route Rationalization and Tariff Study. (ii) Wholesale Market Subproject 3.15 Wholesale Market. A new wholesale market (called "Santa Anita") would be constructed on an 83 ha site owned by EMMSA some 7 km east of the city center (para. 2.27). This market would replace the two small (7 ha total) markets which currently serve Lima (para. 2.25). The master plan for the site indicates that about 30 ha would be devoted to wholesaling activities at the expected time of opening at the end of 1986. An additional 7 ha would be for administrative and service activities, while another 2.5 ha would be for on-site access roads and control stations. The remaining land would be reserved for possible market expansion beyond 1986. A capacity throughput of 1.7 million metric tons would be achieved with construction of the first phase. This capacity would be fully utilized within three years of market opening, and additional construction would be required at that time. The final detailed design, construction, supervision and operation of the Santa Anita market would be carried out by EMMSA.  - 15 - 3.16 Technical Assistance, Training and Studies. (a) Assistance to EMMSA. Although EMMSA is considered to be a fairly strong agency, with responsibility for managing wholesale markets throughout Peru, the proposed project includes additional technical assistance to ensure that the complexities of designing, constructing, and operating a large, modern market with high throughput can be achieved. Experts would be hired to assist EMMSA in the following areas: design, construction supervision, market management, market operation, and financial and accounting procedures. Additionally, a consultant would be hired to advise on an appropriate strategy to relocate some 1,200 existing wholesalers to the new market. (b) Training. Prior to opening the new facility, the project director for EMMSA would be sent abroad to review operations of similar markets. The project includes funds for this training activity. (c) Studies. Three studies would be carried out as part of this subproject: a long-term plan covering the location and size of future wholesale market(s); development of institutional alternatives for an eventual transfer of responsibility for the wholesale market to MLM; and development of a new packaging scheme to reduce waste and facilitate handling. (iii) Solid Waste Management Subproject 3.17 Equipment. A central facility for ESMLL with administrative offices and workshop space has recently been completed. Under this subproject, office and maintenance equipment, mobile repair vehicles, tow trucks, and vehicles for field supervision would be provided. 3.18 Collection Vehicles. Provision of solid waste collection vehicles, overhaul of compaction vehicles owned by MLM, and provision of spare parts for remaining vehicles not requiring complete overhauls are included. 3.19 Transfer Facilities. A new transfer station would be provided, and the capacity of an existing transfer station would be expanded. Development of the new transfer station would involve civil works such as access road building, construction of a small administration/sanitary facilities building and the installation of hoppers and weigh bridges. Transfer vehicles would also be procured. The land for the new transfer station has been acquired by MH, and assurances were obtained during negotiations that MLM would obtain the ownership of the land for the new transfer station by December 1984 '(para. 8.03(c)). 3.20 Landfills. Two strategically located sanitary landfills would be developed as key operational nodes of the solid waste system. The city already owns both sites, which, together, have the capacity to receive all of Lima's solid waste over the next 20 years. The development of access roads and preparation of sites would be undertaken, including the installation of weigh bridges. Bulldozers for spreading and grading solid  - 16 - waste and soil cover, and payloaders for excavating and hauling soil cover would be included. 3.21 Technical Assistance and Training. Technical assistance and training are included, and part of their cost is co-financed by the German Technical Assistance Agency (GTZ) (para. 4.09(b)). GTZ has already begun pre-project technical assistance in order to strengthen the local staff who would deal with project implementation. The technical assistance and training would be provided to ESMLL, together with training for district staff engaged in the collection of solid waste and in public awareness education. The proposed program includes funds for pilot projects which the technical assistance team would help to design and implement. The pilot projects would be conceived to develop safe, effective systems for recycling and cost-effective techniques for refuse collection. (iv) Urban Management Subproject 3.22 Planning. (a) A planning study of the Lima Metropolitan area would be undertaken building on the comprehensive development plan, (Plan Lima) produced in 1972. The general objective of this study is to recommend strategies and policies to guide urban development in Lima in the long term (through 2005) and medium term (through 1996). Specific goals are to: (i) develop a Directional Plan for the long term development of Lima which would establish the land-use and transport strategies and policies to be followed; and (ii) develop a Design Plan which would establish an investment program for transport development over the medium term within the context of the Directional Plan. (b) Technical assistance and training are included in this subproject to strengthen OPDM. This support would enable OPDM to assume a stronger and more positive role in the development and execution of current and long-range planning for the Lima Metropolitan Area. 3.23 Municipal Finances. (a) Cadaster. Under a US$5.4 million equivalent turnkey contract and French export financing, a group of French firms would provide the equipment and technical assistance to begin the process of establishing urban development cadastral data throughout the Metropolitan Area. Initially, the turnkey contract would cover an area of about 20 km2 where new development has been concentrated in recent years. In addition, an assessment would be made of the organizational and staffing requirements of MLM to extend the area covered and to update the data periodically. Training would also be provided under the contract. To complement the work of this contract effectively and to ensure  - 17 - continued functioning once it has been completed, the project would include funds for experts with specialized skills in computer processing and data management. (b) Betterment and Local Taxation. A broad review of local taxation as it relates to the nationwide taxation system has recently been completed under the Public Sector Management Loan (Loan 2204-PE). The study emphasizes implementation of the recently enacted betterment tax; operational guidelines and regulations are expected to be completed by July 1984. A more explicit review is required, however, of metropolitan finances in Lima, particularly in view of changes in functional responsibilities for metropolitan management and, consequently, the need for a significantly larger capital investent program. Under the proposed project, US$450,000 would thus be allocated to fund: (i) implementation of the betterment tax following the completion of operational guidelines and regulations; and (ii) review and implementation of additional fiscal measures. (c) Metropolitan Financial Planning and Management. Financial programing is presently based on yearly budgets which consolidate the revenues and expenditures of the metropolitan administration, including each of the district and municipal offices. The coordination of investment planning with other public sector agencies operating in metropolitan Lima is, however, not well established. Introduction of service costing and pricing systems and multi-year program budgeting in MLM has become urgent as a means of establishing and monitoring operational and financial policies, especially since metropolitan operations and investments are expected to expand significantly as devolution proceeds. Under the proposed project, a detailed review would be undertaken to identify and implement improvements in accounting systems, and in financial and investment planning (para 4.19). Agreement was reached during negotiations that MLM would present the results of this review, including recommendations for followup actions, to the Bank for its review by December 1986 (para. 8.03(p)). (d) Equipment. Office equipment, including reproduction equipment, microcomputers, calculators, and drafting equipment would be provided for MLM and CMC under this subproject. The necessary vehicles to conduct the programs would also be purchased. 3.24 Coordination. The Municipal Project Coordinator (CMP) of MLM would be responsible for carrying out all coordination activities of the municipal subprojects (para. 5.03); funds to finance the hiring of the CMP would be provided under the loan. 3.25 Project Management. Funds would be included for a declining share of salaries of incremental senior personnel and support staff within MLM and CMC. These would supplement counterpart funds on a transitional basis to finance the additional staff needed for project implementation.  - 18 - IV. COST ESTIMATES AND FINANCING PLAN A. Cost Estimates 4.01 The total estimated cost of the project, including land, is US$132.8 million, of which US$72.3 million (54%) is foreign exchange. The base cost estimates are in June 1984 prices. The project cost includes identifiable local taxes and duties which amount to US$9.0 million, or 6.8% of the total project cost. Summary cost estimates are presented in Table 4.1 below. Estimated total financing required, including interest during construction and the capitalized front-end fee, amounts to US$135.9 million (para. 4.07). Detailed cost estimates are presented in Annex 2. Table 4.1 Project Cost Summary In US$ million Foreign as of Subprojects Local Foreign Total % of Total 1. Urban Transport 26.6 33.6 60.2 56 2. Solid Waste 2.0 7.4 9.4 79 3. Urban Management 2.2 4.2 6.4 66 4. Market 15.4 9.3 24.7 38 5. Project Preparation Facility 0 1.0 1.0 100 Base Costs 46.2 55.5 101.7 55 6. Physical Contingencies 5.1 4.7 9.8 48 7. Price Contingencies 9.2 12.1 21.3 57 Total Project Cost 60.5 72.3 132.8 54 8. Interest - Construction 0.2 2.7 2.9 93 9. Front-End Fee 0 0.2 0.2 100 Total Financing Required 60.7 75.2 135.9 55 4.02 Cost estimates for civil works are based on preliminary engineering designs prepared by OMTU, EMMSA and ESMLL and their consultants. Unit base costs were developed from recent contract rates for similar works and from information provided by contractors. Equipment costs are based on current prices in Peru. 4,03 Design and supervision costs (combined) range from 6% to 11% depending on the complexity of the works. These costs are based on current estimates of such costs in Lima. 4.04 The costs of technical assistance, training and studies are based on recent worldwide experience for similar services. The project includes 1,391 person-months of technical assistance, training and studies. Details are available in the Project File.  - 19 - 4.05 Physical contingencies have been estimated at 15% for civil works. Total costs for physical contingencies are US$9.8 million. 4.06 Peru continues to use a system of regular adjustment in its exchange rates relative to hard currencies which approximately covers the difference between domestic and international inflation. Therefore, price contingencies in project costs are calculated on US dollar base values and are estimated at 3.5% for 1984, 8.0% for 1985, 9.0% for 1986 through 1988, 7.5% for 1989, and 6.0% for 1990 and 1991, amounting to a total of US$21.3 million. B. Financing Plan 4.07 The proposed Bank loan of US$82.5 million would finance 65% of the estimated total financing required (net of taxes and duties), including US$69.2 million in foreign costs and US$13.3 million in local costs. Bank financing of local costs is justified by the importance of the project in improving the efficiency of urban management, urban infrastructure and urban services and by the urgent need to improve social conditions in Lima (see Chapter VII, B). The loan would include US$1 million to refinance the PPF advance, the capitalized front-end fee of US$0.2 million, and US$2.7 million for interest and other charges during construction on the market subproject. 4.08 Proceeds of the Bank loan related to the market would be onlent by the Central Government to EMMSA as a US$ denominated loan at the variable IBRD interest rate, repayable in 17 years with six years of grace. The cross currency risk would be borne by the Government. Proceeds of the Bank loan related to the transport, solid waste and urban management subprojects, which are occasionally referred to in this report as "municipal subprojects," would be passed on to MLM as a grant. These arrangements were confirmed during negotiations (para. 8.03(d)). 4.09 Counterpart financing for the market subproject would be provided by an investment of US$2.0 million equivalent by EMMSA (from the sale or lease of surplus land or other sources) and by a loan from the Central Government of US$1.9 million equivalent, on terms satisfactory to the Bank, currently projected at 12% interest for eight years with three years of grace. In addition, government-owned land, valued at US$12.1 million, has already been transferred to EMMSA, of which US$5.8 million represents the pro-rata value of land being used in the Bank-financed subproject. Counterpart financing for transport, solid waste and urban management subprojects would be provided as follows: (a) MLM would contribute, from INVERMET funds, during 1984 through 1990, up to US$4 million equivalent per year up to a total of US$20.2 million to help finance the municipal subprojects; (b) GTZ would grant US$1 million to help finance the technical assistance and training component of the solid waste subproject; (c) Suppliers credits of US$5 million would be provided for traffic signals and road maintenance equipment; and  - 20 - (d) The Government would provide a budgetary contribution of US$17.5 million equivalent, in the period 1986-1991, to help finance the municipal subprojects. These arrangements were agreed during negotiations (para. 8.03(e)). 4.10 If the suppliers credits for traffic signals and road maintenance equipment are not forthcoming and if EMMSA is unable to provide the required counterpart financing, government would also provide financing in the amounts required. These arrangements were agreed during negotiations (para. 8.03(e)). The details are shown in Table 4.2. Table 4.2 Financing Plan In US$ million Total Fi- Bank Loan Central GTZ Sup- Subprojects nancing Re- Passed on as INVERMET Govern- Grant pliers EMMSA quired a/ Grant Loan ment Credit 1. Urban Trans- port b/ 86.0 43.3 20.2 17.5 5.0 2. Solid Waste Management 10.3 9.3 - - 1.0 - 3. Urban Manage- ment 7.5 7.5 - - - - 4. Market 32.1 - 22.4 - 7.7 c/ - - 2.0 TOTAL 135.9 60.1 22.4 20.2 25.2 1.0 5.0 2.0 a/ Includes Front-End Fee b/ Includes Project Preparation Facility c/ Includes land valued at US$5.8 million equivalent C. Flow of Funds 4.11 MLM, through INVERMET, would be responsible for the financial administration of the municipal subprojects (transport, solid waste and urban management), and EMMSA for the market subproject. Two working accounts would be established in the Banco de la Nacion by the Central Government to cover estimated expenditures for the municipal and the market subprojects respectively. Simultaneously, in order to also accelerate disbursement, the Central Government would establish two corresponding Special Accounts at the Banco de la Nacion into which the Bank would make initial deposits estimated to cover the Bank's share of three months of expenditures (US$8.0 million). During negotiations, agreement was reached that the Special Accounts, together with the working accounts, would be established and that the Bank's initial deposits in these special accounts would not be made until MLM's and EMMSA's advances into the working accounts were made (para. 8.03(f)). Reimbursement of the Bank's share of expenditures from the Special Accounts would be claimed upon presentation of withdrawal applications by INVERMET or EMMSA to Banco de la Nacion,  - 21 - which applications, in turn, would be forwarded to the Bank fully documented for replenishment of the Special Accounts. The Bank would require a monthly statement of the Special Accounts which would reflect transactions during the previous month. D. Procurement 4.12 Procurement arrangements are summarized below and further details are provided in Annex 3. (a) Civil Works. Approximately 70 contracts are expected to be let, ranging in value from approximately US$15.5 million (market subproject) to less than US$500,000 (for the paving subproject component). Local competitive bidding (LCB) procedures, acceptable to the Bank and documented in the project file, would be used for approximately US$35.7 million comprising about 50 contracts. These contracts would primarily involve road maintenance and rehabilitation and paving in low-income areas. Because of the nature of the work, the contracts are not likely to attract foreign bidders, and, in an effort to provide opportunities to a large segment of local industry, individual contracts would not exceed US$1.0 million. Other civil works would be divided into suitable lot sizes in an effort to allow wide participation by local firms while still attracting foreign contractors. These contracts would total approximately US$49.5 million and would be subject to international competitive bidding (ICB). Contractors would be allowed to bid for more than one lot depending upon capacity. These arrangements were confirmed during negotiations (para. 8.03(g). (b) Equipment. Following the Bank's guidelines for procurement (July 1980), ICB would be used for all equipment with the exception of approximately US$2.6 million for small equipment contracts, for which local competitive bidding procedures (LCB) would be applied. Any single contract using LCB would not exceed US$50,000. Contracts for goods estimated for US$10,000 or less may be awarded for the lowest price out of a minimum of three quotations from local supppliers, provided that the aggregate cost of goods would not exceed US$500,000. These arrangements were confirmed during negotiations (para. 8.03(g)). (c) Consultants All consultants financed under the loan would have qualifications acceptable to the Bank, and would be hired in accordance with Bank guidelines under terms and conditions acceptable to the Bank. This arrangement was confirmed during negotiations (para. 8.03(g). 4.13 Prior Bank review and approval of bidding documents, bid evaluations and recommendations for contract awards would be required for all contracts subject to ICB under the four subprojects (transport, solid waste, market and urban management). The Bank, through its supervision missions, would review, ex-post and on a sample basis, all other contracts not subject to ICB.  - 22 - 4.14 Bank review and approval would be required for the final design of the following subproject components: (a) Cono Norte; (b) Cono Sur; (c) Central Area (all components); (d) about 5 km of each of the low income area paving and rehabilitation and deferred maintenance components; (e) transfer stations and landfills; and (f) market. These arrangements were confirmed during negotiations (para. 8403(h)). 4.15 Up to US$1.1 million, to cover final design, technical assistance and some equipment expenses incurred during 1984, would be financed retroactively. This arrangement was confirmed during negotiations (para. 8.03(i)). E. Disbursements 4.16 Disbursement categories of the loan would be as follows: (a) 100% of total expenditures for consultant services and training for the municipal subprojects (US$16.9 million equivalent); (b) 100% of total expenditures for consultant services and training for the market subproject (US$1.5 million equivalent); (c) 100% of foreign and 85% of local expenditures for equipment and supplies for the municipal subprojects (US$7.0 million equivalent); (d) 100% of foreign and 85% of local expenditures for equipment for the market subproject (US$0.9 million equivalent); (e) 60% of total expenditures for civil works of the municipal subprojects up to a disbursement of US$16.0 million equivalent and 31% of remaining expenditures up to a maximum accumulated aggregate disbursement of US$23.0 million equivalent; (f) Project management costs (incremental salaries) of the municipal subprojects: (i) 100% up to a maximum accumulated aggregate of US$0.9 million equivalent; (ii) 60% up to a maximum accumulated aggregate of US$ 1.0 million equivalent; and (iii) 20% up to a maximum accumulated aggregate of US$1.1 million equivalent; (g) 84% of total expenditures for civil works under the market subproject (US$11.5 million equivalent); (h) Front-end fee of US$0.2 million equivalent; (i) PPF of US$1 million equivalent; (j) Initial deposit into the Special Account for the municipal subprojects (US$4.5 million equivalent); (k) Initial deposit into the Special Account for the market subproject (US$3.5 million equivalent);  - 23 - (1) Interest and other charges during construction of the market subproject (up to US$2.7 million equivalent accrued through March 1987); (m) Unallocated for municipal subprojects (US$6.5 million equivalent); and (n) Unallocated for market subproject (US$2.2 million equivalent). 4.17 Disbursements would be made against standard documentation except for contracts of local purchases of materials and equipment for which disbursements would be made against statements of expenditure. Documentation for these expenditures would not be submitted to the Bank, but would be retained by MLM and EMM4SA for periodic review by Bank staff. The estimated schedule of disbursements, shown in Annex 4, is based on the anticipated investment schedule, allowing a six-month lag for the processing of withdrawal applications. The period of disbursements would be 7-1/2 years. The loan closing date would be December 31, 1991. 4.18 The proposed 7-1/2-year disbursement period is slightly shorter than the average historical profiles for projects in Peru (9 years) and urban projects in the region (8 years). The 7-1/2-year period is, however, considered realistic for the following reasons: (a) The Bank has been involved in the proposed project since 1981 through its two PPF tranches which have helped to prepare the proposed project and to initiate project implementation; (b) the proposed project is concentrated in one metropolitan area, and the great majority of the subproject components (design and construction) are of a nature which have long been carried out successfully by Peruvian agencies and design professionals. New, untried physical actions are not contemplated; (c) most of the subproject components would be executed under contracting arrangements; (d) a significant amount of technical assistance and training would be provided to ensure that experts in each technical and financial area were available to assist in project execution; and (e) the proposed special accounts and working accounts would avoid delays in the disbursement of both foreign and local funds. F. Accounts and Audits 4.19 INVERMET would be responsible for maintaining project accounts for all components except the market. Accounts for the market would be prepared by EMMSA. The accounting systems in both INVERMET and EMMSA have served reasonably well for the relatively modest level of operations undertaken to date by these entities, and both have consistently received unqualified audit reports. Since the operations of INVERMET and EMMSA would increase both in scale and in complexity, their accounting systems would be reviewed under the project (paras. 3.23(c) and 3.16(a)). Audit of  - 24 - project accounts in MLM and EMMSA would be undertaken by independent auditors acceptable to the Bank, and would be submitted to the Bank no later than six months following the end of each fiscal year. The annual audit of EMMSA would include a review of the adequacy of the tariff structure in maintaining the proposed market on a financially viable basis including operations, maintenance and debt servicing. In addition, MLM would forward annual accounts on its overall operations to enable the Bank to review the impact of revenue measures to be implemented during the project period. The special and working accounts funded by the Bank and by the Government respectively, as well as the statements of expenditure, would also be audited by independent auditors acceptable to the Bank. These arrangements were confirmed at negotiations (para. 8.03(j)). V. PROJECT IMPLEMENTATION A. Institutional Arrangements 5.01 The borrower would be the Government of Peru. The executing agencies would be MLM for all municipal subprojects and EMMSA for the wholesale market subproject. Two draft subsidiary agreements between the borrower and MLM, and the borrower and EMMSA, were presented during negotiations. Signing of final versions of these agreements would be a condition for loan effectiveness (para. 8.01(a)). The overall responsibility for project coordination and control would lie with the Central Government through CMC, a special commission for this project, chaired by a representative of the Ministry of Economy, Finance and Commerce (MEFC) and including representatives from MLM, the Public Credit Department of MEFC, MTC and the Ministry of Agriculture. During negotiations, agreement was reached that the Central Government would maintain CMC for these functions during the period of project execution (para. 8.03(k)). Under the coordinating umbrella provided by C0C, responsibility for execution of the subprojects would be divided between MLM with respect to the municipal subprojects and EMMSA with respect to the wholesale market subproject. The details of responsibilities are shown in Annex 5. 5.02 Responsibility for execution of the four subprojects would be divided as follows between (a) MLM acting through INVERMET and OMTU for transport, through ESMLL for solid waste, and through its Oficina Metropolitana de Catastro (OMC), Direccion General de Rentas (DGR), Oficina del Plan de Desarrollo Metropolitano (OPDM), and Unidad de Presupuesto (UP) for urban management; and (b) EMMSA for the wholesale market. Subproject directors satisfactory to the Bank have been appointed for the transport and the market subprojects. The appointment of a subproject director for the solid waste subproject would be a condition for effectiveness (para. 8.01(b)). Directors would also be named in OMTU and OPDM. 5.03 The office of CMP would have overall responsibility for coordinating the municipal subprojects, and its head would report to the Mayor of Lima through the Director Municipal. The most important activities of CMP would include: (a) determination of necessary corrective actions and ensuring that such actions were taken; (b) assembly of  - 25 - documentation into regular coherent progress reports to CMC; and (c) identification of supervision and monitoring problems arising during implementation, and their possible solution. A Municipal Subprojects Coordinator, satisfactory to the Bank, has been appointed. All procurement activities for the municipal subprojects would be the responsibility of MLM acting through INVERMET. 5.04 For the urban transport subproject, responsibilities would be divided as follows: MLM through INVERMET would be responsible for the design, execution, supervision and monitoring and ex-post evaluation of the civil works, road maintenance equipment, and technical assistance and training related to INVERMET. Implementation advisors would be contracted by MLM through INVERMET. The advisors would be assigned to both INVERMET (two procurement specialists, a road maintenance specialist and a highway engineer) and OMTU (for traffic engineering, transport planning and public transport). Appointments of the implementation advisors for INVERMET would constitute a condition for disbursement of the municipal subprojects (para. 8.02). MLM, through OMTU, would be responsible for the execution of studies, technical assistance and training directed at OMTU, and for equipment acquisition (excluding road maintenance equipment). The Guardia Civil would appoint a project manager to coordinate, with OMTU, the use of police equipment and the carrying out of the traffic enforcement program. Also, an agreement would be reached by December 1984 between MLM and the Guardia Civil which would stipulate that the ownership of police equipment acquired in this project would remain with MLM and that such equipment would be used only for traffic control and safety activities in Lima. These arrangements with the Guardia Civil were confirmed during negotiations (para. 8.03(1)). A condition for loan effectiveness would be the establishement of OMTU by MLM, and the finalization of its general operating guidelines (para. 8.01(c)). 5.05 The approach to road maintenance would be in two stages. First, for approximately the first two years of the project, maintenance would continue to be performed, as at present, by the districts and by NTC. INVERMET would, therefore, develop a "short-term" plan for improving maintenance activities and skills by using consultant experts prior to and in the early months of the project. This approach would allow INVERMET to begin to resolve the urgent problems of road maintenance both by implementation of remedial measures and by advising MTC and the districts on procedures. Second, and in parallel, a maintenance study is proposed which, when completed, would contain recommended actions for the organiza- tion of maintenance activities in the metropolitan area (para. 3.11(c)). 5.06 For the solid waste subproject, ESMLL would have responsibility for planning, design, execution, supervision, and monitoring and ex-post evaluation. 5.07 For the urban management subproject, four municipal offices - OMC, DGR, OPDM, and UP - would be responsible for planning, execution, supervision, and monitoring and ex-post evaluation. OPDM would support, and work closely with, OMTU in the planning study of the Lima Metropolitan  - 26 - Area. The policy framework for the study would be set through a Steering Committee made up of representatives from: MLM; the Ministries of Trans- port, Economy, Finance and Commerce, Interior and Agriculture; the Province of Callao; ENATRU (the state-owned bus company) and private bus operators; thus it would be ensured that all related interests are properly represented and guidance would be provided to MLM for the preparation of the Lima development plan. The Steering Committee would be considered as a "working committee" of CMC and would be ultimately responsible to CMC for the successful completion of the study. The establishment of this committee by the Central Government, by December 1984, was agreed during loan negotiations (para. 8.03(m)). 5.08 MLM is aware of the need to bring community and neighborhood groups into the process of project implementation so that the entire project would receive widespread support. MJM, through CMC, would report regularly to the Bank on progress with community participation throughout the period of project execution. Existing mechanisms (especially the Municipal Coordination Assembly) would be used to disseminate project information and to receive community input. This reporting arrangement was confirmed during negotiations (para. 8.03(n)). 5.09 For the wholesale market subproject, EMMSA would be responsible for design, execution, supervision, and for monitoring and ex-post evaluation. B. Status of Project Preparation 5.10 For civil works in the transport subproject, preliminary engineering designs have been prepared. MLM, through INVERMET, has also completed the final engineering design for the paving and the road rehabilitation and deferred maintenance programs for the first year of project implementation. For the market subproject, preliminary engineering designs for the whole subproject and final designs covering the first year of project implementation have been prepared. EMMSA is presently in the process of consultant selection for the remaining final design works. Design criteria have been set for landfills and transfer stations in the solid waste subproject, and MLM has begun the process of consultant selection for the final design of these facilities. For all technical assistance, training and studies, outline terms of reference have been prepared and, for about half of the total, detailed terms of reference have been developed. C. Implementation Schedule 5.11 Project implementation is estimated to take seven years beginning in mid-1984. The schedule for implementation (physical indicators) of each subproject component is shown in Annex 6. This schedule has been prepared consistent with the most efficient use of resources and in accordance with the necessary coordination of activities.  - 27 - D. Monitoring and Evaluation 5.12 MLM and EMNSA, through the relevant executing offices under the guidance of CMC, would undertake monitoring and evaluation programs for the project. The monitoring programs would identify the physical, institutional and financial status of the subproject components. The aim is to identify implementation problems and the extent of deviation from proposed targets and, thus, to provide the basis for MLM and EMMSA, in consultation with the Bank, to reduce implementation problems and to update project costs and schedules. The monitoring would be achieved through the preparation of quarterly reports, which would detail disbursement progress and, by comparison with plans, demonstrate physical (Annex 6) and institutional (Annex 7) progress. Ongoing and ex-post evaluation programs would be developed to assess the effectiveness of the subprojects in achieving the type and scale of anticipated benefits and to assess the need for modifications (Annex 8). VI. FINANCIAL ANALYSIS A. Metropolitan Finances: An Overview 6.01 In recent years, growth in operating revenues has failed to keep pace with population growth and inflation, and total real per capita expenditures by MLM have fallen about 30% since 1981. To reverse this trend and to prepare MLM for future responsibilities, a policy of strengthening local fiscal authority in order to further reduce MLM's reliance upon central financial support is vital. MLM and the Government need to agree on the principles and steps required to implement such a policy, but, for the near term, it was agreed that it would be necessary for municipal revenues to increase such that: (a) no financing would be required from the Central Government for the Municipality's recurrent expenditures in excess of 1984 transfers, in real terms; and (b) INVERMET's funds would be sufficient, without any allocations in the Central Government's budget, to cover any increase in the Municipality's investment program and the debt service requirements. B. Action Program 6.02 To meet these objectives, MLM has proposed an extensive review of revenue administration; consultant advisory services are being contracted to establish a fiscal cadaster and help to implement betterment taxation. The property tax currently generates about US$1.50 per capita per year and finances about 20% of the total annual operating budget of MLM. This is significantly less than for most cities which administer a property tax. The existing cadaster is incomplete and reflects only a small portion of the considerable development which has taken place in the Metropolitan Area over the last decade. Moreover, because of the present system of self-assessment and ineffective followup, the existing cadaster is seriously undervalued, and evasion is pervasive. Significant additional revenues should therefore accrue from an expanded cadaster and from administrative improvements in billing and enforcement. At existing budgetary levels, the potential for important financial savings is limited. Personnel costs now represent about 55% of recurrent expenditures as compared to 80% in 1981. However, staff productivity is low. Technical  - 28 - assistance included in the project would help MLM to identify measures to strengthen financial planning and budgetary control in order to ensure that additional revenues could be earmarked for expansion and upgrading of services. The consolidated metropolitan budget is summarized in Annex 9. 6.03 Solid waste management is administered by ESMLL and by individual districts (para. 2.10). Because basic corporate systems, including accounting and financial reporting, are not yet established, and because of the modest size of the solid waste subproject, a full institutional financial analysis has not been undertaken. Service charges for solid waste management are based on property values, but, in a number of districts, are collected as a surcharge on electricity tariffs. Some improvement has taken place in recovery of service costs in recent years. In 1981, service charges for solid waste management represented 15% of total revenues and financed about 27% of estimated service costs. For 1983, solid waste revenues represented about 31% of total revenues for the Metropolitan Area. However, service standards and efficiencies vary widely among districts, as do operating deficits. Following the review of service financing included in the proposed project, further improvements are anticipated to bring charges more directly in line with service costs. These would be determined on the basis of improved service costing systems to be installed in ESMLL and the districts through the project. Assurances were received at negotiations that a review of the financial performance of ESMLL and of solid waste activities of all districts would be completed and presented to the Bank by December 1984, that recommendations and a timetable for strengthening the operational efficiency and self-financing capacity of ESMLL would be presented to the Bank for review by December 1985, and that they would be carried out (para. 8.03(o)). The review of service financing would cover operating cost structures, investment requirements and capacity to service debt; the extent of cost recovery and proposed tariff structures, taking account of cross subsidies and affordabilities; budgetary support; financial planning, budgeting, internal control and auditing. MLM confirmed at negotiations that, in the interim, service charges in 17 districts, which are levied with electricity tariffs, have recently been increased by 25%. Also, collection charges by MLM to the separate city districts for use of the existing solid waste transfer station would be enforced more strongly. In order to demonstrate that ESMLL and the districts have adequate funds for project implementation pending completion of this review, agreement was reached at negotiations that MLM would submit to the Bank for review, by March 30 of each year, draft solid waste budgets for ESMLL and for each district for that year which demonstrate that service charges are increasingly capable of recovering at least recurrent service costs (para. 8.03(o)). In addition, assurances were received at negotiations that no additional investment in excess of US$200,000 equivalent in any one fiscal year would be undertaken during the project implementation period by ESMLL without prior consultation with the Bank (para. 8.03(o)). 6.04 Finally, MLM would prepare, jointly with the Government, an assessment of measures to improve municipal financial autonomy, and would present it to the Bank for review and comment by December 1984. A plan of action and a consolidated timetable for achieving financial autonomy would be formulated, endorsed by the Government, and presented to the Bank by December 1985, and MLM would carry out this plan of action. These arrangements were confirmed at negotiations (para. 8.03(p)). Several  - 29 - actions are already under way and oriented toward maximizing management of resources currently available to MLM, primarily through administrative improvements in billing and collection procedures of principal local taxes. In addition, efforts to collect delinquent taxes are also expected to result in increases in property tax receipts. Significant increases are also planned in the rental fees for retail markets and in parking charges and street vendors fees. It is also proposed to eliminate some exemptions from the tax on unoccupied land. C. Fondo Metropolitano de Inversiones (INVERMET) 6.05 Established in 1979 as a trust fund of MLM to finance urban infrastructure improvements, INVERMET has, to date, been financed primarily by transfers of national gasoline tax revenues. Comparative financial statements for 1981 and 1982 (Annex 10) illustrate that INVERMET's finances have been characterized by a high degree of liquidity and substantial investments in short-term financial assets. As its contracting capacity increased, its financial assets were reduced, as a proportion of total investments, from over 80% in 1980 to about 23% in 1982. INVERMET's receipts of gasoline taxes reached about US$7.0 million p.a. in 1982. The assumption of modest increases in gasoline consumption, and of stable international gasoline prices, provides the basis for the projected revenue flows for INVERMET illustrated in Annex 11. These establish INVERMET's capacity to provide the counterpart funding required under the project and to support a modest program of additional capital investments. D. Empresa de Mercados Mayoristas S.A. (EMMSA) (i) Financial Performance on Existing Operations 6.06 Established in 1979 under the Ministry of Agriculture to foster the development of wholesale markets throughout Peru, EMMSA's activities as a market operator have been concentrated in Lima although it has not owned facilities. Comparative income statements and balance sheets for the financial years 1981 and 1982 are shown in Annex 12. Although operating revenues increased rapidly during the first three years of operations, increasing operating costs resulted in narrow operating margins of 2.4% in 1981 and 0.5% in 1982. 6.07 No significant change is foreseen in EMMSA's financial performance prior to the opening of the new market at the end of 1986. EMMSA would not be able to raise concession charges to market users before the new market opens because they are bound by current contracts. These charges were quadrupled in recent years; however, increases in other charges are not anticipated in view of the poor condition of the facilities. Monitoring would therefore concentrate on ensuring that EMMSA would continue at least to break even, so that, when existing operations close down, all liabilities can be fully discharged. EMMSA would therefore be unable, except for the possible sale or lease of the surplus land (para. 4.09), to provide counterpart cash flows to meet project capital outlays or interest during construction (Annex 13), which must therefore be financed from other sources (paras. 4.07 and 4.09). Ownership of new facilities would be vested with EMMSA.  - 30 - (ii) Proposed Market 6.08 The projected revenue statements, cash flows and balance sheets (Annex 13) refer to EMMSA's operations as a whole and demonstrate its financial viability. Since the new market would dominate EMMSA's operations through the late 1980s, financial forecasts for the new market alone would not be significantly different, and have therefore not been prepared. 6.09 The pricing policy under which tariffs would be increased by up to 115% in real terms by 1989 has been designed to ensure that there are adequate resources to service the very large loan financing on this subproject. Agreement was therefore reached at negotiations that EMMSA would not incur any debt unless a reasonable forecast of estimated net revenue would be at least 1.1 times the estimated debt service requirements for the current fiscal year. In addition, and in order to ensure economic efficiency in the operation of the market, agreement was also reached at negotiations that EIMMSA would earn an annual return of not less than 8% on average current net value of EMMSA's fixed assets in operation by 1989 and, for each subsequent fiscal year, a return of not less than 12%. To this end, EMMSA would charge tariffs which would provide a 6% return from opening of the market for the first two years of market operations. Agreement was reached during negotiations that MLM, in coordination with EIMSA, would close the existing markets for wholesale market activities by December 1986 and that MLM would present to the Bank, for review and comments, its plans for the use of the existing markets by October 1985 (para. 8.03(q)). 6.10 Although periodic rehabilitation of on-site roads and parking areas of the new market would not be required until the mid-1990s, adequate financial provision should be made well before then. Agreement was reached at negotiations that, by December 1987, EMMSA would determine the required expenditures on major periodic maintenance for the new market up to the year 2000 and, commencing in January 1988, establish a reserve fund financed by annual contributions, which, together with interest accumulating at current domestic interest rates, would be adequate to finance projected expenditures on the basis of annual reassessments (para. 8.03(q)). Projections indicate that a further additional tariff increase of 20% would be required in 1990, when repayment of principal on the Bank loan falls due, in order to sustain these requirements. 6.11 Because of the sensitivity of EMM(;A's projected financial performance to debt-servicing obligations, agreement was obtained at negotiations that EMMSA would not undertake additional capital investments in excess of US$1 million without prior consultation with the Bank during the period of project execution (para. 8.03(q)). (iii) Financial Management 6.12 In view of the considerable increase in EMMSA's present operating budget represented by the market and the need to maintain sound financial performance, it will be particularly important to maintain effective management accounting systems. To enable EMMSA to deal fully with the increased complexity of financial decisions during project implementation  - 31 - and to give prominence to financial policies during operation, a suitably qualified financial executive would be appointed by March 1985. This appointment was confirmed during negotiations (para. 8.03(q)). 6.13 Cost Recovery. All investment costs, including land at its current value, would be recovered through service charges. 6.14 Affordability. An analysis of the present cost structure of wholesalers and retailers indicates that considerably lower operating costs would result at the new market, primarily from reduced security expenses, porterage, and significantly reduced wastage and losses. The out-of-pocket savings of truckers resulting from reduced waiting times are expected to cover about 75% of increased toll charges. However, the difference could easily be absorbed by the wholesalers/retailers if passed on to them. VII. ECONOMIC AND SOCIAL ANALYSIS A. Economic Justification 7.01 Considerable effort has been made to keep the size of the project to a minimum. During preappraisal, the Government and Bank staff agreed to reduce the level of project costs by more than US$100 million through (a) rigorous economic analysis of alternatives; (b) reduction in design standards to minimum necessary levels; and (c) leaving, to the extent possible, investments in commercial facilities within the market to the private sector and the financing of buses to suppliers. 7.02 The project would have a substantial influence upon the efficiency of Lima's economy in two ways: first, an improvement in urban infrastructure and in public services; and second, an impact on the metropolitan and, hence, on the national economy through improved metropolitan planning and coordination. 7.03 Where feasible, cost-benefit analysis was used to evaluate the subproject components, and 78% of project costs were thus covered. Key assumptions used in the economic analysis are provided in Annex 14. 7.04 All transport subproject components gave benefits in terms of higher travel speeds, which yielded savings in vehicle operating costs and passenger time. In the Cono Norte scheme, accident savings were also considered. Since nearly all the quantifiable benefits of the transport schemes depended on higher travel speeds, detailed measurements were made of existing traffic speeds and of derived speed-flow curves on the basis of field surveys. The influence of road surface conditions on the speed-flow characteristics of different classes of roads was particularly emphasized. 7.05 The solid waste transfer stations and vehicles would reduce transport costs by transferring loads from small collection trucks to large trucks at strategic points so that long hauls to landfills or dumps could be made as cheaply as possible. Since the transfer stations would meet only part of the city's need for more transfer capacity, they would be used only by those collection vehicles which offered the greatest savings.  - 32 - 7.06 The evaluation of the market project required, first, consideration of alternative solutions to the proposed market at Santa Anita and, second, an evaluation of the Santa Anita proposal against the "without project" alternative. 7.07 The analysis showed that the location of Santa Anita for the new market was justified. In the long term, however, there could be a case for developing a second, and possibly a third, market, rather than expanding Santa Anita, in order to save transport costs and to reduce market- generated traffic. 7.08 The benefits of the market at Santa Anita arise from the release of the valuable site at La Victoria, lower handling costs and reduced wastage and from savings in waiting time by suppliers and retailers. 7.09 As shown in Annex 15, all subproject components which can be quantified are strongly justified. The overall rate of return is about 70%, which demonstrates the highly cost-effective nature of the proposed project investments. Furthermore, the nature of some of the benefits, i.e., reduced fuel usage and reduced operating costs, should have a direct and favorable effect on Peru's balance of payments. 7.10 Four sensitivity tests were made, the results of which are shown in Annex 16. In one test, shadow pricing was introduced. Three other tests were made to reflect investment risks. First, the possible construction of a mass transit line along the Cono Norte-Cono Sur Corridor was roughly simulated. Second, all subproject components were subjected to a delay of one year during construction. Third, a delay of three years during construction and an associated increase of 25% in capital costs were postulated. In no case did the IRR fall below 23%. It was therefore concluded that all the subproject components were robust in their economic justification. B. Distribution of Project Benefits 7.11 About 54% of the population of the Lima Metropolitan Region is absolutely poor (earning less than US$167 per month in 1981 prices) and 62% is relatively poor (with US$225 per month). The levels of poverty have been calculated by zone in order to assess the impact of the project. 7.12 The heaviest concentrations of the poor are in the Cono Norte and Cono Sur; many others live near the city center or work there. The proposed transport subproject which would be confined to bus routes would be largely located in these areas. The road paving program would be confined to low income areas. The road rehabilitation and maintenance programs would help buses on many routes but would obviously be of benefit to other traffic also. The area traffic control system covers the inner and central area, which is the focus of the bus network and the main source of employment for the poor.  - 33 - 7.13 Through the provision of maintenance equipment, transfer and landfill systems, as well as improved management procedures, in the solid waste subproject, the efficiency and effectiveness of vehicle and labor resources are expected to be markedly improved, thereby allowing services to be extended, especially in the poor districts where present standards are very low. The market subproject should eliminate a severe environmental and social problem in the poor central district of La Victoria and should lead to cheaper and better food for the whole population. 7.14 The poverty indices, representing the percentages of project costs and benefits attributable to the poor, are shown in Annex 17. About 56% of project costs (excluding those items that could not be evaluated) and 53% of the benefits are attributed to the relatively poor. The market would benefit some two-thirds of the low-income population of the Metropolitan Area. C. Environmental Impact 7.15 Although environmental improvement is not its prime objective, this project would have an important impact on the environment. Lima is currently an unusually dirty city because of very inadequate street cleaning and refuse collection. The solid waste subproject would produce an important improvement in the environment, and the market subproject would eliminate one of the worst environmental problems in the city by removing all wholesale market facilities and associated traffic from a densely populated residential area. 7.16 The paving of roads in pueblos jovenes would immediately change their appearance and improve their cleanliness. All of the subproject com- ponents should have beneficial effects upon health. The other transport components - dealing with Cono Norte, Cono Sur and Alfonso Ugarte - should bring better order and less congestion to these parts of the city, and the road rehabilitation program should make it easier to keep the streets clean. D. Project Risks 7.17 There are four potential risks associated with the project: difficulty in generating local counterpart funds; difficulty in recruiting and maintaining adequate professional staff; problems associated with the bilateral nature (Central Government and MLM) of the project; and possible implementation delays. The project content and institutional arrangements have been designed to reduce these risks to the lowest possible level. Local funding is based heavily on an earmarked source (gas tax revenues from INVERMET) and depends on general revenues from the Central Government only to a very limited extent (US$19.4 million over 7-1/2 years). Bank loan disbursements have been front-loaded to minimize possible financing required from Central Government during the initial years of implementation when counterpart resource constraints would continue to be severe. The risk related to adequate staff has been mitigated by assigning loan proceeds to finance a substantial amount of technical assistance and training. For the largest subproject, transport, the contracting of expert advisors would ensure adequate technical support, even if local staff were not to develop as rapidly as expected.  - 34 - 7.18 The bilateral nature of project responsibility is advantageous in meeting the key institutional objective of strengthening the Municipal Government. Risks have been minimized by the establishment of CMC as the overall coordinating body. Finally, by minimizing these risks, and by concentrating on physical projects of a relatively simple nature, the proposed implementation schedule of seven years should be readily achievable. VIII. AGREEEMENTS REACHED AND RECOMMENDATION 1/ 8.01 The following would be conditions for loan effectiveness: (a) Signing of two subsidiary agreements between the borrower and MLM and the borrower and EMMSA (SAR para. 5.01 and Section 6.01(a) and (b) of LA); (b) Appointment of a subproject director for the solid waste subproject (SAR para. 5.02 and Section 6.01(d) of LA); and (c) Establishment of OMTU, and the finalization of its general operating guidelines (SAR para. 5.04 and Section 6.01(c) of LA). 8.02 The following would be a condition for disbursement of the municipal subprojects: Appointment of INVERMET implementation advisors (SAR para. 5.04 and Schedule 1, para. 4(b) of LA). 8.03 The following assurances were obtained and agreements reached during negotiations: (a) The Government and MLM to inform the Bank of any proposal to undertake transport investments in the Lima Metropolitan area in excess of US$10 million during the project implementation period; provide information on the impact of such investment on the Bank project; and give the Bank an adequate opportunity to comment on the proposed investment; and the Government to agree not to execute any transport investment that would adversely affect the urban transport subproject (SAR para. 2.24 and Sections 4.02 and 5.01(g) of LA); (b) Proposed road maintenance program, covering its institutional framework, budget requirements and proposed financing, to be presented by MLM for review and comment by December 1985 (SAR para. 3.11(c) and Section 2.08(a) of MLM PA); 1/ References are to the relevant sections of the Staff Appraisal Report (SAR), the Draft Loan Agreement (LA), the MLI Draft Project Agreement (MLM PA), and the EMMSA Draft Project Agreement (EMMSA PA).  - 35 - (c) MYLM to obtain the ownership of the land for new transfer station by December 1984 (SAR para. 3.19 and Section 2.10 of M1M PA); (d) Proceeds of the Bank loan related to municipal subprojects to be passed on to MLM as a grant and proceeds of the Bank loan related to the market to be onlent by the Central Government to EMMSA at the Bank's interest rate repayable in 17 years with six years grace (SAR para. 4.08 and Section 3.01(b) and (c) of LA); (e) MLM to contr Loute, from INVER21ET funds, duri