Peru - ESMAP country paper

48009 U Joint UNDP / World Bank Energy Sector Management Assistance Programme C/OThe World Bank 1818 H Street, N.W. Washington, D.C. 20433 U.S.A. ESMAP Country Paper PERU November 1994 This document has restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without UNDP or World Bank authorization.  JOnvT UNDPIWORLD BANK ENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP) ESMAP COUNTRY PAPER (ECP) What Is an ECP? With the cooperation of the government of each participating country, the ESMAP Strategy and Programs Division prepares an ECP, whose overall purpose is to define a multi-year work program for energy sector activities in the country. ECPs are generally divided into four principal parts: (1) main issues in the energy sector and current government policies and pro- grams; (2) critical factors for implementing programs and ensuring the sup- port of the international community (including the Bank and ESMAP) to overcome them; (3) rationale and justification for ESMAP's involvement; and (4) the proposed program, with a description of the basic features of each activity. These include its contribution to the overall energy strategy, operational objectives, priority, budget, and interfaces within the ESMAP program and with other initiatives. Annexes provide further details on the country's energy sector and on proposed activities. ECPs are updated as necessary in light of conditions in the country and progress in the imple- mentation of the work program. The ECP Process An ECP is a process as well as a product. It usually builds on ESMAP's previous experience in the country's energy sector, on sustained dialogue with the government and relevant energy institutions, and on joint missions and discussions with the World Bank, UNDP, and other involved agencies. It involves a preliminary draft by ESMAP, in conjunction with World Bank staff, based on dialogues with local institutions; a mission by an ESMAP staff member to the country, consultation with the UNDP, donors, and gov- ernment officials; a review and clearance of the draft ECP by World Bank/ ESMAP management, reflecting also the views of the UNDP resident repre- sentative; the clearance of the final draft by the government; and presenta- tion of the ECP to the donors. The inside bac  Joint UNDP/World Bank Energv Sector Management Assistance Programme (ESUAP) ESMAP COUNTRY PAPER PERU ECP No. 003/94 November 1994 I This document has restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwide be disclosed without UNDP or World Bank authorization.  PREFACE This paper is the result of a process of dialogue among the Ministry of Energy and Mines and other Peruvian energy sector agencies and enterprises, the Bank's Latin America and Caribbean. Region, UNDP, major bilateral donors and ESMAP. The draft ECP was cleared within the Bank in September 1993 and discussed with Peruvian energy sector authorities in March and July 1994, when it was formally approved.  TABLE OF CONTENTS EXl3CUTnTE SUMMARY ....................................................................................................i I. ENERGY SECTOR OBJECTIVES AM) ISSUES ..............................................1 A. Macroeconomic and Sectoral Reforms ........................................................... 1 B. The Energy Sector ........................................................................................... 2 C. International Support ....................................................................................... 4 I1. ESMAP WORK PROGRAM .............................................................................6 A. Energy Prices: Social Impact and Efficiency Objectives .............................. 7 B. Decentralized Energy Sources: Issues and Options....................................... 9 C. Hydrocarbon Development, "Bench Mark" Environmental Studies and Strengthening of DAA (Direction de Asuntos Ambientales) ......................11 D. Institutional Development, Training and Capacity Building ....................... 13 ANNEX I ............................................................................................................................. 16 Draft T e r n of Reference for Environmental Assessment of Proposed Gas and Oil Development Projects  EXECUTTVE SUMMARY 1. In recent years, the Government of Peni has redefined its basic economic development strategy and has moved ahead with deregulation and demonopolization measures, private-capital oriented legislation and a privatization process, aiming its action at increasing output and greater efficiency. By doing so, the Government has modified its role in society towards the provision of basic inhstmcture of investment in human capital and regulation of those activities that require it. Within this new strategy, the energy sector plays a critical role supporting productive investment, providing public revenues and enhancing the welfare of consumers. 2. The energy sector generated significant resources needed to stabilize the economy in 1990 and, since then, has remained the single most important source of public revenue. Recent privatization efforts have produced additional resources. The efficient future operation of the energy sector and the environmentally sustainable development of hydrocarbon resources, in particular the Camisea gas field, are vital in the Govemment plans to invest more in human resources and protect the environment. Presently developed hydrocarbon resources represent only a few years' consumption; hence conservation efforts together with investments in gas development are needed to fuel Peru's economy into the next century. 3. The Government of Peru has requested that ESMAP assist it in continuing to lead the sector away from state intervention, towards the market-based, privately-owned sector it wishes to establish, with due regard to protecting the welfare of the poorest Peruvians. To that end, together with Government, the operating divisions in the World Bank,and in harmony with the programs of major bilateral donors and UNDP, a multi-year ESMAP-managed work program of technical assistance to Peru's energy sector has been defined, and is presented below for b d i n g by ESMAP's donor countries. 4. The proposed ESMAP work program focuses on four main areas: a. to assist in the consolidation of the privatization process and help the newly created or recently reorganized sectoral institutions to undertake fiesh analysis on specific issues arising fiom the actual process e.g. social impact of new prices, need for a safety net and a strategy for the transition; b. to strengthen local capacity in the execution of new responsibilities (e.g. overall sector policy and strategy within a privately-owned sector; tariff- setting and general regulation in a mostly private energy sector);  ESMAP Country Paper ii c. to cany out some specific tasks, especially on environmental and energy efficiency matters, where the government will of necessity, remain active because of externalities; d. and to jointly define a strategy for the development of energy systems in isolated areas. 5. Peru is a good example of an ESMAP priority country: its Government is committed to improving the sector, it has sought BankIESMAP assistance; there is an on- going reform process and, hence, little doubt that the Peruvian authorities will seriously consider the recommendations of the proposed studies; and the Bank is engaged in policy- based lending1; ESMAP-managed activities support achievement of these same development goals. In support of these efforts and objectives, the overall proposed ESMAP program focuses on four major activities with an overall budget of USS1.5 million to be utilized over 3 years to attain the above mentioned general objectives. The specific activities to be carried out consist of: a. Social Inyract of Energy Prices and Energy Ef)"rciency Objectives This activity starts from ongoing work by the Bank's operational division, which is estimating the impact of energy pricing on economic costs of productive activities and on the level of prices. It also builds on recently completed ESMAP work. The activity has two main elements: a) at the household level, it will review the social impact of cunent and expected energy pricing structures and levels by income levels and consumer categories, and design a mitigatory action plan to protect the already low welfare level of poorest households; b) at the supply and demand level, using the accumulated experience in CENERGIA, it will develop a strategy, including financial and institutional instnunents, to implement greater efficiency of energy supply and end-use in priority sectors. b.. Decentralized Energy Sources: Issues and Optiom This task will assist the Government in: 1. Defining ak overall regionalized strategy for energy supply, and interfuel substitution in rural areas, based on a study of past 1 Bank funding to the sector is included in the Energy and Mining Technical Assistance Loan (EMTAL) and the more recently approved Electricity Rivatization Loan.  iii experience--both institutional and technical-- and on the introduction of more recent approaches and experiences; .. 11. Analyzing the economics of new, renewable, non-conventional sources of energy and defining the potential role of each in the supply picture of Peru's main regions. iii. Analyzing how the role of private initiative Can be expanded, and that of the state focused on its most important tasks, namely, regulation and introduction of new ideas and concepts. 6 Hydrocarbons Development and Environmental Benchmark Studies This activity is designed to achieve two m ain objectives: i) to strengthen the institutional capacity at the Directorate of Environmental Affairs; and ii) to support the development of hydrocarbon resources, in particular through the development of benchmark environmental studies. To do so, relevant pilot case studies will be selected. This work will facilitate the development of this energy resource and ensure the availability of institutional capacity to monitor compliance with environmental regulations. It would also start Peru on the systematic collection of environmental information especially i n sensitive areas or in areas to be subjected to extensive economic activities (such as exploration/exploitation of hydrocarbons). 7. Training Program While all of the above activities will contain an implicit training program, the Government has requested a specific training activity within the ESMAP program as part of a decisive human resource plan that will make sector reform sustainable. This training activity will have two main components: i) an assessment of training requirements in relation to the new functions of the state; and ii) implementation of the priority actions over a period of 2 years. 8. As seen above, this Program of assistance combines short and medium term elements to support initial reform efforts and sustain them over the medium term. In the short term, correction and fine tuning of distortions occurring in the process of privatization; environmental benchmark studies and design of an energy efficiency program and a rural energy strategy. In the medium term, the implementation of these studies and the training of staff to monitor their execution and implementation. An evaluation of this Program's outputs and impacts will be conducted by the Industry and Energy Department (IEN) when it is completed, in approximately three years.  ESMAP Country Paper iv 9. The table below presents the projects proposed and the anticipated calendar of execution. Proposed ESMAP Work Program 1994-962 (Calendar Years and US$'000) ACTNITY CY94 CY95 CY96 Total ppppppp-ppp-- - - 1. Energy Prices: Social Impact of Energy Pricing 50 300 350 Efficiency and Equity Objectives * 2. Decentralized Energy Sources: Issues and 100 250 50 400 options 3. Hydrocarbons Development and Environmental 250 200 450 Benchmark Studies. 4. Training Program. 100 200 300 TOTAL 150 900 450 1500 TOTAL TO BE FINANCED 125 800 450 1375 * Partial funding of US$ 125,000 fiom ESMAP core resources is available. All the remaining projects are unfunded as of late 1994. 2 An evaluation of the outputs and impacts of this Program will be carried out by IEN and is estimated to cost about $20,000.  I. ENERGY SECTOR OBJECTIVES AND ISSUES 1.1 This section is divided along three areas: i) recent macroeconomic and sectoral developments; ii) main characteristics of the Energy Sector, Governrnent objectives and pending issues; and iii) ESMAP's role in the past and role of other agencies. A. Macroeconomic and Sectoral Reforms 1.2 The Economy Following the June 1990 elections, the Government introduced fundamental changes in the economy. The extent of the crisis led to the adoption of comprehensive macroeconomic stabilization and structural reform with the short-term objective of halting inflation. The stabilization component included stringent fiscal and monetary measures as well as refonns in the area of taxation, public expenditures, interest rates and exchange rates. The structural reform package included economy-wide and sectoral liberalization measures. The new trade policy has made Peru's regime one of the h e s t in Latin America. Monopoly rights of public firms have been abolished, new laws for financial institutions have opened this sector and a massive liberalization of foreign investment policies has taken place. Now the Governrnent is focusing its efforts on the privatization program. Recent sales of state assets have netted over US$2,500 million and the forthcoming ones are expected to provide additional substantial resources. I. 3 Sectoral Reform. Policy, legal and regulatory refonns have also been introduced in virtually all sectors to promote competition, private investment and economic efficiency. In agriculture, reforms have liberalized land, product and financial markets. In infi-astructure, transport liberalization has been comprehensive. The government has deregulated prices, entry and routes in shipping, urban, inter-urban and air transport. In highways, almost full cost recovery has been achieved through a variety of user charges, including tolls. The national airline (Aeroperu) and the Lima bus company (Enatru) have been privatized. In the water sector, the government has appointed a committee to prepare the privatization of the Lima water company (Sedapal) and is developing a new legal and regulatory h e w o r k for the sector to ensure water quality and foster private sector participation. 1.4 In mining, the government enacted a new law facilitating private investment, initiated a privatization program for the sale of all state-owned enterprises (SOEs). In hydrocarbons, the government is eliminating Petroperu's (the state-owned enterprise) monopoly in downstream activities, modifying the tax regime for petroleum products to bring it more into line with the broader tax system, and initiating the privatization of Petroperu with the sale of some of its subsidiaries and service stations. A new Hydrocarbons Law was recently approved. In power, a law enacted in 1992 opens the sector to private investment, promotes competition through the separation of generation, transmission, and distribution activities, and allows for market prices at the generation stage, while regulating prices at the transmission and distribution stages.  ESMAP Country Paper 2 1.5 By mid 1994, economic reform was well advanced. Liberalization and demonopolization are the basic vehicles of the recently enacted sectoral laws and are by now, well established. Also, the privatization of state firms,responding to the Government decision to effectively define its role as regulator, rather than owner and manager, is well underway. Energy Regulatory institutions have been set up, are finding their place and asserting their autonomy within their new prerogatives. Still, as the sector moves into a more marketdetermined system, there are areas in which Government's presence--be it directly or through the creation of an enabling environment- will be felt, particularly in the efficiency of supply and use of energy, the supply of energy to isolated areas, the environmental soundness of the energy system, and the sustainability of reforms that will require effective public institutions. These are the areas on which ESMAP assistance will focus. B. The Energy Sector 1.6 This section gives an overview of the Sector, including Government objectives, institutional fiamework, main characteristics of the subsectors, and pending issues. 1.7 Objectives. The general policy of the Government is to defer to and promote private initiative and ownership wherever feasible. Ongoing reforms have liberalized the policy and regulatory environment to promote competition and private investment, while substantially reducing and redefining the role of the state. 1.8 Institutional Structure. The Ministry of Energy and Mines (MEM) is the policy-making institution. It contains two Vice Ministries (Energy; Mines), a number of - General Directorates (Mines - DGM; Hydrocarbons DGH; Electric Power - DGE) and the Directorate for Environmental Affairs (DAA) which for the moment, still reports through DGM. The MEM possesses an advisory body, the Technical Energy Office or OTERG which succeeded the CONERG (Consejo Nacional de Energia) with more or less the same functions, that is, conducting studies and analyses to advise the Minister on important policy matters, notably in setting and reaching long term Sector objectives now that the Sector is quickly becoming privately-owned. 1.9 ElectroPem and PetroPem are the power and hydrocarbons operating companies which are now being privatized. PeruPetro was recently formed to comply with the new Law to take over some of the GOP responsibilities in hydrocarbons (e.g., contracts, supervision of oil companies) while PetroPeru is left as a pure operating oil company (at  Peru 3 this moment shorn of its state-granted monopoly rights) and having relinquished its regulatory prerogatives to PeruPetro.. 1.10 CENERGIA is in charge of energy efficiency and DSM. An autonomous agency within the energy sector, it is a mostly self-financed NGO run by a board including the MEM and PetroPeru. The National Power Tariffs Commission (CNTE) is legally independent but needs to coordinate its work with MEM, the Ministry of Economy and Finance (MEF), and COPRI, an agency of the central government vCtfiich has a wide purview as the National Committee on Privatization. 1.11 Hydrocarbons. Despite i s potential, Peru's hydrocarbons sector - which t accounts for about five percent of GDP - declined sharply during the 80's. Domestic production dropped fiom 195,000 barrels per day (bpd) in 1982 to 1 10,000 bpd in 1992, and the country shifted fiom being a petroleum exporter to a net importer ($186 million in 1991). Known reserves dropped by 50 percent fiom 1982 (their peak level) to 1989 (300 million barrels - enough for less than nine years of consumption at current levels), as investments in exploration and development also declined sharply . Many of the problems stemmed fiom the heavily controlled policy environment, the subsidized prices and the monopoly position held by Petroperu on virtually all upstream and downstream activities as well as perceived policy instability in oil exploration~production rules and regulations. 1.12 The Government's objectives are to further encourage competition and private investment, and complete the privatization of Petroperu and its subsidiaries. This requires a series of legal, policy, regulatory and tax reforms. Several transitional measures have been implemented, though to be effective, full deregulation and competition have to wait for the privatization of PetroPeru and for the 111 entry of private investment into oil exploration and production, and into refining and distribution. 1.13 Electric Power Installed capacity is close to 3,000 MW and is mainly hydroelectric. To reach its main goals of providing a cohesive framework for electricity sector refom and ensuring coherence between the sector structure and the 1egaVregulatory system, the government has adopted market-oriented concepts that have been successfully applied in other countries. They are based on the principles of decentralization, unbundling, competition, deregulation where competition is feasible, and arms-length regulation of natural monopolies. The government enacted in November 1992 a new Electricity Law ("Law on Electricity Concessions") and in February 1993, the corresponding regulations relating to public electricity service. The Law and associated regulations redefine the role of public institutions in policy making, sector entry and exit, pricing, investments, and quality of service. They also stipulate the formation, by generation and transmission  ESMAP Country Paper 4 companies, of supply pools Comites de Operation Econbmica del Sistema Interconectado (COES) to manage load dispatch. 1.14 The government has taken steps to strengthen MEM and other public entities in their policy and regulatory functions. The Power Tariffs Commission (CNTE) will continue to be responsible for tariff setting for regulated consumers, as d e h e d by the 1992 Electricity Law. The new Law also specifies revenue sources for CNTE independent of the government. 1.15 Tariff inadequacies in terms of both levels and structure have persisted over many years. Real tariffs during 1985-89 declined by 60 percent, to 18 percent of their economic cost overall (only 2.3 percent for residential consumption). Country-wide, uniform tariffs added to distortions, and cross-subsidization of the high-cost utilities undermined efficiency incentives. Taxes and surcharges on electricity consumption increased in number and complexity. The Government's electricity sector reform program involved major increases in electricity tariffs, together with changes in the tariff structure and process. Electricity tariffs were increased substantially from August 1990 through December 1992. Following a four-month hiatus, monthly rate adjustments resumed with successive increases of 10 percent per month in May and June (roughly 7 percent in real terms) and 5 percent in July and August of 1993. Tariffs currently average 92 percent of economic costs (defined as short-run marginal costs over the following 48 months) for non- residential consumption and 65 percent for residential consumption. C. International Support 1.16 ESU4P's Role. Peru has made great strides on the path of economic reforms since the change of Government in July 1990. ESMAP assisted the initiation of reforms in the Energy Sector with a piece of sector strategy work (ESMAPICONERG; Y el S w Energetlco, Dec. 1990). A number of technical assistance activities were identified after this study and through the participation of ESMAP staff in subsequent Bank-managed tasks. Peru has conducted many of those studies and technical assistance activities and the course of the sector reform is set. It includes: the deregulation of the energy sector, the redefinition of the role of the state -focusing it on the legal and regulatory frameworks-, the fostering of efficiency through competition, the marshaling of private capital in sector investments and the privatization of many sector enterprises, once shorn of their policylregulatory responsibilities. ESMAP has also contributed to this process by recently completing a technical assistance activity in the provision of advice on energy pricing and taxation.  Peru 5 1.17 Multilateral and Bilateral Assistance . The LAC Region of the World Bank, the UNDP, the Japan Trust Fund and the GTZ have all assisted Peru in defining the needed reforms and beginning their implementation. In addition, World Bank operations in support of privatization, restructuring and sector reorganization are under execution. Specifically, following on ESMAP's Energy Strategy work, the Bank prepared two operations: A Privatization Adjustment Loan for US$ 250 million and an Energy and Mining Technical Assistance Loan (EMTAL) for US$ 11.8 million. A Power Sector Privatization Loan has also been recently approved. Still, areas needitlg quick attention include the design of a well-balanced rural energy strategy, an energy efficiency program stressing private financing, and monitoring of the environmental impact of energy-related operations. 1.18 During the period of stabilization of the economy, and since shortly after the change of government, the Bank, in close collaboration with the IMF, the IDB, ESMAP and bilateral donors, has supported the reforms. In May 1991, the Bank adopted a new debt- workout approach for countries with protracted arrears; in July 1991, the Bank approved the application of the new approach to Peru. Under this policy, the government maintained current debt servicing to the Bank and undertook a Bank-supported macroeconomic adjustment program for a performance period ending in December, 1992. During this period, the Bank approved three adjustment loans: a $300 million Trade Policy Reform Loan (TPRL); a $300 million Structural Adjustment Loan (SAL); and a $400 million Financial Sector Adjustment Loan (FSAL). The IDB supported the program with a trade policy reform loan and financial sector adjustment loan. In parallel, the IMF approved a Rights Accumulation Program (RAP) for Peru in September 1991, under which Peru accrued rights to future disbursements of 188 percent of its quota or SDR625 million, equivalent to its arrears to the IMF. The adoption of the RAP paved the way for a successful Paris Club rescheduling in September 1991. At the same time, following the 1990 Energy Strategy Study, Peru was included among ESMAP priority countries.  ESMAP Country Paper 6 11. ESMAP WORK PROGRAM Energy Sector Needs and Priorities: Proposed ESMAP Role 2.1 To effectively play its role, the Ministry of Energy and Mines is seeking to transform itself into an effective policy-making institution while relinquishing sector supervision and control to the newly enacted legislation. As identified through the Bank's EMTAL project, the of MEM's institutional build up is of critical importance. Priorities are in addition emerging for: a. the development of a coherent medium-tenn energy strategy and perspective, including the evolution of the Sector once the reform process is concluded. This ties in broadly with the required analyticdstrategic capabilities for policy and sector monitoring in all the Ministry's Directorates; b. the continuation of the work on prices and taxes, to enable a full deregulation and privatization of energy markets. Of particular urgency are the analysis of the social impact of the new prices; conservation and substitution strategy in a deregulated market; and the review of wholesale and retail margins and the conditions for entry and competition in the chain of downstream oil activities; c. the updating/development of environmental guidelines, norms and standards and the setting up of a monitoring system able to enforce the new environmental regulations. In addition to the strengthening of the capability of DGAA, it is crucial to have a geographic information system and start sketching the environmental situation in critical areas for hydrocarbons, such as the Amazon basin and the Ceja de Selva;. d. the design of a well-balanced strategy for the supply of energy in isolated regions in the country, comparing the economic and institutional aspects of current commercial systems and renewable sources.. 2.2 To deliver these broad outputs, ESMAP and the Government have proposed a program with four components: (1) Energy Prices: Social Impact and Efficiency Objectives; (2) Decentralized Energy Sources: Issues and Options; (3) Hydrocarbon Development and Environmental Studies; and (4) Design and implementation of a Training .  Peru 7 program. These activities will support and complement current multilateral and bilateral assistance while focusing on areas known to require special attention. It is envisaged also that IEN will conduct an evaluation of the major outputs and impacts of this Work Program on the objectives pursued. A. Energy Prices: Social Impact and Efficiency Objectives. 2.3 Building on ongoing work by the Bank's Operational Departments, this activity will review the social impact of current and expected energy pricing structures and levels by income levels and consumer categories, and help design a strategy to encourage greater efficiency of energy supply and end-use in priority sectors. To do so, this activity will have four main steps: a) evaluation of social impact of energy prices; b) formulation, costing and justification of a mitigatory action plan; c) evaluation of institutional experience in development of energy efficiency programs; d) development of an institutional energy efficiency strategy. Social Impact of Prices 2.4 As indicated, based on the Input-Output analysis performed by the Operational Department, this work will go a step beyond by conducting a survey of energy consumption by low-income households to evaluate the effect of pricing changes on the real incomes (or expenditures) of these groups. The survey would quantify energy consumption by lower-income households in the cities and the countryside; a small sample of high income consumers would also be surveyed to provide a better indication of energy consumption in relation to income. 2.5 Based on these results, a program will be proposed to mitigate negative effects of price changes. The costs of these programs will be estimated and related to the benefits, mainly increased revenues but also reduced low-priority consumption of energy. International experiences will be presented to illustrate how other countries have dealt with this matter. Energy Efficiency Objectives 2.6 Given previous experience in Peni, i.e. CENERGIA, in the implementation of energy conservation programs, this activity will focus on building up on existing institutions and defining a strategy for implementation of agreed targeted sectors. Specifically, it might include three phases:  ESMAP Country Paper 8 2.7 f p r C M R G I A . Key issues may include the following: a. Based on the studies, surveys/audits, and pilot demonstration projects canied over the past five years or more, what are the most prospective areas in each sector for intervention to achieve energy savings? In light of recent experience, are existing targets of CENERGIA for energy savings realistic? What additional policy reforms and measures may be r e q u i d t o realize the potential savings, in particular through third party financing and/or Energy Service Companies? b. What are the main constraints to energy conservation in each of the targeted sectors? How can those constraints be alleviated? What incentives would encourage demand-side energy conservation? What other public and/or private organizations have a role in collaborating with CENERGIA ? e Two: of S- D e v w of Basic for the A g g n ~The ~ main goal for this phase would be to conduct an indepth review and analysis of the high priority issues highlighted during Phase I, to identify all relevant stakeholders that would have a role in collaborating with CENERGIA to solve those issues, and to develop a comprehensive strategy to be used by CENERGIA and others to overcome the roadblocks to greater end-use efficiency. 2.8 e Formulation, costing and justification of an issue-related Action Plan. The central aim is to translate the results of the evaluation and strategy formulation exercise of the previous phases into a well-focused Action Plan. During this phase, ESMAP and CENERGIA would collaborate: (i) to review the organhtion structure, work program, and financial resources; (ii) define specific actions strengthening its capabilities in relation to the proposed issue-related strategy; (iii) prepare the justification for a comprehensive and fully costed Action Plan, including the credit facilities to increase the number of energy conservation projects in all economic sectors; (iv) depending on the impact of new, higher energy pricedtariffs on most seriously affected, low-income households, design a program of social mitigation (either direct targeted subsidies, palliative against hunger or mass unemployment, or investment in human capital) in harmony with the findings and conclusions of the study of the Social Impact of energy prices.  Peru 9 Budget The overall budget is estimated at US$350,000, broken down as follows: B. Decentralized Energy Sources: Issues and Options 2.9 Peru is a large country with marked regiondgeographical features. Its natural regions are fundamentally different, from the coastal desert, through the temperate sierra and the Amazonian rain forest. Energy supply systems, and consumption patterns are equally varied. Access to modem energy sources is limited and costly due to geographical isolation and distance.  ESMAP Country Paper 10 2.10 This activity seeks to assist the G.O.P. in more fully analyzing these complex realities and giving general guidelines as to the most economic supply options, and most rational consumption or substitution pattern. Areas where biomass or insolation is plentiful have problems that are different from the densely populated, inigated mostly urbanized, if not urban, coastal valleys. The G.O.P. will need to develop a strategy for dealing with these complexities and tactics for helping resolve the issues faced by the inhabitants of these areas. 2.1 1 The strategy will require an evaluation of past experiences and concentrate on identifying economic and reliable sources of energy for the m ain end-uses (lighting, heating, cooking, cooling) and the tactics will need to see how financial and technical constraints can be overcome so that these populations can satis@their energy needs through the fhctioning of the market, as opposed to relying on government intervention. It is clear that, with distressed populations and generally low incomes, options will be limited and analysis critical to determine the proper role of renewable and non-commercial energy versus conventional sources and grid-based versus decentralized systems. 2.12 This task will assist the government in: a. defining an overall regionalized strategy for energy supply and interhel substitution in the rural areas (based on a study of past experience and on the introduction of more recent approaches such as energy services companies, etc.); b. analyzing the economics of new, renewable, non-conventional sources of energy and defining the potential role of each in the supply picture of Peru's main regions; c. analyzing, how the role of private initiative can be expanded, and that of the state focussed on its most important tasks, namely, regulation and introduction of new ideas and concepts.  Peru 11 This activity has a budget of US$400,000 broken down as follows: C. Hydrocarbon Development, "Bench Mark" Environmental Studies and Strengthening of DAA (Direction de Asuntos Ambientnles) 2.13 This activity is designed to achieve two main objectives: i) to strengthen the institutional capacity at the Directorate of Environmental -airs; and ii) to support the development of the natural gas resources, in particular undertaking benchmark studies of agreed areas. This work will thus pave the way for the development of this resource and help create the institutional capacity to monitor compliance with environmental regulations. 2.14 The Environmental Affairs Directorate (DAA) of the Ministry of Energy and Mines is located within the Directorate General of Mining, although the MEM has, in principle, decided that it should become a General Directorate and report directly to the Minister or one of the Vice Ministers. The DAA's mandate was granted back at a time when environmental concerns were less important and when the energy sector was very much an emanation of the State, leaving the Environmental Directorate little leeway for  ESMAP Country Paper 12 independent action. Its purview was also concentrated on mining, and that is why it reported primarily to the Directorate General of Mines. This, of course, is no longer true and the D M ' S mandate has been extended to cover the energy sector. 2.15 The DAA has received assistance through Japanese bilateral funds, and has started to develop in coordination with Bank activities and operations. Its role now and in the future is bound to be much more important and crucial with the sector becoming autonomous, and increasingly privately-owned and needing both greater guidance and greater supervision. 2.16 The first step in this new direction will be to conceptualize and implement an objective assessment of the environmental situation of the different areas of the country, followed by the introduction of an adequate reporting system of the impact of on-going and new environmentally sensitive industry operations and projects. The conceptualization study is essential to define the detailed work and coverage, evaluate the resources required to implement and, more importantly, to operate, the environmental monitoring system. 2.17 One of the areas of interest is Carnisea, which is probably one of the less environmentally damaged areas of the Amazon jungle, though a very delicate one. The area consists mainly of rainforests, located at the western edge of the Manu National Park, known the world over for its biodiversity. Because of the large gas-condensate reserves found (over ISTCF), Camisea will become the main energy source fueling the Peruvian economy in the coming century. After the exploration campaign canied out during the mid eighties, the area has basically returned to its traditional pattern of life. This may be one of the selected areas to conduct a "Bench Mark" assessment, which could provide the fmt systematic reported data for the geographic environmental system the DAA wants to set up and, also be the starting point for the environmental studies needed, before the gas development project is launched. It would also be a useful reference (or bench mark) to test the development options and further monitor the impact of the construction and operation of the gaskondensates facilities in the area.  Peru 13 The overall budget is estimated at US$450,000,broken down as follows: D. Institutional Development, Training and Capacity Building 2.18 A critical component of the energy sector reform, which will contribute to its sustainability, is the co~lsolidationand strengthening of its institutions through the improvement of the technical skills of the Ministry's staff. In particular, the National Energy Office (OTERG) and the key Directorates of Hydrocarbons and Electricity in the Ministry of Energy and Mines, which have lost a significant number of qualified personnel during the adjustment process need to rebuild their organizations and increase their efficiency. Most of the inputs that are being received for the preparation of regulations and other sectoral norms may well remain only on paper if there is no qualified staff in place to digest them and to put them in practice correctly.  ESMAP Country Paper 14 2.19 There are also urgent training requirements outside the central Government. The new local auditing and fiscalization fums, operating in hydrocarbons and, in general, local consultants operating in the energy sector are not applying state-of-the-art industry procedures and urgently require substantial technical training to upgrade their skills and ensure the quality of their reports and services. This effort will have to extend to newly graduated engineers which will be among those best placed to assimilate the new p d m s and adapt their working methods to the new sector policies. 2.20 It is, in consequence, necessary to establish a training program, with a medium and long-term perspective, to satisfy energy sector needs. Provided salaries are improved and financed through stable financial resources, recently trained professionals will be attracted into central governmentjobs. A training program in specialized institutions in Peru and abroad complemented with on the job training during actual reform work in the Ministry, could provide incentives that the typical central government jobs and salaries currently do not provide. This training program which would attract recent, better qualified university graduates in support of institutional development in these key governmental institutions is urgently needed. 2.21 An indication of training needs was given even by the Comision Nacional de Tarifas Electricas (CNTE). While the CNTE expressed overall satisfaction with the level and coverage of assistance received (fiom both the Bank and other sources) it nonetheless thought that ESMAP could usefully assist it in tasks that require more intensive staff inputs (e.g. learning by doing, on-the-job training) and greater involvement of national staff. The ideas mentioned by the Commission, together with a sector wide training plan may need to be reviewed and fully defined at the time of implementation. More specifically, CNTE requested assistance with: a. the methodology and actual calculation, of the new replacement cost of fixed assets in transmission and distribution (for tariff setting and rate of return purposes, as required under Articles 6 1 and 76 of the Law); b. training for CNTE and power utility staff on basic principles of welfare economics and tariffs (applied economics of regulation, tariffs and welfare: Chapter V of the Law). 2.22 To cover the training priorities, this activity will have two phases: i) assessment of needs and design of a plan; ii) implementation of priority actions over the two later years of the ESMAP program.  Peru 1 5 Budget The overall budget is estimated at US$300,000,broken down as follows:  ESMAP Country Paper 16 ANNEX I Draft Terms of Reference for Environmental Assessment of Proposed Gas and Oil Development Projects 1. This activity will be split into two stages, a "benchmark" assessment of the environmental situation now (including impact of major ongoing projects and activities other than Camisea Gas) and the EM proper of the Project i.e. Camisea (the scope of the project is still somewhat fluid as no real decisions had been taken, on the precise configuration of the project, although the presumption has been strengthened that it would be an integral project, as initially identified, to include both in s htreatment, gas and liquid pipelines to Lima and possibly, also to C u m , and, in addition LPG and gas processing and distribution facilities). 2. The task would be conducted by an interdisciplinary team of consultants, with expertise that includes tropical ecology and wildland conservation, oil pollution control, and anthropology or sociology. The consulting team should work with counterparts from the Directorate of Environmental AfFairs of the Ministry of Energy and Mines (MEMDAA), as well as PERUPETRO's regular staff, so that both receive in-service environmental training under the general coordination of ESMAP in coordination with LATEN and ENV. 3. To satisfy the Bank's requirements, the EA report should contain all of the features listed below. These are elaborated in the Bank's Operational Directive on Environmental Assessment (copy attached). The EA report's recommendations should also be consistent w ith the Bank's relevant environmental policies (Wildlands, Indigenous Peoples, Cultural Properties, and Involuntary Resettlement), Environmental Guidelines, and Occupational Health and Safety Guidelines. Copies of these policy statements will be attached to the Terms of Reference of the selected consultants and sent to MEMDAA and Pempetro. 4. The EA report should, at a minimum, contain the Benchmark Study, as the first stage of the EIA, including: a. An Executive S-; .. within b. A discussion of the v which the EA should be prepared. This would include a brief discussion of all relevant Peruvian environment-related laws and regulations, as well as the World Bank's environmental policies and guidelines; c. Until a detailed description of the project is made available (i.e. final project design is agreed) this stage of the study should limit itself to identifying the broader area of influence of the project's possible environmental impacts (including likely pipeline routes) and locating them on a suitable map. d. on the relevant biological, physical, and socioeconomic features of the project's area of influence. These include: Majorv - 1 .. sensitive areas, including different types of 1. forests; wetlands; rivers, streams, and lakes; all legally protected areas (including Parques Nacionales and other categories of reserves); centers of exceptional species diversity and endemism; and other wildlands; .. 11. Wild ; w m a lwhich are known to be threatened with extinction, of major local economic importance, or particularly vulnerable to Project activities; iii. Existing and projected (even without the project) future land, how they compare with the existing natural resources base (including soils and agricultural land use capabilities), and the extent to which these land uses are legal and in accordance with official Government plans for the area; iv. Geolagv, particularly any risks fiom earthquakes, landslides, or other disturbances; v. Surface and groundwater m, including rainfall and flooding patterns;  ESMAP Country Paper 18 vi. Information on h u m a n ,including ethnic background (types of indigenous groups and colonists), population size and projected growth, principal economic production systems (such as different types of agriculture, hunting and gathering, trading and services, and oil and gas industry labor), employment, land tenure, status of land title regularization, income distribution, access to public services, public health problems, and any major social tensions or conflicts; vii. ,- including archaeological, historic, and sacred religious sites; and ... vln. Ongoing and proposed . ..with significant environmental effects (but not directly related to the proposed project). The EIA Report should also contain: 5. Once final project design has been agreed, the EIA should include a description of all proposed project components including precise geographical location and the timing of construction of all project-related infrastructure. a. All significant environmental((direct and indirect) likely to result fiom the proposed project should be identified and (to the maximum extent possible) quantified. Anticipated environmental impacts should be discussed in terms of their probability of occurrence, physical magnitude, duration (whether temporary or permanent), reversibility, and compensability. The Bank's Operational Directive on EA provides a checklist of categories of possible environmental impacts. The EA report should indicate specifically how the environmental features described in the above paragraph (d.) would change under the project. b. of dtematives in project design (including siting and technologies used) and operation, to mi nim ize negative environmental impacts in the area of influence of the gas fields, oil-gas separation plant and other facilities, pipeline right-of-way, and port facilities. Each alternative should be evaluated in terms of its environmental impact, investment and recurrent costs, and institutional, training, and monitoring requirements. The least  Peru 19 environmentally damaging alternatives be selected and incorporated within project design, unless there are compelling reasons not to do so (for example, if the financial costs were to be prohibitive). Any departure fiam recommending the least environmentally damaging alternatives must be explicitly justified. Pipeline routing alternatives should be evaluated with a view towards minimizing road construction through environmentally sensitive wildland areas. Many of the technical options for minimizing environmental impacts fiom oil and gas developmenr fin terms of road construction management, drilling wastes, prevention and control of spills, land management and worker activities) are well known. c. A c,which would outline in detail all measures needed to minimize, mitigate, or compensate for any expected environmental damage fiom the project. This Plan should include a precise division of institutional responsibilities for its implementation (including monitoring of compliance and of environmental quality) between the -tor and national and local Government agencies, including recommendations for any legal which may be needed. The Plan should also contain a timetable of planned activities (which must be properly synchronized with project construction plans) and budget (which should include a discussion of how the plan would be fully financed). The plan should also indicate the numbers and qualifications of environmental personnel required within the staff of the Operator. d. c of - provided by Government and non-governmental organizations on the draft EA and the proposed project itself (see below), along with a brief discussion of how these comments were incorporated within the final EA. The final EA should also mention those comments which were rejected as inadvisable, and specifically indicate why those comments were rejected; and e. Important , - including a bibliography of references (published and unpublished), maps, aerial or ground photographs, technical diagrams, etc. 6. Within two months of beginning work on the EA, ESMAP, PERUPETRO and MEMDAA should organize two formal meetings to obtain constructive suggestions for carrying out the EA. and for improving the design and implementation of the project's  ESMAP Country Paper 20 environmental components. One of these meetings should be with all interested national and local Government agencies, including those in charge of environmental regulation, national parks and other reserves, forest management, land titling and colonization, indigenous peoples' afkirs and national and local development planning. The other meeting should be with interested parties, which should include environmental Egos; indigenous peoples' Egos; international oil and gas companies and contractors with existing (or formally planned) operations in Peru; independent experts, such as consultants and university professors; and any other i n t e r d members of the public. The written invitations for both meetings should include a copy of the terms of reference (and draft table of contents, if available) for the EA., a brief description of the proposed project, a small scale map of the main project area, a chronogram of the planned EA preparation, and a copy of the Bank's EA Operational Directive. 7. After a draft EA is completed, it should be formally reviewed (if possible) by the government's m ai n institution in the environmental protection area; the BanklESMAP will consider these comments before completing the EIA. Copies of the draft EL4 should also be sent to the same governmental and non-governmental representatives who participated in the earlier two meetings (discussed in the above paragraph); these representatives should be invited to provide comments on the draft EA. These comments can be in writing, or presented orally at one of two additional formal meetings (one for governmental and one for non-governmental representatives), which PERUPETRO and MEMDAA should specifically convene to review the findings and recommendations of the draft EA. ESMAP, PERUPETRO, MEMDAA and the consultants should take all constructive comments into account in finalizing the draft EA. 8. During the process of preparing the EA, PERUPETRO together with the MEMDAA should send brief (about 5 pages) bi-monthly progress reports to the BankIESMAP. These reports should indicate: a. Which major tasks have been accomplished, and which remain to be done; b. The pace of progress in completing the EA, and whether any delays are expected; c. Any surprising findings which could substantially change project design or implementation plans; and d. Any unforeseen problems which the BanklESMAP could help resolve.  Peru 21 9. The EA report should be no longer than is necessary to convey all of the information needed for proper environmental evaluation and design of the project. Most of this information is outlined above. The final EA should be made available to interested members of the public (fke or at a nominal charge, if needed to cover reproduction costs) including the potential operators of the project, if no operator has been finally designated by them.  JOINT UNDP / WORLD BANK ENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP) PURPOSE The Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) was launched in 1983to complement the Energy Assessment Programme, established three years earlier. ESMAP's original purpose was to implement key recommendations of the Energy Assessment reports and ensure that proposed investments in the energy sector represented the most efficient use of scarce domestic and externalresources. In 1990,an internationalCommissionaddressed ESMAP's role for the 1990s and, noting the vital role of adequate and affordable energy in economic growth, concluded that the Programme should intensify its efforts to assist developing countries to manage their energy sectors more effectively. The Commission also recommended that ESMAP concentrate on making long-term efforts in a smaller number of countries. Today, ESMAP is conducting Energy Assessments, performing preinvestment and prefeasibility work, and providing institutional and policy advice in selected developing countries. Through these efforts, ESMAP aims to assist governments, donors, and potential investors in identrfymg, funding, and implementing economi- cally and environmentally sound energy strategies. GOVERNANCE AND OPERATIONS ESMAP is governed by a Consultative Group (ESMAP CG), composed of representatives of the UNDP and World Bank, the governments and institutions providing financial support, and repre- sentatives of the recipients of ESMAP's assistance. The ESMAP CG is chaired by the World Bank's Vice President, Finance and Private Sector Development, and advised by a Technical Advisory Group (TAG) of independent energy experts that reviews the Programme's strategic agenda, its work program, and other issues. ESMAP is staffed by a cadre of engineers, energy planners and economists from the Industry and Energy Department of the World Bank. The &ector of this Department is also the Manager of ESMAP, responsible for administering the Programme. FUNDING ESMAP is a cooperative effort supported by the World Bank, UNDP and other United Nations agencies, the European Community, Organization of American States (OAS), Latin American Energy Organization (OLADE), and countries including Australia, Belgium, Canada, Denmark, Germany, Finland, France, Iceland, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Sweden, Switzerland, the United Kingdom, and the United States. FURTHER INFORMATION An up-to-date listing of completed ESMAP projects is appended to this report. For further information or copies of ESMAP reports, contact: ESMAP C/O Industry and Energy Department The World Bank 1818 H Street N.W. Washington, D.C. 20433 U.S.A.