Document of The World Bank Report No. 14939-PE STAFF APPRAISAL REPORT PERU RURAL ROAD REHABILITATION AND MAINTENANCE PROJECT NOVEMBER 6, 1995 Infrastructure and Operations Division Country Department III Latin America and the Caribbean Regional Office CURRENCY EQUIVALENTS (as of October 23, 1995) Exchange rate used in this study: Current Unit = Nuevo Sol (S/.) US$ 1 = S/. 2.26 FISCAL YEAR OF GOVERNMENT OF PERU January 1 - December 31 ACRONYMS and ABBREVIATIONS CORPAC Peruvian Airport and Commercial Aviation Corporation (Corporacion Peruana de A eropuertos y A viaci6n Commercial) CTAR Regional Temporary Administrative Council (Consejo Transitorio Administrativo Regional) DGC General Directorate of Roads (Direcci6n General de Caminos) ENAFER National Railway Company (Empresa Nacional de Ferrocarriles) FONCODES Social Development and Compensation Fund (Fondo Nacional de Compensacion y Desarrollo Social) FCM Fondo Compensaci6n Municipal GDP Gross Domestic Product ICB International Competitive Bidding fDB Inter-American Development Bank IERR Internal Economic Rate of Return INADE National Institute of Development (Instituto Nacional de Desarrollo) NCB National Competitive Bidding MEF Ministry of Economy and Finance (Ministerio de Economiay Fin2anzas) MTC Ministry of Transport, Communications, Housing and Construction (Ministerio de Transporfes, Comunicaciones, Vivienda y Construcci6n) NGO Non-Governmental Organization NMT Non-Motorized Transport PERT-PCR Project Implementation Unit (Proyecto Especial Rehabilitaci6n Transporte-Programa Caminos Rurales) PERT Project Coordination Unit for Ln.3717-PE (Proyecto Especial de Rehabilitaci6n de Infraestructura de Transporte) SIMAC National Highway Maintenance System (Sistema Nacional de Mantenimiento de Carreteras) SOE Statement of Expenditures CAPECO Peruvian Chamber of Construction (Camara Peruana de la Construcci6n) PERU RURAL ROAD REHABILITATION AND MAINTENANCE PROJECT Table of Contents 1. RURAL DEVELOPMENT AND THE TRANSPORT SECTOR .....................................................1 A. THE ECONOMIC SETTrNG ..............1.......................... B. RuRAL DEVELOPMENT AND POVERTY IN PERUh ............................................1.............................................. .... 1 C. GOVERNMENT STRATEGY FOR RURAL DEVELOPMENT AND POVERTY ERADICATION ............... ............................... 3 D. TRANSPORT SECTOR OVERVIEW ...........................................................4.............................. 4 E. THE ROAD TRANSPORT SECTOR ...... 5 F. RURAL ROAD SECTOR ISSUES ...... 11 G. PREvious BANK INVOLVEMENT IN THE TRANSPORT SECTOR .16 2. THE PROJECT.17 A. ORIGIN OF THE PROJECT .17 B. RATIONALE FOR BANK INVOLVEMENT .17 C. PROJECT OBJECTIVES .18 D. PROJECT DESCRIPTION .18 E. ENVIRONMENTAL AsSESSMENT .27 F. PROJECT COSTS AND FINANCING ...7................................. 27 G. PROJECT BENEFITS ...........................................28.......................................................................................... 28 3. PROJECT IMPLEMENTATION .31 A. PROJECT ORGANIZATION AND MANAGEMENT .31 B. SELECTION AND PROGRAMMING OF INVESTMENTS ................................................................................... 34 C. IMPLEMENTATION STRATEGY .37 D. MONITORING, REPORTING AND BANK SUPERVISION .41 E. PROCUREMENT.45 F. DISBURSEMENTS, ACCOUNTING AND AUDITS ................48................................................................................... 48 . PROJECT RISKS AND SAFEGUARDS .51 4. AGREEMENTS TO BE REACHED AND RECOMMENDATION .52 This report is based on the findings of a joint IDB-IBRD appraisal mission that visited Perd from May 25 to June 9, 1995. The World Bank team comprised Messrs. /Mmes Jose Luis Irigoyen (Task Manager), Aurelio Menendez, Sally Burningham (all of LA31N), Janet Entwistle (LA3C1), Juan Quintero (LATEN), Paul Guitink (TWUTD), Oswaldo Patifio (Resident Mission), Nora Femenia and Eduardo Beteta (Consultants). The IDB team comprised Messrs. Rodolfo Huici (Task Manager), Hernan Welsh (RE3FI3) and Felix Leyton (Resident Mission), and Jacob Greenstein (RE3FI3) and Ricardo Bellver (Consultant) in a follow-up mission. Mr. Peter Ludwig is the responsible Division Chief. Messrs. Henri Beenhakker and John Riverson are peer reviewers. The Projects Advisor is Mr. Robert Crown. Mr. Yoshiaki Abe was the Department Director until Octojer 1, 1995. Mr. Paul Isenman is the present Department Director. i PERU RURAL ROAD REEIABILITATION AND MAINTENANCE PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Peru Implementing Agency: Ministry of Transport, Communications, Housing and Construction Poverty Category: Program of Targeted Interventions. The project's intends to: (a) improve access of rural areas to markets and services, encompassing about 2.7 million people living in the initial six departments, and about 4.5 million or 20 percent of the population of Peru once the project is expanded to 12 departments; (b) form and strengthen small and medium size enterprises and community groups that will be involved in the execution of works financed by the project, and spur the creation of more than 250 micro- enterprises participating in routine maintenance contracts; and (c) bring benefits to about 100 provincial municipalities as a consequence of the investment and institutional strengthening components included in the project. About 35,000 one-year equivalent of non-skilled seasonal jobs would be generated by road rehabilitation works and more than 4,000 of non-skilled permanent jobs would be generated by road maintenance works contracted out to micro-enterprises. Loan Amount: US$90 million equivalent, including up to US$9 million in retroactive financing. Terms: LIBOR-based floating rate single currency loan in US dollars, payable in 17 years, including five years of grace. The loan will be amortized in level payments of principal. Commitment Fee: 0.75 percent on undisbursed loan balances, beginning 60 days after signing, less any waiver. Net Present Value: All sub-projects will meet eligibility criteria that assess institutional, environmental and technical factors (including the sustainability of the investments) as well as social and economic benefits. Social criteria based solely on prevailing poverty indicators would be applied to sub-projects with costs below a certain threshold. The economic criterion establishes a benchmark minimum rate of return of 10 percent, based on a net increase in agricultural and livestock output. The economic analyses of 76 percent of ii the road rehabilitation sub-projects in terms of kilometers (70 percent in terns of costs) under the pilot yields a net present value of almost US$25 million and a prorated internal economic rate of return of 44 percent. Financing Plan: See Paragraph 2.36 Environmental Classification: B Staff Appraisal Report: 14939-PE Map: IBRD No. 27276 - 1 - PERU RURAL ROADS REHABILiTATION AND MAINTENANCE PROJECT 1. RURAL DEVELOPMENT AND THE TRANSPORT SECTOR A. The Economic Setting 1.1 Peri has undergone a remarkable recovery since the inauguration of the Fujimori administration in July 1990 which saw the implementation of the most comprehensive program of economic reforms in the history of the country. While Peru has a generous supply of minerals, fish and hydrocarbons, the country had seen vast fluctuations in its economy in its previous 40 years and poverty has been a long-standing problem. The reforms aimed at reducing inflation, stabilizing the economy and radically changing the state-dominated economy into a market- orientated one. The reforms were in large part embodied in the Constitution ratified by a close margin in an October 1993 popular referendum. There has been a steady drop in the rate of inflation (from 7,600 percent in 1990 to 15 percent in 1994); the economy has recovered strongly growing by 10% in 1994; and there has been enormous progress in reducing terrorism and establishing public order. 1.2 The economic recovery has resulted in welfare increases for the vast majority of Peruvians. In the short term, however, the benefits have not reached the poor to a sufficient degree. Government priorities have increasingly shifted towards enhancing the access of poor communities to mainstream economic activities by reversing the deterioration of basic infrastructure after years of neglect. The Government is rehabilitating basic infrastructure concentrating on areas with the highest prevalence of extreme poverty, the rural sierra and the urban pueblos j6venes. B. Rural Development and Poverty in Peru 1.3 After several years of slow agricultural growth, including negative growth from 1990- 1992, real agricultural GDP grew by over 6 percent in 1993 and by 13 percent in the first half of 1994. Better climatic conditions and increased rural security seem to be underlying factors for the recovery. However, although production recovered in 1993 the levels of production were still below average for 1986-1989 for most crops. In 1993, agriculture represented 12.3 percent of GDP and industry (including fishing, mining and manufacturing) represented 34.1 percent of GDP. About 40 percent of the economically active population work in the agricultural sector. This percentage is higher in departments of the rural sierra like Huancavelica where about 60 percent work in the agricultural sector. GDP growth in the sector has been uneven while the productivity of agricultural labor has also remained poor, improving only marginally during the last three decades. On average, there was zero annual growth in the rate of food production per capita between 1979 and 1992. Agricultural profitability declined with the removal of subsidies and price control mechanisms and the decrease in world prices for many crops. - 2 - 1.4 Although the majority of Peru's population has traditionally been employed in the agricultural sector, Peru6 is not an intrinsically agricultural economy. The per-capita availability of cultivable land is only 0.13 hectares, which is less than one third the Latin American average of 0.44 and lower than the 0.18 average for Asia. Nevertheless, food products and non-elaborated agricultural products contributed to about one third of Peru6's exports in 1993. Commercial farming is concentrated in the costa in heavily irrigated areas where rainfall is limited and this production accounts for 60% of agricultural GDP. The sierra, with only 18% of cultivable land, has 36% of the country's population and relies largely on subsistence farming. The scope for a large increase in agricultural productivity of the sierra is limited since this mountainous region does not have a favorable natural environment for agriculture. On the other hand, the prospects for growth of livestock farming (vacuno and alpaca) are encouraging as the price of livestock and its byproducts has been rising. In addition, non-farm activities are important in the sierra, in particular the production of handicrafts. The non-farm sector has also good prospects for growth and should increasingly play a larger role in improving the standards of the rural poor. 1.5 Almost 30 percent of Perfu's population live in rural areas. The prevalence of poverty is highest in the rural mountainous areas, where two thirds of the households are poor and 47 percent fall into the extreme poverty category. In the mountains less than half the population has access to a public water system, and only 8 percent have access to public sewerage removal services. The indigenous populations are much poorer than the rest of the population: they account for 40 percent of the extremely poor and 25 percent of the poor. In health, the situation has been worse in some rural areas, due to long-standing regional and ethnic inequalities. Infant mortality rates are three times higher in rural areas than in metropolitan Lima. For example, while the infant mortality rate averaged 58 per 1,000 births for the whole country, in the department of Huancavelica, in the rural sierra, the rates were 107 deaths per 1,000 births in 1993. In nutrition, in 1993, while 48 % of primary school children were defined as being chronically malnourished, this was concentrated in the rural areas where 64% were chronically malnourished as compared to 34% in urban areas. In 1991, malnutrition affected as much as 73 percent of children under the age of 5 in some rural areas (compared to 13 percent for the whole country). In education, in 1991, about 29 percent of the rural population was illiterate (compared to 15 percent for the whole country), and 44 percent of rural women could not read or write. 1.6 Against this background, the enhanced macroeconomic conditions have laid the ground for improvements in poverty indicators. A July 1994 survey stated that total poverty in Peru declined from 54% in 1991 to 46% in 1994, and extreme poverty declined from 22% to 18% over the same period. This decline in poverty levels has been attributed to the recovery of the economy together with the implementation of various social programs in the last few years. Nonetheless, the prevalence of both poverty and extreme poverty remains high in the rural sierra with levels of 66 percent and 44 percent, respectively (Table 1). The rural sierra is estimated to contain the largest number of extremely poor (about 1.6 million people) while, because of its size, metropolitan Lima contains the largest number of poor (about 2.5 million people). The more modest impact on poverty reduction to date in the rural sierra, reflects the depth and intransigence of economic stagnation in rural Peru. Decades of uneven distribution of the benefits of development, and the difficulty of expanding small scale improvements in economic and social - 3 - infrastructure and delivering services outside the cities, has contributed to a slower pace of recovery and reform in rural Peru. Table 1. Poverty by region, 1991 and 1994 (percentage of population) Poverty (1) Extreme poverty (2) Region 1991 1994 1991 1994 Rural Sierra 68% 66% 47% 44% Urban Sierra n/a n/a 19% 15% Metropolitan Limna 49% 33% 10% 4% Costa Urban 55% 44% 22% 13% Peru (total) 54% 46% 22% 18% (1) Poverty = insufficient income to purchase the equivalent of a food basket which would meet energy and protein requirements and satisfy other basic non-food requirements. (2) Extreme poverty = insufficient income to purchase only the equivalent of the food basket Source: FONCODES C. Government Strategy for Rural Development and Poverty Eradication 1.7 In the face of overwhelming problems in the social sectors, particularly for the indigenous community, the Government established in 1990 a social emergency program to provide direct food and health assistance to the poor. This program was replaced in August 1991 by FONCODES, the National Fund for Social Compensation and Development, a mechanism for channeling government and external resources to labor-intensive projects. FONCODES, which is centrally administered, encourages close involvement of community representatives, and responds to demands from poor communities for rehabilitating social and economic infrastructure, and improving access to basic social services. 1.8 In early 1993, the Government prepared its first poverty alleviation strategy. This strategy focused on the promotion of broad based economic growth and the improvement in the living conditions of the extreme poor through FONCODES as well as through food assistance, health, and education programs coordinated through the Ministries of Health and Education. It concentrated on targeting programs to the rural areas, particularly the rural sierra, where the extreme poor are concentrated. This strategy has already begun to show results as indicated by a decline in the percentage of those living in extreme poverty, detailed in the previous section. 1.9 Recognizing that the absolute numbers of poor are still high, among the highest in Latin America, the Government, with the goal of poverty eradication in mind, has been broadening its efforts at poverty reduction beyond FONCODES and centrally administered and funded programs in the social sectors. These programs circumvent local governments, and while many are effective in getting things done, their sustainability is uncertain. The Government has, (1) started extensive programs, with local government involvement, to rehabilitate and maintain long neglected basic infrastructure starting with roads and water supply and sanitation networks, (2) initiated a program to rationalize social sector expenditure, (3) instituted a series of integrated rural development projects implemented through FONCODES, (4) established a pilot program of - 4 - decentralization of responsibility and funding for primary education in two school districts, (5) decentralized responsibility for FONCODES project approval to select qualified local offices, and (6) made initial efforts at improved central coordination of programs. 1.10 To consolidate and solidify these various efforts, the Government has initiated efforts to rethink its poverty strategy. It is now developing a strategy with a longer term view toward social integration and efficiency in service delivery. This strategy, which is under preparation to be presented at the third Consultative Group, planned for October 1995, will continue to recognize that the promotion of broad-based growth is key to poverty reduction efforts. Other essential elements include increasing the efficiency of public sector service provision through: (1) decentralization of infrastructure and social services which will require strengthening of local governments and funding to match responsibility, (2) coordination of programs within central government and with local governments, (3) clarification of the role of FONCODES, FONAVI vis a vis other programs, (4) recasting and strengthening of central government functions complementary to decentralization, and (5) further rationalization of expenditures. Further, the strategy should ensure that programs are environmentally sustainable, and reach the indigenous population and the large informal sector. In addition, it should clarify the role of the private sector in infrastructure and social service provision. D. Transport Sector Overview 1.11 The Peruvian transport system comprises: i) a classified road network of nearly 70,000 kin, of which about 11 percent is paved; ii) a system of 24 maritime and river ports; iii) a railway network (about 2,000 km) made up of seven separate systems, with little physical or operational integration; iv) 300 airports and landing strips, only 16 of which have paved runways; and v) a system of pipelines, the most important of which is the 900 km North Peruvian pipeline from the oil fields in the selva to the coast at Bayovar. Similar to trends in most other countries, the road sector has increasingly predominated in the transport of passengers and freight across Peru6 (Table 2). In 1992, roads carried 71% of freight tons, followed by river and (mainly) coastal shipping with 25%. Railways have decreased their participation to 4%, though they play an important role along particular corridors (Callao-Huancayo and Matarani-Puno). Air freight transport hardly reaches 0.1%. Passenger traffic largely moves by road, with the railways playing a critical role along specific corridors that lack adequate access roads. Table 2. Modal Distribution of Domestic Freight Traffic (percentage distribution of tonnage) Year Road Shipping Railways Air 1983 33 59 8 0.31 1988 36 57 6 0.20 1992 71 25 4 0.06 Source: AMTC 1.12 Transport infrastructure provision and operations have been concentrated in the hands of public sector enterprises. Recent reforms aim at commercializing operations, transferring services to the private sector, and reducing the level of public involvement in the construction and - 5 - operations of the various transport infrastructure. One of the initial actions in this respect was the privatization of the national airline carrier--Aeroperu--and the transfer of port operations to the private sector. On-going efforts include the privatization of the railway company--ENAFER--and the creation of a road authority that would increase the financial autonomy for the maintenance of the national road network. These efforts are being supported by Loan 3717-PE. Annex 1 summarizes the main characteristics of the transport sub-sectors and details government actions on each of them. E. The Road Transport Sector 1.13 The Road Sector. Road transport is the dominant mode of domestic transport in Peru, carrying about 70 percent of domestic freight traffic and 80 percent of inter-urban passenger traffic. Yet PeruI has the lowest endowment in road infrastructure especially in terms of paved roads compared to peer countries in Latin America. The condition of the road system in Perui is not satisfactory to support national economic and social goals. From 1986 to 1991, investments in the road sector were very limited. Reflecting a dramatic declining trend, the percentage of government expenditures dedicated to the transport sector decreased from 6.1 percent in 1981 to 2.5 percent in 1990. Since 1991, investments have grown incrementally, reaching a level of US$370 million in 1994, largely fueled by the multilateral and bilateral-financed programs of road reconstruction and rehabilitation (Table 3). Analyses performed by the Planning Office of the Ministry of Transport, Communications, Housing and Construction (MTC) indicate that the level of investment would have to reach about US$600 million per year in order to bring the road network to satisfactory standards. Table 3. Public Expenditures in the Road Transport Sector (US$'000) Programs 1990 1991 1992 1993 1994 Central Administration and Management 13,270 16,419 21,499 23,908 18,781 DGC Rehabilitation Program 28,850 27,380 84,028 72,938 96,964 IDB-Highways Project - - 18,820 79,734 166,090 World Bank - Transport Rehab. Project - - - 227 6,023 SINMAC-Road Maintenance Program - - - 2,593 23,015 Subtotal: Central Government 42,120 43,799 124,347 179,400 310,873 Subtotal: Regional Governments 12,886 20,042 14,132 33,323 46,971 Decentralized Agencies (1) 1,270 7,553 8,842 4,916 13,137 Total Transport 56,276 71,394 147,321 217,639 370,981 Total Government Expenditure (2) 3,908,157 3,883,406 4,626,353 4,470,241 5,610,609 Transport Exp. / Total Gov. Exp. (%) 2.52 2.97 5.87 8.88 12.15 As a percentage of GDP 0.4% 0.4% 0.5% 0.6% 0.8% (') Only expenditure in transport by INADE (2) External debt service not included Source: DGPP-MEF - 6 - 1.14 Road Network. The Peruvian road network comprises about 70,000 km of roads of which about 11 percent are paved roads, about 19 percent are gravel roads, while the remaining 70 percent are earth and non-engineered roads. This road network is organized into three tiers consisting of(1) about 16,000 km of national roads, (2) about 14,000 km of secondary or departmental roads, and (3) about 40,000 km of rural roads (see Table 4). The road system deteriorated badly in the 80s due to mismanagement, severe financial constraints and deferred maintenance practices. Government's emphasis on the strategic rehabilitation of the existing infrastructure is reversing this trend. While the condition of the national network has improved since 1990 as a result of on-going rehabilitation and maintenance programs supported by IDB, the Bank and other donors, conditions on the secondary and rural networks remain critical. The poor reliability of these roads also negatively affects the cost of road usage. The lack of all weather roads coupled with poor maintenance practices and adverse topographical and climatic conditions, render large segments of the rural road network impassable or very costly to users. This has impeded development and contributed to the isolation of poor rural communities, particularly in the mountainous sierra, where 66 percent of the population is poor and about 1.6 million inhabitants live in extreme poverty. Table 4. Road Network by Function Class and Surface Type (km) Road Network Total by type of surface (km) Functional Total Non-engineered Classification Km. Paved Gravel Earth roads National or Primary Roads 15,692 5,635 7,020 2,594 442 Departmental or Sec. Roads 14,473 1,057 4,136 6,039 3,242 Rural Roads 39,805 766 2,420 7,228 29,390 Total 69,970 7,458 13,576 15,861 33,074 Source: Planning Office-MTC 1.15 Institutional Set-up. Administration of roads in Peru has gone through fundamental changes in the last decade, in part due to a protracted decentralization process which is still far from being settled. Historically, MTC's General Directorate of Highways (DGC) had overall responsibility for the planning, design, construction, and maintenance of the entire road system. The Regionalization Law (1984) transferred all roads to the newly established regional governments. This mandate was partially reversed in 1991, when MTC was reassigned the responsibility for managing the national road network, while departmental and rural roads remained under the control of regional and local governments. Departmental and rural roads receive insufficient attention from the various agencies falling under the jurisdiction of regional and local governments. A weak institutional base, ill-defined responsibilities, and strong dependence on central government budgetary allocations have prevented regional governments from delivering more responsive services and coordinating development programs. Presently, the future of Regional Governments is uncertain under the government's decentralization agenda. 1.16 The Municipal Law (Ley Organica de Municipalidades) passed in 1984 made provincial and district municipalities responsible for rural roads planning, construction and maintenance, responsibility that is shared with regional governments in the absence of sufficient resources. The Law establishes a distinction between provincial and district municipalities. However, functional assignments between them are ambiguous in as much as both types of municipalities are given largely the same set of responsibilities (though the legislation gives more prominence to the role of the provincial municipalities). Such responsibilities, however, are not commensurate with the institutional and financial capacity of those municipalities. This, compounded with ambiguities and overlaps in the roles of the different levels of government and inherited dependency from central government, results in a generalized avoidance of accountability in the sector. In response to the weaknesses of local governments, community-based organizations have intervened in an attempt to fill the gap and cope with the most compelling needs, but these efforts have been isolated and unsustained. The result is a very large rehabilitation backlog and the poor serviceability of the departmental and rural road network. 1.17 Road Financing. Currently, road users are charged taxes on the consumption of automotive fuels, license registration fees, and tolls on thirteen major national roads (as of end 1994). Taxes on automotive fuels vary between 40 and 55 percent at the pump depending on the type of gasoline or diesel. In 1993, these taxes (both the value-added tax--representing 30 percent of the revenues--and a selective consumption tax) generated about US$650 million or 16 percent of the total central government revenues. Revenues collected through tolls amounted to about US$16 million in 1994 while license registration fees, mostly collected by municipal governments, are negligible. With an annual budget of about US$370 million for road transport projects, user charges (net of the general value-added tax) would cover the maintenance and rehabilitation costs of existing infrastructure. However, tax revenues are incorporated into the general central treasury (or municipal treasury in the case of registration taxes) and only toll revenues are directly collected and managed by MTC. As most of the revenues are collected by the central government, local entities depend on transfers to be able to finance their responsibilities in road transport. These responsibilities already translate into budgets in which public transport projects--including the construction and rehabilitation of roads--constitute the largest percentage of the investments (about 26 and 30 percent for provincial and district municipalities, respectively). 1.18 For most municipalities, a principal source of revenue is the intergovernmental transfer channeled through the Municipal Compensation Fund (MCF). The MCF is financed from a 2 percent surcharge (equal to about 10 percent of the receipts) on the national Value Added Tax, along with an 8 percent share of the gasoline tax and with two other minor revenue sources. There is a high degree of variation among the municipalities in terms of their dependence on these transfers which are 80 percent earmarked for expenditures on capital investments. While the 12 largest municipalities outside Lima depend upon the transfers for only 12 percent of their revenues, the 51 poorest municipalities depend upon the transfers for 80 percent of their revenues. The latter clearly lack the capacity to raise funds locally to any meaningful extent. The fiscal autonomy of municipal governments is very limited. They cannot impose taxes or determine tax rates - these are determined at central level, and the same tax rate structure applies to all municipalities. Municipalities can generally update tax bases, except for property tax (the main municipal tax) which is updated by the National Council of Assessments. Overall, a lack of transparency in the allocation of responsibilities and in the assignment of resources to the different levels of government does not render a level and a structure of user charges that are both - 8 - sufficient to cover the maintenance and rehabilitation needs of the road network and equitable in charging users in accordance with their contribution to road damage (and other externalities). Progress on this matter is being monitored in connection with Loan 3713-PE, and will be further developed for the particular case of the rural road network under a study that will be carried out under this project. 1.19 Road Infrastructure and Transport Services. The importance of rural infrastructure and transport services is reflected in the results of a 204-household indicative survey of rural communities' access to transport, markets, input supply systems and social services. Table 5 disaggregates the average distance from sample households to various services by department. The table suggests that access to motorized transport is lowest in the sierra departments, where the project would be initiated. Table 6 shows the percentage distribution of distances between a random set of 204 households and motorized transport, markets, schools, health posts, and other facilities. Though a large percentage of households appear to have access to motorized transport, access to important services such as health and secondary schools, markets, and technical assistance entail travel over relatively large distances. The table also reflects the centrality of transport infrastructure for technical assistance in agriculture. Table 5. Average Distances to Services by Department (km) No. Post Market Mot. Bank Public Primary Second. Techn. obsv. Office Transp. Agency Phone School School Assist. Sierra Ancash 19 8.3 3.0 1.0 10.7 13.9 0.1 2.3 9.6 Apurimac 4 9.5 10.0 0.3 9.5 16.3 1.1 4.8 16.3 Ayacucho 4 14.5 8.0 1.3 15.3 15.3 0.1 7.8 15.3 Cajamarca 25 6.7 8.2 2.0 5.4 12.7 0.8 2.5 13.1 Cuzco 22 5.6 5.8 2.0 6.3 7.2 0.9 5.8 7.4 Huancavelica 4 3.2 3.2 3.0 3.3 19.0 0.5 3.3 17.8 Huanuco 6 11.5 6.0 2.0 13.7 14.2 0.5 2.0 14.2 Junin 9 3.1 2.8 0.1 2.4 2.9 0.1 3.0 4.3 Pasco 8 10.8 9.6 0.0 10.8 11.1 0.4 5.0 10.8 Puno 14 3.3 3.5 0.4 3.9 20.7 0.2 1.8 9.1 SanMartin 9 15.4 17.1 0.8 17.1 17.6 0.0 16.8 12.1 Selva Amazonas 5 41.6 41.6 0.0 54.9 41.6 2.3 19.1 30.8 Loreto 12 17.6 9.1 0.1 9.0 33.1 0.0 5.9 15.9 Madre de Dios 2 16.0 16.0 0.0 16.0 22.0 0.0 16.0 7.0 Ucayali 2 20.0 20.0 na 20.0 27.0 0.0 0.0 30.0 Costa Arequipa 4 9.5 2.5 0.0 7.8 9.5 0.0 3.1 20.5 Ica 2 3.3 3.3 0.0 3.3 3.3 0.0 2.3 15.0 La Libertad 18 4.4 3.1 1.6 4.9 8.2 0.9 3.8 9.9 Lambayeque 6 6.7 6.8 1.2 6.7 8.1 0.6 4.1 5.2 Lima 11 7.3 4.6 1.4 8.3 8.1 2.0 3.7 9.4 Moquegua 4 2.5 41.3 0.0 2.5 41.3 0.3 0.9 0.2 Piura 14 12.1 6.0 0.6 6.5 7.1 0.6 2.5 10.9 Source: Own calculations based on May-July 1994 Survey of 204 Households, Cuanto Institute et~~~~~~~~~~~c 4 Z ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~o t)~~~~~~~~- C.~~~~~~~~~~~~~~~C cu ~ ~~~~~~ aAE J5,~~~~ n g.0~~~flg. -a.&Z Qn LAO C~~~~~0-- -j C, ~~~ tn -~~~~~~~~6 c CD ~~.. ~ ~ ~ ~ ~ ~~~ - ~ C We-' .O . . .0. . . . O,~~~~~~~ C) 0~ ~~~~U r 7 0 rA 0~0~ 40 PO- - P t:~~ nI~~. 0 -~~~~~~~~~~~ O~ 0 ~N-& u'O ooA FLC.r C.~~~~~~~~~~~~~~~~~~~~~~~~~ir - 10- 1.20 Boxes 1, 2 and 3 illustrate how transport availability affects economic development and poverty in Cajamarca and Cuzco. In the first case (Box 1), poor roads have resulted in high production and service costs and risks, and have led to inappropriate technical choices. The second case (Box 2) shows how a municipal government and the local transport organization worked together to provide transport along an unprofitable route by cross-subsidization from high-volume routes. Road rehabilitation and maintenance would decrease the overall vehicle and managerial costs, increase the reliability of services, and reduce the costs to all the passengers and transport operators. In the third case (Box 3), high transport costs along the poorly-maintained roads surrounding the town of Ccorca and connecting it to Cuzco detract the commercial margins of rural potato producers. To accommodate the high transport costs and the deficient road conditions farmers are forced to use less-efficient means of transport. Box 2 Passenger transport enterprise of "Santisima Cruz de Motupe" Santisimna Cruz de Motupe (SCM) is a local transport organization that manages a fleet of 60 smal vans servicing the periphery iof Cajamarca. This case shows how the regulatory powers of the municipality combined with the managerial economies of scale at the private local transport organization converged to provide service of acceptable cost:and frequency to low income, sparsely populated peripheral areas. The municipality negotiated with and granted to SCM operation rights lover a combination of high-profit and deficitary routes, :so transport service providers could operate profitably whilekservicing the low-revenue routes. Incentives and Mregulationsi had to complement proper route mixtures and scheduling to deter the relatively autonomous operators from concentrating on the profitable routes and neglecting the peripheral routes. To provide operators with Ian incentive to serve:the deficitary routes, the municipal government (a) limited entry to the profitable routes by non-affiliated transport operators, (b) reduced the cost and red tape needed to renew opeiration permits, and (c) used its influence to prevent graft at the contracted routes. SCM, in turn, (a) agreed to pay and supervise four controllers to monitor schedule and route compliance by all operators, and (b) negotiated preferential group insurance rates for all affiliates. Box 3: The Comuneros of Ccorca Ccorca is a rural town of 4000 people located about 25 km from Cuzco. For centuries, sma11 farmers in Ccorca have planted potatoes for household consumption and trading; Market pricesfor potatoes have a high transport content, because potatoes are bulky and heavy. Fann-gate prices for.a sack of potatoes in Ccorca, for instance, are about US$ 1.50, while market prices in Cuzco are close US$ 3.00. The price differential results: mostly from transport costs, as there are no further processing. storage or packaging charges,:and:the potato marets in Cuzco are: fairly competitve. When transport conditions deteriorate, prices and marketing margins ate affected..: Faced withmincreasing:transport costs, some farners use back porterage :and pack animals, but those less: able tocay heavy loads or keepgporterage animals endure smaller incomes. 1.21 Box 4 summarizes some of the comments made by rural people who assisted to four beneficiary-participant workshops during the appraisal mission (May-June 1995). The summary highlights the benefits from road rehabilitation as perceived by the beneficiaries themselves. The workshops appear to be a powerful means for mobilizing the public around transport issues and creating ownership for project implementation. Overall, the field experiences validated the approach taken for defining the project's objectives and performance indicators (summarized in the logical framework given in Annex 3), the structure of its demand-driven approach (para. 3.8), and the development of its social and economic justification (para. 3.10). - 11 - Box 4: Te View from the Beneficiawy Communities During the appraisal mission (May-June 1995), four workshops were organized with the direct participation of beneficiaries. TIwo involved community leaders (e.g., mayors) and heads of base organizations (e.g., NGOs) in Cusco and Huancavelica; the other two involved open discussion with whole conunuities in one- day meetings in the towns of Ccorca (Ctuzco) and Izcuchaca (Huancavelica). The following is a summary of the participants' views on road transportation issues: * the road is too steep, too narrow, with too many curves; and bridges will not support average truck weight, liniiting the supply of transport services and increasing transport costs * high transport costs affect negatively not only prices and the timely delivery of market products but also the cost of products imported into villages * the road becomes slippery when it rains, making it impossible for trucks to pass; the community is then deprived of selling its products and obtaining the necessary production inputs * during the winter, there is no traffic due to potholes and the rains that flood the roads; the community is isolated and cut from critical health and education services; all year-round, health providers and teachers do not visit the village because of bad road conditions * with limited production and limited health and education services, people are emigrating and those who stay are becoming poorer and poorer * bad road conditions limit the frequency and quality of transport services; with limited services, operators have the prerogative to accept passengers and the type of products to be transported, better road conditions will bring more and better transport services and increased competition * with poor access, the quality of health and education services in the communities declines markedly because professional doctors and teachers do not want to serve those communities, even when the basic facilities are in place * well-maintained roads would allow improved transport services and commerce with neighboring communities and progressive substitution of animal by vehicular transport * there should be a permanent public information campaign to make communities aware of their dependency on roads in good condition for their well-being and development * important to reach a multi-sector agreement (among transport experts, comuneros, transport operators, etc.) to ensure future support and execution of road maintenance 1.22 Road Construction Industry. There are about 1,300 construction firms registered in CONSULCOP (Consejo Superior de Licitacionesy Contratos de 0bras Piblicas). Only 40 are specialized in road construction, and their capacity is presently overburdened by the major road construction programs that are currently taking place at a national level after a long period of inactivity. A survey undertaken in 6 departments in connection with the preparation of the proposed project showed that there is a large number of medium and small size contractors that operate at the regional and local levels; out of the 285 firms surveyed, Ill have sufficient capacity to undertake road rehabilitation contracts ranging from US$200,000-US$250,000. Some of them are established informally due to the high cost of registration in CONSULCOP and the occasional nature of their activities. The lack of financial resources at regional and local levels has prevented these contractors from prospering and benefiting from a steady workload. F. Rural Road Sector Issues 1.23 The broad national issue of administrative decentralization to local governments has a major bearing on the solutions to sector issues. Government decision-making is highly centralized, and the government has yet to define and implement its decentralization agenda. As presently envisaged, the agenda aims at strengthening the role of municipalities, especially district municipalities, vis-a-vis regional governments. So far it is neither clear whether the Regions will continue in the present form nor the functions that will be assigned --if any-- to the adopted - 12 - intermediary level of govemment. Specific issues in this respect refer to institutional organization, inter-agency coordination, planning and maintenance, funding of road expenditures. 1.24 Institutional Organization. As with other sectors of the economy, the allocation of responsibilities to regional and local governments in the road sector is far from settled. Responsibility for construction, improvement and maintenance of roads other than the national highways is not clearly defined and those outlined in the existing legislation have never been matched by the resources and authority necessary to fulfill the designated functions (see para. 1.17). Furthermore, the present circumstances are characterized by ambiguity and overlap in roles and responsibilities between all levels and by inter-government fiscal and financial arrangements that encourage dependency, conflict and the avoidance of accountability. 1.25 While it is recognized that it will take time to address the variety of issues arising from the incipient decentralization process, the proposed project would provide a venue for sustained dialogue on the key policies in the rural roads sector. It will help MTC review the current functional classification of roads and clarify the responsibilities of the organizations in charge of the different road links in each network, taking into account their constitutional and legal responsibilities as well as capacity to assume these responsibilities (see para. 1.32). 1.26 Inter-agency Coordination. A recent study in several departments in the sierra found that MTC, the CTARs through their sector secretariats, provincial and district municipalities, and seven deconcentrated units of the central government are involved in road construction and maintenance (Table 7). This has added more confusion to the institutional organization. Because of their inherent weakness, the CTARs have been unable to plan rural development and coordinate these initiatives. 1.27 The proposed project would foster development of coordinated strategies at the provincial and departmental level. The Project Implementation Unit (see para. 3.1) will provide a strong focal point for overall coordination during project implementation. In addition, staff of MTC's Planning Office will also be trained as part of the project to, among other functions, coordinate investments with other sector ministries who have development and poverty alleviation programs targeting the same provinces. MEF will ensure consistency of the overall budget allocations. But more importantly, better coordination in the programming and execution of investments will be achieved among the deconcentrated units of those institutions through the criteria adopted for selection of sub-projects. The increased access to basic social and economic infrastructure by the rural poor may not fully materialize in the absence of a coordinated effort where road improvements are followed by other investments intended to increase economic productivity and coverage of basic needs. 1.28 Rural Road Planning and Maintenance. An area with clear scope for improvement at all levels is that of rural road planning and maintenance. The issue of sustainable maintenance in Peru is very complex because it entails institutional and financial reforms, and cannot be addressed without clarifying responsibilities, setting a basic institutional framework, and progressively. - 13 - Table 7. Institutions with Involvement in the Road Sector Central Level Ministry of Transport, through DGC- Ministry of Presidency, through Ministries Direcci6n General de Carreteras, and Deconcentrated PERT-Proyecto Especial FONCODES-Fondo Compensacion y Desarrollo or autonomous Rehabilitacion Transporte Social (including PREDES-Programa Acciones de agencies SINMAC-Sistema Nacional Emergencia Desarrollo Region Inca) Mantenimiento Carreteras INADE-Instituto Nacional de Desarrollo through: ---PAR-Proyecto Apoyo Repoblaci6n (Apurimac, Ayacucho, Huancavelica, and Junin) ---PGEAGL-Programa Generacion Empleo y Apoyo Gobiernos Locales (Ancash, Apurimac, Ayacucho, Junin, San Martin, Loreto, Ucayali) ---PESCS-Proyecto Especial Sierra Centro Sur (Apurimac, Ayacucho. Cuzco, Huancavelica) COOPOP - Cooperacion Popular Regional Level CTARs - Consejo Transitorio Administraci6n Regional (Eleven regions, with subregional offices) through their sectoral secretariats Local Level Provincial Municipalities (a total of 176) District Municipalities Centros Poblados and Anexos through niucleos ejecutores (FONCODES program) Private Mining companies building MTC and local governments' capacity to deliver day-to-day maintenance throughout the entire road network. The deteriorated condition of the secondary and rural road networks calls for a two-part strategy: i) an extensive rehabilitation program to bring roads up to a condition where they can be maintained; and ii) a maintenance program, which will cover the "core" improved road network and progressively extend to other road links until the entire road system is subject to routine maintenance. To maximize the impact of the former, investment planning and programmning needs to be improved by setting prioritization criteria with economic and social factors clearly incorporated into them. For the latter to succeed, its implementation arrangements must be tailored to the capacity of the implementing agencies. The project supports this strategy. Another important step would be to complete an inventory of roads, on which basis the needs of each administrative level and individual jurisdiction can be identified and the resources required made available (see para. 1.32). Emphasis will be given to coordinating transport activities between provincial municipalities and their districts, with the former taking the lead as they present better prospects for success due to their stronger capacity as well as economies of scale that derive from their larger size. 1.29 Rural Roads Funding. The resources available to local governments are very limited. While at the national level, revenues from road users (gasoline taxes, taxes on vehicle imports and ownership) have historically exceeded government expenditure on roads, local governments have no similar buoyant source of local revenue, and largely depend on a centrally controlled property tax and on intergovernmental transfers. Most of these transfers are allocated through the FCM, which gives roughly US$300 millions per year to provincial and district municipalities on the basis of population and infant mortality (see para. 1.17). About 80 percent of these funds are earmarked for capital investments. In the absence of a decentralization of responsibilities over the - 14 - secondary network (or an adequate source of local revenue to cope with its maintenance needs), maintenance of the secondary network may be severely underfunded. Similarly, rural roads will remain poorly maintained as long as the local governments have no appropriate revenue sources. The issue of securing the flow of funds for maintenance is being addressed in the context of the reorganization of the sector. Government Strategy 1.30 Since January 1995, Government has embarked on a long-term effort to restructure road sector management to improve its efficiency and effectiveness, in a process that involves consultation with key government officials, representatives of the private sector, as well as IDB, the Bank and GTZ. This started with a policy workshop to review the roles of the various levels of government and the private sector in road sector administration and development. The Government's strategy is designed to arrest the deterioration of the road network by (a) defining a decentralization agenda that would clarify responsibilities over the three-tier road network and resources to attend those responsibilities; (b) strengthening road administration, promoting private sector participation, and building up capacity at the local level; (c) increasing budgetary allocations for road rehabilitation and maintenance; and (d) focusing investments on areas with high levels of poverty and emphasizing labor-based construction methods as a means to generate employment in those areas. Box 5: Main Tenets of Government's Road Transport Sector Strategy * redirect the role of government (central and local) in the provision of road infrastructure * strengthen first the deconcentration then the decentralization of the sector administration * continue strategic rehabilitation of key networks and removal of bottlenecks to reduce vehicle operating costs * ensure the necessary mechanisms to attend emergencies and disasters * allocate resources to address the chronic lag of road infrastructure,provision, especially to the poor of rural and:marginal urban areas * generate employment through programs of rehabilitation and maintenance of main roads and rural roads * promote private sector investments in the sector through the application of Law Decree No. 758 . promote transport technological developments and better services in urban areas. Source: Planning Office of MTC - October 1994 : 1.31 This strategy translates into priorities in the rehabilitation of the three-tier road system, investments along the intermodal corridors that connect the coast and the inlands, and the facilitation of private sector participation in railways, airports and ports (see Box 5). Within the rural roads sub-sector, the government aims at implementing a wide-ranging program of road rehabilitation in order to improve the quality of life of rural areas, enhance the accessibility of rural areas to markets, promote the return of the peasant population to the rural areas, and, in all, activate the rural economy. The long term goal is to progressively rehabilitate the whole of the 40,000 km. of the rural network. To start with, Government has designed a six-year rural road program (1995-2000) that targets more than 30 percent of the rural road network, with priorities established on the basis of: (1) the percentage of rural population; (2) the poverty indicators; (3) the existence of parallel programs of social stabilization, and (4) the commitment of the local population. - 15 - 1.32 At an operational level, Government is taking steps to: (a) refocus MTC's mission on policy-making, investment planning, coordination among transport modes, road usage regulation, and monitoring transport system performance. To ensure that this mission is consistently carried out in the rural road sector, key staff in the Planning Office will be trained under of the proposed project (para. 3.1); (b) clarify the roles and responsibilities for road administration at the various levels of government, in line with Government's decentralization agenda. Government has decided that responsibility over rural roads falls under local government, with financial and institutional support from MTC (initially channeled through the proposed project). Responsibility over national and departmental roads, the latter on a temporary basis until the agenda for political and administrative decentralization is defined, falls under central government. In June 1995, MTC revised the functional classification of all public roads (Decree 09-95), and is now undertaking the inventory of the roads under responsibility of central government. The inventory of the rural road network will be gradually carried out under the proposed project; (c) establish a road agency, with technical, administrative and financial autonomy to manage the national road network (and temporarily the departmental road network with assistance from the proposed project). Key features of the proposed legislation include (1) contracting out most of the work to the private sector, including ample use of road concessions and Build-Operate-Transfer schemes, and (2) operating under private sector labor regime, which will enable attracting qualified staff MTC plans to submit to Congress legislation in this regard and complete a study to define the organizational details; and (d) ensure the sustained funding of road maintenance at the central level and develop mechanisms for financing maintenance of rural roads, consistent with the evolution of Government's decentralization agenda. The latter is part of a broader policy dialogue that aims at allocating revenue raising and administrative responsibilities among the various levels of government in Peru. A study to propose more appropriate mechanisms for financing maintenance of rural roads will be undertaken under the proposed project (see para. 2.25). 1.33 IDB and the Bank have been involved in the definition and implementation of the Government strategy in the road sector, and would continue doing so, in the context of the supervision of their on-going highway projects (Bank's Ln. 3717-PE and IDB's 65 1-OC-PE and 836-OC-PE). - 16 - G. Previous Bank Involvement in the Transport Sector 1.34 Previous Bank experience. Since 1952, the Bank has made 18 loans to Pernu in the transport sector totaling US$641 million. However, only 52 percent (or two-thirds if the most recent Transport Rehabilitation Project is not considered) have been disbursed. Of the total, 46 percent has been for highways, 17 percent for urban projects (a large part of which had urban transport components), 12 percent for multi-modal projects, 12 percent for aviation, 9 percent for railways, and 3 percent for ports. In the rural infrastructure sector, the Bank has also an on-going US$100 million loan to support FONCODES, which includes funding for labor-intensive projects in poor rural areas (about one third of the project consists of developing economic infrastructure in rural areas). 1.35 Other donors are also active in the transport sector in Perui. Notably, IDB has approved two road rehabilitation loans totaling US$462 million, and is participating in this project with US$90 million. CAF (Corporaci6n Andina de Fomento) approved a US$50 million loan to contribute toward the cost of the first IDB road rehabilitation project, and is expected to approve very soon another loan for about US$75-100 million to develop the Ilo-Desaguadero Corridor. Government has also obtained US$30 million from the US, and grants from Japan for studies, rehabilitation of locomotives and acquisition of road maintenance equipment. As part of the cofinancing arrangements for the Bank's Transport Rehabilitation Project, the OPEC Fund for Development and KfW are participating with US$5 million and about US$38 million loans respectively, the latter not yet approved. Annex 2 provides more details on Bank, IDB and other donor lending in the Transport sector in Peruz. 1.36 Lessons learned. Aside from the macroeconomic conditions which beset the country in 1983 and led to the default on the Government's debt service payments to the Bank and hence to the suspension of disbursements, lack of counterpart funds and institutional weakness have often been the main reasons for the unsatisfactory performance of delays in transport projects. Besides, implementation of these projects has been difficult due to the technical problems caused by extreme physical conditions, inadequate engineering designs, and weak project management aggravated by low salary levels of professionals in the executing agencies. The creation of the PERT as the unit which is implementing the Transport Rehabilitation Project as well as the IDB projects has attempted to address those shortcomings. 1.37 Road components were included in eight Bank loans to Peru which supported overall highway development, transport corridor improvements, rural development, and reconstruction after a major disaster. Experience exists with free-standing feeder road projects elsewhere, especially in Africa and Asia. The principal problems in achieving sustainable results have been (1) institutional weaknesses and inadequate coordination, leading to delays in implementation and incomplete execution of the works; (2) inadequate monitoring of results. 1.38 Bank-wide experience has resulted in the following advice for designing a successful rural roads project: i) there should be a strong government commitment and beneficiary participation in defining priorities and funding for maintenance to ensure the sustainability of services and infrastructure; ii) a central focal point should be established for formulating and reviewing rural - 17- roads policy, for project planning and execution, and for coordination between the ministries of agriculture, interior and transport; iii) a strong and dedicated project management team should be created to assure timely implementation and adequate monitoring of the project; and iv) the capacity for labor-based methods and intermediate means of transport should be developed. These lessons have been incorporated in the design of the present project. 2. THE PROJECT A. Origin of the Project 2.1 Peru's badly deteriorated infrastructure limits its capacity to compete abroad and inhibits economic growth. Transport infrastructure suffered from years of neglect and mismanagement. To reverse this trend, Government has embarked on major institutional and policy reforms aimed at improving efficiency in the delivery of transport services, and on strategic rehabilitation of key road, railway and airport facilities. Rehabilitation of more than 6,000 km of main highways is underway with the support ofthe Bank, IDB and other donors (see para.1.35). Yet the needs for improved transport services and access in rural areas are staggering. This is quite evident in the rural sierra, where poor access has led to isolation and contributed to extreme poverty. Perceived as a prerequisite for distribution of improved living conditions, economic wealth and social balance, in May 1994 Government requested both the Bank and IDB to support the proposed project to address the needs for alleviating poverty and raising the living standards of the rural poor by improving access to agricultural zones through rehabilitation and maintenance of the rural road network. B. Rationale for Bank Involvement 2.2 The Bank has been assisting the Government implement its poverty eradication efforts. Initial efforts focused on the design and implementation of the stabilization and structural reform program, key to the resurgence of growth. Under the Structural Adjustment Loan, the Bank supported the Government's efforts to design the first poverty alleviation strategy. Following the 1993 clearance of arrears accumulated to the Bank since 1987, the Bank reinitiated investment lending by offering a $100 million loan to the Government to support FONCODES. Loans for basic health and nutrition, primary education, transportation rehabilitation and water rehabilitation and management have followed. Additional loans are under preparation for irrigation rehabilitation and rural electrification. 2.3 This project, the Rural Roads Rehabilitation and Maintenance project, following the Government's longer-term vision, is focused on local government service delivery and maintenance. It is consistent with the Country Assistance Strategy presented to the Board on November 22, 1994, which has poverty reduction as its central objective, and concentrates on (1) infrastructure development, (2) social sector development, (3) institution building, and (4) macroeconomic sustainability. 2.4 The project would bolster infrastructure development by supporting a comprehensive road rehabilitation and maintenance program to arrest deterioration of the existing road system in the - 18 - rural sierra, safeguarding key social and economic links, and providing a framework for further assistance to the rural road subsector. Bank's experience on free-standing feeder road projects elsewhere, especially in Africa and Asia, has been incorporated into the design of the project. Dialogue between the Government and the Bank during preparation resulted in stricter definition of sub-project eligibility criteria, in-depth elaboration of community participatory mechanisms, and stronger emphasis on institutional development matters. The project will have a positive demonstration effect, and should be considered as a complement to the on-going Transport Rehabilitation Project towards broader Bank assistance in the transport sector, in particular towards facilitating the integration of poor rural communities into the mainstream economy and the expansion of markets for agriculture and other non-farm products. The joint IDB-World Bank collaboration further strengthens IDB's and the Bank's dialogue with the country and the effectiveness of both banks' involvement in the sector. C. Project Objectives 2.5 The overall purpose of the proposed project is to provide a well-integrated and reliable rural road system through rehabilitation and maintenance of rural roads and key links connecting to the primary road system. This will help alleviate rural poverty and raise living standards of rural communities through increased access to basic social and economic and income-generating activities, the goal of the Government's strategy. The specific objectives are to: (a) reduce transport costs and raise the reliability of vehicular access to expand markets for agricultural and non-farm products; (b) integrate poorly accessible zones with regional economic centers; (c) improve transport conditions in rural villages; (d) generate employment through the rehabilitation and maintenance of rural roads to mitigate rural poverty; and (e) build up institutional capacity at local government level and develop small and medium enterprises to manage and carry out, on a sustainable basis, the maintenance and upgrading of rural roads. D. Project Description 2.6 The proposed project is being prepared jointly by Government and IDB and Bank staff. The project would support the first phase of the Government's six-year program designed to improve transport conditions between rural communities and production and consumption centers (see para. 1.31). Government, IDB and the Bank would finance jointly the investments planned under the project under the same project conditions. 2.7 The project emphasizes the connection of the benefited rural communities with a well- integrated and reliable road system through rehabilitation and maintenance of a "core" road network composed of rural roads and connecting primary and secondary roads. Several advantages are foreseen from this strategy. First, it will remove the bottlenecks constraining transport services in rural areas, maximize the population benefited, and, overall, have a greater social and economic impact than in the case of isolated road improvements. Second, through improved road access the project would permit easier coordination among other rural development programs. Third, it introduces local governments to the principle of "network" management (including the informal network of non-motorized tracks), which is key to improving transport services. However, it will take time and substantial efforts in technical assistance for this principle to take root among local governments, since this is a major change from the current - 19- practice where municipalities are mostly limited to occasional road emergency works. Thus, while building an intense road investment program, the proposed project also supports a strong institutional development component. The program will support MTC's policy to emphasize rehabilitation and maintenance over new construction. 2.8 In view of the large size of the program and the history of inactivity in the rural roads subsector, MTC is carrying out a Pilot which would be financed retroactively by the project. This Pilot has established the technical, administrative, socio-economic and cost information needed to design the project (see para. 3.17). Though implementation of the pilot is still underway, the experience gained so far has confirmed the validity of the assumptions and data used for project design. 2.9 As presently designed by Government, the rural roads program entails rehabilitating in a six-year time frame about 30 percent of the rural road network in 12 departments out of a total of 24. The proposed project would finance the first phase of the program which includes investments started in 1995 in six departments under the Pilot, and investments from 1996 to 1998 which would progressively expand to cover the total of 12 departments. The second phase of the program would be carried out under a follow-up project, to be supported by IDB and Bank loans to finance additional investments in the same 12 departments starting in 1999 and on. This follow on operation is tentatively planned for approval by end 1998 to ensure the continuity of the financial plan. However, the actual scope of this second phase, as well as the amount of the loans and appropriate time to process them, would be adjusted based on the performance achieved during implementation of the proposed project. The project remains viable even if only the first phase of the program is completed. In addition, phasing the financing will facilitate accommodating changes in the project environment--i.e., progress in the decentralization agenda --, reduce project risks and give more incentives (and leverage to IDB and the Bank) for better performance. The decision to start preparation of the follow up operation would be undertaken at the project third annual review which constitutes the mid-term review of the program (see para.3.31 ). 2.10 The project would start in the six departments in the sierra region chosen for the Pilot, which rank highest in terms of rural poverty, namely Ancash, Apurimac, Ayacucho, Cajamarca, Cusco and Huancavelica. In 1997, the project would be expanded to also cover another six departments, the next ones in terms of rural poverty: Huanuco, Junin, Pasco, Puno, San Martin and Madre de Dios (with start-up of works in the two latter scheduled for 1998). This staged- approach will give an opportunity to immediately apply lessons learned from the Pilot and during the first year of project implementation to the additional departments incorporated into the project. The 12 departments selected, out of a total of 24, account for about 61 percent of the rural road network in Peru. They cover most of the sierra region, and some departments, also areas of piedmont (Ceja de Selva) where road improvements can support alternative development programs in coca producing areas. 2.11 The strategies used in the definition of the proposed project build directly from the Bank's experience in other projects in Per6 (mainly the Social Development and Compensation Fund Project), as well as experience in other countries and regions. The rehabilitation of critical - 20 - sections, the promotion of small and medium contractors, and the development of micro- enterprises systems for rural road maintenance, were pioneered in other Bank projects in Latin America and Africa, and are consistent with the Bank's overall strategy for rural roads. The five components of the proposed project are described below. The logical framework of the project as well as the program it supports, with key indicators and physical targets by component, is given in Annex 3. The performance indicators and physical targets were agreed at negotiations. Rehabilitation of Rural Roads 2.12 This component would finance rehabilitation of about 7,500 km (out of the 12,500 km planned under the program) of the rural road network to improve accessibility and help reduce the overall deterioration of that network. Though poorly engineered, these one-lane roads have geometric standards reasonably adapted to the terrain and the traffic they serve (from a few vehicles a day up to 15-20 vehicles on peak market days, mostly micro-buses and 3 tons trucks). The proposed works would concentrate on eliminating critical sections and spot improvements to ensure adequate transitability and a level of access tailored to the specific transport needs of the local communities. Through spot rehabilitation access is substantially improved at a low cost, in terms of transport time required and accessibility during the rainy season. This would entail correcting the surfaces with limited regraveling to provide a more durable running surface over poor soils and on steep gradients, removing landslides, and constructing retaining walls and additional drainage and erosion control structures. To obtain long-term benefits, spot improvements would be followed by an effective road maintenance program. 2.13 Because of the simple nature of these rehabilitation works, they can be carried out through labor-based methods without compromising quality and cost-effectiveness. Most of the works will be contracted out to small local contractors, who will make use of the labor force available from the benefited communities. The opening of a regular market for simple mechanized rehabilitation works would also assist in strengthening the local construction industry. Other works in remote areas or where heavy machinery is not needed, will be handled directly by the communities, engaged through ad hoc agreements or conv'tenios. Use of local labor would increase farm incomes during periods of reduced agriculture activity, notably between March and September in the sierra, which is the dry season when most of the works will be carried out. The experience of the on-going pilot program, as well as that of FONCODES, shows that the commitment to, and direct participation of the population in these community-based arrangements is possible. Rehabilitation of Connecting Primary and Secondary Roads 2.14 This component would finance rehabilitation of primary and secondary roads that are directly connected and give access to the feeder r oads systems under rehabilitation. These are unpaved roads carrying traffic in the range of 50 to 200 vehicles per day, and that after many years without any maintenance are in a deplorable condition. About 2,200 km (out of the 3,200 km envisaged under the program) of primary and mostly secondary roads will be rehabilitated through the project. The: rehabilitation works envisaged for the main roads aim at restoring year- round trafficability and will include such works as regraveling, grading, bridge replacing, slope - 21 - protection and drainage system repairs. Paving, widening or realignment are not envisaged, to avoid unnecessary high standards that affect both cost and program output over time. This component will be coordinated with works being undertaken by DGC (or its successor) on an annual basis. Agreement was reached at negotiations that DGC will furnish to IDB and the Bank by July 31 each year, starting in 1996, the rehabilitation and maintenance programs to be undertaken with its own resources during the upcoming year. Routine Maintenance of Rural Roads 2.15 This component aims at setting up a routine maintenance system. Innovative cost- effective schemes based on contracting out labor-intensive works to micro-enterprises or local cooperatives, and equipment-intensive works to small and medium contractors, would be introduced. Present capacity of the public sector is limited. Involving communities and developing small local contractors would increase capacity and build pressure over local governments for continuous road maintenance. The strategy pursued under the project is that the rural road network in most of the sierra region first must receive rehabilitation on critical sections (spot improvements) before maintenance activities begin. Subsequent routine road maintenance would consist of simple works regularly performed throughout the year to maintain the drainage systems (ditches, culverts, vegetation) and the running surface (filling potholes and ruts, maintaining the surface camber). The project would basically finance routine maintenance of those roads rehabilitated through the project, but other roads could be included if local governments commit themselves to supporting these activities. Maintenance of roads built or rehabilitated by other rural development programs (e.g. FONCODES, INADE) would also be eligible for project support, provided they are linked with, or in the vicinities of road sub-projects being implemented under the project. This would entail maintaining from about 1,500 km of roads at the beginning of the project to about 7,500 km at the project end. 2.16 The rationale for funding routine maintenance is that little or no maintenance has been done in the past. Thus, it becomes necessary to demonstrate the long-term benefits of simple day- to-day maintenance through the structured learning exercise that the project would provide. It is of the essence that adequate funding be available not only for developing the proposed maintenance schemes but also for sustaining their effectiveness through implementation. Experience in other countries has shown that despite putting in place favorable co-financing arrangements, it is very difficult and demands substantial efforts in technical assistance to mobilize local governments to carry out routine maintenance. 2.17 The IDB and the Bank loans would finance maintenance on a declining basis, while Government contribution would increase accordingly throughout project execution. Government is reviewing the mechanisms for road funding, including the option of setting a Road Maintenance Fund to secure a steady flow of funds for road maintenance at the various levels of administration. However, a Fund would finance only a fraction of rural road maintenance costs, requiring municipalities to mobilize their own resources to match this contribution, a burden well above their current possibilities. A study financed under the project will help define a strategy to address this issue (see para. 2.25) within the context of the Government's decentralization agenda. - 22 - Improvement of Village Streets 2.18 Villages and small towns with populations up to about 2,000 inhabitants do not classify as "urban" and often are neglected in "rural" transport programs. The road infrastructure in such villages, despite servicing a high number of beneficiaries, is rarely planned for, and is developed many times in an ad-hoc manner. Furthermore, construction of secondary and rural roads that go through villages often neglects the impact on village amenities, such as street drainage. Investments in village roads and streets have the potential to improve the welfare of village residents through better access to village centers of activity (e.g., market, hospital, school, cemetery) and improved health as a result of better drainage of runoff from roads and streets. 2.19 This component would finance street improvements in small rural communities to enhance environmental conditions and raise living standards by upgrading or paving the section of the rural road crossing a village. It is anticipated that about 220 km of village streets will be improved under the six-year program, with the potential to benefit about 300 villages; about 140 km are planned for execution under the project. The works will remain simple and appropriate for labor- based construction methods, including: i) laying new stone pavements and/or resetting existing stone pavements empedrados. Stone quarries are abundant in the sierra region and there is a long tradition in the use of these materials that goes back to the early Incas; ii) paving with adoquines of interlocking concrete blocks; and iii) paving with concrete slabs. The initial investment cost of the two latter options are higher than asphalt surface treatments, but more cost-effective if maintenance costs are brought into a life cycle cost analysis, and much less costly in terms of foreign exchange. 2.20 The designs will emphasize improving drainage and safety conditions, and ensuring sustainable maintenance. The community's capacity to maintain the improved streets will be a key factor for choosing the appropriate technology. The project in general would finance empedrados. The terms of reference for preparation of engineering studies require consultants to provide detailed justification (and approval by PERT-PCR) for any departure from this standard solution. Criteria in this aspect include comparative cost (based on life cycle cost analysis), type of service to be provided, prevailing condition of other existing road infrastructure in the village and capacity for future maintenance. Improvement of Non-Motorized Rural Transport 2.21 Transport and mobility of goods and people in rural areas relies on the existence of adequate infrastructure and on the access to means of transport. Improvement of accessibility and mobility of rural areas must also take account of the unclassified network of tracks and footpaths that service the transport needs of the rural poorest, and poor women in particular. Mobility needs in rural areas are often met by non-motorized transport (NMT) modes, even on classified roads. Widespread use of non-motorized vehicles (bicycles, tricycles) and animals is both hampered by the poor condition of rural transport infrastructure (compounded with difficult terrain conditions), and also by their high acquisition price which is above the cash income earning capacity of most households. Field visits undertaken during project preparation showed that poor inhabitants of small villages utilize a variety of intermediate- and non-motorized modes. Certain - 23 - remote anexos and caserios are not serviced by the classified rural road network but by tracks and paths that connect them to the closest village or municipal district. 2.22 The non-motorized rural transport component would provide local governments and communities with a tool to help them formulate coherent programs for the management and maintenance of village level infrastructure and improvement of transport technology. To this end, this component will finance (1) technical assistance for village-level infrastructure management, and (2) physical works aimed at removing unsafe spots and other bottlenecks constraining the use of the intermediate means of transport. The project will not directly address the issue of improving affordability to more efficient means of NMT. It is anticipated, however, that the project would have positive indirect impact by (1) raising awareness of the importance of transport services over the unclassified village network through this component, (2) helping design ad-hoc local programs to mobilize additional financial aid for this purpose, and (3) generating supplemental income through implementation of the road components. The project would finance 80 percent of the total cost estimated by PERT-PCR for the proposed works based on standard designs and unit costs. This would fully cover the cost of materials, equipment and skilled labor, while most of the unskilled labor would be contributed by the community. Annex 4 describes in more detail the design and implementation arrangements for this component. The community will be determinant in the selection, planning, implementation and financing of the proposed works. Institutional Development 2.23 This component would consist of: i) technical assistance to improve planning and management of rural roads at the national and local levels. This technical assistance will be supported by two policy and institutional studies on local road management practices and rural road financing; ii) technical assistance to develop micro-enterprises for execution of routine maintenance using work methods tailored to the institutional and financial capacity of rural municipalities; and iii) a package of technical assistance and training services to strengthen the local road construction industry, to be offered on a voluntary basis to local contractors and micro- enterprises who will be awarded contracts under the road rehabilitation components, and on-the- job training to local engineering firms and beneficiaries on the preparation of feasibility studies and technical project proposals. The project would also finance training in Peru and abroad for key staff from MTC, PERT-PCR and local governments participating in project activities. 2.24 Technical Assistance to Improve Planning and Management of Rural Roads. The terms of reference for this assignment are given in Annex 5. Recruitment of consultants will start prior to loan effectiveness to ensure that the consultant services can be developed from the beginning of the project (see para 3.22). The program will be organized into three streams: (a) Technical assistance to strengthen MTC's capacity for formulating and reviewing rural roads policy, programming investments in coordination with other Ministries, and monitoring compliance with investment programs and performance of the rural transport system. Staff within MTC's Planning Office will be trained for this purpose. - 24 - (b) Technical advice to PERT-PCR, during project execution. This would include reviewing the adequacy of investment programs and quality of studies produced by consultants, ensuring consistent application of the Project Operational Manual (see para. 3.7), upgrading procedures defined in the Manual based on feedback from project implementation (including preparation of an Environmental Manual for environmental management of rural roads), assisting PERT-PCR's management in evaluating performance of PERT-PCR's deconcentrated units and developing the institutional strengthening components; and (c) Technical assistance to municipal provinces and distficts to strengthen their capacity to plan and carry out rural roads maintenance. This would be a three-part effort. First, exposing municipalities to the organizational shortcuts, the simple planning and budgeting systems, and the extensive use of labor-based methods and contract arrangements promoted under the project. Second, setting in place a simple road performance evaluation system and establishing maintenance capability and a coordinated strategy at the provincial level. This strategy should emphasize coordination between municipal provinces and their districts, and between districts and their villages. Third, fostefing grassroot environmental awareness among rural communities and involving road users and other stakeholders in the road management process to increase municipalities' accountability. The technical assistance will put in place effective local participation mechanisms to improve selection and execution of rural road projects and regularly assess progress in achieving the project development objectives. Municipalities in the project area will be required to participate in the technical assistance program, but the program will also be available to other interested municipalities. The program will be tailored to the size, structure and complexity of the different municipalities. 2.25 This package will be complemented by the two studies outlined below, whose final terms of reference will be prepared by end-September 1996 to reflect the development of the Government's decentralization policy. The design of sustainable mechanisms for the financing of rural roads maintenance and the streamlining of road admiinistration practices at the local level, as well as appropriate action plans to implement them in reasonable time, are foreseen as key outcomes of the project (see Annex 3). These mechanisms and action plans will be thoroughly discussed and agreed upon at the third annual review of the project (mid-term program review). (a) Study on Local Road Management Practices. Assessments on the institutional, administrative and financial capacity of local governments undertaken as part of project preparation have shown that cumbersome regulations and procedures used for budgeting, procurement and administration of road works, and excessive reliance on inefficient force account arrangements, constitute bottlenecks that coupled with a weak financial base, seriously inhibit the capacity of local governments to manage their rural roads networks in an efficient manner. The proposed study would examine existing procurement legislation and practices to uncover bottlenecks impeding project implementation and design system improvements. It will also look at possible shortfalls constraining further - 25 - development of the local construction industry, as needed to shift to a policy of increased usage of private contractors. This would include factors such as affordability of, and access to bank credit to finance equipment, and working capital, legal and registration requirements, policy and employment conditions which may influence a choice against labor-intensive methods, as well as the need for further government support for promoting plant pools for equipment rental. (b) Study on Rural Road Financing. With support from IDB's Highways I project (Loan 65 I-OC-PE), MTC has undertaken a study to analyze and propose financing mechanisms to assure the adequate flow of funds for maintenance of the national road network. The rural road network, by its own physical and traffic characteristics requires a different perspective towards securing and channeling the necessary maintenance funds. In any municipality rural road maintenance is but one service among many competing for scarce resources (and likely less visible than others). There are no ready made solutions to the central problem of mobilizing local resources for maintenance of rural roads. Early involvement of local government in planning seems to be beneficial in building up awareness, but in the long term they must have some reliable means to raise funds themselves for this purpose. The project would finance a study to analyze this issue. The study would include an estimate of the maintenance needs for the rural road network and the institutional mechanisms to meet those needs, including funding responsibilities, by looking at a representative sample of district and provincial municipalities and proposing practical and feasible ways of raising maintenance revenues from the beneficiaries of the road infrastructure. The study would conclude with specific recommendations regarding (1) the extent of financial participation of higher levels of government; (2) the revenue-raising prospects and mechanisms at the local level (municipalities and users) for rural road expenditures; and (3) a feasible structure of revenues for road maintenance that would observe a close relationship with road usage. 2.26 Technical Assistance to Develop micro-enterprises formed by groups of beneficiaries for road maintenance. The difficulties of ensuring central-government maintenance of a myriad of scattered rural roads, and the failure of traditional municipal force account works, suggest private-sector involvement in the form of municipal contracts with small local engineering firms and road maintenance micro-enterprises. The proposed component contemplates developing micro-enterprises to undertake routine and emergency maintenance of rural roads (with possibly larger firms supplying specialized equipment and know-how for more complex works). This approach has been successfully introduced in Peru for some urban services (e.g., waste collection) and specifically for road maintenance in Colombia. In addition, the use of micro-enterprises has some comparative advantages for further developing rural areas: they may act as catalysts for other local development initiatives, become contact points for extension services, and even mobilize untapped local resources for local community ventures. This in turn may encourage local governments to utilize the micro-enterprises. The technical assistance will guide the transition towards locally supported use of the maintenance schemes developed under the project. - 26 - 2.27 Typically, microenterprises will be made up of 8 to 14 people living close to the road, to carry out manual routine maintenance activities on approximately 15 to 50 km. The project would finance all activities related to (1) promoting the development of microenterprises among leaders of the communities and base organizations, (2) assisting microenterprises throughout their constitution, including legal and technical advice, (3) contracting out maintenance of more than 10,000 km to micro-enterprises, (4) putting in place adequate contract arrangements and payment systems, (5) providing supervision and monitoring to ensure smooth implementation of the program, and (6) supporting a dissemination campaign among local governments to sensitize them about the benefits of the micro-enterprise program. Preparation of this component builds on the recommendations of the Pilot Maintenance Study undertaken with support of the on-going Transport Rehabilitation Project (Ln. 3717-PE). MTC through PERT-PCR will recruit consultants for developing the first group of microenterprises by March 31, 1996 under the terms of reference shown in Annex 5. 2.28 Technical Assistance and Training Services to Strengthen the Local Road Construction Industry. This technical assistance package will aim at increasing the technical and managerial capacity of small- and medium-scale local firms engaged in road construction and maintenance. The rationale behind this component is that most firms in the target group are expected to show weaknesses, in terms of management, work organization, and technical skills, which might jeopardize the successful implementation of the sub-projects that they will be commissioned to carry out. The provision of some technical assistance to contractors is deemed an effective way of addressing this risk and provide a basis for long-term development of the local construction industry. MTC through PERT-PCR will submit to IDB and the Bank the assistance program, outlining the training services that will be offered as well as the strategies for their delivery, proposed for the upcoming year, not later than July 31 each year, starting in 1996. 2.29 Three subprograms will be offered under this component, namely (1) a business adrninistration and financial management program intended for entrepreneurs and their administrative staff, (2) a work organization program primarily designed for foremen, and (3) various technical training courses to improve the skills of basic workers. These subprograms would have a practical orientation and take the form of on-the-job assistance training. Potential beneficiaries will be free to accept or refuse this form of assistance, except in cases where technical assistance is deemed indispensable for successful implementation of the sub-project and therefore a condition for contract award. 2.30 This technical assistance component also includes support to local consultants to prepare feasibility studies and technical project proposals that would be submitted to PERT-PCR for funding. Training courses will be provided to ensure that the terms of reference and methodologies developed for the project are well understood and correctly applied. Perhaps more importantly, local consultants will be exposed to on-the-job training during the formal review and approval of the studies submitted to PERT-PCR for financing under the project. - 27 - E. Environmental Assessment 2.31 The project has been rated "B", as no major environmental issues are foreseen. The project supports rehabilitation and maintenance of existing unpaved rural and departmental roads. Since these are in general existing roads, the risk of additional indirect negative impact linked with human activities (i.e., colonization, deforestation) is limited and the proposed project activities are unlikely to harm the ecological and social environment. The greatest environmental damages associated with the existing targeted road network is erosion and flooding of farmlands and road surfaces. By its very nature, the spot rehabilitation and maintenance strategy adopted has positive impacts on the environment because of its strong focus on identifying and offsetting erosion problems. Annex 6 presents an overall environmental assessment of the project works and provisions included in the project to build environmental management capacity. Nevertheless, performance audits (see para. 3.29 ) will include an assessment on the compliance with the environmental guidelines agreed under the project. 2.32 Furthermore, the project would assist MTC and local governments in developing and implementing a sound strategy for environmental management of rural road projects. The Project Operational Manual will set environmental guidelines to adequately address the following issues: i) procedures for environmental screening of projects at their preliminary identification. Simple but effective guidelines will help assess potential risks and categorize the projects on account of the actions recommended; ii) guidelines for identification of environmental damages and design of corrective or mitigation measures, with emphasis on preparation of Environmental Management Plans; iii) technical specifications for work execution, with clear provisions to ensure that work methods are environmentally sound. These procedures will also be consolidated in an Environmental Manual for rural roads to facilitate their application by local and regional entities under and beyond the implementation of the project. 2.33 As noted in para. 2.24, the technical assistance program includes actions to institutionalize these environmental practices. The Government's capacity to address environmental issues related to road and transport services is weak. The overall responsibility for environmental management in the transport sector rests with MTC. An Environmental Unit has been established within MTC and technical assistance is being provided under the on-going Transport Rehabilitation Project (Ln. 3717-PE). Through the technical assistance component, further attention is given under the proposed project to foster (1) grassroot environmental awareness among rural communities, (2) environmental planning and preparation of mitigation plans, and (3) inter-institutional arrangements for implementation of environmental management plans. F. Project Costs and Financing 2.34 Project Costs. The total project cost is estimated at US$250 million, with a foreign exchange component of about US$83 million (33 percent). Base costs are in January 1995 prices. Physical contingencies were calculated at 10 percent of base costs. Price contingencies were calculated at an annual rate of 2.7 percent. This escalation rate was applied to both local and international prices, which implies that the exchange rate is periodically adjusted to reflect the difference between internal inflation and the evolution of world prices. Project costs are shown in the attached summary, altogether with the costs estimated for the second phase of the program - 28 - (1999-2000) and the totals for the entire six-year program (1995-2000). Annex 7 details the cost estimates on a year-by-year basis. 2.35 The costs of civil works are based on work quantities determined from field surveys and engineering designs prepared by local consultants for the Pilot (see para. 3.17), entailing about 1,506 km of roads. The unit prices used in the project are slightly higher than those calculated by the consultants and obtained from bids already received under the Pilot, in anticipation of a possible increase of unit costs with the acceleration of construction activity in the project area. 2.36 Project Financing. The proposed Bank loan of US$90 million would finance about 36 percent of the total cost of the project. IDB would provide joint cofinancing through a loan of US$90 million. Together, the two loans would cover all foreign costs and about 58 percent of local costs. The loans will be made to the Republic of Perui. Government requested this joint financing as opposed to parallel cofinancing to simplify project administration. This is feasible in view that (1) both Banks are financing the same components under the same implementation arrangements, and (2) no international procurement is envisaged as the small size of the contracts is unlikely to attract contractors from outside the region. Government will provide about US$70.3 million for Phase I of project implementation, of which about US$38.2 million are taxes. A summary of the financial plan is attached below. A detail financial plan by component, covering the proposed project (or phase I) and phase II of the program, is given in Annex 7. G. Project Benefits Intended Benericiaries 2.37 The project's intended beneficiaries are divided into three groups. First, there is the population at large benefiting from better access in rural areas. In particular this will benefit the poorest rural communities located in the sierra region, since sub-project selection criteria give priority to these areas. The potential number of beneficiaries is the 2.7 million rural population living in the first six departments targeted under the project. Further expansion of the project to include a total of 12 departments will benefit an additional potential 1.8 million rural population. All in all, this represents about 70 percent of the rural population of Peru and about 20 percent of the total. In these rural communities women constitute a major beneficiary group for road and track improvements. They are the largest group involved in taking products to the markets and improved road reliability should increase their income earning capacity. Better access to social services, such as hospitals and schools, would offer greater proportionate benefit to women. Scope for involvement of women directly in road work activities is yet to be assessed. 2.38 Second, there are the small enterprises and community groups that will be formed or strengthened as a result of their involvement in the execution of the works financed by the project. This will improve the individual skills of the workers who will be employed, and the corporate competitiveness of the small firms that will carry out the works so as to develop their capacity to respond to increased opportunities for sustained employment after project completion. Since most of the contractors have been working on sporadic informal basis, the project will contribute to helping them achieve a transition from the informal to the formal sector. The project also - 29 - PERU RURAL ROADS REHABIUTATION AND MANTFNANCE PROJECT SUMIMARY Of PROGRAM AND PROJECT COSTS (US$'000) PROJECT (tPH8E a PHASEII TOTAL PROGRAM PROJECT COMPONENTS Cot (US*OO0) Coat (US$000) Co t (1S*000) Locsa For ian Eo. Totl Local For,gn Eo Total Loca orIigo E. Total CFVIL WORKS 90,448 600148 150,896 71.370 38,330 109.700 161,818 85A478 260.256 RohabI,taon of RuralRod. 45,000 30,000 75.000 30,000 20,000 50.0D0 75,000 50,000 125,000 Rahablitaion of Conn.cting Mina-y aod S.condary Roads 15,400 19,400 38.800 9.000 9,000 18.000 28,400 28,400 56.80O Routin. Maintanno. of Road. 11,500 2,300 1X800 22,500 4.500 27.000 34,000 6,800 40Q000 lrnjcronrnant of Villa.Q Strata 12,298 B,198 20A9t' 6,720 4,400 11,200 19,018 12,678 3t1966 Inwov--ont of ViII.g Uncl-nifwd Notwoika 2,250 2S0 2.500 3,150 350 3.500 5,400 600 6.O00 CONSULTANT SERVICES 11.270 1,514 18.784 8.145 3,A30 8,576 16,A16 10.944 27.320 P-I-ln vnn Studi 6,206 4,136 10,344 1,434 956 213S1 7,641 5,094 12.S35 Suproition of Civil Work. 4,518 3,012 7,630 3,291 2.194 SA,S 7,809 5,206 i3,01 PNrfom,an. Audit (7Tohnioa), Onv,ron,ntal, Procor-nrant 546 364 S10 420 280 700 966 644 1,6SO and Mange. nnt Aud,t) WSTfTUTIONAL DEVELOPMENT 2760 6,140 7,900 1440 2,760 4.200 4.200 7.900 12,100 Tahonioal Aatano. for Rural Road Mannng and Maaga gi. 1,200 2.800 4,000 720 1,680 2,400 1.920 4,480 6,800 Toh. A_it. forD D-xp.ng Maiotano. M -cro.nt.rpr.i.. 840 9e0 1.600 350 540 SOD 1.000 1,500 2,500 Tnch. A.aa. ior D-veloping th. Lo-a) Con trucitn Indu try 240 360 6o0 160 240 400 400 600 1,000 Taoh. Aa.t. for Non-Mtcoriand Rurl Tranoport Coxnpo..nt 2b0 420 700 120 190 300 400 600 1.000 Stud... on Rural Road FPnnScing and Local Adnn-t-ctbion 280 420 700 00 00 00 280 420 700 Training Paru and Abroad 120 150 300 80 120 200 200 300 500 TOTAL BASELINE COST 104,478 72.S02 177.280 77.955 t4520 122.476 182,433 117,322 2899755 Phycal Contin-ni 9,045 6.015 1500w 7,137 3,833 10,970 16,182 9,84 26,020 Priot Contignnci.. 5,872 4,077 B,94S 10,831 6,155 16.985 16,420 10,514 26.9!S Projact Man..oannt Coat. 9,800 00 9,800 7,500 00 7,600 1 7,300 00 17,300 TOTAL PROJECT NET COST 123,194 982,93 212,068 103423 54.508 167,931 232.335 137.684 370,019 T.." and Dutia 38,176 00 36,170 28.428 00 294,25 66,603 00 e6,003 GRAND TOTAL 167,370 82.893 250.264 131.851 54,508 186.36 2988938 137,884 436.622 Financing Plan (US$'000) Local Foreign Ex. Project Taxes Total Cost As % of As % of Cost Cost Cost (IGV) inc. Taxes Project Cost Total Cost PROPOSED PROJECT (PHASE I, 1995-1998) o IBRD 48,553 41,447 90,000 0 90,000 42.4% 36.0% o IDB 48,553 41,447 90,000 0 90,000 42.4% 36.0% o GOP 32,088 0 32,088 38,176 70,264 15.1% 28.1% TOTAL PROJECT 129,194 82,893 212,088 38,176 250,264 100.0% 100.0% PHASE 11(1999-2000) a IBRD 32,772 27,254 60,026 60,026 38.0% 32.2% IDB 32,772 27,254 60,026 60,026 38.0% 32.2% o GOP 37,880 0 37,880 28,428 66,307 24.0% 35.6% TOTAL PHASE II 103,423 54,508 157,931 28,428 186,3S8 100.0% 100.0% SIX-YEAR PROGRAM (1995-2000) o IBRD 81,184 68,842 150,025 150,025 40.5% 34.4% IDB 81,184 68,842 150,025 150,025 40.5% 34.4% o GOP 69,968 0 69,968 66,603 136,571 18.9% 31.3% TOTAL SIX-YEAR PROGRAM 232,335 137,684 370,019 66,603 436,622 100.0% 100.0% - 30 - benefits local consultants and NGOs that will be engaged in the preparation of engineering designs and supervision of works, providing expanded opportunities for their development under practices that provide the necessary motivation for quality and efficiency. Access to opportunities will break the conundrum of "no work-no experience-no qualification". 2.39 A third group of beneficiaries is constituted by a large number of municipalities that will benefit from investment and institutional strengthening from the project. The 71 provincial municipalities in the initial six departments are targeted under the project. This number could increase to about 100 provincial municipalities, out of a total of 176 in the country as a whole, once the project is expanded to cover 12 departments. However, other municipalities are potential beneficiaries should they have interest in participating in the technical assistance component of the project. Economic Justification 2.40 Eligibility criteria were used early in the project preparation stage to screen investments and identify rural roads selected for rehabilitation under the pilot and first-year programs of the project. These programs include roads which were selected on the basis of geographic (provincial) poverty indicators (infant mortality rates and unsatisfied basic needs). Thirty two provinces, located in the six poorest departments, were targeted for intervention within the pilot and first-year programs. The economic analyses (that take into consideration the expected agricultural and livestock production) of 76% of the kilometers of the pilot yielded a net present value of around US$25 million and a combined economic rate of return of 44.1%. No costs or benefits have been quantified for the village-level investments and non-motorized improvements (about 13 percent of the cost of physical investments), and institutional development, training and technical assistance activities representing about 15 percent of the total base cost. Annex 11 details the methodology and results of the economic analysis. 2.41 For the second- to fifth-year programs, the eligibility criteria include institutional, technical, environmental, social and economic factors whose application would follow a structured process that would permit screening the level of social purpose of a particular project and the prospects for its sustainability (see para 3.12). The Project Operational Manual would detail the definition of the four eligibility criteria in order to ensure the application of uniform yardsticks to the approval of projects across the different provinces. Their application, with the assistance of a consultant firm (see para. 2.24), will help single out road projects with, first, a strong social purpose and the adequate technical and environmental specifications and institutional capacity and, second, for those of a larger scale (in terms of total cost and cost per kilometer), a proven economic worthiness to the potential increase in the agricultural development of their area of influence. At project negotiations, assurances were given that all sub-projects considered for financing under the project will comply with the specified eligibility criteria, as defined in the Project Operational Manual. - 31 - 3. PROJECT IMPLEMENTATION A. Project Organization and Management 3.1 Operational Set-up. MTC will have overall responsibility for project coordination and implementation. MTC lacks the capacity to directly manage a large rural roads project, and it would involve a costly and lengthy process to rebuild the capacity. Actual implementation will be delegated to a specialized unit, the Proyecto Especial de Rehabilitaci6n del Transporte - Programa de Caminos Rurales (PERT-PCR), which was created in July 1995 by Ministerial decree. With staff and budget separated from the rest of the Ministry, the unit enjoys ample technical, administrative and financial autonomy. Its limited personnel is engaged at private- sector salaries and paid from local counterpart funds. Most of the tasks will be undertaken by consultants engaged under the project. The unit is led by an Executive Director who reports directly to the Vice-Minister of Transport. Implementing the project within the proposed time frame will demand strong skills to manage hundreds of road links spread over difficult remote rural areas. This will require setting deconcentrated units in those departments with active programs to manage the works, a strategy that is consistent with Government's agenda for decentralization. The Operational Plan for the final establishment of PERT-PCR and its initial deconcentrated units is shown in Annex 8. Due to the special nature of the statutes of PERT- PCR, its duration is initially limited to the execution of the proposed project. At the third annual review, Government jointly with IDB and the Bank will review the need to continue with PERT- PCR after project completion, taking account of the progress made in the decentralization agenda. 3.2 The project operational set-up would have a three-layer organization that would attempt to efficiently achieve an adequate monitoring of project execution, the decentralization of responsibilities, and the participation of municipalities and communities, as follows (Chart 1): (a) PERT-PCR's central unit in Lima would be responsible for general project management. This would entail (1) establishing indicative budgetary allocations and investment programs, (2) designing and coordinating the institutional strengthening component, (3) issuing implementation guidelines (through the Operational Manual and further reviews of it), (4) channeling project funds to the deconcentrated units, (5) putting in place and upkeeping the project ex-post monitoring system, (6) auditing performance of deconcentrated units (para.3.29), and (7) preparing progress reports, processing disbursement requests, and managing the Special Account (para.3.46). (b) The deconcentrated executing units (UEDs) of the PERT-PCR, located in the project areas (likely one per department or region participating in the project), would be responsible for managing the work programs. This would entail (1) promoting the project among, and entering into agreements (convenios) with municipalities and communities, (2) coordinating with other decentralized agencies their rural development and poverty alleviation programs, (3) defining and programming investments in consultation with the municipalities, (4) engaging consultants and NGOs for engineering studies, supervision of works and delivery of institutional components, (5) tendering contracts for works, (6) administering - 32 - contracts and convenios (including payments), and (7) monitoring and reporting implementation of the various project components. (c) Municipalities and communities at the local level. Though the project funds will not be channeled to the municipalities, municipalities would participate in (1) identifying sub-projects and coordinating with UEDs the investment programs, (2) contributing to the cost of the works for community-managed components and directly executing small works through convenios; (3) undertaking the institutional action programs agreed under the project; and (4) overseeing through Road Committees the delivery of programs and reporting any difficulties in the implementation of the project. 3.3 Each UED will be established according to one of the following three possible options: (1) contracting out management services to a private firm, (2) establishing an ad-hoc unit with staff appointed by PERT-PCR, and (3) delegating the management functions to an existing decentralized or local government agency restructured to meet the project requirements. It is envisaged that nine units will be needed to efficiently manage the work programs in the 12 departments selected under the project. The location and phasing in the creation of these units have been determined taking into account (1) the volume of work in each department or geographic area, (2) potential gains to be realized through the proposed location, in terms of improved accessibility to work sites (some rural areas are better reached from contiguous departments rather than from their own department) and to the existing market of local contractors and consultants, and (3) institutional and operational capacity available locally. The size of the UJEDs will vary in line with the volume and nature of the work planned, but in general will consist of 6 to 8 staff organized in three areas: (1) project development (planning, promotion of subprojects and institutional building, (2) engineering (review of studies, procurement and contract supervision), and (3) accounting and administration. The managers of the UEDs will report directly to the Executive Director of PERT-PCR. 3.4 MTC through PERT-PCR will enter into inter-administrative 'participation agreements' with municipalities with jurisdiction over project areas (though the agreements will generally be structured on the basis of provinces, all districts within the province will be required to sign in). The agreements, whose key features are described in Annex 8, will most notably spell out future obligations and undertakings assumed by both parties with regard to the execution of the project. The project will avoid further investments in those provinces where compliance with the agreements and the institutional action programs has not been satisfactory. Also, with assistance from PERT-PCR, provincial municipalities are expected to prepare, in consultation with their districts, transport plans documenting the actions agreed to improve transport conditions in their jurisdiction, as required under the Municipal Law. 3.5 Coordination with other development initiatives. At the central level, MTC will be responsible for coordinating with MEF and the Ministries of Presidency (FONCODES, INADE) and Agriculture all aspects regarding the Government's poverty alleviation strategy and the allocation of funds to other programs to support it. MTC has initiated preliminary 'cooperation agreements' with FONCODES and INADE, which control the largest rural infrastructure programs, to define mechanisms for sharing socio-economic and sub-project generation data, and - 33 - coordinating implementation of investment programs within common targeted areas. Key features of these agreements are shown in Annex 8. In addition, staff within MTC's Planning Office will be trained as part of the project to strengthen the Office's capacity to set rural roads policy, coordinate investments with other agencies who have developed rural development projects, and monitor investments and transport performance on a continuous basis. Chart 1 Institutional Set Up of the Project Coordination of: _ Poverty Alleviation Strategy . .. ..... .. MTC :0 *Allocation of fumds to prograns M DGC Techrical Assistance ^ MEP, Foncodes, Inade Rural Roads Unit Auditing Services . Ministry ofAgridcut re Q ... PERT-PCR : - Coordination of:., i! Priority areas and actions ............... ... ..... ...... *Identifiction of transport needs .....SX .. t! *Evaluation of prograrns .. Esl 2t . .: ~~~~~~~~~~PERT-C' 9 . 8 ..... ~~~~~~~~deconcentr td UnRbI _ J . S ~~~~~~~~~~~~~~~~Contracts I . _ / ~~~~~~~Contracts Coordination of _/ Agreements zu ~~~~~~~Municipality _/Consultants between province./ eg and distrncrs ---- Transport Plan |/Cnrco l l I Corntnun~~~~~~~~~~~~~ities involved in project selection Districts and work execution _ ~~~~~~~Municipalities _ Iinter adrinirstrative agrnemem l ~~~~~Admrdxib-ae Units to be crated urider proprowd cviodoamnsrcndgda l ~~~~~~projed .. congisd driLrio lea | | EJa~~F-sbr4 Admir":trative Umuts .............. . .... . CoorcUutor 3.6 To ensure the coordination of efforts with other governmental programs in specific regions or departments, the UJEDs would promote the establishment of regional inter-institutional committees that would be responsible for further promoting the project, reviewing the list of proposed subprojects, and providing information about other programs/projects in the vicinities of the proposed subprojects. The inter-institutional committees would include representatives from the communities (including women groups) in the vicinities of the projects being considered for analysis. These conmmittees should meet as a minimum once a month and though they would not - 34 - Box 6 Content of the Project Operational Manual Indicatively, the manual would include: * descnption of background, objectives, and components of the project; . institutional framework and responsibilities: of the PERT-PCR and the UEDs, including the list of indiaors to assess the performance of each unit and the methodology for calculating these indicators on a:six-month basis, procedures for project administration and flow of funds; * minimum qualifications and regulation for the employment of staff, and restrictions that would apply to thea staff to avoid conflict of interest; * procedures for the generation, selection (eligibility criteria), and approval of project proposals; * environmental guidelines to be followed in the execution of project works and to mitigate any adverse impacts which may be generated by the rehabilitation of rural roads; * procurement procedures for works and consultant services, including guidelines for the pre-qualification of firns, evaluation of proposals/bids, and awarding of contracts; and * obligations of the PERT-PCR and UEDs in implementation and monitoring, including the update of the. database information system and the upkeep of accounting and disbursement records. * a set of model documents for items such as (I) agreements (convenios) with local institutions; (2) road. rehabilitation and maintenance standards, including technical specifications for both traditional and labor- based methods of construction; (3) terms of reference for preparation of sub-project eligibihty and engineening studies, and supervision works; (4) standard bidding documents and contracts for works; (5) letters of. invitation, and contracts for consultant services; (6) terms of reference for performance audits; and (7) format and content of database information system. have any approval responsibility (which is fully vested upon the chief of the respective UEDs), they would have the strong possibility of informing the UEDs of the advantages and disadvantages of undertaking particular sub-projects and of carrying particular actions (such as methods of construction, procurement, micro-enterprise development). A detailed list of current rural development programs that need to be coordinated at the local level is given in Annex 8. 3.7 The Project Operational Manual. In order to ensure consistency in the implementation of the project's various components across departments, PERT-PCR will use a Project Operational Manual that will clearly define the guidelines and procedures to be followed by the IJEDs when discharging their responsibilities in the execution of the project. MTC assisted by consultants is finalizing the manual. The format and content of the manual was agreed at negotiations (see Box 6 and Annex 9), and its adoption by PERT-PCR is a condition of loan effectiveness. Adherence to the manual will be assessed every six months by external auditors engaged for the performance audit of PERT-PCR and its UIEDs. B. Selection and Programming of Investments 3.8 Participatory Process in Sub-project Generation. To achieve the intended objectives of alleviating poverty and building up local institutional capacity for sustainable maintenance, the project makes the beneficiaries participate in the various phases of subproject generation, design, implementation and maintenance. While the whole project design is built on this participatory approach, it relies on the systematic use of participatory workshops especially designed to ensure that community participation is undertaken in a systematic and organized manner. Specific objectives of these workshops are to: i) assess transport needs at the community level, ensuring that the needs of the rural poor are taken into account; ii) confirm with the beneficiaries the priority of the proposed road rehabilitation subprojects and the commitment of the conmmunity to their maintenance; iii) validate the design of the selected subprojects to include local solutions; iv) - 35 - mobilize support for road maintenance through increasing ownership of the project and promoting micro-enterprises formation; and v) provide local communities with necessary information about the project and their role in the project. 3.9 As described in Box 7, several exercises were undertaken during project preparation to develop the participatory mechanisms that would be applied throughout project implementation to achieve the above mentioned objectives. These exercises confirmed the potential benefits and viability of the participatory approach proposed under the project. Some adjustments to the initial methodology proposed were introduced on the basis of the experience gained in the field. A full description of the Participatory Process is given in Annex 10. Also included in the Annex are the Operational Guidelines developed in the field in conjunction with PERT-PCR for application of the participatory process and organization of workshops with beneficiary communities and municipalities. The Guidelines are intended for use by local consultants, municipalities and PERT-PCR staff in applying participatory mechanisms during project development and implementation. Their use throughout project implementation will also expose municipalities to participatory approaches and provide on-the-job training to community leaders and local authorities involved. Box 7 : The Participatory Approach during project preparation * Rationale. The Peruvian government is implementing general policies aimed at integrating the rural poor into the mainstream of national economy and culture. In the rural roads sector, regardless of how well constructed or rehabilitated roads are, without maintenance the trafficability of roads is compromised, and with it, a wide array of services that directly impact in the livelihood of towns and villages. If changes of community attitudes towards maintenance are necessary, then the people whose behavior has to change must see their own interests linked with the change and commit themselves to it. The value of community participation in ensuring the sustainability of projects is well documented. * Objectives. Validation of a participatory approach during project preparation. At project appraisal special emphasis was given to developing a proven methodology that could be replicated by local facilitator teams from MWC for enhancing commnunity participation in project implementation. * Approach taken Villages were selected for methodology testing and evaluation contingent upon poverty evaluation, by which only extremely poor communities in isolated regions were included. The approach was implemented at two levels. At the first level, the Community Participatory Workshops were held with community leaders (alcaldes, gobernadores and such) and heads of base organizations that are representatives of the intended beneficiaries, or heads of NGOs working with the poor in a similar way to the government body, FONCODES. These meetings in the cities of Cusco and Huancavelica lasted 5 to 6 hours. At the second level, the Community Participatory Workshops were designed around a broad open invitation to whole communities, to gather in one-day meetings. This participatory design was applied to two rural communities, one was Ccorca, in the Cusco Department and the second was Izcuchaca, in the Huancavelica Department. Communities within walking distance were also included. * Selection ofstakeholders. Mayors (alcaldes) were the first resource used in selecting leaders from the rural communities and gave detailed information about the basic structure of the community and its organizations. Spontaneous mobilization happened: when local leaders knew about the meetings, they invited thernselves. One group attended the Cusco meeting after hearing about it by the local radio news. Among those leaders, representatives of women's groups like the Mother's Clubs were very important to provide a description of social needs (education; health-care) related to road rehabilitation and maintenance. Also, in the case of the Huancavelica meeting, they provided community women's view concerning their readiness for future road maintenance works. * Conclusions. Community participatory workshops are a powerfiu way for mobilizing public involvement and a sense of ownership of a development project. The role of the RRPM project concerning poverty alleviation is more than a purpose declaration: it now becomes a shared objective that connects international funding institutions, the government of Per& and the high sierra comuneros. - 36 - 3.10 Subprojects of the pilot and first-year programs were selected on the basis of poverty criteria among candidate roads located in the poorest provinces of the six poorest departments, after consultation with local authorities. Subsequent subprojects would be identified on the basis of the requests of communities, municipalities, and other public and non-governmental entities submitted to PERT-PCR and, in particular, its UEDs. The UEDs are charged with promoting and preparing subprojects using the participatory mechanisms described in Annex 10; they would disseminate the objectives and components of the project through municipalities and local NGOs and a radio campaign. The UEDs would organize participatory workshops with the various communities involved, to finalize the identification of the main characteristics and components of the requested subprojects. Local consultants will then be engaged to collect the information necessary for assessing the eligibility of the requested subprojects and defining their technical specifications. Upon approval of a subproject, the pertinent works would be procured with the contracting of local construction companies or organized communities (particularly for smaller scale maintenance works) under the rules specified in the Project Operational Manual (para.3.7). 3.11 Eligibility Criteria. In Peru, with two thirds of the rural population being poor or extremely poor, investments in rural roads have a strong social policy purpose. Accordingly, the Project emphasizes social factors for those project with costs below certain thresholds--in terms of both total value and cost per kilometer. For investments with costs above those thresholds, their economic worth would be evaluated on the basis of expected agricultural yields and livestock production. The eligibility methodology of the Project Operational Manual (detailed in Annex I 1) requires to assess the institutional and technical factors (including the sustainability of the investments and their possible environmental impacts) of a proposed project as well as both the social and agricultural-production feasibility. Non-quantified project benefits include increased access to health and education services, accident reduction, and improved institutional capacities at the local level. Non-quantified costs include the possible adverse environmental impact of the execution of particular road works--for which mitigation measures and methodologies are included for their application in the Project Operational Manual. 3.12 Four criteria constitute the vertebras for the eligibility assessment of projects. The institutional criteria refer to the level of identification the communities in the area of influence would have with a particular road project, including the degree of commitment to the future maintenance of those roads. This commitment takes place initially as part of the effort of the community in requesting a sub-project or participating in its preparation and design, and second by assessing the level of (a) priority of the sub-project as expressed by the communities through the participatory workshops; (b) coordination with other rural programs in the area of influence of the project; and (c) capacity for organizing the future maintenance of the rehabilitated project, including the formation of micro-enterprises. 3.13 The technical criteria refer to the construction characteristics of the proposed sub- projects, the soundness of their environmental mitigation measures, and their functionality within the road network in the pertinent province or department. The construction (or technological) characteristics aim at implementing works that (a) can be adequately maintained; (b) can maximize the use of local labor; (c) their costs keep relation with the expected benefits of the road, and (d) do not cause or adequately minimize environmental impacts. Furthermore, the proposed sub- - 37 - projects would be analyzed within the context of the broader transport network and, in particular, of the connection of the road to market and/or production centers of the province or department, with the objective of defining connected "trees" of rural roads and, when necessary, of departmental roads that would ultimately maximize the economic and transport benefits of the investments. Both the institutional and technical criteria are of a narrative nature, and the results of the evaluation would be documented by the pertinent analyst. 3.14 The social criteria, based on two readily-available poverty indicators (infant mortality rate and unsatisfied basic needs) would be applied when the total cost and the cost per kilometer of a sub-project fall under US$200,000 and US$8,500, respectively. Under these circumstances, a sub-project would become eligible if the infant mortality rate is higher than 80 and the indicator for the unsatisfied basic needs is higher than 70 percent (as described and documented by the 1993 Census of Population). Furthermore, to ensure the sub-project benefits a reasonable number of people, it will also be required than the number of beneficiaries per kilometer is higher than 100. The thresholds for these indicators have been determined on the basis ofthe analysis ofthe pilot sub-projects. 3.15 When a project surpasses the cost threshold for the solely application of the social criteria or when it does not comply with these criteria, it would be subjected to economic criteria whereby the rehabilitation and maintenance costs of the sub-project would be compared to the benefits it would bring about in terms of the increase of the net agricultural and livestock production (net of the local consumption and of production costs) in the area of influence of the sub-project, without causing environmental encroachment into natural forests or protected areas. On the basis of this information, the internal economic rate of return (IERR) of the sub-project would be calculated and when the IERR is higher than 10% the project would become eligible. The 10% benchmark has been selected considering that, first, the projects have a strong social focus and, second, not all the benefits would be quantified (for instance, to simplify the economic analysis, calculations would be performed on the production possibilities of the five major agricultural, livestock products or other by-products in the area, leaving out a few others that may also contribute to the benefits of the project). 3.16 The above-mentioned eligibility criteria should generate a program of projects that is evenly distributed among the different departments of Peru and among the various project components (e.g., between investments on village streets and on the rehabilitation and maintenance of rural roads). To avert a skewed distribution at project completion, at each annual review, an examination of the distribution would be performed and the necessary adjustments would be incorporated to both the participatory process of project generation and the eligibility methodology. C. Implementation Strategy 3.17 The Pilot Program. In view of the large size of the project and the history of inactivity in the rural road sector, Government decided to undertake a pilot prior to implementing the project. The main objective of the pilot was to establish the basic technical, administrative, socio- economic and cost information necessary to design the project (see Box 8). The 'Pilot Program' - 38 - Box 8: Objectives of the Pilot Obtain information and generate experience about:- * the availabilit and capacity of local consultants (who reside in the project areas) to undertake the studies,; adequacy of the terms of reference and the costs, quality and consistency of the studies; * the nature of the works recommended, including their costs, duration and scheduling; X the capacity of the local contractors (who reside in the project areas) to undertake the works; * the socio-economic parameters in the project areas and the means of obtaining them; recommended methods for the execution of the works, including specific proposals for the use of labor- intensive methodologies; * the distribution of the needs and works among road networks in order to adequately dimension the project. encompasses about 1,485 km of road rehabilitation and 21 km of paving of village streets, with an estimated cost of US$33.1 million. These works are located in 19 provinces within six departments of Perui ranking highest in terms of poverty (Ancash, Apurimac, Ayacucho, Cajamarca, Cusco, Huancavelica). One university and 21 local consultants were engaged to collect socio-economic data and prepare the engineering designs for the roads. The studies showed that the average number of direct beneficiaries is about 210 per km of road. The designs are consistent with the spot improvement guidelines discussed in para. 2.12. The works are limited to those necessary to reestablish trafficability and are suitable for labor-intensive construction methods. The average estimated cost for rehabilitation of rural roads is slightly less than US$10,000 per km; higher costs are associated with road sections with major landslides. Cost estimates for improving village streets average about US$140,000 per km (these subprojects rarely exceed 0.8 km in length), ranging from about US$58,100 (simple empedrados) to about US$230,000 in one case (concrete pavements involving major additional works in drainage and sidewalks). The works are being contracted out to small contractors. Contract amounts are below US$250,000 and provide for the rehabilitation of an entire road section, typically extending eight to 20 km. Consultants are retained to supervise all the works in a project area. An ad-hoc Rural Roads Unit, established within PERT to assist in the preparation of the proposed project, has been responsible for developing and implementing the Pilot Program. Since July 1995, the Unit has become part of PERT-PCR. The progress and preliminary experience on the Pilot was assessed during the appraisal mission to incorporate refinements to project design and implementation. A more detailed description of the Pilot Program and its accomplishments to date is given in Annex 12. 3.18 Though implementation of the Pilot is still underway, the experience gained to date has generally confirmed the validity of the assumptions and data used for project design: i) the local consultants (who reside in the project areas) demonstrated capacity to produce suitable designs in a timely manner, including adequate economic and technical assessments, at an acceptable cost. Feedback from initial reviews allowed to improve the terms of reference for the studies; ii) the solutions proposed have been consistent with the type of road encountered, as a function of its traffic characteristics and the population served. Consultants' cost estimates are on average about US$10,000 per km (net of taxes). This figure has been used for financial planning of the project in spite of the fact that so far contractor bids are 10 to 20 percent less than the consultants determined values, given that contractors have been inactive in this sector for a long period of time; iii) the small local contractors have shown so far sufficient capacity to undertake the works under contracts in the range of US$200,000 to US$250,000. They were able to produce bids, and where construction has already begun, to undertake the works in an efficient manner. One of the aims of the project is the development of the local construction industry and there are - 39 - indications that the project would address this objective; iv) the socio-economic criteria proposed for the project were found to be workable and the data readily accessible by consultants for their designs. v) the objective of using labor-based methods is being met in terms of the cost percentage given to manual labor in the road rehabilitation component. PERT-PCR will monitor this aspect more closely on the paving of village streets component to see that local material as well as local labor is being used to the greatest extent possible; vi) the targets proposed for the rehabilitation of primary and secondary roads were revised to take into account DGC's current accomplishments in rehabilitating those networks. This experience has highlighted the need for continuous coordination in the field. 3.19 In general, the findings from the Pilot to date are positive and, where necessary, improvements have been incorporated. The incremental nature of the project and the number of sub-projects allows for changes and updates to be readily incorporated. 3.20 Overview of Implementation Arrangements. As noted in paras.2.9 and 2.10, the project would be carried out in twelve departments: Ancash, Apurimac, Ayacucho, Cajamarca, Cusco, Huancavelica, Huanuco, Junin, Pasco, Puno, San Martin, and Madre de Dios (see Annex 8). Though not presently envisaged, other departments could be included in the project area in addition to, or in substitution of these departments. However, prior to including a new department, IDB and the Bank must be satisfied with (1) the adequacy and relevance of the project objectives and implementation approach in the said department, (2) the organizational structure proposed for the respective implementation unit, and (3) the indicators to assess performance of such unit. Recognizing the recurrent issue related to the availability of government counterpart funds, the planning of the project will be brought into the phase with the Government's budget cycle. PERT-PCR will furnish to IDB and the Bank for review and approval, not later than July 31 of each year of project execution, starting in 1996, the proposed annual investment plan providing for the activities in each project area, the respective justifications and implementation schedules, and proposed budget for each component of the project during the upcoming year. Independents consultants, financed under the project, will conduct biannual performance audits, to assess the quality of the works, the compliance with environmental and procurement procedures set forth in the Project Operational Manual (see para. 3.29). 3.21 Road and Street Works Components. The Project Operational Manual establishes guidelines, technical specifications and terms of reference for design and supervision of spot improvement and rehabilitation works. The guidelines emphasize on-site designs for rural roads, to keep engineering cost at an acceptable proportion of the total construction cost, and more detailed engineering studies for primary and secondary roads. The use of the Manual will ensure consistency in the solutions proposed. Annex 12 includes the list of road sections being considered for the Pilot and the first year of project implementation. Contractors and communities, the latter engaged through convenios, will carry out the works using labor-based methods. Though the exception, it is possible that in some remote areas it could be difficult to attract contractors with the machinery required. When not possible, PERT-PCR will contract government-owned equipment fleets from either MTC or the subnational governments to undertake equipment-intensive activities under the project. - 40 - Box 9 : C:riteria for SelectingFive Pilot Areas for NMTIComponent iCriteria Ibrselecting thpilot areas would include but not be limitedto: * location in areas where project road components&are executed to. ensure integrated§oral action; * d; ivei;rse existence and use of non-motorized transport modes in order to test a variety of interventio istd :r0ael patters that indicate suppressed tranport and mobility needs; * high degreeofvillage interest and existence of organized farmers or community development groups to ensurie: i ommunity paticipation;: * commitment of local leadership through designating a local project manger responsible fWor iating contacts. with thetconcerned communities. 3.22 Local consultants will carry out the engineering and supervision of the road works, grouped taking into account geographic considerations. The quality of the designs produced so far for the Pilot has been good and the costs have been kept below the estimated cost of the works. Microenterprises developed through the project will undertake the labor-based routine maintenance activities financed by the project. Other maintenance activities that require intensive use of equipment will be contracted out to private contractors or carried out through convenios with municipalities and MTC. 3.23 Non-Motorized Rural Transport. The component will be first implemented in five pilot sites located in Huancavelica and Cusco. PERT-PCR, the implementing agency will determine the location of these sites based on criteria set out in Box 9, and based on the willingness of communities to actively participate in the sub-projects. The size of these "sub-projects" are often such that feasibility studies become prohibitively expensive. Many of the intangible benefits of village level infrastructure improvements are hard to quantify in monetary terms. Expected benefits include extended life for the means of transport, safer transport conditions for people and "acemilas", time savings through less detours, and improved load carrying capacity. 3.24 It is crucial that all aspects of the program are closely monitored and evaluated both to determine whether it is worthwhile expanding and, if so, highlight any modifications, adjustments or changes that may be necessary. A base line survey would be conducted in the five pilot areas to choose the variables that would drive the expansion and design of the program. Variables to explore include difficulty in reaching health and educational services, the main forms of inter- village transport and the routes chosen, the amount of human porterage, the constraints for the use of non-motorized modes, and the distances covered. In 1997, the coverage of this component will be expanded on the basis of results from the monitoring of the Pilot. Staff trained in this methodology will be assigned to the program to coordinate training in all districts. 3.25 Institutional Development Component. Implementation of the institutional development component will be governed by the program of actions outline in Table 8. The program entails certain actions that go beyond the scope of the project but are necessary to enhance the institutional and financial framework for road sector management in Peru. The program also lists the actions needed to carry out the project's institutional development component and achieve its development objectives. The technical assistance in rural roads planning and maintenance will be provided by an experienced consultant firm, with access to international experts. Implementation of the technical assistance to develop microenterprises will - 41 - be done through NGOs with actual experience in developing micro-enterprises for infrastructure maintenance. In this approach, the NGOs will have a high stake in the quality of the service provided by the micro-enterprises because of their interest in replicating the model elsewhere. The microenterprises, in turn, will benefit from the experience and know-how the NGOs have accumulated from similar experiences elsewhere. PERT-PCR, in turn, will assure through the maintenance component of the project that there is sufficient demand for services of the microenterprises. Municipalities will be exposed to the program, and their capacity to monitor results strengthened through performance evaluations carried out jointly with PERT-PCR. The establishment of an effective technical and management assistance operation to the small and medium firms involved in project execution will be contracted out to outside entities (e.g., local representations of the Colegio de Ingenieros, CAPECO, and regional universities). D. Monitoring, Reporting and Bank Supervision 3.26 Monitoring. The monitoring of project implementation encompasses two levels. One consists of the reviews of project performance and annual plans that will be undertaken by PERT- PCR on a continuous basis; the other consists of performance audit exercises that would be carried out by an independent firm on a six-month basis. PERT-PCR will select performance monitoring indicators to measure the efficiency and effectiveness of the UEDs in discharging the project. Annex 8 gives details of the indicators proposed for this purpose as well as the design and application of the Project Information and Monitoring System that would allow PERT-PCR and the Banks to ascertain the progress in the implementation of each sub-project and the degree of achievement of the project development objectives (as measured by the outcome of the Logical Framework). 3.27 The project would use an information system for monitoring the implementation of the large number of sub-projects scattered across the departments of Peru. The development of the system entails the creation of a data base and the procedures for capturing key technical, financial and social information for each sub-project. The database system would serve several purposes, mainly: i) as decision- and monitoring-support system for the UEDs to know the main characteristics of the sub-projects presented to them, record the approval procedures, and, by consolidating the information for all the sub-projects under their jurisdiction, monitor overall project performance in their department; ii) as monitoring-support system for the PERT-PCR central office, which through the consolidation of the data from the UEDs, would have up-to-date information on the progress and performance of the overall project; iii) as a supervision-support tool for the lending agencies which at annual reviews would count on readily-available information and a base for incorporating adjustments to the implementation variables of the project; and iv) as an evaluation tool, the database will consolidate the information needed to update the project indicators defined in Annex 3 in order to assess progress in achieving the objectives of the project. - 42 - Table 8. Action Program for Institutional Development Purpose Who? What? When? Enhance the MTC complete the inventory of (1) national and (2) departmental roads (1) by March 31 institutional under direct responsibility of central government, and update if 1996, and (2) framework necessary the functional classification of public roads in Peru. November 30, 1996 Enhance MTC with coordinate implementation of investment programs with throughout inter-agency PERT-PCR FONCODES, INADE, and any other governmental agency involved project coordination in rural development programs in the project area, in accordance execution with the Project Operational Manual establish PERT-PCR's deconcentrated units to provide a focal point In accordance for coordination with other agencies involved in rural development w/ Operational at departmental and local levels; Plan MTC's (1) prepare, in coordination wlith PERT-PCR, its road rehabilitation by July 31, each DGC and maintenance programs in the project area for the upcoming year year, starting in to ensure complementarity between such programs and the project, 1996 (2) furnish to IDB and the Bank such programs for review, and as for information on other road programs in the project area being or to be implemented by other entities, and (3) carry out MTC's program in the project area and the project's annual investment program ensuring at all times complementarity between them; Build up PERT-PCR recruit consultants to implement the technical assistance in rural by March 31, institutional under MTC road planning and management 1996 and financial supervision complete the training of key staff within MTC's Planning Office to by December capacity at strengthen its capacity to set rural roads policy and monitor rural 31, 1996 local level transport performance select consultants to carry out the studies on Local Road by December Management Practices and Rural Roads Financing; 31, 1996 (1) submit to IDB and the Bank an action plan for implementation at third annual of suitable mechanisms for financing rural road maintenance and for review streamlining local road management practices, and (2) implement (program mid- such action plans in a manner and under a timetable satisfactory to term review) IDB and the Bank; retain consultants to assist in developing micro-enterprises for road by March 31, maintenance; 1996 contract out to mnicroenterprises and/or community associations the through project labor-based routine maintenance works under the project; implementation enter into participation agreements with the municipalities involved through project in the annual project implementation plans; execution; draw up together with each respective provincial municipality and within six present to the banks an action program to develop the municipality's months of the capacity to assume within a reasonable time, full responsibility for respective managing the maintenance of the respective rural road network; agreement review compliance with such action programs, and based on such at project review, determine the eligibility of municipalities for conmmitting annual reviews further project investments in their jurisdiction;- approve an Environmental Manual for design and execution of rural by September road maintenance and rehabilitation works, and require all 30, 1996 contractors executing works under the project to use such manual; PERT-PCR complete the inventory of all rural roads in the jurisdiction and put within six through its into effect with the respective municipalities in the area, the months of UEDs functional-jurisdictional road classification adopted by MTC. signing the respective participation agreement - 43 - 3.28 The maintenance of the data base would be the responsibility of each UED; the PERT- PCR, upon receiving the information from the UEDs, on at least a monthly basis, would check the consistency of the information and compel the daily maintenance of the database by the UEDs. The project information and monitoring system would be installed in PERT-PCR's central office and in each deconcentrated unit, and maintained throughout project execution. 3.29 Every six months, auditors acceptable to IDB and the Bank will conduct a performance audit of the implementation of the project by examining a sample a sub-projects under execution by the UEDs. The terms of reference, including criteria for establishing the scope and size of the sample, are included in Annex 8. The audit will focus on the execution of the project physical components (quality and cost of works), procurement procedures, and compliance with the guidelines of the Project Operational Manual and the performance indicators agreed between PERT-PCR and each UED. Through the audit, cost comparisons will be made available and reviewed to identify procurement problems or other factors contributing to variations among the different regions; the sample of work sites included in the audit will be expanded according to these findings. Agreement was reached at negotiations that MTC through PERT-PCR will (1) engage independent consultants acceptable to IDB and the Bank to undertake bi-annual audits, starting with the semester January-June 1996, on the performance of PERT-PCR and its UEDs in the implementation of the project, including achievement of physical targets, quality and cost of the works, compliance with eligibility criteria, procurement, and environmental procedures set forth in the Project Operational Manual, and achievement of the performance indicators for each UED, and (2) furnish to 1DB and the Bank within 90 days after each semester the report of such auditors. 3.30 Reporting. PERT-PCR will prepare quarterly progress reports for all components of the project. These will be sent to the Bank within one month after the end of each quarter and will describe (1) progress achieved during the previous quarter in the implementation and in the achievement of the objectives of the project based on the performance indicators, (2) an assessment of the problems and issues derived from the implementation of the project, (3) updated implementation and disbursement schedules for the following two quarters, and (4) status of compliance with the legal covenants contained in the Loan Agreement. The reports will provide timely and updated information on project implementation, highlighting issues and problem areas, recommending actions and commenting on progress in executing previous recommendations. The format and contents of the progress reports, including key monitoring indicators will be agreed at negotiations. 3.31 Annual Reviews. During the second quarter each year, the Bank, IDB and the Government will conduct a formal joint review of the progress made in reaching the project objectives and in implementing the project components. Participants will include key representatives from the operating UEDs, pertinent consultants and NGOs involved in the technical assistance component, MTC, MEF, decentralized agencies involved in rural development programs, and of a sample of beneficiaries. 3.32 The annual reviews will provide an opportunity to assess (1) progress in project implementation and achievement of the project objectives on the basis of agreed performance - 44 - indicators and targets, (2) the performance of PERT-PCR and each of its UEDs, (3) the effectiveness of the work programs in terms of community and local government involvement, local contractors response, coordination with other development programs, and achievement of project objectives, (4) progress in implementing the institutional development components, including compliance of participating municipalities with the Institutional Action Programs, (5) the adequacy of the procedures stated in the Project Operational Manual, (6) progress in restructuring and strengthening road maintenance administration and finance, and (7) the justification of the investment and institutional proposals for implementation during the subsequent year. The project implementation schedule and monitoring indicators will be updated during the annual review. PERT-PCR would furnish to IDB and the Bank at least two weeks before departure of the annual review mission, a "review report" containing the agenda for the meeting, the current status with regard to the topics listed above and the annual plan proposed for the prospective year. The format and content of these reviews would be agreed upon at negotiations. Agreement was reached at negotiations that MTC and the Government will conduct annual project reviews with IDB and the Bank to cover the above mentioned topics, and that in the event of unsatisfactory progress, Government will prepare remedial action plans satisfactory to IDB and the Bank within two months of the review. 3.33 Mid-Term Review. The third annual review will constitute a Mid-Term Review of the six-year program and provide an opportunity for a more comprehensive assessment of the achievements of the project to date, and of the prospects for successful project completion. Prior to this review, PERT-PCR will conduct a performance survey in a sample of provinces participating in the project to assess the progress in achieving the objectives of the project, as defined by the set of agreed indicators. In addition to covering the topics listed above, this review will examine the progress made by Government with regard to (1) its agenda for administrative decentralization and the need to adjust the operational set up of the project accordingly, (2) the establishment of a strategy for rural roads funding and, (3) the improvement of inter-agency coordination, and (4) the participation of municipalities in project activities, including the possibility that certain municipalities became direct executing agencies under PERT-PCR. The review will consider proposals for restructuring or reorienting the program, taking account of all relevant sector and project issues. At this stage, government, IDB and the Bank will discuss specific arrangements for financing the second phase of the program including decisions on the need to start preparation of the follow-on loans to support its execution, the amount of financing required, the need to extend the program to cover more departments than the 12 presently selected, and other adjustments considered necessary to enhance the development impact of the program. Subject to actual performance in project implementation, the comprehensive nature of this review is expected to provide sufficient information to appraise Phase II of the program. 3.34 Project Supervision. Building on the experience gained during project preparation, IDB and the Bank will supervise the project through a shared project team. The respective task managers will coordinate the timing and composition of field missions. Their frequency will be guided by the progress and special requirements of project implementation. The missions are expected to supervise the project twice a year. However, the supervision plan calls for a greater involvement of the Resident Missions. The field offices will play an active role in (I) reviewing sub-project eligibility and procurement. (2) monitoring the monthly update of the project - 45 - information system, (3) visiting work sites and municipalities involved in the technical assistance program, and (4) providing follow-up and problem-resolution support. Overall, it is estimated that the supervision effort will entail about 154 staff weeks for the duration of the project, with the Bank's share estimated at about 77 staff-weeks (out of which 30 staff-weeks or 38 percent correspond to staff stationed in the Bank's Resident Mission in Peru or local consultants). This would result on an average of 20 to 23 staff-weeks during the first three years of project implementation, an estimate that reflects synergies expected from sharing project supervision with IDB and delegating responsibilities to the Resident Mission. The Bank-IDB Supervision Plan is included in Annex 13. E. Procurement 3.35 All project components financed under the proposed Bank loan would be procured in accordance with the Bank's guidelines for Procurement (January 1995). All procurement arrangements were confirmed at loan negotiations to ensure that they are in compliance with both Bank and IDB guidelines. Civil works are estimated to account for about 82 percent of total project costs, consultant services about 13 percent, and project management about 5 percent. Table 9 shows the estimated project cost breakdown by procurement method. Table 10 summarizes the limits on types of procurement and prior review thresholds. 3.36 Civil Works. Procurement of small works estimated to cost less than US$50,000 up to an aggregate of US$40 million may be done through direct contracting with (1) nuicleos ejecutores (which is a recognized entity formed by members of a community to support implementation of a specific investment in their area), and (2) micro-enterprises for road maintenance developed under the project. This procurement modality would allow for: i) implementation of works that would not attract local contractors because of their small size and remote location; ii) poor rural communities to directly manage small investments and to make the required 20 percent contribution to the work through partial donation of unskilled labor (non- motorized rural transport component); and iii) local communities to take an active role in maintaining their road infrastructure. The contracting of each work to a nuicleo ejecutor would be supported by a technical proposal with its budget (expediente tcnico). PERT-PCR will establish a system of standard regional unit prices to guide both the budgeting of the works and review of contracts under direct contracting. PERT-PCR's inspectors or the consultants engaged to supervise the work programs in a project area will provide monthly certificates and a final certificate at completion of the works (actas mensuales-acta de recepci6n), which will specify the works done and expenditure incurred, as a proof of successful execution of the work and justification for reimbursement by the Special Account. Model agreements will be incorporated into the Project Operational Manual. Subject to approval by IDB and the Bank, works (1) estimated to cost less than US$50,000 equivalent and US$4,500,000 equivalent or less in the aggregate, (2) of an equipment-intensive nature, and (3) to be carried out in areas where no contractors with the required equipment are available, may be procured through force account procedures satisfactory to the banks. Under the force account arrangements, the Bank loan will finance 45 percent of the total expenditure incurred in respect of each force account package ("convenio"). In the approval of each convenio, the Bank will ensure that its 45 percent financing share only includes the variable cost of equipment. The total cost of these force account packages will be determined on the basis of pre-agreed schedules of costs per activity. - 46 - 3.37 Works estimated to cost US$250,000 equivalent or less per contract would be procured under fixed price contracts awarded on the basis of quotations obtained from at least three qualified domestic contractors in response to a written invitation. The invitation would include a detailed description of the works, including basic specifications, the required completion date, a basic form of agreement acceptable to IDB and the Bank, and relevant drawings when necessary. All bids received will be opened in public on a predetermined date to be stated in the bidding document. The award would be made to the contractor who offers the lowest price quotation for the required work, and who has the experience and resources to successfully complete the contract. Standard bidding documents and standard contract forms would be agreed during negotiations and included in the Project Operational Manual. The combined aggregate amount of contracts awarded under the above mentioned procedure and direct contracting (para. 3.34) would not exceed US$153 million. Table 9. Procurement Arrangements (a) (US$ million) Non-Bank Category NCB Other Financed TOTAL Civil Works: Rehabilitation of roads and 53 134 (b) 187 improvement of village streets and (20) (51) (71) non-motorized transport networks Maintenance of Roads 19 (c) 19 (5) (5) Consulting Services 33 33 (14) (14) Project Management 12 12 Total 53 186 12 250 (20) (70) (90) Notes: (a) Figures in parenthesis are the respective amounts financed by the Bank loan, including contingencies. IDB cofinancing will apply to all Bank procurement by equal amounts in each component (b) Direct contracting with nudeos ejecutores, fixed unit price contracts awarded on the basis of quotations obtained from at least three qualified contractors in response to a written invitation, and force account packages. (c) Direct contracting to microenterprises for road maintenance 3.38 National Competitive Bidding (NCB) procedures acceptable to the Bank would be used for work contracts above US$250,000. It is anticipated that about US$53 million will be procured under NCB procedures, with contracts ranging from US$300,000 to US$2 million. The use of standard bidding documents and standard contract forms satisfactory to the Bank was - 47 - agreed during negotiations. No International Competitive Bidding (ICB) is expected because of the rather small size of the works financed under the project. However, ICB would be required for any contract exceeding US$3 million equivalent. Participation of contractors from countries outside the region in NCB and ICB is very unlikely. However, the procurement advertisements and the bidding documents, will clearly state that participation of foreign firms from any country eligible under the Bank guidelines is not precluded, and that the financing will be secured by the Bank loan. In the event that the bidder who has submitted the lowest evaluated bid is from a country not eligible under IDB, the Bank will authorize an increase in the pari-passu established under the respective loan category in order to cover IDB's portion and meet the expenditures incurred in respect of that contract. IDB will authorize a similar increase in respect of other contracts eligible under IDB guidelines until the balance is reestablished. 3.39 Consultant Services. Consultants will be hired following the procedures established in the Project Operational Manual. The services include studies, engineering designs, construction supervision, technical assistance, training courses and auditing services. By and large, they will be provided by local firms and individuals. The procedures already applied to recruit consultants for the Pilot Program consistent with the "Guidelines for the Use of Consultants by the World Bank and by the World Bank as ani Executing Agency", dated August 1981, and conforming to IDB guidelines. 3.40 Procurement Review. For civil works, all bidding packages of US$ 1.0 million or higher will be subject to prior review of advertising, bidding documents, bid evaluation and contract award; they will be handled directly by PERT-PCR's central office. The first NCB bidding packages prepared by each deconcentrated executing agency of PERT-PCR and all force account packages, irrespective of the amount, will also be subject to prior review. For consulting firms, services estimated to cost US$100,000, as well as all single-source assignments, will be subject to prior review of contracts, terms of reference, and selection procedures; for individual consultants, services of US$50,000 or higher will be subject to prior review. For consultant services under the above limits only the terms of reference will be subject to prior review. 3.41 Although the level of prior review would be low (about 15 percent for civil works and about 58 percent for consultant services), it would be compensated for in several ways: i) external auditors will conduct performance audits every six months (covering technical, environmental, procurement and management aspects) on a sample of sub-projects satisfactory to the Bank and I:DB (para. 3.29); ii) the project information and monitoring system, would be used to compare costs of similar sub-projects within an executing unit and among units in order to detect possible discrepancies which might indicate procurement problems and the need for further analysis. Accuracy of the data in the project information system will be checked through the audits; and iii) Bank and IDB supervision missions will conduct random reviews, including frequent field visits and reviews of procurement documentation. It is anticipated that both the IDB and Bank Resident Missions will play a key role in this regard. 3.42 Advance Procurement Action and Retroactive Financing. The loan would finance retroactively expenditures incurred under the Pilot Program not more than a year before loan signing (see para. 3.17). Implementation of this pilot is being done in consultation with IDB and - 48 - the Bank, including a review by the Bank of procurement actions. It is estimated that total payments made in respect of the contracts for civil works and consultants services would be around US$18 million. The amount to be financed retroactively out of the proceeds of the Bank loan will not exceed 10 percent of the loan amount. Table 10. Limits on Types of Procurement and Prior Review Thresholds fUS$'000) Description Type of Prior Review Limit Contract Value Procurernent (US$'000 equiv.) (US$'000 equiv.) Civil Works ICB All > 3,000 NCB All contracts > 1,000 > 250 up to 3,000 First contract each Unit Three quotations None 250 or less Direct contracting None 50 or less Force account All 50 or less Consultant services Local and foreign firms All contracts > 100 All single source Local and foreign All contracts > 50 individuals F. Disbursements, Accounting and Audits 3.43 Disbursements. The Project Completion date is June 30, 1999. The proposed loan is expected to be fully disbursed by December 31, 1999, the closing date. The disbursement schedule by the Bank fiscal year is shown in Table 11. It deviates from the standard disbursement profile for Bank projects in Perui to take account of (1) the expenditure incurred under the Pilot Program carried out in 1995, which would be financed retroactively, and (2) the slower pace for subsequent disbursement, which is typical of projects financing a large number of small investments. Disbursement estimates by quarters are given in Annex 14. Table 11. Estimated Loan Disbursments by Fiscal Year (USSmillion) Fiscal Year FY96
Группа Всемирного банка · Staff Appraisal Report
Peru - Rural Road Rehabilitation and Maintenance Project
Открыть оригинал документа
Полный текст размещён на сайте публикующей организации. lawenc.com индексирует метаданные и ведёт на официальный источник.
Полный текст
Основные сведения
Организация
Группа Всемирного банка
Тип документа
Staff Appraisal Report
Страна
Перу
Источник
Всемирный банк