FOR OFFICIAL USE ONLY

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$150 MILLION TO THE REPUBLIC OF PERU FOR A SAFE AND SUSTAINABLE TRANSPORT PROJECT December 10,2009 Sustainable Development Department Bolivia, Ecuador, Peru and Venezuela Country Management Unit Latin America and the Caribbean Region Report No: PE This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective December 1,2009) Currency Unit = Peruvian Nuevo Sol (PEN) PEN 2-94 = US$ 1.00 US$ 1.00 = SDR 0.62 FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS AAA AADT BCR - CNSV CAF COFIDE CPS CREMA CY DGASA DPL D.U. EIA EIRR ESAR ESMF ESSMP FEAP EIA EMP ESW FMA GAC GDP GIS GoP HDM IBRD ICR IaDB IEG IFC IFR IIRSA ILO Analytical and Advisory Activities Average Annual Daily Traffic Benefit Cost Ratio National Road Safety Council Andean Development Corporation Development Financial Corporation Country Partnership Strategy Contracts of Rehabilitation and Maintenance Calendar Year General Directorate for Environmental and Social Affairs Development Policy Loan Emergency Decree Environmental Impact Assessment Economic Internal Rate of return Environmental and Social Assessment Report Environmental and Social Management Framework Environmental and Social Strengthening Management Plan Preliminary Environmental Evaluation Form Environmental Impact Assessment Environmental Management Plan Economic and Sector Work Financial Management Assessment Governance Action Plan Gross Domestic Product Geographic Information System Government of Peru Highway Development and Management (model) International Bank for Reconstruction and Development Implementation Completion Report Inter-American Development Bank Independent Evaluation Group International Finance Corporation Interim un-audited Financial Report Initiative for the Integration of the South America Regional Infrastructure International Labor Organization INC R\IDEPA IPE IPPF irap IRF IRI ISR KSI LAC LPI MDBs MEF MINAM MoU MTC NPV OECD OGA OGPP OSITRAN PACRI PEN PPP RAP RED RED1 SAT SBD SEPA SIAF SNIP SIM TORS VPd National Institute of Culture National Institute for the Development of Indigenous Peoples Peruvian Economics Institute Indigenous Peoples Planning Framework International Road Assessment Program Involuntary Resettlement Framework International Roughness Index Implementation Supervision Report Killed and Seriously Injured Latin America and Caribbean Region Logistics Performance Index Multilateral Development Banks Ministry of Economy and Finance Ministry of Environment Memorandum of Understanding Ministry of Transport and Communications Net Present Value Organization for Economic Co-operation and Development General Administrative Unit General Unit for Planning and Budget Peruvian regulator for public transport infrastructure Involuntary Resettlement Compensation Plan Peruvian Nuevo Sol Public-Private Partnership Resettlement Action Plan Roads Economic Decision (model) Recent Economic Development in Infrastructure Safeguards Advisory Team Standard Bidding Document Procurement Plans Execution System National Integrated System of Financial Management National System of Public Investment Sector Investment and Maintenance Loan Terms of Reference vehicles per day Vice President: Country Director: Sector Director: Sector Manager: Task Team Leader: Pamela Cox Carlos Felipe Jaramillo Laura Tuck Aurelio Menendez Nicolas Peltier-Thiberge

3 I. I1 A. B. C. PERU Safe and Sustainable Transport Project CONTENTS FOR OFFICIAL USE ONLY Page STRATEGIC CONTEXT AND RATIONALE... 1 Country and Sector Issues... 1 Rationale for Bank Involvement... 3 Higher Level Objectives to which the Project Contributes PROJECT DESCRIPTION... 5 A. B. C. D. E. F. G. I11. A. B. C. D. E. F. IV. A. B. C. D. E. F. G. Lending instrument... 5 Government's Transport Policy Letter... 6 Governance... 6 Project development objective and key indicators....' Project components... 8 Lessons Learned and Reflected in the Project Design Alternatives considered and reasons for rejection IMPLEMENTATION Partnership Arrangements Institutional and Implementation Arrangements Monitoring and Evaluation of Outcomes/Results Sustainability Critical Risks and Possible Controversial Aspects Loadcredit Conditions and Covenants APPRAISAL SUMMARY Economic and Financial Analyses Technical Fiduciary Social Environment Safeguard Policies Policy Exceptions and Readiness This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

4 Annex 1: Country and Sector or Program Background Annex 2: Transport Sector Development Policy Letter Annex 3: Major Related Projects Financed by the Bank and/or other Agencies Annex 4: Results Framework and Monitoring Annex 5: Detailed Project Description Annex 6: Project Costs Annex 7: Implementation Arrangements Annex 8: Financial Management and Disbursement Arrangements Annex 9: Procurement Arrangements Annex 10: Economic and Financial Analysis Annex 11 : Safeguard Policy Issues Annex 12: Project Preparation and Supervision Annex 13: Documents in the Project File Annex 14: Statement of Loans and Credits Annex 15: Country at a Glance Annex 16: Maps

5 Date: December 10,2009 Country Director: Carlos Felipe Jaramillo Sector Director: Laura Tuck Sector Manager: Aurelio Menendez PERU PERU SAFE AND SUSTAINABLE TRANSPORT PROJECT APPRAISAL DOCUMENT LATIN AMERICA AND CARIBBEAN LCSTR Team Leader: Nicolas Peltier-Thiberge Sectors: Roads and Highways (80%); General Transportation Sector (20%) Themes: Export Development and Competitiveness (P); Infrastructure Services for Private Sector Development (S); Injuries and Non-Communicable Diseases (S) Project ID: P Environmental Screening Category: B (Partial Assessment) Lending Instrument: Sector Investment and Maintenance Loan Project Financing Data [XI Loan [ ] Credit [ ] Grant [ 3 Guarantee [ ] Other: Source BORROWER INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT [NTER-AMERICAN DEVELOPMENT BANK Total: Local Foreign Total O iii

6 4nnual Zumulative Expected closing date: July 1,2014 Does the Droiect dedart from the CAS in content or other simificant resdects? r lyes TX1 No Does the project require any exceptions from Bank policies? [ ]Yes [XINO Have these been approved by Bank management? [ ]Yes [ IN0 Is approval for any policy exception sought from the Board? [ ]Yes [XINO Does the project include any critical risks rated substantial or high? [XIYes [ ]No Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ] No Project development objective. Improve passenger and freight transport conditions in an efficient and safe manner along national road corridors that are essential to Peru s competitiveness, in particular those included in the Government s stimulus package in response to the global crisis. Project description Component 1. Road Rehabilitation, Upgrading and CREMA Pilot. Carrying out of rehabilitation and upgrading works for at least four national road corridors along the following sections which represent approximately 183 kilometers: Road Ayacucho-Abancay: section 50-98; Road Llama-Cochabamba; Road Cochabamba-Chota; and Road Puente Reither -Puente Paucartambo - Villarica; as well as any such other section which may be acceptable to the Bank in addition to, or in substitution of, the above sections, which may include the carrying out of a pilot CREMA Contract. Financing of a strategic environmental assessment of the package of works to be implemented under this component, to assess what would be the cumulative environmental impact and to provide recommendations for future design studies, as well as for supervision activities and works management. Component 2. Road Maintenance. Carrying out of MTC s outsourced, performance-based maintenance program, including: (a) periodic maintenance contracts on selected national roads; and (b) periodic maintenance activities included in mid-term, performance based, maintenance contracts on selected national paved or unpaved roads. Component 3. Road Safety Infrastructure. Financing of priority civil works to improve road safety on national roads that have been selected for their high levels of road crashes, through the use of the irap methodology, or any other methodology acceptable to the Bank. Component 4. Institutional Support and Transport Regulation. Provision of institutional support to strengthen the capacity of Provias Nacional to improve road asset management practices, bring innovation and build up its knowledge base, including: (i) the design and implementation of a bridge management system; (ii) the implementation of a pilot program on improving the right-of-way on national roads, and the revision of the applicable normative framework; (iii) the improvement of the existing system to handle road emergencies; (iv) the carrying out of road safety auditing and scaling up of the road safety assessments using the irap methodology or any other methodology acceptable to the Bank; (v) the improvement of contract management and monitoring of results; (vi) the development of technical standards applicable to urban and peri-urban roads; and (vii) the strengthening of Provias Nacional s capacity for environmental and social safeguards management. Provision of institutional support to: (a) iv

7 OGPP, including: (i) the carrying out of original destination surveys for freight transport; (ii) the update of MTC s GIs, with the acquisition of a new cartographic database; (iii) the provision of an information system for interprovincial passengers transport; (iv) the design of a safe corridors pilot; and (v) the design and implementation of the national registry of road crashes, in coordination with other relevant institutions; and (b) DGASA, including: (i) the dissemination of the Project s safeguards instruments; (ii) the improvement of coordination between DGASA and Provias Nacional, particularly regarding the environmental categorization and the scope of design studies, so that social and environmental issues can be addressed sufficiently early on in the project cycle; and (iii) the carrying out of training of MTC s civil servants on environmental and social safeguards (including resettlement and indigenous peoples), as well as training of consultants and contractors. Component 5. External Audits. Financing of the financial external audits for the Project. Which safeguard policies are triggered, if any? Environmental Assessment Natural Habitats Physical Cultural Resources Involuntary Resettlement Indigenous Peoples Significant, non-standard conditions, if any, for: Board presentation: None Loadcredit effectiveness: The Operational Manual is adopted in form and substance satisfactory to the Bank Covenants applicable to project implementation: Not later than March 3 1, 201 1, the Borrower, through Provias Nacional, shall complete and submit to the Bank the strategic environmental assessment referred to in Part 1 (b) of the Project, in accordance with terms of reference satisfactory to the Bank, Not later than six months after the Effective Date, or a later date agreed with the Bank, the Borrower, through Provias Nacional, shall appoint independent auditors for the duration of the Project under terms of reference and with qualifications and experience satisfactory to the Bank. Not later than the mid-term review of the Project, the Borrower, through Provias Nacional shall submit to the Bank a report on the implementation of the irap recommendations. No reallocation of Project funds from Part 3 of the Project will be authorized by the Bank if the conclusions from such report have not been found satisfactory to the Bank. Not later than three months after the Effective Date, the Borrower, through Provias Nacional, shall have completed the tailoring of its accounting information system in order to submit project financial reports and customized statement of expenditures. Not later than September 30 of each year of project Implementation, the Borrower, through Provias Nacional, shall send to the Bank the draft budget for the following year of Provias Nacional s rehabilitation and maintenance works, which shall include the funds needed to finance signed contracts under the Project. The Borrower shall comply with the Safeguard covenants set forth in the Loan Agreement. V

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9 I. STRATEGIC CONTEXT AND RATIONALE A. Country and Sector Issues 1. Despite recent improvement, Peru s relative competitiveness remains hampered by the poor quality of its transport infrastructure. Peruvian firms rank the poor quality of transport conditions as one of the most limiting factors to business growth. Because of it, firms need to have high inventories, to account for contingencies. High inventories generate financial costs which in turns increase unit costs, lowering competitiveness and productivity. About 80 percent of the firms surveyed by the World Bank Logistics Performance Index (LPI) initiative reported they believed the quality of the transport infrastructure in Peru was low or very low. As a result, with about 32 percent of product value, Peru s logistic costs are among the highest in Latin America, far greater than the OECD average of 9 percent. With 450 km of paved roads per million inhabitants and only 11 percent of paved roads out of a total network of 127,320 km, Peru is one of the last countries in the region with regard to its transport infrastructure stock. In comparison, the density of paved roads achieves 1,713 km per million people in Argentina and 934 km in Chile. According to the latest road inventory assessment done in 2005, only 39 percent of the Peruvian national roads are in good condition and at least 42 percent are in poor or very poor conditions. In Argentina, through an aggressive road asset management program, the National Road Agency has increased the proportion of national roads in good condition to 91 percent over a 20 year period. 2. Road safety conditions are among the worst in the region, with road crashes having a substantial economic cost. With official reports indicating an annual 3,510 deaths and 49,857 injured, Peru ranks poorly with regards to road safety. When accounting for Peru s low motorization rate, Peru has 42 deaths per 10,000 vehicles (the worst record in the region), compared to 12 for Colombia, 9 for Costa Rica, 8 for Chile, whose motorization rates are more than double that of Peru. The fatality rate per 100,000 habitants is equally worrisome, at 21.6; Peru is second to Venezuela (21.S), while Costa Rica (15.4), Chile (13.7) and Colombia (11.7) fare relatively better. A rough estimate of the economic cost of road crashes in Peru is about 1.5 percent of GDP. Driver behavior accounts for over 50 percent of road crashes, and is attributed to speeding, recklessness and inebriety. Studies also indicate that a lack of effective regulation of the vehicle fleet, particularly public transport vehicles, is also a major contributing factor, as well as deteriorated or poorly designed transport infrastructure. According to a recent road safety assessment performed by the International Road Assessment Program (imp) and financed by the World Bank through the Global Road Safety Facility on about 3,000 km of Peruvian roads, about 22 percent of these roads can be considered highly dangerous for car users and 63 percent of them for pedestrians. While road safety has been identified as a problem for many years, the Ministry of Transport and Communications (MTC) has only recently placed a high priority on this issue, with the reactivation of the National Road Safety Council and the endorsement of a comprehensive National Road Safety Plan. This plan has set an objective of reducing crashes by its successful implementation will require solving still unaddressed bottlenecks such as the lack of an effective lead agency that can set policy and direct implementation to oversee the achievement of results, the absence of a culture of safe road design and usage, and the lack of a results-focused approach. 30 percent over the 5-year period I However, 1

10 3. In the context of the global economic downturn, Peru s stimulus package is placing a high priority on improving the country s transport infrastructure, with a particular focus on a few selected mega-projects. Although Peru is less affected by the global economic crisis than other countries in Latin America, the growth forecast for 2009 has been reduced from 6 to 2.5 percent. There are signs that the Peruvian economy has hit bottom is recovering slowly in the second semester of 2009 so that economic growth could reach about 4.0 percent in To mitigate the risks of any further deterioration of its economic performance and support growth recovery, the Government has prepared a countercyclical stimulus package ( Plan de Estimulo Econbmico ) of about US$3 billion for the years Peru s stimulus package has earmarked two thirds of the resources for the infrastructure sectors, with an objective to double capital expenditures, compared to The Government s response takes into account the lessons from the last macroeconomic crisis faced by Peru at the end of the 1990s when infrastructure spending were severely downsized as part of the country s fiscal adjustment policies, resulting in a future loss of competitiveness and growth. Public investment in transport in Peru only amounted to 0.09 percent of GDP in , far behind competitors in the region. Private expenditures - although higher than in neighbor countries, were not sufficient to fill the gap. The level of public investment in transport has increased since The stimulus package will continue this trend by giving particular attention to a few selected mega projects. These include in particular the completion of the URSA Sur road, the concession of six regional ports, the concession of the URSA Centro road, the concession of six regional airports and the construction of the infrastructure needed for the Tren Electrico, a new Lima urban transport system. Some of these projects are sufficiently attractive so that private financing could be leveraged though Public-Private Partnership (PPP) arrangements, despite the current difficulties to access financial markets. However, several of the prioritized projects do not have a clear financial profitability and the bulk of the financing is therefore expected to ultimately come from public sources. Past experiences have illustrated that contingent liabilities from the initial contracting arrangements of mega-projects may often be underestimated. If this issue is not properly addressed, it could create a growing financing need in the transport sector and a tension for the budget of the Ministry of Transport and Communications (MTC). 4. In order to have the greatest impact on the performance of the transport sector, the stimulus package must also improve the situation of road asset management and road safety. If the financing need created by the mega-projects is not properly addressed, less politically visible - though essential, investments such as road rehabilitation and maintenance, may end up being downsized to give the fiscal space needed. Only a few road rehabilitation investments have so far been prioritized as part of the stimulus package and the financing of road asset management expenditures (rehabilitation and maintenance) is therefore not fully ensured. Road maintenance is particularly critical in order to avoid a deterioration of road assets. It also has the highest economic returns of all the various types of road works. Between 1992 and 2005, it has been estimated that the lack of maintenance has caused the rapid deterioration of 1,357 km of national roads, generating a loss of US$718 million for the GoP. Road maintenance is also the most labor-intensive of all infrastructure investments. A recent World Bank study3 has ~ ~~ ~~ Source, Calderon, Easterly and Serven (2003). Source, Instituto Peruano de Economia (IPE). 3 Tuck, L., Schwartz, J. and Andres, L. (2009)- Crisis in LAC: Infrastructure Investment and the Potential for Employment Generation. 2

11 estimated that, albeit limited in scope, routine maintenance works can generate up to 500 jobs per US$ million invested and can act as a safety net mechanism for the rural poor, through the use of specialized microenterprises. 5. The capacity of the Ministry of Transport and Communications, as well as several transport regulatory instruments, need to be strengthened so that the stimulus package can be effectively implemented. The stimulus package is likely to result in a dramatic increase of investments to be managed by the MTC. Provias Nacional, the agency in charge of the national road network within the Ministry, has seen a doubling of its budget in 2009 compared to the previous year, and a quadrupling since Provias Nacional has also been asked to rescue two faltering mega projects ( IIRSA Sur corridor and Lima s Tren Electrico ). Nevertheless, Provias Nacional is one of the most efficient institutions in the Peruvian administration and, therefore, the counterpart entity, but also the construction sector which has been hit by the economic downturn, is ready to move forward with a larger volume of investments expected for However, the increase in works volume and the increasing focus on mega projects driven by the Government s stimulus package, may progressively jam the absorptive capacity Provias Nacional and affect its capacity to implement important reforms in the transport sector, such as the design of safer road standards, or the implementation of sound road asset management activities. In addition, while Provias Nacional is already a high-performing institution, other areas of MTC that are relevant for the implementation of the stimulus package (eg. planning, transport regulation, concessions, safeguards unit) are suffering from serious institutional shortfalls and lack of resources. Maximizing the benefits of the stimulus package therefore requires an extensive and comprehensive institutional strengthening program not only of Provias Nacional but also of these other areas of the Ministry. In order to accelerate investments, the Government is also revisiting and optimizing many of its internal processes. As a consequence, many of the internal mechanisms regulating the Peruvian public expenditures (such as the Sistema Nacional de Inversion Pziblica) have lost some of their influence. While a deep reengineering of the highly bureaucratic Peruvian spending processes is needed so that the stimulus package can quickly produce all its expected benefits, key mechanisms that ensure the quality of public expenditures - such as proper planning and information systems - also need to be protected and even strengthened in order to improve the effectiveness of the Government s response. B. Rationale for Bank Involvement 6. The Peruvian Ministry of Economy and Finance (MEF) has requested Bank assistance in order to improve the design of the Government s stimulus package and help finance its implementation. In the road sector, a US$900 million financing gap has been identified by MEF to be financed from external resources. While other financing institutions (eg. Corporacidn Andina de Foment0 - CAF) are focusing their efforts on the financing of the Government s mega projects, the World Bank and the IaDB have explored, together with the MEF and the MTC, an investment and technical assistance package that would secure and scale up road asset MEF initially requested US$300 million to each of the three multilateral institutions active in transport in Peru (CAF, IaDB and the World Bank). On Dec. 23, 2008, CAF approved US$300 million additional to help finance the additional costs of the URSA Sur project. MEF finally requested US$150 million to the World Bank and US$l50 million to the IaDB. 3

12 management activities (in particular road maintenance), bring innovative practices (low-cost paving technologies, output performance-based contracts), initiate a road safety program and address institutional shortfalls so that the stimulus package can be implemented rapidly while bringing all its expected benefits. The MTC is particularly interested in the international best practice the two banks could bring to the design of the program. The World Bank has proposed to use its experience on the following three issues to bring added-value in the design of this operation: (a) Road Safety. The Bank has financed a stand-alone road safety project in Vietnam and is working with other countries to provide guidance on the implementation of road safety policies. Two countries in LAC have taken the lead in this area (Chile and Costa Rica). Through a seat-belt campaign, Costa Rica has for example increased compliance from 24 to 82 percent and reduced fatalities by 13 percent; (b) Output performance- based contracts. The Bank has financed a successful implementation of rehabilitation and maintenance (CREMA) contracts in Argentina and Brazil; (c) Low-cost paving technologies. Chile has been implementing a low-cost paving program to improve access on low-traffic roads in a cost-efficient way. 7. The Bank has been involved in the transport sector in Peru for several decades, mostly in the design and implementation of decentralized transport operations (Decentralized Rural Transport, Regional Transport Decentralization). The Peru Rural Roads Program, initiated in 1995, has been one of the most successful Bank operations in rural transport and it has become a reference which has been replicated by other countries in the region. This program has developed low-cost rehabilitation technologies (gravel roads) that proved highly sustainable when combined with a permanent efficient routine maintenance mechanisms (implemented by the micro-enterprises). The program also supported the decentralization of rural roads management at the provincial level. The last Bank-financed project targeting the national road network is the 1994 Transport Rehabilitation Project. However, through its policy dialogue, the Bank has kept providing the Government with technical assistance, particularly in the areas of concessions and PPPS. 8. In parallel to the proposed Safe and Sustainable Transport Project, the Bank is helping the Government in other areas that are relevant for the design and implementation of the stimulus package. One of these areas is PPP and the design of Peru s infrastructure fund. The Bank has been associated in the design of Mexico and Colombia s infrastructure funds and could facilitate twinning arrangements of these countries with Peru. The PPP agenda in Peru is mostly driven by Prolnversidn, although other institutions (MEF, MTC, OSITRAN) are also involved. The Bank has also financed the 2005 Peru Guarantee Facility, implemented by Prolnversidn. While this instrument has, so far, not been used by the Government, Bank guarantees could prove useful in the implementation of the Government s PPP agenda, particularly for those mega-projects that have the greatest economic returns but may not be sufficiently attractive to the private sector. Bank intervention is this area would also depend on the operational and safeguards procedures applied to these investments. The Bank is also exploring further support with subnationals (in particular at the regional level) and for the development of decentralized infrastructure. Rural and regional roads, as well as other infrastructures, are particularly important to address Peru s 4

13 high rates of rural poverty. However, institutional weaknesses have so far reduced the capacity of subnational governments to respond to the demand for increased access to infrastructure services. The Bank is tackling these issues through its policy dialogue but also through various operations (IFC s Peru Subnational Guarantee Facility, Vilcanota Valley Rehabilitation and Management Project, Sierra Rural Development Project, Decentralized Rural Transport, Regional Transport Decentralization Project, Rural Electrification Project). C. Higher Level Objectives to which the Project Contributes 9. Alignment with the Bank Strategy in Peru. The proposed operation would support Cluster 2 ( Sustaining growth and widening its base ) of Pillar 1 ( Economic Growth ) of the World Bank Group Country Partnership Strategy (CPS) for Peru for the period FY07-11, discussed by the Executive Directors on December 19, 2006 (Report No PE). These objectives would be achieved through enhancing the effectiveness of infrastructure investments in transport and by generating employment opportunities for the poor, through the road maintenance activities. The CPS progress report for FY07-09 has highlighted weak planning, design and implementation capacities as a major bottleneck for the performance of the infrastructure sectors. This issue is particularly important for a successful implementation of the Government s stimulus package. To address this critical need, the proposed project includes extensive institutional strengthening activities, gathered under its fourth component. 11. PROJECT DESCRIPTION A. Lending instrument 10. The proposed lending instrument is a Sector Investment and Maintenance Loan (SIM), structured as a Variable-Spread Loan, repayable in 21-5 years with a grace period of 8.5 years. 11, Given the broad scope of the proposed program and the need to align it in the most effective way within the Government s stimulus package, the approach proposed for two of the project s components (component1 : road rehabilitation and upgrading; and component 2: road maintenance) has adopted a program-based approach. Procedures have been filly harmonized between the World Bank and the IaDB, and the proposed project contributes to support the Government s rehabilitation and outsourced maintenance program for Traditional sector investment operations do not allow a development impact at the level of the Government programs in the sector ( ring-fenced approach), given the sheer size of the programs and the need to focus attention on specific transactions, rather than program outputs. The program-based approach will allow better streamlining of the proposed activities within MTC s regular budget cycle. It will effectively complement the primary focus of the stimulus package on megaprojects by helping also emphasize the importance of road asset management and road safety. 12. More specifically, the proposed project would support, under a program-based approach, two of MTC s programs for CY 10. The first one is MTC s CY 10 rehabilitation and upgrading program that should help improve the condition of 977 km of national roads. The proposed project would finance at least the rehabilitation and upgrading of 183 km of national roads. The second one is MTC s CY 10 outsourced, performance-based maintenance program, that should 5

14 secure maintenance needs for 2,096 km of national roads in the mid-term (5 years). Bank support will help improve the implementation of these two programs, bring innovations based on international best practices and accelerate implementation in the broader context of Peru s stimulus package. The proposed Bank loan s disbursement profile is also highly frontloaded in CY 10 in order to better support the GoP in its response to the global crisis. B. Government s Transport Policy Letter 13: The MTC has prepared a draft Transport Policy Letter describing the short, mid and longterm objectives of the reform program in the transport sector, in the context of the Government s response to the global crisis. The Transport Policy Letter sums up the existing legal framework for the transport sector. It describes MTC s strategy to improve road assets management through outsourcing, long-term maintenance contracts and the use of innovative low-cost paving technologies. It emphasizes the need to better articulate the different planning levels (municipal, regional, national) for land transport and to build up information systems for more effective planning. It also highlights the need to modernize the institutional framework in place and to promote public and private partnerships (PPP). Finally, it stresses the importance of road safety and of the protection of the environment. The endorsement of the Policy Letter is a condition for negotiations. C. Governance 14. Despite progress in the system of check and balances, the situation of governance in Peru continues to be a source of concern. The issue of corruption has acquired new prominence in Peru after a corruption scandal over oil concessions in October 2008, which resulted in the resignation of the entire cabinet. In response, the GoP has designed an Anticorruption Action Plan whose implementation is being monitored, and which requires substantial technical assistance. A number of the activities listed in this plan have already been implemented at the level of different ministries and the Government has reaffirmed its commitment to fight against corruption. Another issue is that the civil service career system and policies suffer a number of shortcomings, in addition to the public perception of the state apparatus as overstaffed and highly inefficient. This has increased the difficulty of retaining or attracting skilled labor to deliver better quality of,public services and implement adequate policies. In response, the Government created in 2008 the National Authority of Civil Service (DL 1023). The National Authority is responsible of human resources management and policies in the public administration. Despite these advances, the civil service reform continues to be a low priority in the government agenda. 15. In the transport sector, both issues are also a source of concern. However, the risk is partially mitigated by the systematic publication of bidding documents in the Public Procurement Electronic System (SEACE), thus enhancing the transparency of procurement processes. The particular status of Provias Nacional, under the legal form of Special Program within the organization of the MTC, has also helped improve the management of human resources. Provias Nacional is currently seen as one of the most efficient institutions in the Peruvian public sector. 16. The Bank is helping the GoP address its governance shortcomings through a number of Governance and Anti-Corruption (GAC) related activities. A series of four Development Policy 6

15 Loans (DPLs) is supporting government s efforts in the areas of efficiency and quality of fiscal management, competitiveness and procurement. In addition, a series of three DPLs is supporting the government s program to strengthen the results and accountability framework of Peru s social sectors, in particular by introducing monitoring systems to track the performance of health posts and schools. Finally, several Analytical and Advisory Activities (AAAs) and Trust Fundfinanced advisory initiatives have been launched to reinforce and contribute to the reform agenda, especially in the areas of performance-based budgeting, improving capacity of central and sub-national governments to execute public investment, strengthening congressional budget commission oversight capacity, and identifying and addressing corruption risks in key sectors through a national observatory of governance policies. The Bank is also supporting the government s justice systems through a technical assistance loan focused on the improvement of service delivery and strengthening of human resources management. D. Project development objective and key indicators 17. The proposed project development objective is to improve passenger and freight transport conditions in an efficient and safe manner along national road corridors that are essential to Peru s competitiveness, in particular those included in the Government s stimulus package in response to the global crisis. Specific objectives include: (i) improving the quality of selected national roads, through a scaling up of rehabilitation and effective maintenance, as well as the use of low-cost paving technologies; (ii) generating employment opportunities, particularly for the rural poor; (iii) supporting the reduction of road traffic fatalities and injuries (and resulting economic losses), on selected national roads, through the development of safe corridors and the implementation of an investment program prioritized through the application of the irap road safety assessment methodology; and (iv) strengthening MTC s institutional framework with a view to improve the effectiveness of the Government s stimulus package. 18. Key performance indicators include the following: OUTCOMES AND IMPACTS OUTPUTS: Decreased vehicles operating costs on rehabilitated and upgraded roads Decreased travel times on rehabilitated and upgraded roads Proportion of the national road network in good or regular conditions Proportion of the national road network receiving permanent and efficient maintenance through either concession or long-term performance-based maintenance contracts (CREMA or Proyecto Peru) Proportion of national roads that are paved (including low-cost paving) 0 Number of km of national roads rehabilitated to agreed standards Number of rehabilitation and maintenance contracts using a CREMA approach Number af km of roads receiving periodic maintenance and that are maintained using performance-based contracts, according to agreed standards 7

16 e e e e e e Employment opportunities created (annual equivalent) Proportion of the irap recommendations implemented Number of km of safe corridors implemented in accordance with agreed multi-sectoral approach Improved MTC capacity to handle social and environmental safeguards and improved coordination between General Directorate for Environmental and Social Affairs(DGASA), General Unit for Planning and Budget (OGPP) and Provias Nacional New MTC s GIS fully operational with updated information on roads condition Road crashes database improved and regularly updated E. 19. Project components The proposed project includes the following five components: 20. Component 1: Road rehabilitation and upgrading and CREMA pilot (estimated cost: US$ million of which US$ million-would-be financed by the Bank). This component will support the carrying out of rehabilitation and upgrading works for at least four national road corridors along the following sections which represent approximately 183 kilometers: Road Ayacucho-Abancay: section 50-98; Road Llama-Cochabamba; Road Cochabamba-Chota; and Road Puente Reither -Puente Paucartambo - Villarica; as well as any such other section which may be acceptable to the Bank in addition to, or in substitution of, the above sections, which may include the carrying out of a pilot CREMA Contract. CREMAs are long-term, performance based rehabilitation and maintenance contracts that have been successfully experimented by several countries (eg. Argentina and Brazil in LAC). Associated with adequate contract supervision mechanisms, they allow transferring in a cost-effective way some of the technical risks to the private sector. A strategic environmental assessment of the package of works to be implemented under this component, will also be financed to assess what would be the cumulative environmental impact and to provide recommendations for future design studies, as well as for supervision activities and works management. Design studies and safeguards instruments have been completed for the four identified road works. This component supports MTC s road rehabilitation and upgrading program for This program aims at rehabilitating eight national road corridors, totaling sixteen road sections and representing 1,024 km. Six of these corridors have been flagged as priorities in Peru s stimulus package (D.U. No ) and the remaining two had been prioritized prior to the design of the package. 21. Component 2: Road maintenance (estimated cost: US$ million of which US$ 35.0 million would be financed by the Bank loan). This component will support the carrying out of MTC s outsourced, performance-based maintenance program, including: (a) periodic maintenance contracts on selected national roads; and (b) periodic maintenance activities included in mid-term, performance based, maintenance contracts on selected national paved or unpaved roads. Envisaged activities include 10 periodic maintenance and performance-based maintenance on 7.9 percent of the total national network. The 2010 program aims at financing the maintenance of 2,096 km of national roads, including 712 km identified to receive a periodic maintenance and 1,384 km under a performance-based maintenance contract. This program is 8

17 part of the new strategy of Provias Nacional to move away from force-account practices, transfer maintenance activities to the private sector (including emergency maintenance) with performance-based contracting arrangements, implementing low-cost paving technologies for low-traffic national roads (Proyecto Peru), and better ensuring the sustainability of road investments by securing maintenance in the mid-term (5 years). Execution estimates for CY 10 amount to US$76.25 million, half of which would be eligible to Bank financing, for up to US$35.0 million. The latest initial budget figures for CY10 for this program, as agreed between MEF and MTC, include PEN305 million (US$102 million) but this amount still needs to be approved by the Peruvian Congress. Some budget adjustments could also be made by the MEF during CY10, depending on budget execution progress. This component is also expected to generate significant employment opportunities due to the labor-intensiveness of routine maintenance activities. Job creation will be monitored during implementation. 22. Component 3: Road safety infrastructure (estimated cost: US$ 20 million of which US$ 10 million would be financed by the Bank loan). This component will support the financing of priority civil works to improve road safety on national roads that have been selected for their high levels of road crashes, through the use of the irap methodology, or any other methodology acceptable to the Bank. The MTC is planning to label some of these roads safe corridors. The safe corridor concept goes beyond the improvement of the sole infrastructure and it implies working with other agencies and ministries in order to articulate a combination on road safety improvements (safer infrastructure but also more stringent enforcement, road safety education initiatives and more efficient emergency mechanisms) that could increase the impact to reduce road crashes. The irap assessment has been completed, with support from the Global Road Safety Facility, on 3,000 km of Peruvian roads. Some of the investments recommended by irap could also be included under an existing rehabilitation and maintenance contract under component 1 or 2, or outside of the scope of the proposed project. The actual implementation of the irap recommendations will be monitored, as one of the project s performance indicators and a legal covenant will help restrict the reallocation of loan resources for this component unless sufficient progress has been made in this area. 23. Component 4: Institutional support and transport regulation (estimated cost: US$ 3.3 million of which US$ 1.6 million would be financed by the Bank loan). This component will support the provision of institutional support to strengthen the capacity of Provias Nacional to improve road asset management practices, bring innovation and build up its knowledge base, including: (i) the design and implementation of a bridge management system; (ii) the implementation of a pilot program on improving the right-of-way on national roads, and the revision of the applicable normative framework; (iii) the improvement of the existing system to handle road emergencies; (iv) the carrying out of road safety auditing and scaling up of the road safety assessments using the irap methodology or any other methodology acceptable to the Bank; (v) the improvement of contract management and monitoring of results; (vi) the development of technical standards applicable to urban and peri-urban roads; and (vii) the strengthening of Provias Nacional s capacity for environmental and social safeguards management. This component will also support the provision of institutional support to: (a) OGPP, including: (i) the carrying out of original destination surveys for freight transport; (ii) the update of MTC s GIs, with the acquisition of a new cartographic database; (iii) the provision of an information system for interprovincial passengers transport; (iv) the design of a safe 9

18 corridors pilot; and (v) the design and implementation of the national registry of road crashes, in coordination with other relevant institutions; and (b) DGASA, including: (i) the dissemination of the Project s safeguards instruments; (ii) the improvement of coordination between DGASA and Provias Nacional, particularly regarding the environmental categorization and the scope of design studies, so that social and environmental issues can be addressed sufficiently early on in the project cycle; and (iii) the carrying out of training of MTC s civil servants on environmental and social safeguards (including resettlement and indigenous peoples), as well as training of consultants and contractors. The objective of this institutional strengthening package is to improve the institutional performance of these agencies so that they can be the most efficient and effective in implementing the Government s stimulus package. While Provias Nacional s capacity currently seems sufficient in order to implement the projected pipeline of road investments, fewer resources become available for innovation and strategic initiatives. The proposed component therefore focuses on these specific needs. In case Provias Nacional s capacity would be jammed during implementation, due to the additional activities generated by Peru s stimulus package, a reallocation of project resources would be performed to assign more resources to this component. Regarding road safety activities, the Vice-Minister of Transport is the President of the National Road Safety Council (CNSV in Spanish) and his office will be leading the national road safety agenda. Implementing the National Road Safety Strategy requires a strong road safety agency that is still missing today although some early progresses have been signaled within the CNSV. The Bank, through its policy dialogue with the MTC, will continue to give technical assistance to help build up a lead agency that could effectively implement Peru s road safety strategy. For example, a workshop was co-organized by the World Bank and the Vice-Minister of Transport on September 22-23, 2009 in order to advance on those issues. 24. Component 5: external auditing (estimated cost: US$0.2 million of which US$ 0.1 million would be financed by the Bank loan). This component will finance the financial external audits for the project. F. Lessons Learned and Reflected in the Project Design 25. The design of the proposed project builds on the following lessons from other initiatives in Peru or other countries: a) Keeping infrastructure and services ready to run should be a priority in times of economic downturn. A review by the Bank of the stimulus packages of seven middleincome countries highlighted that the proposed infrastructure spending - of which transport took the largest share - represented on average 64 percent of a total of US$157 billion. While the global demand for transport services has been falling as a result of the downturn, priority should be put on keeping transport infrastructure and service ready to run. In this context, the Bank strategy is to work with its client countries in order to maintain a full operational status of all assets to avoid any delay in recovery when growth resumes, This requires in particular maintaining transport infrastructure throughout the crisis as a matter of priority. 5 Saghir, J. - Transport: Invisible Force - Visible Impacts; Presentation at the 2009 Transport Week. 10

19 Long-term, performance-based maintenance contracts, such as the CREMA approach, can produce significant efficiency gains for road asset management. Using CREMA contracts, Argentina s National Road Agency has reduced its maintenance backlog from 35 to 9 percent over a 20-year period. Brazil has introduced the CREMA model in the early 2000s and it has progressively been extended to one third of the federal network and more than 10 percent of the states networks. An ex-post evaluation, comparing objectively output performance based contracts to the traditional inputmeasurements approach, has shown that these contracts brought an overall improved efficiency to the road sector which translated to better road conditions at lower costs for the governments and a reduced management burden on the road administrations; Low-cost paving technologies are cost-effective solutions for low-transit roads. Chile has been implementing a low-cost paving program (Programa de Caminos Bcisicos) to improve access on low-traffic roads, without jeopardizing the cost-efficiency of such investments. Various technological alternatives have been developed, depending on the climate conditions and the availability of local materials (eg. by-products from the mining industry). The use of the alternative technologies has been highly successful but some technologies have been performing better in certain climatic conditions and may therefore not be replicated country-wide. Strong political commitment, robust institutional settings and effective pilot programs are key ingredients for the success of a road safety policy. International and regional experience highlights that, in order to be successful, road safety programs require a strong lead agency, capable of overcoming the coordination challenges triggered by the multidisciplinary nature of road safety issues and accountable for delivering results. Sweden with its vision zero approach has emerged as a consistent leader in road safety. Other European countries implemented programs to enhance enforcement and enabled a reduction in fatalities. While still relatively new, the Province of Cordoba in Argentina introduced a highway safety patrol, and witnessed a reduction in fatalities by 40 percent within its first few months of operation. Alternatives considered and reasons for rejection Alternative interventions and approaches that have been considered for the project include: a) Traditional, ring-fenced investment program. The choice of a program-based approach versus a ring-fenced investment project is justified by the objective to better streamline sound road asset management practices within MTC s programs. b) Financing of one or two mega-projects of the GoP s stimulus package. This option was discarded because road asset management investments are considered of greater priority than these mega-projects, due to their critical importance for road investments 6 Meyer, A,, Lancelot, E. - Output performance based contracts in the road sector: Towards improved efficiency in the management of maintenance and rehabilitation - Brazil s experience. 11

20 sustainability. In addition, some of the mega-projects (eg. IIRSA Sur) were not initiated using fiduciary and safeguards procedures that are compatible with Bank policies. Channeling all the proposed road safety activities through a new lead agency. This option would have consisted in adding a third implementing agency to execute some of the road safety activities. This agency could have been the National Road Safety Council (CNSV) or the recently-created Super-Intendencia of Land Transport. This option was discarded in order not to add to the project s overall complexity and considering pending uncertainties regarding the road safety institutional framework. Instead, the office of the Vice-Minister of Transport has been identified as one of the beneficiaries of the technical assistance activities to be provided under the project s fourth component. In parallel, the Bank, as part of its on-going policy dialogue in the sector, is helping the GoP set its institutional framework for road safety by bringing best international practices and by advising the Vice-Minister of Transport on assessing possible institutional alternatives. A workshop was for example organized by the Bank and the Vice-Minister of Transport in September 2009 on the issue of establishing Peru s lead road safety agency IMPLEMENTATION A. Partnership Arrangements 27. The proposed operation will be co-financed by the World Bank and the Inter-american Development Bank (IaDB). The co-financing arrangement is parallel since no pooling of funds will be made and funds will be disbursed directly to the Peruvian Treasury for expenditures advanced by MTC. The World Bank and the IaDB have worked together closely over the past fifteen years, with at least six projects being joint-financed or parallel financed by the two MDBs in the transport sector. Such coordination has brought important benefits to both the GoP and the two development banks, among which: (1) reduction of transaction costs for the client through the harmonization of operational and reporting procedures; (2) improved coherence of policy dialogue for reforms in the transport sector; and (3) increased frequency and quality of supervision. In the case of the proposed operation, the two banks and the GoP have agreed to use harmonized procurement and financial documents, define respective disbursement profiles, and supervise implementation through joint supervision missions. B. Institutional and Implementation Arrangements 28. The proposed project will be implemented by two separate entities of the Ministry of Transport and Communications: (a) Provias Nacional will implement components 1, 2, 3 and sub-component 4.1. Provias Nacional is, within MTC, the agency in charge of managing the national road network. The proposed project will finance three investment programs which fall under Provias Nacional s responsibilities (rehabilitation of national roads, outsourced maintenance on non-concessioned national roads and road safety improvement works), as well as specific institutional strengthening and technical assistance activities related to the sound asset 12

21 management of national roads. Provias is a highly experienced agency with a satisfactory track record both in terms of working with multilateral organizations (IaDB, CAF, WB) and in terms of budget execution. (b) MTC s Office of General Administration (OGA) will implement component 4.2. The OGA is a small unit which is in charge of handling fiduciary activities (eg. procurement of goods and consultancies) for other entities of MTC. These other entities include MTC s General Unit for Budget and Planning (OGPP in Spanish), the General Directorate for Social and Environmental Safeguards (DGASA in Spanish) and the office of the Vice-Minister of Transport. 29. All infrastructure improvements will be implemented by Provias Nacional. Other technical assistance activities will be procured by OGA and will benefit other areas of the Ministry. For example, the development of the crash data collection and analysis system will be procured by OGA but handled by OGPP, in close coordination with CNSV. 30. All activities to be financed under the proposed project will be included in the MTC s budget and will have to follow existing procedures in vigor in Peru to control the quality of public expenditures. A particularly important step is the validation of individual road improvement investments by the National Public Investment System (SNIP in Spanish) of the Ministry of Economy and Finance (MEF). All of the identified works to be initiated in 2010 as part of component 1 have already been cleared by the SNIP. Component 2 s activities (road maintenance) are considered current expenditures and do not have to be cleared by SNIP. C. Monitoring and Evaluation of Outcomes/Results 31. Outcomes and results for most of the project s activities will be primarily monitored by the lead implementing agency. Provias Nacional will in particular report on the number of kilometers of roads rehabilitated or upgraded, and maintained, as well as on the employment opportunities generated. Road asset management indicators, such as the proportion of the national network in good conditions, the proportion of this network receiving adequate maintenance or the proportion of the national roads that are paved, will be monitored by Provias Nacional, in close coordination with the Planning and Budget Office (OGPP) of MTC. The project, as part of its 4th component, includes significant resources to improve the quality and reliability of MTC s and Provias Nacional s information systems. The benefits of road improvements for road users will be measured through specific user surveys to be performed by a specialized consulting firm. Particular attention will be given to the monitoring of the benefits of the CREMA approach piloted under component 1, in order to facilitate the dissemination of this experience. D. Sustainability 32. The proposed project aims at improving the sustainability of transport investments in Peru through the scaling up of sound existing road maintenance practices (eg. five-year upgrading and maintenance contracts implemented under Proyecto Peru) and the piloting of innovative long-term, performance-based maintenance contracts (CREMA). A Peruvian think 13

22 tank (IPE) estimated that between 1992 and 2005, the lack of maintenance accelerated the deterioration of 1,357 km of national roads, resulting in a US$718 million accumulated loss for the GoP. The proposed project will increase the quality and the sustainability of public investment in transport and raise the proportion of national roads that receive permanent and efficient maintenance from 32 to 89 percent. These maintenance practices will continue beyond the project s closing date since the contracting period of most of the maintenance contracts (5 to 10 years) will exceed the project s duration. Finally, by moving into longer-term maintenance contracts and demonstrating their benefits on the roads life cycle, the project is also expected to build and reinforce an asset management culture within MTC which should promote a greater sustainability for road investments. The institutional strengthening package designed under Component 4 will also contribute to develop greater capacity for sound road asset management. In order to gain in efficiency, Provias Nacional s strategy for road maintenance is moving toward longer-term maintenance contracts (CREMA, Proyecto Peru) and progressively phasing out force account practices. E. Critical Risks and Possible Controversial Aspects Risk The performance of the transport sector in Peru remains hampered by insufficient strategic framework, institutional limitations and an incomplete regulatory framework. The mega-projects draw all the attention and resources of MTC agencies, affecting the proposed investment program, based on road asset management and road safety. Some mega-projects have serious implementation problems (social and environmental, governance) that affect the credibility of the entire stimulus package. Complex project for preparation and implementation Mitigation Sound leadership of current Minister and good policy dialogue with the Bank. The Peru rural road program is a best practice that can be built upon. Specific ESW (Peru REDI) to further policy dialogue with the sector. The Transport Policy Letter will ensure that the proposed program has sufficient visibility and it is expected to reinforce the political momentum. The monitoring of employment generation will help demonstrate the side social benefits of the proposed program. The program builds on the highly visible Proyecto Peru which benefits from a strong Dolitical su~~ort. The proposed program does not finance the implementation of the mega-projects. Instead, it aims at securing less visible activities like road maintenance that could be affected by the budget needs of these mega-projects. The institutional strengthening and transport regulation package proposed under component 4 also aims at strengthening key Peruvian spending mechanisms (eg. planning, safeguards management) that can help protect the quality of public expenditures. The Bank aims at addressing the technical assistance and - possibly - financing needs generated by the mega projects investment package, through other means and instruments (eg. guarantees, technical assistance on PPP, etc.) The implementing agency is one of the highest performing public agencies in Peru, as illustrated by its high execution rate (75 to 90 percent since 2005). An ambitious and comprehensive institutional strengthening package has been designed in order to address institutional shortfalls. Moderate Substantial Moderate Moderate 14

23 Risk Mitigation Risk Rating with Mitigation Road safety is currently high in the Peruvian political agenda due to the number of serious road crashes that occurred lately Substantial in Peru. A growing demand for safer transport conditions is likely to maintain this political interest in improving the situation. Resources have been included in component 4 to support the design of the safe corridor pilot and the implementation of a road crash database. A workshop to bring best international practices for road safety institutional arrangements has been organized by MTC with the assistance from the World Bank. The project, through its 4th component, will support the Moderate strengthening of DGASA and Provias Nacional s capacity to enforce its own environmental and social regulations and guidelines (that are up to Bank safeguard standards) to cope with these matters timely and effectively. The lack of a strong road safety agency andor the lack of political leadership and commitment hampers the ability of the CNSV to coordinate with other institutions and ministries and implement the proposed safe corridors program. The scope of Peru s stimulus package could overwhelm Provias Nacional and DGASA s capacity to cope with the required social and environmental due diligence Financial management Procurement F. Loadcredit Conditions and Covenants Effectiveness Condition : See annex 8 See annex 9 Overall Risk Rating Moderate Moderate Moderate The Project Operational Manual has been adopted in form and substance satisfactory to the Bank. Covenants: Not later than March 31, 201 1, the Borrower, through Provias Nacional, shall complete and submit to the Bank the strategic environmental assessment referred to in Part 1 (b) of the Project, in accordance with terms of reference satisfactory to the Bank. Not later than six months after the Effective Date, or a later date agreed with the Bank, the Borrower, through Provias Nacional, shall appoint independent auditors for the duration of the Project under terms of reference and with qualifications and experience satisfactory to the Bank. Not later than the mid-term review of the Project, the Borrower, through Provias Nacional shall submit to the Bank a report on the implementation of the irap recommendations. No reallocation of Project funds from Part 3 of the Project will be authorized by the Bank if the conclusions from such report have not been found satisfactory to the Bank. Not later than three months after the Effective Date, the Borrower, through Provias Nacional, shall have completed the tailoring of its accounting information system in order to submit project financial reports and customized statement of expenditures. Not later than September 30 of each year of project Implementation, the Borrower, through Provias Nacional, shall send to the Bank the draft budget for the following year of Provias Nacional s rehabilitation and maintenance works, which shall include the funds needed to finance signed contracts under the Project. 15

24 0 The Borrower shall comply with the Safeguard covenants set forth in the Loan Agreement. IV. APPRAISAL SUMMARY A. Economic and Financial Analyses NPV = US$210 million, EIRR = 21.8% (see Annex 9) 33. The economic evaluation covers the main civil works components of the project that entail capital costs: (i) road rehabilitation and upgrading program (183 km), (ii) periodic maintenance program (846 km) and (ii) the performance-based maintenance program (1,384 km). The main measured project economic benefits are the reduction in vehicle operating costs, passenger time costs and future maintenance requirements brought about by the improvement and maintenance of the project roads. 34. The overall Economic Internal Rate of Return (EIRR) for all programs is estimated at 21.8 percent, 14.9 percent for the road rehabilitation and upgrading program, 25.3 for the periodic maintenance program, and 28.2 percent for the performance-based maintenance program. The overall Net Present Value (NPV) is estimated at US$210 million, based on an 11 percent discount rate, consisting of a contribution of US$46 million from the road rehabilitation and upgrading program, US$129 million from the periodic maintenance program, and US$35 million from the performance-based maintenance program. Three cases were considered for sensitivity analysis: investment costs increase by 20 percent, project benefits decrease by 20 percent, and investment costs increase by 20 percent meanwhile project benefits decrease by 20 percent. The corresponding overall EIRR is 18.0, 17.2 and 14.0 respectively, which confirms that the project is economically feasible. The switching value analysis shows that for the EIRR to fall to 11 percent, investment costs would need to be 1.8 times higher, or benefits 44 percent lower than estimated. A description of the economic evaluation method and an analysis of the results are provided in Annex 9. The following table summarizes the results of the economic evaluation. Ecoaomlc Evaluation Summary Periodic Maintenance Program 35. As with regarding to MTC s entire rehabilitation and upgrading program for CY10, corresponding to the rehabilitation and upgrading of eight national road corridors, totaling sixteen road sections with a total length of 1,024 km, the economic evaluation indicates a satisfactory economic justification for the overall MTC s road rehabilitation and upgrading 16

25 program, with an overall EIRR of 19.7 percent and all corridors yielding an EIRR higher than 1 I percent. B. Technical 36. The characteristics of the rehabilitation and maintenance activities to be implemented through the proposed project do not entail major technical difficulties. The proposed works will involve upgrading and improvements to existing surfaces, drainage systems and retaining walls to ensure a level of mobility tailored to the levels of traffic. The design of rehabilitation and maintenance works will follow national technologies and standards, as specified in existing norms. Low-cost paving technologies are expected to bring innovations to existing road standards in Peru and main require some adjustments to the existing national norms. These technologies are commonly used in other countries (eg. Chile) and MoUs have been signed by Provias Nacional with Peruvian academic institutions to monitor and assess the performance and sustainability of such technical alternatives. C. Fiduciary 37. Financial Management. The proposed project will be partially financed by the Bank and implemented by the Ministry of Transport and Communications through Provias Nacional and MTC s OGA (in coordination with other MTC units - OGPP, DGASA and Vice-Minister of Transport). The project is part of a broader program also partially financed by the IaDB. Components 1, 2, 3, 5 and sub-component 4.1, which represent almost the entire loan proceeds, will be implemented by Provias Nacional while the MTC s OGA will implement the subcomponent 4.2, which comprise institutional strengthening activities. Provias Nacional will be the project implementing entity responsible for project execution with a coordinating and oversight role over MTC s OGA. As such, Provias Nacional will be responsible for the consolidation of the financial and disbursements information of the whole project. In addition, the IaDB and the Bank have worked jointly to define the most appropriate financial management arrangements and harmonized financial reporting and auditing arrangements. Inherent and control risk are rated as Moderate (M) and the Financial Management total risk is considered Moderate. Nevertheless the Financial Management assessment has identified some areas which require to be mitigated for project readiness. On such basis, the most crucial actions which require to be completed by Provias Nacional include: (a) the completion of the final Operational Manual; and (b) adjustments to the accounting information system to tailor project reporting requirements. 38. Retroactive Financing. Although no activity to be retroactively financed under the proposed project is expected, retroacting financing would be allowed for expenditures occurred after the date of November 13 h, 2009, subject to compliance with Bank fiduciary, safeguard and anti-corruption provision, and within the maximum limit of 20 percent of the Bank loan amount (ie. US$30 million). 39. Procurement. Procurement for the proposed project would be carried out in accordance with the World Bank s Guidelines: Procurement Under IBRD Loans and IDA Credits, dated May 2004, revised October 2006; and Guidelines: Selection and Employment of Consultants by 17

26 World Bank Borrowers, dated May 2004, revised October 2006, and with the provisions stipulated in the Legal Agreement. Procurement activities for Components 1, 2, 3 and subcomponent 4.1 will be carried out by Provias Nacional and procurement activities for subcomponent 4.2 will be carried out by MTC s Office of General Administration (OGA). Provias Nacional has a unit in charge of Civil Works procurement and of Consultants selection. This unit is staffed with the unit s director, four specialists - one of them being a Procurement specialist with experience in Bank s procurement procedures, and two technical professionals. An assessment of the capacity to implement the project s procurement activities was carried out by the Bank s Peru Country Office (summary in project files). The assessment reviewed the organizational structure for implementing the project and the interaction between the project s staff responsible for procurement and concluded that the unit has significant prior experience in implementing World Bank-financed projects, which ensures an appropriate level of transparency and control while also facilitating a smooth implementation. 40. Key corrective measures agreed to avoid risks in procurement include: (i) an adequate update of the Operational Manual (effectiveness condition); (ii) the development of Bidding Documents before implementation begins (Standard Bidding Documents for CREMA pilots shall be developed before the first process is launched); (iii) publication of the Procurement Plan in SEPA (Sistema de Ej ecucion de Planes de Adquisiciones); (iv) as needed, reinforcing the number of procurement staff; and (iii) procurement reviews conducted by independent auditors and/or Bank staff. D. Social 41. The project is expected to have short and long term positive social and economic impacts both, for rural areas (including indigenous communities) and towns and provincial cities. In the short and medium terms, it will provide significant number of local jobs for skilled and unskilled workers and will help alleviate poverty in rural areas that lack employment opportunities outside agriculture, including remote sites such as highland communities and upper areas in the Selva region. In the long run, the project will provide the necessary infrastructure conditions for improving freight transport, tourist activities and tourism investment, improve prices for local crops, and have better access to education and health services for people living away from urban centers. In the short term however, there will be adverse impacts in a minor scale to people s assets such as houses, crops, grasslands and cultivated and non cultivated land due to the widening of the road platform and overall improving of road conditions. These adverse impacts will be managed, mitigated and compensated through the application of both social safeguard policy instruments. 42. Out of the four initial road segments to be rehabilitated and upgraded as part of component 1, two are located near areas where Indigenous Peoples live (see Annex 4). The road segments are Ayacucho - Abancay (section 50-98) and Pte Reither - Pte Paucartambo - Villa Rica and the communities are Quechua, and Ashaninka-Yanesha peoples respectively. The communities are relatively well integrated in regional markets and economic activities. Because of this proximity, they perceive road rehabilitation as beneficiary to their economic activities and well being. Provias Nacional through its regional offices has developed good relationships with the indigenous communities country wide through the provision of local employment for road 18

27 rehabilitation and maintenance as well as through the implementation of the Local Development Window, a mechanism aiming at promoting the emergence of productive activities in the areas where transport conditions have been improved. 43. Because some of the proposed road works may affect the assets owned by families living on both sides of the roads to be improved, OP Involuntary Resettlement is triggered. During project preparation, a field visit was carried out by two consultants (one environmental expert and one social specialist) on a sample of segments within MTC s road rehabilitation and upgrading program, to gather first hand information on the potential impacts. The main finding is that social impacts are minor and moderate because the civil works to be carried out are for the upgrading and rehabilitation of already existing roads. No major resettlement will take place, besides moving or rebuilding individual and dispersed affected houses in situ. Most affected assets are small and partial areas of grasslands as well as plots (either cultivated or not), adjacent to road platforms as it has been the case in other similar projects that do not involve the construction of new roads. However, given the number of roads to be rehabilitated and their extension, a significant number of assets will be affected (estimated 1,100 affected assets, out of which 144 are rural houses and small rural shops). E. Environment 44. Although the proposed project would generally produce positive social and environmental impacts related to the improvement of the quality of life of the population covered by the intervention and the extended lifetime of the roads (due to sound maintenance procedures), there are potential negative impacts which trigger OP (Environmental Assessment). Because the project may intervene in natural habitats of particular environmental sensitivity or with cultural heritage value, Bank policies for Natural Habitat (OP/BP/4.04) and Physical Cultural Resources (OP/BP/4.11) have also been triggered. During project preparation, a series of studies and instruments were developed in order to ensure the environmental sustainability of the project, and to comply with the national environmental legislation, as well as with Bank Safeguard Policies. These studies and instruments were developed to comply with the Bank s Safeguard Policies, and were agreed with the Government of Peru through the Ministry of Transport and Communications - MTC and Provias Nacional - PVN, institutions responsible for project implementation. All of these studies requested by the Bank are available in Provias Nacional s web page ( and in the Bank s Infoshop, in compliance with the Bank s Disclosure Policy. 45. The project was classified as a Category B according to the Environmental Assessment Policy (OP/BP 4.01). In general, the road works that would be financed by the proposed project do not have any significant environmental and social impacts that could create major risks to the natural and/or social environment. Nevertheless some of the works present moderate environmental risks. These works will require an adequate environmental and social management to ensure their environmental and social sustainability, as well as their compliance with the national environmental legislation and the Bank s Environmental Safeguard Policies. In addition to the social and environmental instruments developed during project preparation, a Strategic Environmental Assessment (SEA) of the entire rehabilitation program would be 19

28 performed in the first year of operation in order to confirm that the cumulative environmental impact of this program is indeed limited. 46. An Environmental Impact Assessment (EIA), including an Environmental Management Plan (EMP), has been prepared for each of the four initial rehabilitation and upgrading works. In addition, during preparation, three of these roads (Ayacucho - Abancay; Llama - Cochabamba; and Cochabamba - Chota) were visited by a Bank environmental consultant and no specific issues were identified. As a result of this review, some recommendations were however formulated and taken into account in the final draft of these environmental assessments. Key recommendations included: (i) specific measures in sensitive areas (paramos and punas) in the case of the Ayacucho - Abancay and Otuzco - Cayacullh; (ii) inclusion in the EIA of the Ayacucho - Abancay road, of an archeological site identified during the field visit (Toccto Archeological site); and (iii) several recommendation regarding environmental passives that in two cases were not included in the documents and in the EMP. These recommendations were including in the EIAs in ways satisfactory to the Bank. A summary of the main environmental issues is included in the project s Environmental Assessment Report (EAR). The EIAs and the EAR have been disclosed, both in country on November 23, 2009 and in the Infoshop on November 6, 2009 (EIA Ayacucho-Abancay), November 9, 2009 (EAR) and November 20, 2009 (EIAs Cochabamba-Chota, Llama-Cochabamba and Puente Reither - Villarica). An updated version of the EAR was published in country on November 30, 2009 and in the Infoshop. 47. An Environmental and Social Management Framework (ESMF) has also been prepared for this project. This framework describes the environmental management procedures to be followed during implementation. It would particularly apply to the already identified activities but also in case additional works from MTC s road rehabilitation and upgrading program were to be financed by this project (in substitution or in addition to the four currently identified). This framework has been reviewed and was found acceptable to the Bank. It has also been disclosed, both in country on November 23, 2009 and in the Infoshop on November 9, An updated version was published in country on November 30,2009 and in the Infoshop. 48. As part of the environmental due diligence process, a preliminary environmental assessment was carried out on a sample of rehabilitation works included in Provias Nacional s envisaged road rehabilitation and upgrading program for CY 10. This preliminary assessment applied the environmental instruments developed by the DGASA/MTC (Direccion General de Asuntos Socio-Ambientales) and by Provias Nacional. A field visit was organized for these sample of roads (June 2009) and secondary information, such as environmental studies, was also reviewed, whenever available. The outcome of the environmental assessment is that all the proposed works would have a moderate environmental risk (Category B), according to the classification established by the DGASA and in accordance with Bank guidelines. 49. As part of the environmental due diligence process, an analysis of the institutional management capacity was carried out and an Environmental and Social Strengthening Management Plan (ESSMP) was developed for the DGASA and Provias Nacional, in order to continue improving the environmental management in the sector. It is important to mention that, as part of the project s environmental capacity building activities, a strengthening of MTC s 20

29 information systems will be performed, so that social and environmental dimensions are better streamlined in the road planning process. To implement the mentioned Plan, an amount of about US$270, has been budgeted. 50. In conclusion, the proposed project should be considered viable from the social and environmental point of view, and it complies with the Bank s Social and Environmental Safeguards Policies. The DGASA is highly experienced with Bank policies due in particular to past and on-going Bank engagement in the sector, and it already counts on sound procedures and tools that should help ensuring an adequate socio-environmental management, in line with Bank Safeguards Policies. Activities envisaged under component 4 of the proposed project will help to go further in improving social and environmental management practices within MTC. F. Safeguard Policies 5 1, The proposed Project triggers five Bank safeguards: Environmental Assessment, Natural Habitats, Physical Cultural Resources, Involuntary Resettlement and Indigenous Peoples. An Environmental Assessment Report, a Resettlement Action Plan and, when applicable, an Indigenous Peoples Plan have been prepared for each of the four road rehabilitation and upgrading works identified at the time of appraisal. In addition, an Environmental and Social Management Framework, an Involuntary Resettlement Framework and an Indigenous Peoples Framework have been prepared and would be applied to any other road improvement or maintenance works to be financed by the proposed project. Finally, a preliminary Environmental Assessment was also prepared for a sample of MTC s road rehabilitation and upgrading program scheduled for CY 10. All documents have been reviewed by Bank specialists and their comments have been integrated. All documents have been disclosed in country by Government agencies on November 23,2009, prior to appraisal, and in the Bank s Infoshop between November 6 and November 23, An updated version for some of these documents was then published on November 30,2009. Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP 4.01) [XI [I Natural Habitats (OP/BP 4.04) [XI [I Pest Management (OP 4.09) [I [XI Physical Cultural Resources (OP/BP 4.1 1) [XI [I Involuntary Resettlement (OP/BP 4.12) [XI [I Indigenous Peoples (OP/BP 4.10) [XI [I Forests (OP/BP 4.36) [I [XI Safety of Dams (OP/BP 4.37) [I [XI Projects in Disputed Areas (OP/BP 7.60) [I [XI Projects on International Waterways (OP/BP 7.50) [I [XI 52. Environmental Assessment (OP/BP 4.01) is triggered because some limited environmental impacts could appear, principally during project execution that would have to be prevented, mitigated and/or compensated. Environmental Assessments have been prepared for the four road rehabilitation and upgrading works pre-identified to be financed under component 1. In case additional works from MTC s road rehabilitation and upgrading program would also 21

30 be financed be the proposed project, an Environmental and Social Management Framework has been prepared. An Environmental Assessment Report has also been prepared for a sample of works of MTC s road rehabilitation and upgrading program for CY , Natural Habitats (OP/BP 4.04) is preventively triggered because other road sections located in sensitive areas could become eligible under component 1. For these potential cases, the corresponding environmental studies would include the respective Environmental Management Plans in order to take into account the environmental and social considerations, as well as measures to prevent and/or to mitigate the potential negative impacts. 54. Physical Cultural Resources (OP/BP 4.1 I) is triggered because Peru has an extensive cultural, historical and archeological heritage and because some of the targeted road sections are located in the indirect influence zone of archeological places. Although no significant adverse impact is expected on these archeological sites, these works have to follow the review and authorization process of the National Institute of Culture (INC). Additionally, Chance Finds Procedures have been included in the ESMF to take into account these cases. 55. Involuntary Resettlement (OP/BP 4.12) is triggered because, although civil works will mostly take place within the existing right of way, the project will affect partial areas of grasslands and also partially cultivated and non-cultivated plots. Works will also affect houses or small buildings for which in situ reconstruction or cash compensation will be implemented. For each of the four initial road segments to be rehabilitated as part of component 1, a Resettlement Action Plan (RAP) has been prepared, following Bank policies. Based on the information provided in these plans it is expected that there will be a total of around 1, 100 affected assets, out of which 144 are rural houses and small rural shops. These numbers are subjected to change because several of these assets are within the right-of-way of the roads when in practice only those within the area of construction are actually affected by the project. The consultation process is described in each RAP. Each plan has been disclosed both on the MTC s website on November 23, 2009 and in the Infoshop on November 19, 2009, except for the RAP of the Ayacucho-Abancay road which was published on November 9, In case additional works from MTC s road rehabilitation and upgrading program are financed by this project (in substitution or in addition to the four currently identified), an Involuntary Resettlement Framewark (IRF) has been prepared, following Bank policies. The IRF will guide the preparation of further RAPS if needed. The IRF has been disclosed both on the MTC s website on November 23, 2009 and in the Infoshop on November 9, An updated version was published in Peru, on November 30,2009 and in the Infoshop. 57. Indigenous Peoples (OP/BP 4.10) is triggered because two identified road corridors to be rehabilitated under the proposed project have the presence of indigenous peoples. For each of these road segments to be rehabilitated and upgraded as part of the project, an Indigenous Peoples Plan has been drafted and published in country on November 23, 2009, prior to appraisal, and in the Infoshop on November 20, 2009 (IPP Sagazu community) and on November 23, 2009 (IPP Ocros community). The consultation process is described in each IPP. Each plan has been disclosed both on the MTC s website and in the Infoshop. In case additional works from MTC s road rehabilitation and upgrading program are financed by this project (in 22

31 substitution or in addition to the four currently identified), an Indigenous Peoples Planning Framework (IPPF) has been prepared, following Bank policies. As part of the preparation of this IPPF, a social assessment of a sample of indigenous communities has been prepared for areas where the GoP might invest in road rehabilitation and upgrading in The IPPF has been disclosed both on the MTC s website on November 23, 2009 and in the Infoshop on November 6,2009. An updated version was published in Peru, on November 30,2009 and in the Infoshop. 58. All these social safeguards instruments (plans and frameworks for resettlement and Indigenous Peoples) have been found acceptable to the Bank. In addition, the MTC (Provias Nucional and DGASA) has developed a comprehensive list of regulations and guidelines that address Indigenous Peoples issues, consultation protocols and resettlement related issues and compensations. These regulations and guidelines have been inspired by the Bank safeguard policies as well as by the ILO Convention 169 (a detailed description of all these instruments is included in each policy framework). G. Policy Exceptions and Readiness 59. The proposed project does not require any exception from Bank policies or procedures. 60. The project meets all Regional criteria for readiness for implementation. All safeguards instruments have been prepared and disclosed. A final draft of the project s operational manual has been prepared and is now pending formal approval by the two implementing agencies. The fiduciary procedures have been defined and there is sufficient capacity in place to execute them. 23

32 Annex 1: Country and Sector or Program Background PERU: Safe and Sustainable Transport Project The infrastructure Gap and its Consequences for Peru's Competitiveness 1. With 450 km of paved roads per million inhabitants and only 1 1 percent of paved roads, Peru is one of the last countries in Latin America with regard to its transport infrastructure stock. Peru's road network consists of 127,320 km, to which 10,367 km currently under works should be added. A road reclassification was recently passed, resulting in 28 percent of the roads (26,377 km) being national roads (primary network), ' 30 percent (28,844 km) being departmental roads (secondary network) and 42 percent (82,467 km) being rural roads (tertiary network). There are only 13,487 km of paved roads, of which 11,370 km are national roads. The last road inventory and road condition assessment was done in 2005 (a new one is scheduled for 2010). In 2005, only 39 percent of the national roads were in good condition, 19 percent in fair condition and 42 percent in poor or very poor conditions. For the unpaved network, the situation was even worse with only 3 percent being in good condition and 34 percent in fair conditions. In comparison, the density of paved roads achieves 1,713 km per million people in Argentina and 934 km in Chile. In Argentina, through an aggressive road asset management program, the National Road Agency has increased the proportion of national roads in good condition to 91 percent over a 20 year period, reducing road user cost savings by US$275 million. 2. The poor condition of transport infrastructure is a liability for Peru's competitiveness. About 80 percent of the firms surveyed by the World Bank Logistics Performance Index (LPI) initiative reported they believed the quality of the transport infrastructure in Peru was low or very low. With about 32 percent of product value, Peru's logistic costs* are among the highest in Latin America, well above Colombia (23 percent), Chile (1 8 percent) but also Brazil (26 percent) and Argentina (27 percent). In comparison, the OECD average for logistic costs is about 9 7 Following a recent road reclassification process, about 9,000 additional km of former secondary or tertiary roads have been reclassified as national roads. Although there is no precise definition of logistics costs, they can generally be defined as direct transaction costs (transport but also trade-related costs like the processing of permits, customs or standards) added to indirect financial costs (eg. inventory, storage, security) and non-financial costs (insurance). (Source. Guasch and Kogan, 2005). 24

33 percent. Because of poor transport conditions, Peruvian firms need to have high inventories, to account for contingencies. This is particularly illustrated by the inventories of raw materials for which the mean ratio to U.S. level by industry reaches 4.19, compared to 2.98 in Brazil, 2.22 in Colombia, 2.17 in Chile and 1.58 in Mexico. High inventories generate financial costs which in turns increase unit costs, lowering competitiveness and productivity. The Deteriorated Situation of Road Safety in Peru 3. With official reports indicating an annual 3,510 deaths and 49,857 injured, Peru ranks disturbingly low with regards to road safety. When accounting for Peru's low motorization rate, Peru has 42 deaths per 10,000 vehicles (the worst record for the region), compared to 12 for Colombia, 9 for Costa Rica, 8 for Chile, whose motorization rates are more than double that of Peru. The fatality rate per 100,000 habitants i s equally worrisome, at 21.6; Peru is second to Venezuela (2 1.8), while Costa Rica (1 5.4), Chile (1 3.7) and Colombia (1 1.7) fare relatively better (see charts below). A rough estimate of the economic cost of road crashes in Peru is about 1.5 percent of GDP. Driver behavior accounts for over 50 percent of road crashes, and is attributed to speeding, recklessness and inebriety. Studies also indicate that a lack of effective regulation of the vehicle fleet, particularly public transport vehicles, is also a major contributing factor, as well as deteriorated or poorly designed transport infrastructure. A rough estimate of the economic cost of road crashes in Peru is about 1.5 percent of GDP. Driver behavior accounts for over 50 percent of road crashes, and is attributed to speeding, recklessness and inebriety. Studies also indicate that a lack of effective regulation of the vehicle fleet, particularly public transport vehicles, is a major contributing factor in road crashes. Finally, deteriorated or poorly designed transport infrastructures contribute to Peru's road safety situation fatalities/lrj,ow habitants fataiitlesll0,ow vehicles VI motorlzatlon rate t l5 B 1; According to a recent road safety assessment performed by irap and financed by the World Bank through the Global Road Safety Facility on about 3,000 km of Peruvian roads, about 22 percent of these roads can be considered highly dangerous for car users and 63 percent of them for pedestrians. While road safety has been identified as a problem for many years, the Ministry of Transport and Communications (MTC) has only given recently a high priority on this issue. The National Road Safety Council has been reactivated and a comprehensive National 25

34 Road Safety Plan has been prepared and endorsed. However, major bottlenecks still remain for the implementation of this Plan. One of the most critical is the lack of an effective lead agency that can set policy and direct implementation to oversee the achievement of results. Other important issues include the necessity to build in Peru a culture of safe road design and usage, and the need for a results-focused approach in order to achieve the long term vision of the Plan and, in particular, its objective of reducing crashes by 30 percent over the 5-year period Peru s Investments in Transport Infrastructure and the Expected Impact of the GoP s Stimulus Package 5. In Peru, the last significant increase in infrastructure spending occurred at the beginning of the 1990s when the national road network was on the verge of collapsing with only 12 percent of the roads being in good conditions. This program almost quadrupled the length of good condition roads in 5 years. Infrastructure spending was then severely constrained, in Peru as well as in other Latin America countries, during the economic downturn of the late 1990s when capital expenditures paid the highest price in the fiscal adjustment that were implemented in response to the macroeconomic crisis (Calderh, Easterly and Serven, 2003). Peru s public investment in transport infrastructure represented 0.34 percent of GDP in but only 0.09 percent in This drop has been compensated by a significant increase in private financing that represented only 0.02 percent of GDP in but 0.28 percent in However, the total investment (public and private) in transport in Peru in (0.37 percent of GDP) remained, together with Mexico, the lowest rate in Latin America, far below Chile (1.69), Argentina (0.68), Colombia (0.67) and Brazil (0.41) (Calderon and ServCn, 2009) oa fnnsport infnstructun rxprnditunt (pmmt of GDP) r3 Ib L.d.i 08 inmtlito Peru UL Public expenditures in transport infrastructure ( , percent of GDP) # I)Ubk i 8 piivdtei * jtiibllc prl~nte~2001-2m)gi 0 Source: Calder6n and Serven (2009). 6. Since 2007, road improvement expenditures have increased and this trend is expected to further accelerate with the GoP s stimulus package. Provias Nacional s budget for national roads investment has been quadrupled between 2005 and 2009 to reach almost US$l, 1 billion in The execution rate is high (75 to 90 percent) although it has been slightly decreasing recently, possibly due to some institutional limitations to absorb the additional workload. Nevertheless, after only 4 months, 29 percent of the 2009 budget had already been executed by Provias Nacional, despite the doubling of budget resources compared to the previous year. The 26

35 most important increase of this budget is observed for the category of larger infrastructure works (eg. IIRSA Sur road or Tren Electrico urban transport system) s *0 ~ -.- E GOO ~ Provias Nacional s budget for national roads investments 1000 I I_ I I larger scale road works, - construction and PPP 6: rehabilitation aiid upgrading long-term upgrading and inainteiiance coiitractr (Proyetto Peru) 0 1 other iriaiiitenaiice (iiiicro G enterprises, periodic (actual) (actual) (actual) (actual) (initial) maintenance, force account), 1 7. The countercyclical stimulus package adopted by the GoP in response to the global crisis is expected to further the trend, although the Peruvian package is still in the lower range in the region, with US$3 billion or about 2.5 percent of GDP. In comparison, Argentina s package amounts to 12.5 percent of GDP and the Brazilian package to 3.8 percent. Peru s stimulus package plans to dedicate two thirds of the resources on infrastructure and aims at doubling capital expenditures, compared to The Government s package takes into account the lessons from the last macroeconomic crisis faced by Peru at the end of the 1990s when infrastructure spending were severely downsized as part of the country s fiscal adjustment policies, resulting in a future loss of competitiveness and growth. 8. The package gives particular attention a few selected mega projects - most of them in transport. They include in particular the completion of the IIRSA Sur project (US$900 million additional needed), the concession of six regional ports (US$591 million), the concession of the IIRSA Centro (US$220 million), the concession of six regional airports (US$157 million) and the construction of the infrastructure needed for the Tren Electrico, a new Lima urban transport system (US$lOO million). These mega-projects - except the IIRSA Sur and the Tren Electrico, as well as a few other road rehabilitation and bridge construction investments have been published in two Emergency Decrees: Decreto de Urgencia No , dated Dec. 18, 2008, and No , dated January 29, The proposed project will not finance the mega projects but will help finance some of the prioritized road rehabilitation investments, as well as other priority rehabilitation and maintenance investments. As part of the stimulus package, the Government has also announced the creation of a US$lOO million infrastructure fund, managed by COFIDE, in order to support some of the PPP infrastructure investments. Table: TransDort Investments Flagged as Priorities in Peru s Stimulus Package. 27

36 I Rehab. Road Huaura - Sayan - Churin 1 US$90m I Rehab. Road Churin - Ov6n I US$IS~ (C) These investments have already been contracted by Provias Nacional. The situation of Road Sssets Management 9. Planning. Public investments in transport are prioritized through different planning instruments. The most important is the Intermodal Transport Plan which sets the medium to long-term vision for the sector. Other planning instruments that are relevant for the national road network include the 5-year National Road Plan and the National Road Maintenance Plan On the other hand, the Proyecto Peru program was launched through Ministerial Resolutions No MTC-02 and MTC/02. The Proyecto Peru prioritized 35 road corridors (for a total length of 12,500 km) and 4 river-based corridors that connect production centers with national and international markets. 10. Monitoring of road conditions. The last inventory of national roads was performed in 2005 on the 17,000 km of roads listed at that time in the national network. IRI data were collected and served as basis for the categorization of national roads according to the condition (good/average/poor). A road reclassification decree (No MTC) was published in 2007 and led to the expansion of the national road network from 17,000 km to 23,000 km, before being further extended to 26,377 km. An updated assessment of the national road network is planned for Road maintenance. Road maintenance is particularly critical in order to avoid a deterioration of road assets. Between 1992 and 2005, it has been estimated that the lack of maintenance has caused the rapid deterioration of 1,357 km of national roads, generating a loss of US$718 million for the GoP. Maintenance is less politically visible than other larger-scale investments (such as the construction of new roads) and, for, that reason, it is often the first expenditure to be downsized in times of budget constraint. However, road maintenance has the highest economic returns of all the various types of road works and it is also the most laborintensive of all infrastructure investments. Albeit limited in scope, routine maintenance works can even generate up to 500 jobs per US$ million invested and can act as a safety net mechanism for the rural poor. The Ministerial Resolution No /MTCY which describes the main national policies applicable to the transport sector, assigns the greatest priority to the preservation of existing transport infrastructure. 9 Source: lnstituto Peruano de Economia (IPE). 28

37 12. MTC s strategy focuses on long-term maintenance contracts and the progressive phasing out of force account. Maintenance on national roads (mostly routine and emergency) is still partially handled through force account although a phasing out process has been initiated. For a number of national roads, routine maintenance has been outsourced to microenterprises constituted from poor people living aside from the road. 60 microenterprises have been created for this purpose. lo Periodic maintenance is also outsourced to private contractors. Another maintenance model is the use of performance-based upgrading and maintenance contracts (Proyecto Peru), through which an upgrading (low cost paving) is bundled together with maintenance for a period of 5 years, for a package of 200 to 400 km of national roads. The contractor generally performs himself the larger scale works (initial upgrading, periodic maintenance), while routine maintenance is subcontracted to microenterprises. This maintenance modality is being rapidly scaled up by the MTC and will be further supported by the proposed project, the total length of national roads maintained under the Proyecto Peru is expected to increase from 3,233 km to 11,694 km between 2009 and A similar approach is also being implemented by Provias Nacional through performance-based maintenance contracts that bundle together periodic maintenance, emergency maintenance and 5-years of routine maintenance. Four of such contracts have already been signed for about 1,500 km and contracts for an additional 1384 km will be supported through the proposed project. Finally, for 4,987 km of higher traffic roads, maintenance is ensured as part of a concession contract. maintenance 13. Expansion of the Paved Network. Peru has one of the lowest densities of paved roads in the region. To tackle this problem, the MTC is working in three directions: (1) ensuring the maintenance of existing paved roads to preserve the existing stock of infrastructure; (2) taking advantage of the normal rehabilitation of unpaved national roads to perform an upgrading of road surface, whenever economically justifiable; and (3) piloting (before scaling up) the use of lowcost paving technologies on low-traffic national roads. Low-cost paving works have recently been tested by the MTC as part of the Proyecto Peru program and a specific monitoring mechanism (involving the civil engineering department of a Peruvian university) has been established to verify that it is indeed a cost-effective and sustainable solution for lower-traffic national roads. lo Microenterprises are widely used by Peruvian municipalities, with the technical guidance of Provias Descentralizado. As of 2008, 612 microenterprises, employing about 7,000 workers, had been created and were performing the routine maintenance of about 15,000 km of rural roads. 29

38 14. Road Concessions. The Road Development Plan envisaged the concessioning of 11 road corridors, totaling 6,898 km. These corridors have high-traffic levels with at least 2,000 vpd and some sections exceeding 5,000 vpd. To date, 9 of these corridors have been concessioned under a PPP approach, for a total of about 4,987 km, including 2,593 km for the 5 segments of the IIRSA Sur. As part of the stimulus package, the GoP aims at awarding new road concessions, through PPP arrangements. However, under current traffic conditions, the concessionable part of the national road network is unlikely to exceed 7,000 to 8,000 km. Road Length (km) I Characteristics Concessionaire Ancon-Huacho-Pativilca year concession Norvial S.A. US$6 1.4 million investment Basic toll: US$].Wax Eje Multimodal Amazonas Norte (IIRSA year concesion IIRSANorte Norte) US$280 million investment S.A i Pucusana-lca Basic toll: USS 1 Sttax 30 year concession COVIPERU US$157.7 million investment Basic toll: USS 1.5-tax I San Juan de Marcona-Nazca-Puquio year concession BOT Survial S.A. Chalhuanca-Abancay-Cusco (IIRSA Sursegment I) US83 million investment US$I 1 million annual operation Urcos-lnambari (IIRSA Sur-segment 2) year concession Interocehnico USS278 million investment Sur - Tramo 2 Basic toll: US1 Sttax S.A. Inambari-liiapari (IIRSA Sur-segment 3 ) year concession Interocehnico I USS40.7 million investment Sur - Tramo 3 Basic toll : US$I +tax S.A. Inambari-Azangaro (IlRSA Sur-segment 4) year concession INTERSUR US$205 million investment, Concesiones Matarani-Azangaro-llo-Juliaca (IIRSA Sur year concesidn segment 5) i 1 USS183.4 million investment Basic toll: USS I.5-tax Empalme 1 B-Buenos Aires-Canchaque 78.1 I5 1 ear concession US$3 1,l million investment COVISUR Canchaque S.A. Institutional and Regulatory Rramework for the Transport Sector 15. Regulatory Framework. After the decade of the 80s during which the Peruvian State intervened directly in most aspects of transport policies, the 90s saw aggressive deregulation and liberalization reforms. Since 2000, important legislations were passed to refine the regulatory framework, better ensure the quality of transport infrastructure and services, and reduce the high levels of informality in the sector. The most important of these legislations is the General Transport Law, approved on October 8, This law obliges the State to promote free competition, while remaining in charge of those functions that are socially important and which cannot be developed by the private sector. The law sets that all actors have to assume the costs associated with their decisions and that the prices of transport services have to be real and competitive, with the exception of corrections justified by negative externalities such as traffic congestion and pollution. Technical standards and regulatory measures should also promote the optimization of traffic management. 30

39 16. The Ministry of Transport and Communication (MTC). The MTC is the Peruvian institution in charge of defining strategies, policies and technical norms for the transport sector. The MTC includes a Vice-Ministry of Transport, which itself includes five general directorates: (1) the General Directorate for Civil Aviation (DGAC); (2) the General Directorate for Maritime and River-based Transport (DGTA); (3) the General Directorate for Roads and Railways (DGCF); (4) the General Directorate for Land Transport (DGTT); and (5) the General Directorate for Social and Environmental Affairs (DGASA). The Vice-Ministry also includes two operational units ( Special Programs ), one that is in charge of managing the national road network (Provias Nucionao and the other of supporting the road decentralization process at the regional and municipal levels (Provias Descentralizado). A Planning and Budget Unit (OGPP) is in charge of managing the planning instrument and the budget process for the sector. Finally, a concession unit is following MTC s concession program (roads, ports airports) in coordination with the other Peruvian institutions in charge (OSITRAN, PROINVERSION) 17. Provias Nacional. Provias Nacional is the entity in charge of managing the national road network and is therefore the legitimate counterpart for the proposed project. It is one of the most efficient institutions in the Peruvian administration (with a 75 to 90 percent budget execution track record over the past 4 years). However, it is now getting close to saturation and there is a risk that this agency is reaching its maximum absorptive capacity, considering the doubling of its budget in 2009 compared to 2008, and the quadrupling compared to 2005, as well as the 2007 road reclassification that led to an increase of the length of the national road network by 35 percent. Provias National has a staff of 980 (stable since 2002), 90 of which are working in the regional bureaus (Unidades Zonules). 18. Road Decentralization. Since 2002, the management of regional roads has been handed over to 24 regional governments, while the management of rural roads is now handled by 2,006 district and provincial municipalities. The decentralization process has produced highly positive results for rural roads, thanks to the use of low-cost rehabilitation technologies (gravel roads), participatory road planning, effective routine maintenance (performed by microenterprises) and successful institutional arrangements (Provincial Road Institutes) that allowed overcoming the high fragmentation of the municipal sector in Peru. However, the needs are still enormous with only about 30 percent of the registered rural road network rehabilitated to date. The situation is less advanced at the regional level, although a significant share of public investments in decentralized transport, are now managed by the regions. Institutional weaknesses in the regional governments are still affecting the execution of the investment program in regional roads. Two IaDB and World Bank-financed operations are currently supporting the road decentralization process at the regional and municipal level. Peru - Decentralized Rural Transport Project and Peru - Regional Transport Decentralization Project. 31

40 Annex 2: Transport Sector Development Policy Letter PERU: Safe and Sustainable Transport Project 1. The Peruvian economy has been on a steady growth path for more than 90 months, with growth rates topping 9 percent in the past two years. Despite the persistent adverse global climate Peru s economy-still among the fastest growing in the world-is set to continue expanding. Forecasts are calling for positive GDP growth in 2009 and over-5 percent increases on average for ( Multiyear Macroeconomic Plan - Ministry of Finance). 2. The country s social policy is premised upon a move away from short-term piecemeal State efforts toward a long-range, comprehensive vision, pursuing phased benchmarkable goals. To that end the authorities have identified programs that can be amalgamated and new programs that would be coordinated and aligned to the State s new social policy, specifying the roles and responsibilities that should fall to the sectors involved so that resource (budget) allocations meet true requirements for program execution and target achievement. 3. At present the government s efforts are focused on cushioning the impact of the global crisis on the nation s economy and, particularly, on conserving recent poverty reduction gains that took the poverty rate from 48 percent in 2005 to 36.2 percent in In the transportation sector, high-quality infrastructure and services are key to efficient operation of markets, export and import growth, and successful social programs. Peru s slower than desired progress in the transportation sphere has to do with a significant connectivity gap which the Peruvian Economic Institute ascribes to an infrastructure gap that would cost US$8.609 billion to close. This shortfall, coupled with inefficiencies of nonintegrated transport services and institutional weaknesses both on the transport company operations side and the regulatory and compliance authority side, has created a transportation system that is still too uncompetitive. The Global Competitiveness Report tells the story in numbers: Peru ranks 10 1 st on the list of 13 1 countries rated for transportation infrastructure competitiveness. 5. Because of their cross-cutting dimensions, transportation and communications activities unquestionably are fundamental for Peru s sustainable economic and social progress, and more particularly the provision of transport infrastructure such as roads, ports, and airports. Unless such activities keep pace-at the very least-with the country s economic growth, in the near term transportation will become a roadblock to the competitiveness it needs to achieve to support sustained development and the competitiveness it ultimately must achieve if it is to reduce present levels of poverty and inequality, among other goals. ROAD TRANSPORT: BACKGROUND 6. Growth in the different components of Peru s transportation system has been uneven in recent years. Improvements on national highways and roads have been considerable-by 2011, 90% of these roads are expected to be in good and fair condition-but progress on regional and local roads is slower. Consequently, the country s road network cannot be considered an integrated system, that is, one whose operating efficiency levels satisfy accessibility, capacity, 32

41 and serviceability requirements. Transport services still are of poor quality; many are operating informally, have low logistical capacity and scant technological innovation, institutional weaknesses, and insufficient environmental and public health safeguards. 7. Executive Order MTC (Ministry of Transportation and Communications) of September 2007, subsequently amended by E.O MTC, reclassifies Peru s roads system. Peru s Road System Classification (in kilometers) Type National roads Departmental roads Local roads Total Paved Unpaved Planned Total 11,370 12,533 2,474 26,377 1, ,300 6,050 28, ,000 1,843 82,467 13, ,833 10, , Peru s road system is made up of the National Roads System (19 percent of the country s roads and highways), the Departmental Roads System (21 percent), and the Local Roads System (60 percent). The breakdown by traveling surface is 10 percent paved, 83 percent unpaved, and 7 percent planned. 9. Breakdowns for each component of the national network are as follows: national roads, 43 percent paved, 48 percent unpaved, 9 percent planned; departmental roads, 5 percent paved, 74 percent unpaved, 21 percent planned; and local roads, 1 percent paved, 97 percent unpaved, 2 percent planned. 10. Existing national roads comprise 23,903 km of the National Roads System, of which 4,987 km have been concessioned out and Provias Nacional operates the non-concessioned 19,013 km. In 2009, 8,486 km of the non-concessioned roads are paved, of which 5,616 km is in good repair, 594 km in fair condition, and 2,273 km in poor condition. 11, A total of 2,174 km of the unpaved network is in good repair, 1,937 km in fair condition, and 6,412 km in poor condition, these involving primarily the National Roads System expansion pursuant to E.O By 2012 the non-concessioned paved National Roads System is set to increase from the present 8,486 km to 13,764 km. TRANSPORT SECTOR DEVELOPMENT POLICY 13. Law 29370, the Ministry of Transportation and Communications Act, states that the Ministry s prime mandate is to develop, plan, direct, coordinate, deliver, enforce, oversee, and assess national and sectoral policy in matters falling within its purview, such policies being applicable to all levels of government (national, regional, and local). 33

42 14. At the heart of the transport sector policy roadmap approved in November 2006 is a transformative shift in the traditional notion of how the nation s transport system operates, setting aside the prevailing infrastructure bias to prioritize instead transportation as a service. The following are the policy pillars: 0 A Comprehensive Vision of Transport Services and Infrastructure 15. The comprehensive vision should be shared and developed by all actors, authorities, and operators, the guiding principle being that infrastructure and infrastructure expansion are one component of transport services. User-Focused Integrated Transport System Management to Improve Transport Safety Conditions and Quality 16. The guiding premise being that transportation services should move people and goods efficiently and safely, resource allocation in transport system management needs to be more efficient, to deliver resources to infrastructure projects that take a preeminently multimodal approach, address transport safety issues, and will enhance in-country integration by effectively articulating the National Roads System with regional and local road networks and with ports, airports, and railways. Modern Legislation and Standards and Institutional Organization 17. Continue to build specialization capacity for the delivery of transport sector functions, to equip the Ministry to provide leadership in policy, standards, and enforcement capacity, clearly distinct from regulatory and transport operations functions. 0 Adequate Funding for Transportation Infrastructure 18. Promote private sector participation in the delivery of transport infrastructure and services, affording assurances of stable policies and legislation and transportation pricing transparency and increasing public spending to help supply the demand for new project funding. 0 Priority Focus on Infrastructure Conservation and Expansion to Meet Demand and Accessibility Requirements 19. One transportation sector priority is to instill a transport infrastructure conservation culture with an institutional base to make such conservation sustainable in the medium and long term. The Ministry has set a goal of efficient National Roads System maintenance and a target of over 60% of the system in fair condition or better. 20. One of the avenues to meet that target is the ongoing Proyecto Peni road infrastructure project designed to promote private sector participation through three- to five-year performancebased road maintenance contracts, which will actively involve 19 road corridors with a total length of about 6,532 km. The planned interventions consist of standards changes, periodic 34

43 maintenance, minor rehabilitation works, routine maintenance, emergency work, and maintenance management. 2 1, Another planned initiative is a five-year pilot rehabilitation and maintenance contract (CREMA) for comprehensive road rehabilitation, improvement, and maintenance. ROAD TRANSPORT MANAGEMENT AND PLANNING 22. Road infrastructure and transport service management and planning responsibilities are spread. across the three levels of government:. Ministry of Transportation and Communications (MTC): National Roads System and. interdepartmental and international transport services Regional governments: Departmental Roads System and interprovincial transport Municipalities: Local Roads System and urban and intercity transport. 23. As one facet of Peru s decentralization process the MTC has completed the transfer of eight specific transport functions to the regional governments (Ministerial Order MTC/Ol and others). 24. However, since the regional and municipal governments road infrastructure planning and management capabilities are still weak, the MTC through Provias Descentralizado is operating the Departmental Roads Program to assist the regional governments with management of the Departmental Roads System, and the Decentralized Rural Transport Program to help municipalities with local road asset management. These programs contain institutionstrengthening components and provide cofinancing for road projects. The most significant achievements on the planning side are the 20 Departmental Road Plans produced. 25. The Provincial Road Plans developed under the Decentralized Rural Transport Program were put together with input from local community organizations under the leadership of local government authorities. To date 94 such plans have been produced and 176 Provincial Roads Institutes have been created. 26. The road infrastructure management mandates of the three tiers of government are clearly spelled out in roads legislation but in practice the distinction is not clearly understood or observed, primarily in district municipalities and among the general public. Moreover, the paternalistic criterion that sees the Executive (MTC) as having responsibility for everything continues to hold sway, aggravated by political differences between mayors and regional presidents. 27. To get road work done the different levels of government round out their own efforts and resources, and projects where one level does not have a mandated responsibility are being carried out under interagency agreements. For instance, regional governments in regions that levy a mining concession tax are being allowed to co-fund National Roads System projects with the MTC, or a road is temporarily reclassified from national to regional or local. 35

44 28. Against this backdrop, work is being done to strengthen and institutionalize strategic transportation planning. Infrastructure planning and programming, logistics platform planning, information management tools, and baseline studies are some of the facets of the envisaged comprehensive transport planning. 29. In its new transport services-focused vision the MTC sees logistics as a link between transport infrastructure and transport service. Here, logistics and logistics platforms become critical elements for transport sector development, contributing to efficient use of transportation infrastructure. 30. A planned MTC study entitled Transportation Logistics Services Development Plan is to produce a comprehensive analysis of the features of Peru s logistics system, with an emphasis on operational demand and supply but integrating findings of ongoing logistics infrastructure studies. The aim is to come up with a proposal of a package of actions that can promote a sustainable, diversified, in-country supply of value added logistics services and meet production sector needs, and thereby help build a more competitive economy and make more efficient use of transport infrastructure The MTC also has been producing or commissioning logistics infrastructure studies dealing for instance with the Callao Logistics Platform, Paita Logistics Platform, Yurimaguas and Pucallpa Logistics Platform, and siting of a logistics platform in southern Peru. According to the latter study an Urban and Regional Distribution Platform should be developed in the city of Arequipa; a feasibility study is now under way. 32. On the matter of new information management tools, another planned MTC project will update the satellite database and institutionalize the Geographic Information System (GIS) to better serve other Ministry departments and units and general users. This will give continuity to the Geographic Information System Implementation project to improve regional transport and road planning and privatization studies, which updated digital maps of Peru s national and departmental road systems and set up a GIS in the Ministry. This is part of an initiative to enhance the Ministry s information systems and solidify coordination mechanisms. MODERNIZATION OF ROAD TRANSPORT MANAGEMENT 33. Having recognized transportation s crucial role in sustainable development (transport management and operations responsibilities being shared by State institutions and the private sector), Peru has made significant efforts over the past five years as part of its modernization of the State process with cooperation support from multisectoral organizations to modernize transportation administration. 34. At the local management level, for instance, the new Executive Branch Act and Regional Government Act are regulating and modernizing State activities, their chief focus being to demarcate national and subnational government responsibilities. As this legislation has been implemented the Ministry has been able to spell out, in the regulations governing its organization and functions, the policy functions that fall within its purview: responsibility for policy and for 36

45 technical standards and regulations for policy delivery and oversight rests with the MTC, and all levels of government are required to adhere to its policies and standards. 35. The Regional Government Act, for its part, specifies the functions that are shared by the MTC and the regional governments. The Ministry now is reconfiguring its management tools so it can continue to streamline its organization and rationally assign responsibilities across the different transport sector entities. 36. Some specific review and strengthening focuses are the eminently implementing role of the Provias agencies and the planning and policy and standards functions of core Ministry departments (Office of Planning and Budget, Roads and Railways Directorate, and others). A Superintendency of Overland Transport of Persons and Goods has been created to bolster and build oversight and compliance specialization for overland transport, with two near-term aims: lower the levels of operational informality in transport services and accord the necessary importance to the delivery of overland transport policy and modernization of the associated technical standards. 37. The guidelines for improving road transport management thus have been laid; the task now is to focus efforts and cooperation assistance on building capacity to perform the assigned responsibilities and functions, principally to capture and adopt state-of-art technologies that will ensure timely technical responses and reduce political discretion in road asset management decisions. PUBLIC/PRIVATE PARTNERSHIPS AND ROAD TRANSPORT FINANCE 38. Infrastructure ventures require huge investments that can be funded only with a mix of public monies and private capital. Accordingly, the Peruvian Government is promoting private sector participation in infrastructure construction, particularly by way of publidprivate partnerships (PPPs). PPP projects are long-term ventures that yield high social returns but low financial returns, so the State has to put in a share of the funding. 39. A number of recent laws and orders are facilitating this process, most notably the Framework Law on Publidprivate Partnerships for Productive Employment Creation (Legislative Order of May 13, 2008) which regulates private sector participation in public infrastructure operation or public utilities delivery under the Publidprivate Partnership (PPP) format, to make such ventures viable, create productive employment, and make the country more competitive. 40. In addition, Emergency Order one piece of the government s Economic Stimulus Package to manage the effects of the global financial crisisnontains extraordinary provisions to facilitate PPPs. These helped put together concessions for the Trujillo-Sullana section of Autopista del Sol and the Downtown Lima-La Oroya-Pucallpa and La Oroya- Huancayo sections of the Amazon transport corridor. 4 1, At this writing PPP concessions have been awarded for 4,110 km of roads and highways involving an investment of US$2.286 billion. These include the Paita-Yurimaguas segment of 37

46 the North Amazon Corridor (955 km), the IIRSA South Interoceanic Transport Corridor (2,594 km), Road Network No 4 Pativilca-Trujillo (362 km), Junction 1 B-Buenos Aires-Canchaque Connecting Road (76 km), Ovalo Chancay/Dv. Variante Pasamayo-Huaral-Acos road (46.8 km), and Nuevo Mocupe-Cayalti-Oyotun road (76.5 km). 42. Concessions also have been let for 406 km of roads under two projects not being cofunded by the State (self-sustaining) that call for investments of US$302 million: Road Network No 5 Anch Huacho-Pativilca (223 km) and Road Network No 6 Pucusana-Cerro Azul-Ica (183 km). 43. Between August 2006 and December ,363 km of roads were built, rehabilitated, and improved-646 km of works paid for with public money and 717 km with private funding (concessions). The works targets for are 3,817 km of road construction, rehabilitation, and improvements--1,029 km to be publicly funded and 2,787 km paid for with private capital (concessions). The end result in 2011 should be 3,902 km of concessioned national roads duly paved and sustainably maintained. MAKING ROADS SAFER 44. The transport sector policy aim is to see quality transport services delivered efficiently and safely and in conformity with Peruvian law and applicable international standards. It seeks to enhance the professionalism of public and private transport operators to ensure safe, highquality transportation services. 45. The following are the proposed overland transport strategies: Institute mechanisms to improve domestic and international overland passenger and freight transport monitoring, oversight, and compliance activities to ensure compliance with technical specifications and improve standards of service; establish conditions for development of an institutional apparatus for transport services; devise ways to help transport companies become more firmly established and more competitive and to operate formally; strengthen avenues for sectoral consensusbuilding on overland transport matters and promote a culture of road safety and road safety education, coordinating these initiatives with other associated institutions; prescribe technical specifications for passenger and freight transport vehicles and institute appropriate compliance mechanisms; prescribe technical standards for vehicle circulation in order to improve transport safety and protect the environment; and promote modernization of the passenger and freight vehicle fleet. 46. The proposed overall strategy for road infrastructure is to achieve substantive improvements in road safety conditions, gradually creating Safe Corridors (pilot project) on national and city roads. 47. One Peruvian Government move to this end was the 2008 Executive Order MTC which gave the National Road Safety Council the formal mandate of promoting and coordinating road safety activities in Peru. Headed by the Ministry of Transportation and Communications, this body brings together representatives of government agencies and private 38

47 sector organizations. The 2008 Order s provisions to strengthen Regional Road Safety Councils are enhancing regional-national coordination. 48. The National Road Safety Plan approved in 2007 makes safe roads a national priority and promotes improvements in safety conditions on Peruvian roads to preserve the lives and physical integrity of those who travel them. The National Plan s primary target is to lower traffic accidents by 30%. 49. Action is needed to remedy the chaotic and unsafe conditions of Peruvian streets and highways. Behavior changes need to be encouraged to develop a culture of respect for the norms of social cohabitation in our society, in which considerable numbers of people are disobeying elementary traffic rules codified in the National Traffic Regulations The MTC thus is modernizing overland transport legislation such as the following: Law establishing a Penalty Points System for Driver s Licenses (May 28,2009). Law creating the Superintendency of Overland Transport of Persons and Goods (SUTRAN) (June 16, 2009) as a specialized oversight and compliance agency for transport services (matters falling within the MTC s purview) and ancillary services. Executive Order MTC approving the Consolidated Text of the National Traffic Regulations-Traffic Code (April 22,2009). Executive Order MTC approving the National Transportation Administration Regulations (April 22, 2009) Among the matters dealt with in these pieces of legislation are stiffer penalties for traffic infractions and creation of a single overland transport compliance authority. Important changes in the Consolidated Text of the National Traffic Regulations include: a) a new penalty points system for traffic infractions; b) a streamlined penalty procedure; c) a registry of drivers found operating under the influence of alcohol or drugs; d) citizen reporting of traffic infractions; and e) removal of duplicate or nonapplicable infractions and toughening of penalties. 52. The MTC is working out an agreement with the Attorney General s Office under which it would support, in areas falling within its purview, compliance activities to prevent traffic accidents countrywide. 53. To lower the number of unregistered passenger and freight vehicle drivers and avoid overlaps Peru started a registry this year of trained drivers who provide road transport of passengers and goods. 54. A number of initiatives have been launched to improve road safety education in schools and among the general public and to raise road safety awareness. Ongoing traffic rule and accident awareness campaigns are reminding the public that they have obligations as well as rights. Some associated initiatives are driving schools being promoted in Lima and elsewhere in the country, driver training organizations, and the Travel Safely campaign that checks passenger and freight transport vehicles before they go onto national highways. 39

48 5 5. The Integrated Overland Transport Information System currently in development, consisting of the National Driver Registry System, National Penalty Registry System, and National Transport Services Registry System, will be a tool to make sure that individuals, vehicles, and roads are driving or operating as they are supposed to and thereby minimize the chance of harm to the collective. 56. Weak traffic rule enforcement is one of the most serious road safety issues. To bolster MTC and subnational government road transport service oversight and compliance capabilities a Superintendency of Overland Transport of Persons and Goods (SUTRAN) has been created to coordinate the actual operationality of enforcement work with central government road safety departments and agencies and subnational governments. The National Road Safety Council, for its part, will scale up efforts to secure the genuine commitment of its constituent institutions to implement designed activities and programs such as the International Road Assessment Program (irap) initiative that has operated on selected national roads and is slated to run on others. PROTECTING AND ENHANCING THE ENVIRONMENT 57. MTC policy dictates that care must be taken to prevent and minimize environmental impacts in transport infrastructure construction and operation and in transport services delivery. Specifically, the MTC has charted strategies to bolster social and environmental safeguards, ensure that transport infrastructure and services projects will be socially and environmentally viable, develop solutions for environmental liabilities, and prevent and curb moving-source environmental pollution, along with strategies to address the social dimension of transport projects, such as involuntary Resettlement Action Plans and right-of-way release. 58. Environmental impact assessments (EIAs) for road projects should ascertain their potential positive and adverse effects on the environment. Measures have been established for that purpose to avoid, reduce, or mitigate environmental harm or, where no adverse impacts are anticipated, measures to make the most of the environmental benefits the road project stands to yield. The environmental dimension is to be addressed all along the project cycle, from the planning stage to studies and designs to project execution to operation of the road. This requires information system coordination within the Ministry as well as interagency coordination. 59. The MTC s Social and Environmental Affairs Directorate created in 2002 is the transport subsector s environmental arm. Two of its functions are to monitor compliance with environmental conservation laws and standards to ensure that natural resources are properly managed during transport infrastructure construction and to direct expropriations and any ensuing resettlements of area residents. 60. Road transport services are another focus of MTC environmental protection work. Here the aim is to renew the vehicle fleet by adopting tax policies that give incentives to buy new personal and mass transit vehicles and measures to rationalize the fleet by scrapping vehicles, along with vehicle technical inspections and energy matrix change. 40

49 CROSS-BORDER PHYSICAL INTEGRATION 61. Peru is an active party to South American physical integration movements, notably the Initiative for the Integration of Regional Infrastructure in South America (IIRSA) and bilateral initiatives with Brazil and Ecuador, Bolivia and Colombia. Peru is involved in four IIRSA corridors or hubs: Amazon Hub (Peru, Ecuador, Colombia, Brazil) Peru-Brazil-Bolivia Hub Interoceanic Hub (Brazil, Paraguay, Bolivia, Peru, Chile) Andean Hub (Peru, Ecuador, Colombia, Venezuela, Bolivia. Chile) Infrastructure projects in these hubs consist of road and highway construction, rehabilitation, and improvement, river and ocean port terminal improvements, airport modernization and improvements, improvements in commercial navigability of Amazon region rivers, and logistics development and energy integration projects. 64. The Peru-Brazil-Bolivia hub (IIRSA South Interoceanic Corridor) is one of the most important by virtue of its anticipated development impact in the southern Peru macroregion, which will open up trade opportunities with Brazil. 65,. The IIRSA South Interoceanic Road Corridor paving projects will improve and rehabilitate sections of roads in the departments of Madre de Dios, Cusco, Puno, Arequipa, and Moquegua. Under the terms of the signed contracts work began in July 2006 with a scheduled completion time, in stages, of 48 months; the stage one work is now complete. To date 689 km of the planned 1,009 km has been paved; the remaining work is slated for completion in the first half of A number of road projects and other activities currently under way are the fruit of the Peace Accord with Ecuador. The following are the ongoing initiatives in four of the five transport corridors: Road Corridor No 1 :. w International Bypass: Construction completed (8.82 km), cost S/ million. International Bridge: 80 m long; work under way. Cost S/.16.9 million. Scheduled completion October Binational Border Service Center (CEBAF): First-phase works 35.3% completed; expected completion second quarter Road Corridor No 2:. Sullana-El Alamor highway: Call for tenders published in Development Business (IDB) Issue Number 748. Contract to be awarded this month (September). Financed by IDB loan 1827/0C-PE, National Highway System Serviceability Improvement Program. Cost S/.73,858,352; S/.28.9 million in 2009 budget. 41

50 Road. Corridor No 3: Construction of New Macara International Bridge and accesses (110 m). Ecuador is responsible for studies, construction, and maintenance. Grant funding from the Government of Japan. Three calls for bids issued; no contract awarded, bids having been over the reference cost. New negotiations are to be started with Japan and Ecuador.. Improvement of Sullana-Puente Macara Highway, Dv. La Tina-La Tina feeder road (1 5.3 km). Part of the National Highway System Serviceability Improvement project funded by the fourth IDB loan. The viability assessment required under the National Public Investment System is under way.. Sullana-Puente Macara Highway (128 km). Periodic maintenance work in progress, cost U.69 million. Work slated for completion in January Road Corridor No 4: Chamaya-Jaen-San Ignacio-Pte. Integracion Highway. Final studies are being produced for the Pericos (Puerto Cirue1os)-San Ignacio segment (55.5 km) and San Ignacio-Puente Integracion segment (48 km). Construction scheduled to start in second quarter El Reposo-Durand-Sarameriza Highway, El Reposo-Durand section (89.24 km). Ongoing asphalt paving (Km O+OOO - Km ) and double layer surface treatment (Km Km ), total cost Y million. At August 31, 2009 work is 85.08% finished; expected completion January Duran-Urakusa Highway (1 20 km) serviceability. Serviceability improvement study under way; engineering study for the section (Km Km ) completed. BORDER CROSSINGS 67. To facilitate trade and deepen cross-border integration, countries need border crossings that reduce crossing time and costs. A diagnostic assessment of the state of all Peruvian border crossings is under way to identify current issues and come up with proposals to move ahead with the planned crossings and modernize current border posts, for which IDB and European Union cooperation support has been secured. TRAFFIC ACCIDENT DATABASE 68. In light of the high accident rates on Peru s highways and city streets and as one component of the sectoral policy to improve road safety conditions, transport authorities are addressing the need for substantive improvements in traffic accident data through a proposal for a traffic accident database that would take in national roads and highways and Lima streets. 42

51 69. This fits into one of the mandates of the recently created Superintendency of Overland Transport of Persons and Goods (SUTRAN), a specialized oversight agency for overland transport services, which is tasked with... operating a current registry of vehicles involved in accidents on national roads... At a first stage this information, along with Lima city accident data, will be entered into the proposed accident database, which ultimately would be scaled up to take in other Peruvian road systems and cities. 70. The database proposal should be tied in to the project to create the Transport Observatory. The plan in that regard is to engage consultant services to determine the data to be compiled, mechanisms and sources; design the entity and establish its mission, size, equipment requirements, legal features and other requirements, and make recommendations as to its place within the transport sector s organizational structure. 43

52 Annex 3: Major Related Projects Financed by the Bank and/or other Agencies PERU: Safe and Sustainable Transport Project 1. The World Bank and the IaDB have a long history of cooperation to support the GoP s reforms in the transport sector. This partnership has been particularly successful in the area of rural transport and decentralization, with three rural roads operations being implemented over the past 15 years. More recently, the Regional Transport Decentralization Project was approved to support a more efficient and decentralized management of secondary roads at the regional level, following a new wave of decentralization reforms that were passed by the Peruvian administration in Finally, the Bank is also active in urban transport with the Lima Urban Transport project, still under implementation and for which an additional financing is envisaged. Sector Issue World Bank-financed Project Latest Supervision (ISR) (W (DO) Contribute to territorial development and to the fight against rural poverty in the Borrower s territory by improving access of rural households and entrepreneurs to goods, social services and income-generating opportunities through reduced transport costs and better rural transport infrastructure. WB/IaDB: Decentralized Rural Transport Project S S Improve - through decentralization at the regional level - the prioritization, efficiency and effectiveness of regional transport interventions and, hence, their contribution to regional development and policy reduction in Peru. WBAaDB: Regional Transport Decentralization Project MU MU Assist the Municipality of Metropolitan Lima in enhancing the economic productivity and the quality of life within the Lima Metropolitan area through improving mobility and accessibility for the metropolitan population, especially in the periurban poor neighborhoods by establishing an efficient, reliable, cleaner and safer mass rapid transit system. WB/IaDB: Lima Urban Transport Project S MS Pioneer public private partnerships in Peru for infrastructure projects. The GOP has identified enormous infrastructure investments, required to bring average coverage levels to adequate standards, decrease coverage gaps and inequity, and improve the country s competitiveness by reducing logistical costs. Improve the access of rural poor to basic social services, market integrating infrastructure and income-generating activities with gender equity, to help alleviate rural poverty and raise the living standards of rural communities Guarantee Facility Project WBIIaDB: Second Rural Road Project Approved in April 2005; not effective yet ICR ratings: Outcome: HS Bank perf.: HS Borrow. Perf.: HS 44

53 Sector Issue Project Latest Supervision OSR) Provide a well integrated and reliable rural road system through rehabilitation and maintenance of rural roads and key connecting links to the primary road system. 1) Rehabilitate essential transport infrastructure; (2) assist Government in implementing institutional reforms in the road and railway subsectors, aiming at improved resource use and sustainable development; and (3) lay the ground work for future projects focusing on strengthened road management, increased private participation in the transport sector, and improved mobility of the poor. Other Development Agencies Objectives: 1) maintenance of the paved road network, 2) rehabilitation of the non paved road network with low-volume transit, 3) improvement of critical sections. Components: 1) Rehabilitation of the non paved road network, 2) Rehabilitation of the paved road network, 3) Maintenance of the rehabilitated road segments, 4) Institutional strengthening, including training in road management systems, maintenance management systems, and technical aspects related to the proposed works. The Northern Amazon Hub is an IIRSA integration corridor between the port of Paita in the Pacific and the river Port in Yurimaguas over the Huallaga river that connects to the Amazon river. The project will be carried out under a concession scheme and the construction payments will be deferred in annual payments once the construction period is finished. To guarantee better financial conditions, the GoP will provide a guarantee from IDB to cover the annual payments for construction. Finance rehabilitation and maintenance activities on selected segments of the national road network and provide technical support to MTC Expansion and upgrade of 180 km highway toll road system. WBllaDB: Rural Road Rehabilitation and Maintenance Project Transport Rehabilitation Project IaDB: National Highway System Serviceability Improvement Program (US$lOO million) IaDB: Guarante for IIRSA Northern Amazon Hub (US60 million) ladb: Road Rehabilitation and Maintenance Project (series of 3 projects : US$2 1 Om, US$252m, US$150m) IaDB: Red Vial 5 Toll Road (US$l8m) IEG ratings: Outcome: HS Bank perf.: HS Borrow. Perf.: HS ICR ratings: Outcome: S Bank perf.: S Borrow. Perf.: S Approved Dec 18,2006 Approved Feb 1,2006 Respectively approved Nov 27, 1991,Nov23, 1994and Dec Approved Sep 24,

54 Finance additional works IIRSA Sur (2) Finance additional works IIRSA Sur (1) Finance Segment 4 of IIRSA Sur Tren Electric0 (Tramo Puente Atocongo - Hospital Dos de Mayo) CAF (US$300 million) CAF (US$300 million) CAF (US$90 million) CAF (US$300 million) Approved Jan 9,2009 Approved Dec 19,2008 Approved Nov 28,2006 Approved Aug 18,

55 Annex 4: Results Framework and Monitoring PERU: Safe and Sustainable Transport Project Results Framework PDO Improve passenger and freight transport conditions in an efficient and safe manner along national road corridors that are essential to Peru s competitiveness, in particular those included in the Govern men t s st imu Ius package in response to the global crisis. Intermediate Outcomes Improving the quality of selected national roads, through the implementation of a rehabilitation program and the piloting of long-term, performance-based rehabilitation and maintenance contracts (CREMA) Project Outcome Indicators Decreased vehicles operating costs on rehabilitated and upgraded roads Decreased travel times on rehabilitated and upgraded roads Proportion of the national road network in good conditions (core indicator) Proportion of the national road network receiving permanent and efficient maintenance through either concession or long-term performance-based maintenance contract (CREMA or Proyecto Peru) Proportion of national roads that are paved (including low-cost paving) Proportion of the irap corridors labeled at least 3- stars for road safety Intermediate Outcome Indicators 0 km of road rehabilitated to agreed standards (core indicator) 0 km of road rehabilitated and maintained using the CREMA approach employment opportunities created (annual equivalent) Use of Project Outcome Information Assess benefits of project s road investments for road users Assess impact of project s road investments on efficiency of transport system Evaluate progress on quality of national road assets stock Evaluate improvements in road assets management for the national road network Evaluate improvement of national roads standards to improve Peru s situation relative to benchmark countries Evaluate improvement of road safety conditions on corridors assessed by irap Use of Intermediate Outcome Monitoring Measure implementation progress for road rehabilitation Assess implementation progress for CREMA pilot Evaluate contribution of rehabilitation program on :mployment generation 47

56 Scaling up sound asset management practices, through upgrading of road conditions, using low-cost paving technologies, combined with effective maintenance 0 km of roads maintained to agreed standards within a performance-based maintenance approach 0 employment opportunities created (annual equivalent) Measure implementation progress for road upgrading and maintenance Evaluate contribution of maintenance program on employment generation Supporting the reduction of road traffic fatalities and injuries (and resulting economic losses), on selected national roads, through the development of safe corridors 0 proportion of the irap recommendations implemented 0 km of safe corridors Verify actual implementation of irap recommendations Measure MTC s demonstrative road safety pilot program Strengthening MTC s institutional framework, with a view to improve the effectiveness of the Government s stimulus package improved MTC capacity to handle social and environmental safeguards and improved coordination between DGASA/OGPP/Provias Nacional new MTC s GIS fully operational with updated information on condition of road network road crashes database improved and regularly update through coordination between MTC, Police and other relevant institutions lead road safety agency clearly established and fully operational Assess streamlining of social and environmental dimensions in road assets planning and management Evaluate actual implementation of MTC s main information system Verify improvement of road safety statistics through improved inter-institutional coordination Evaluate emergence of a champion for road safety Arrangements for Results Monitoring 1. Outcomes and results for most of the project s activities will be primarily monitored by the lead implementing agency. Provias Nacional will in particular report on the number of kilometers of roads rehabilitated or upgraded, and maintained, as well as on the employment opportunities generated. 2. Road asset management indicators, such as the proportion of the national network in good conditions, the proportion of this network receiving adequate maintenance or the proportion of the national roads that are paved, will be monitored by Provias Nacional, in close 48

57 coordination with the Planning and Budget General Office (OGPP) of MTC. The project, as part of its 4 h component, includes I significant resources to improve the quality and reliability of MTC s information systems. 3. The benefits of road improvements for road users will be measured through specific user surveys to be performed by a specialized consulting firm. 4. Particular attention will be given to the monitoring of the benefits of the CREMA approach piloted under component 1, in order to facilitate the dissemination of this experience, as well as to furthering the monitoring instruments already in place for the low-cost paving pilot, initiated by the Proyecto Peru program. 5. For road safety indicators, resources have been included in component 4 in order to help improve the existing road crashes database. 6. Although Core Indicators are not mandatory for Bank operations in IBRD countries such as Peru, the proposed results framework includes two transport core indicators that are directly linked to the project s development objectives. Those are: (i) km of roads rehabilitated; and (ii) share of the national road network in good conditions. 49

58 ddd N 0 0 0

59 3 5 ; '5 z e o a c c c O I) O W 0 W = 3 % N? vi m 0 3 % 9 00 XI e 00 d 0 m = m e e 0

60 Annex 5: Detailed Project Description PERU: Safe and Sustainable Transport Project Component 1: Road rehabilitation and upgrading and CREMA pilot (estimated cost: US$ million of which US$ million would be financed by the Bank loan). 1. This component would help finance MTC s road rehabilitation and upgrading program for 2010 and help accelerate these investments as part of Peru s stimulus package. The proposed project is expected to contribute to finance rehabilitation and upgrading works for at least four sections of the national road network. However, depending on the availability of resources and of the evolution of MTC s priorities, additional works from MTC s road rehabilitation and upgrading program for 2010 could be added or substituted to the proposed list of four road sections, provided these additional works comply with the project s eligibility criteria and that Bank procedures are followed. 2. The initial four road sections that would be rehabilitated and upgraded total km. The total amount of works has been estimated to US$177.4 million (ie. an average rehabilitation cost of US$968,000 per km). Road Cochabamba - Chota 29.7 I Q2/2010-Q3/2011 I 35.9 I The proposed list of four road sections belong to a broader road rehabilitation and upgrading program that the MTC is planning to implement in This program currently includes eight national road corridors, totaling sixteen sections and representing 1,024 km. The total amount of the works has been estimated to US$811.5 million (ie. an average rehabilitation cost of US$811,500 per km). Section km ,4 * 52

61 Section Kishuara - Sahuinto bridge * Corridor Chongoyape - Cochabamba - Cajamarca Section Chongoyape - Llama * Section Llama - Cochabamba * Section Cochabamba - Chota * Corridor Huaura - Sayan - Churin * Corridor Trujillo - Shiran - Huamachuco Section Dv. Otuzco - Callayacullan * Corridor Chanchamayo - Villa Rica Section Pte Reither - Pte Paucartambo - Villarica I TOTAL , The selected road corridors have been prioritized in MTC s national road planning instruments. MTC s multi-annual rehabilitation program for includes 22 road corridors, totaling 36 sections and representing 1,915 km (7 percent of the national road network and 17 percent of the paved portion of this network). The works for several of these corridors have started in 2009, prior to the proposed project, and are outside of the project s scope. Instead, the proposed project focuses on the rehabilitation program, to support the implementation of Peru s stimulus package that same year. 13 of the 16 identified sections have been prioritized in the GoP s stimulus package and published in Emergency Decree No The remaining sections correspond to road corridors that had been declared a priority prior to the preparation of the stimulus package. 5. A CREMA pilot will be initiated on at least one transport corridors. The CREMA pilot would involve the rehabilitation of a paved road section and the maintenance of that section for a period of 5 to 10 years. Contracting arrangements would be made, based on the Bank experience with CREMAs in Brazil and Argentina (see Box). 6. During project preparation, a video conference was held involving the Bank specialists involved in the Argentina CREMA program and Provias Nucional, during which issues in the contracting arrangements such as length of contract, transfer of risk and payment methods were discussed and are to be taken into consideration during project implementation. The envisioned CREMA in Peru will differ from the Brazil and Argentina experiences in that they plan to build on the successful program of microenterprises for routine maintenance to which routine maintenance activities would be outsourced. 7. The cost of design studies and supervision activities is not included in this component which would only finance works. Studies and supervision will be financed exclusively by MTC. 8. The program only includes rehabilitation works on existing national roads. Larger scale activities - such as construction or major improvement works - are not eligible because they! belong to a different investment program of Provias Nacional. 9. Design studies for the four selected works have been completed, as well as the safeguards instruments (Environmental Assessment, Resettlement Action Plan and, when applicable Indigenous Peoples Plan). 53

62 Box: the experience of CREMA contracts in Brazil and Argentina. CREMA contracts bundle rehabilitation works together with 5 to 10 years of maintenance (periodic and routine). It is a result-based contract: the contractor is evaluated on the quality of the road, regardless of the inputs that are needed to upgrade and keep it in such conditions. Moreover, the contractor has the flexibility to determine what technology will allow to minimize the overall cost of rehabilitation and maintenance (a cheaper road will require more maintenance but seeking to reduce too much maintenance needs will also require a much more expensive initial investment). Implementing CREMA contracts require finding the right contractual arrangements but also changing the way the Ministry of Transport is supervising the works. As the CREMA system has been remarkably successful, particularly in improving the efficiency and public accountability of road maintenance expenditures, it is enjoying wide acceptance in the LAC region and elsewhere, as is seen with the introduction of similar programs in Chile, Brazil, Uruguay, and through World Bank programs in sub-saharan Africa. Two countries in LAC have moved ahead quite significantly with a CREMA program and could draw important lessons for Peru: 0 Argentina, emerging from depths of unattended infrastructure, backlogs in early 90s, is now regarded as one of the highest performing countries in the region in road asset management. Since the early nineties, through reform and technical assistance as well as financing from the Bank, Argentina has successfully introduced a CREMA program, and now has the most extensive experience and coverage (1 1,OOOkm of network covered, with individual contracts of 100-3OOkm). The road contracts include rehabilitation and maintenance over a period spanning 5 years, as well as provisions for emergency works in the event of unforeseen events. Through the CREMAs risk and responsibility are transferred to the private sector (including requirements for compliance with environmental and social concerns). The roads are inspected regularly, contractor compliance assessed and payments delivered. As the contractor is evaluated on the performance of the asset, the standards must be clearly defined in the contract, and must be measurable to allow for objective evaluation. Some examples of measurable performance indicators that contribute to user satisfaction, protection and costs: Roughness (vehicle operating costs); Potholesicrackingirutting (ride quality); Surface friction - (safety); Unobstructed drainage system (integrity of structure, safety); Retro-reflexivity of road signs & markings (safety); Removal of fixed objects at roadsides (safety), etc. The communities in the vicinity of the road sections maintained through the CREMA process benefitted from employment generated due to the maintenance works required: about 5,000 jobs have been generated across all regions, every year. The CREMA programs also allow for the securing of funds for road maintenance - which are always vulnerable when governments change fiscal policies in periods of crisis. Finally, the risk of cost overruns was substantially reduced as the contracts are set at a fixed price -the cost overruns were found to be less than 3% (attributable mainly to climatic and force majeure events) - much lower than the 15% cost overruns witnessed in traditional road contracts. Brazil has introduced the CREMA model in the early 2000 s. The use of this contract management model has progressively spread to reach, as of today, 1/3 of the federal network and more than 10% of the states networks, and expectations are for higher figures in the short run. The model was notably expected to bring rationalization, accountability and credibility to the sector at a moment when road maintenance, though a crucial issue when considering the networks characteristics and conditions, was not given sufficient consideration by the federal and state levels. The comparison of output performance based contracts to the traditional input-admeasurements approach, showed that these contracts brought an overall improved efficiency to the road sector which translated to better road conditions at lower costs for the governments and reduced management burdens on the road administrations. 10. This component will also finance a strategic environmental evaluation of the package of works to be implemented under the proposed component. The objective of this evaluation is to assess what would be the cumulative environmental impact of MTC s rehabilitation program for 2010, and provide recommendations for future design studies, as well as for supervision activities and works management. This evaluation will be performed in Draft terms of 54

63 reference have been prepared and are included as annex to the project s Environmental Assessment Report. The estimated cost of the strategic environmental evaluation is US$l 00, According to the latest disbursement profile for this component, most of the amount financed by the proposed IBRD loan should be disbursed in Component 2: Road Maintenance (estimated cost: US$ million of which US$ 35.0 million would be financed by the Bank loan). 12. This component will help finance MTC s outsourced, performance-based maintenance program in This program should help secure maintenance for 2,096 km of national roads (7.9 percent of the total national roads network). 13. At least 10 new maintenance contracts are expected to be launched in 2010 and would be eligible under the proposed component. The program includes 6 periodic maintenance contracts and 4 performance-based contracts. US$ million Total expected execution Sub-component 2.1. Sub-component 2.2. Cumulated execution WB loan disbursements Cumulated disbursements Table: Execution Schedule ( Q Q2 43 I 44 and beyond While the list of works expected to be financed under this component corresponds to the latest available information about the budget for road maintenance (PEN305 million envisaged), some modification or substitution could be made, on a case-by-case basis and subject to the Bank prior review of eligibility conditions (technical, economical, fiduciary, safeguards). This could happen, for example, if the 2010 budget for MTC s maintenance program was to be modified. 15. Routine maintenance activities are expected to be outsourced by private contractors to microenterprises constituted from poor men and women living aside from the rehabilitated roads. Sub-Component 2.1. Periodic Maintenance. (estimated cost: US$ million of which US$12.0 million would be financed by the Bank loan). 16. This sub-component will finance periodic maintenance contracts on selected national roads. Provias Nacional is planning to contract out in 2010 the periodic maintenance of 846 km of national roads (3.2 percent of the total national road network and 6.3 percent of the paved portion of this network). These activities would be implemented under 6 potentially eligible contracts, for a total amount of US$126.7 million. The average unit cost is US$150,000 per km. 55

64 Table: Provias Nacionaf s Periodic Maintenance Program to be Contracted in Panamericana Norte (km ) Panamericana Norte (km ) Panamericana Norte (km ) TOTAL 27.3 Q Q Q Sub-Component 2.2. Performance-Based Maintenance Contracts. (estimated cost: US$ million of which US$23.0 million would be financed by the Bank loan). 17. This sub-component would finance mid-term, performance based, maintenance contracts on selected national roads. Roads can either be paved or unpaved. 18. In the case of unpaved roads, the proposed interventions will be handled under a specific program of Provias Nacional named Proyecto Peru. This program has been testing low-cost paving technologies bundled together with a 5 year maintenance program, on low traffic national roads. Proyecto Peru is currently maintaining about 3,233 km of national roads. An additional 3,263 km are scheduled to be contracted by the end of 2009 and MTC is planning to expand this program so that 11,694 km (44 percent of the national road network or about 78 percent of the unpaved portion of this network) would be covered under this modality by the end of When taking into account the concessioned network, it is estimated that 89 percent of the national road network could have an efficient performance-based maintenance mechanism in place by the end of the proposed project (2012). Road corridors included in the Proyecto Peru have been prioritized according to their importance to connect production areas with national and international markets. The complete list of these corridors has been published in Ministerial Resolutions No MTC-02 and MTC/02. The estimated unit cost for Proyecto Peru works amount to US$98,300 per km (for 5 years). This average cost can be discomposed in US$22,300 per km for the first year and US$19,000 per km for subsequent years. 19. In the case of paved roads, the proposed interventions bundle together one periodic maintenance, emergency maintenance and routine maintenance for a 5-year period. Provias has been planning to implement 14 of such maintenance contracts, for a total road length of 4,886 km. Four of them have been procured in 2009, prior to the proposed project and would therefore not be eligible. 20. The initial 2010 budget does not currently include budget resources for additional Proyecto Peru contracts. However, the budget does include 4 performance-based maintenance contracts on paved roads that would be eligible to the proposed sub-component, with a total cost of US$137.4 million, for 1,384 km. The unit cost (for 5 years) is US$lOO,OOO per km. 2 1, Additional performance-based maintenance contracts (in particular under the modality of Proyecto Peru ) would be eligible if additional budget becomes available for MTC s maintenance program, subject to conformity with the agreed operational procedures. 56

65 El Reposo-Duran y Chamaya-Jaen-San Ignacio - La Balza Pta. Pejerrey-San Clemente-Ayacucho Ciudad de Dios-Cajamarca, Chilete-San Pablo and Trujillo-Lim. Regional Lambayeque Pun0 - Desaguadero, Calapuja - La Raya, Ilave - Mosocruz Total estimated Beginning date Length cost (5 years, for works (W US%m) 23.5 Q Q Q Q The cost of design studies and supervision activities is not included in this subcomponent which would only finance works. Studies and supervision will be financed exclusively by MTC. Component 3: Road Safety Infrastructure (estimated cost: US$20 million of which US$ 10 million would be financed by the Bank loan). 23. This sub-component would help finance priority civil works on about 3,000 km of national roads that have been selected for their high levels of road crashes and for which the Ministry of Transport and Communications decided to launch a safe corridors program. The road safety characteristics of these roads have been assessed, using the irap methodology and a series of corrective investments has been identified. 24. The top five countermeasures, with the greatest potential for reducing fatalities and serious injuries are (i) signalized crossing (161 sites); (ii) shoulder sealing of less than 1 meter (398 km); (iii) shoulder sealing of more than 1 meter (4 km); (iv) refuge island (403 sites); and (v) traffic calming (55 km). 25. The MTC is planning to implement all irap recommendations by either processing addendums to existing contracts, including them in the scope of future maintenance or rehabilitation contracts (some of which would be financed under components 1 and 2 of the proposed project) or through separate, specific contracts (to be partially financed under this subcomponent). 26. Other road safety-related works could be financed by the proposed components, on a case-by-case basis, to be approved by the World Bank. Component 4: Institutional Support and Transport Regulation (estimated cost: US$ 3.3 million of which US$ 1.6 million would be financed by the Bank loan). 27. This component would finance a comprehensive technical assistance and institutional strengthening package for Provias Nacional (subcomponent 4.1) and other areas of the MTC (subcomponent 4.2). The objective is to improve the institutional performance of these agencies so that they can be the most efficient and effective in implementing the Government s stimulus package. The eligible activities, to improve capacity for management, monitoring and evaluation, are grouped under four overall themes: (a) improvement of information management systems 57

66 (such as, road and bridge asset management, emergency and incident management, contracts management); (b) support for planning systems; (c) improvement of road safety management and transport regulation systems; and (d) capacity building for improved management of environmental and social safeguards. Subcomponent 4.1. Institutional Support for Provias Nacional (estimated cost: US$ 1.34 million of which US$0.67 million would be financed by the Bank loan). 28. This subcomponent will be implemented by Provias Nacional and will support activities aiming to improve road asset management practices, bring innovation and build up Provias Nacional s knowledge base. Examples of activities that would be eligible under this subcomponent include: (i) designing and implementing a bridge management system (estimated cost: US$500,000); (ii) implementing a pilot program on improving the right-of-way on national roads, and possibly revise the applicable normative framework (estimated cost: US$200,000); (iii) improving the existing system to attend road emergencies (estimated cost: US$200,000); (iv) road safety auditing and scaling up of the irap assessments (estimated cost: US$250,000); (v) improving contracts management and monitoring of results (estimated cost: US$50,000); (vi) developing technical standards applicable to urban and peri-urban roads (estimated cost: US$70,000); and (vii) strengthening Provias Nacional s capacity for environmental and social safeguards management (estimated cost: US$70,000). Subcomponent 4.2. Institutional Support for other areas of the MTC (estimated cost: US$1.91 million of which US$0.96 million would be financed by the Bank loan). 29. This subcomponent is to be implemented by MTC s Office of General Administration of (OGA in Spanish). MTC entities to be supported as part of this sub-component would include, inter alia: the General Unit for Planning and Budget (OGPP in Spanish) and the General Directorate for Social and Environmental Safeguards (DGASA in Spanish). 30. Examples of activities that would be eligible under this subcomponent include: (a) for the OGPP: Information systems that relates to strategic planning in the transport sector, including (i) original-destination surveys for freight transport (estimated cost: US$550,000); (ii) updating of the Ministry s GIs, with the acquisition of a new cartographic database (estimated cost: US$550,000); (iii) information system for interprovincial passengers transport (estimated cost: US$150,000); (iv) design of a safe corridors pilot (estimated cost: US$250,000); and (v) design and implementation of the national registry of road crashes, in coordination with other relevant institutions (eg. the Police and the Ministry of Interior, estimated cost: US$250,000). (b) for the DGASA: Activities needed to systematize and improve the management of social and environmental issues. This includes in particular: (i) Systematization of the environmental and social instruments; (ii) streamlining the exchange of information between DGASA and other areas of the Ministry, particularly information that could be included in the GIS of the MTC and be used for strategic planning; (iii) improving coordination between DGASA and Provias Nacional, particularly regarding the 58

67 environmental categorization and the scope of design studies, so that social and environmental issues can be addressed sufficiently early on in the project cycle; and (iv) training of MTC s civil servants on environmental and social safeguards (including resettlement and indigenous peoples), as well as training of consultants and contractors. A preliminary budget for some of these activities has been prepared (see Table). Activities budget budget Strategic Environmental Assesment 100 Systematization of the environmental and social management instruments 40,000 Training of MTC staffs Training of the Zonales Training of consultants, contractors and other stakeholders Preparation of a toolkit for resettlement planning Total Total ,000 14,000 14,000 28, ,000 8, Component 5: External Auditing (estimated cost: US$0.2 million of which US$ 0.1 million would be financed by the Bank loan) This component will finance the project s external audit. 50,000 50, ,000 26, ,000 59

68 ~~~~ ~ ~ ~ ~~ ~ ~ ~~ ~~ ~~~ ~ ~~~~~ ~~ ~ Annex 6: Project Costs PERU: Safe and Sustainable Transport Project Local Foreign Total Project Cost By Component and/or Activity us us us $million $million $million Component 1: Road rehabilitation Component 2: Road upgrading and maintenance Component 3: Road safety infrastructure Component 4: Institutional support and transport regulation Sub-Component 4.1 : asset management of national 1.o roads Sub-Component 4.2: other institutional support and transport regulation activities Component 5: External auditing Total Baseline Cost Contingencies (4%) Total Project Costs Front-end Fee Total Financing Required

69 Annex 7: Implementation Arrangements PERU: Safe and Sustainable Transport Project 1, The proposed project will be implemented by two separate entities of the Ministry of Transport and Communications: (a) Provias Nacional will implement components 1, 2, 3 and sub-component 4.1. Provias Nacional is, within MTC, the agency in charge of managing the national road network. The proposed project will finance three investment programs which fall under Provias Nacional s responsibilities (rehabilitation of national roads, outsourced maintenance on non-concessioned national roads and road safety improvement works), as well as specific institutional strengthening and technical assistance activities related to the sound asset management of national roads. Provias is a highly experienced agency with a satisfactory track record both in terms of working with multilateral organizations (IaDB, CAF, WB) and in terms of budget execution. (b) MTC s Office of General Administration (OGA) will implement sub-component 4.2. The OGA is a small unit which is in charge of handling fiduciary activities (eg. procurement of goods and consultancies) for other general directorates of MTC. 2. The implementation of sub-component 4.2. will require very close coordination with the benefiting entities and General Directorate involved (OGPP, DGASA, Office of the Vice- Minister of Transport). This coordination will be daily led by the OGPP as the entities in charge of managing planning and strategies in MTC. The Vice-Minister of Transport will validate strategic choices to be taken for the implementation of this sub-component. Since 2009, the Vice-Minister of Transport is also the President of the National Road Safety Council. 3. All activities to be financed under the proposed project will be included in the MTC s budget and will have to follow existing procedures in vigor in Peru to control the quality of public expenditures. A particularly important step is the validation of individual road improvement investments by the National Public Investment System (SNIP in Spanish) of the Ministry of Economy and Finance (MEF). Most of the works to be performed in 2009 as part of component 1 have already been cleared by the SNIP. 61

70 Annex 8: Financial Management and Disbursement Arrangements PERU: Safe and Sustainable Transport Project Executive Summary 1. An initial Financial Management Assessment - FMAI2 of the project s implementing entities Provias Nacional and the Office of General Administration MTC s OGA was conducted as part of a preparatory mission conducted from May 4 to 8, The objective of the FM assessment was to determine the entities capacity to implement the project, manage all project proceeds and produce timely reliable financial reporting and withdrawal applications for Bank special purposes. The FMA has been updated during the pre-appraisal mission of July 13-18, 2009 and after subsequent missions conducted from September 9 to 18 and October 23, The proposed project will be partially financed by the Bank and implemented by the Ministry of Transport and Communications through Provias Nacional and MTC s OGA (in coordination with other MTC units - OGPP, DGASA and Vice-Minister of Transport). The project is part of a broader program also partially financed by the IaDB. Components 1, 2, 3, 5 and sub-component 4.1 which represent almost entire total loan proceeds will be implemented by Provias Nacional while the MTC s OGA will implement the sub-component 4.2, which comprise institutional strengthening activities. In this regard, Provias Nacional will be the project implementing entity and main responsible for project execution with a coordinating and oversight role over MTC s OGA. As such, Provias Nacional will be responsible for the consolidation of the financial and disbursement information of the whole project. In addition to this, the IDB and the Bank have worked jointly to define the most appropriate financial management arrangements and harmonized financial reporting and auditing arrangements. Overall Conclusion 3. Given Provias Nacional s experience in implementing investment projects financed by multilaterals (IaDB and the Bank13), but also by other bilaterals (CAF, Japan Bank International Corporation), and other considerations such as: (i) well staffed Finance Department; (ii) reliable information systems such as the National Integrated System of Financial Management - SIAF, and the complementary information system SIGA, which will be adjusted to project information needs; the Bank fiduciary experts concluded that Provias Nacional meets the minimum financial management requirements and therefore, implementation arrangements will rely on its existing installed capacity. 4. Taking into account that in Peru budget preparation and execution follows an orderly, reliable and transparent process with commitments and payment process conducted through the use of the country integrated financial management system - SIAF and considering that loan proceeds will be reimbursed to the Government on the basis of pre-financed expenditures under specific budget lines for MTC, inherent and control risk are rated as Moderate (M) and the 2 Conducted in accordance with OP/BP and the Manual on Financial Management Practices in World Bank- Financed Investment Operations. 3 Transport Rehabilitation Project - IBRD 371 7, implementedfrom I994 to

71 Financial Management total risk is considered Moderate. Nevertheless the Financial Management assessment has identified some areas which require to be mitigated for project readiness. On such basis, the most crucial actions which require to be completed by Provias Nacional include: (a) completion of the final Operational Manual; and (b) adjustments to the accounting information system to tailor project reporting requirements. Country Public Financial Management Background 5, Peru s Public Expenditure and Financial Accountability (PEFA) report, published in June 2009 concluded that overall Public Financial Management in Peru is functioning well and that it is in line with international best practices. In this regard, the country s budget preparation and execution follows an orderly, reliable and transparent process. Moreover, the country has been implementing a series of Public Financial Management reforms in the last few years, including the implementation of the Treasury Single Account. Additionally, commitments and payment processes are conducted through the use of the country integrated financial management system - SIAF which has proved to have adequate degrees of transparency. Thus, there is a degree of confidence for the Bank that pre-financed expenditures to be reimbursed under the project, through loan proceeds, will be implemented following a credible financial management process applicable in the country and that, therefore, the fiduciary risk is mitigated. Risk Assessment and Mitigation 6. The following risk assessment comprises a summary of the issues considered for the project as a whole. As mentioned above, the Financial Management risk rating for this project has been assessed as Moderate. Once there is evidence that the mitigating measures have been implemented and are working as intended, the level of Financial Management risk for this project will be re-assessed and revised accordingly. Description of Risk INHERENT RISK Country Level The government priorities could change at any time next year especially given the upcoming election year that could impact the resources allocated for this project during implementation. Risk Mitigating Measures Residual Condition of Risk Effectiveness (Ym) Rating An ambitious and comprehensive M N/A institutional strengthening package has been designed in order to address institutional shortfalls. M 63

72 Entity Level Sub-component 4.2 of the project will be implemented by MTC s OGA (in coordination with other units within the Ministry of Transport); however, the OGA does not have experience implementing investment lending projects. Project Level Project implementation (delays on disbursements). could be hinder by lack of coordination between Provias Nacional and MTC s OGA CONTROL RISK Budgeting: Budget ceiling for each of the financed components, under the project, could be reduced or not approved to be executed as expected during the life of the project. Accounting and Internal Control 0 Provias Nacional will be the main responsible for project implementation and as such will have a coordinating and oversight role over MTC s OGA. 0 The Bank will carry out supervisions not only to Provias Nacional, but also to the MTC s OGA during project implementation. Appropriate roles and responsibilities of staff under each implementing entity are reflected in the Operational Manual. The Operational Manual will include clear responsibilities and monitoring role of project execution. Provias Nacional will coordinate budgeting status, on a timely basis, with MEF. Governmental budget classification system and new accounting chart of accounts has been implemented by Provias Nacional in line with local reforms. M M M M L Adoption of Final Operational Manual by the Borrower in form and substance acceptable to the Bank. Effectiveness cy) Funds Flow: There is a risk of (i) duplication of expenditures when reported to the Banks; and (ii) reporting of ineligible expenditures. Project Operational Manual will refer to specific Administrative and Functions Manuals of Provias Nacional. 0 The majority of contracts under component 1 and 2 will be subject to prior review. Customized SOEs will be accompanied by a detail of contracts status. Adjustments to the accounting information system to tailor project reporting requirements, including customized SOE will be performed shortly before effectiveness. M Accounting information system is adjusted to submit tailor project financial reports and customized SOE, not later than three months after the Effective Date. Dated Covenant (Y) 64

73 Financial Reporting: The financial reporting system SIGA requires to be tailored to produce harmonized financial reports for the project. 0 The project will utilize the National Integrated System of Financial Management - SIAF and the complementary information system SIGA to adopt harmonized (IaDB and Bank) financial reports and customized SOE for the project. M 0 An Information Technology Specialist is being contracted to adjust SIGA information system. Auditing: Possible delays contracting a timely audit firm for the project. Total Risk 0 Harmonized audit TORS will be submitted for Bank s no objection after Loan Agreement signature. The project will prepare the selection package for appointment of audit firm and submit to Contraloria General de la Republica with sufficient time to request its consent to carry out the selection process and appointment of auditors for the entire life of the project. L M Audit firm is appointed not later than six months after the Effective Date or a later date agreed with the Bank. Dated covenant Cy) Strengths and Weakness - Action Plan 7. Provias Nacional is an implementing unit of MTC which has an extensive experience in the implementation of projects financed by multilateral organizations such as the IaDB and the Bank and bilateral institutions such as CAF and Japan Bank International Corporation. Furthermore, Provias Nacional has a well staffed Finance Department with qualified and experienced professionals. Moreover it counts with reliable information systems such as the SIAF and the complementary SIGA which will be adjusted for the purpose of financial reporting for the proposed project. Besides, Provias Nacional has sound internal controls based on administrative and functions manuals. 8. Nevertheless, on the basis of the assessment performed, the following key actions have been discussed and agreed with Provias Nacional to be completed by the deadlines established in order to declare the project readiness for implementation. 65

74 I# Weakness Require to have of Operational Manual for the Project. Actionls Prepare Project Operational Manual in form and substance acceptable to the Bank. Responsible Provias Nacional Target Preliminary version October 16, Revised version November 16,2009 Final Operational Manual adopted by the Borrower By effectiveness Status Zompletec 2ompletec Pending Accounting information system needs to be tailored to submit financial reporting required for the project purposes. D Contract Information Technology Specialist to adjust accounting information system in accordance to tailored chart of accounts and harmonized financial reports and customized SOE. Adjustments to information system are completed for project implementation. Provias Nacional Information rechnology Specialist Contracted for November 16,2009 Three months after the Effective Date. 2ompletec Pending Appointment of Auditors D Submit harmonized audit TORS on time and send for Banks review. Appointment of acceptable auditors. Provias Nacional Once the Loan Agreement is signed. Six months after the Effective Date or a!ater date agreed with the Bank Pending Pending Implementing Entity and Organizational Structure 9. The Safe and Sustainable Transport Project will be implemented by two different entities of the Ministry of Transport and Communications, Provias Nacional and MTC s OGA. Provias Nacional will implement components 1, 2, 3, 5 and sub-component 4.1, which represent almost entire of the total loan proceeds while the MTC s OGA will implement the sub-component 4.2 comprised by institutional strengthening activities. The implementation of sub-component 4.2. will require a very close coordination with other MTC units, such as General Unit for Planning and Budget - OGPP, the General Directorate for Social and Environmental Safeguards - DGASA and the office of the Vice-Minister of Transport. 10. Provias Nacional will be the project implementing unit and main responsible for project execution with a coordinating and oversight role over MTC s OGA. As such, Provias Nacional will be responsible for consolidation of overall project information, including financial and disbursements information for the whole project. Provias Nacional 66

75 1 1, Provias Nacional is an implementing unit of MTC with technical, administrative, financial and managerial autonomy. Provias Nacional has developed a significant experience in the implementation of projects financed by multilateral organizations (IaDB, CAF and the Bank) and PROVIAS NACIONAL ORGANIZATION CHART Vice-Minister of TWiSDOTt Institutional Control Executwe Lawyer Ad-Hoc unrt Directton I Special Projects I! off ice I t - Technical Concessions Of fkce 1 Plannlngand Monitoring Offke Administrative and Account ing U n ft Legal Advisov Unit 1 I I Studies WorksManagement Environment Operations Management UnR unrt Management Unit Management unlt I Regional UnRs implemented the IBRD Transport Rehabilitation among 1994 to The current organization chart follows: 67

76 12, The Administrative and Accounting Unit (UGA) comprises: an Administrative Manager, one principal Accountant one accountant assistant, two Finance Specialists, one Tax Specialists, three Accounting Analysts; four additional assistants and a Treasurer department. The Administrative and Accounting Unit is responsible for budgeting, accounting, administrative and financial transactions, control, preparation of financial statements, contracting, procurement and payments, and it is expected to undertake overall responsibility for the project s financial management tasks, in close coordination with the Planning and Monitoring Unit of Provias Nacional. The Administrative Manager has confirmed the current team will in charge of project implementation and has assigned: an accountant, one financial specialist; one treasurer. This staff has prior experience in implementing international IaDB and WB-financed investment projects. The financial management assessment determined that the current structure for the administrative unit can be considered adequate for project purposes. ADMINISTRATIVE AND ACCOUNTING UNIT Administrative Manager Accountant Treasurer Accounting Support i I I Financial Specialists Financral Speclatlsts Accouting Anallsts Specialist in in Control (2) intax (1) (3) Rendiciones (4) I I Assistant (1) Assistants (3) MTC S Office of General Administration (OGA) 13. MTC S OGA is an implementing unit of the MTC with administrative and financial autonomy and will be in charge of implementing sub-component 4.2. MTC units to be supported by sub-component 4.2 include: the General Unit for Planning and Budget - OGPP and the General Directorate for Social and Environmental Safeguards - DGASA. In addition; the office of the Vice-Minister of Transport is also expected to benefit from this sub-component. This subcomponent will finance activities (consultancies and capacity building activities) to improve the information system related to strategic planning in the transport sector and activities required to systematize the management of social and environmental issues. The OGA administrative team will be in charge of coordinating operational procedures with Provias Nacional. In this regard, reports, supporting documentation of eligible expenditures and operational procedures will be agreed with Provias Nacional and described under the Operational Manual. 68

77 Programming and Budget 14. The preparation of the annual program and budget will follow local regulations stated by the Direccidn Nacional de Presupuesto Ptiblico - DNPP of the Ministry of Economy and Finance - MEF. Provias Nacional and the MTC s OGA, in coordination with the General Unit for Planning and Budget - OGPP of MTC will have to formulate the budget to the DNPP and set and agreed on priorities (budgetary lines) for external financing under the Safe and Sustainable Transport Project. The Budget is operated under the National Integrated System of Financial Management - SIAF. The budget assigned to the Program will be approved by the MEF and with the budget approved in the information system SIAF, the commitment and implementation of activities comprised under the project will take place. The Bank will reimburse eligible project expenditures under the budgetary lines defined and executed by the Program. Accounting and information systems 15. The project is using the new Governmental budget classification system and new accounting chart of accounts which is in line with local reforms of January In order to produce project financial statements, the chart of the accounts will be complemented in the accounting information system to obtain information by component, subcomponent and activities under the project. 16. The project will use the National Integrated System of Financial Management - SIAF, which ensures adequate transparency and specific controls in budget execution; a new platform and design is currently being developed for the SIAF. In addition to SIAF, Provias Nacional will also use the complementary information system called SIGA which receives information from SIAF through an interface. 17. The accounting information system will be adjusted to record project transactions and produce tailored financial reports (annual financial statements and interim reports) by components, subcomponents, categories of expenditure and customized statement of expenditures. 18. In order to revise the accounting information system so that it can produce project financial reports and customized SOE, Provias Nacional has contracted an Information Technology Specialist to adjust the system in accordance to project information needs. Moreover, the information system will have to be adjusted in order to account for the exchange rate differences originated by the Bank reimbursement of local currency expenditures in US dollars equivalents. Operational Manual 19. The Operation Manual includes project-specific Financial Management arrangements: (i) roles and responsibilities of all actors and units in charge of project implementation; (ii) applicability of appropriate internal controls for project implementation; (iii) project financial reports; (iv) funds flow charts; and (v) auditing arrangements. For the disbursement section, the Operational Manual will make reference to the Disbursement Letter. The Operational Manual 69

78 provides information on existing administrative procedures for project implementation purpose to control, collect, record and generate financial information, paying special attention to the roles and responsibilities of each unit, segregation of duties, authorization of payments/disbursements, etc. Internal Controls 20. The Manual of Process and Procedures sets the main policies and procedures to be followed by Provias Nacional. In addition, there is a Manual of Functions which describes main roles and responsibilities of each post. The internal control environment of Provias Nacional is sound since there is an adequate segregation of responsibilities, recording has adequate support documentation and monthly bank reconciliations are prepared. MTC s Internal Control Office (OCI), which depends from the General Controller Office of the Republic of Peru (CGR), will carry out operational audits of Provias Nacional s activities. Financial Reporting and Monitoring 2 1. Provias Nacional will have the responsibility for the preparation of consolidated interim Jinancial reports and financial statements for the whole project. Supportive documentation of financial statements will be available for decision-making, audits and supervision missions. The Bank and the IaDB have agreed on harmonized financial statements, interim financial reports and customized SOE to be used under for project monitoring purposes and which have been discussed and agreed with Provias Nacional. Considering that the exchange rate to be used will be the one originated by the Bank s reimbursement of local currency expenditures in US dollars equivalent, the project requires reflecting exchange rate differences for their reporting purposes. 22. MTC s OGA will agree with Provias Nacional on the information and supporting documentation (related to activities under sub-component 4.2), required to consolidate project financial statements and these arrangements will be described under the Operational Manual. 23. The interim financial reports required for the project will be prepared on a semiannual basis jointly with the project progress report and submitted to the Bank, not later than forty five calendar days after the end of each semester. The interim financial reports will provide the following information: Sources and uses of funds, by category (for the reporting semester and for the cumulative period); and Uses of Funds by project component/activity (reporting actual vs. planned investments, including analysis of variances), for the reporting semester and cumulative period. External Audit 24. In accordance with Banks procedures, annual audited financial statements are required to be submitted to the Bank s review, after the end of each Borrower s fiscal year. 70

79 ~~~ 25. Although the Bank financed projects in Peru require to apply the Memorandum of Technical Understanding 14, which specifies that the Contraloria General de la Republica (CGR) is responsible for contracting acceptable, independent private auditors; under the current Safe and Sustainable Transport Project - financed by the Bank and IaDB, the following arrangements will be applied: (i) harmonized TORs will be prepared by Provias Nacional under terms and scope acceptable for both Banks; (ii) at the beginning of the selection and contracting process, Provias Nacional will request to CGR its consent to proceed with the selection and contracting process; (iii) Provias Nacional will be in charge of contracting directly an independent audit firm acceptable for both Banks (iv) audited financial statements will be sent to the Banks not later than four months after the end of each fiscal year or period approved by the Bank; and (v) audit costs will be financed out of loans proceeds of both Banks, and selection process will follow the Bank Guidelines for the Selection of Consultants. 26. Annual project financial statements will be audited in accordance with International Standards on Auditing (ISAs) issued by the International Federation of Accountants (IFAC). The audited financial statements should reflect all project activities and all financing sources. 27. Audit TORs will be submitted for Bank s no objection immediately once the Loan Agreement is signed. Auditors are required to be appointed no later than six months after the Effective Date. Auditors are required to submit the following opinions: (i) on the project financial statements, (ii) on the statements of expenditures, (iii) on the compliance with applicable laws and regulations and (iv) an internal control management letter. The scope of the audit would include detail review of internal controls, reimbursements and supporting documents of the activities carried out by Provias Nacional and the MTC S OGA. In addition to this, the auditors are required to carry out, on a sample basis, inspection of civil works. In order to comply with these requirements, the external auditors are expected to carry out at least three visits to the project during the fiscal year for the following purposes: (i) planning, (ii) preliminary work and (iii) final assessment. Funds Flow and Disbursement Arrangements 28. The Bank will disburse the proceeds out of the loan using the disbursement method of reimbursements for Borrower s pre-financed expenditures. Although the reimbursement method has been chosen for this project, Provias Nacional has the capacity to manage other disbursement methods such as advances to a Designated Account, considering its extensive experience implementing projects. Direct payments are not envisioned under the project as all activities to be financed under the Safe and Sustainable Transport Project will be pre-financed. Provias Nacional will consolidate the information of pre-financed expenditures for the whole project, including the expenditures incurred by MTC s OGA, under the sub-component 4.2. In this regard, Provias Nacional will be the entity responsible for preparing withdrawal applications to be sent to the Bank. Pre-financed eligible expenditures (budgetary lines agreed to be financed) under each project component, will follow Bank acceptable procurement procedures. It is important to mention that works contracts will follow ICB method and will be subject to prior review by the Bank and IADB, which constitutes a mitigating measure of the fiduciary risk. l4 Signed in February 2007 between the CGR and the Bank. 71

80 29. Retroactive Financing. Although no activity to be retroactively financed under the proposed project is expected, retroacting financing would be allowed for expenditures occurred after the date of November 131h, 2009, subject to compliance with Bank fiduciary, safeguard and anti-corruption provision, and within the maximum limit of 20 percent of the Bank loan amount (ie. US$30 million). 30. Bank disbursements will be made against actual expenditures incurred by the project. Original supporting documentation will rest at each entity for ex-post reviews; however, a copy of MTC s OGA supporting documentation will be also available at Provias Nacional. The exchange rate to be used will be the one originated by the Bank s reimbursement of local currency expenditures in US dollars equivalent. The use of this exchange rate is based on majority of expenditures are expected to be in Soles. Therefore, the withdrawal applications for payments in local currency (Soles) will be submitted separately from the application of expenditures paid in US dollar The Bank would notify the project the exchange rate that will apply for their own reporting purposes. The project requires reflecting exchange rate differences for their reporting purposes and adjusting information system accordingly. Disbursements from the Bank will be deposited into an account of the Banco de la Nacidn within the Treasury Single Account - as designated by MEF- and as indicated in the withdrawal application by MTC- PROVIAS. WORLD BANK & 1AD.B FUNDS FLOW CHART PERU SAFE AND SUSTAINABLE TRANSPORT PROJECT MEF PROVlClAS NACIONAL - MTC S OGA U PROWAS 8 OGA HAVE MEF APPROVES 4 BUDGET APPROVED BY MEF ; i DOCUMENTS TO THE DOCUMENTATION 72

81 31. The withdrawal application will be accompanied by a customized SOE which will be issued by the information system SIGAT and an annex indicating the detailed of contracts under which payment is being requested for reimbursement. The customized SOE has been harmonized with the IaDB and it will require to be adjusted within the information system SIGA (Disbursement module system). The form and content of the agreed customized SOE will be attached to the Disbursement Letter. Withdrawal applications will be submitted for all components, on a quarterly basis. This frequency will facilitate the project to gather the required documentation to support the reimbursement request and/or submit withdrawal application more often (either monthly, biweekly, etc). Category (1) Works and consultants under Part 1 of the Project * (2) Works under Part 2 of the Project * (3) Works under Part 3 of the Project * (4) Goods; consultant services and training under Part 4.1 of the Project (5) Consultant services under Part 4.2 of the Project Amount of the Loan Allocated (expressed in USD) 103,275,000 35,000,000 10,000, , ,000 Percentage of Expenditures to be financed (inclusive of taxes) 100% 100% 100% 100% 100% I (6) Audit fees under Part 5 of the project TOTAL AMOUNT 100, ,000,000 I 100% I 32. Finally Provias Nacional will have to request access to Client Connection System, which is a secure website that would offer the project implementing agencies useful information in a quicker access about their portfolio, disbursements status, withdrawal applications formats and guidelines. Upon Loan Agreement s signature, Provias Nacional will request the Bank access to Client Connection and will request the forms to fulfill the information required. Supervision Plan 33. Financial Management supervision would include on-site and off-site supervisions. On site supervision missions will be carried out jointly with IaDB, twice a year to the extent possible, to review Provias Nacional and MTC s OGA. The review will include transaction review to verify the eligibility of expenditures. However, depending on the project performance and risks rating, supervision intensity could be modified during the project s life. Off-site supervisions will comprise desk reviews of interim financial reports and audited financial statements. Desk reviews will be complemented through virtual communications to assure a correct implementation of observations/recommendations and provide technical assistance during the project s implementation period. 73

82 Annex 9: Procurement Arrangements PERU: Safe and Sustainable Transport Project A. General 1, Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004 revised October 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 revised October 2006, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Credit, the different procurement methods or consultant selection methods, the need for pre-qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. The proposed program-based approach enables Provias Nacional to institute a single procurement system, thus reducing the transaction costs of parallel systems. Through the harmonization process, the World Bank is working to reach agreements with the IaDB for high-value contracts. 2. Procurement of Works: Works procured under this project would include: roads rehabilitation and upgrading, bridges construction and upgrading and roads maintenance. The procurement will be done using the Bank's Standard Bidding Documents (SBD) for all ICB and National SBD agreed with or satisfactory to the Bank. 3. Procurement of Goods: Goods procured under this project would include computers, software and cartographic databases. To the extent possible, contracts for these goods will be grouped in bidding packages of more than US$250,000 equivalent and procured following ICB procedures. Contracts with estimated values below this threshold per contract may be procured using NCB procedures and standard bidding documents agreed with and satisfactory to the Bank. Contracts for goods which cannot be grouped into larger bidding packages and estimated to cost less than US$50,000 per contract may be procured using Shopping (nationalhnternational) procedures based on a model request for quotations satisfactory to the Bank. The procurement will be done using Bank's SBD for all ICB and National SBD agreed with (or satisfactory to) the Bank in the operational manual. 4. Procurement of Non-Consulting Services: Non-consulting services procured under this project would include pilots of Output performance-based contracts for roads rehabilitation and maintenance (CREMA). ICB procedures would be followed and Standard Bidding Documents (SBD) satisfactory to the Bank would be used. 5. Selection of Consultants: Consultants services procured under this project will include: Design studies, surveys, assessments, general studies, monitoring, dissemination and communications services, strategic planning studies and audits services. Short lists of consultants for services estimated to cost less than $350,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the 74

83 Consultant Guidelines. Where firms are not required, individual consultants will be hired according to Section V of the Guidelines. 6. Training: The project will finance all costs associated with training, workshops and study tours required for the implementation of the project. 7. Operating Costs: Not expected.. 8. The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, are presented in the Operational Manual. B. Assessment of the Agency s Capacity to Implement Procurement 9. Following the implementation arrangements defined in Annex 6, procurement activities for Components 1, 2, 3 and subcomponent 4.1 will be carried out by Provias Nacional and procurement activities for subcomponent 4.2 will be carried out by MTC s Office of General Administration (OGA). The capacity assessment report is part of the project files. 10. The assessment looked into Provias Nacional and MTC s Office of General Administration (OGA): (a) organizational structure, (b) facilities and support capacity, (c) qualifications and experience of the staff that will work in procurement, (d) record-keeping and filing systems, (e) procurement planning and monitoring/control systems used, and (f) capacity to meet the Bank s procurement contract reporting requirements. It also reviewed the procurement arrangements proposed in the Procurement Plan. 11, The overall project risk for procurement is Moderate. The level of risk for this project will be reassessed and revised once there is evidence that mitigating measures such as (i) the adequate implementation of the Operational Manual; (ii) the development of Bidding Documents for project implementation, and (iii) procurement reviews conducted by independent auditors and/or Bank staff. C. Procurement Plan 12. The Borrower, at appraisal, developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on November 24, 2009 and is available at Provias Nacional, Jr. Zorritos No Lima 01. It will also be available in the project s database and in the Bank s external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. D. Frequency of Procurement Supervision 13. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended annual supervision missions to visit the field to carry out post review of procurement actions. The Bank will assist the 75

84 Borrower in the start-up activities by providing training to key staff in procurement under Bank procedures. E. Thresholds for Procurement Methods and Prior Review 14. Thresholds recommended for the use of the procurement methods specified in the project procurement plan are identified in the table below, which also establishes thresholds for prior review. ICB = International Competitive Bidding NCB = National Competitive Bidding DC = Direct Contracting QCBS = Quality- and Cost-Based Selection QBS = Quality-Based Selection FBS = Fixed Budget Selection LCS = Least-Cost Selection CQS = Selection Based on Consultants' Qualifications SSS: Single Source Selection F. Details of the Procurement Arrangements Involving International Competition 1. Goods, Works, and Non Consulting Services (a) List of contract packages to be procured following ICB and direct contracting: 76

85 1 Ref. No Contract (Description) Estimated Cost Procurement P- (000) USD Method Q I REHABlLlTAClON Y MEJORAMIENTO I 56'566'00 I I 1 Ayacucho-Abancay (seccion 50-98) 1 ICB 6 Domestic Preference (yesho) No (yesho) Llama - Cochabamba ICB REHABlLlTAClON Y MEJORAMIENTO 29,67 Cochabamba - Chota ICB 4 42,20 REHABlLlTAClON Y MEJORAMIENTO Pte Reither- Pte Paucartambo - Villa rica ICB Mantenimiento Periodico Puente 7,60 Stuart - Huancayo ICB Mantenirniento Periodico Urcos - 21,38 Sicuani - La Raya ICB Mantenimiento Periodico 16,40 Lambayeque - Olmos ICB 27,33 Mantenimiento Periodico Panamericana norte (km S86t600 al 736t600) ICB 27,33 Mantenimiento Periodico Panamericana norte (km al 886t600) ICB lo 26,67 Mantenimiento Periodico Panamericana none (km al 1033t400 Sullana) ICB 23,50 Conservacibn por Resultados El Reposo - Duran y Chamaya - Jaen - San lgnacio - La Balza l2 Conservacion poi Resultados Pta. Pejerrey - San Clemente - Ayacucho 13 Conservacion por Resultados Ciudad de Dios - Cajamarca, Chilete - San Pablo y Trujillo - Lim. Regional Lambayeque l4 Conservacion por Resultados Puno - Desaguadero, Calapuja - La Raya, llave - Masocruz 40,20 37,95 35,75 ICE ICB IC8 ICB No No No No No No No No No No No No No Prior Prior Post Prior Prior Q12010 Q12010 Q Q Prior Q I Prior Prior Prior Q Prior Q12010 Prior [ Q12010 I I (b) ICB Civil Works contracts estimated to cost above US$ 15 Millions per contract and all direct contracting will be subject to prior review by the Bank. (c) ICB Goods contracts estimated to cost above US$ Millions per contract and all direct contracting will be subject to prior review by the Bank. 77

86 2. Consulting Services I Ref. I No. I 1000) USD Method (PriorPost) Submission Date Description ofassignment I Estimated Cost I Selection 1 Review by Bank I Expected Proposals I Comments 1 I 1 I SistemadeGesti6n de Puentes I 50 I QCBS 1 Prior I Q I I 3 Estudios de Trbsito 55 QCBS Prior Actualizaci6n del SIG QCBS Prior Q (b) Consultancy services estimated to cost above USD 200,000 per contract and single source selection of consultants (firms) will be subject to prior review by the Bank. (c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than USD 350,000 equivalent per contract, may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 78

87 Annex 10: Economic and Financial Analysis PERU: Safe and Sustainable Transport Project A. Beneficiaries 1. The economic evaluation focuses on the three main civil works components of the project: (i) road rehabilitation and upgrading program that includes upgrading works on four national road sections, representing 183 km with an estimated cost of US$177.4 million; (ii) periodic maintenance program on 846 km with an estimated cost of US$126.7 million; and (iii) performance-based maintenance program for four contracts, representing 1,380 km with an estimated costs of US$137.4 million. The main measured project economic benefits are the reduction in vehicle operating costs, passenger time costs and future maintenance requirements brought about by the improvement and maintenance of the project roads. 2. The overall Economic Rate of Return (EIRR) of a1 programs is estimated at 21.8 percent and the overall Net Present Value (NPV) is estimated at US$210 million, based on 11 percent discount rate. Three cases were considered for sensitivity analysis: investment costs increase by 20 percent, project benefits decrease by 20 percent, and investment costs increase by 20 percent meanwhile project benefits decrease by 20 percent. The corresponding overall EIRR is 18.0, 17.2 and 13.0 respectively, which confirms that the project is economically feasible. The switching value analysis shows that for the EIRR to fall to 11 percent, investment costs would need to be 1.8 times higher, or benefits 44 percent lower than estimated. Table 9.1 presents the economic evaluation summary. I Benefits I (MUS$) Table 9.1: Economic Evaluation Summary Rehabilitation and Upgrading Program Periodic Maintenance Program Performance-Based Maintenance Program 75 Total 384 Rehabilitation and Upgrading Program 133 costs - - I (M US$) I Periodic Maintenancekogram I 90 I Performance-Based Maintenance Program 40 Total I74 Net Benefits Rehabilitation and Upgrading Program 46 (M US$) Periodic Maintenancekogram Total Rehabilitation and Upgrading Program 14.9% Periodic Maintenance Program 25.3% 28.2% Total 21.8% B. Economic Evaluation Methodology 3. The economic evaluation was done using the Roads Economic Decision Model (RED) that adopts the consumer surplus approach to estimate project benefits that are comprised of road user costs (vehicle operating costs, passenger time costs, and accident cost) savings, which are estimated using road user costs relationships from the Highway Development and Management Model (HDM-4) that is a globally accepted key analytical tool for economic analysis of highways investment alternatives, which simulates life cycle conditions and costs and provides 79

88 economic decision criteria for multiple road design and maintenance alternatives. The RED Model is customized to the characteristics and needs of unpaved roads, such as the high uncertainty of the assessment of the model inputs in terms of road condition and traffic, the different characteristics of the dry and wet seasons, the importance of speeds for model validation, and the need for a comprehensive analysis of generated and induced traffic. 4. The economic evaluation was done adopting 2009 unit road user costs based on average 2009 vehicle fleet characteristics and economic unit costs that are given on Table 9.2. Road user costs were estimated for seven vehicle types comprising passenger car, pickup, bus, and light, medium, heavy and articulated trucks. This information is updated yearly by the MTC Direccion General de Planificacion y Presupuesto to be used on all economic evaluations in Peru. The value of time for car passengers was estimated to be US$ 1.30 per hour considering an average income of 1,000 Soles per month, 176 working hours per month, non-working time being 25 percent of working time, and 70 percent of work related trips. For bus passengers an average income of 550 Soles per month was considered. Table 9.2: VI Ye\+ Vehicle Cost (US$ vehicle) New Tire Cost (US$/tire) Fuel Cost (US$/liter) Lubricant Cost (US$/liter) Maintenance Labor Cost(US$/hour) Crew Cost (US$/hour) Passenger Time (US$/hour) Cargo Time (US$/hour) Interest Rate (%) Passengers (no) Kilometers Driven per Year (km) Hours Driven per Year (hr) Service Life (years) Gross Vehicle Weight (tons) 1. I ESA Loading Factor Source: OGPP - MTC icle Fleet Charaderistics and Economic Costs Light Medium Heavy Articulated Car Utility Bus Truck Truck Truck Truck , , , IO I IO IO Table 9.3 presents typical unit road user costs, in US$ per vehicle-km, for the different vehicle types and roughness levels IO I I I Table 9.4 presents typical traffic composition per traffic range. The average annual traffic growth rate was estimated to be 4 percent per year for passenger cars and 5 percent per year for commercial vehicles based on past trends of population growth for passenger vehicles and economic growth for commercial vehicles. The average growth in GPD per year from 2004 to 80

89 2009 in Peru was 5.4 percent. The generated traffic was estimated assuming a price elasticity of demand equal to 1.0. Traffic Range (AADT) 30 - IO Light Medium Heavy Articulated Car Utility Bus Truck Truck Truck Truck I I Table 9.5 presents typical maintenance unit costs for paved and unpaved roads. Economic costs were computing removing taxes, subsidies and duties from financial costs. Economic costs for maintenance works represent around 75 percent of financial costs and for upgrading and rehabilitation works 79 percent. Unpaved Roads Grading Spot Regravelling Regravelling Routine Maintenance Paved Roads Patching Reseal Overlay Reconstruction with DST Routine Maintenance Unit Financial Cost Economic Cost km m m Km/year 2,500 1,875 m m m m Km/year 3,000 2,250 C. Rehabilitation and Upgrading Program 8. An economic feasibility study was done for all road sections of the MTC s road rehabilitation and upgrading program for 2010 that aims at rehabilitating eight national road corridors, totaling sixteen road sections and representing 1,024 km. The studies were done by different consultants over the last 5 years to assess the economic justification of proposed investments, help select a recommended investment, and fulfill the norms of the Sistema Nacional de Inversion P~blica that requires that all investment projects be subjected to an economic evaluation. The economic evaluations were done using the HDM-4 or the RED models and considered typically four possible project alternatives: (i) keep the road unpaved (without project alternative), (ii) improve to surface treatment standard; (iii) improve to asphalt concrete standard with a design life of 10 years, and (iv) improve to asphalt concrete standard with a design life of 20 years. The evaluations considered the current road condition and traffic characteristics of each road and average unit costs of road works in the area of the project roads. All recommended investments achieved and EIRR higher than 11 percent, the discount rate used in Peru. 9. The economic feasibility of the road sections was reevaluated for the project appraisal with updated estimates of investment costs, common updated road user costs, current traffic data, and a common methodology. The RED model was selected because the project roads are unpaved in need of upgrading. The without project alternative consists of keeping the project road unpaved with minimum maintenance interventions consisting of routine maintenance, 81

90 grading and gravel resurfacing. The adopted evaluation period is 20 years and the discount rate i s 11 percent. 10. Table 9.6 presents the average characteristics of the four national road segments to be rehabilitated and upgraded with the project financing. All road sections are in bad condition with an average traffic of 264 vehicles per day and 25 percent trucks. Road Name Ayacucho - Abancay (Km ) Llama - Cochabamba Cochabamba - Chota Total I 2008 Length Width TrafTtc Province (lan) (m) (AADT) Ayacucho Lambayeque, Cajamarca Caiamarca Table 9.7 presents the proposed road works and the estimated road works costs per road section. The average upgrading cost is around US$968,000 per kilometer to upgrade the roads to an Asphalt Concrete standard. Road Name A\acucho - Abancab (Km ) Liama - Cochabamda' Cochabamba - Chota Puente Reither - Pt Paucartambo - Villarica New Surface Works Works Surface Thickness Cost cost Road Work Type (m) (MUS$) (v S $ h ) Cueradine AC Upgrading AC ,5 20 Upgrading AC ,462 Upgrading AC ,07 1, The evaluation shows that the rehabilitation and upgrading program yields an overall EIRR of 14.9 percent with a global NPV of US$46 million. The EIRR falls to 12.5 percent with 20 percent increase in investment costs, to 11.9 percent with 20 percent decrease in project benefits, and to 19.7 percent with a combination of 20 percent increase in project costs and 20 percent decrease in project benefits. The switching value analysis shows that for the EIRR to fall to 11 percent, investment costs would need to be 1.34 times higher, or benefits 34 percent lower than estimated. Table 9.8 summarizes the results that indicate a satisfactory economic justification for the program. Base Case EJRR Sensitivity Analysis (%) Road NPV ERR A: Costs B:Benefits Name Ovl US$) (YO) +20% -20% A+B Ayacucho - Abancay (Km ) % 8.5% 8.1% 6.2% Llama - Cochabamba 11.4% 9.3% 8.8% 6.9% Cochabamba - Chota 1 1: % % 14.9% 12.4% Total 46 I 14.9% I 12 5% 11.9% 9.7% 13. The road section Ayacucho - Abancay (Km ) has an EIRR slightly less than 1 1 %; therefore, its economic justification was confirmed by reviewing the economic evaluation of the whole road corridor, which has an overall EIRR of 13.5% for the four road sections that make up this corridor. Table 9.9 summarizes the economic evaluation results for the eight 82

91 national road corridors, totaling sixteen road sections, which indicate a satisfactory economic justification for the overall MTC's road rehabilitation and upgrading program for 2010, with an overall EIRR of 19.7% and all corridors yielding an EIRR higher than 1 1 %. Table 9.9 Overall MTC's 2010 Road Rehabilitation Program Economic Evaluation Length Cost Trflic ERR Corridor Section oun) ( MUSS) (AADT) ( %) Chamala - Jaen - San lgnacio Corridor Total %, I I san lgnacio - Puente Integracidn I 48.0 I 55 5 I 192 I 105% I Pericos - an lgnacio % Quinua - San Francisco Corridor Total % km % km % Lima - Canta - La Viuda - Unish Corridor Total % Ayacucho - Abancay Canta- Huallay % Lima - Canta (km and ) % Corridor Total % km % D. Periodic Maintenance Program 14. The periodic maintenance program will finance periodic maintenance works on six road sections, with an average length of 119 km and average daily traffic of 1,869 vehicles per day. Table 9.10 presents the average road section characteristics. Section Puente Stuart - Huancayo Urcos - Sicuani - La Raya Lambayeque - Olmos Panamericana Norte (km a ) Panamericana Norte (km a ) Panamericana Norte (km a ) Total Length Width Surface Roughness Traffic Trucks Climate (Ian) (m)?lpe (IRI) (AADT) (%) Sierra CA % Sierra CA % Costa CA 35 1,587 25% Costa CA 35 2,700 26% Costa I50 72 CA 35 2,500 26% Costa CA 35 2,200 26% 712 1,869 26% 15. The program road sections are in fair to poor condition requiring overlays or mill and replace works. Table presents the proposed road works and the estimated road works costs. Table 9.11: Periodic Maintenance Program Road Works Road cost Cost Section Work (MUS%) o]s$/km) 1 Puente Stuart - Huancayo Urcos - Sicuani - La Raya Mill and Replace SOmm ,652 I Lambayeque - Olmos Panamericana Norte (km al ) Overlay 50 mm Overlay 50 mm Overlay 50 mm Overlav 50 mm , , , Panamericana Norte (km al ) Panamericana Norte (km al ) Overla; 50 mm Total ,720 83

92 16. The evaluation was done following the same methodology adopted on the evaluation of the rehabilitation and upgrading program. The evaluation yields an overall EIRR of 25.3 percent and a total NPV of US$129 million. The EIRR falls to 21.7 percent with 20 percent increase in investment costs, to 21.O percent with 20 percent decrease in project benefits, and to 17.9 percent with a combination of 20 percent increase in project costs and 20 percent decrease in project benefits. The switching value analysis shows that for the EIRR to fall to 11 percent, investment costs would need to be 2.3 times higher, or benefits 56 percent lower than estimated. Table 9.12 summarizes the results that indicate a satisfactory economic justification the program. Table 9.12: Periodic Maintenance Economic Evaluation Base Case ERR Sensitivity Analysis A: Costs B: Benefits NPV ERR *20% -20% A+B Section (MUSS) (%) (%) (YO) (%), Puente Stuart - Huancayo % 9.0% 8.5% 6.6% Urcos - Sicuani -La Raya % 10.6% 10.1% 8.1% Lambayeque - Olmos % 15.6% 15.0% 12.5% Panamericana Norte (km al ) % 27.8% 26.9% 23.1% Panamericana Norte (km al ) % 26.0% 25.2% 21.6% Panamericana Norte (km al ) I 33 I 26.9% I 23.2% 22.4% 19.2% Total I 25.3% I 21.7% 21.0% 17.9% E. Performance-based Maintenance Program 17. The performance based maintenance program will finance routine maintenance, capital (periodic maintenance and upgrading), emergency, data gathering and overhead expenditures on four networks, with an average length of around 346 km, over a 5 year period to be contracted in The actual road works to be executed in each of the networks will be defined by the contractors that are required perform a detailed network road condition and traffic survey and to provide a given level of service stipulated on the contract over a 5 year period. For a representative economic appraisal of the program, the evaluation was done with estimates of the capital road works needed and current traffic prepared by MTC for a sample of ten networks being contracted in 2009 under the same type of contract. 18. Each network was subdivided into homogenous road sections in terms of condition and traffic and the estimated capital road works needed over the next five years were defined. Table 9.13 presents the basic characteristics of the ten sample contracts. Juliaca - Dv Huancane Emp Pe IN - Dv Otuzco Emp I S - Comas - Satipo Dv Paita - Sullana Ricardo Palma - La Oroya Lambayeque - Mocce Dv Bayovar - Bappo Guadalupe - Ica Dv. Las Vegas - Tarma,,, Total , I I I I ,480 6,500 3,245 2, I.o ,539 3,105 I I 1,544 84

93 19. The capital road works were classified in four categories: (i) periodic maintenance of paved roads, typically a surface treatment with an average cost of US$31,200 per km; (ii) road access for unpaved roads, typically periodic maintenance and heavy repair to provide basic allweather access prior to upgrading works, with an average cost of US$11,500 per km; (iii) rehabilitation of unpaved roads, typically reconstruction to a gravel standard, with an average cost of US$63,000 per km; and (iv) upgrading of unpaved roads, typically upgrading to a slurry seal standard, with an average cost of US$ 113,600 per km. 20. The evaluation shows that the capital road works on the ten contracts yield an overall EIRR of 28.2 percent with a global NPV of US$102 million. The EIRR falls to 22.5 percent with 20 percent increase in investment costs, to 21.3 percent with 20 percent decrease in project benefits, and to 16.2 percent with a combination of 20 percent increase in project costs and 20 percent decrease in project benefits. The switching value analysis shows that for the EIRR to fall to 11 percent, investment costs would need to be 1.9 times higher, or benefits 46 percent lower than estimated. Table 9.14 summarizes the results that indicate a satisfactory economic justification the program. Table 9.14: Sample Performance-Based Maintenance Progrim Economic Evaluation Base Case ERR Sensitivity Analysis. AGm B:Benefits Samplc NPV ERR +20% -20% A+B contract (MUS$) (%) (%) (YO) 1%) Emp Pe 3s - La Quinua I % 349% 333% 269% Juliaca - Dv Hu&cane., % 16.7%. 15.6% Emp Pe 1 N - Dv Otuzco % 26.9% 25.6% Emp 1 S - Comas - Satipo.,, % 18.1% 17.0% Dv. Paita - Sullana % 15.6% 15.6% Ricardo Palma - La Oroya., % 24.2% 24.2% Lambayeque Mocce., % 45.0% 43.1% Dv. Bayovar - Bappo,., % 38.4% 36.9% Guadalupe - Ica,., % 15.6% 14.6% Dv. Las Vegas - Tarma.,. Total i ++E- 11.1% 20.1% 12.4% 15.6% 24.2% 35.6% 30.3% 10.4% 18.6% 17.5% 13.0% 22.5% 21.3% 16.2% 2 1. Considering that the performance-based maintenance program financed by the project will total four contracts with an estimated total length of 1,384 km and total cost of US$137.4 million, the extrapolated NPV for the program is US$35 million with an EIRR of 28.2 percent. F. Road Safety Improvement Works 22. The irap methodology aims at prioritizing corrective investments with the greatest costbenefit. For the top five countermeasures, with the greatest potential for reducing fatalities and serious injuries (KSIs) in Peru, a benefit-cost ratio (BCR) of 10 to 28 has been estimated: 85

94 23. A number of safety improvement alternative program have been evaluated. Each alternative program is composed of improvements all of which have a specified minimum benefit-cost ratio (1, 3 or 5). The program recommended by irap includes projects with a minimum benefit-cost ratio of 5 for medium to high volume roads and projects with a minimum benefit-cost of 1 for low-traffic roads. Such a program has an estimated 20-year cost of S/89,000,000 and would, over a 20-year period, reduce 3,407 fatalities and serious injuries, corresponding to a benefit of S/1,292,000,000 and a benefit-cost ratio of 14.4 for the program as a whole. The program would thus provide 14.4 dollars for each dollar spent on safety improvement, and would reduce fatalities and injuries on the selected road network by 9 percent. The proposed project builds on these recommendations for medium and high-volume roads (national roads) while recommendations on low-volume roads (secondary and tertiary) will be explored with sub-national governments as part of other Bank-financed operations (Decentralized Rural Transport Project and Regional Transport Decentralization Project). Table: Benefit-Cost analvsis for Several Road Safetv Alternative Programs Medium and High volume roads Low-volume roads Estimated cost to build and maintain (20 years) 223,000,000 91,000,000 66,000,000 23,000,000 6,000,000 3,000,000 (SO KSls saved (20 years) 4,028 3,463 3, Value of safety benefit 1,527,000,000 1,3 13,000,000 1,2 18,000,000 74,000,000 44,000,000 33,000,000 (20 years) (S/) Cost per KSI saved (S/) 55,479 26,134 20, , ,653 34,7 16 Overall program I benefit-costratio (BCR) I 86

95 Annex 11: Safeguard Policy Issues PERU: Safe and Sustainable Transport Project 1. As part of the environmental due diligence process of the Peru Safe and Sustainable Transport Project - PSSTP), a series of activities, studies, and instruments were developed during project preparation, in order to assure the project s environmental and social sustainability and to comply with Banks Safeguards Policies (World Bank and IaDB) and the national environmental legislation. 2. These requirements were agreed with the Peru Government and the institutions responsible for project implementation (Ministry of Transport and Communications - MTC; Provias Nacional - PROVIAS NACIONAL). The environmental and social studies performed were: (i) Environmental Assessments, including an Environmental Management Plan, for each of the four initial road rehabilitation and upgrading works scheduled to be financed under component 1; (ii) Resettlement Action Plans for each of the same four road works mentioned above; (iii) Indigenous Peoples Plans for two of the initial road rehabilitation and upgrading works scheduled to be financed under component 1 ; (iv) Environmental and Social Management Framework (ESMF); (v) Involuntary Resettlement Framework (IRF); (vi) Indigenous Peoples Planning Framework (IPPF); and (vii) Environmental Assessment Report (EAR). All of these documents are available in Provias Nacional s web Page ( and in the Bank s Infoshop, in compliance with the Bank s Disclosure Policy. 3. The project has been classified as a Category B according to the Environmental Assessment Policy [OP/BP In general, the road works that would be financed by the proposed project do not have significant environmental and social impacts that could put in risk the natural and/or social environment. Nevertheless the works present moderate environmental and social risks. These works will require adequate environmental and social management to ensure their environmental and socially sustainability, as well as their compliance with the national legislation and the Bank s Safeguard Policies. 1. BACKGROUND 4. The responsible agency for environmental and social management in the MTC, is the Direccidn General de Asuntos Socio-Ambientales - DGASA which is the sector environmental authority. This Direction was created in 2002 through Supreme Decree No , The creation and the institutional strengthening of the DGASA have been supported by the Bank and the IaDB. 5. The DGASA has developed a series of procedures, mechanisms and instruments to ensure the environmental and social sustainability of MTC s transport investments, and to comply with the national environmental and social legal dispositions, as well as to the applicable safeguards policies of multilateral financiers. 87

96 6. The following presents an environmental analysis of the following aspects: (i) Safeguards Policies triggered by the Project; (ii) Analysis of the MTC/DGASA instruments of environmental and social management; (iii) Summary of the instrument developed during project preparation; and (iv) Results of the project s environmental assessment and of a sample of subprojects selected for this analysis. 2. ENVIRONMENTAL AND SOCIAL POLICIES TRIGGERED IN THE PROJECT 7. The following Bank s safeguards policies are triggered by the project: Environmental Assessment; Natural Habitat; Physical Cultural Resources; Involuntary Resettlement; and Indigenous Peoples. a. Environmental Assessment (OPBP-4.01) 8. Although no significant adverse social and environmental impacts are expected, this policy is triggered because some limited impacts will occur during project execution that would have to be prevented, mitigated and/or compensated. It is important to mention that the types of proposed works (improvement, rehabilitation and maintenance of roads) involve the existing right-of-way and that no new roads construction is envisaged. As mentioned before, the Project was classified as a Category B because the road works that would be financed by the project do not have significant environmental and social impacts that could cause major risks to the natural and/or social environment. Nevertheless the subprojects require the implementation of environmental measures to prevent, mitigate and/or compensate the potential adverse impacts. 9. In line with Bank guidelines, Environmental Assessments have been prepared for the four initial road rehabilitation and upgrading works to be financed under component 1. These Environmental Assessments include for each road an Environmental Management Plan that describes the measures to be taken during the execution of the corresponding road works. 10. For any additional road works that may be financed by the proposed project, MTC/DGASA has developed an updated Environmental and Social Management Framework (Marco de Gestidn Ambiental y Social - MGAS); and an Environmental Assessment Report (Informe de Gestidn Ambiental y Social - IGAS). b. Natural Habitats (OPBP-4.04) 11. None of the identified works crosses protected areas. Nevertheless, this Policy is triggered in a preventive way, in case some new road sections that would be located in sensitive areas enter the proposed program. If this would occur, the environmental studies and in particularly the Environmental Management Plans would include measures to prevent and/or to mitigate the potential negative impacts in this sensitive or critical areas. 12. It is important to mention that the Environmental Impact Assessment not only assesses potential negative impacts but also potential positive impacts that could be fostered by the subproject through environmental planning or compensation activities. 88

97 c. Physical Cultural Resources (OP/BP-4.11) 13. This Policy is triggered because Peru has an extensive cultural, historical and archaeological heritage dispersed in the whole country, and therefore potentially also in areas where the proposed project will intervene. This is in particular the case for one of the road rehabilitation and upgrading works to be financed under component 1 (Ayacucho - Abancay section 50 to 98.5 Km; Toccto Archeological Site). Although no significant adverse impact is expected on these archeological sites, works have to follow the review and authorization process of the National Institute of Culture (INC). 14. The EIA developed for this particular road investment identifies this area and proposes some measures in the corresponding Environmental Management Plan, to prevent potential negative impacts. Additionally Chance Finds Procedures have been included in the ESMF. 15. Peru counts on a sound legal and institutional framework for cultural and physical heritage. The INC has developed an instrument for the early identification of potential affectation (Certificate of Archaeological Nonexistence - CertiJicado de Znexistencia de Restos Arqueoldgicos - CIRA), which have to be obtained for every infrastructure project, as part of the ex-ante assessment process. Considering the importance of this topic, Provias Nacional has recruited a technical specialist whose responsibility is to ensure, in coordination with the DGASA, the fulfillment of this legal request before the Environmental Certification is issued. d. Involuntary Resettlement Policy (OP/BP 4.12) 16. This policy is triggered because the proposed road works will affect houses, lands or other properties located in project areas. However, these impacts are expected to be minor considering the nature of the works, and it should be mitigated with adequate corrective actions. As part of the preparation of the project and in line with Bank guidelines, four Resettlement Action Plans have been prepared, one for each of the four identified road rehabilitation and upgrading works to be financed under component 1. In addition, in case additional road works would be financed under the proposed project, the borrower has prepared an Involuntary Resettlement Framework (IRF, or Marco de Compensacidn y Reasentamiento Znvoluntario - MCRI), taking into account existing DGASA guidelines and practices, as well as former IRFs that had been prepared for previous Bank supported projects. 17. It is worth noticing that DGASA has a Resolucidn Directoral (R.D. No MTC/l6), which includes guidelines for the elaboration and application of Involuntary Resettlement Compensation Plans (Plan de Compensacidn y Reasentamiento Znvoluntario - PACRI) for transport projects. These guidelines aim at ensuring that people affected by specific projects receive fair and adequate compensation, returning in equal or better forms to the original conditions before the execution of works. It is important to note that these PACRIs are based on the Bank s Involuntary Resettlement Policy. The PACRIs provide detailed information on the socio economic characteristics of the affected population, the process of consultation that has been followed, as well as the rosters of affected assets, the methodology for valuation of assets, and the legal processes to follow to compensate affected people. 89

98 18. The MTC has developed a large experience in dealing with resettlement related issues, and is in particular strongly familiarized with the Bank policy. DGASA, through its Social Direction, is the entity responsible to ensure that the PACRIs are included in the EIA (Environmental Impact Assessment). The entity responsible for the implementation of the PACRIs is Provias Nacional, which counts, just for this purpose, on a team of 72 technicians (32 based in Lima and the difference based in the rest of the country). While this team of professionals has accumulated significant experience in this area, the actual implementation of procedures can still be improved. Through its fourth component, the proposed project intends to support institutional strengthening activities, as well as training and dissemination of best practices in this regard. 19. The IRF includes a description of the legal and institutional framework of the country regarding resettlement and compensation mechanisms, as well as consultation procedures and value assessment methodologies. It also explains the content of the PACRIs and the steps the MTC takes to address resettlement-related issues during project preparation and implementation. 20. The PACRIs are prepared through a phased process that includes the following: (a) Preliminary phase (desk work): gathering of information (geographical charts, aerial pictures, registries, topographic maps). Identification of the information to be verified in the field. Field work planning. (b) Field phase. Identification of the affected assets in situ (houses, fences, cultivated gardens, plots). Gathering of complementary information. (c) Final phase (desk work). Processing of the collected information. Preparation of the technical files on compensation and of Resettlement Action Plans. 21. The PACRIs are then implemented as follows: Phases Clearing of Areas Social and Economic Development Monitoring and Evaluation Projects 1. Regularization of land tenure 2. Acquisition of affected areas 3. Social support project 4. Activities during the implementation of civil works Programs 1. Registry 2. Titling of property 3. Regularization of the juridical condition of actual owner 1. Direct negotiation 2. Asset valuation and compensation payments 3. Houses and fences reposition 4. Inscription and registry I. Technical assistance for agriculture and handicraft confection I. Verification and rectification of individual files 2. Monitoring and evaluation 3. Contingency program e. Indigenous People (OP/BP 4.10) 22. Through a screening carried out by the team social specialist and later on through a field visit made by a local consultant to a sample of roads, the presence of Indigenous Peoples has been confirmed in several of the segments that will be subject of road rehabilitation and upgrading. Out of the four initial road segments to be rehabilitated under the proposed project, 90

99 two include areas where Indigenous Peoples live. These are Quechua, and Ashaninka-Yanesha peoples. 23. It is worth mentioning that during the latest indigenous protest in June 2009, one of the main claims in the regions of Abancay and Apurimac (where one road corridor is located) was the completion of roads paving. Therefore, no opposition is expected to the rehabilitation of roads where the majority of the Indigenous Peoples is located. As mentioned before these Indigenous farmer communities with links to the market economy favor the rehabilitation of roads for these are positively perceived in terms of improving their economic outputs (better prices for their products) and their general well being (easier access to health and education services). 24. As required by the Bank, the borrower has prepared an Indigenous Peoples Plan for each of the two road works identified to be financed under component 1 of the proposed project. Besides these IPPs, the PACRIs also referred to the assets being affected that belong to these Indigenous farmer communities. For the case of the Ayacucho - Abancay (km 50-98) road, three communities have one piece of natural grassland being affected, while a fourth community has 41 assets (grasslands and cultivated and non cultivated plots) and 10 houses. The Pte Reither- Villa Rica corridor is the second road that affects one Indigenous community, and for which an IPP has been prepared as well. 25. In addition, an Indigenous Peoples Planning Framework (IPPF) has been prepared and would apply if additional road works from MTC s rehabilitation and upgrading program are. substituted or added to the initial list of the four identified works. The framework includes a social assessment of the sample of routes visited during project preparation,. including demographic information and spatial occupation, with a description of the potential adverse impacts and mitigating measures, as well as potential positive ones. This information is based both on the actual studies carried out during the pre-investment phase as part of the EIA for each route segment, as well as on the national census. The assessment also provides detailed recommendations and a specific protocol to deal with land acquisition issues where land is the property of indigenous communities. 26. The IPPF also discusses to a great length the national legal framework regarding Indigenous Peoples rights in the country, including ILO Convention 169, the new national law of citizen participation, and the specific regulations and guidelines prepared by the DGASA for MTC and contractors for an adequate relationship with Indigenous Peoples. 27. The IPPF provides a detailed set of recommendations and guidelines for the three phases of the project cycle: pre-investment, implementation and operation. These recommendations and guidelines are based on a Guideline prepared by DGASA (Marco de las Propuestas de Desarrollo de Pueblos Indigenas). The framework also addresses the process of consultation and provides a set of specific recommendations to improve the inter-cultural dialogue with Indigenous Peoples. 28. Finally the framework also deals with the issue of compensation and acknowledges the fact that Provias Nacional intends to implement a Local Development Window mechanism 91

100 (Ventana de Desarrollo Local) to facilitate the emergence of productive activities in the areas where transport conditions have been improved. 3. ENVIRONMENTAL MANAGEMENT INSTRUMENTS 29. DGASA has developed social and environmental management procedures, mechanisms and instruments applicable to MTC s transport investments, in compliance with the environmental and social legal dispositions of the Ministry of Environment (Ministerio del Ambiente - MINAM), and, for externally-financed activities, with the social and environmental guidelines of multilateral financiers. Main DGASA s responsibilities during the project cycle are: (i) Screening and Scoping process (Environmental Categorization); (ii) Environmental Evaluation; and (iii) Environmental and Social Supervision. a. Screening and Scoping Process: Categorization 30. DGASA applies a series of key criteria to achieve an adequate environmental and social classification. These criteria are applied in the early phases of review and evaluation of the projects and are verified in the respective field visits. Regarding the environmental aspects, the following criteria are used: (i) intervention level; and (ii) sensibility of the territory. Regarding the level of intervention, the request of environmental due diligence is the following: (i) for construction or new work: Detailed Environmental Impact Assessment (EIA-d); (ii) for improvement: Semi- Detailed Environmental Impact Assessment (EIA-sd); (iii) for rehabilitation: Environmental Impact Declaration (DIA); and (iv) for Bridges (rehabilitation or construction): Environmental Impact Declaration (DIA). The sensibility of the site where the project is located can modify the type of studies before mentioned, for example a DIA can be raised from an EIA-sd; or an EIA-sd to an EIA-d. The criteria that are taken into account include verifying if the project is located in a protected natural area; in a buffer area; or in a fragile or sensitive area, according to available secondary information (Maps -SIG) and to the technical inspection of the zone. Relating to the social aspects the following criteria for the categorization are used: (i) existence of affectations; (ii) presence of indigenous people territories; and (iii) presence of campesinos or nativos communities. b. Environmental Assessment 31. Based on the Environmental Category, DGASA drafts Terms of Reference (TdR) to prepare the studies required by the national environmental legislation as well as any other complementary studies required to comply with DGASA s guidelines (Resoluciones Directorales) and with Bank requirements. During the preparation of the studies, DGASA carries out the activities review, and also hires consultants whenever needed. Finally, DGASA makes sure that the recommendations identified in the studies are included in the respective environmental clauses of the contracts for the execution of works. 92

101 32. During this evaluation phase, DGASA coordinates very closely with Provias Nacional, specifically with the environmental specialist in charge, in order to ensure that the evaluation process is framed in accordance with the national environmental legislation. c. Environmental Supervision 33. DGASA has developed a specific instrument named "Format to prepare the Environmental Supervision Report", which needs to be followed by works' supervisors. The purpose of this instrument is to identify adequate environmental measures that should be taken into account during the construction, rehabilitation and/or improvement of roads. This instrument has been designed so that it is easy to use during supervision activities and that it is compatible with the monthly reports that should be elaborated by the environmental supervision. If needed, supervisors can expand actions or recommendations. This instrument includes a review of the different components of works (camps, plants, quarries, among others) where environmental impacts can potentially be generated. 4. ENVIRONMENTAL ASSESSMENTS 0 TyDes of works 34. The Project will finance road upgrading and rehabilitation works; and road maintenance works (periodic maintenance works and performance-based contracts). 35. In relation with the rehabilitation and upgrading works, the Project only includes works on existing national roads. Larger scale activities, such as construction or major improvement works, are not eligible because they belong to a different investment program of Provias Nacional. The concept and the type of works used in these kinds of interventions are the following: - Upgrading: Improving road specifications. Most of the works are done on the existing platform or right of way. Additional land acquisition may be needed. Type of works: Widening shoulders; adding extra lanes in steep inclines; improving curves; and strengthening bridges. - Rehabilitation: Bringing existing deteriorated roads to previous conditions. All of the works are done on the existing platform. No additional land acquisition is.needed. Type of works: improving drainage, slopes, embankments and/or other structures; strengthening pavements; complete resurfacing; and recuperating civil works 36. In relation with maintenance works, at least 10 new maintenance contracts are expected to be launched in 2010 and would be eligible under the proposed component of the Project. The program includes 6 periodic maintenance contracts and 4 performance-based contracts. The roads can either be paved or unpaved. The concept and the type of works used in this kind of intervention are the following: 93

102 - Maintenance: Routine or periodic works to maintain the road in working condition. All of the work is done on the existing platform. Type of works: Routine works, patching potholes, clearing drains; and Periodic works such as resurfacing, line marking, bridge maintenance. 0 Applicable Environmental Criteria 37. In order to select the road works that will be financed by the Project, the following socioenvironmental criteria have been established: - The project will finance subprojects among Category I1 and I (moderate and low environmental impacts); - The project will finance roads improvement once PVN submits a socio-environmental study of alternatives and has obtained the no objection from the DGASA and the Bank to the selected alternative; - The project will finance roads expansion subprojects if the area of construction is fully released, and - The project will finance subprojects located in buffer zones (Natural Habitats), only if it is shown that the execution of the works will not bring significant direct or indirect negative impacts to the environment. 0 General Environmental Analysis 38. The proposed works are not expected to have any significant social and environmental impacts that could put in risk the social and/or natural environment. However, some works present moderate environmental risks and therefore require an adequate social and environmental management system in place to ensure the sustainability of the works and to comply with both the national legislation and Bank guidelines. Next are summarized (i) the positive environmental impacts brought by the proposed investments; (ii) a list of the activities that are susceptible to generate negative environmental impacts at different stages of the project cycle; (iii) an analysis of the cumulative impact; and (iv) a description of the Environmental Management Plan. A) Environmental positive impacts: 39. Some direct and indirect positive impacts are expected from the proposed works. They include: (a) Recovery of Environmental Passives: The rehabilitation and improvement of roads can include actions and measures to protect and to improve the environmental conditions of the influence area, among them: slopes management, recovery of erosive processes, and reforestation. The contractors and the supervisors are responsible for the execution and the monitoring of the environmental management plans of the subprojects, which indicate the processing that should receive each environmental problem in the area of influence of the project, including the recovery of the environmental passive when justified. (b) Road Safety: Improving the conditions and physical characteristics of the roads, as well as the associated complementary works (drainage, slopes stabilization, sign posting, 94

103 among others). Accident rates of the improved sections are expected to be reduced. The implementation of the irap recommendations should have a measurable impact in this area. (c) Greater access to the regional and international markets: The improvement of the transport conditions on the selected secondary and primary road network should bring a greater and better access to the regional and international markets, which in association with the tertiary road network, will bring large benefits to small Peruvian towns. (d) Greater opportunities of employment: Through the realization of the proposed road works, particularly road maintenance which is the most labor-intensive road investment. (e) General improvement of the economic conditions in the influence areas: The rehabilitation and improvement of the road proposed will enlarge the value of the lands and properties, especially of those that are in the direct influence area. In the agriculture sector, productivity gain and diversification outside of subsistence agriculture are also expected. B) Potential negative environmental impacts: Activities that Could Generate Negative Environmental and Social Impacts: 40. Eventual negative environmental and/or social impacts depend on the type of works. Project activities that could potentially generate adverse consequences are: (i) improvement of affirmed roads; and (ii) rehabilitation of paved roads Improvement of affirmed roads: It is understood by "improvement" the following types of works: paving of affirmed roads, construction of drainage, enlargement of shoulders, new rails in zones of slope, improvement of curves, reinforcement of bridges, and recovery of environmental passive. Most of works are carried out in the existing platform or right of way. Some limited acquisition of lands may be needed in specific zones. Activities susceptible to generate environmental and/or social impacts include: (a) During the phase prior to works execution, Selection of camp location areas, equipment and asphalt plants; Selection of quarries for the exploitation of material; and Transportation of fuels and lubricants. (b) During works execution, Transportation of material and flammable; Management of oils, greases and fuel in equipment and plants of asphalt areas; Operation of asphalt plants that produce air pollution; Construction activities that can create dangerous conditions of traffic when interfering with the normal traffic flow; Deposit of waste materials toward areas of final disposal; Solid waste disposal in the camps and places of work; Movement of lands in zones with high potential of archaeological finds; and Exploitation of quarries. (c) During works closing, Waste material deposit places management; Reforestation of the areas intervened; and Recuperation of areas utilized for camp. (d) During the operation phase, Control and monitoring of the number of accidents in the way, especially in urban areas where the rate of accident can increase. 95

104 42. Rehabilitation of paved roads: It is understood by rehabilitation bringing an existing deteriorated road to its original conditions. All the works are carried out in the existing structure or in the right of way. No major land acquisitions are generally needed. Specific works include: Rehabilitation of drainage, slopes, retaining walls, and other structures; Strengthening of the pavement; Resurfacing; and Recovery of civil works. Activities susceptible to generate environmental and/or social impacts include: (a) During the phase prior to works execution, Selection of camp location areas, equipment and asphalt plants; Selection of quarries for the exploitation of material; and Transportation of fuels and lubricants. (b) During works execution, Transportation of material and flammable; Management of oils, greases and fuel in equipment and plants of asphalt areas; Operation of the asphalt plants that produce air pollution; Construction activities that can create dangerous conditions of traffic when interfering with the normal traffic flow; Deposit of waste materials toward areas of final disposal; Solid waste disposal in the camps and places of work; Movement of lands in zones with high potential of archaeological finds; and Exploitation of quarries. (c) During works closing, Waste material deposit places management; and Recuperation of areas utilized for camp. (d) During the operation phase, Control and monitoring of road safety conditions, particularly in urban areas where higher speed may increase the number of accidents. Environmental Negative Impacts: 43. Potential negative environmental and social impacts include: (a) Air Pollution; Some works may increase the emission of particles in the atmosphere that can affect the natural environment and the workers. These activities are: (i) operation of machinery and equipment by the emanation of gases due to the combustion; (ii) material banks exploitation; (iii) deposit of material; and (iv) others. (b) Traffic circulation: The works may affect the normal traffic flow of vehicles, causing a discomfort to the users. Also, the works may affect traffic safety. Whenever needed, a Traffic Plan will have to be prepared to ensure an adequate management of this issue. (c) Solid Waste: Some contaminants may be produced such as residues of material and residual products of the machinery (filters, spare used, pneumatics, deposits of oil, trash, among others). (d) Noises and/or vibrations: The use of machinery and equipment, material banks exploitation as well as traffic increase from road improvement, can generate noise levels that affect the workers and the population located in the influence area. (e) Visual Contamination: The final disposal of waste material in the right of way may alter the landscape or existing scenic beauties. (f) Sensitive and protected areas: The works execution in zones declared under some state of environmental protection or in zones of highly sensibility require an integral management of the area. Zones of the right of way that present certain characteristics that promote the development of natural habitats used as biological corridors should be avoided. 96

105 (g) Stabilization of slopes and eroded zones: Unstable zones, if affected, may aggravate the erosion processes of these areas which could ultimately affect the natural environment and the traffic. (h) Physical and cultural patrimony: The inadequate movement of lands in zones with potential archaeological finds could present irreversible impacts, reason by which should develop an adequate strategy during the planning phase and construction to prevent this type of impacts. (i) Occupational health and industrial security: The works may generate risks for the workers. Specific dispositions should be included during work execution to mitigate these risks. (j) Presence of natural resources in the right of way: The inadequate use or application of pesticides in the right of way for the maintenance of these zones could cause serious damages to the animals and surrounding vegetation. The use of such pesticides is not permitted in the scope of this project. C) Environmental Cumulative Impacts 44. The proposed project would only finance works with limited social and environmental impact and their cumulative impact is expected to be non-significant. However, it will be important to monitor the impact generated by the proposed rehabilitation and maintenance works. A list of the indicators used for this purpose is provided in the project s EAR (Environmental Assessment Report, or IGAS in Spanish). In addition a Strategic Environmental Assessment (SEA) is scheduled to be performed in the first year of project implementation in order to evaluate globally the road rehabilitation and upgrading works financed under component 1, assess eventual cumulative impacts and formulate recommendations on how to improve environmental management practices in MTC. Draft Terms of Reference for this SEA have been included as an annex to the project s Environmental Assessment Report. D) Environmental Management Plan 45. The EAR (or IGAS in Spanish), lists the general social and environmental measures and in the EIAs includes the specific measures in the respective Environmental Management Plan (EMP), to prevent, mitigate and/or compensate the potential environmental and/or social negative impacts that could occur in the different phases of the project cycle: (a)prevention and/or Mitigation: protection of the biotic, physical environment and of human interest, including activities of Environmental Education and Environmental Signposting; (b)environmental Monitoring and Follow-Up: The purpose is to verify that the corrective and preventive measures are complied with; (c)management of Solid Waste: The purpose is to achieve an adequate disposal of solid residues generated by the project, in order to avoid pollution, deterioration of the landscape, risk of illnesses and other; (d)management of Camps: The purpose is to prevent or to reduce the environmental impacts that can be produced during the operation of these installations; and 97

106 (e)contingencies: The purpose is to establish the actions that should be set against the technical, accidental or human character events occurrence. 5. OUTCOMES OF THE ENVIRONMENTAL AND SOCIAL STUDIES AND PLANS OF THE INITIAL SET OF SUBPROJECTS 46. As part of the environmental and social due diligence process, a preliminary environmental assessment was carried out on the four eligible road rehabilitation and upgrading works included in Provias Nacional s multiannual planning. In addition, all the Environmental and Social Studies and Plans have been reviewed in order to ensure that all of these documentation is acceptable to the Bank. The preliminary assessment applied the environmental instruments developed by the DGASA/MTC and Provias Nacional. A field visit was also organized for three of the four proposed road rehabilitation and upgrading works. 47. The environmental assessment of the proposed identified subprojects to be financed concluded that all of them a moderate environmental risk (Category I1 or B), according to the classification established by the DGASA and in line with Bank guidelines. Table No. 1 Subprojects Reviewed During Project Preparation Road corridors to be rehabilitated Road Ayacucho - Abancay 1) Section km 50-98,s I Road Chongoyape - Cochabamba - Cajamarca 2) Section Llama - Cochabamba 3) Section Cochabamba - Chota Environmental Length Environmental and Social (km) Studies Category* 1 1 required I1 48,8 EIA-sd I EIA-sd I EIA-sd 4) Section Pte. Reither - Villarica I1 39,4 EIA-sd I I I TOTAL * According with the national legislation and is compatible with the WB Categorization EIA-sd: Semi-detailed Environmental Impact Assessment. 48. The following presents a summary of the main social and environmental issues identified as a result of the EIAs and EMPs of each subproject. 0 Road Ayacucho - Abancay (section km 50-98,s) 49. The section is part of the corridor that connects the cities of Abancay and Cusco. The total length of the section i s 48.8 km and the road is generally in poor or regular conditions. The proposed works include the improvement of the road but not the enlargement or change in alignment. 50. The road is characterized by its undulating topography varying from colluvial and volcanic terrain, with some intrusive rocks. The road unfolds gently with slopes between 1 and 3 98

107 percent. Drainage problems were identified in some sections, as well as the presence of wetlands ( bofedales ) in the sector. 5 1, From the environmental standpoint, the section across an area of (paramo and (puna, which are considered sensitive areas from the environmental point of view, not only for its richness of flora and fauna, but also for the scenic beauty of these places. In the past, explosive materials have been used during road construction in these areas (environmental liabilities). It was requested that such construction techniques are not used in these areas in order not to cause further and irreversible impacts that may jeopardize the natural environment. The recovery of past environmental liabilities was also included in the respective Environmental Management Plans. Regarding the socio-cultural and archaeological heritage, an archeological site called Toccto was identified near this road. The site will not be affected by the works execution,, however, the guidelines of both INC and the Bank will be followed and chance finds procedures will be adopted during works execution. 52. In relation with resettlement issues, there are 44 affected assets, out of which 10 are houses. Three Indigenous farmer communities have one affected asset each (natural grasslands), while a fourth one has 41 affected assets. 53. Soles). The budget to implement the EMP was estimated to about US$1. million (3,465, Once applied the Preliminary Environmental Assessment Form ESMF, it was concluded that the project has an Environmental Category I levels of socio-environmental risk. Therefore, an EIA-sd has been prepared. Map No. 1 (FEAP) defined in I, that is, moderate Source: Gerencia de Estudios y Proyectos, Provias Nacional, julio

108 0 Road Llama - Cochabamba 55. The project is part of the corridor that connects the cities of Chiclayo and Cajamarca. The section has a total length of 59.2 km and the road is generally in poor or regular conditions. The proposed works include the improvement of the road but not the enlargement or change in alignment. The section presents a hilly and mountainous topography. The potential negative environmental impacts are related to: (i) possible decline in air quality by the generation of dusts, gases and noise; (ii) potential generation of slopes' instability; (iii) possible soil pollution, water pollution and disturbance to natural drainage; (iv) possible disturbance to terrestrial and aquatic fauna; (v) possible direct damage to plants and reduced vegetation cover; (vi) possible alteration of terrestrial and aquatic habitats; (vii) possible altered landscape; (viii) potential affectation to the health conditions of local residents and workers and potential accidents for local workers; (ix) temporary disruption of traffic and improved transport conditions (when in operation). The main positive impacts are employment generation, local economic revitalization and improved quality of life for local people. 56. Regarding resettlement issues, there are 443 affected assets, out of which 30 are houses. 57. The budget to implement the EMP was estimated io about US$S.lmillion (16,464,063 Soles). 58. Once applied the Preliminary Environmental Assessment Form (FEAP) defined in ESMF, it was concluded that the project has an Environmental Category "II", that is, moderate levels of socio-environmental risk. Therefore, an EIA-sd has been prepared. 100

109 0 Road Cochabamba - Chota 59. The project is also part of the corridor that connects the cities of Chiclayo and Cajamarca. The section has a total length of 35.9 km and the road is generally in poor or regular condition. The proposed works include the improvement of the road but not the enlargement or change in alignment, 60. The potential environmental negative impacts in descending order are: (i) potential accidents; (ii) possible affections to the health of workers; (iii) generation of noise and vibration; (iv) possible disturbance to terrestrial wildlife; (v) generation of dust and gases, (vi) possible pollution of surface water pollution from soil compaction; (vii) possible disturbance to the landscape and relief; (viii) possible interruption of vehicular traffic and direct damage to plants and reduced vegetation cover. Other minor impacts include: alteration of terrestrial and aquatic habitats, alteration to the functioning of schools, groundwater contamination, among others. The main positive impacts are employment generation, local economic revitalization and improved quality of life for local people. 61. Regarding resettlement issues, there are 433 affected assets, out of which 8 1 are houses, plus 23 small rural shops. 62. The budget to implement the EMP was estimated to about US$3.lmillion (10,010,947 Soles). 63. Once applied the Preliminary Environmental Assessment Form (FEAP) defined in ESMF, it was concluded that the project has an Environmental Category "II", that is, moderate levels of socio-environmental risk. Therefore, an EIA-sd has been prepared. Map No. 3 Section Cochabarnba - Chota Source: EIA Cochabamba - Chota, DGASA

110 0 Road Puente Reither - Pte Paucartambo - Villarica 64. This subproject is part of the road Chanchamayo-Villa Rica, which has a length of km and is located in the Departments of Junin, Province of Chanchamayo, and the Department of Pasco, province of Oxapampa. The proposed works include the improvement of the road but not the enlargement or change in alignment. 65. This project is located in a high forest area, which from an environmental perspective is generally an area of high biodiversity but also highly vulnerability; so infrastructure works in this area generally require a particular care. Additionally, the road passes through several towns (San Luis de Shuaro, Capelo Puente, Puente Paucartambo, the native community of fiagazu and finally the city of Villa Rica). 66. Regarding resettlement issues, there are 182 affected assets, out of which 23 are houses, plus 55 small rural shops. One Indigenous community is also affected. 67. The budget to implement the EMP was estimated to about US$0.6 million (1,971,502 Soles). 68. Once applied the Preliminary Environmental Assessment Form (FEAP) defined in ESMF, it was concluded that the project has an Environmental Category "II", that is, moderate levels of socio-environmental risk. Therefore, an EIA-sd has been prepared. Map No. 4 Section Cochabamba - Chota 102

111 6. SAFEGUARDS FRAMEWORKS DEVELOPED DURING PROJECT PREPARATION 69. In compliance with Bank s Safeguard Policies and the national environmental legislation, a series of environmental and social studies and instruments have been developed. These are: Environmental and Social Management Framework (Marco de Gestidn Ambiental y Social - MGAS); Environmental Assessment Report (Informe de Gestidn Ambiental y Social - IGAS); Involuntary Resettlement Framework (Marco de Compensacidn y Reasentamiento Involuntario - MCRI); and Indigenous Peoples Planning Framework (Marco de Pueblos Indigenas - MPI). 70. During project preparation, a consultation process was performed with key stakeholders from Government agencies but also from civil society. First, with the TORS and the methodology used for each of the frameworks (June 2009); and second, with the draft documents (August 2009). The evidence of this disclosure is present in Provias Nacional s web page ( including the documents prepared. Also all this documentation has been disclosed in the Bank s Infoshop. 7. INSTITUTIONAL ASSESSMENT OF THE ENVIRONMENTAL MANAGEMENT 71. As part of the environmental due diligence process, an analysis of the institutional management capacity was carried out and an Environmental and Social Strengthening Management Plan (ESSMP) was developed for the DGASA and PVN, in order to continue improving the environmental management in the sector. It is important to mention that, as part of the project s environmental capacity building activities, a strengthening of MTC s information systems will be performed, so that social and environmental dimensions are better streamlined in the road planning process. To implement the mentioned Plan, an amount of about US$ 270, has been budgeted. 72. For the DGASA, activities needed to systematize and improve the management of social and environmental issues. This includes in particular: (i) Strategic Environmental Assessment (SEA) for the Rehabilitation and Maintenance Program; (ii) dissemination of the project s safeguards instruments; (iii) streamlining the exchange of information between DGASA and other areas of the Ministry, particularly information that could be included in the GIS of the MTC and be used for strategic planning; (iv) improving coordination between DGASA and Provias Nacional, particularly regarding the environmental categorization and the scope of design studies, so that social and environmental issues can be addressed sufficiently early on in the project cycle; and (v) training of MTC s civil servants on environmental and social safeguards (including resettlement and indigenous peoples), as well as training of consultants and contractors. 103

112 ACTIVITIES MTC - DGASA 1. Strategic Environmental Assessment 2, Review and Systematization of environment and social management instruments 3. Internal and External Capacitating 2.1 DGSA 2.2 Zonales (1 7) 2.3 Contractors, Consulting, others 4. Guidelines for the PACRIs process Subtotal MTC - PROVIAS NACIONAL 4. PROVIAS NACIONAL Environmental and Social Strengthening Subtotal TOTAL AMOUNT US$ COMPLIANCE WITH THE NATIONAL ENVIRONMENTAL LEGISLATION 73. The Peruvian Government has an extensive environmental legislation. The Annex 2 of the REA lists Laws, Regulations, Decrees and Ministerial Resolutions, that are applicable to the transport sector. 74. The environmental legal base in Peru includes in particular the National System of Evaluation of the Environmental Impact (Not ) Law published in the Official Newspaper The Peruvian April 23, 2001; and the General Law of the Environment (Not ) of October 13, 2005, through which the National Environmental Authority and the territorial and sectorial authorities are created. 75. All the works proposed under the proposed project have been reviewed by the DGASA and are in the process to obtain the Environmental Certificate. 9. ENVIRONMENTAL VIABILITY 76. The environmental due diligence process of the proposed project was concluded in accordance with Bank guidelines. In conclusion, the proposed project should be considered viable from the social and environmental point of view, and it complies with the Bank s Social and Environmental Safeguards Policies. The DGASA is highly experienced with Bank policies due in particular to past and on-going Bank engagement in the sector, and it already counts on sound procedures and tools that should help ensuring an adequate socio-environmental management, in line with Bank Safeguards Policies. 77. All required EIAs and safeguards plans of the subprojects proposed have been prepared and disclosed prior to project appraisal for the initial set of four identified road rehabilitation and upgrading works to be financed under component 1 of the proposed project. 104

113 78. The implementation of the Environmental and Social Frameworks developed for the proposed project is expecting to strengthen Provias Nacional 's social and environmental management practices. The Environmental and Social Strengthening Management Plan presented in the REA, as well as other technical assistance activities implemented under component 4 of the proposed project should also help strengthening the social and environmental management in the sector. A monitoring of the implementation of the social and environmental frm'ework and of the Environmental and Social Strengthening Management Plan will be performed during project implementation as part of the joint World Bank / IaDB supervision missions. 105

114 Annex 12: Project Preparation and Supervision PERU: Safe and Sustainable Transport Project Planned Actual PCN review April 27, 2009 April 27,2009 Initial PID to PIC April 30,2009 May 20,2009 Initial ISDS to PIC April 30,2009 June 5,2009 Appraisal October 20,2009 November 24,2009 Negotiations November 2,2009 November 30,2009 Board December 22,2009 Planned date of effectiveness January 31,2010 Planned date of mid-term review November 15,20 11 Planned closing date June 30,2013 Key institutions responsible for preparation of the project: Provias Nacional / Ministry of Transport and Communications - Oficina General de Administracidn / Ministry of Transport and Communications Bank staff and consultants who worked on the project included: Name Title Unit Fabiola Altimari Sr. Counsel LEGLA Rodrigo Archondo Callao Sr. Highway Engineer ETWTR Anthony Bliss Lead Road Safety Specialist ETWTR Stephen Brushett Lead Transport Specialist LCSTR Jean-Charles Crochet Sr. Transport Economist, Peer Reviewer MNSSD Richard Martin Humphreys Sr. Transport Economist, Peer Reviewer ECSSD Nelly Ikeda Financial Management Analyst LCSFM Ana Lucia Jimenez Nieto, Financial Management Specialist LCSFM Michel Kerf Sector Leader LCSSD Jerry Lebo Country Program Coordinator, Peer Reviewer EACNO Aymeric Albin Meyer Sr. Transport Specialist, Peer Reviewer LCSTR Licette Moncayo ET Temporary LCSTR Xiomara Morel Sr. Financial Management Specialist LCSFM Anna Okola Transport Specialist LCSTR Nicolas Peltier-Thiberge Sr. Infrastructure Economist, TTL LCSTR Pierre- Antoine Picand Project Management Analyst, Consultant LCSTR Francisco Rodriguez Procurement Specialist LCSPT Maria Marcela Silva Sr. Transport Specialist, Peer Reviewer LCSTR Tomas Socias Sr. Procurement Specialist LCSPT Juan Tapia Sr. Road Safety Specialist, Consultant LCSTR Francesco Totaro ET Consultant LCSTR Alonso Zarzar Sr. Social Scientist LCSSO Marco Zambrano Sr. Environmental SPecialist. Consultant LCSTR 106

115 Bank funds expended to date on project preparation: 1. Bank resources: US$237, Trust funds: Global Road Safety Facility US$150,000 for the Peru irap assessment 3. Total: US$387,425 Estimated Approval and Supervision costs: 1. Remaining costs to approval: US$5, Estimated annual supervision cost: US$102,

116 Annex 13: Documents in the Project File PERU: Safe and Sustainable Transport Project Calderbn, C., W. Esterly, and L. ServCn (2003): Latin America s Infrastructure in the Era of Macroeconomic Crisis, in: Easterly et al. Calderh, C. and ServCn, L. (2009): Infrastructure in Latin America: An Update ( ). Easterly, W. and L. ServCn (Editors) (2003): The Limits of Stabilization. Infrastructure, Public Deficits and Growth in Latin America, Stanford University Press and the World Bank, Washington D.C. Fay, M. and Yepes, T. (2003): Investing in Infrastructure: What is needed from 2000 to 2010? Policy Research Working Paper WPS3102, the World Bank, Washington D.C. Giugale, M., Fretes-Cibils, V. and Newman, J. (2007): An Opportunity for a Different Peru: Prosperous, Equitable, and Governable, the World Bank, Washington D.C. Guasch, J.L and Kogan, J. (2005): Inventories and Logistics Costs in Developing Countries: Level and Determinants, A Red Flag on Competitiveness and Growth, Revista de la Competencia y la Propriedad Intelectual I(1). Guerra Garcia, G. (2008): Diagnostic0 y Propuesta de Politicas sobre las Capacidades de Planificacidn y Ejecucidn de Inversiones de 10s Sectores de Transportes, Energia y Saneamiento - Sector Transporte, Informe Final. IPE (Instituto Peruano de Economia) y ADESEP (Asociacidn de Empresas Privadas de Servicios Publicos) (2003): La Brecha en Infraestructura, Servicios Ptiblicos, Productividad y Crecimiento en el Perti. Meyer, A,, Lancelot, E. - Output performance-based contracts in the road sector: Towards improved efficiency of the management of maintenance and rehabilitation - Brazil s experience; the World Bank, Washington D.C. MTC (Ministerio de Transporte y Comunicaciones) (2003): Plan Intermodal de Transportes ( ), Lima, Peru. (2005): Programa Quinquenal de Provias Nacional; Propuesta de Financiamiento, Lima, Peru. (2009). Marco de Gestidn Ambiental y Social (Social and Environmental Management Framework). (2009). Marco Conceptual de Compensacibn y Reasentamiento Involuntario (Involuntary Resettlement Framework). Report). (2009). Marco de Pueblos Indigenas (Indigenous Peoples Framework). (2009). Reporte de Evaluacidn Ambiental (Environmental and Social Assessment (2009). PACRI Ayacucho Abancay (Resettlement Action Plan, road rehabilitation and upgrading of Ayacucho Abancay, km 50-98). 108

117 (2009). PACRI Llama Cochabamba (Resettlement Action Plan, road rehabilitation and upgrading of Llama Cochabamba). (2009). PACRI Cochabamba Chota (Resettlement Action Plan, road rehabilitation and upgrading of Cochabamba Chota). (2009). PACRI Pte Reither Pte Paucartambo Villarica (Resettlement Action Plan, road rehabilitation and upgrading of Pte Reither Pte Paucartambo Villarica). (2009). Estudio Ambiental Ayacucho Abancay (Environmental Impact Assessment, road rehabilitation and upgrading of Ayacucho Abancay, km 50-98). (2009). Estudio Ambiental Llama Cochabamba (Environmental Impact Assessment, road rehabilitation and upgrading of Llama Cochabamba). (2009). Estudio Ambiental Cochabamba Chota (Environmental Impact Assessment, road rehabilitation and upgrading of Cochabamba Chota). (2009). Estudio Ambiental Pte Reither Pte Paucartambo Villarica (Environmental Impact Assessment, road rehabilitation and upgrading of Pte Reither Pte Paucartambo Villarica). (2009). Plan de Pueblos Indigenas Comunidad fiagazu (Indigenous Peoples Plan Community Gagazu). (2009). Plan de Pueblos Indigenas Comunidad Ocros (Indigenous Peoples Plan Community Ocros). Saghir, J. - Transport: Invisible Force - Visible Impacts; Presentation at the 2009 Transport Week; the World Bank, Washington D.C. Tapia, J. (2008): Perti: Desarrollo Econbmico Reciente in Infraestructura - Sector Transporte, Informe Final. Tuck, L., Schwartz, J. and Andres, L. (2009): Crisis in LAC: Infrastructure Investment and the Potential for Employment Generation; the World Bank, Washington D.C. World Bank (2006): Peru: Country Partnership Strategy. 109

118 Annex 14: Statement of Loans and Credits PERU: Safe and Sustainable Transport Project Original Amount in US$ Millions Difference between expected and actual disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev d PI PE 2nd Prg Fiscal Mgmt & Comp PI DPL/DDO PE First Prog Environ DPLDDO PI PE-2nd Results & PO Accnt (EACT)DPLIDDO PE- (APL2) Health Reform Program PO PE Decentralized Rural Transport Project PO PE Sierra Rural Development Project PO90 I PE Rural Electrification PO PE Real Property Rights II PO PE Regional Transport Decentralization PO PE lnst Capacity for Decent TAL PO PE Vilcanota Valley Rehab & Mgmt PO Project PE (APL2)Agric Research and Extension PO PE-(CRL1)ACCOUNT FI DECENT PO SOC SCTR PE Justice Services Improvement PO PE LIMA TRANSPORT PROJECT PO PE NATIONAL RURAL WATER PO SUPPLY AND PE IRRIGATION SUBSECTOR PROJECT Total 1, , PERU STATEMENT OF IFC s Held and Disbursed Portfolio In Millions of US Dollars FY Approval 2006 I Company Agrokasa Alicorp COT. Drokasa EDYFICAR FTSA Gloria ISA Peru, SA ISA Peru, SA Committed Disbursed IFC IFC Loan Equity Quasi Partic. Loan Equity Quasi Panic oo oo SO

119 I I lnka Terra Interbank-Peru lnterseguro Interseguro lnterseguro Laredo Laredo Latino Leasing MIBANCO MIBANCO Mi I kito Miraflores Norvial S.A. Paramonga Peru OEH Quellaveco Quellaveco Quellaveco Quellaveco RANSA RANSA Tecnofil S.A. USMP Y anacoc ha Total portfolio: Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic UPC I Drokasa PCG 2004 CMAC Arequipa 0.01 Total pending commitment:

120 POVERTY and SOCIAL Annex 15: Country at a Glance PERU: Safe and Sustainable Transport Project 2007 Population mid-year (millions) 27 9 GNIpercapita (Atlas method US$) GNI (Atlas method US$ billions) 982 Average annual growth, Population (W 12 Labor force (W 26 Most recent ertlmate (latest year avallable, ) Poverty (%of population belo wnationalpo vertyline) 53 Urban population (%of totalpopulation) 71 Life expectancyat birth (pars) 71 Infant mortalitylper 10001ive births) 21 Child malnutrition (%of children under5) Access to an improved water source (%of population) 84 Literacy (%ofpopulation age 15+J 88 Gross primary enro llment (% 0 f school-age population) m Male 18 Female n KEY ECONOMIC RATIOS and LONG-TERM TRENDS GDP (US$ billions) Gross capital formation1gdp Eqorts of goods andseniceslgdp Gross domestic savingsigdp Gross national SavingslGDP 24 1 Current account balancelgdp Interest paymentslgdp Total debt/gdp Total debt servicelexports 35 6 Present value of debt1gdp Present value of debtiexports (average annual gm Mh) GDP GDP percapita Exports of goods andservices Latin America Peru & Carlb , PO P Lower. middle- Income % m m n I Development diamond' capita I*+? - T Life expectancy Access to improved water source Peru - ~owr-middle-income group Economlc ratios* Trade Indebtedness Lower-middle-income group primary Gross enrollment formation STRUCTURE of the ECONOMY (%of GDP) Agnculture a3 87 Industry M anufactunng services Household final consumption eqenditure General gov't final consumption expenditure Imports of goods and services P GCF -GDP (average annual gm Mh) Agnculture Industry M anufactunng Services Growth of exports and Imports (%) Household final Consumption expenditure General gov't final consumption eqenditure Gross capital formation Imports of goods and SBNIC~S ne P9 02 Uporla -Inports Note 2007 data are preliminary estimates This table was producedfrom the Development Economics LDB database 'Thediamonds showfourkeyindicators inthecountry(in bold)comparedwithtts income-groupaverage If dataaremissing thediamondwill be incomplete 112

121 Peru PRICES and GOVERNMENT FINANCE Domestic prices (%change) Consumer prices Implicit GDP deflator Government finance (%of GDP includes current grants) Current revenue Current budget balance Overall surpiusideficit Inflation (%) IiO le lo GDPdeflator -CPI I TRADE (US$ millions) Totalexports (fob) Copper F is hmeal Manufactures Totalimports (cif) Food Fuel and energy Capital goods Export price index (200O=WO) Import price index (2OOO=WO) Terms of trade (200O=x)OJ , II t?O 5, / gz ,Export and Import levels (US$ mill ) I ) , ~OIports olmporls 119, ---l BALANCE of PAYMENTS (US$ millions) Exports of goods and services Imports Of goods and SBNIC8S Resource balance ,506 4, D842 8, ICurrent account balance to GDP (%) Net income Net current transfers Current account balance -1,3't? -2, , Financing items (net) Changes in net reserves 919 I Memo Reserves including gold (US$ millions) Conversion rale (DEC local/us$) E V , EXTERNAL DEET and RESOURCE FLOb IS 1987 (US% millions) Total debt outstanding and disbursed 8,483 IBRD 1,2M IDA 0 Total debt service IBRD IDA Co mpo sitio n of net resource flo ws Official grants Official creditors Private Creditors Foreign direct investment (net inflows) Portfolio equity (net inflows) World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Ne1 transfers , , , i74 2,633 2, , G 3011 A 2633 I:.: I E-Blidwsl B. IDA D. Mher mrltiialetd F. Privale GI Short-term f Note This tablewas produced from the Development Economics LDB database 9/24/08 113

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123 MAP SECTION

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