Documut of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 12245-PE

STAFF APPRAISAL U.EPORT

PERU

SOCIAL DEVELOPMENT AND COMPENSATION FUND

(FONCODES)

PROJECT

NOVEMBER 16, 1993

MICROGRAPHICS

Report No; 12245 PEType: SAR

Latin America and the Caribbean Regional OfficeHuman Resources Operations DivisionCountry Department I

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY AND EQUIVALENT UNITS(As of November 15, 1993)

Currency Unit = Sole (S./)US$1 = 2.16 Soles (S./)

GLOSSARY OF ACRONYMS

ANC National Association of CentersBCR Central Reserve BanlkCIAS Inter-ministerial Committee for Social AffairsCOMDES Social Development CommitteesCOOPOP National Office of Popular CooperationCORDE CALLAO Departmental Cooper. for the Development of CallaoCORDE LIMA Departmental Cooperation for the Development of LimaDC Direct ContractingFONAVI National Housing FundFONCODES National Fund for Social Compensation and

DevelopmentGOP Government of PeruGTZ German Development AgencyICB International Competitive BiddingIDB Inter-American Development BankIIN Nutrition Research InstituteIMF International Monetary FundINABIF National Institute of Family Well-beingINADE National Institute for DevelopmentINEI National Institute for Statistics and InformaticsINFES National Institute of Educational InfrastructureKfW Kreditanstalt fur WiederaufbauLCB Local Competitive BiddingLS Local ShoppingMEF Ministry of Economy and FinanceMIGA Multilateral Investment Guarantee AgencyMD Medical DoctorNGO Non-governmental OrganizationOPIC Overseas Private Investment CorporationPAHO Pan-American Health OrganizationPRONAA National Program for Food SupportPRONABECE National Program for Goiter and Cretinism ControlSIF Social Investment FundSOE Statement of ExpendituresTPS Social Policy WorkshopUNICEF United Nations Children's FundWHO World Health Organization

PERU FISCAL YEAR

January 1 - December 31

FOR OMCIAL USE ONLY

PERU

SOCIAL DEVELOPMENT AND COMPENSATION FUND PROJECT

STAFF APPRAISAL REPORT

TABLE OF CONTENTS

LOAN AND PROJECT SUMMARY

I. INTRODUCTION 1

II. POVERTY IN PERUSocial Indicators 1Social Expenditures 3Social Services 4

m. ECONOMIC REFORM ANDPOVERTY ALLEVIATION

The Economic Reform Program 5Poverty Alleviation Strategy 7Financing Poverty Alleviation 8Implementation of thePoverty Alleviation Strategy 9

IV. BANK STRATEGY FOR THESOCIAL SECTORS IN PERU

Rationale for Bank Involvement 11Lessons Leamned from Bank Experiencewith Social Investment Funds 12

This report is based on the findings of pre-appraisal and appraisal missions which visited Peru inApril and July 1993. Mission members were Messrs/Mmes. Alexandre Abrantes (LA1HR),Mateen Thobani (LA1EA), Jean-Paul Faguet (LA3BO), Nuno Crato, Jos6 Durdn, Eugen Finkeland Christian Hurtado (Consultants), and Andrea Delbruck (KfW). Messrs. Rainer B. Steckhanand Alain Colliou are the Department Director and Division Chief, respectively, for thisoperation. Peer reviewers were Xavier Coll (LA4HR), Jean-Jacques de St. Antoine a-A2HR),Margareth Grosh (PHRPA), and Cecilia Valdivieso (MN2PH). Messrs./Mmes. Theresa P.Jones, Karen Cavanaugh, Juliana Weissman, Sarah Menezes (LAMHR) and Izumi Ohno(LAlCO), contributed to the report at headquarters. This report draws extensively upon theBank's Peru Poverty Assessment and Social Policies and Programs for the Poor Report (ReportNo 11191-PE) and the Social Assistance Program in Peru report, prepared by the GOP for theConsultative Group Meeting held in Paris in June 1993.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

V. NATIONAL FUND FOR SOCIAL COMPENSATION ANDDEVELOPMENT -- FONCODES

Background and Objectives 13Performance 14Estimated Impact 16Organization 18Project Portfolio 20Financing 21Community-based Project Cycle 22Inter-institutional Coordination 27

VI. THE PROJECTObjective and Scope 28Dcription 28Lending and Implementation 30Costs and Financing Plan 30Procurement 32Supervision and Reporting 35Disbursements andDocumentation of Expenditures 36Accounts and Audits 38Cost Sharing and Sustainability 38Environmental Aspects 39Mid-term Review 39

VH. BENEFITS AND RISKSBenefits 40Risks 40

VHII. AGREEMENTS REACHEDAND RECOMMENDATION

Agreements 41Recommendation 43

Annexes

1. Socio-economic Indicators for Peru2. Letter of Social Sector Policy3. FONCODES Portfolio, January 92 - March 934. FONCODES Administrative Structure5. Project Costs and Financing Plan6. Estimated Schedule of Disbursements7. Key Performance Indicators8. Supervision Implementation Plan9. Documents Included in the Project File

Maps IBRD No. 24209 -- PERU: DepartmentsIBRD No. 25190 - PERU: Poverty Map

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PERU

SOCIAL DEVELOPMENT AND COMPENSATION FUND PROJECT

STAFF APPRAISAL REPORT

LOAN AND PROJECT SUMMARY

Borrower: Republic of Peru.

Executing Agency: Fondo Nacional de Compensaci6n y Desarrollo Social --FONCODES.

Beneficiaries: Low-income households, through communityorganizations, NGOs and other entities.

Amount: US$100 million equivalent.

Terms: Standard IBRD terms, with 20 years maturity and a fiveyear grace period.

Project Objectives: The project would (a) sustain the GOP poverty alleviationefforts, (b) mitigate the social costs of macro-economicadjustment, and (c) strengthen the institutional capabilitiesof FONCODES. The project would: (i) genciateemployment and improve social services; (ii) promotestrong and self-reliant community organizations; (iii)complement other nation-wide projects in education andhealth; and (iv) maximize support from other potentialdonors.

Project Description: The project would support the overall operation ofFONCODES for the period 1994 to 1996. Morespecifically, it would: (a) support a range of community-based, labor-intensive projects, with a strong focus oneducation, health and nutrition, and other areas that wouldassist poor rural and peri-urban populations; and(b) support the institutional development of FONCODES.

Benefits: The project would: (a) improve the availability andaccessibility of social services for the poor; (b) providehigh-return social and economic infrastructure in poorareas; (c) raise employment and income of workersemployed in community projects; (d) strengthencommunity participation and transparent decision maldng;and (e) attract other donors' investments.

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Risks: The main risks of the project are: (a) discontinuity andweakened management of the implementing agency in theevent of excessive political instability and interference;(b) ineffective community project implementation due topoor targeting, appraisal, supervision or lack ofsustainability; and (c) weakening of existing institutions,due to the potential diversion of funds from line ministriesand municipalities.

Environmental Category: B

Estimated Costs:

PERU: Social Development and Compensation Fund Project.Estimated Costs (USS million)

Componentu Local Foreign Total

FONCODESCommunity-based projects 398.5 70 468.5

bIstitutional Development 17.5 9 26.5

Total Cogst 416 79 495

o taxes an uties

Probable Financing Plan:

PERU: Social Development and Compensation Fund Project, Co-financing (US$ million)

F nadng PlanT Local Foreign T Total l

Government of Peru 200 0 200

Beneficiaries 42 0 42

World Bank 80 20 100

Inter-American 80 20 100Development Bank .

Other Donors (including KfW) 14 39 53

Total 416 79 495

Retroactive Financing: Up to US$10 million equivalent would bepermitted for eligible e.-penditures incurred sinceAugust 1, 1993.

iff

Estimated IBRD Disbuzrsements:

Per: Social Development and Compensation Fund Project

Estimated IBRD Disbursements (US$ million) __ _

lBRD Fisca Year 1994 1995 1996 1997

Auual 1 25 40 25 101t.Cumulative 25 65 90 100

Economic Rate of Return: Not applicable

Poverty Category: PA - Poverty Alleviation; Program of TargetedInterventions

PERU

SOCIAL DEVELOPMENT AND COMPENSATION FUND

STAFF APPRAISAL REPORT

I. INTRODUCTION

1.1 This report presents a Social Development and Compensation FundProject for which a World Bank (Bank) loan of US$100 million equivalent tothe Republic of Peru is proposed. Total project cost is estimated at US$495million equivalent. The Project would consist of a loan to enlarge and enrichthe programs of the National Fund for Social Compensation and Development -- FONCODES, and to improve its effectiveness and efficiency. TheGovernment of Peru (GOP) created FONCODES in 1991, to mitigate the effectsof the previous economic crisis and the social cost of economic adjustment,through the financing of small-scale, short-term investment projects ofimmediate impact on the poor and most vuhlerable. FONCODES has beendesigned as a transitional institution, to operate efficiently and transparently,until the institutional capacity of State social sector entities is strengthened andstructural transformations are consolidated. Until now, the GOP has been theonly source of FONCODES financing, excep; for a small technical assistancegrant provided by the Inter-American Development Bank (IDB) for theinstitutional development of FONCODES. The GOP, the IDB and otherbilateral donors such as KfNW have expressed interest in supporting an expansionof FONCODES programs.

1.2 This report:

(a) describes the extent and causes of poverty in Peru;0) reviews the GOP's program to restructure the economy and the

strategy to alleviate poverty, including the role of FONCODES;(c) describes why the Bank should support FONCODES;(d) describes and appraises the objectives, performance and

organization of FONCODES; and(e) proposes a Bank loan to expand and deepen the FONCODES

program and improve its effectiveness, and provides theframework for project implementation.

II. POVERTY IN PERU

Social Indicators

2.1. Poverty is a long-standing problem in Peru. During the last twentyyears, a higher incidence of poverty has persisted in Peru, relative to most ofits neighbors in the region. A comparison of social indicators among countriesin the region shows that Peru ranks near the lowest in most poverty-relatedareas such as health, and falls below countries which have similar per capita

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GDPs. In 1991, Peru had a GNP per capita of US$1,070 equivalent and aninfant mortality of 53 per 1,000 births, higher than other middle incomecountries in Latin America such as Colombia, Ecuador, Jamaica and Paraguay.Moreover, improvements achieved in the last decade were one of the lowest inthe region.

2.2 Poverty is widespread and has worsened over the last eight years.According to (wo recent nutrition surveys which covered 75 percent of thecountry, about 12 million people (53 percent of the population), fall below thepoverty line, with annual incomes below the cost of the basic household basketwhich includes food and non-food commodities (US$ 411 and US$245, on thecoast and in the mountainous areas, respectively). Three and a half millionpeople (21 percent of the population) are extremely poor, with an annual incomebelow the cost of the basic food basket (US$277 and US$193, on the coast andin the mountainous areas, respectively). Between 1983 and 1990, real wagesdecreased at a 6.1 percent rate. Unemployment stands officially at 5.9 percentof the economically active population, but it is estimated that 78.5 percent of theeconomically astive population is presently under-employed. Finally, 45 percentof the population does not have access to a reliable source of clean water, and62 percent does not have access to a public sewerage system.

2.3. The prevalence of poverty is highest in the rural mountainous areas,where two thirds of the households are poor and 47 percent fall into the extremepoverty category. In the mountains less than half the population has access toa public water system, and only 8 percent have access to public sewerageremoval service. The indigenous populations are much poorer than the rest ofthe population: they account for 40 percent of the extremely poor and 25 percentof the poor; among the indigenous populations, the poorest are the Aymaraspeakers, of whom 86 percent are poor and 70 percent are extremely poor.Poverty is also closely related to education: about two thirds of the extremelypoor households are headed by someone with no more than primary education.

2.4. In health, the situation is characterized by high infant and maternalmortality rates, malnutrition, high prevalence of endem-ic diseases and newepidemics, such as cholera. In 1991, the infant mortality rate was 53 per 1,000births, higher than one would expect in a middle income country. The situationwas far worse in some rural areas, due to long-standing regional and ethnicinequalities. In Huancavelica, Cuzco, Apurimac, Ayacucho and Puno, infantmortality rates were higher than 100 deaths per 1,000 births. In 1991, matemalmortality was at an alarming 30 per ten thousand births and was due to causeswhich could be prevented with family planning and deliveries being assisted bytrained birth attendants. Malaria, leishmaniasis, hepatitis, dengue fever andyellow fever are endemic. Moreover, some diseases are on the rise:tuberculosis cases increased 20 percent over the last 10 years and malaria caseshave doubled over the same period. Between 1980 and 1989, acute respiratoryillnesses increased six-fold and acute diarrheal infections doubled.

2.5. The 1991 cholera epidemic demonstrated in a dramatic way theprecariousness of health and sanitary conditions nationwide. Between February

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and June 1991, 223,000 cases were reported, one of the most serious epidemicsof this century. Although neighboring countries also suffered choleraepidemics, none had such a large number of cases and deaths.

2.6. In nutrition, chronic child malnutrition is a serious and widespreadproblem. In 1991, malnutrition affected 13 percent of children under the ageof 5, but the percentage was as high as 73 percent in some rural areas, and isestimated to cause about 9,000 deaths per year. Child growth seems to bejeopardized more by inappropriate weaning practices and infection than by lackof food availability. In 1986/87, a national survey estimated that goiter wasendemic in 88 percent of the mountainous and jungle communities, averaging34 percent among school children. The government has mandated theproduction and distribution of iodized salt, but only 60 percent of the populationhas access to it, due to its high cost, poor distribution and the widespreadavailability of non- iodized salt. The incidence of iron deficiency anemia hasnot been estimated, but small-scale studies suggest it is also a problem amongpregnant and lactating women, and children.

2.7. In education, the situation is characterized by high illiteracy andrepetition rates. In 1991, about 15 percent of the population was illiterate. Theproblem was particularly sexious among the rural population (29 percentilliterate) and women (21 percent illiterate). Forty-four percent of rural womencould not read or write. Although figures suggest high primary and secondaryenrollment ratios, repetition rates are very high. By 1988 it was estimated that,for each 100 children entering primary school, only 31 finished on time, 45percent fiiled to pass at least once, and 24 dropped out altogether. The averagePeruvian student was 2.5 years behind the grade the student should have beenattending at his or her age, and those from Quechua- or Aymara-speakingparents were about 3.6 years behind. The picture was similar at the seconda ylevel, where a large percentage of students taldng a standardized test at the endof the cycle scored below the norm in mathematics, language, social sciencesand natural sciences, and about 7 percent drop out before graduation. Pre-school attendance of children 3-5 year old was about 50 peicent.

Social Expenditures

2.8. Peru has generally spent less than its neighbors in the social sectors andinvestments have dwindled in recent years. For example, in 1987, in SouthAmerica, only Argentina and Paraguay spent less in education, as a proportionof GNP. The health share of central government expenditures has remainedfairly stable at 4-5 percent through the 1970s and 1980s, falling to about 3.2percent in 1990, when it was only 0.5 of GDP and the equivalent of US$8.3 percapita. As for the education sector, the government emphasis has lessened,from about 18 percent of central government spending in the 1970s, to 9.7percent in 1990, when it had fallen to 1.4 percent of GDP and the equivalent ofUS$25 per capita.

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2.9 Public resources available for social services in Peru have becomescarcer with the severe recession and the near vanishing of the country's taxsystem but, on average, social expenditures were somewhat protected from themost severe expenditure reductions. In 1990, central government expendituresamounted to 15 percent of GDP which, in real terms, means that they were 65percent lower than in 1980 and 30 percent below the 1970 level, but healthexpenditures only decreased about half as much as total expenditures and ineducation the figures suggest a similar picture. In spite of scarce resources,formal cost-sharing was not considered an option until very recently, althoughthere is some evidence that the poor have to incur significant out of pockethealth care expenditures.

Social Services

2.10. In general, the situation regarding tie provision of social services is thefollowing: (a) generally adequate number of facilities which, however, are oftendeteriorated and lack appropriate technology; (b) a reasonable supply ofpersonnel, who are poorly distributed and trained; (c) severe shortages ofsupplies; and (d) inefficiency and low priority given to cost-effectivetechnologies.

2..11 In health, there has been a significant expansion of the prmary healthcare infrastructure over the last ten years. The number of health centers hasincreased by 60 percent and the number of health posts has doubled, supplyinga relatively good level of 1.9 facilities per 10,000 inhabitants. However, thereis marked physical deterioration of buildings and widespread scarcity ofequipment, personnel is poorly distributed and little is spent on critical cost-effective interventions. Personnel is concentrated in Lima and other cities,being scarce in the mountainous areas (1 doctor/34,000 people), and the numberof nurses is clearly insufficient (doctors/nurses = 1.29). Salaries and moraleare very low, resulting in abysmal productivity (e.g. 2 consultations per hourin ambulatory care). Finally, public services are poorly coordinated with othersources of traditional community-basel health care, such as municipalities,NGOs, the church and grass-roots oiganizations, leading to ineffective andinefficient management of resources.

2.12. While the coverage of high risk groups with health services may appearadequate, he intensity and quality of services is poor. In 1991, child-healthservices covered an impressive 86 percent of all infants under age of one, butonly reached 24 percent of children aged 1-4. Matemal-care services covered57 percent of pregnant women, but only 13 percent of those lactating, and only36 percent of women at child-bearing age used family planning services. Thehigh coverage of infants under one may reflect the fact that parents have to taketheir children to a health center in order to get a birth certificate. The numberof consultations was also very low, 0.4 ver year for a pre-school and school agechild. The availability of critical pharmaceuticals is inadequate, due todisorganized distribution, budget constraints and failure to give it priority.

2.13. in nutrition, the Ministry of Health's Child Growth and DevelopmentProgramn is the only large scale promotional program. The program is welldesigned and essentially ai ns at targeting nutrition supplements to mothers andchildren at high risk of mnalnutrition, and at rehabilitating malnourished children.Low funding for the program contributes to a high concentration of activities inLima and limited supervision outside the capital. In addition, the Ministryoperates the National Program to Control Goiter and Endemic Cretinism(PRONABECE), but there are no data on which to judge its effectiveness andefficiency.

2.14. In education, there has been an impressive expansion of primaryenrollments. Parents are committed to sending their children to school, as 97percent of each age cohort enrolls in the first grade, on time. By 1990, whileenrollment was up, the real level of expenditures in education declined to a lowof US$80 per student, causing: (a) an exodus of trained teachers from thesystem; (b) poor maintenance of the infrastructure; and (c) lack of textbooks andteaching materials in the classroom.

2.15. Due to salary erosion, many trained peisonnel left the teachingprofession and the proportion of uncertified teachers rose to 50 percent in 1990.As a result the quality of service deteriorated, repetition rates increased,particularly in the early grades, and the wide geographical disparities ineducational attainment and efflciency increased. Secondary education offersvery little intermediate technical or professional training.

2.16. In spite of the low levels of academic performance, 25 percent of therelevant age group is enrolled in institutions of higher education and governmentspending on higher education represented, in 1984, about a third of totalexpenditures in education, surpassed on the continent only by Venezuela.

HI. ECONOMIC REFORM AND POVERTY ALLEVIATION

The Economic Reform Program

3.1. The major reason for the persistence of a relatively high incidence ofpoverty in Peru is the past dismal performance of the economy. TheGovemment intervened excessively in the economy and the legal andadministrative structure discouraged growth. The economy became closed anddid not create enough jobs. The public sector became overextended and wastedresources. An attempt to implement an unorthodox economic program in themid-1980's compounded these problems and caused plummeting output andhypeifation. The Government was forced to reduce spending to extremelylow levels, although social services were somewhat protected. Nevertheless, theoverall scarcity of resources has meant that Peru has been able to spend verylittle on the social sectors.

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3.2. In July 1990, the situation was characterized by hyperinflation (400percent in August 1990), deep recession, high unemployment, and severereduction of family income, with real wages reduced by one-half in three years.Tax revenues collapsed, the deficit reached 13 percent of GDP and the CentralBank was depleted of its reserves. The Government defaulted on paying itsdebts to international creditors and lost its credibility in the internationalfinancial markets. Finally, the economic collapse resulted in severedeterioration of all public services. Basic infrastructure, health services andswurity were left to deteriorate as the crisis deepened, leading to increasingpoverty and loss of social cohesion.

3.3. To reverse a long period of poor economic perfornance, r.sing povertylevels and declining living standards, the Government in 1990 launched aneconomic stabilization and structural reform program aimed at controllinginflation, establishing the basis for sustainable economic growth, andreestablishing international credibility. The stabilization program included: (a)fiscal discipline and reform of the exchange rate mechanism, (b) deregulationof economic activity, and (d) promotion of competitiveness.

3.4. The Government reduced public expenditures to the level of its fiscalresources, severed all subsidies, and fought tax evasion and smuggling, bringinginflation down to 56 percent by February 1993. It adjusted monetary policyto match the reduced inflation targets and set the exchange rate to discouragecheap imports and stimulate exports. Finally, it linked the primary emission ofcurrency to the purchase of foreign exchange by the Central Bank andderegulated the financial system and interest rates.

3.5. The Government deregulated the commercial and financial markets,reduced import duties drastically and removed other restrictions to imports. Itliberalized international financial operations, allowing for transfers fromPeruvians abroad. Finally, the Government limited its intervention in theeconomy, and reduced the number of civil servants, by offering strongincentives for early retirement.

3.6. To promote competitiveness, the Government is implementing a largeprogram to privatize about 70 public enterprises, attracting capital into thecountry and generating productive investments and sustainable employment.The GOP is also promoting private investment by: (a) opening theinfrastructure, education and other social sectors to private initiative, (b)facilitating land transactions, (c) negotiating international banking guaranteeswith MIGA and OPIC, and promulgating a code for international investments,and (d) opening the market for private pensions. Finally, the Government passeda series of laws to promote an efficient labor market, including the eliminationof indexed wages, temporary contracts, and linking job stability to productivityand the financial situation of the firm.

3.7. To reestablish international credibility, the GOP renegotiated theservicing of its bilateral and multilateral debt and has recently cleared its arrearswith the Bank and the International Monetary Fund (IMF). In 1991, the

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international community, led by the USA and Japan, reacted positively to theeconomic program described above and created the First Support Group. Fromthis Group, Peru received a combination of grants and loans. In 1993, a SecondSupport Group committed about US$2.8 billion for 1993-94 and Peru has againbecome eligible to borrow from the IMF. The debt to the Paris Club and otherinternational creditors has also been renegotiated, while negotiations with Chinaand other East European creditors are still underway.

Poverty Alleviation Strategy

3.8. Economic recovery, stimulated by economic stabilization andderegulation, is the basis of the poverty alleviation strategy. Economic growthwill benefit the poor by providing them with more opportunity to use theirassets, such as labor and land. It will offer job opportunities, raise income andprovide for the basic needs of the poor. However, in the short run, the poor arelikely to be adversely affected by the program, as the benefits of growth will notflow immediately to all the poor, particularly in Peru, where macroeconomicinstability and economic deterioration have been severe and where extremeregional disparities exist in the welfare of the population.

3.9. In the meantime, the poor must have access to health and educationservices; otherwise, they will not be able to benefit from the opportunitiesavailable in an expanding economy. In spite of improved social services, in theshort run, some groups will remain vulnerable, because they are already livingon the edge. For these people, social compensation programs, such asemployment generation and food assistance, can complement the two mainelements of a poverty alleviation strategy - promotion of broad-based growthand improved and more equitably distributed social services.

3.10. To tackle the problem in the long-term the Government is trying tostimulate economic recovery, is increasing its social investments, and requiringthat social programs be targeted to the poorest and be more efficient.Specifically, the objectives of the GOP poverty alleviation strategy are:

(a) to improve the availability and quality of primary and preventivehealth care, with an emphasis on rural and peri-urban areas;

(b) to improve the efficiency and quality of education, with anemphasis on primary education in rural and peri-urban areas;

(c) to support schools with feeding programs and the distribution ofbooks and other teaching materials; and promote basic literacyand job training for adults;

(d) to distribute food supplements to the most vulnerable strata of thepopulation in rural and peri-urban areas;

(e) to raise income and generate employment in poor rural and peri-urban areas, through labor-intensive social infrastructure projectsand support to production; and

(f) to support credit for small, informal sector micro-entrepreneursand farmers, in order to improve efficiency.

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3.11. To respond to the immediate needs of the poor, the GOP created theSocial Emergency Program in August 1990, with activities in the areas ofeducation, health and nutrition, and employment for the poorest. Over twomonths, the Government channelled about US$65 million of food and healthcare supplies through community organizations such as mother's clubs,community kitchens and the Catholic Church. In August 1991, the GOP createdthe National Fund for Social Compensation and Development - FONCODES,a social development fund to finance temporarily labor intensive projects witha strong focus on employment generation, health and nutrition services andeducation programs, as well as other investments for productive activities, suchas support to micro-enterprises and farmers, that could assist urban and ruralpopulations.

3.12. Given the current resource constraints and the need for continued fiscaldiscipline, the GOP is targeting its poverty alleviation programs to the very poorand the most vulnerable. Geographically, targeting is based on poverty maps,which have been drawn on the basis of low income, high unemployment orunder-employment, associated with high infant mortality, malnutrition, illiteracyand repetition rates, as well as with poor accessibility to social services. On thebasis of these criteria, Apurfmac, Huancavelica, Ayacucho, Cuzco, Cajamarcaand Puno correspond to the poorest areas of Peru (Maps). It is proposed thatpoverty surveillance be carried on a regular basis by the Inter-ministerialCommission on Social Affairs and the Technical Committee for SocialDevelopment, which include the Central Reserve Bank (BCR), the NationalInstitute for Statistics and Informatics (INEI), the Social Policy Workshop(TIS), the Nutrition Research Institute (IN) and UNICEF.

Financing Poverty Alleviation

3.13. The GOP is increasing the level of its investment in the social sectorsand requiring that social services be more efficient. From August to November1990, the Government allocated US$89 million to an emergency socialprogram, raising it to US$124 million in 1991, and again to US$225 million in1992. For 1993, the GOP has allocated US$424 million (1 percent of GDP) forthe alleviation of extreme poverty and plans to raise its support to a level of 1.5percent of GDP by 1995. One-half of these investments are to be channelledthrough FONCODES, and the rest through other agencies. In 1993, theMinistries of Education and Health have been allocated US$338 million andUS$194 million, respectively.

3.14. Private investment in the social sectors and in poverty alleviation issignificant, amounting to more than US$35 million per year. It is estimated thatNon-Governmental Organizations (NGOs) spend some US$10 milion, that theCatholic Church invests another US$20 million, and that private enterprisescontribute directly with some US$5 million.

3.15. Multilateral and bilateral agencies have contributed significantly topoverty alleviation programs and their assistance will continue to be essential forsome time.

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llmplementation of the Poverty Alleviation Strategy

3.16. The poverty alleviation strategy will be implemented by a combinationof central and decentralized responsibilities, with strong and direct communityparticipation, and with the involvement of both public and NGOs.

3.17. The later-ministerial Committee for Social Affairs (CIAS) coordinatesthe Country's poverty alleviation strategy and policy. The CIAS is chaired bythe Prime Minister and includes the Ministries of the Presidency, Economy andFinance, Health, Education and Labor.

3.18. The CIAS is to be supported by several technical Social DevelopmentCommtees (COMDES), which would be created on an ad hoc basis to dealwith specific issues and include specialists from the relevant sectors. Onespecific COMDES would monitor and oversee progress in achieving the targets.The Ministry of Economy and Finance (MEF) provides the secretariat for theseCOMDES.

3.19. The Ministry of Economy and Finance (MEF) will carry out thenecessary poverty studies, to identify the most vulnerable strata of thepopulation, study alternative strategies for financing the social sectors, proposetarget groups and specific program objectives, coordinate with ministries andother executing agencies, appraise programs and projects and evaluate, axpost,how these affect the life of the target population.

3.20. The Ministries of Education and Health will implement the relevantlong-term development programs and are being allocated specific budgets forthis purpose. Social sector lne ministries and other existing social agencies andprograms are at this time weak, and will take some time to reform.

3.21. There are also a wide range of other active social sector agencies, butconsiderable gaps and duplications in functions exist: (a) the National Programfor Food Support (PRONAA) provides food assistance and security, mainly inareas seriously affected by terrorism; (b) the National Institute of EducationalInfrastructure (INFES) is responsible for rehabilitating, building and equippingschools; (c) the National Office of Popular Cooperation (COOPOP) promotescommunity work; (d) the National Institute of Family Well-being (INABIFF)provides social services for problem families, children and adolescents; (e) theNational histitute for Development (INADE) manages large nationalinvestment projects; and (f) the National Housing Fund (FONAVI) financesprojects in urban infrastructure.

3.22. The Fondo Nacional de Compensacl6n y Desarroilo Social -FONCODES, created in August 1991, will cushion the poor and the mostvulnerable against the negative effects of economic adjustment, and until lineministries and other more permanent social agencies undergo strengthening andreforn. It operates as a social bank and financial intermediary for nationalsocial investments, and for multilateral and bilateral grants and loans. It

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finances small, community-based, labor-intensive, privately contracted, projectswith a strong focus on employment generation, health, nutrition and educationprograms, on the rehabilitation of both the economic and social infrastructure,as well as other investments, such as support to micro-enterprises, targeted onurban and rural populations living in extreme poverty. It is an instrument toimprove the quality, equity and efficiency of social investment. This projectwould specifically contribute to an enlargement and enrichment of its programsand improve its effectiveness and efficiency.

3.23. Municipalities are seen as a necessary part of the poverty alleviationstrategy, but have been unable to respond effectively, given the constraintsimposed by central-local fiscal relationship,, imperfect or absent investmentfinancing and cost-recovery mechanisms as well as weak administrativecapacities. At this time, municipalities are under-funded and access to qualityof municipal-level services is still deteriorating, with the attendant negativeconsequences for productivity, poverty alleviation and environmentalamelioration.

3.24 Municipalities are being progressively involved in the implementation ofthe poverty alleviation program, and are receiving increasing responsibilities andresources from the Central Government. In time, municipalities are expectedto be the major actors in poverty alleviation, as they take responsibility forprimary education, primary health care, public health, children centers,recreation, and special employment programs. At present the "Glass of MilkProgram", in which committees of mothers distribute milk to target children, isalready managed by municipalities.

3.25. Communities have organized themselves to respond to their immediatesocial needs. Mothers' clubs, "Glass of Milk" clubs, community kitchens, andneighborhood associations have proliferattd. To apply for FONCODES grants,communities have organized themselves into thousands of "executingcommittees" which have been able to generate about 12,000 proposals andexecute half as many. The education decentralization reform, which is beingproposed by the Ministry of Education, in which parents' committees will beawarded by the Ministry a grant per enrolled student for directly managingprimary schools, offers a test for how further social responsibilities could beassumed by communities.

3.26. Non-governmental organizations (NGOs) are deeply involved in theimplementation of poverty alleviation programs. At present, in Peru, it isestimated that there are over 700 NGOs, organized in the National Associationof Centers (ANC) and other consortia. For years, they have been active in ruraldevelopment and support to micro-enterprises (36 percent), basic education (57percent), basic health care (23 percent), human rights (10 percent), andenvironment and social studies (45 percent). Many of them are deeply involvedin FONCODES community-based projects, as promoters, intermediaries andimplementers.

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IV. BANK STRATEGY FOR THE SOCIAL SECTORS IN PERU

Rationale for Bank Involvement

4.1. The Bank is supporting the Government of Peru in a three-part povertyalleviation strategy, which consists of: (a) encouragement of broad-basedeconomic growth, through private sector development and public sector reform,(b) development of human capital, and (c) mitigation of the short-term impactof adjustment.

4.2. To encourage economic stability and adjustment, the Bank has approvedfour adjustment and one technical assistance loan:

(a) Trade Policy Reform Loan (L-3437-PE), including a reform ofthe -xchange regime, tariffs, import barriers, export regime andtrade institutions;

(b) Structural Adjustment Loan (L-3452-PE), including reforms ofthe macroeconomic and fiscal policies, social sector strategy,privatization and deregulation, agriculture, labor issues and socialsecurity;

(c) Financial Sector Adjustment (L-3489-PE), including reforms ofthe development banks, "Banco de La Naci6n", privatization,banking supervision and regulation and capital markets;

(d) Privatization Technical Assistance (L-3540-PE); and(e) Privatization Adjustment Loan (L-3595-PE).

4.3. In the area of human capital and poverty alleviation, Bank strategyemanates from the Poverty Assessment and Social Policies and Programs forthe Poor (Report No. 11191-PE), and is to:

(a) Alleviate poverty and cushion vulnerable groups against potentialnegative effects of the economic adjustment program;

(b) Improve the provision of basic social services to the poor and tothe most vulnerable groups;

(c) Strengthen the effectiveness and self-reliance of community andother non-governmental organizations; and

(d) Support the rehabilitation of the social infrastructure in thepoorest rural and peri-urban areas.

4.4. To implement this strategy, the Bank is preparing a Basic lHealth andNutrition Project, and identifying a Basic Education Project, which areexpected to strengthen and contribute to the reform of the relevant lineministries.

4.5. The proposed project would complement these long-term efforts with arapid and targeted initiative to assist low income communities to: (a) reestablishbasic infrastructure and public services, (b) generate employment and (c) put inplace the key elements of a social safety net. With its range of experience with

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social funds, the Bank is well placed to help strengthen FONCODES'management, improve its effectiveness and stimulate the involvement of otherpotental donors.

Lessons Learned from Bank Experience with Social Investment Funds

4.6. Pioneered in Bolivia, Social Investment Funds (SIFs) have since spreadto other countries in Latin America, including Guyana, Haiti, Honduras,Nicaragua, and are under preparation in Chile, Ecuador, and Guatemala.Typically, they target low-income groups and areas by financing small-scaledevelopment projects, generated and administered by community-basedorganizations. Projects are generally carried out by private contractors,incorporating a high proportion of local labor and materials.

4.7. Experience shows that success of SIFs depends on:

(a) Semi-autonomous manageme and weUl paid high quality staffto reduce the potential for political influence;

(b) Demand-riven mechanisms for project generation, withstrong local participation, to ensure ownership, sustainability,project relevance and stimulation of community organization andsocial cohesion;

(c) Targeting mechanim based on poverty maps, to ensure thatthe poorest groups and areas are reached;

(d) Promotion and support for community-based projectgeneration, in poor municipalities where communities havedifficulty in generating projects;

(e) Simple conmmunity-based project desig and transparentprocedures to allow for efficient sub-project appraisal andimplementation;

(f) Execution of community-based projects by privatecontractors, to stimulate efficiency and strengthen the localeconomy; and

(g) Regular and frequent financial and operational audits toensure transparency and accountability, which are essential tomobilizing external funds.

4.8. Poorly implemented Social Investment Funds can result in:

(a) Instability of the implementing agency;(b) Poor targeting, projects not reaching the poorest or the most

vulnerable; and(c) Nonsustainable or otherwise ineffective community-based

projects, due to poor appraisal, execution or supervision; and(d) Weakening of other social sector agencies, such as the

ministries of education, health or public works.

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4.9. Most conditions for a successful operation in Peru have been presentsince August 1992, and have contributed to the remarkable record ofFONCODES since then: (a) high-level management is of high quality and enjoyssignificant autonomy from political influence; (b) projects are based on grass-roots community organizations; (c) targeting, appraisal and selection areadequate; and (d) project execution draws extensively on the local private sector.On the other hand: (a) promotion and project development must be supportedin some very poor areas where demand is lower than what could be expectedfrom the level of poverty, and (b) project sustainability and supervision have tobe improved. These concerns have been included in the revised OperationalManual which was transmitted to the Bank prior to negotiations (8.1).

V. NATIONAL FUND FOR SOCIAL COMPENSATIONAND DEVELOPMENT -- FONCODES

5.1. The proposed Project would support the overall operation ofFONCODES for the period 1994 to 1996. It would consist of a loan to enlargeand erdich FONCODES' programs, and to improve its effectiveness andefficiency. The next sections describe and appraise FONCODES' objectives,activities and impact, resources and organization.

Background and Objectives

5.2. The Government of Peru created FONCODES on August 15, 1991, inan effort to mitigate the social costs of economic adjustment through thefinancing of small scale, short-term social investment projects of immediateimpact on the poor and most vulnetable. After the first 17 months ofoperations, the GOP reviewed the Fund's legal statutes on December 30, 1992,in order to reinforce its autonomy and improve its efficiency. On that date,FONCODES became a decentralized public agency, which depends directly onthe President of the Republic, with technical, administrative, economic andfinancial autonomy. It also became the principal social sector Governmentmagnet for international, bilateral and multilateral aid, credit and developmentagencies.

5.3. FONCODES finances small-scale projects in social and economicinfrastructure, as well as programs in social assistance and income-generation,geared towards improving the living standards of the poor. Emphasis is givento the areas of education, health and nutrition, sanitation and employment-income generation. Projects and programs must be managed by communityorganizations with technical assistance from regional and municipalgovernments, ministries, NGOs and independent professionals.

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5.4. FONCODES targets its social assistance projects towards the populationaffected by structural poverty, and its infrastructure and employment generatingprograms to those who have slipped into poverty and extreme poverty as a resultof recession and economic adjustment. These groups include:

(a) Severely depressed rural and indigenous communities and thosemost affected by instability;

(b) Community organizations in peri-urban areas;(c) Small-scale farmers, fishermen and artisans, and other micro-

entrepreneurs; and(d) Womeni and children.

Performance

5.5. During its short life, FONCODES has had a remarkable performance.From January 1992 until March 1993, PONCODES, reviewed 12,035community-based project proposals, for an estimated US$542 million, of whichFONCODES approved 6,036 (50 percent approval rate), estimated to be worthUS$176 million. Approval rates varied by type of project. By February 1993,4,073 contracts had been signed with community organizations, whichcompleted 818 projects (20 percent), and disbursed the full US$116 millionFONCODES budget allocation for 1993 (Annex 3).

FONCODES - Proposals and Contracts, by Sub-project Type. August 1992 - March 1993

Type of Project Proposals Approved | Approval; (US$542 M) (US$176 M) Rate

Social Assistauce 6.4% 6.0% 31%

Social Infrastructure 42.6% 56.5% 43%

Economic Ilfrastructure 32.0% 31.0% 31%

Income and Employment 19.0% 6.5% 11%Generation

5.6. FONCODES has been effective in targeting its resources to the poorestareas. Ninety-two percent of all community-based projects it has financedoriginated in the 50 poorest provinces, and it has allocated 50 percent of itsinvestments for this purpose. Community projects in these extremely poor areasaccount for: (a) 49 percent of all contracts, (b) 48 percent of newly-generatedjobs, and (c) 35 percent of all beneficiaries.

5.7. Community-based projects were appraised and executed without majorproblems even in areas under the state of emergency, such as Ayacucho,Huancavelica and San Martfn. In these areas, FONCODES approved over1,000 projects, for more than US$55 million, which generated more than 2.1million workdays and benefited more than 2 million people. Projects werecarried out even in Iberia (Madre De Dios), close to the border with Brazil, inan area which can only be reached by plane or after several days of rough roadtravel.

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5.8. During identification, preparation and appraisal, Bank staff andconsultants visited more than 50 community-based projects and reviewed thefiles of many more. In general, Infrastructure projects, which constitute morethan 80 percent of the portfolio, were of good quality, using high qualitymaterials and equipment. For some, such as water and power supply, andirrigation, the sustainability and maintenance of the project had not been wellconsidered. The Project would introduce these concerns as key elements ofappraisal and supervision (para 6.38.)

5.9. Social assistance projects, which constituted only 6 percent ofFONCODES portfolio, varied in quality. Some health projects, such as choleraand endemic disease control, were typical Ministry health promotion andpreventive campaigns, managed through WHO/PAHO, with relatively littlecommunity participation. On the other hand, education sector projects, such asthe school breakfast project, offer excellent examples of how to transformvertical, top-down social programs into highly participative community-basedprojects. In the school breakfast project, parent associations organizedthemselves into executing committees, representing at least 1,000 students, topresent project proposals, in which they would take the responsibility fordelivering school breakfasts to a certain number of students for a year.FONCODES hired the Institute of Nutritional Research, a specialized NGO, todefine the technical specifications for a balanced school breakfast and toorganize a local competitive bidding procedure for companies wishing toproviding the nutritional supplements. FONCODES signed an umbrella contractwith the winning company, to provide a certain number of school breakfastsover one year. When a community-based project is approved, the companystarts delivering monthly supplies to the Departmental capital, where theparents' associations come to collect them. After checking that all is in order,the executing committee authorizes the payment to the supplier. The parentsalso organize the daily preparation and delivery of the school breakfasts to thestudents, during the morning break.

5.10. Credits to small-scale farmers and entrepreneurs, for income andemployment generation, constitute only about 6 percent of the projectportfolio. FONCODES provided for the establishment of revolving funds, tobe administered by NGOs (79 percent), such as CARE, IDESI and HABITAT,and by 'savings and loans" financial institutions, such as the Federation ofMunicipal Savings and Loans. Because banks generally do not give loans tosmall-scale entrepreneurs, often in the informal sector, NGOs and savings andloans are, at present, the Peruvian financial institutions which are best placedfor reaching the target beneficiaries. Credit awarded at market conditions hasbenefited mostly rural communities (66 percent of the awarded loans), and thefinancial intermediaries ensured adequate training and technical assistance to thebeneficiaries, and have had low loan default rates, ranging from 4 to 8 percent.The Lima Savings and Loans was an exception, as it did not provide adequatetechnical assistance, showed poor loan judgement, and accumulated a muchhigher level of bad debts. As a result, FONCODES will not renew its contractwith this agency.

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5.11. The contracts with the financial intermediaries were not clear on theprovisions for returning the revolving funds to FONCODES, and were notstandardized regarding the financing of the operational costs of the intermediaryinstitution and the credit conditions for beneficia!ies. Supervision of this typeof projects needed more resources and an improved management informationsystem. The project would make sure that these would be taken intoconsideration in the institutional development of FONCODES (paras 5.52,8.1,c.)

5.12. Community-based projects to support small-scale farmers, with theexception of those which distributed agricultural inputs to areas suffering fromlast year's drought, appeared to be adequately targeted and of high priority, tobe well designed and sustainable, and to rely on the private sector for execution.

5.13. The operation of FONCODES has been efficient, with administrativecosts representing only 4 percent of the total budget in 1992. FONCODESincreased its sub-project processing rate from 308 projects a month in late 1992,to 858 projects per month in the first quarter of 1993. The time taken toapprove or reject a project proposal has diminished from an average of 119 daysin late 1992, to 42 days in the first quarter of 1993. Yet, this achievementoccurred in spite of clear resource shortages: vehicles were too few, as werecomputer terminals, telephones, faxes and radios. The proposed project wouldsupport the institutional development of FONCODES, according to a planFONCODES has developed with the technical assistance of IDB and isacceptable to the Bank. According to the plan, all Regional Offices would haveat least two vehicles, an adequate number of computer terminals andperipherals, and a telephone, fax and radio system (para 6.3.b.ii.)

Estimated Impact

5.14. Community-based projects funded by FONCODES are estimated to havebenefited over 10 million people and generated over 8 niillion paid workdays,i.e., about 30,000 man-years.

FONCODES - Impact and Cost Effectiveness, by Sub-project Type

7ype of Projec t Benefiiaries Wor*-days T US$ per I US$ perI Milion JMillion benefic. work day

Social Assistance 8.1 N.A. 1.3 N.A.

Social Infrastructure 3.5 2.2 15.2 25

Economic lnfrastructure 1.8 3.2 23.7 13

Income and Employment 1.8 2.6 13.5 10Generation

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5.15. The relatively few social assistance projects benefited more than twiceas many people as any other type of project. On the other hand, economicinfrastructure sub-projects benefited relatively fewer people, but generated thelargest number of workdays. Income and employment generating sub-projectswere the most efficient in creating jobs. The credits to small-scale farmers andentrepreneurs incorporated the beneficiaries into the formal economic structureand assisted them in organizing production and taling advantage of economiesof scale, while infrastructure projects have trained many unskilled workers,providing local populations with valuable assets.

5.16. During appraisal a sample of 10 typical projects was selected for abeneficiary assessment. All projects were clearly oriented to satisfy real needsof the beneficiaries, although in two cases, one could argue that the satisfactionof other needs might have been more urgent. The commitment and directcontributions of the population were remarkable, including voluntary work-hours, collective volunteer work-ays, and acceptance of salaries well belowmarket wages, which allowed the project to reach the most needed. Equallyremarkable was the working relationship between the communities, promoters,inspectors and FONCODES staff. This beneficiary assessment served both toassess a certain number of projects, but also to develop the terms of referencefor an ongoing expost evaluation of a sample of projects, which the project willinclude, based on a mix of traditional economic evaluation and a morequalitative beneficiary assessment (paras 5.61., 6.25.g.)

5.17. All the evaluated projects were successful in the immediate alleviationof poverty and in generating temporary employment, mostly for unskilledworkers, but the effective generation of permanent employment was modest, asis usually the case for social investment funds which are designed to provideshort-term poverty alleviation measures during a period of economic adjustment.To generate more permanent employment, FONCODES would have to promotecertain project types, such as agriculture land rehabilitation, terracing,community kitchens, storage and commercialization centers, cattle breeding,dairy and livestock, fishing, and investments in small enterprises.

5.18. Some of the evaluated community-based projects would not besustainable, unless additional investments were carried out. Typicaly, it wasa question of an originally comprehensive and sustainable project, being cut intoseveral smaller unsustainable sub-projects to accommodate FONCODESeligibility and appraisal criteria, with the underlying hope of being able to havethe series of sub-projects approved in succession and, thereby, achieve theoriginal project objectives. In such cases, it would make sense for FONCODESto request a revision of the relevant proposal, or to promote the neededcomplementary community projects (para 6.38.)

5.19. Communities also benefited from organizing themselves to prepare andmanage project execution. This process contributed to community organizationdynamism, self-reliance and effectiveness. Communities were energized bytheir positive experiences and many have proceeded from completing their firstproject to preparing a second one.

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5.20. The risk of FONCODES being used as an instrument of politicalmanipulation was considered during project preparation and appraisal. TheBank's and the IDB's staff and consultants involved reviewed FONCODES' pastexperience and confirmed that there had been no serious or negative politicalmanipulation in FONCODES project selection. Almost all of the projectsvisited were genuinely grass-roots, community-based and responded to realneeds of the population. In some remote areas, the name FONCODES was noteven associated with the Government, but was thought to correspond to theacronym of an NGO. The project would monitor the risk closely, through Banksupervision and independent ex post evaluation of a sample of projects.

Organization

5.21. FONCODES is a small organization, relative to the overall resources andnumber of projects it manages. It has a staff of 200, 70 percent of which areprofessionals. These are complemented by another 250 external evaluators andsupervisors. In 1992, overhead costs were about 4 percent of the institution'syearly budget.

5.22. The organizational structure is simple and sound. The President of theRepublic directly appoints the five-member Board of Directors which is chairedby the Minister of the Presidency. The Board defines general policies andregulates and supervises the overall operation of FONCODES. It also ratifiesdecisions on community-based projects which would cost over US$100,000equivalent. One of the Board members is appointed Executive Director, andis responsible for executing Board decisions and for the institutionalrepresentation of the Fund. The rest of the organizational structure (Annex 4)is still evolving and is presently composed of:

(a) A General Manager, who plans, organizes, coordinates,supervises and evaluates, according to the statutes and policiesestablished by the board;

(b) Three line managers, for:

(i) Programs and Projects, responsible for targeting,promotion, and appraisal;

(ii) Supervision and Control, responsible for supervision,and contract management; and

(iii) Operations, for budgeting, accounting and managingdisbursements and personnel;

(c) 21 Regional Managers, responsible for Regional Offices, whichpromote, select, appraise and supervise projects in theirjurisdiction; these are coordinated by a Regional CoordinationManager.

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(d) Three support managers, for:

(i) Legal Affairs, for legal counsel of Management;(ii) Internal Control, which ensures compliance with

appropriate procedures and accountability through regularaudits and ad hoc enquiries; and

(iii) Planning and Management Information Systems, incharge of information network and institutionaldevelopment; and

(e) One Special Advisor on External Technical Assistance andFinancing, in charge of liaison with multilateral and bilateralagencies.

5.23. FONCODES is presently building the capacity of its Regional Officesand intends to grant them significant autonomy in promoting technicalassisiance, appraisal, selection and supervision of community-based projects.At present 70 percent of all project proposals are appraised at regional offices,which can direcdy approve projects costing up to US$10,000 equivalent. Theproject would support this decentralization effort, through quality assurancemechanismns, such as standards setting, training and regular monitoring andcontrol. At present, neither Tacna nor Apurimac have a regional office, due toa low demand for community-based projects. This is a cause of concern in thecase of Apurimac, which is an area with a high prevalence of poverty andextreme poverty. The project would help develop the Apurimac Regional Officeto promote projects and provide technical assistance to communities wishing topropose projects.

5.24. The staff is dedicated and of good quality, but overworked. Vehiclesand equipment are, at present, insufficient for the number of projects which willneed to be appraised and supervised. Research and development was notadequately supported and the coordination between appraisal and supervisioncould be improved. The project would assist FONCODES in implementing aninstitutional development plan, developed with the technical assistance of IDB,which would address the identified deficiencies (para 6.3.b). The institutionaldevelopment plan is available in the Project files.

5.25. As a result of project preparation, FONCODES has created a researchand evaluation function to study needs, develop innovative community-basedproject concepts, evaluate expenence and incorporate lessons learned into newcommunity-based project design and administrative procedures. The projectwould support the institutional development of FONCODES, including therehabilitation of facilities, purchase of vehicles and equipment, technicalassistance, studies and training. It would improve the integration betweenproject appraisal and supervision. It would also promote a post communityproject evaluation, to evaluate the impact on beneficiaries.

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Project Portfolio

5.26. FONCODES finances community-based projects in the following areas:

(a) Social Assistance, including projects in: (i) health and nutrition,such as primary health care, disease prevention, family planning,medical supplies, and (ii) education, such as pre-schooling,school supplies, school libraries, literacy campaigns and trainingof unemployed workers;

(b) Social Infrastructure, including water treatment and supply,sewerage, health post rehabilitation and medical equipments,community kitchens, school rehabilitation and equipment, andrehabilitation of sports and community centers;

(c) Economic Infrastructure, including economically viable projectswith a significant social impact such as rehabilitation of smallroads and sidewalks, irrigation systems, terracing, landrehabilitation and erosion control, reforestation, electricitysupply, and markets; projects in categories (a) to (c) above arefinanced through grants provried by FONCODES to community-based entities; and

(d) Income and employment generation projects for small-scalefarmers, fishermen and micro-enterprises; these projects areimplemented through loans, at market rates, provided byintermediaries which administer revolving funds for this purposereceived from FONCODES.

5.27. At the start, FONCODES supported a wide and open portfolio ofprojects, without imposing any priorities, to generate community demand andcreativity. At the present stage, when demand vastly out-paces the availabilityof funds, FONCODES intends to prioritize those types of projects which wouldcontribute more to poverty alleviation, and would focus its activities into thepoorest areas. The project would add this priority ranldng to the appraisalcriteria (para 8.1.b.i.)

5.28. As described above (para 5.18), some community-based projects wouldnot be sustainable alone. They would need to be complemented by additionalcomponents or by other associated community-based projects: rehabilitation ofschools would need to be complemented with fiuniture, school books, andassurance that a teacher is available; health nosts would require that a sourceof clean water, basic medical equipment and supplies, exist and that healthpersonnel would be available at least twice or three times a week; communitykitchens would need to have a source of clean water; school breakfasts andmedical suipply projects would require some assurance of continuity. Theproject would promote these complementary inputs and projects (para 6.38).

5.29. Again, some projects, such as water and power supply, and irrigation,would not be sustainable without proper organization and training of the usercommunity. Such training and organizational development would be coveredby adding specific components to medium sized projects, or by organizing

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specific projects to cover training and organizational needs of a number ofsimilar small projects. For water and sewerage projects, as well as for irrigationprojects, FONCODES would promote the creation, training and support ofcc.mmunlity-based resource management committee, which would beresponsible for maintenance and minor repairs and would ensure the collectionof tariffs. FONCODES would also contract out the preparation and distributionof the relevant infrastructure maintenance manuals.

Financing

5.30. Until now, FONCODES has been almost solely financed by the PublicTreasury. In 1992 and 1993, it was granted US$87 million and US$214.9million equivalent, respectively, of which 97 percent came from the Treasury.

5.31. FONCODES provides financial support to organized communities forproject preparation, labor and materials and for the services of anadviser/inspector who can ensure the technical quality of the community project.Financing is provided through:

(a) Grants to community organizations carrying out socialassistance, rehabilitating social and economic infrastructure; and

(b) Transfer of Funds to Fiduciaries, such as the Savings andLoans (Cajas Municipales) and NGOs, which in turn lend suchfunds at standard market rates to small-scale farmers, fishermenand micro-enterprises.

5.32. At present, revolving funds constitute a mere 6 percent of FONCODES'investments. FONCODES would only support this type of project temporarily,in cases of market failure, until the government sets an overall policy on creditto small and medium enterprises. At negotiations, assurances were obtained thatthis type of project would not constitute. at any time. more than 10 percent oftotal grants or loans aproved by FONCODES (para 8.2.c.)

5.33. FONCODES' initial portfolio included loan guarantees for financialinstitutions making loans to small-scale farmers, fishermen and micro-enterprises, but no proposal was ever approved. At negotiations, assuranceswere obtained that this type of project would not be eligible for FONCODESfunding (paM 8.2.c.)

5.34. Until now, the overall portfolio of FONCODES shows that projects havebeen small and community-based, costing an average of US$30,000 equivalent.To achieve this result FONCODES has required that: (a) project execution timeshould not exceed one year; (b) basic salaries should not exceed the minimumwage for an unsldlled civil worker; (c) labor costs must account for at least 30percent of the budget; and that (d) average costs per unit should not exceed theaverage unit costs of such projects in the region or municipality.

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5.35. Cost Sharing. During the emergency phase of poverty alleviation,communities have not been asked to share the costs of projects. In some cases,they have not been asked to pay for the costs of providing the servicesassociated with the project (e.g. water and power supply). However, apreliminary review of approved community-based projects shows that themajority of them already include substantial community contributions, in theform of management costs, land, materials, complementary inputs, and evenvolunteer work. These contributions were estimated to vary from an averageof 6 percent of total costs in social assistance projects, to 19 percent in somesocial infrastructure projects, such as the rehabilitation of schools. Also, powerand water supply infrastructures is typically transferred to municipalities at thetime of project completion, and the municipalities collect and administer userfees.

5.36. The Project would require community contributions for all projectsapproved by FONCODES, which would be on average 10 percent of projectcapital-costs, adjusted to the type of project, and poverty levels. Such cost-sharing scheme and maintenance arrangements would improve communityownership and project sustainability (para 6.36). In addition, for certain typesof projects, such as irrigation, water and power supply, communities would berequired to organize to collect charges, to cover the recurrent costs, and themunicipality or the relevant ministry would ensure maintenance.

Community-based Project Cycle

5.37. FONCODES' project cycle includes targeting, identification andpromotion, appraisal and selection, contracting and disbursements, supervisionand ex-post evaluation.

5.38. Thrgeting. Although community-based projects are demand-driven, andoriginate in communities, FONCODES establishes budgetary and activity targetson the basis of poverty maps. Far from an attempt to plan projects, the targetsare a reference for establishing priorities among the vast needs of the Peruvianpoor. The objective is to ensure that between regions, and within each region,the more developed groups do not use most of the resources, and to avoid thatthe poorest, who may be less able to generate good projects, remain uncovered.

5.39. Targeting is based on poverty maps, constructed with a poverty indexbased on income per capita and infant mortality rates. For each fiscal year,tentative budgetary targets are established for each area, and the allocation isthen fine-tuned by the Board for conditions of special hardship, such as livingunder emergency security conditions. The final allocation is confirmed by atask-force which includes the Central Reserve Bank (BCR), the NationalInstitute for Statistics and Informatics (INEI), the Social Policy Workshop(TPS), the Nutrition Research Institute (IN), FONCODES and UNICEF.Management monitors the demand for community-based projects per area, ona monthly basis, and the Regional Offices, which are closer to communityneeds, take the leading role in promoting and supporting project preparation in

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those areas where need is well recognized but demand is below what could beexpected. The present system has so far produced a fair distribution of funds.

5.40. Community project identification and promotion are carried out byFONCODES regional office staff or by individual external promoters, who canbe any person or body, private or public, willing to (a) inform and organize thepopulation to present a community-based project to FONCODES, and (b) assista community in project preparation.

5.41. FONCODES and other promoters meet with formal and informalcommunity leaders, municipal authorities and NGOs, to describe: (a)opportunities offered by FONCODES; (b) major eligibility requirements; and(c) steps to prepare a project proposal. FONCODES also uses otherdissemination techniques, such as the distribution of written materials, and theproduction of radio programs. Special promotion efforts are made in certainareas, where the poverty mapping identifies populations living in extremepoverty and lacking the capacity to generate and prepare projects. In thesecases, FONCODES or an intermediary, such as an NGO, undertake spezialpromotion efforts and assist the community in preparing a project proposal.

5.42. Project promoters work on their own initiative, after learning about theopportunities created by FONCODES. For approved projects, FONCODES canfinance project preparation costs retroactively, including the promoters' fees, upto a maximum of 5 percent of total project costs.

5.43. Community organization. To submit a project, communities organizethemselves and nominate executing committees, the nucleos ejecutores, whichreceive and manage the respective FONCODES grant, and are responsible forproject implementation. Where communities are extremely poor and lack thecapacity to independently present a project proposal, NGOs, the CatholicChurch or municipal governments participate as promoters and provide technicalassistance. Depending on the nature of the program, they may also enter intoa management contract with the community.

5.44. Appraisal and selection. FONCODES specialists, in the Programs andProjects Division or in the Regional Offices, are responsible for appraising thecommunity project proposals. Alternatively, appraisals are done by externalevaluators contracted by FONCODES for this purpose, typically through therecommendation of the College of Engineers. There is still a lack ofFONCODES evaluators for some project categores such as loans for small-scalefarmers and micro-entrepreneurs.

5.45. Appraisal is based on standard eligibility and appraisal criteria, which aredescribed in the Operational Manual, and typically include:

(a) Eligibility:

(i) Rural or pen-urban area, in extreme poverty or underemergency rule;

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(ii) Labor-intensive, with a focus on local unskilled workers;(iii) Simple design, rapid execution time;(iv) Contribution to basic social service provision;(v) Comwunity participation in project development and

maintenance;(vi) Use of local inputs; and(vii) Costs compatible with estimated local market costs;

(b) Appraisal:

(i) Poverty alleviation potential;(ii) Project quality;(iii) Costs and efficiency;(iv) Estimated rate of return, when relevant;(v) Poverty; estimated income of beneficiaries;(vi) Sustainability; and(vii) Managing capacity of the executing committee.

5.46. In the sample of projects reviewed during project preparation andappraisal, Bank staff and consultants found that appraisals had been conductedprofessionally and with good judgment. In addition, the IDB is conducting anindependent in-depth review of a random sample of 70 projects financed byFONCODES, and the report of the evaluation will be available to the Bankbefore negotiations.

5.47. As described above, cost-sharing has not been a requirement andsustainability arrangements have sometimes been overlooked (paras. 5.18, 5.28-29, 5.35-36). The Project would require that these be included among theeligibility and appraisal criteria (para 6.38).

5.48. Until now, FONCODES has not made systematic environmental impactevaluations of community-based projects. The Project would require suchevaluations for certain types of projects (para 6.39). For this, FONCODES isdeveloping summary environmental impact guidelines, with the technicalassistance of the IDB.

5.49. The FONCODES Selection Committee includes the General Manager,the three line managers and the legal counsei. It approves the community-basedprojects to be financed, on the basis of a summary staff appraisal report.Regional Office Managers can directly approve small projects (up to US$10,000equivalent), after consulting with the General Manager. The Board ratifiesdecisions on large projects, such as those estimated to cost more thanUS$100,000 equivalent.

5.50. Project appraisal is supported by a management information systemwhich standardizes cost estimates and unit-cost reviews. The system is based ona data base of project input costs (wages, construction materials, equipment andprofessional services), calculated for six geographical areas. The data base isupdated monthly, on the basis of prices quoted in the Construction Price

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Review, which is published monthly in Peru. The system also has a Unit-PriceAnalysis Component, based on criteria and standards published by the PeruvianChamber of Construction and Public Works), which includes standards for thecommonly requested FONCODES projects such as irrigation, electricity supply,and roads. The unit-cost system was reviewed at appraisal and considered tobe satisfactory, transparent, well maintained, and to reflect real prices in thePeruvian market. However, the system has been introduced only recently andhas been used for only 50 percent of the projects. The projects processed byexternal evaluators are not presently subject to this control. The system is inrapid expansion, and the project would ensure that all community-based projectsare subject to the same type of standard cost analysis.

5.51. Contracting and Disbursements. Once a community-based project isapproved, FONCODES signs a sub-project agreement with the executingcommittee which, in turn, executes the project by force account or by hiring aprivate contractor, an NGO or a municipality. In addition the executingcommittee signs an agreement with an inspector acceptable to FONCODES.The inspector is responsible for directly controlling the works or projectexecution and for reporting to the FONCODES supervisor on all technical,administrative and accounting issues. He is paid by the executing committee,out of the proceeds of the FONCODES grant. Funds are deposited in a bankaccount and controlled jointly by the inspector and the executing committeetreasurer.

5.52. Some contracts need to be improved, namely those that pertain tofinancial intermediaries which administer funds as fiduciaries for credit to small-scale farmers and entrepreneurs (para. 5.10). The latter would need to clarifythe responsibility of the intermediary institution regarding assumption of creditrisk, refunding FONCODES for the administered funds, coverage of operationcosts and inclusion of standardized credit conditions. At negoQianFONCODES presented reviewed model contracts in which these issues weresatisfactorily addressed (8.l.c).

5.53. Following the contract, FONCODES disburses about 60 percent of theexpected costs of the project to a special account opened by the executingcommittee for the community project. Further disbursements are authorized bythe regional FONCODES project supervisor, based on project progress orcompletion.

5.54. The executing committee normally contracts the works directly with localskilled and non-skilled workers. For works or services of some complexity, theexecuting committees will typically contract with local private enterprises orNGOs.

5.55. Given the nature and small size of community-based projects,FONCODES has not systematically imposed any procurement rules upon theexecuting committees. The Project would require that Bank guidelines forprocurement of goods and services be used in all community-based projects

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funded by FONCODES, and in the institutional development of FONCODES(paras 6.13-24)

5.56. Project supervision and control are carried out by the concerneddivision in FONCODES. Supervision is done directly by FONCODES regionalstaff, or is contracted to intermediaries, such as the College of Engineers, withclear terms of reference. Supervisors: (a) monitor project execution; (b)authorize disbursements; (c) ensure compliance with contract covenantsconcerning executing committees, the contracts and suppliers; (d) verifycommunity participation and arrangements for maintenance and projectsustainability; and (e) sign the project completion report, check accounts and setthe final financial balance.

5.57. FONCODES has had difficulty in ensuring adequate project supervisionof the large number of community-based projects it has approved. At thebeginning, only about 20 percent of the community-based projects were subjectto adequate supervision. This resulted from shortages in personnel, vehicles andlack of access to an automated momtoring and control system which are nowbeing resolved. The proportion is presently 85 percent and can be expected toreach 100 percent in the next several months. The Project would contribute toimproving the intensity and specialization of supervision, through theimplementation of the FONCODES' institutional development plan, which hasbeen developed with the assistance of the IDB (para 5.24, 6.3.b),

5.58. Project supervision is supported by a management information systemwhich keeps track of physical, social and financial performance. The systemhas the key elements needed for good management and was able to produce, atshort notice, all management reports required by project preparation andappraisal. The existing system is functioning well and is particularly suited forsupervising infrastructure and engineering projects. However, it is not as wellsuited for monitoring social assistance and income and employment generationprojects. The system is presently being upgraded with the technical assistanceof the 1DB.

5.59. Accounts and Audits. FONCODES' accounting systems follow theusual and customary model of public accounting but have, until recently, beenmostly implemented by hand. The system is presently being automated, as partof the development of the management information system, under the technicalassistance of the IDB.

5.60. FONCODES is subject to regular audits by the Accountant General. Inaddition, it has ordered a private firm to conduct an audit of its activities andaccounts, as well as of a sample of 100 community-based projects.

5.61. hx-post evaluation of community-based project impact has not, untilnow, been made on a regular basis. As part of Project preparation,FONCODES has created a new research and evaluation unit which willcoordinate community-based project evaluations. The project would include anongoing evaluation of a sample of completed projects, which would be

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contracted to an independent organization, such as an university or a specializedresearch-oriented NGO, consisting of a mix of traditional economic evaluationand beneficiary assessment (para 6.25.g).

5.62. Operational Manual. The organization and functions of FONCODESare described in an Operational Manual and a Users' Guide, which include amain section describing the general operation of the Fund, and specific sectionswhich cover each project category, and the most frequently sought project types.Both the Manual and Guide are still evolving, as is the whole organization.They were reviewed by Bank's staff and consultants, during preparation andappraisal, and found to be adequate for the present development stage ofFONCODES. They still have some inconsistencies, leaving evaluators andsupervisors with excessive discretion. These deficiencies are being addressedunder technical assistance of both the Bank and the IDB. Copies of both areavailable in the Project files.

5.63. In addition to the above weaknesses, some Bank concerns, includingprioritizing (para 5.27), cost-sharing (para S.35, 5.47), sustainability (para 5.18,5.28-29), and environmental appraisal (para 5.48), are inadequately covered inthe manual. At negotiations, FONCODES Mresented a revised version of theOperational Manual, which the Bank found to be satisfactory (ra 8.4.b).

Inter-institutional Coordination

5.64. FONCODES' mandate and activities potentially overlap with those ofother government agencies, as described above (para. 3.21). To avoidduplication, inefficient use of resources and inter-institutional conflict,FONCODES coordinates its policies and activities with those of other socialsector ministries and government agencies, through a Commission which hasbeen formed by the National Institute of Education Infrastructure (INFES), theNational Institute of Development (INADE), the National Office of PopularCooperation (COOPOP), and the Departmental Cooperation for theDevelopment of Lima and Callao (CORDE LIMA and CORDE CALLAO).The coordination has until now been generally satisfactory. The roles,interfaces and articulation between these institutions is described at length by theMinistry of Economy and Finance in the "Institutions which Develop PovertyAlleviation Programs" report, which is part of the Project files.

5.65. Certain community-based projects, such as the rehabilitation of schoolsand health posts lead to significant additional recurrent costs in personnel,supplies and maintenance. In addition, community-based projects such as newroads, water, sanitation and power supply can have significant impact on theexisting networks. In both cases, community project proposals must include anapproval letter from the relevant line ministry or agency, to ensure that they fitinto the plans of the relevant Ministry, regional or municipal governments.

5.66. For a time, there was a certain degree of overlap between FONCODESand another Government fund - National Housing Fund (FONAVI) underwhich the Ministry of the Presidency finances investments in urban

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infrastructure. FONAVI, through its Program of Supervised Credits, makesloans to community-based organizations for urban infrastructure improvementsin a manner similar to that of FONCODES, but requires significant cost-sharing. PONAVI coordinates with FONCODES and to avoid duplication andoverlap they have agreed that FONAVI would operate in major cities,supporting large infrastructure projects, such as roads, water, sanitation andpower supply, while FONCODES would target its resources to rural areas andin smaller, isolated communities, and give priority to small social assistance andrehabilitation of social infrastructure.

5.67. In some cases, central and local government agencies have done morethan just coordinate with FONCODES, and have become directly involved inthe preparaton or execution of community-based projects. Although communityorganizations typically identify, propose and manage projects, several publiccorporations have been involved in promoting projects, and in assistingcommunities in project preparation and supervision. In fact, different Ministrieshave been involved, in some capacity, in about 13 percent of the projects (e.g.cholera control in an emergency area, drug and other supplies for health posts),and local governments have participated, in some capacity, in 38 percent of theprojects.

VI. THE PROJECT

Objectives and Scope

6.1. The Project's objectives are to: (a) sustain the GOP poverty alleviationefforts, (b) mitigate the social costs of maco-economic adjustment, and (c)strengthen the institutional capacity of FONCODES. Specifically, the Projectwould support the overall operation of FONCODES for the penod 1994 to1996.

6.2 The Project would contribute to poverty alleviation by supporting,through FONCODES, a range of projects with a strong focus on education,health and nutrition, and other areas that would assist the poor rural and urbanpopulations, and by promoting the efficiency and effectiveness of FONCODES.The community-based projects would (a) generate employment and improveaccess to social services, (b) support social development, (c) complement otherlong-term projects in health and education, with effective mechanisms to reachthe poor in the short run, and (d) maximize support from other potential donors.

Description

6.3. The Project, with a total cost of US$495 million, would have twocomponents:

(a) Support to FONCODES community-based projects, with atotal cost of US$468.5 million (95 percent). This component

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would finance, through the Fund, a range of community-based,labor-intensive projects, with a strong focus on health andnutrition, education and on other areas that could assist poorrural and urban populati-ns. From FONCODES' pastexperience, it is estimated that the Loan would supportcommunity-based projects in all four FONCODES project types:

(i) Social Assistance (14 percent), including: healthpromotion and disease prevention campaigns, primaryhealth care and family planning services, medicalsupplies, nutritional supplements, pre-schooling, literacycampaigns, institutional development of community-basedorganizations, school libraries and materials, andretraining of unemployed workers;

(ii) Social Infrastructure (37 percent), including: watertreatment and supply, sewage collection and treatment,environmental sanitation, health post rehabilitation andequipment, school rehabilitation and equipment,community kitchen construction or rehabilitation andequipment, and sports and community center constructionand equipment;

(iii) Economic Infrastructure (33 percent), including:rehabilitation, extension and construction of wells andirrigation systems, land rehabilitation and reforestation,road and sidewalk rehabilitation, marketing infrastructure,and electricity supply; and

(iv) Credits to small-scale farmers and entrepreneurs forincome and employment generation (9 percent), includingsupport and capacity building to micro-enterprises, small-scale fisheries, agriculture inputs and small-scaleprocessing firms .

(b) Institutional Development of FONCODES, with a total cost ofUS$26.5 million (5 percent). This component would finance:

(i) works, such as the rehabilitation and refurbishing ofFONCODES' offices;

(ii) goods, including vehicles, communications and computingequipment; and

(iii) services, including training of FONCODES staff inproject management, technical assistance for projectappraisal and supervision, poverty studies, ex postevaluations of community-based projects funded byFONCODES, audits of FONCODES and community-based projects, and support to enity-bed projectpreparation and implementation.

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Lending and Implementation

6.4. The proceeds of the Loan (US$100 million equivalent) would be lent tothe Republic of Peru, which would pass them on as a grant to FONCODES,which would, in tum, use the Loan in conjunction with other funds from theNational treasury and other international donors and credit agencies to financecommunity-based projects and to support its institutional development.Community projects would be supported in the form of:

(a) Grants awarded to community organizations, NGOs or publicagencies, which would contract works and supervise project execution-ith the assistance of an approved inspector; and

(b) Transfer of Funds to intermediary financial institutions, actingas fiduciaries, which in turn would lenid funds at standard market ratesto support investments in small-scale enterprises.

6.5. As a condition of loan effectiveness. a SubsidiAgreement for makingfunds available by the Borrower to FONCODES. on terms acceptable to theBank. would be signed (para 8.4.a)

6.6. The Project would be implemented over a period of about four years.FONCODES would be the implementing agency. The structure and operationalprocedures of FONCODES, including criteria and procedures for projectidentification, preparation, appraisal, and implementation of community-basedprojects, were reviewed by the Bank and are generally satisfactory, with theexception of the issues mentioned in paragraph 5.63. FONCODES currentmanagement is satisfactory to the Bank. At negotiations. assurances wereobtained that: (a) FONOCODES would maintain an Executive Direto. GeneralMana=e. and Line Managers with eprncand qualifications aQccptble tothe Bank (paM 8.2.a): and (b! any substantial change in the Operational Manualor User's Guide would be require prior Bank approval (para 8.2.b).

Costs and Financing Plan

6.7. The total project cost, net of taxes and duties, expressed in July 1993prices, is estimated at US$495 million equivalent. The estimated foreignexchange costs (US$79 million) represent 16 percent of the total project costs.The Bank would finance 25 percent of foreign exchange costs and also 25percent of local costs. The financing of local costs under the project is aconsequence of: (a) the foreign exchange component of total costs is only 16percent, and (b) the project is targeted to areas of the country where extremepoverty is high. A breakdown of project costs is shown in Annex 5 and issummarized below. The disbursement schedule is shown in Annex 6.

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6.8. Since the project is essentially a financial intermediary type of operation,physical targets depend on community-based projects to be presented and nocontingencies have been provided. Any increase in the average community-based project amounts would be reflected in a reduced number of projectsexecuted.

6.9. The cost estimates and average size of community-based projects(US$30,000 equivalent) reflect a consensus of sector specialists and theexperience accumulated by FONCODES, based on its experience in financingof projects in 1992-1993 and the projected average costs and number of projectsfor 1994-1995. The project is expected to finance about 16,500 community-based projects over three years, i.e. about 5,500 community projects a year,which seems realistic when compared with an average of 6,000 projects per yearfor 1992 and 1993. The costs of the institutional development component,which would finance rehabilitation works in FONCODES offices, studies, auditsand evaluations, technical assistance, training and administrative systems, arebased on the average cost of technical assistance provided by UN agencies andon the market costs of consultants and training services in Peru.

6.10. The proposed Bank loan of US$100 million equivalent would representabout 20 percent of total project cost. Local beneficiaries, including ultimatebeneficiaries, municipalities, NGOs and other entities, would contribute US$42million equivalent (about 9 percent of total project costs). The Borrower'scontribution would be US$200 million equivalent and would partly financeFONCODES' operating costs. This amount seems realistic when compared withthe Government's past contribution to FONCODES, of over US$300 millionequivalent in 1992 and 1993.

PERU: Social Development and Compensation Fund Project.Estimated Costs (USS million)

Conwnents ~Local Foreign Total Percent

Community-based ProjectsSocial assistance 60 11 71 14.3Social infrastructure 158 28 186 37.6Economic infrastructure 140.5 24 164.5 33.2Income/Employment Generation 40 7 47 9.5

Sub-total 398.5 70 468.5 94.6 l

Institutional Development of FONCODESRehabilitation Works 1.5 0 1.5 0.4Equipment and vehicles 2 4 6 1.2Technical assistanee 7 3 10 2.0Operating costs 7 2 9 1.8

Sub-total 17.5 9 26.5 5.4

Total Costs 416 79 495 100.0

Net of taxes and duties

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6.11. The project will receive parallel financing from the IDB and theGovernment of Germany (KfW). The IDB has indicated that it would contributeUS$100 million for the project, to finance social and economic infrastructurecommunity-based projects. Other donors, including KfW, would support theProject with another US$53 million equivalent, to finance the whole range ofFONCODES projects in a pre-determined area, which is likely to be the IncaRegion. FONCODES would propose to the lenders which projects would befinanced by each institution. Joint supervision (para 6.26) would ensure inter-lender coordination.

PERU: Social Development and Compensation Fund Project. Financing Plan. US$ million

Finaning Plan Loc | Foreign T Total

Government of Peru 200 0 200

Beneficiaries 42 0 42

World Bank 80 20 100

Inter-American sO 20 100Development Bank

Other Donors (ncluding KfW) 14 39 53

Total 416 79 495

6.12. The Loan would retroactively finance community-based projectexpenditures incurred after August 1, 1993, provided they were eligible underthe terms and conditions set in the loan agreement, up to a maximum of 10percent of the Loan.

Procurement

6.13. Procurement of works, goods, and services, as well as the contractingof consultants with Bank funds would be carried out in accordance with Bankguidelines. A recent review by the Bank of the procurement proceduresfollowed by both the public and prvate sector in Peru show that these aregenerally acceptable. The procurement procedures followed by the public sectorare largely based upon competition, with only minor exceptions of directcontracting which are compatible with Bank guidelines.

6.14. Very little procurement would be carried out by FONCODES directly.This would be limited to some rehabilitation of FONCODES offices and theirrespective equipment. Most procurement would be done by communityexecuting committees, or intermediaries such as NGOs, municipalities orministries, using standard bidding documents acceptable to the Bank.

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6.15. To facilitate FONCODES' administrative procedures, the IDB, KfW andthe Bank would enter into an agreement to adopt common procurementprocedures in this project.

PERU: Social Development and Compensation FundProcurement Methods by Category. US$ million

Category Procurement Method ANFB | Total

ICR LCB Other

Communty-Based Projects

Works 0.00 17.87 81.41' 244.21 343.50

(0.00) (12.51) (56.99) (69.5)

Goods and Services 0.00 4.89 22.26a 72.86 100.00

(0.00) (3.42) (15.58) (19.00)

Consultants 0.00 1.26 5.74 18.00 25.00

(0.00) (1.26) (5.74) (7.00)

Total 0.00 24.02 109.41 335.07 468.50

(0.00) (17.19) (78.31) (95.50)

Instfuonal Development ofFONCODES

Rehabilitation Works 0.00 0.27 1.23' 1.50

(0.00) (0.14) (0.62) (.75)

Goods and Services 0.00 0.23 1.03a 4.75 6.00

(0.00) (0.14) (0.62) (.75)

Consultants 0.00 0.54 2.46 7.00 10.00

(0.00) (0.54) (2.46) (3.00)

Operating Costs 0.00 0.00 0.00 9.00 9.00

(0.00) (0.00) (0.00) (0)

Total 0.00 1.04 4.72 20.75 26.50

(0.00) (0.81) (3.69) (4.50)

TOTAL 0.00 25.05 114.13 355.82 495.00

(0.00) (18.00) (82.00) (100.00)4ote: Figures in parenheses are the respective amounts Inaced by the Bank loan

' Local Shopping or Direct Contracting. b Not Bank Financed.

6.16. Procurement of Works would be as follows:

(a) International Competitive Bidding (ICB), if any, for contractsesfimated to cost US$3,000,000 equivalent or more;

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(b) Local Competitive Bidding (LCB), for contracts estimated to costfrom US$250,000 to US$3,000,000 equivalent each, up to anaggregate amount of US$18,300,000 equivalent;

(c) Local Shopping (LS), requiring at least three quotations, forcontracts estimated to cost Ifrom US$35,000 to US$250,000equivalent each, up to an estimated aggregate of US$47,000,000equivalent; and

(d) Direct Contracting (DC) for small works not exceedingUS$35,000 each, in remote locations (when shopping is notpossible) either with the only available or interested contractor,or with the community as a contractor (provided that thecommunity has the legal capacity to enter into contracts oragreements), on a one contract per community basis. Thesemeasures would not be jointly applicable with direct purchasingof equipment and/or materials as under 6. 19.d below, and up toan aggregate amount of US$35,000,000 equivalent.

6.17. Locial shopping and direct contracting are justified because of the smallscale of most community-based projects which demand little, if any, heavyequipment. Most works would be carried out in scattered places, where it isunlikely that large domestic contractors would be interested in bidding for civilworks. A system of standard regional unit prices would guide the selection ofcontracts under direct contracting.

6.18. No International Competitive Bidding (ICB) is expected, because of thesmall size and decentralized nature of FONCODES community-based projects.However, ICB would be required for any contract exceeding US$3,000,000equivalent.

6.19. Procurement of Goods and Services. The types of goods to be procuredunder the project mainly consist of basic construction materials, equipment andsupplies for health posts and schools, medical supplies, school books, smalladministrative systems, vehicles, computing systems and other equipment forFONCODES. The types of services to be procured under the project aredisease prevention campaigns, family planning, primary health care, literacycourses, studies, audits, evaluations, management services and training. Goodsand services would be procured as follows:

(a) ICB, if any, for contracts estimated to cost US$250,000equivalent or more;

(b) LCB for contracts estimated to cost from US$50,000 toUS$250,000 equivalent, up to an aggregate amount ofUS$5,000,000 equivalent;

(c) LS with at least three quotations, for contracts estimated to costfrom US$5,000 to US$50,000 equivalent each, up to anaggregate amount of US$16,000,000 equivalent; and

(d) Direct contracting for community-based projects in remotelocations, when shopping is not possible, for (i) small items ofequipment each costing up to US$5,000 equivalent; and (ii)

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construction materials costing up to US$15,000 equivalent,restricted to one contract of each kind per project and not jointlyapplicable with direct contracting for works as under 6.16.d.above, up to an aggregate amount of US$7,000,000 equivalent.

6.20. Consultants would be selected and contracted in accordance with Bankguidelines for the use of consultants. All contracts with individual consultants,and those with consulting firms costing more than US$100,000 equivalent,would require the Bank's prior review. Any taxes paid by consultants wouldbe excluded from Bank financing.

6.21. The Bank will undertake a prior review of:

(a) Contracts for works exceeding US$150,000 equivalent;(b) Contracts for goods exceeding US$100,000 equivalent; and(c) The first contract for each kind, per year, regardless of the

amount involved.

6.22. Based on FONCODES' experience in financing of projects in 1992-1993and the projected average costs and number of projects for 1994-1996, it isestimated that the Bank will review about 65 contracts per year (4 percent ofBank-financed projects). Other contracts would be reviewed a postenoni, on asample basis, which is acceptable given the nature of the project.

6.23. Starting July 1, 1994, FONCODES would review the standard regionalunit-prices for works and goods, twice a year, no later than January 1 and June1, and promptly change such prices, in form and substance satisfactory to theBank, if the review so recommends.

6.24 FONCODES would retain the services of a procurement auditorsatisfactory to the Bank, to prepare procurement audits, at least every sixmonths, on the basis of appropriate samples of procurement documentation.The audit reports would be sent to the Bank not later that two months after theircompletion date (para 8.2.e).

Supervision and Reporting

6.25. Starting on September 1, 1994, FONCODES would submit to the Banksemi-annual reports, on March 1 and September 1, comparing achievementswith the set of agreed performance indicators (Annex 7). These reports wouldinclude information on:

(a) community-based projects presented, appraised, in execution,completed and evaluated, including beneficiaries, employmentgenerated, amounts committed and executed, costs perbeneficiary and generated workdays;

(b) list and summary reports of studies, technical assistancesummaries; outlines of courses and numbers of staff trained, andmanagement systems installed;

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(c) full documentation on any project costing over US$250,000equivalent, regardless of the source of financing.

(d) FONCODES costs and financing;(e) changes in FONCODES staffing and structure;(f) supervision visits; and(g) ongoing ex-post evaluation of a sample of completed projects,

which would be contracted to an independent organization, suchas an university or a specialized research-oriented NGO, andconsist of a mix of traditional economic evaluation andbeneficiary assessment. At negotiations, assurances wereQbtained that FONCODES would retain the services of anindependent organization. under terms of reference acceptable tothe Bank and not later than June 30, 1994, for purposes ofcarrying out evaluations of community-based projects which havebeen executed (para 8.2.-f

6.26. The Project would require about 24 staff-weeks of supervision per year,including about 13 weeks in the field. The supervision team would include theTask Manager and consultants with experience in the operation of similar socialinvestment funds in Latin America. Their main areas of expertise would beoperations, health and nutrition, education, rural development, infrastructureengineering, and finance. The Bank has collaborated with other multilateral andbilateral agencies, such as IDB, GTZ and KfW while preparing and appraisingthe project and would continue to do so during supervision.

Disbursements and Documentation of Expenditures

6.27. The proposed Loan would be disbursed over a period of four years, tobe completed by March 31, 1997. The final date for presentation of requestsfor approval or authorization to disburse in respect of community-based projectswould be September 30, 1996. The project Closing Date would be June 30,1997, three months after the completion date.

PERU: Social Development and Compensation Fund Project

Etimated Schedule of Disbursements, USS million

Bank Semester Disburs. Cwnmd. Dlsburs. LonFiscal Ending during Amount as % of BalanceYear Semester Total

FY94 30-Jun-94 25 25 25 75

FY95 31-Dec-94 20 45 45 55

FY95 30-Jun-95 20 65 65 35

FY96 31-Dec-95 15 80 80 20

FY96 30-Jun-96 10 90 90 10

FY97 31-Dec-96 5 95 95 S

FY97 30-Jun-97 5 100 100 0

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6.28. Disbursements are expected to occur faster than is usual for LACprojects, but are consistent with the previous experience of FONCODES andwith other social investment funds in Latin America. Disbursements areexpected to occur as follows:

6.29. Disbursements would be made against the following categories ofexpenditures (Annex 6):

(a) Community-based projects, 70 percent of expenditures made inworks and goods, and 100 percent of expenditures made fortechnical assistance, for eligible projects, up to an aggregateamount of US$95 million equivalent;

(b) Institutional Development of FONCODES:

(i) works: 50 percent of local expenditures, up to anaggregate of US$750,000 equivalent;

(ii) equipment: 50 percent of local and 100 percent of foreigneligible expenditures, up to an aggregate of US$750,000equivalent;

(iii) technical assistance, including consultants, studies, audits,and training: 100 percent of eligible expenditures, up toan aggregate of US$3,000,000 equivalent; and

6.30. At negotiations, it was agreed that retroactive financing of up to US$10million would be permitted for eligible expenditures incurred since August 1,1993. Funds would be used for financing a backlog of eligible community-based projects approved by FONCODES, in line with the eligibility andappraisal criteria acceptable to the Bank.

6.31. Withdrawal applications with a contract value of US$250,000 equivalentor more for works, US$150,000 equivalent or more for goods, US$100,000equivalent or more for services with consultant firms, and aU individualconsultant contracts would be supported by full documentation and the restwould be made on the basis of Statement of Expenditure (SOEs), for whichsupporting documents would be maintained by FONCODES and would be madeavailable for review by the Bank.

6.32. A Special Account would be opened in a commercial bank satisfactoryto the Bank, with an initial deposit of US$10 million equivalent. This wouldcorrespond to about three months of expenditures required under the Project.FONCODES would forward the Bank the documentation necessary fordisbursement (SOEs or full documenta in), covering a number of projects orcontracts for services whose aggregate sum would be at least US$3 million.

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Accounts and Audits

6.33. An independent audit firm audited FONCODES accounts and those ofa random sample of 100 community projects, for the period between January 1,1992, and July 1, 1993. At negotiations, the Bank reviewed the audit reportand was satsfied that the accounts are in good order and follow generallyaccepted accounting practices (pam S.1 .d.). Assurances were obtained thatFONCODES would adopt the reommendations of the audit reort managementletter.

6.34. Under the Project, private independent external auditors acceptable to theBank would annually audit FONCODES. No later than six months after the endof its fiscal year, FONCODES would submit to the Bank certified copies of theaudit reports contqining the auditor's opinion on: (a) project accounts, includingSOEs; (b) whether procurement was carried out in accordance with agreedguidelines; and (c) adequacy of internal controls to minimize the possibility ofmisuse of funds or other improprieties.

6.35. Auditors would undertake special semi-annual audits of community-basedprojects supported by FONCODES, on the basis of acceptable accounting normsand procedures. Auditors would examine a sample of community projects,review individual contracts, ascertain whether the terms of these contracts arecomplied with, inspect progress of works, reconcile the physical progress withfinancial expenses incurred, and state whether procurement guidelines are beingrespected. The auditors would prepare quarterly reports for the Board ofFONCODES and for the Bank (to be submitted no later than two months aftereach quarter), as well as an annual summary. For this, auditors would audit asignificant sample of projects, acceptable to the Bank.

Cost-sharing and Sustainability

6.36. Beneficiary communities would contribute with at least 9 percent of totalproject costs, in cash, labor or materials, overheads and other inputs.Furthermore, communities have to ensure that the project can be sustained aftercompletion, including maintenance and operation. Certain types of community-based projects would have higher cost-sharing requirements than others,depending on their relevance for extreme poverty alleviation. Based onFONCODES' experience with projects it supported in 1992 and 1993, it isestimated that communities would contribute to total project costs as follows:

(a) Social assistance 5 percent(b) Social infrastructure 19 percent(c) Economic infrastructure 13 percent

6.37. Projects which provide credit to small-scale farmers, fishermen andentrepreneurs charge market interest rates and therefore can be said to providefull cost-recovery.

- 39 -

6.38. Community-based projects would need to be sustainable, alone or inconjunction with other complementary projects: (a) school classes would needto be complemented with furniture, school books, and ensure that a teacher isavailable; (b) health posts would require that a source of clean water, basicmedical equipment and supplies be available, and that health personnel be onduty at least twice or three times a week; (c) community kitchens would needto have a source of clean water; school breakfasts and medical supply projectswould require some continuity; and (d) water and electricity supply, andirrigation would require the establishment and training of a community-basedresource management committee, which would be responsible for maintenanceand minor repairs and would ensure the collection of charges. At negofaffinsthe Bank confirmed that these requirements have been incorporated into theOperaifonal Manual. as eligibility or appraisal criteria (para. 8.1 .b.ii-iW).

Enviromnental Aspects

6.39. Since community projects are mostly small (average $30,000) and limitedessentially to rehabilitation, they would not generate significant environmentalimpacts. Some projects, such as those concerned with reforestation, erosioncontrol and small sanitary works, are expected to have a positive environmentalimpact. In any case, a summary environmental appraisal would be mandatoryfor certain projects, such as irrigation, which could have a potential negativeenvironmental impact (para 5.48). At negotiations the Bank confirmed thatsummary environmental apraisal guidelines, acceptable to the Bank. have beenincluded in the Operational Manual, where relevant (para 8.1.b.v.)

Mid-Term Review

6.40. The GOP would conduct a mid-term review of progress inimplementation of the project, in which the Bank would participate. The reviewwould cover:

(a) impact of community-based projects, both stated and unforeseen;(b) success in targeting of community-based projects to poorest

areas/populations in Peru, and recommendations for improvementof targeting methodology;

(c) efficiency of FONCODES in selecting, financing and supervisingcommunity-based projects, considered globally as well as byproject category;

(d) quality of the FONCODES portfolio, both between and amongproject categories;

(e) adequacy, transparency and fairness of procurement practices,both within FONCODES and among community-based projects.

(f) implementation of the Letter of Social Policy, including the roleof FONCODES in the implementation of the overall povertyalleviation strategy.

- 40 -

6.41. At negotiations. assurancs were obtained that the Borrower wouldundertake a Mid-Term Review of FONCODES by June 30. 1995. Based on thereview and on disussions with the Bank. the Borrower and FONCODES willtake any necessay remedial action agreed with the Bank (pam 8.2.h.)

6.42. The Mid-Term Review would require about 18 staff weeks, of which 12weeks in the field, and include the Task Manager and consultants withexperience in the operation of similar social investment funds in Latin America.Their main areas of expertise would be operations, health and nutrition,education, rural development, infrastructure engineering, beneficiary assessmentand finance.

VII. BENEFITS AND RISKS

Benefits

7.1. The project would benefit the poor and the most vulnerable by: (a)creating jobs and raising the income of workers employed by FONCODES, (b)investing in high return social and economic infrastructure in low income areas,(c) improving availability and accessibility of social services, (d) attractingother donors' investments, and (e) strengthening community participation,transparent decision making and social development.

7.2. It is estimated that good project implementation would result in: (a)improved access to social services, such as education and health, for about 3million people per year; (b) improved social infrastructure, such as betterschools, health posts, community kitchens, water and sanitation for 2 millionpeople; (c) improved economic infrastructure, such as better roads, irrigationsystems, electricity, and agriculture terracing, for about 1.3 million people; and(d) 4.5 million workdays in FONCODES' funded projects.

Risks

7.3 The risks of the projects would be: (a) discontinuity and weakenedmanagement of the implementing agency, that could arise in the event ofexcessive political instability; (b) ineffective implementation, in the event ofpoor targeting, appraisal, supervision, or lack of sustainability; (c) weakeningof existing institutions, and (d) poor governance, by FONCODES and bycommunity executing committees.

7.4. To minimize risks, assurances would be sought that the replacement ofthe Executive Director, General Manager, Line Managers would be subject toprior Bank agreement on the experience and qualifications of the candidates, andta FONCODES would promptly inform the Bank of any replacement ofRegional Offlce Managers.

- 41 -

7.5. To foster good project implementation and sustainability, the Bank hasrequested FONCODES to make some changes in its policies and procedures, asdescribed in sections V and VI. These changes have been adequatelyincorporated into FONCODES' Operational Manual. The Project would alsoinclude an ongoing impact and process evaluation of a sample of community-based projects. The bi-annual reports would be used by FONCODES toimprove its operation and be a key element in Bank supervision.

7.6. The Government has prepared a Letter of Social Policy, which outlinesthe objectives and timing of structural reforms planned to restore satisfactoryand sustainable delivery of social services. In addition, the Bank is supportingthe Government in the preparation and implementation of projects in educationand health, which are expected to strengthen the respective line ministries. Anurban development operation, also in preparation would strengthenmunicipalities.

7.7. An improved management system, intensive supervision and an ongoingaudit, as described before, would foster good gov 2rnance. At the Mid-TermReview, both objectives and procedures of FONC(ODES would be reviewed andcorrective action taken.

VIII. AGREEMENTS REACHED AND RECOMMENDATION

Agreements

8.1 Prior to negotiations, the Borrower submitted the following documents,whose content was satisfactory to the Bank:

(a) draft Letter of Social Sector Policy;(b) a modified Operational Manual including the modifications

requested by the Bank:

(i) prioritization of community projects (pam 5.27),(ii) comprehensiveness or complementarity of projects

(pam 6.38),(iii) training requirements for the relevant project types

(para 6.38),(iv) beneficiary contributions and cost recovery, where

relevant (para 6.38),(v) draft summary environmental appraisal guidelines

(para 6.39);

(c) Terms of reference and proposed draft contracts for: financialintermediaries which administer revolving funds for credit tosmall-scale farmers and entrepreneurs (pam 5.52); and

- 42 -

(d) Audit report, concerning FONCODES and 100 community-basedprojects, for January 1992-June 1993 (para 6.33)

8.2. At negotiations, assurances were obtained that:

(a) FONCODES would maintain an Executive Director, GeneralManager, Line Managers with experience and qualificationsacceptable to the Bank (para 6.6);

(b) any significant change in the Operational Manual and User'sGuide would require prior Bank approval (para 6.6);

(c) credits to small-scale farmers and entrepreneurs would notrepresent more than 10 percent of FONCODES' portfolio (5.32),and loan guarantees would not be eligible for FONCODESfunding (para 5.32);

(d) FONCODES will follow the Bank's procurement and theconsultant guidelines and the procurement procedures outlined inparagraph 6.13 through 6.23;

(e) FONCODES would retain the services of a procurement auditorsatisfactory to the Bank, to prepare procurement audits every sixmonths on the basis of appropriate samples of procurementdocumentation (para 6.24);

(f) FONCODES would retain the services of an independentorganization, under terms of reference acceptable to the Bank andnot later than June 30, 1994, for purposes of carrying outevaluations of community-based projects which have been carriedout (para 6.25.g);

(g) PONCODES provide the Bank with semi-annual reports whosecontents, format and timetable would be as outlined in paragraph6.25;

(h) the Borrower would undertake a Mid-Term Review ofFONCODES no later than June 30, 1995. Based on the reviewand on discussions with the Bank, the Borrower and FONCODESwill take any necessary remedial action agreed with the Bank(para 6.41);

(i) FONCODES would enter into agreements with executing entitiesand financial intermediaries under terms and conditionsacceptable to the Bank;

(j) counterpart funds would be available in the Peruvian Government1994 budget.

8.3. The following would be a condition of Board presentation:

(a) the Borrower would send to the Bank a Letter of Social SectorPolicy, satisfactory to the Bank;

- 43 -

8.4. The following would be conditions of loan effectiveness:

(a) A Subsidiary Agreement for making the funds available toFONCODES, on terms acceptable to the Bank, would be signed(para 6.5); and

(b) FONCODES would formally adopt the Operational Manual andUsers' Guide, satisfactory to the Bank (para 5.62).

Recommendation

8.5. Subject to the above conditions, the proposed project would constitute asuitable basis for a Bank loan of US$100 million equivalent to theRepublic of Peru, to be repaid over a period of 20 years, including afive-year grace period.

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ANNEX 1

PERU

SOCIAL DEVELOPMENT AND COMPENSATION FUND PROJECT

SOCIO ECONOMIC INDICATOS

DATA YEAR SOURCE

A. GENERAL COUNTRyDATA:_ _

1. Estimated Total Population 21.9 1991 WDR(million) ________

2. Population Projection 26 2000 WDRMion) _

3. Assumed Year of Reaching Net 2010 WRRReproduction

Rate of One

4. Size of Stationary 48 1991 WDRPopulation (Million)

5. GNP Per Capita (US$) 1070 1991 WDR

6. Average Annual GDP - 0.4 1980-91 WDRGrowth Rate (%)

7. Urban Population as 71 1991 WDR% of Total

8. Illiteracy Rate (%) 15 1990 WDR

9. Area (1,000 Ki2) 1285 1990 WDR

10. Population . Density 16 1990 WDR(1.000 per KM2)

B. POPULATION DATA:

1. Crude Birth Rate 27 1991 WDR(Per 1,000)

2. Crude Death Rate 8 1991 WDR(Per 1,000) _

3. Annual Rate of Population Growth(%) 2.2 1980-91 WDR

4. Total Fertility Rate 3.4 1991 WDR

5. Population Age Structure (%)0-14 Years 37.1 1991 WDR15-64 Years 60.8 1991 WDR

6. Women of Child-bearing Age(15-49 as % of Female

Population) 51 1991 WDR

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7. Contraceptive PrevalenceRate Crotal %) 46 1990 SID

C. HEALTH DATA:

1. Populaion Per Physician 1040 1984 WlDR

2. Populaton per Nurse NA - WDR

3. Population per HospitalBed 590 MRE SI

4. MPSSP Budget as % of GNP 2.4 1990 HDR

S. MPSSP Budget as % of TotalGovt. Budget 6.2 1986 GFS

6. Maternal Mortality(per 10,000) 165 1988 WDR

7. Infant Mortality Rate(per 1,000) 53 1991 WDR

8. Life Expectancy at Birth (Years):Women 66 1991 WDR

Men 62 1991 WDR

9. Proportion of Births Attendedby Health Staff 55 1985 WDR

GFS - Government Finance Statistics YeabookHDR - Human Development Report

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ANNEX 2

PERU

SOCIAL DEVELOPMENT AND COMPENSATION FUND PROJECT

DRAFr LETIER OF SOCIAL SECTOR POLICY(To be addressed fom the Minister of Economy and Financo to the the Ditector of LAI)

Lineas prioritarias de la polltica social de2.gobie:no

El Gobierna peruano es conciente qua lasolucift de los problemas estructurales delpals se encuentra en el crecimiento econ6m±ccsostonido. En es-a perspectiva el Gobierncpretende que el Estado cumpla con au funciftsocial de una manera eficienta a trivas de lmejora de la calidad de vida de la pcblacifnmediante el acceso a la eduacidn b4sica,salud, administraci&i de justicia,infraestructura bisica y empleo adecuado.

El Progama Social del Gobierno parte dala promisa de que las personas son el capitalmIs valioso del pals. Par ello, la Politica.Social promueve la inversi6n da modiana ylargo plaza en este capital humana, de talforna qua los recursos destinadas no seconsideran un gasto sina una inversion.

Las estadisticas sabre la evolucidn delgasta social confirman la situaciL6n de.colapsa en la que se encuentra el pals en loque a servicios sociales so refiere.

.En junio de l9S3 ae Gobierno presentd anParis el Prograza de Apayo social que, aunquecentrada en la actividad del FONCOOES,expiesaba los elementos iniciales de lasactividades y =etas en otras treas sociales.Si;n embargo so considera necesarti avanzar enel desarrolla de una estrategia social con

nf asis en las actividades perinanentes.

Este doc=iento muestra solamente losaspectos que se consideran mis importantespara asegurar el inicia del procesa dereforma de los sectares sociales qua asegu=Quna mejora de las calidad de vida de lapoblaci6n, an especial de la de menorosrecursas.

El Pere esta hacienda esfuerzas enarmespar revertir tendencias negativas en diverscscam.pos. Las avances en la estabilizaci6n de

-47 -

la economla y en la lucha contra eiterrorismo son dos aspectos que absorvieronla mayor parte de los esfuerzes entre 1990 y1993; se considera necesaric concentrar ahoramayores esuterzos en los aspectos sociales.

Para esto e1 Gobierno se ha propuestopriorizar sus ambitos de accifn y fomentar,en todcs los cascs la participacifn de lacomunidad en la administracifn y control delos servicios. (aspecto sgenerales)

Se han seleccionado campos pricritariesdel programa social para obtener mejoras enla calidad de los servicics en educacidnsalud , saneamiento y administracion dejusticia. Esto no significa dejar de ladootros aspectos sociales importantes sino unreconocimiento de las limitaciones de gasto yde arganizacidn. En general so estima queel; gasto se incramente progresivamente hastaestabilizarse en el mediano plazo.

adeoms de los temas espectficos que seseoalan m&s adelante eL Goblerno continuaricon el.anAlisis y el desarrollo de accionespara asegurar las conidiciones para undesarrollo sostenible; el marco generaldeberA asegurar la coherencia entre lastendencias de crecimiento de la poblaci6n, elpotancial productive y el ambiente.

EJUtCACION

La reforma del sistema educativo se basaen la transferancia a la comunidad de laadministraci6n de los centros educativos, entanto que el MMD fortalecerla su funciLnnormativa y de supervisitn. El marco legalpara iniciar la reforma ya se ha dictado y seespera contar con los reglamentes antes deenero do 1994.

Ourante 1994 so espera haber concluidoel proceso de autonowma administrativa paraaproximadamenta ..... mil estudiantes ycontinuar avanzando a ritmo acelerado en lossiguientes a?ios. Este procesa incluye otras

-48 -

acciones importantes como reforma decurriculum, capacitaci6n, etc.

La capacidad del MED para cumplir consus funciones so mejorari reforzando las4reas de .... ,

SA. X 'D

La reforma se concentrar& en el nivel debaja complejidad buscando dar autonomIaadministrativa a los puestos de salud,promovisndo la participacidn de la comunidad.El MINSA reforzarl su funci6n normativa y desupervisi6n.

So espera que .... mil personas puedanpasar a ser atendidas per establecimientoscon administraci6n reformada para fines de1994; se ostima quo todo el proceso dereforma para el primer nivel requerirl de ...afios.

La capacidad del MINSA a nivel centralse reforzar& mediante........

INFRA.ZSTRtICTUEA BASICA

La acci6n pCblica estari concentradaprincipalmente en el area de saneamiento paragrupos de mencres recursos. Para 1994 seespera contar con el marco legal adecuado ypromover que la comunidad sea la responsablede la operaci6n y mantenimiento de losservicios locales en coordinacidn conempresas municipales o privadas en cada Ireageogr&ifica.

La inversifn en saneamiento basicodurante 1994 se estima en .... iillones delos cuales ....millones serin donaci6n acomunidades que no pueden recuperar lainversifn aunque si deben responsabilizarsepar la operacifr y mantenimiento.

-49 -

ADMINISTRACION DE JUSTICIAk

El Estado iniciara un proceso deincremento de plazas de fiscales yjueces.......

PROGRAUAS DE A°POY0 Y DESARROLLO SOCIAL

Los programas de apoyo socialcontinuarAn en tanto las condiciones deempleo lo requieran. Se espera que apartirde 1997 se pueda iniciar una tondeciadecreciente y una transferencia ainstituciones permanentes de las capacidadesdesarrolladas. El GRAFZCO .. muestra latendencia esperada del gasto si lascondiciones de empleo e ingreso de lasfamilias mejora paulatinamente.

Las actividades se concentrar&n en dosgrandes lineas de accion: la inversi6r social(INADE y FONCODES) y los programas de qapoyoa greupos de mayor riesgo mediantecomplementaci6n alimentario- nutricional.El sistema de vigilancia nutricional servirldo base para la orientaci6n de recursos.

El FONCODES tiene la mision principal detraisferir capital a los grupcs pabres de lapablacifn y apoyar a las Areas permanentes enel pe_iodo de transici6n. FONCODESinterviene subsidiariamente donde no hayempLeo adecuado ni actividad suficiente deatras instituciones pabLicas o privadas; portanto su volumen de operacifn decrecer& en lamedida qua la situaci6n econdmica del patsmejore, en especial en lo relacionado alemplea y a la canacidad de las familias para.satisfacer neces1dades blsicas. Apesar delcar&cter urgente de la acci6n de FONCODES seintenta que sirva de apoyo para resolverproblemas estructurales, tanto por suorientacifn general a las Areas gegr&ficasmA.s deprimidas asT coma sirviendo de apcyo alas procesos de reforma en los sectoressociales permanentes como salud-nutrici6f,educaci6n y saneamiento.

-50 -

COOERDINACION DE LAS ACTtIVDADES

La PCK y e1 MEF asuzen la funcifn decoordinaci6n de la politica con el obj eto degarantizar la coherencia entre ls objetivos,las necesidades y los recursos.

La revisi6n de las politicas y e1segu±imento de su aplicacift se realizardncada 2.5 dias durante las reunionesinterminiateriales. Una secretarla tGcnicaso encarga de preparar los informes y laagenda para las rouniones mzinist.riales(CIAEF/CIAS) .

-51 -

ANNEX 3

PERU

SOCIAL DEVELOPMENT AND COMPENSATION FUNND PROJECT

FONCODES PORTFOLIO

Breakdown of Projects by Category: Jan. 1992 - Mar. 1993 (US$)

Projects Submitted Projs ApprovedXavestment Category (Amount) (Amount)

Soaa Asitac 34,723,753 6.40% 10,793,809 6.14%Packages of medicines 7,120,239 1.31% 3,993,923 2-27%Prevention campaigns 10,259,955 1.89% 1,6,39S 0.72%Family planning 224,855 0.04% 109,761 0.06%Primary care 2,6,664 0.49% 681,991 0.39%Preschool care 308,708 0.06% 0 0.00%Pkgs of school materiaLs 11,386,210 2.10% 4,536,065 258%Lbraries 196,694 0.04% 0 0.00%Literscy campaigns 2,239,040 0.41% 26,018 0.01%Trainng 339,38 0.06% 189,656 0.11%

Smit 1ntrasbucre 231,341,731 42.66% 99,702,341 S6.74%Water Treasbent 2,275 0.00% 0 0.00%Water Supply 89,027,536 16.42% 27,322,361 1535%Environmental saniation 1,211,S68 0.22% 369,59S 0.21%Hlth materialslequipsmcnt 712,049 0.13% 303,667 0.17%Healh post construction 13,175,434 2.43% s,505,792 3.13%Soup kitchen construction 409,319 0.08% 124,912 0.07%School furoture 23,150,914 4.17% 12,049,466 6.86%Sport center construction 8,781,484 1.62% 5,957,274 3.39%Communit center constr. 4,987,550 0.92% 1,969,194 1.12%Claussroom construction 89,883,602 163s% 46,100,080 26.24%

EmnDomi Inrasftcture 160,122,980 29.53% 50,704,605 28.86%Irrigation systems :- 40,583,231 7.48% 18,542,307 10Q35%Land rebabWitation 31,751,161 5.85% 4,351,108 2.48%Sidewalk renovation 2,528,746 0.47% 773,66S 0.44%Construction of wets 612,105 0.11% 74,037 0.04%Drought emergencies 14,076,156 2.60% 14,340,654 8.16%Roadl/energy infrastr. 70,S71581 13.01% 12,622,834 7.18%

Inome Esnpbywnet P"sowp s 116,125,340 21.41% 14,506,410 8.26%bicroenterprise support 63,833,506 11.77% 4,335,370 2.47%Reforestation 14,0-73,425 2.60% 2,998,129 1.71%Small-scale fsheries 344,= 0.06% 6,471 0.00%Watering points 294,843 0.05% 3,821 - 0.00%Marketing infrastructure 684,24 0.13% 163,478 0.09%Agricultural inputs 30,310,351 5.59% 6,990,318 3.98%Small processing frms 6,584,769 1.21% 8,623 0.00%

TOTAL 542,313,804 100.00% 175,707,165 100.00%

Number of Projects 12,035 6,036 1

Source and Prepandoa FONCODES

ORGANIZATIONAL STRUCTUREPRESIDENT

OF THE REPUBLIC

BOARD OFDIRECTORS-

EXECUInVE |SPECIAL ADVISOR DIRECTOR w

FOR INTERNAL TECHNICAL FI-NTE-R-NAL |1ASSSTACE| GENIERAL lCONTROL

MANAGER

SYSTEIMS | LEGALMANAGER COUNSQEL

, 'I .. I . , ~I ._,l_.PROGRAMS AND [SUPERVISION REGIONAL OFFICE OPERATIONS

PROJECTS MANAGER AND CONTROL COORDINATOR MANAGER

REGIONAL OFFICEMANAGERS

- 53 -

ANNEX S

PERUSocial Develpmet and Compeatio Fund Projwet

Estimatd Priect Costs (US$ m"on)

C,*enr Load F.,*. Tal Per_..

Comuit-ased ProjectsSocial asistac 60 11 71 14.3Social infc 158 28 186 37.6Bconmic infastcture 140.5 24 164.5 33.2IncomlEinplbyment eraation 40 7 47 9.5

Sub-toW 398.5 70 468.5 94.6

| bttonl Dcvelopmeoft o FONCODESRehabIlita Woks 1.5 0 1.5 0.4Equ nmet and veIle 2 4 6 1.2Teclhni assane 7 3 10 2.0Opeaing codsa 7 2 9 1.8

26.5Sub-totl 17.5 9 SA

TOtl oa 416 79 495 100.0

Net of txes and du*es

PERUSocial Dcvelopmet and Caomsaon Fund Project

9_qaiy of Fin g Pln(USS mion)

FI,umda PI Local 1 Fodga TOWa

(loveent of Petu 200 0 200

Beficries 42 0 42

World Bank 80 20 100

Inter-Americn SO 20 10ODevelopment Bank ___

Oh Dnors (udig KVfW) 14 39 53

TOWal 416 79 495

- 54 -

ANNEX 6

Soial Developmeut and Companstion Fund ProjectEdimated Schedule of Disbursements, USS millon

Bank Se,iester Dish. dawrh f wdakfive Disb. as Oa&mce of

P&ee Year Iing Smetr Amoun j X of row Lan

FY94 30-June-94 25 25 25 75

FY95 31-Dec-94 20 45 45 55

FY95 30June-95 20 65 65 35

PY96 31-Dec-95 15 80 80 20

PY96 30-Jun96 10 90 90 to

FY97 31-Dec-96 5 95 95 5

FY97 30-Jun-97 5 100 100 0

PERU

Sodal Devopment and Coapensation Fund ProjectDisbunements, USS mon

Whhdawal of the Proceeds of the Lan

___ ___ ___ ___ __ ___ ___ ___ _ AThOA ted Pmem Financed

Community-based Projects 96.50 70% fo works and goods100% for techll assitan

Sub4otal 96.50

|nttoad DevepmeAt of PONCODES

eRdabilaon Woiks 0.75 50%

Equpmenat 0.75 50% of eligible cal ependius100% of eligible forign expenditu

Tedcnicl Assitanco (cants, 3.00 100%.udies, audit, Iain__

Subtot 4.50

TOAL 100.00

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ANNEX 7PERU

SOCIAL DEVELOPMENT AND COMPENSATION FUND PROJECT

KEY PERFORMANCE INDICATORS

The foLlwing indicators are the basis for FONCODES performance tnonitoring and control and would bereviewed during Bank supervision missions.

Estmated annualdisbursement

INDICATOR SOURCE OBJECTIVE UNlTS 1993 1994Th(data base)C.A.d.O. R

Projects Projects Estimated Number 14,000 19.000Presented Demand Amount (USS) 598,800.000 791,000.000

Projects Projects EEiciency Number 9.500 12.500Evaluated Amount (USS) 400,000,000 529.000,000

Projects Projecm. Efaciency Number 8,000 10,600Approved Amount CUSS) 246,000,000 326.000,000

Projects Projects Eficiency Number 7,900 10.500Financed Amount (USS) 225,000,000 323.000,000

Projects Projects Populadon Number 4.000 9,000concluded execudtig Amount CUSS) 110,000,000 284.000,000

._ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ capacity _

Disbursements Projects Eficienqc Amount (USS) 165,000.000 250,000.000

Proporion of Projects Evaluation Percentage 0.60% 0.2¢4%cancelled projects qualicy

Time between Projects Eticiency Calendar Days 45project presentationand evaluaionreport .

Time between Projects Efficienc, Calendar Days 18project apprvaland firstdisbursement

Human Resources: Personnel Eficiency PersonsEvaluadon 18o 223Supervision 1471 195

Thc informaion gathered through these performance monitoring indicators would be complemented with qua#cryreports describing the results Of oTsgoxig'

(a) independent financial and procurement audit of a sample of community based projects;(b) indcpcndent impact avaluadon of a samplc of cominunity-based projects, including a beneficiary assessmnct

- 56 -

ANNEX 8PERU

SOCIAL DEVELOPMENT AND COMPENSATION FUND PROJECT

SUPERVISION IMPLEMENTATION PLAN

PERUSOCIAL DEVELOPMENT AND COMPENSATION FUND

Bank Supervision Input into Key Activities |

Approximate Activity Skill Requirement Staff InputDate _

January Project Launch Workshop Task Manager, specialists in 10 staff-1994 procurement, disbursements, weeks, in

audits, evaluation the field

May First Supervision Mission. Focus on Social Task Manager, specialist in 8 staff1994 Assistance projects health, nutrition and education weeks in

the field

October Sxond Supervision Mission. Focus on Social Task Manager, specialist in 6 staff1994 Infrastructure Projects infrastructure planning and weeks in

management the field

February Third Supervision Mission. Focus on Economic Taskl Manager, specialists in 6 staff1995 Infrastructure Projects infrastructure, agriculture and weeks in

environment the field

June Mid-term Review Task Manager, specialists in 12 staff-1995 health and nutrition, education, weeks in

infrastructure, agdculture and the fieldenvironment, financial servicesand small- and micro-enterprises,operations (procurement,disbursement and audit)

November Third Supervision Mission. Focus on Credits Task manager, specialists in 6 staff-1995 for Small-scale farmers and entrepreneurs financial services and small- and weeks in

micro-enterprises the field

May 1996 Fourth Supervision Mission. Focus on ex post Task manager, specialist in 6 staff-evaluation and beneficiary assessment economic evaluation and weeks in

l_____________________________ beneficiary assessment the field

November Fifihe Supervision Mission, including a closing Task Manager, specialists in 12 staff1996 workshop. Focus on Lessons Learned health and nutrition, education, weeks in

infrastructure, agriculture and the fieldenvironment, financial servicesand small- and micro-enterprises,operations (procurement,disbursement and audit)

December Project Implementation Review Task Manager and evaluation 4 staff1997 specialist weeks in

the field

- 57 -

ANNEX 9

PERU

SOCIAL DEVELOPMENT AND COMPENSATION FUND PROJECT

DOCUMENTS INCLUDED IN THE PROJECT FILE

PROJECr NAME: | PROJECTCODE: Loan Credit No:PERU: Social Development and Compensation Pund 6PERPA134 _ _

SEC77ON DOCUMEWDESCRIP7ON (lTde, ope, auhor_) Doc date Date cnt toinfo Center

Decrto Legislativo No. 657. Crfation of PONCODES 8/15191 9/30193

Decreto Supemo No. 163-91-PCM. Statutes of FONCODES 10120/91 9/30/93

Dacreto Ley No. 26157. PONCODES law 12/30/92 9/30/93

Nuevos Estutoa de FONCODES. Proposed statutes of FONCODES 1993 9/30/93

Maual de Organizacion y runciones del PONCODES. Operatia Manual, 1993 9/30/93includig (a) main section, (b) education and (c) health.

Guis General Operativa. Uers Guide, including (a) main pam (b) teacy, (c) school July 1993 9/30/93librarics, (d) nmdical supplies, (e) schools, (M school furnire, (g) health pods, (b)healt post furialture, (i) water supply, Q) sewerage, (h) power supply, () irgatian, Droads. (k) makde, (O) spots infrauctur, (m) agricultue suppo, (a) income anda_pklya geration). _

Conmpromisos dc FONCODES con el Banco Mundial. Documen and reports reques May, 1993 9/30/93during prepaation and p-appraisal, inclhuing: (a) revised finacing plan for 1994and 1995; (b) proposals to canr comaunty particiaion, including cot-sharing, andproject sustinability; (c) soeloeconomic indicators; (d) draft social policy leUer NOOsin Peru; (e) key performance indicators; (f) study of cost-sharing in community-basdprojects, and(g) repott on the institutions ivolved in poverty alleviton i Peru.

Documnos Entegados. Repots to support appraisal, incuding: (a) Olranization 7/14/93 9130t93and afng of FONCODES; O) Manacment information systen - aus anddevdopmnat plan; (c) Torgeting of social investmnas - methodology and results; (d)proumet ruls asnd documentation for ager pwrjet; (c) D eveopmen ofmaagement capacity at ocal social sector agencies. .

Back to Office Report. Pro-appraisal Mission, inclding special report on (a) April 1993 9/30/93management informatio system, and (b) agricuure portfolio .

Back to Office Report. Appraisal Mission, including speeial reporb co: (a) inf- August1993 9/30/93StfUCtCre portfolio, (b) credit to small-scale farmers and entcpeurs portfolio, (c) the

qpeatioa maa, and (e) ex post evaation of a sample of project.

Decreto Supmno 050-93-PCM. Creates a Coamision to oversec public ivestment July 93 9/30/93with hternational conomic cooperato

Decreto Supremo 057-93-PCM. Approves the revised Msau of PONCODES August 93 9/30/93

Decreto Supremo 123-93-EF. Creates and ad hoc commiUee to follow up on August 93 9/30/93in _aioa coopea resulting from c lative group mfeti

Resolucion Suprean 352-93-PCM. Nominats the vrepresntatives of FONCODES in June 1993 9/30/93the above ad hoc committee

Social Assistance Pogram in Peru. Document prseted by the Govemmet of Peru to June 1993 9/30/93the Paris meeting of the Conutative Group

Derto Supreno 057-93-PCM. FONCODES stat August 1993 9130193

PONOODES. Manual Operativo. Revisod Operational Manual October 1993 10/31/93

Infosc the Moktoso y Evaluaci6 de Inyacto de ts Programs de Miro Ema Sqaber 1993 10131/93de PONCODES. Evaluati projects providing credits to snall scale cdntepis I

FOD. Oganizaci. A repot _ the isi a devlopme of ONCODS October993 10/31/93

- 58 -

PONCODES. EBdoa P hiomcio. 1ndead Audit Rqeort by Moraao PatWoPice Ocober 1993 10131193Wateam

PONCODES. Iuoft Lasgo. Indeamd t Auw Repot/Manaeemcnt Leltcr by October 1993 10131/93Moao Patli/Pric. Wawue. .

Pditca 8oci1 ddl Ocie. Draft dociutu to ban Letter of Social POlicy. October 1993 10/31/93

PONCODES. Reopiation y uso de precioa de iwos cn e cdaulo de coslaunia a para pswyco de infraattur. Deactina of the Xut cos systtm forprjc evalatio.

FONCODES. Area de Program de Apoyo a Micromnpreas (7 documents). Revised October 1993 10/31/93mod cotrc. guidoliea and evaluation ammay I_I

FONCODBS. Plnamieto Estregco. Organizatioal Analys and development plan Sqeeber 1993 10/31/93

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