Documentof The World Bark FOROFFICIAL USEONLY Report No: 37733-PE PROJECT APPRAISAL DOCUMENT ON A PROPOSEDLOAN INTHEAMOUNT OFUS$20.00MILLION TO THE REPUBLIC OF PERU FORA SIERRA RURALDEVELOPMENT PROJECT March23,2007 SustainableDevelopment Network Bolivia, Ecuador, Peru, Venezuela Country ManagementUnit LatinAmerica and CaribbeanRegion This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bankauthorization. CURRENCY EQUIVALENTS (Exchange Rate EffectiveJanuary 15,2007) Currency Unit = Nuevos soles US$1 = Soles3.13 FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS APL Adaptable Program Loan CCL Local Coordinating Council (Consejo de Coordinacidn Local) CCR Regional Coordinating Council (Consejo de Coordinacidn Regional) CDD Community drivendevelopment CND National Decentralization Council (Consejo Nacional de Descentralizacidn) CLAR RegionaVLocal ResourceAllocation Committee (Comite'Local de Asignacidn de Recursos) CPS cso Country Partnership Strategy Civil society organization DESCO Center for the Study and Promotionof Development (Centro de Estudios y Promocidn del Desarrollo) DNI National Identification Document (DocumentoNacional de Identidad) EA Environmental assessment EMF Environmental managementframework EU EuropeanUnion FA0 Foodand Agriculture Organization FM Financial management FONCODES Social Development Cooperation Fund(Fondo de Cooperacidnpara el Desarrollo Social) GDP Gross domestic product GOP Government of Peru IAA Institutefor Alternative Agriculture (Institutopara unaAlternativaAgraria) IBRD International Bank for Reconstruction andDevelopment ICB International competitive bidding IDB Inter-American Development Bank IFAD International Fundfor Agricultural Development INCAGRO Agricultural Extension andResearchProject (Proyecto de Informacidn, Investigacidny Extensidn Agricola) INEI NationalInstitute of Statistics and Information(Instituto Nacional de Estadistica e Informbtica) IPP Indigenous peoplesplan LIL Learning and Innovation Loan MARENASS SouthernSierraNaturalResourcesManagementProject (Proyecto de Manejo de 10sRecursosNaturales en la Sierra Sur) FOR OFFICIAL USEONLY MINCETUR Ministry of Foreign Trade andTourism (Ministerio de Comercio Exterior y Turismo) MIMDES Ministry o f Women and Social Development (Ministerio de la Mujer y Desarrollo Social) MINAG MinistryofAgriculture (MinisteriodeAgriculturay Ganaderia) M&E Monitoringand evaluation MEF Ministry o fFinance (Ministeriode Economia y Finanzas) MIS Managementinformation system MTC Ministry of Transportation and Communication (Ministerio de Transportesy Comunicaciones) PAC Project Advisory Council (Consejo Directivo del Programa) PC Procurementcapacity PCM Prime Minister'sOffice (Presidencia del Consejode Ministros) PIP Project implementation plan POA Annual operating plan (Plan operativo artnual) POM Project Operational Manual PRA Poverty Reduction and Alleviation Project PROALPACA Project to Support Shepherds inthe Highlands o f Apurimac, Ayacucho, and Huancavelica (Apoyo a CampesinosPastores de Alturas en 10s departamentosde Apurimac, Ayacuchoy Huancavelica) PRODUCE Ministry o f Production I Ministerio de la Produccidn PRONAMACHCS NationalProgram for WatershedManagement and Soil Conservation (Programa Nacional de Manejo de CuencasHidrogrcijcas y Conservacidn de Suelos) RAC ResourceAllocation Committee (Comite' deAsignacidn de Recursos) RCO Regional Coordination Office (Ojcina de Coordinacidn Regional) REMURPE PeruvianNetwork of Rural Municipalities (Redde Municipalidades Rurales del Perti) SA Social assessment SBD Standardbiddingdocuments SDU Sierra Development Unit (Unidadde Coordinacidn Multisectorial para el Desarrollo Rural en la Sierra (CMDRS)) SIL Specific InvestmentLoan SNIP NationalPublic InvestmentSystem(SistemaNacional de Inversidn Ptiblica) TA Technical assistance USAID UnitedStatesAgency for International Development Vice President: PamelaCox Country ManagerIDirector: JohnNewmdMarcelo Giugale Sector ManagerDirector: McDonaldBenjamidLauraTuck Task Team Leader: MarkAustin distribution and may be used by recipients only in the performance o f their official duties. Its contents may not be otherwise disclosed without World Bank authorization. PERU PE Sierra RuralDevelopmentProject CONTENTS Page A. STWTEGIC CONTEXT AND RATIONALE .................................................................. 1 1. Country and sector issues .................................................................................................... 1 2. Rationale for Bankinvolvement.......................................................................................... 6 3. Higher level objectives to which the project contributes .................................................... 6 B. PROJECT DESCRIPTION .................................................................................................. 7 1. Lendinginstrument.............................................................................................................. 7 2. Project development objective andkey indicators .............................................................. 8 3. Project components ............................................................................................................ ) .8 4. Lessons learned and reflected inthe project design.......................................................... 14 5. Alternatives considered andreasons for rejection............................................................. 15 C. IMPLEMENTATION ......................................................................................................... 15 1. Partnership arrangements (ifapplicable) ............................................................. ;.............15 2. Institutional and implementation arrangements ................................................................ 16 3 18 4.. Monitoring and evaluation o f outcomes/results ................................................................ Sustainability ..................................................................................................................... 19 5. Critical risks and possible controversial aspects ............................................................... 20 6. Loadcredit conditions and covenants ............................................................................... 21 D APPRAISAL SUMMARY . .................................................................................................. 21 1. Economic and financial analyses.. ..................................................................................... 21 2.. Technical ........................................................................................................................... 22 3. Fiduciary............................................................................................................................ 23 4. Social ................................................................................................................................. 24 5. Environment ...................................................................................................................... 25 6. Safeguard policies.,............................................................................................................ . . 26 7. Policy Exceptions and Readiness ...................................................................................... 26 Annex 1:Country and Sector or ProgramBackground .......................................................... 27 Annex 2: Major RelatedProjectsFinancedby the Bankand/or other Agencies ..................34 Annex 3: ResultsFrameworkandMonitoring ......................................................................... 35 Annex 4: DetailedProjectDescription ...................................................................................... 45 Annex 5: ProjectCosts................................................................................................................ 60 . . Annex 6: ImplementationArrangements .................................................................................. 61 Annex 7: FinancialManagementand DisbursementArrangements ..................................... 69 Annex 8: Procurement ................................................................................................................ 77 Annex 9: Economicand FinancialAnalysis .............................................................................. 84 Annex 10: SafeguardPolicyIssues ............................................................................................ $91 Annex 11:ProjectPreparationand Supervision .................................................................... 110 Annex 12: Documentsinthe ProjectFile ................................................................................ 112 Annex 13: Statementof Loans and Credits ............................................................................. 114 Annex 14: Country at a Glance ................................................................................................ 116 Annex 15: Targetingof GeographicalArea andBeneficiaries .............................................. 118 Annex 16: DetailedLessonsLearned ....................................................................................... 126 Annex 17: World BankOperationsinthe Sierra ................................................................... 128 Map IBRD 35335 PERU PE SIERRA RURAL DEVELOPMENT PROJECT PROJECT APPRAISAL DOCUMENT LATINAMERICA AND CARIBBEAN LCSAR Date: March26,2007 Team Leader: Mark A. Austin Country Director: Marcel0 Giugale Sectors: Generalagriculture, fishing and Sector ManagerAIirector: McDonald forestry sector (SO%);Sub-national government Benjamin/Laura Tuck administration (50%) Themes: Decentralization (P);Other environment andnatural resources management(S) Project ID: PO79165 Environmental screening category: Partial Assessment LendingInstrument: Soecific InvestmentLoan [XILoan [ ]Credit [ ]Grant [ ]Guarantee [ ]Other: For Loans/Credits/Others: Total Bank financing (US$m.): 20.00 Proposedterms: FSLwith a customizedmaturity structure (repayment of 50% on April 15,2018 Local Communities 7.10 0.00 7.10 Total: 29.60 5.33 34.93 Borrower: Responsible Agency: Ministry of Agriculture (MINAG) Peru Presidenciadel Consejo de Ministros (PCM) Peru Estimateddisbursements(Bank FY/US$m) 7Y 7 8 9 10 11 0 0 0 0 h u a l 2.55 4.83 6.28 4.70 1.64 0.00 0.00 0.00 0.00 hmulative 2.55 7.38 13.66 18.36 20.00 20.00 20.00 20.00 20.00 Expected effectiveness date: October 30, 2007 Expected closing date: December 31,2012 Does the project depart from the CAS incontent or other significant respects? Re$ PAD A.3 [ ]Yes [XINO Does the project require any exceptions from Bankpolicies? Re$ PAD D.7 [ ]Yes [XINO Have these been approved by Bank management? [[ ]Yes [XINO ]Yes [ IN0 I s approval for any policy exception sought from the Board? Does the project include any critical risks rated"substantial" or "high"? Ref: PAD C.5 [XIYes [ ] N o .P Does the project meet the Regionalcriteria for readiness for implementation? Ref: PAD D.7 [XIYes [ ] N o a Project development objective Re$ PAD B.2, TechnicalAnnex 3 The project objective is to improve the assets andeconomic conditions ofapproximately 53,600 rural families inthe selected areas o fApurimac, Ayacucho,Huancavelica, Junin, Huanuco, and Pasco, and strengthengovernment capacity to implement an integrated Sierra development strategy. Project description [one-sentence summary of each component] Re$ PAD B.3.a, Technical Annex 4 * Component 1(Rural Businesses) will award demand-based financing for small subprojects proposed by groups o f rural producers to build strategic productive alliances andincrease market access and income. * Component 2 (Community Development) will award demand-based financing for small subprojects proposed by communities and groups of families to increase basic agricultural and livestock production that will improve their socioeconomic and food security. * Component 3 (Sierra Coordination, Project Management andMonitoring) will finance consulting and nonconsulting services, goods, and operational overhead required to execute the project and monitor project performance and outcomes and support the national government?s efforts to harmonize the entire portfolio o fnationally and internationally financed projects and activities related to rural development inthe Sierra. Which safeguard policies are triggered, if any? Re$ PAD 0.6, Technical Annex 10 EnvironmentalAssessment (OP/BP/GP 4.01) NaturalHabitats (OP/BP 4.04) Pest Management(OP 4.09) Physical Cultural Resources (OP 4.11) Indigenous Peoples (OP 4.10) Forests (OP/BP 4.36) Significant, non-standard conditions, if any, for: Re$ PAD C.7 Boardpresentation: None. Loadcredit effectiveness: MARENASS Regulationduly updated by all necessary governmental and corporate action to make it consistent with MARENASS'Srole inthe Project. Covenants applicable to project implementation: None. A. STRATEGIC CONTEXT AND RATIONALE 1. Countryand sector issues 1. Alleviation o f poverty in Peru cannot be achieved without a concerted effort to create sustainable and equitable growth, increase human capacity and security, and strengthen local institutions inthe rural Andean highlands, or Sierra region. The Sierra to a large extent defines the national identity o f Peru, yet it has the highest poverty rates inthe country and requires solutions that are tailored to its unique history, geography, population, and economy. The proposed Sierra Rural Development Project will be a linchpino fthe government's strategy for the rural Sierra. Country issues 2. Political and economic context. Peru i s currently enjoying a period o f relative stability and sustained economic growth after decades of tumultuous political transitions, inconsistent development strategies, and erratic economic performance. During the 1980s and early 1 9 9 0 ~ ~ the country endured a period o f civil conflict and upheaval triggered by the Shining Path (Sender0 Luminoso) movement. The violence by the Shining Path and the military efforts to combat it had severe and lasting effects on Peru's society, politics, and economy. These impacts, and the deaths, disappearances, and dislocation associated with the violence, were most acute in the communities o ftherural Sierra. 3. Duringthe past five years, Peru has enjoyed strong economic growth and sound policy, with gross domestic product (GDP) increasing by more than 5 percent per year on average. Yet poverty has not been significantly reduced in decades and most o f the recent economic benefits have gone to Lima andthe Pacific coast, with only limitedgains inthe Sierra andAmazon regions, where the incidence o fpoverty i s highest. 4. The administration o f President Alan Garcia, who took office in July 2006, has made bringing economic benefits to the rural Sierra one o f its top priorities. The government's new Sierra Exportadora program has set ambitious goals for the region in terms o f agricultural production and export, job creation, income generation, and poverty alleviation. The government sees the proposed project as critical to supporting the Sierra Exportadora Program objectives and sustainable rural growth and as a vehicle for bringingcoherence to the many sectors, actors, and initiatives related to rural development inthe Sierra. 5. Population and poverty inPeru's Sierra region. The Sierra region o f Peru includes all areas of the Andes above 2,000 meters. It has a population o f 10.6 million, o f which about 60 percent (6.3 million) live in rural areas. Most rural inhabitants (roughly three-quarters) are indigenous people, most are poor, and most are dependant on subsistence agriculture.' The 2002 National 'The term "indigenous peoples" is used ina generic sense to refer to a distinct, vulnerable, social and cultural group possessing the following characteristics in varying degrees: (a) self-identification as members o f a distinct indigenous cultural group and recognition o f this identity by others; (b) collective attachment to geographically distinct habitats or ancestral territories in the project area and to the natural resources in these habitats and territories; (c) customary cultural, economic, social, or political institutions that are separate from those o f the dominant society and culture; and (d) an indigenous language, often different from the official language. The two main indigenous and linguistic groups inthe project area are Quechua and Aymara. Most o f the indigenous people inthe project area are subsistence farmers. The nonindigenous, or mestizo population that accounts for about one- 1 Household Survey conducted by INEI (the National Institute o f Statistics and Information) put poverty inthe rural Sierra at 82 percent and extreme poverty at about 58 percent. While the rural Sierra has less than 25 percent o fPeru's population it accounts for 54 percent o fthe extreme poor. 6. Although long-term GDP growth in the Sierra has been slightly lower than the national rate, its economic performance has beensteadier due to its diverse economy and the fact that much o fthe rural economy i s subsistence-oriented. The agriculture sector accounts for one-quarter o fthe Sierra's GDP, but i s growing more slowly than the rest o f the economy. The second largest sector i s services, followed by industry, commerce, mining, construction, andthe public sector. The main crops are potatoes, white maize, barley, wheat, fodder crops, various legumes, and vegetables. Main livestock products are milk, beef, wool, and alpaca fiber. Average yields are low and have improvedlittle inrecent decades. Sector issues 7. Some o f the key factors limiting poverty alleviation in the rural Sierra are lack o f economic opportunities and strategic productive alliances, socioeconomic insecurity and lack o f productive assets and services, weak rural institutions, absence o f strategic planning to maximize development impact and poor overall coordination of the existing development strategy. 8. Poor overall program coordination in the Sierra. Despite the many national and international initiatives in the rural Sierra, many o f which have been successful within the limitedscope oftheir mandate, the entire portfolio o fprograms, projects, and investments are not being reviewed and assessed against the strategic needs o f the Sierra nor coordinated in a way that maximizes the added-value o f other interventions andleverages their inputs effectively.* 9. Thus, there i s a need to establish a government unit that has the mandate and can provide the leadership to define the overall scale o f the challenges, determine the most pressingneeds, and set strategic priorities in terms o f what investments would yield the highest impacts for achieving more equitable growth inthe Sierra. There i s also the need for the donor community, including the Bank, to rationalize our development work in the Sierra to achieve maximum impact. The Bank's 2002 Rural Development Strategy for the Peruvian Sierra (see page 4) provided a starting point for such efforts by describing the existing and proposed interventions in the Sierra and how they can contribute to three overarching development priorities: promoting quarter o f rural Sierra inhabitants, tend to live at lower elevations and are more likely to be involved incommercial farming than are indigenous people. The various aspects of a Sierra development program must be prioritized, planned, and costed. Many o f the needs in the Sierra have been defined inthe World Bank's Rural Development Strategy for the Peruvian Sierra (2002). Examples o f specific areas of focus are, programs on productive alliances, development o f niches, economic corridors, tourism, small-scale industries, private-sector development, road and rural road infrastructure, telecommunications, rural energy, irrigation, wholesale markets, research and extension, rural fiance, land administration, municipal infrastructure, watershed management, biodiversity conservation, rural education, food security programs through subsistence, off-farm employment programs, food aid and nutrition, health and reproductive health, water supply and sanitation, violence, crime, disaster mitigation, strengthening o f regional governments and local development councils, strengthening o f central government and national development institutions, communities and farmer associations, civil society organizations, rural access to security and justice, and cultural development. 2 sustainable rural economic growth, enhancing human development, and building up institutions to sustain growth and social protection(see Annex 17 for more details). 10. Community DrivenDevelopment. There is a need inthe Sierra to establish andmainstream mechanisms that approach poor people and their institutions as assets and partners in the development process and give control o f decisions and resources to community groups and local governments. Community driven development (CDD) programs operate on the principles o f local empowerment, participatory governance, demand-responsiveness, administrative autonomy, greater downward accountability, and enhanced local capacity. Experience has shown that given clear rules o fthe game, access to information, appropriate capacity and financial support, poor men and women can effectively organize to identify community priorities and address local problems byworking inpartnership with local governments andother supportive institutions. 11. CDD projects have shown to have a positive impact in a variety o f ways. First, when implemented according to the core principles outlined above, the CDD approach truly empowers communities; they are at the center o f the development efforts affecting their livelihoods. Second, CDD builds "social capital" as it strengthens social organization, promotes trust, and encourages collective action related to public investments and local development policy. Third, subproject implantation following the CDD approach increases the cost-effectiveness, speed, and sustainability o f investment subprojects. Fourth, the CDD approach increases transparency inthe use o f public resources and potentially can have a dramatic impact in increasing democratic accountability o f local government officials and institutions. And fifth, given their decentralized nature, the CDD approach can be scaled-up effectively and have a major aggregate impact on the provision of basic public infrastructure and services, targeted interventions for the benefit o f marginalizedpopulations, and overall poverty reduction. 12. Limited opportunities and productive alliances. There i s a great deal o f untapped productive potential in the rural Sierra that could be leveraged through creation o f strategic productive alliances between producers, processors, marketers, wholesalers, exporters, government, and technical service providers. Productive options in the rural Sierra are often limited and economic risks high because o f its relatively harsh environment, fragmented agricultural plots, lack o f transportation and communication infrastructure, poor and marginalized smallholders, difficult market access, and insufficient technology and capital inputs. Strategic productive alliances that foster coordination between different actors in the value chain, along with well-targeted technical assistance and financial support, could help overcome issues o f quality and reliability o f production, inputs, supply, and demand, creating a better environment for investment by small producers and helping them identify and exploit productive opportunities and market niches. Partnering with actors on the demand side o f the market will help ensure that production strategies are demand-driven. 13. Socioeconomic insecurity and lack o f productive assets and services. Broad economic growth often bypasses the poor andextreme poor who lack access to basic services such as health care, sanitation, and education. Rural farmers vulnerable to socioeconomic riskhave fewer choices, are often forced into a "safety first" mentality that prioritizes subsistence farming over more uncertain commercial production, and lack off-farm employment opportunities that could serve as an economic back-up if market-oriented agricultural ventures fail. While improving subsistence 3 agriculture might not increase their income, it could improve their food security, nutrition, and overallwell-being as a first step out o fpoverty andexpandingtheir productive options. 14. Weak rural institutions. Local-level rural institutions in the Sierra lack the capacity to provide the assistance, territorial planning, and coordination necessary to help ensure that investments and inputs yield sustainable growth and help empower communities to planandtake control o f their own economic and productive future. Although Peru i s in the process o f decentralizing government budgets and responsibilities, regional and provincial governments, community assemblies, and local intersectoral cooperation entities still lack the capacity to carry out this type o f planning and coordination. A concerted effort is needed to help strengthen such local institutional capacity so that investment planning will be likely to yield longer-tern benefits with strategies and programs that can adapt to new opportunities and new risks, are replicable, and effectively leverage other productive activities and investments. Government strategy 15. The Peruvian government has an array o f development and poverty alleviation plans and policies that must translate into a coherent set o f projects and interventions that avoids both fragmentation o f investments andduplication o f efforts insupporting territorial development inthe Sierra region. 16. Sierra Exportadora. One o f the cornerstones o f the government's development policy i s the Sierra Exportadora program launched in 2006, which emphasizes expanding the production o f small fanners, helping them identify and exploit commercial opportunities, and developing products that can compete in national and international markets. The program marks a move away from asistencialismo (assistance-based economic and food security) and toward productive investments to promote local economic growth, employment, and income generation for low- income producers. Its objectives include converting 150,000 hectares o f agricultural land to more productive and profitable crops, generating US$1 billion in new exports, creating 300,000 jobs, and tripling rural income by 2011 by improving natural resources management and modernizing agricultural production and marketingpractices. 17. Rural Development Strategy for the Peruvian Sierra. In 2002 the Bank prepared a Rural Development Strategy for the Peruvian Sierra in collaboration with the FA0 and in consultation with the government o f Peru3 The strategy proposes a three-pronged approach based on (i) promoting sustainable rural economic growth to increase incomes and reduce poverty, (ii) enhancing human development through education, health services, providing social protection for those bypassed by growth, and (iii) building institutions to sustain growth and enhance local capacity to manage developmentand improve quality o f life. Developingproductive alliances i s a crucial part o f the strategy, along with the creation o f economic corridors, productive infiastructure, and private investment for productive activities. The strategy also called for improving subsistenceagriculture andenhancing social safety nets for the poorest rural inhabitants. 18. Other National Plans for Development and Poverty Alleviation. On the basis o f consultations and dialogue through the Acuerdo Nacional, in 2004 the Peruvian government The strategy forms the basis for dialogue between the government and the Bank and provides the analytical rationale for the proposed project. 4 developed national strategies for rural development, poverty alleviation, and a number o f other topics. The objectives o f these plans include (i) rural economic development, (ii) sustainable management o f natural resources and risks, (iii)strengthening the capacity of rural populations and communities, (iv) institutional change to enhance rural development, (v) developing human capital among poor and vulnerable groups, (vi) promoting economic opportunity and capacity, and (vii) strengthening the network o f social protection. 19. Peace and Development Plan. Another key element o f the government's approach to the Sierra region i s the Peace and Development Plan adopted in2003 inresponse to the findings o f the Truth and Reconciliation Commission. This plan seeks to improve living conditions and ensure peace and the security for the communities most directly affected by the violence o fthe 1980s and 1990s. More than US$800 million will be spent to improve public works and strengthen government institutions and civil society inten regions (previously called departments), mainly in the Sierra region. The specific objectives for the planare to (i) improve diet, health, education, and security, (ii) rehabilitate andimprove roads, telecommunications, andelectricity infrastructure, (iii) increase production and productivity, particularly in agriculture and agri-business, and (iv) strengthen civil society institutionsthat contribute to the region's development. 20. Decentralization. Between 2002 and 2003 the government passed the Decentralization Framework Law and Regional Government Law, drafted the National DecentralizationPlan, and held elections for regional governments. This created the legal and political basis for a decentralized state, introduced a new political and institutional dynamism, and gave new responsibilities to sub-national governments for promoting rural development. However, local governments are still developing capacity to effectively perform these new functions. 21. National Plan for Undocumented People (2005-2009). InOctober 2004, the Government o f Peru launched a Special Commission to prepare a National Plan for Undocumented People (2005-09)4. The Commission estimated a total of 3.4 million undocumented people at the national level (83.9 percent adults and 16.1 percent children). The national policy targets the prevention o f undocumented people and actions for providing national identification document (DNI) with due consideration to gender and ethnic equity, and civic rights. The project will assist the Government's efforts, in coordination with the National Registry o f National Identification and Civil Status (RENIEC) and local governments, in decreasing the number o f undocumented citizens by ensuring that participants o fproject activities register names and apply for and are issued the DNI, as condition o f participation. This i s particularly important for the project because, (i) i s a highincidence o f undocumented citizens inthe project area such as there post conflict and poor areas (e.g. 43 percent o f victims o f terrorism are undocumented), (ii) undocumented citizens tend to be rural, indigenous and women, and are especially vulnerable as they often do not actively seek participationinavailable rural services, and (iii) the DNI, without citizens are not guaranteed access to basic services (education, health, justice), access to titling and property rights, formal marriage, inheritance, initiate a business, open a bank account, lead any formal productive activity, and others civic andcommercial rights. 4Members of the Commission were MIMDES. MOE. MINSA. and Ministrv of Interior. CND. Ombudsman. INDEPA, RENIEC, CONADIS, RENIEC, and civil society organizations such i s AWI, Flora Tristan, ID&P, and UNICEF 5 2. Rationale for Bank involvement 22. The proposed project will provide a platform to promote rural development initiatives, expand productive opportunities, create alliances between producers and other actors inthe value chain, build social capital and food security, and strengthen local institutions. The Bank i s well positioned to finance this project given its (i)strong track record in supporting rural development and decentralization in Peru through the Country Partnership Strategy (CPS) dialogue, (ii) extensive experience in promoting demand-driven rural productive alliances and community driven development in Peru and in other countries (Argentina, Bolivia, Colombia, Ecuador, Guatemala, etc.) and (iii) through its past and current operations in the Sierra, including projects for Sierra Natural Resources Management and Poverty Alleviation (PRONAMACHCS), Rural Roads, Social Development Fund(FONCODES), Rural Education, Indigenous and Afro-Peruvian Peoples Development, Rural Water and Sanitation, Rural Electrification, Trade Adjustment and Competitiveness, Vilvanota Valley Rehabilitation and Management, and Agricultural Extension andResearch(INCAGRO). 23. Inaddition, in2002 the Bank formulated a Rural Development Strategyfor thePeruvian Sierra that identified key directions and mechanisms through which equitable growth in the Sierra could be achieved. The strategy, developed incollaboration with FAO, has been the basis for dialogue between the government and the Bank in developing the proposed Sierra Rural Development Project. The project will serve as a pillar for the government's Sierra Exportadora Program and will work in conjunction with other Bank projects to amplify the effects o f economic growth inthe Sierra by providing a coordination mechanism for rural development in the Sierra (see Annex 17 for a matrix o f programs financed by the Bank). The proposed project will also complement or scale up some o f the projects being implementedinthe Sierra by other national and international institutions, such as the Puno-Cusco Corridor, PROALPACA, and various other livelihood projects runby organizations such as CARE, Caritas, and other NGOs. 24. The project would directly benefit about 268,000 participants (about 11 percent o f the rural population o f the six regions in the project area). The project i s also expected to provide broader benefits, particularly in the community development component, through the demonstration and multiplying effect o f cultural and social traditions within campesino communities that reward sharing knowledge and benefits with others inthe community. There is even greater potential for leveraging benefits through the Sierra Development Coordination subcomponent, which reflects a strong degree o f ownership and commitment by the national government to optimize its investments and maximize their impact. By identifying problems, solutions, andpriorities, then bundlinginterventionswithin the framework ofterritorial strategies and programs, the government expects to create greater physical connectivity in the region, better harmonization between social and productive investments, and stronger links between productive activities andmarket demand. 3. Higher level objectives to which the project contributes 25. The proposed project addresses some o f the Peruvian government's top development priorities. It supports the goal ofbringingthe benefits o f economic growth to a wider segment of the population, and in particular redressing the long-standingobstacles and inequities that have left 58 percent o f the rural population inthe Andean highlands inextreme poverty. 6 26. The project is intended to directly address specific parts o f both the Bank's 2002 Rural Development Strategy for the Peruvian Sierra and Peru's 2004 National Strategy for Rural Development, including productive alliances, development o f niche markets, building food security through subsistence fanning, creating off-fann employment opportunities, and strengthening regional governments and local development councils, communities, producer groups, and civil society organizations. Other priorities in rural development and poverty alleviation, such as education, communications, transportation infrastructure, household water supply, electricity, trade promotion, and health services will be the focus o f separate projects, with overall program coordination in the Sierra being provided by a central government unit financed bythe Sierra Rural Development Project. 27. The project also supports the objectives o f the 2007-11 Country Partnership Strategy (CPS)' agreed between the Bank and the Peruvian government. It i s a key element o f the "widening the base o f growth" cluster within the Economic Growth strategic pillar and also supports the clusters o f (i)making growth sustainable, (ii) promoting a new social contract (nutrition aspects), (iii)strengthening public sector management, and (iv) managing decentralization. 28. Within the overall goal o f ensuring that rural inhabitants in the Sierra have better opportunities to achieve their economic development goals, the proposed project will: (i) Increase opportunities for rural growth by promoting "strategic partnerships" and local economic development through producer-market ties. (ii) Build productive capacity and improve food and economic security by helping organize, build capacity, and promote empowerment among rural inhabitants and cofinancing productive investment subprojects. (iii) Improve coordination o f Peru's various rural development programs by funding a unit with the express mandate o f harmonizing and prioritizing investments across sectors to yield greater development impacts. B. PROJECT DESCRIPTION 1. Lendinginstrument 29. The project will be financed by a Specific Investment Loan (SIL) o f $20.00 million from the IBRD, $7.83 million from the government o f Peru, and an anticipated $7.10 million in cash and in-kindcofinancing from beneficiary families andproducers. Thus, the total project cost will be $34.93 million. ' IBRDandIFC CountryPartnershipStrategyfor the RepublicofPeru, ForthePeriodof 2007-2011, December 19,2006. ReportNumber 37913-PE. 7 2. Projectdevelopmentobjectiveandkey indicators 30. The project objective is to improve the assets and economic conditions o f approximately 53,600 rural families in the selected areas o f Apurimac, Ayacucho, Huancavelica, Junin, HU~UCO,Pasco, and strengthen government capacity to implement an integrated Sierra and development strategy. 31. These objectives will be achieved by financing small, demand-driven subprojects proposed by communities and groups of producers, and supporting a national Sierra Development Unit (SDU) to prioritize and harmonize government and donor projects and programs andprivate-sector investments across all sectors inthe Sierra region.6 32. Subproject selection criteria would be aimed at creating better opportunities for rural people to achieve economic development goals through, (i)the promotion o f strategic partnerships and productive alliances throughout the value chain to enhance local economic development and (ii) organization, capacity building and empowerment o f rural inhabitants and support to productive investments. 33. Key indicators for project performance andoutcomes include: Net value o fproduction o fparticipating rural families increased by 20 percent. Value o fproject beneficiaries' principalproductive assets (such as landunder cultivation, pastures, water, animals, etc.) increased by 30 percent. The Sierra's economic production as a share o fnational GDP has increased. National government developmentinvestmentsinthe Sierra increase by 30 percent. 3. Projectcomponents 34. The project includes three components. Component 1(Rural Businesses) will award demand-based financing for small subprojects proposed by groups o f rural producers to build strategic productive alliances and increase market accessandincome. Component 2 (Community Development) will award demand-based financing for small subprojects proposed by communities and groups o f families to increase basic agricultural and livestock production that will improve their socioeconomic and food security. Component 3 (Sierra Coordination,Project Management and Monitoring) will finance consulting and nonconsulting services, goods, and operational overhead required to execute the project and monitor project performance and outcomes and support the national government's efforts to harmonize the entire portfolio o f nationally and internationally financed projects and activities related to rural development inthe Sierra. 6InSpanish the SDUis also knownas the Unidad de CoordinacidnMultisectorialpara elDesarrollo Rural en la Sierra, or CMDRS. 8 35. The project area encompasses the highland provinces o f six regions: Apurimac, Ayacucho, Huancavelica, Junin, Huhuco, and Pasco (see Annex 15 for selection criteria and details o f geographic area and beneficiary population). Financing for subprojects inComponents 1 and 2 will target small rural producers indistricts that suffered highlevels o f violence during the civil conflicts o f the 1980s and 1990s as defined by the Peace Census conducted by the Commission o f Truth and Reconciliation (see Annex 15). The community development fund in Component 2 is further restricted to families in districts with both high levels o f past violence and limited market access. Most o f these families are expected to be indigenous. Component 3 will address development issues throughout the entire Sierra region. The intervention area and target population o fthe proposed project are summarized intables 1and2. Table 1:InterventionArea of ProposedPro.ject(components 1and2) Regions 6 (Apurimac, Ayacucho, Huancavelica, Junin, Huinuco, and Pasco) Provinces 43 Districts 483 Area 132,200 square kilometers Communities 2,309 (at least 875 will participate directlyunder Component 2) Groups ofrural 620 will participate directlyunder Component 1 producers Households Project area total: 483,522 in Sierra portions of the six regions Component 1:295, 310 ineligible districts, 18,600 direct participants Component 2: 199,229 ineligible districts, 35,000 direct participants Table 2: TargetPopulation Area Population (million) Peru 27.0 Sierra 10.6 Rural Sierra 6.3 Six selected regions 2.4 High-violence districts o fregions 1.5 Direct beneficiaries (Comp. 1and 2)* 0.3 * Direct beneficiaries are expected to include 18,600 families for Component 1(Rural Businesses) and 35,000 families for Component 2 (Community Development) for a total o f 53,600 families for the project. Assuming an average family size o f five people, there will be 268,000 direct beneficiaries, or about 11percent o f the rural populationo f the selected regions and 18 percent o f the rural population in the eligible (high violence) districts. 9 Table 3: Proieet Cost Table by FinancingSource (US$ ~ j l l ~ o ~ ~ 0.40 0 12 0 0.28 0.78 0.08 0.16 0.55 14.43 0.72 4.33 9.38 3 1. Sierra ~ e ~ e ~ o ~OQrdina~i~n ~ m e n ~ 050 0.50 0 0 3.2. Central Project~ a ~ a g e mand~@&E e n 2.57 2.30 0 0.27 2.67 2.53 0 0.15 36. t will help ~ r o ~ i ruralegrowth and b o ~ p o ~ ~ ~ by~supporting i i $ s the e ~ ~ t a of~subpr ~ o n cts, proposed by smaX1 rural produccrs, to ~ ~ p r their product~on,~ a r k e access, and income. For small producers who already have o ~ ~ c t access to ~ ~ a ~ ~the tproject will seek to i c s , ~ ~and~d ~r~ e~r stheiry c~o ~ ~ ~ e r cact~vitiesand ~vf i a l niarkct access. For s ~ ~ s ~ s famicrscor c ~ ~ n e & ~ ~who~cunently produce&p ~~i ~ a rfor lself- ~ ~ e ~ ~ ~~ y c # ~ i s ~ ~ ~i pn t~~a~~~~n~i ~dy ~p~ople)~oproject will tiel ~ ~ ~the u s ishinitial access to In p ~ ~ ~ j cit~will~pa~r ,o ~ ~# ~ e ~ r alliances~between~d actors in thc value ~ ~ ~ ~ ~ and co~petitj veness, increase to reliably deliver pro inputs, i ~ t r o ~ u cnew p~#duc~jon e ation, and ~ d e ~and~exploit e t f ~ 38. It is cxpcetcd that most subpr~~ectswill be in agriculture (crops, li tock, and agro- forestry) but ~ i o ~ ~ ~ ~ si ~c~~~Ip~r ouj{~ar c~atus~a c u ~ tt~o~~r~~r,~services, h a n d i c ~ ~small-scale s n ~ , f ~ ~ , idus us try^ and a ~ r i ~ ~ swill~ also be~eligible. A ~ t ~ o ue ~g i~g i b ~for~ ~~~ i ~ i pi sa not i o ~ i e ~ s l t ~ c ~ ~ t i ~ ion~degree of market access, it is likely that thcrc will be greater d e m ~ n ~ g n t and more viable ~roposa~sfor ~ ~ a ~~c~ inthis~$cr~ ~ p o n efrom n~ n ~ producers in districts with bettcr acccss to makers. 39. Examples o f potential subproject proposals include (i) producers of staple crops helping to compete with imports by supporting alliances between wholesalers and producers to ensure uniform quality standards and reliable supplies, (ii) collaboration between tour operators and communities to provide training in tourist services and improving rural tourism facilities, (iii) forming alliances between the alpaca wool processing and export industry and local producers to provide pricing incentives and improve upstream production quality, (iv) fostering cooperation between producers and wholesalers/exporters o f handicrafts and small-scale industry products to overcome problems related to quality and quantity o f supply by channeling technical assistance, training, technology, and financing, and (v) helping producer groups establish brand names to market their items better innational markets. The actual subprojects financed will depend on the proposals received. 40. The proposals will be prepared by a group o f small producers, assisted by local technical specialists called yachaqs, community trainers called yachachiqs, and/or other local organizations. The project seeks to support financially viable and sustainable rural business subprojects, with a secured market outlet to ensure that the market demand and conditions o f the business plans have been given due consideration. To ensure that the subprojects are driven by market demand, the producer groups will be required to include a market agent (such as a wholesale buyer, processor, or intermediary) as a partner in their proposals. The business relationship (e.g. proposed purchasingconditions, volume, and price) will be outlined in a letter o f intent, which will be part o f the submission package for financing. Details will be outlined in the project Operational Manual. 41. The regional offices o f the Southern Sierra Natural Resources Management Program (MARENASS) will hold competitions at the regional level based on yearly resource allocations determined by the MARENASScentral office. Groups o fproducers would request preinvestment financing based on subproject profiles, then submit final business plans to the MARENASS regional office for technical evaluation and safeguard and eligibility screening (by the regional coordinators) and clearance (by the central component coordinators), with support from outside experts when necessary. Every six months a Local Resource Allocation Committee (CLAR) will meet in regions with active competitions to select final winners. The CLARs will be composed o frepresentatives o f the public and private sectors as well as civil society entities. 42. Direct investment in subprojects will include US$10.20 million inIBRD financing and an anticipated US$4.49 million in cofinancing by beneficiaries. Each subproject must include at least 10 families and it is expected there will be an average o f about 30 participating families or producers in a typical subproject. A single family or producer can receive no more that US$600 from the fund, and the maximum for a single subproject will be US$21,000. Participants are required to contribute cofinancing, in cash, equivalent to 30 percent o f the total cost o f the subproject. For microenterprise proposals (as defined inthe operational manual and described in Annex 4), up to 50 percent o fthe beneficiary cofinancing maybe in-kindrather than cash. Component 2: Community Development (US$l3.58 million) 43. This component will address socioeconomic risk and insecurity among the poor who lack access to basic services and are likely to be left behind even in periods of broad economic growth. For these families, improving subsistence agriculture might not increase their income, 11 but it will improve their food security, nutrition, and overall well-being as a first step out of poverty and escaping the "safety-first" dilemma that limits their economic choices. The process o f designing and collectively implementing productive subprojects, including the technical assistance o f MARENASSandjoint supervision and reporting responsibilities, i s intendedto not only increase community resources but help strengthen social capital, capacity, and community productive alliances as well. 44. The component will support the design and implementation o f subprojects to diversify, expand, and improve the assets andproduction o f rural families inareas that have limitedaccess to markets. It i s expected that because o f this lack o f market access most subproject proposals will be aimed primarily at improving natural resources management, reducing vulnerability to risks, and increasing agricultural and livestock production for self-consumption by families and organized rural communities. Examples o f possible subprojects include simple improvements to increase yields, such as using improved cultivation techniques, soil conservation and water retention methods, optimized input use, and plant protection. To the extent possible, opportunities will also be sought to generate excess production for sale inlocal markets. 45. The main output will be implementation o f about 875 community development subprojects with clearly defined and sustainable goals. Its main outcome will be to help an estimated 35,000 rural families attain increased and diversified production, greater food security, improved standards o f living, and higher income whenpossible. 46. Resources for the investment fund will be budgeted to the regional offices annually on the basis o f the size o f the local target population, expected demand, and actual demand as the project progresses. Rather than having competitions with specific deadlines, the regional offices will open funding windows on a provincial basis, which will remain open until the end o f the fourth year o f the project or untilthe available funds are awarded. Participationwill be limited to communities located in districts that have both high levels o f past civil violence and limited access to markets (see annexes 10 and 15). 47. Initial proposals will be screened by the Community Assemblies and then submittedby the community representative to the MARENASS regional office, which award preinvestment financing to about 875 proposals to develop subproject profiles or simple business plans. These plans will be reviewed by the regional offices, which will make a final decision to award investment financing based on the eligibility and selection criteria specified in the Operational Manual. Implementation o f the subproject will be the responsibility o f the rural communities, whose representative will sign a contractual agreement with the project to abide by all administrative and fiduciary requirements. In some cases, the community may use part o f the financing as awards for the families whose efforts or innovations yield the best results for the productive activities targeted by the subproject. This type of incentive-based competition, combined with formal recognition during community ceremonies or events, has been shown in other projects to providevery powerfbl leverage for optimizing investments. 48. The fund will include US$9.34 million in IBRD financing, US$1.59 million from the government o f Peru, and is expected to generate US$2.62 million in beneficiary cofinancing. Average subproject funding, not including cofinancing, i s expected to be approximately US$12,000, which assumes an average o f 40 families per project and US$300 per family (the 12 maximum per family financing would be US$350). The communities or groups o f families themselves are required to contribute cash or in-kind cofinancing o f 20 percent. Most cofinancing under this fund will likely be in the form o f in-kindcontributions o f labor and local materials. Component 3: Sierra Coordination, Project Management and Monitoring (US$5.74 million) 49. This component would (i)ensure efficient and effective development planning in achieving the project development objective and other indicators and to feed that information back into enhancing project implementation, This component will also support the Peruvian government's efforts to prioritize, strategize, coordinate and implement the execution o f an integrated development programfor the Sierra. This program will be financedby the government. 50. For Sierra coordination activities implemented by the PCM, the proposed project will support creation o f the SDU by financing consultants, technical assistance, workshops, training, and goods to strengthen the capacity o f the SDU to promote economic development inthe rural Sierra. The SDU would include national level sectoral committees to represent particular sectors and coordinate activities within the sector and with other sectors, and would also work with the regional andprovincial governments andmesasde concertaci6n. 51. A transparent and participatory M&E system will be established at the central office o f MARENASS, which will rely on information provided by the project's regional offices, beneficiaries, and annual surveys o f beneficiaries and control group members. Some tools for transparency that MARENASS will use are (i) score cards "tarjetas de calzjkacion, (ii) " focus groups, (iii) independent budget analysis, and (iv) radio reporting or photography reports. 52. The main outputs o f this component include (i) personnel to manage the project at the key national andregional levels hired, (ii) management information system inoperation for the project, (iii) managementsysteminoperation,(iv)aprojectM&Esysteminoperation,and(v)all financial key reports, including the project implementationplan(PIP), annual operatingplans (POAs), audit reports, and M&E reports systematically prepared and submitted according to the designated schedule, (vi) establishment o f the SDU within the PCM (with a coordinator and private sector and public sector specialists), (vii) an updated integrated rural development strategy for the Sierra, (ix) creation o f a prioritized investment program for the rural Sierra based on consultations with stakeholders and financing entities, (x) strategic analytical work to identify key problems, bottlenecks, and solutions and to define strategic investment priorities, (xi) a diagnostic study o f local financial institutions, their coverage, and service provision, (xii) promotion or strengthening o f local and regional sectoral roundtables (mesas de concertucidn) and local coordinating councils to coordinate investments inthe Sierra, and (xiii) government approval and implementationo f an integrated Sierra Development Program 53. The main outcomes o f the Sierra coordination activities will be (i) development o f an overall development strategy for the rural Sierra and effective coordination at the national level o f all investments and programs financed by the national government and international donors, and (ii) increased investments and higher priority for Sierra rural development by both local and national government. 13 4. Lessonslearnedandreflectedinthe projectdesign 54. As detailed inAnnex 16, preparation o fthe project benefitedfrom lessons learned inmany rural development initiatives carried out in the Sierra region by the Bank, bilateral aid agencies, other international organizations, andNGOs. Competitive h d s have also been tested ina number o f successful projects in Peru and other countries. The Rural Development Strategy for the Peruvian Sierra prepared in 2002 by the Bank, in partnership with the FAO, also provided extremely valuable insights from leading experts in the field. Lessons learned from these experiences include: Rural development in the Sierra Complex project designs (such as revolving funds with multiple social, political, and economic objectives) may hinder implementation if they exceed the management and administrative capacity of rural communities. Such delays can engender mistrust by beneficiaries and conflict between the project and local organizations and stakeholders. Well-defined institutional roles and hnctions, transparent mechanisms, and clear accountability are required to avoid politicization and corruption. Effective communication and promotion i s needed to generate useful feedback and advice, avoid false expectations, and improve the likelihood o f achieving good results. Projects design should be flexible to adapt to ongoing experiences and emergingconditions. Programs should have a limitedgeographical spread andrespond closely to local needs while also promoting territorial approaches and improving physical connectivity between geographic areas and between producers and markets. Supporting agricultural production alone i s not enough to promote rural growth. Natural resource management, access to markets, linkage to value chains, and off-farm employment need to be explicitly addressed also. Bundlingo f investments and interventions across sectors within the framework of a territorial strategy helpsmaximize impacts. The project shouldbeproactive inidentifyingandreferring service providers with good track records and who can work well with rural communities because such service providers are scarce inthe rural Sierra. Competitivefunds for rural communities and small ruralproducers Programs should be open to a broad range o f subproject ideas, avoid creating a predefined list o f eligible activities, and involve rural people and project beneficiaries in important design and implementation decisions. This helps enhance the project, legitimize the views o f rural people, create realistic expectations, and avoid controversies. Technical assistanceand fimding for maintenance are critical to the sustainability o fbenefits. Givingcontrol o f decisionmaking andproject resources to rural communities increases their incomes, assets, and self-esteem. Competitions should be transparent and should emphasize strong links to markets. Programs should seek to raise the historically low participation by women, especially since programstendto bemore sustainable whenmanagedbywomen's groups thanbymen. Trained local service providers are best able to respond to the needs of their communities. 14 a Local service providers connected to rural communities can help link rural and urban areas andexpand marketsand opportunities for small businesses. a Requiringcofinancingfrom beneficiaries helps optimize resources and sustainability. a Support to rural poor producers should be based on the identification o f market opportunities, and not only on satisfying "needs" or "demands" with unclear prospects for penetratingthe market. a Having external agencies assist communities in procurement disempowers the communities. It should be avoided if possible and should only be done under strict limitations and guidelines when necessary so that communities take on as much responsibility as possible. a A demand-driven approach requires a dynamic and adaptive M&E system rather than depending on predefined indicators because the actual types o f projects funded will only be knownduringimplementation. a A CDD project requires close coordination with local authorities for potential fiscal support for both capital and recurrent expenditures to increase sustainability. 5. Alternatives consideredandreasonsfor rejection 55. A continuation o f the Bank-funded Sierra Natural Resources Management Project (PRONAMACHCS) was considered. However, it was rejected because (i) its sectoral approach was not considered to be fully consistent with the cross-sectoral, multidimensional, and territorial principles o f the country's rural development andpovertyalleviation policies, and (ii) the project had a legacy o f politicization and did not emphasize diversified assets held by rural populations inthe Sierra. 56. A supply chain (cadenasproductivas) approach was considered that would select certain "winner" products and then seek to open the bottlenecks that were keeping them from reaching the market. This approach was suggested in the Sierra rural development strategy but ultimately rejected because o f its limited development impact given the vast areas in the rural Sierra that have low market access, particularly compared to the more inclusive territorial approach that would build on existing assets, increase connectivity, and help develop strategies to bundle investments and intervention across sectors to reduce poverty rather than only concentrating on increased production. C. IMPLEMENTATION 1. Partnershiparrangements(if applicable) 57. The project's strategy o f building productive alliances will directly support the Sierra Exportadora program, which will be represented on the project's Steering Committee by P C M and will help evaluate rural business proposals inComponent 1. Other strategies for coordination with Sierra Exportodora were discussed during appraisal and more formal arrangements will be agreed prior to project approval. There will also be close coordination with INCAGRO, sharing o f lessons, and search for synergies where possible to leverage the experience o f both programs. Sierra Rural Development Coordination activities carried out during project implementation (under subcomponent 3.1) will also create strategic alliances between World Bank Group projects and other donor programs within the Sierra. 15 2. Institutionalandimplementationarrangements 58. All project activities will be implemented by MINAG except for the Sierra Rural Development Coordination activities in subcomponent 3.1, which will be implemented by the PCM. MINAG will have responsibility for overall management, supervision, coordination, technical design, fiduciary control, and monitoring and evaluation. Direct implementation of MINAG'sproject activities will be carried out by staff from MARENASS, while subcomponent 3.1 will be executed by the SDUto be established inthe PCM. 59. Other key actors will include regional governments and provincial municipalities (and associations o f municipalities), formally established rural communities (comunidades campesinas), producer and business groups, local grassroots organizations, private and community technical specialists and service providers, local chambers of commerce, universities and technical centers, and various regional and local committees and planning boards. The Prime Minister's Office (PCM), the National Council on the Environment (CONAM), and the ministries o f Women and Social Development (MIMDES), Production (PRODUCE), Transportation and Communications (MTC), and Economics and Finance (MEF) will also be important partners and will help oversee project planningand strategy as members o f the project Steering Committee. Ministry of Agriculture (MINAG) 60. MINAG's mandate i s to reduce poverty and improve living conditions in rural areas by integrating small growers and subsistence farmers into the marketplace and supporting them in the areas o f natural resources management, quality control, technology transfer, and increased productivity to help achieve greater profitability and competitiveness. MINAG will be the implementing agency for the majority o f project activities, and its minister will be the president o fthe project Steering C~mmittee.~ Southern Sierra Natural Resources Development Program (MARENASS) 61. MARENASS i s a program within MINAG that began operations in 1998 with support from the International Fundfor Agricultural Development Its goals were to increase the amount o f arable land for farmers in Peru's southern highlands and enhance the commercial value o f their productive natural resources. In addition to providing technical assistance and promoting technological change, the project used competitive funds to finance small community subprojects in agricultural and livestock management, community planning, soil conservation, forestation, and management o f pastures, water, and other natural resources. The long-term mission o f MARENASS is strengthen rural families and communities, improve their quality o f life, give them greater responsibilities, resources, and opportunities, increase their management capacity, and help them buildrural businesseswith strong links to markets, * An 'Subcomponent 3.1, which relates to Sierra development coordination activities, will be implemented by the PCM. Executive Decree i s proposed to modify the geographical scope of MARENASS to encompass a larger area o f the Sierra. The new Executive Decree will also expand the mandate o f MARENASS in line with the activities envisioned in the proposed project. The MARENASS central office will be relocated from Abancay to Ayacucho, some existing regional offices will be relocated, and new offices will opened to better serve and access a larger area o f the Sierra. 16 62. MARENASS was selected to execute the proposed project because o f its experience with competitive subproject funds similar to those inthe proposed project, its direct knowledge o f and established presence inthe Sierra, its proven track record inworking with international agencies, and institutional capacity both independently and as a program o fMINAG. 63. Although the main purpose o f MARENASS initially will be implementation o f the proposed project, ultimately it i s expected to also take on administration and implementation of other programs and initiatives inthe rural Sierra. Since closure o f the FADproject inJune 2005, MARENASShas continued its main activities with government funding, albeit on a scaled-back level. Once the proposed project begins implementation, the existing staffing o f MARENASS will be augmented by project-funded staff, two new regional offices will be opened, and new activities will begin. MINAG-fbndedstaff positions o f MARENASS will be maintained and activities that MARENASS has been conducting for the past seven years will continue. In2006 MARENASS also began preparing a second phase o f its FAD-supported operation, which would be expanded to the northern Sierra (Cajamarca, L a Libertad, Lembayeque, and Amazonas). Details o f this proposed operation are still being defined, but activities will be coordinated with the proposed Bank project to ensure a consistent approach to rural development. 64. Because the proposed project will be carried out by regular MARENASS staff (and subcomponent 3.1 by PCM staff), no separate project implementation unit will be established. Prime Minister's Office (PCM) 65. The Prime Minister's Office i s uniquely positioned to coordinate nationally and internationally fhded investments and activities, as proposed in Component 3 (subcomponent 3.1). The PCM coordinates andsupervises the multisectoralpolicies andprograms ofthe Executive Branch o f the government and helps align the priorities o f the various branches o f national and local government and other entities inthe pursuit o f national goals. It is the key entity responsible for harmonizing and definingthe strategic priority o f government programs andpolicies. Institutional Capacity Constraints 66. The main capacity constraints identified during preparation were lack o f adequate internal control arrangements and insufficient familiarity with Bank financial management (FM) and procurement procedures. The borrower has agreed to a detailed action plan for finalizing institutional arrangements, contracting key staff, creating internal control mechanisms, puttingin place management and financial systems, defining the flow o f funds and disbursement arrangements to final beneficiaries, and preparing an Operations Manual, implementation and procurement plans, and standard procurement and FM documents and subproject contracts and agreements. Procurement and FM capacity assessments conducted prior to appraisal found that MINAG had completed most agreed actions and identified final steps to be carried out prior to negotiations to put inplace adequate procurement and FM systems, staff, and procedures. Accountability and Flow of Funds 67. As the main project executing agency, MINAG will be responsible for all official communication with the Bank, coordinate project activities with other ministries, and have 17 ultimate fiduciary control and responsibility for the project components implementedby MINAG (through its staff in MARENASS). The Minister of Agriculture, or the minister's designated representative, will serve as president o f the project Steering Committee, thereby exercising oversight and control o f the project as well as taking the lead in setting overall policy and strategy. The P C Mwill carry out these functions for subcomponent 3.1. 68. Definition o f arrangements for flow o f fimds has been agreed for different components. In general terms, the administrative unit in the central office of MARENASS (which will be moved from Abancay to Ayacucho prior to or shortly after project effectiveness) will manage all flow o f funds for the project, including the expenses of the regional offices and subproject financing, with support from MINAG's central administrative unit if necessary. The MARENASS administrative unit includes an administrator (who will be responsible for overall budget planning and financial management), accountant, assistant accountant, treasurer, legal advisor, and procurement specialist. 3. Monitoring and evaluation of outcomes/results 69. Component 3 includes specific arrangements and budget for monitoring and evaluation (M&E). An M&E unit inthe MARENASS central office will include a lead specialist and two assistants who will work closely with the component coordinators and regional offices to design and implement an effective M&E system. While each component will have its own M&E strategy, requirements,andprocedures, when possible they will be developed to complement one another, use comparable formats or protocols, and form a coherent whole in terms o f overall project monitoring and evaluation. The M&E unit will contract and supervise baseline studies, design survey and reporting forms, select control groups, determine parameters to be measured, maintain records, analyze results, help monitor, contract compliance by beneficiaries, and participate directly ingathering information inconjunctionwith the regional offices. 70. A robust M&E systemwill be under implementation by at least the end o fproject year 1 to monitor subproject implementation, project and subproject impacts, and project implementation. The M&E system will provide specificity indata collection methodology, levels o f monitoring and evaluation activities, data collection and reporting responsibilities, provisions o f resources (both human and budgetary) and frequency of M&E activities. The M&E system will collect data that will measure project impacts and also verify the intermediate outcome and impact indicators. Data collection methodology and impact evaluation will be based on three instruments: a survey at entry o f all participants in Components 1 and 2, control surveys for those components, and a baseline study for Component 3. There will also be an annual survey and end-of-project survey o f the treatment and control samples. 18 4. Sustainability 71. Both the project designanddialogue with the borrower have been basedinlarge part on the Bank's 2002 Rural Development Strategyfor the Peruvian Sierra. The new administration, which took office in July 2006, has made the rural Sierra its highest development priority and considers the proposed project a key element inits strategy for bringingthe benefits o f economic growth to the region. To move the project forward as quickly as possible, the government has transferred ownership of the project to a new agency, put a new project preparation teams inplace with high level leadership, andmovedthe project to the front o fits administrative and legislative agenda. 72. Some factors critical for sustainability include (i) coordination of project investments with other key sectoral investments such as transportation infrastructure, water, electricity, exports and competitiveness, social services, land administration, andmicrofinance, (ii) adequate technical assistance and maintenance arrangements for improvements to productive assets, small works, and goods procured under the subproject components, (iii) suitability o f investment to local needs and commitment and ownership o f subprojects by recipients o fproject financing, and (iv) continuity o f government staffing andbudgetallocationto project objectives after closing. 73. The project addresses these issues by: i)Includingwithintheprojectitselfthecreationofbothlocalmechanisms (some ofwhich already exist but need to be strengthened) and a permanent high-level, national coordination unit to ensure that project investments are reinforced and inturn complement other sectoral interventions. ii)Useoftheexisting(andplanned)decentralizedMARENASSofficesintheSierra,including its central office located in Ayacucho, will help keep the planningand implementation of the project close to local government and stakeholders to increase opportunities for establishing partnerships with local institutions. iii)Makingtheinclusionintheproposalofamaintenanceandoperatingplanandbudget(when applicable) one o f the criteria for evaluating and awarding hnds to subproject proposals. iv) Making financing o f subprojects demand-driven, with proposals coming from groups o f families, rural communities, and small rural producers themselves to ensure that the financing i s in line with local needs and priorities, and requiring cofinancing from participants to help ensure ownership o f the subprojects and commitment to making the investments successhl and sustainable. Business proposals with no established marketing agreements or those without viable financial rates o freturn will not be eligible for support. v) Designingthe project to be implementedthrough an existingprogramwithin MINAGthat will continue to exist and receive government fimding for project activities after the project closes, andwith staffworkingonthe project financed byMINAG. 19 Risk Risks Mitigation Measures Rating Change inpolitical Buildproject ownership inthe central government and in M commitment to project inthe the Sierra region by having strong stakeholder capital or inthe Sierra participation among relevant institutions and beneficiaries Project i s controlled inLima Use decentralized programo fMINAG(MARENASS) to L and i s not decentralized execute project from Ayacucho central office and other adequately regional offices; involve local communities, private sector, and civil society inthe Sierra inproject implementation Corruption inallocationo f Establishan effective fiduciary system inthe Sierra region M project resources (Annex 7); make selection process transparent (Annex 8); involve multiple local actors inprocess to create strong social control mechanisms; include robust M&Esystem. Producer groups do not pay Duringthe disseminationcampaign, emphasize the M cofinancing in subprojects importance o fbuildingownership and accountability - Project becomes politicized Maintain a professional cadre o fproject staff. Clearly M (established criteria are articulate rules o f the game inan operational manual that overlookedto prioritize certain i s constantly updated (with Bank approval) to maintain areadgroups o fbeneficiaries relevancy. Resource allocationwill be decidedby public- for political gain) private independent technical panels. I Fiduciary Risks Limitedprocurement capacity Hire a procurement specialist with World Bankproject H by MARENASS to carry out experience to coordinate procurement planning and (perform) procurement tasks, management inMARENASS and evaluate the capacity evaluate, advice, monitor, and o f the regional offices. Ifthe evaluation identifies any supervise subproject deficiencies, the procurement specialist will prepare an beneficiaries, and keep control actionplanto provide any requiredtraining and advice. o f the procurement The specialist will implement monitoring and informationrelated to all supervision mechanisms with the participation o f the components. regional offices staff. MINAG's central administrative unitwill assist MARENASS inplanningandmonitoring procurement processes and providing TA and advice, if needed. Inadequaterecordkeeping & MARENASS central office will implement a system M filing system o f selection (procedures) with the instructions for filing project processes and procurement procurement documentation. The system i s to be usedby documents by regional offices the regional offices and beneficiaries, and the instructions should be inthe project operational manual. 20 Risk Risks Mitigation Measures Rating Limited control systems MARENASS to conduct annual independent M procurement audits and Bank ex-post reviews to verify compliance with Bank guidelines by subproject beneficiaries. Limitedcapacity for the A specific action planhas beenagreed with M definition, design and MARENASS for the completion o f these tasks, including implementations o fthe the provision o f technical assistance from the Bank side. specific financial management arrangements that support the To the extent possible the information system currently implementationo f components used by a similar project withinMINAG will be installed 1and 2, which include, design and adapted to project needs to facilitate record keeping, o f model agreements, and internal control and preparation o f financial reports. budgeting, accounting, disbursements and financial reporting at the subproject level. Overall RiskRating I M RiskRatings: L(Low); M(Moderate), S (Substantial); H(High) 6. Loadcredit conditions and covenants 74. Effectiveness condition: MARENASS Regulation duly updated by all necessary governmental and corporate action to make it consistent with MARENASS'Srole inthe Project. D. APPRAISAL SUMMARY 1. Economic and financial analyses 75. The project does not lend itself to detailed ex-ante cost-benefit analysis because the specific activities financed will depend on the subproject proposals made by community and producer groups during implementation. Although the local development constraints and market opportunities are generally known, it will be the interested communities and producer groups who will ultimately determine the nature, scope and mix o f investments. To obtain a rough approximation, some potential initiatives were analyzed, based on primary and secondary information. However, more accurate and representative economic and financial estimates . should be generated, during project start-up activities, with primary information from a larger sample o f preliminary community development and rural business proposals. Standard procedures should be applied for ex-ante and ex-post impact evaluation. 76. The rural business subcomponent will cofinance TA and nondurable goods to organized producer groups, with eligible business plans aimed at production, processing and marketing activities, preferably engaged through alliances with market agents. The community development subcomponent will cofinance similar items to communities with eligible investment proposals aimed at natural resource management and productive activities. 21 77. Based on preliminary estimates, average economic IRR o f incremental flows wouldbe 30 percent for rural business initiatives and 20 percent for community development initiatives. If there are 53,600 beneficiary families, aggregate economic NPV and IRR would be US$11.7 million and 29 percent, and aggregate incremental annual employment would be equivalent to 1,000 persodyears. Average financial IRR o f incremental flows would be 28 percent for rural business initiatives and 14 percent for community development initiatives. For the above- mentioned target population, aggregate financial NPV and IRRwould be US$4.0 million and 17 percent, and aggregate tax NPV would be US$3.9 million (US$1.1 million income tax and US$2.8 millionvalue-added tax). 2. Technical 78. The rationale for the selected technical design and approach is based on the successful use o f similar competitive funds to finance small-scale productive subprojects in rural areas of Peru and other countries such as Argentina, Bolivia, Colombia, Ecuador, and Guatemala, including the IFAD supported MARENASS project, World Bank INCAGRO project, and other experiences. This validity o f the strategic alliances and community development approach emphasized through the competitive subproject funds is confirmed by rigorous analysis inboth the Bank's Rural Development Strategyfor the Peruvian Sierra and the Peruvian government's own rural development, poverty alleviation, and food security plans developed through a formal national dialogue with diverse stakeholders and technical specialists in these fields. These analyses supported both the rural business development model based on building productive alliances within the value chain to improve market access and opportunity. 79. Inaddition, the analyses supported the notion that improvements in subsistence farming and other noncommercial productive activities can play a critical role in improving socioeconomic and food security and overall well-beingand a first step toward escaping poverty and freeing the poor to engage in market activities and identify and exploit a wider range o f economic opportunities. Financing will be demand-driven, its actual contents depending on the proposals presented to the project by the beneficiaries themselves. It i s expected that the financing plan will include the necessary technical assistance as well as goods to successfully implement their proposals. Thus, once the proposals are under implementation, aside from regular supervision and monitoring, there will be no other general technical assistance for the beneficiaries. However, the project will maintain a close communication with other relevant projects in the Sierra so that any infrastructure bottlenecks faced by the beneficiaries may be referred to these other projects, such as rural roads, rural water and sanitation, and rural education. 80. The project caters closely to the borrower's needs and is considered as one o f the cornerstones o f its effort to widen the base o f economic growth to reach the poor and extreme poor in the rural Sierra, which i s one o f the highest development priorities o f the current government. The SDU strengthens the government's capacity to harmonize a wide range o f nationally and internationally financed investments and activities in order to maximize their development impact and ensure sustainable outcomes. Furthermore, the project i s appropriate to the implementation capacity o f rural families, communities, and small-scale producers, who will themselves definewhat their priorities are and how best to achieve them. 22 3. Fiduciary Financial Management 81. In view of the implementation arrangements defined for the project, a financial management assessment was conducted for the proposed implementing entity, MARENASS. The assessment was performed in accordance with OPBP 10.02 and the Manual "Financial Management Practices in World Bank - Financed Investment Operations." The objective o f the assessment was to determine MARENASS'Scapacity to properly manage and account for all project proceeds and to produce timely accurate and reliable financial statements for general and Bank special purposes. 82. Project design and implementation arrangements require a robust financial management system, that also considers the associated risks and weaknesses that may prevent the implementing entity from providing the Bank, the Borrower and other interested parties with accurate and timely information regarding project resources, expenditures and activities. Subject to the successful implementation o f the proposed arrangements -including the mitigating measures-, the project's inherent and control risk ratings are modest. However, these ratings could be affected ifthe implementing entity i s not able to maintain the proposed arrangements - includingqualified staff- throughout the life o f the project, and also, ifmitigating measures are not implemented as expected. 83. On the basis o f the review performed, the progress reached so far and the actions that are being taken to complete the pending requirements that will be followed-up upon before Board presentation and during implementation, the financial management team concludes that the proposed financial management arrangements are acceptable to the Bank. Finally, it is important to note that monitoring and supervision o f the operation o f the arrangements defined will be essential to guarantee the adequacy o fthe financial management system. Procurement 84. A preliminary assessmentwas carried out in September 2006 and finalized inNovember 2006. The assessment identified some minor weaknesses such as lack o f internal control mechanisms, project management information system, project planning experience, and inBank procedures and documents. The borrower agreed to a detailed action plan to be completed prior to the appraisal mission, includingthe draft project procurement plan, the proposed organization and staffing o f MARENASS to confirm that project procurement arrangements are acceptable to the Bank. A procurement assessment at appraisal found that progress had been made in implementing the previously agreed action plan, but that a few issues were still pending and will be completed within the following month after Negotiation and be in place before implementation. 85. MARENASS will build on the project management experience it acquired during its implementation o fprevious IFAD financed projects and will also operate incoordinationwith and receive support from staff in MINAG's central administrative unit. The organizational and implementation arrangements should be finalized, to confirm the relationship and responsibilities o f MINAG, MARENASS and PCM, to prepare a Project Operational Manual. The Project 23 Operational Manual will describe in detail the procurement arrangements, methods, roles, responsibilities and standard bidding documents to be carried out by MARENASS and specific aspects critical to the work o f the Bidding Committee. MARENASS will manage major procurement activities through its decentralized headquarters office inAyacucho and will provide assistance to project participants in any procurement planning and contracting for which they are responsible, ifnecessary. Annex 8 details the procurement processes that will be followed as well as the agreedinstitutional strengthening requirements for MARENASS andPCM. 4. Social 86. The project i s expected to have a positive impact on social inclusion by increasing assets and improving economic conditions for rural families in areas o f the Sierra that suffered high levels o f violence related to the Shining Pathduringthe 1980s and 1990s. About 75 percent o f the expected project beneficiaries are indigenous subsistence farmers. A thorough social and beneficiary assessment (SA) was conducted by the government o f Peru using participatory methodologies (focus groups, workshops, and consultations) in both Spanish and Quechua to directly reach more than 10,000 farmers. This process resultedin a broad consensus in support o f the project, confirmed in an Act o f Agreement signed by 10,040 campesinos. The main stakeholders consulted were indigenous subsistence farmers, usually living in areas above 3,000 meters. Additional consultations were carried out with representatives o f civil society groups, who were mainly nonindigenous people living inareas below 3,000 meters. These two groups included professionals and nonprofessionals, youth, men, women, small agribusinesses, nonagricultural businesses. Consultative meetings were also held with 73 representatives o f regional, provincial, anddistrict governments, and 11localrepresentatives o fnationalgovernment entities. 87. Indigenous culture i s oriented toward promoting a territorial and ethnic identity, and the indigenous people maintain strong cultural traditions, values and practices based on the ancestral patterns o f reciprocity, solidarity, and communal work. These distinct characteristics enhance opportunities for productive agricultural and nonagricultural development regimes. The project has internalized the risks identified through the SA and devised mitigation mechanisms so that the risk of negative socioeconomic impacts i s strongly mitigated. For example, the project will include considerable promotional, educational, analytical, and consultative activities to ensure inclusiveness o f the beneficiaries. Experiences in integrated community development among indigenous peoples have also been internalized into the project design, such as using the community trainers (Yachachiqs) started in the Jabonmayo Cusco project as teachers for entrepreneurial and technological issues intheir own communities. 88. Some of the key conclusions from the consultation workshops that helped drive the project design (particularly components 1 and 2) and were taken into account indefining specific operational arrangements and drafting the project operational manual, include: (i) the target population i s interested in new technologies and knowledge that can be used in their communities, (ii) should be respect and consideration for community organizations in the there selection o f project activities, (iii) technical training events for subprojects should be organized inparticipants' native language and with the help o f community trainers (Yachachiqs), (iv) the demonstration and multiplyingeffect o f the subprojects for other members of the community can be more powerful that the financing itself, (v) the project should actively seek to include 24 women's associations, and (vi) the project design should take into account indigenous customs and practices such as communal work and providing incentives through awards and recognition. 5. Environment 89. The project i s expected to have positive environmental impacts through financing subprojects that promote sustainable natural resources management, watershed protection and soil conservation. Given that the specific location and nature o f potential subprojects has not yet been determined, during project preparation an Environmental Assessment (EA) was developed that identified and assessedpotential unintendedenvironmental impacts and designed screening mechanisms so that these impacts can be prevented or minimized. The EA also reviewed the legal and institutional context in Peru and its relation to the project, and the environmental characteristics o fpotential areas o f intervention. SafeguardPoliciesTriggeredby the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [XI [ I Natural Habitats (OP/BP 4.04) Pest Management (OP 4.09) Physical Cultural Resources (OP 4.11) Involuntary Resettlement (OPBP 4.12) IndigenousPeoples (OP 4.10) Forests (OP/BP 4.36) Safety o fDams (OPBP 4.37) Projects inDisputedAreas (OP/BP/GP 7.60)* Projects on International Waterways (OP/BP/GP 7.50) 90. Potential adverse environmental impacts include: (i) soil erosion; (ii) biodiversity loss; (iii) deforestation; (iv) degradation or conversion of natural habitats; (v) disruption o f hydrological dynamics; (vi) water pollution; and (vii) damage to watersheds. The EAincludes anEnvironmental Management Framework(EMF) that i s mainstreamed within the overall project. It provides a 15- step approach process for evaluating subproject proposals during the preparation, pre-feasibility, and feasibility stages. The environmental impact evaluation, prevention, and mitigation measures recommended in the EA are incorporated as criteria and procedures within the operational rules. The EMF proposes criteria and procedures to cany out the environmental analysis consultations for the specific subprojects (once identified), and provides guidelines and questionnaires for in- depth interviews with stakeholders. Likewise, a number of public consultation meetings and stakeholder analyses were conducted during project preparation that covered environmental aspects (impacts andbenefits) o fthe project (see social analysis section below). 91. The eligibility criteria for subprojects require, inter alia, (i) clearing or conversion o f no forests or other natural habitats to establish new agricultural systems, (ii) any agroforestry or reforestation activity can only use non-native species ifthey do not displace native species or natural ecosystems, (iii) any small community works or infrastructure activities strictly adhere to * By supportingtheproposedproject, the Bank does not intend toprejudice thefinal determinationof theparties' claims on the disputed areas 25 the 3-stage, 15-step EA evaluation process detailed inthe EMF and operational manual, and (iv) selection criteria will give greater weight to subproject proposals that would directly promote conservation and restoration o f degraded natural resources. MARENASS will have qualified environmental and social specialists with the capacity to oversee fulfillment o f the above- referenced eligibility criteria, supervise overall compliance o f Bank environmental safeguards, develop environmental managementplans, and monitor compliance. The regional coordinators will be responsible for screening and the overall component coordinators for final clearance (with support from outside experts whennecessary). 6. Safeguard policies 92. This project is classified as Category Bythe appropriate classification for projects whose potential adverse environmental impacts on humanpopulations or environmentallyimportant areas are site-specific, reversible, and can be readily mitigated. The project could involve natural habitats, but would not lead to their loss, degradation or conversion. In accordance with this classification, a free-standing EMF report has been drafted and reviewed by the Bank; it has been publicly disclosed and will be revised and improved during appraisal. The specific subproject investments and their locations will be defined during the implementationphase. The EMF report includes the criteria and procedures-including operating rules-that will be used during project implementation to identify and avoid or minimize any adverse environmental impacts. Project preparation included a number o f public consultation meetingswith a broad range o f stakeholders inwhich environmental issues(potential environmental impacts andbenefits) were discussed. 93. Since the majority o f the target project and anticipated beneficiaries are indigenous peoples, the project triggers OP 4.10. However, the project itself is considered an Indigenous Peoples Plan (IPP) and therefore does not require a separate plan. OP 4.09 on Pest Management i s triggered, and the EMF includes a Pest Management Plan and guidelines for alternative designs and mitigation measures. Activities that would trigger the natural habitats and forests policies are excluded by the subproject eligibility criteria and the EMF includes screening procedures to ensure that such activities are identified and prevented. The project may involve small works but would not require involuntary resettlement and the revised EMF includes "chance find" procedures in the unlikely event that an archeological or cultural site i s encountered. 7. Policy Exceptions and Readiness 94. No policy exceptions are sought. 26 Annex 1: Country andSector or ProgramBackground PERU: PE Sierra RuralDevelopmentProject 1. Countryandsector issues 1. Alleviation o f poverty in Peru cannot be achieved without a concerted effort to create sustainable and equitable growth, increase human capacity and security, and strengthen local institutions in the rural Andean highlands, or Sierra region. The Sierra to a large extent defines the national identity o f Peru, yet it has the highest poverty rates in the country and requires solutions that are tailored to its unique history, geography, population, and economy. The proposed Sierra Rural Development Project will be a linchpin o f the government's strategy for the rural Sierra. Country issues 2. Political and economic context. Peru is currently enjoying a period o f relative stability and sustained economic growth after decades o f tumultuous political transitions and different economic strategies, during which promising trends often gave way to recession, inflation, and political turmoil. Duringthe 1980s and early 1990sthe country also experienced political, social, and economic upheaval as the government fought the Shining Path (Sender0 Luminoso) movement.While the conflict eventually brought terror to Lima and brought foreign investment and tourism to a standstill, the most sustained and devastating impacts were on the economy, security, and social fabric o f communities inthe rural Sierra. 3. Under the Toledo Administration (2001-06), Peru enjoyed strong economic growth and sound macroeconomic policy, with GDP increasing by more than 5 percent per year on average. Yet poverty has not been significantly reduced in decades and most o f the recent economic benefits have gone to Lima and the coastal areas. There have been only limited gains in the Sierra and Amazon regions, which have the highest incidence o f poverty and are home to the majority of the country's extreme poor. 4. The administration o f President Alan Garcia, who took office in July 2006, has made bringingeconomic benefits to the rural Sierra one o f its top priorities. The flagship o f that effort i s the Sierra Exportadora program, which has set ambitious goals in terms o f agricultural production and export, job creation, income generation, andpoverty alleviation. The government sees the proposed project as critical to sustainable rural growth and as a vehicle for bringing coherence to the many sectors, actors, and initiatives encompassed in Peru's Sierra rural development strategy. 5. Population and povertv in the Sierra region. Peru's Sierra region, generally defined as including all areas above 2,000 meters, has a population o f about 10.6 million, o f which 4.3 million are urban and 6.3 million rural. The Sierra's rural population is mainly indigenous (77 percent speak Quechua) and while rich in tradition and culture, they are largely poor, marginalized, and dependent on subsistence agriculture. The 2002 National Household Survey (INEI 2002) put rural poverty in the Sierra at 82 percent and extreme poverty at about 58 percent. While the rural Sierra has less than 25 percent o f Peru's population it accounts for 54 percent of the extreme poor, the majority of whom are native Quechua speakers. 27 6. Although long-term GDP growth in the Sierra has been slightly lower than the national rate, its economic performance has been steadier due to its diverse economy and the fact that much o f the rural economy i s subsistence-oriented. The agriculture sector accounts for one- quarter o f the Sierra's GDP, but i s growing more slowly than the rest o f the economy. The second largest sector is services, followed by industry, commerce, mining, construction, and the public sector. The main crops are potatoes, white maize, barley, wheat, fodder crops, various legumes, and vegetables. Mainlivestock products are milk, beef, wool, and alpaca fiber. Average yields are low andhave improved little inrecent decades. Sector issues 7. Some o f the key factors limiting poverty alleviation in the rural Sierra are lack o f economic opportunities and strategic productive alliances, socioeconomic insecurity and lack o f productive assets and services, weak rural institutions, absence o f strategic planningto maximize development impact and poor overall coordination o fthe existing development strategy. 8. Poor overall program coordination in the Sierra. Despite the many national and international initiatives in the rural Sierra, many o f which have been successful within the limitedscope of their mandate, the entire portfolio,ofprograms, projects, and investments are not being reviewed and assessed against the strategic needs o f the Sierra nor coordinated in a way that maximizes the added value o f other interventions and leverages their inputs effe~tively.~ 9. Thus, there is a need to establish a government unit that has the mandate and can provide the leadership to define the overall scale o f the challenges, determine the most pressing needs, and set strategic priorities in terms o f what investments would yield the highest impacts for achieving more equitable growth in the Sierra. There i s also the need for the donor community, including the Bank, to rationalize our development work in the Sierra to achieve maximum impact. An initial effort has beenmade within the Bank to define what the existing andproposed interventions inthe Sierra are andhow they can contribute to the three overarching development priorities o f promoting sustainable rural economic growth, enhancing human development, and buildingup institutions to sustain growth andsocial protection(see Annex 17 for more details). 10. Community Driven Development. There i s a need in the Sierra to establish and mainstreammechanisms that approach poor people and their institutions as assets andpartners in the development process and give control of decisions and resources to community groups and local governments. Community driven development (CDD) programs operate on the principles o f local empowerment, participatory governance, demand-responsiveness, administrative autonomy, greater downward accountability, and enhanced local capacity. Experience has shown that given clear rules o f the game, access to information, appropriate capacity and financial The various aspects o f a Sierra development program must be prioritized, planned, and costed. Many o f the needs inthe Sierra have been defined inthe 2002Rural Development Strategyfor the Peruvian. Examples o f specific areas of focus include, programs on productive alliances, development o fniches, economic corridors, tourism, small-scale industries, private-sector development, road and rural road infrastructure, telecommunications, rural energy, irrigation, wholesale markets, research and extension, rural finance, land administration, municipal infrastructure, watershed management, biodiversity conservation, rural education, food security programs through subsistence, off-farm employment programs, food aid and nutrition, health and reproductive health, water supplyand sanitation, violence, crime, disaster mitigation, strengthening o f regional governments and local development councils, strengthening o f central government and national development institutions, communities and farmer associations, civil society organizations, rural access to security andjustice, and cultural development. 28 support, poor men and women can effectively organize to identify community priorities and address local problems by working in partnership with local governments and other supportive institutions. 11. CDD projects have shown to have a positive impact in a variety o f ways. First, when implemented according to the core principles outlined above, the CDD approach truly empowers communities; they are at the center o f the development efforts affecting their livelihoods. Second, CDD builds "social capital" as it strengthens social organization, promotes trust, and encourages collective action related to public investments and local development policy. Third, subproject implementation following the CDD approach increases the cost-effectiveness, speed, and sustainability of investment subprojects. Fourth, the community-driven development approach increases transparency in the use o f public resources and potentially can have a dramatic impact on increasing the democratic accountability o f local government officials and institutions. And fifth, given their decentralized nature, the CDD approach can be scaled-up effectively and have a major aggregate impact on the provision o f basic public infrastructure and services, targeted interventions for the benefit o f marginalized populations, and overall poverty reduction. 12. Socioeconomic insecurity and lack o f productive assets and services. Most efforts to promote rural growth are likely to bypass the poor and particularly the extreme poor because they lack access to basic services such as health care, sanitation, and education, or even the satisfaction o f basic needs required to take advantage o f such services when they are available (such as going to school when the family lacks money to buy clothes or books, or needs all available labor merely to produce food for subsistence). Rural farmers are also vulnerable to socioeconomic risks that severely constrain their choices and prevent poor, small-scale producers from abandoning the "safety first" mentality that prioritizes subsistence farming over commercial production. Because they lack off-farm employment opportunities, there i s no economic back-up if market-oriented agricultural ventures fail. While improving subsistence agriculture might not increase their income, it could improve their food security, nutrition, and overall well-beingas a first step out o fpoverty and expanding their productive options. 13. Weak rural institutions. A further obstacle to economic growth is the lack o f local-level rural institutions to provide the assistance, territorial planning, and coordination necessary to ensure that investments and inputs yield sustainable growth and to empower local communities to plot their own strategy and adapt to changing economic and market conditions. Regional and provincial governments and community assemblies lack the capacity to carry out such planning and coordination and particularly in a participatory way with input from private and civil society stakeholders. Local and regional planning committees that bring together diverse stakeholders from different sectors are generally either nonexistent or ineffective. Without such institutional capacity, investments tend to yield temporary benefits that are not sustainable over time, cannot adapt to new opportunities or new risks, and are not replicable and do not have a multiplier effect o f generating productive activities beyond the narrow scope for which they were intended. Governmentstrategy 14. The Peruvian government has an array of development and poverty alleviation plans and policies that must translate into a coherent set o f projects and interventions that avoids both 29 fragmentation o f investments and duplication o f efforts in supporting territorial development in the Sierra region. 15. Sierra Exportadora. One o f the cornerstones o f the government's development policy, and one of its most ambitious initiatives, i s the Sierra Exportadora program launched by the government in 2006. Its overall objective is to reduce poverty by promoting and financing productive activities, technical capacity, and infrastructure, with an emphasis on expanding the production o f small farmers, helping them identify and exploit commercial opportunities, and developing products that can compete innational and international markets. 16. This emphasis on sustainable productive investments marks a move away from an approach to poverty alleviation based on asistencialismo (assistance-based economic and food security) and toward the promotion o f local economic growth, employment, and income generation for low-income producers. 17. Sierra Exportadora's specific objectives are to convert 150,000 hectares o f agricultural landto more productive andprofitable crops, combat soil erosion anddeforestation, industrialize and technify agriculture, produce organic products and sustainably manage natural areas, and standardize production systems. Its goals include generating U S $ l billion in new exports, creating 300,000 jobs, and triplingrural income by 2011. 18. The program would begin in the less isolated areas where access to markets, greater productivity, and income gains can be realized more quickly, and would seek to progressively develop economic opportunities in more remote communities with less assets and low market access where more intensive investments would be required to make substantial economic gains. Sierra Exportadora spans 11 regions, including the 6 regions covered in the proposed project (Apurimac, Ayacucho, Huancavelica, Junin, HU~UCO, andPasco). The proposed project is fblly in line with Sierra Exportadora and i s seen an important instrument to help achieve some o f its key objectives. A representative from the Sierra Exportadora program will participate inthe evaluation o frural businessproposals inComponent 1. 19. Rural Development Strategy for the Peruvian Sierra. As a contribution to Peruvian government policymaking and preparation o f the 2002 Country Assistance Strategy, the Bank prepared a strategy in consultation with the government and with Peruvian development experts on how to promote long-term development in the Sierra. The strategy advocated integrated interventions and proposed a three-pronged approach based on, (i)promoting sustainable rural economic growth to increase rural incomes and reduce rural poverty in a sustainable way, (ii) enhancing human development through rural education and health services and providing social protection to those bypassed by growth, and (iii) building up institutions to sustain growth and social protection to enhance capacity o f people in the rural Sierra to manage local affairs, development and improve their quality o f life, and promote their self-esteem. 20. Development o f market links between urban areas and agriculture/livestock inrural areas was a crucial part o f the strategy, which suggested using productive alliances between small Sierra producers and processors, exporters, or retailers to strengthen those linkages. The development o f economic corridors, productive infrastructure and private investment were seen as other crucial instruments. The strategy also called for improving subsistence agriculture, not 30 necessarily to lift people out o f poverty, but to directly improve food security, raise nutritional levels, and enhance the well-being o f the poor. The strategy analyzed social, production and safety needs from a risk management angle: economic, survival, social, and disasters risks were analyzed. Migration, temporary off-farm employment, and subsistence agriculture were seen as important safety nets. 21. The proposed project supports the implementationo fthree key aspects o fthis strategy, (i) building strategic productive alliances to help overcome obstacles to sustainable rural growth, (ii) increasing community food production to help reduce socioeconomic risks and vulnerability o f those who lack access to basic services and are most likely to be left behind by broad economic growth, and (iii) strengthening weak rural institutions to provide better participatory planning and coordination o f rural development planningand investments. Other aspects o f the strategy, such as improving rural education, transportation, communication, and health services fall outside the direct investment instruments o f the project, but would still be coordinated throughthe national SDUproposed inComponent 3. 22. Other National Plans for Development and Poverty Alleviation. The Garcia Administration's Sierra Exportadora program builds on a number of plans and strategies for development and poverty alleviation formulated under the previous government. An important source o f guidance for defining Peru's policy framework i s the Acuerdo Nacional, a unique initiative signed in July 2002 between the government, political parties, and key civil society organizations to help consolidate Peru's democratic institutions, define a shared vision o f the country's future, and achieve consensus on national goals, objectives, and policies. The national strategies and plans developed by the government on the basis o f this dialogue include two that are particularly relevant to the rural Sierra: the National Strategy for Rural Development and the National Planto Overcome Poverty, botho f which were issued in2004. 23. The proposed project supports the rural development strategy objectives o f (i) rural economic development, (ii)sustainable management o f natural resources and risks, (iii) strengtheningthe capacity of rural populations and communities, and (iv) institutional change to create favorable conditions for rural development. For the poverty alleviation strategy, the project i s aligned with its objectives o f (i) developing human capital among poor and vulnerable groups, (ii) promoting economic opportunity and capacity, and (iii) strengthening the network o f social protection. 24. Peace and Development Plan. Another key element o f the government's approach to the Sierra region is the Peace and Development Plan adopted in 2003 inresponse to the findings o f the Truth and Reconciliation Commission. This plan seeks to improve living conditions and to ensure peace and the security for the communities most directly affected by the violence o f the 1980s and 199Os, which include about 1.8 million people. More than US$SOO million will be spent to improve public works and strengthen government institutions and civil society in ten regions, mainly inthe Sierra region. 25. The specific objectives for the plan are to (i)improve diet, health, education, and security, (ii) rehabilitate and improve roads, telecommunications, and electricity infrastructure, (iii) productionandproductivity,particularlyinagricultureandagri-business, and(iv) increase strengthen civil society institutions that contribute to the region's development. 31 26. Activities under the proposed project would focus on many o f the same post-conflict areas targeted by the Peace and Development Plan. By promoting productive activities, linkage to markets, and strengthening regional and local governments through strategic alliances with communities and the private sector, the project would support some o f the Peace and Development Plan's main objectives and complement its other interventions inthe area o fpublic works and infrastructure. 27. Decentralization. A crucial backdrop for all these programs and strategies i s the government's effort to transfer more resources and responsibilities to local governments. A strong movement in favor o f decentralization began under the government o f Alejandro Toledo and is expected to continue under the current administration. Between 2002 and 2003 the government passed the Decentralization Framework Law and Regional Government Law, drafted the National Decentralization Plan, and held elections o f regional governments. These measures created the legal and political bases for a decentralized state, introduced a new political and institutional dynamism to regions and provinces, and gave new responsibilities to sub- national governments for promoting rural development. However, regional and provincial governments do not yet have the capacity to effectively perform these new functions. 2. Rationale for Bank involvement 28. The proposed project will provide a platform to promote rural development initiatives, expand productive opportunities, create alliances between producers and other actors in the supply and marketing chain, build social capital and food security, and strengthen local institutions. The Bank i s well positioned to finance this project given its strong track record in supporting rural development and decentralization inPeruthrough the CPS dialogue and through its past and current operations inthe Sierra. 29. Inthe Sierra region specifically, the Bankhas considerable experience through the Sierra Natural Resources Management and Poverty Alleviation Project (implemented by PRONAMACHCS) that closed in March 2004, Rural Roads Project, Social Development Fund Project (FONCODES), Rural Education Project, Indigenous and Afro-Peruvian Peoples Development Project (closed), Rural Water and Sanitation, Rural Education, Rural Electrification, Trade Adjustment and Competitiveness, and the Agricultural Extension and Research Project (INCAGRO). Also, the Bank, inpartnership with the FAO, completed a Rural Development Strategy for the Peruvian Sierra in 2002 that identified key directions and mechanisms through which equitable growth inthe Sierra could be achieved. Based on these past interventions, the Bank has established considerable experience and expertise in the theme o f rural development and the indigenous people ofthe Sierra region. 30. The proposed Sierra Rural Development Project will serve as a pillar basis for the government's Sierra Exportadora program and will work in conjunction with other Bank projects to amplify the effects o f economic growth in the poorest areas. This type of regional, multisectoral approach that coordinates provision of services and inputs has been identified in Bankanalyticalwork as a keyfactor inincreasing the incomes o fthe poor. 31. Inaddition, the proposedBank project will complement and scale up some ofthe smaller projects being implementing in the Sierra by other international institutions, such as the Puno- 32 Cusco Corridor Project, PROALPACA project, and various other livelihood projects run by NGOs such as CARE, Caritas, IAA (Institute for Alternative Agriculture), and DESCO (Center for the Study and Promotion o f Development). In some cases, in addition to its broad coordination role, the proposed project will complement these initiatives by filling specific geographic and programmatic gaps. 33 Annex 2: Major Related Projects Financed by the Bank and/or other ~ ~ ~ e ~ PERU: PESierra Rural~ ~ ~Prujcct e ~ ~ ~ ~ e ~ Amount (of which external) Closing Project name Financier $US M Rating date Sector issues WE3 IDB S Rural Roads Rehab. 'ZVB H s Dee. 3 f , ~ e h a b ~ ~and a ~ i o ~ ~of ~ ~iiia~n~enance and ~ a i n t e ~ ~ a n c e 2000 rurat roads iv13 u WB S Mar.3f ~ r n ~ r o vnatural resource i n ~ 2004 ~ ~ ~ a n a ~ ~through.sod m e n t con~ervati~~n.re~ores~a~ion,and smatl scale l n i ~ ~ ~ ~ o n IFA13 2004 Increase arable landand the corntnewciat value of natural ~ ~ s ~ uofr producers c c ~ Second Rursl Roads WBiLDB SIS June 30, Second phase of rum1roads 2006 p ~ o ~ ~ ~ IFAD 2006 Increase income and d e ~ e ~ o p m e n ~ capacity of the rural poor; S ~ ~ e n ~ tproduct1ve chains h e ~ i PovcfeyReduction and USAID Sept. Busincssd e \ ~ ~ ~ Improved ~ ~ n ~ ~ o p ~ ~ A3tcviallon {PRA} 2007 market access; Productive chains IFAD 20t 1 Natural resource ~ s n a ~ e n i e n ~ i ~ p ~ o ~tncreasin~market ~ ~ e n ~ : access Agrtc. Research ril: WB Phase: I k c . 3 1, Increasing the p r o d u c ~and~ ~ t ~ ~ ~ ~ Extenston ~ I ~ ~ A ~ R I~ S ~ 201I ~ ~ m p e ~ i ~ ~of p ~ n c s ~ agricultures by a APL cunently in I1 SrS (Phase HI) pri\ate sector-led ~ e c h ~ o ~ o ~ second of three phases) inno~yatt~?nsystem Note: ICR ~~~~~~~~erstttngused foi closedprojects, IP DOratings from latest ISR used for ongorogpsojccts. Rating: IfS = highlysatisfactory; S = srtisfactary; I T = unsat~sfact~r~ 34 - - -- - .. -- _. _- I I Project Project Use of Project Outcome Development Objective Outcome Indicators 1nforrnation - .. . - -_- Use of Intermediate Outcome hlonitoring ___.^ _^_. 35 lutcome3 Sierra - By end o fyear 1,the Sierra Y2-Y5:Adjustments o fthe Annual Zoordination, Project Development Unitwithin the PCM i s Operational Plans andbudgets vlanagement and established and functioning; Yl-Y4: Inputinto project M&E vlonitoring: By end o fyear 1, the government's The project is coordinated Y5: Inputinto Implementation rural development strategy for the Completion Report :fficiently, including Peruvian Sierra has beenupdated; lecentralized implementation Y5: Assess the demand and By endo fyear 2, sectoral committees Ifcomponents 1and2 feasibility o f funding a MARENASS I1 have been established to coordinate project (an expansion or scaling-up hrough MARENASS sector investments inthe Sierra; and phase) ieadquarters and field By endo f year 2, anintegrated Sierra Iffices; capacity of national Development Programhas been ;overnment to promoterural approved by GOP. xonomic development and Within six months o feffectiveness, :oordinate private and public all project personnel have been nvestments inthe Sierra, contracted through independent ncluding international technical evaluations; kancing, i s improved. Performance o f personnel i s externally evaluatedperiodically; By end o fyear 1, information management system is established and i s operational; By end o fyear 1,financial management system i s established and operational; By endo f year 1, monitoring and evaluation system i s established and operational; and By endo fproject, M&EandMIS systems have beenproducing useful reports for MARENASS and MINAG management. 36 Arrangements for Results Monitoring 1. Monitoring and evaluation system. A robust monitoring and evaluation system will be under implementation at least byproject year 1.The M&Esystem will provide specificity indata collection methodology, levels o f monitoring and evaluation activities, data collection and reporting responsibilities, provisions o f resources (both human and budgetary) and frequency o f M&Eactivities. 2. Data collection methodologies. The M&E system will collect data to measure project impacts and verify the intermediate outcome and impact indicators. Data collection methodology and impact evaluationwill bebased on three instruments: e Surveyat entry o f all participants. Participants inthe competitive funds inComponents 1 and 2 will be required to answer survey questions before signing subproject contracts with MARENASS. Although all participants will be surveyed at entry, only a subset o f them will be randomly selected ("treatment sample") to conduct subsequent survey designs and statistical analysis. e Control sample survey. In addition to the survey o f participants, a sample o f other producers that are similar to the participants and are located in the same area or nearby areas will also be surveyed to serve as a control group ("control sample"). For the M&E system to provide accurate causality o f project interventions and observed changes in the project indicators, the project activities should not be implemented in the communities from which the control sample i s drawn. If feasible, the control sample will be large enough to provide robustness o f the statistical analyses. A large control sample will also allow help ensure that the sample is still statistically meaningful even ifproject activities affect some of the control areas. e Baseline study for Component 3. A baseline study for Components 1 and 2 will be carried out duringproject start-up. e Annual survey of treatment andcontrol samples. The purpose o ftaking annual surveys o f the treatment sample is to help understand the dynamics o f the beneficiary group and monitor implementationprogress on an ongoing basis. The same "treatment sample" will be surveyed annually to provide a basis for statistical analysis to monitor progress. These annual follow-up surveys will begin after the first full year of subproject implementation. e End-of-proiect survey o f treatment and control samples. This will serve to assess the impact o f the project. The same group of "treatment sample" and "control sample" will be surveyed at the end o fproject. 3. M&E activities. Monitoring activities will be conducted at three levels: (i) subproject implementation, (ii) impacts, and (iii) implementation. project (i) Monitoringsubproiectimplementation e Achieving project objectives relies on successful implementation o f the subprojects in Components 1 and 2. A computerized project management information system (MIS) will provide continuous tracking o f the implementation progress o f subprojects. The MARENASS regional offices will be responsible for entering into the MIS database the general demographic and socioeconomic data 37 o f each participant and the proposed investment activities o f each subproject proposal or preinvestment financing request it receives, and will update the database with more detailed data after subprojects are chosen for financing. 0 Regular reports from participants, site visits, and annual survey data will provide the information about subproject implementation. These monitoring reports will highlight any divergence from the objectives o f the subprojects and observed intermediate outputs so that MARENASS can consider taking corrective action or discussing possible modifications to subproject activities with the participants. These reports should also highlight any particularly successful subprojects from which to draw lessons or explore potential for replication. The MARENASS regional offices are responsible for ensuring the quality and timeliness o f these reports and surveys and regularly uploading the information to the MIS database. They are also responsible for providing regular reports to the MARENASS central office. (ii) Monitoringimpacts 0 The project's impact depends heavily on the outcome o f subprojects in Components 1 and 2. Provisions have been made in the project M&E system to have annual surveys and studies conducted to assess these impacts. These studies and surveys aim at assessing the effectiveness o f the project's targeting and at establishing the degree to which observed changes inboth subproject outputs and final outcomes can be attributed to project interventions. Intermediate indicators and targets defined inthe Results Framework will beused to assess the outputs o f subprojects as well as the project outcomes. The impact monitoring will be carried out byMARENASSand its regional offices as an ongoingproject activity. MARENASS will also apply some o f the following tools for survey design and/or reporting purposes: (i) score cards "tarjetas de califcacion;" (ii)focus groups; (iii) independent budget analysis; and (iv) radio reporting or photography reports. To supplement annual impact monitoring, independent evaluations will be carried out project start-up (base-line work) at mid-term review and end o f the project. The impact monitoring will also be routinely reviewed by the Bank's regular supervisionmissions. 0 Since the project will initially be launched in only three o f the six regions and only one-fifth o f subprojects will be implemented in the first two years, early impact monitoring could provide important lessons for the large number o f subprojects to be designedand implemented inthe final three years o f project. To ensure that a statistically significant sample ofparticipants ("treatment sample") i s included in the baseline, over sampling will be necessary in the beginning o f the project. In addition, to establish causality between project interventions and observed changes in the intermediate indicators, a statistically significant sample of nonparticipants ("control sample") will be surveyed once participating communities within each region have beenidentified. 0 Timing of the baseline is very important. Data on the treatment sample and control group must be collected after identification o f participating communities butbefore subproject preinvestment funds are disbursed. 38 0 Distinct impacts can be expected from different types o f subprojects. To ensure that most if not all types o f subprojects are represented in the treatment sample, the universe o f participants should be categorized by type o f subproject prior to selecting the sample. (iii) Monitoring;proiectimplementation 0 Successful project implementation requires competent project staff. The M&E system has provisions for continued staff training and staff performance evaluations. In addition, the selection process for both MARENASS staff and outside consultancies will conform to the Guidelines for Selection and Employment of Consultants by WorldBank Borrowers. 0 The World Bank will conduct an assessment prior to appraisal to identify any gaps in the fiduciary standards and staffing o f MARENASS and to provide recommendations for strengthening those standards. Standard financial and procurement audits will be performed by independent, specialized firms on an annual basis. World Bank supervision missions will review the technical and fiduciary aspects every six months or more often if necessary. Supervision o f specific technical aspects, in particular those under component 4, will be performed by specialized firms with relevant experience in the sector and in the area. 4. Capacity. Different studies have been or are being outsourced to collect baseline information. Further studies and research will be outsourced and fbndedthrough project costs as part o f the M&E system. These specialized surveys and assessments will be carried out by consultants who are not involved in project design or implementation. The monitoring and evaluation specialists at MARENASS will be responsible for preparing TORSfor the external consultants and supervising their activities. The M&E specialists will also be responsible for finalizing the design of the impact evaluation study, including sample selection, as well as for supervisingthe external consultants duringthe analysis o fthe baseline andthe impact evaluation study. Provision is made in the budget for hiring two M&E specialists and for contracting external consultants to conduct and analyze the baseline and the follow-up surveys. 5. Semiannual and midterm evaluation. The Bank will conduct semiannual supervision missions to evaluate progress inimplementing project activities. Supervision missions will draw lessons learned to-date and provide guidance to the project team. In addition, the Bank, together with external reviewers and key stakeholders, will conduct a midterm evaluation of project execution. The midterm review will focus on (i)progress in achieving project outcomes, (ii) institutional arrangements for project implementation, (iii) effectiveness and suitability o f the monitoring and evaluation system, and (iv) the project implementation plan and general project operation manual. The midterm review will be conducted no later than three years after the first disbursement o f the project. 7. Final evaluation. A final evaluation will be conducted in the last semester of project execution. The key objectives o f the final evaluation will be to (i) assess attainment o f the expected project results and (ii) lessons learned to be included inthe replication plan. draw 39 *_. '7 L -. I I t f i 0 G I I 3 0 Q c would be achieved by d-driven subproje groups o f producers, pmcnt Unit (SDU) to prioritize and hamionize ~ o ~ ~ ~and donorn t n ~ e private-sector j ~ ~ r e s across~all sectors inthc Si ~ n ~ ~ ~ s 3. ~ ~ b p r o ~selection criteria would be aimed at ~ e c t ~ better~ ~ p pao ~ u n~i ~for~ erural n ~s ~ ve e ~ o ~ d~e ~~e ~o p~ ~iegoals~ rhrough, (i)the pram l c~ i ~ ~ r o ~ thehvalueu chain ta enhan ~ o ~ , capacity building of Pura1 i n h a ~ j ~and. ~ ~ ~ a tmcnts, and (iii)strcng of sewices to the poor. Iand provinces of six regions: A p u ~ ~ ~ ~ ~ ~ , 1 and 2 will target small rural ~ ~ r # d ~ine districts that suffered high levels o f v i ~ r s the citil conflicts of the 1980s and 1990s as defined by the Peace Census con c o ~ ~ d~e ~nG l~o p~n y ~in ~ fund ~ ~ cted to families in districts both high levels of past violence st of these famifies 1 1. ProgramP ~ ~ ~I~~i s~s ei~ on an~ o n i 0.60 0.12 0 0 28 1 2. P ~ e ~ n v eActivities ~ ~ ~ e n 0.78 0.08 0 16 0 55 1 3 Rural BusinessFund 0.72 4 33 9 38 I .59 2.62 9.38 0 08 0 0 18 0 23 0.07 0 11.16 23111 144 2.62 9.04 3. Sierra C ~ ~ ~ ~ProjectMgmt.and~~ ~on i~~ o~ r i n g 5.74 ~ f l a ~ 5.32 0 0.42 7% 3.1 Sigrra D e v ~ l o ~~~oe~~r dt i n a t i ~ ~ 0 50 0.50 0 0 3.2. Central Project~ a ~ a ~ eandnM&E ~ r ~ n 2 57 230 0 0.27 3.3. Resional ProjectA~minist~ati~n 2.87 2 53 0 0.15 45 aimed at addressing development issues throughout the entire Sierra region. The intervention area and target population o fthe proposed project are summarized intables A4.2 andA4.3. TableA4.2: InterventionArea of ProposedProject(components 1and2) Regions 6 (Apurimac, Ayacucho, Huancavelica, Junin, Huhnuco, and Pasco) Provinces 43 Districts 483 Area 132,200 square kilometers Communities 2,309 (875 will participate directly under Component 2) Groups of rural 620 will participate directly under Component 1 producers Households Project area total:483,522 inSierra portions ofthe six regions Component 1:295, 310 ineligible districts, 18,600 direct participants Component2: 199,229 ineligible districts, 35,000 direct participants Table A4.3: Target Population Area Population (million) Peru 27.0 Sierra 10.6 Rural Sierra 6.3 Six selected regions 2.4 High-violence districts o f regions 1.5 Direct beneficiaries (Comp. 1and 2)* 0.3 * Direct beneficiaries are expected to include 18,600 families for Component 1and 35,000 families for Component 2 (total 53,600 families). Assumingan average family size o f five people, there will be 268,000 direct beneficiaries, or about 11percent o fthe rural populationo f the selected regions and 18 percent o f the rural populationinthe eligible (high violence) districts. The Ministry o f Agriculture (MINAG) will execute the project through its Southern Sierra Natural Resources Management Project (MARENASS), which will be headquartered in Ayacucho and will have five regional offices to serve the six regions in the project area. Subcomponent 3.1 would be executed by the Prime Minister's Office (PCM). These agencies, their institutional structure, andthe implementation arrangements for the project are discussed in detail inAnnex 6. Component1:RuralBusinesses(US$15.61 million) 6. This component will help promote rural growth and business opportunities by supporting the design and implementation o f subprojects proposed by groups of small rural producers to improve their production, market access, and income. In particular it will promote productive alliances between different actors in the value chain to strengthen market access and competitiveness, increase productivity and production quality, provide key technological inputs, 46 introduce new production practices, disseminate timely market andpricing information, identify and exploit emerging niche markets, and foster more reliable supply and demandconditions. 7. The component's main activities will be, (i) promoting and disseminating information about the component, (ii)providing preinvestment financing to create proposals with viable business plans, and (iii) directly financing selected subprojects. The component's main output will be the implementation o f about 620 rural business subprojects with clearly defined and sustainable goals. The main outcomes will be diversified production, greater market access, and higher incomes for an estimated 18,600 families involved in rural businesses, including an increase o f at least 25 percent inthe profits o fparticipatingruralproducers. 8. It is expected that most subprojects will be inagriculture (crops, livestock, agro-forestry) but nonagricultural subprojects (aquaculture, tourism, services, handicrafts, small-scale industry, agribusiness) will also be eligible. Although eligibility for participation is not contingent on degree of market access, it i s likely that there will be greater demand and more viable proposals for financing under this component from producers in districts with better access to markets. In part to ensure that the more isolated communities o f the Sierra can also compete for funds and will benefit from the project, Component 2 is open only to districts with low market access and will use selection criteria that are lessbusiness-oriented. Subcomponent I.I:Programpromotion and dissemination (US$0.39million) 9. The objective o f this subcomponent is to (i) general awareness and disseminate raise specific information about the rural business fund, and (ii)help prospective participants understand the procedural details o f the program, find partners, and identify opportunities. The communication and dissemination strategy will be designed and carried out by consultants and contractors under the supervision o f the MARENASS central office inconsultation with the rural business program coordinator and the regional offices. 10. General promotion will be accomplished through radio programs, television, and distribution o f posters and pamphlets in both Quechua and Spanish. Dissemination o f detailed information to potential stakeholders about the scope o f the program, eligibility requirements, evaluation criteria, proposal process, and other "rules o f the game" detailed in the project Operational Manual will be done through local workshops and information fairs. The regional offices will directly contact producer associations, chambers o f commerce, technical assistance providers, financial service providers, and other identifiable groups o f prospective participants to provide information and invite them to workshops and information fairs. 11. The outcomes o f the subcomponent include stimulating interest in the program among targeted beneficiaries and supplying prospective participants and providers o f technical services with a clear understandingo fthe project and how to participate. Subcomponent I.2: Preinvestment activities (US$O.78 million) 12. This subcomponent will provide financing and technical assistance to rural producer groups to prepare about 875 viable business plans for submission to MARENASS, which will clear, evaluate, and select subproject proposals to be considered for final approval by the Regional Resource Allocation Committees (CLARs). The outcomes o f the subcomponent are to 47 help groups of producers develop concepts and partnerships for subprojects and generate submissiono f technically and commercially viable final business plans for possible financing by the rural businesshnd. 13. After producers have carried out the preliminary steps o f identifying, organizing, and designing subprojects and creating a basic profile o f the proposal, the MARENASS regional offices will review these profiles to make sure they satisfy the fund's eligibility requirements before awarding financing o f up to $800 to conduct preinvestment feasibility studies and create a finishedbusinessplan. The beneficiaries must contribute an additional amount, incash, equal to 25 percent o fthe financing awarded bythe project. 14. The activities will be directly supervised by the MARENASS regional offices with the guidance and collaboration o f the Rural Business program coordinator inthe central office. Rural producers groups will be assisted in preinvestment activities by local indigenous and mestizo technical specialists (known as yachaqs) and by community trainers (known as yachachiqs) or other local technical specialists from the NGO service providers contracted by the applicants and approvedby the regional offices. Subcomponent 1.3: Rural businessfund (US$14.43 million of which 9.40 million IBRD, US$ 4.33 million beneficiaries) 15. This component will provide actual financing o f productive subprojects designed by groups o f small rural producers. It will finance about 620 subprojects benefiting an estimated 18,600 families o f producers. The main outcomes of the subcomponent will be (i)the establishment, expansion, diversification, and increased sustainability and profitability o f rural businesses and (ii) improvedproduction capacity and increased income for participating families. 16. Activities. Financing will be available not only for activities to improve or enhance existing businesses, but also for subprojects aimed at developing new business concepts or opportunities and forming strategic business alliances with other actors in the value chain. Business can be either agricultural or nonagricultural (including services). Examples o f activities that the project will fund are those aimed at gaining better access to markets, developing new markets, adding value to current production (of either the participants or other producers), upgrading the technology o f productive processes, buildingalliances between different actors in the value chain, reducing vulnerability to supply and demand fluctuations, diversifying production and business lines, and acquiring or improving equipment and facilities that serve multiple producers. The funding may be used for provision of services (technical assistance, marketing studies, surveys, laboratory tests, publicity, organic certification, etc.), goods (equipment, machinery, vehicles, and other inputs), or small community infrastructure (storage facilities, processing plants, water supply and irrigation, treatment or disposal o f solid waste and effluents, etc.). 17. Examples of potential subproject proposals include (i) helpingproducers o f staple crops to compete with imports by supporting alliances between wholesalers and producers to ensure uniform quality standards and reliable supplies, (ii) collaboration between tour operators and communities to provide training in tourist services and improving rural tourism facilities, (iii) forming alliances between the alpaca wool processing and export industry and local producers to 48 provide pricing incentives and improve upstream production quality, (iv) fostering cooperation between producers and wholesalers/exporters o f handicrafts and small-scale industryproducts to overcome problems related to quality and quantity o f supply by channeling technical assistance, training, technology, and financing, and (v) helping producer groups establish brand names to market their items better innational markets. The actual subprojects financed will depend on the proposals received. 18. The project seeks to support financially viable and sustainable rural business subprojects, with a secured market outlet to ensure that the market demand and conditions o f the business plans have been given due consideration. Specifically, as part o f the eligibility criteria, the producer groups will be required to find a partner market agent, such as a wholesale buyer, processor, intermediary, to take part in the proposed plan. The business relationship, e.g. proposed purchasing conditions, volume, price, will be outlined in a letter o f intent, which will bepart ofthe submission package for financing. 19. Financing. The fund will include US$9.40 million in IBRD financing and an anticipated US$4.33 million in cofinancing by beneficiaries. Average subproject fhding, not including cofinancing, i s expected to be approximately US$16,200, which assumes an average o f 30 families or producers per subproject and US$540 per producer. The maximum amount o f financing per family or producer can receive from the project through this fund i s US$600, and the maximum each subproject can receive i s US$21,0000. Each subproject must include at least 10 families. In addition to the investment by the project, the rural producer groups themselves are required to contribute cofinancing, in cash, equivalent to at least 30 percent o f total subproject cost. For microenterprise proposals (as defined in the operational manual and described inAnnex 4), up to 50 percent o fthe beneficiary cofinancing may be in-kindrather than cash. 20. Differentlevels of financing andprocurement of goods will be allowedfor three different sizes o f subprojects (related to the scale of the businesses involved), as summarized in Table A4.4. The maximumpercentage of total subproject expenses that can be used for procurement o f goods i s 60 percent (for microenterprises) and inno case can the amount o f financing for goods exceed $4,200. TableA4.4: FinancingLimitsby Size of Business Maximum Maximum total Maximurn Minimum Totalproject financingfrom financingfor cofinancing beneficiary financing Typeof business fund (US$) goods from fund cofinancing (US$) * 1/ Microentepnse 7,000 60% ($4,200) 70% 30% 10,000 2/ Smallbusiness 14,000 30% ($4,200) 70% 30% 20,000 3/ Mediumbusiness 21,000 20% ($4,200) 70% 30% 30,000 Average financing 16,450 70% 30% 23,275 * Basedonmaximumfinancingfromfundandminimumcofinancingfrombeneficiaries. 21. Implementation. The business plans, prepared by the producers with technical assistance financed under subcomponent 1.2, would be (i) cleared by MARENASS for compliance with 49 eligibility, environmental and social criteria, (ii) evaluated by consultants hiredby the regional .. offices for technical merit and commercial feasibility, and (iii) submitted to the Local Resource Allocation Committees (CLARs) for final approval o f subprojects to be financed. The regional coordinators would be responsible for environmental and safeguards screening, while final clearance would be the responsibility o f the MARENASS Rural Business Coordinator (for environmental aspects) and the Community Development Coordinator (for social aspects), with support from outside experts when necessary. The CLARs would be composed o f representatives o f the public and private sectors as well as civil society entities. The exact composition would vary from region to region. The Sierra Exportadora program is expected to participate in the process o f evaluating the proposals and selecting the subprojects to be presented to the CLARs. 22. Competitions supervised by the regional offices would be held at the regional level based on yearly resource allocations determined by the MARENASS central office. Participation would be limited to producers from districts with high levels o f past civil violence as identified inthe Operations Manual. Although all districts willbe eligible regardless ofdegree ofaccessto markets, it is expected that the most demand and the most viable business planswill come from districts with relatively high access to markets. Proposals that lack feasible market strategies would not be selected and financed. 23. The regional offices would announce the amounts available and date o f competitions via media outlets and direct contacts with producer associations. The CLARs will meet periodically (every six months, or as required by the terms o f each competition) to select winners from amongthe proposals submittedby the deadline for that competition. MARENASS must confirm FigureA4.1. ProjectCyclefor RuralBusinessFund 1 1. I I 2. 3. ' PROMOTION FORMULATION SCREENING Via radio, Producers develop pamphlets, posters, subproject concepts and MARENASS reviews workshops, etc. profiles profiles for eligibility I 6. 5. 4. SELECTION I CLEARANCE -I PREINVESTMENT Local Resource Business plans sent to Funds awarded to Allocation Committee 7I MARENASS for eligibility conduct studies and (CLARs) select winners and safeguard screening develop business plans 8. 9. CONTRACTS EXECUTION MONITORING and MARENASS signs By producer groups with EVALUATION contract with producers technical assistance Producers, third parties, and transfers funds from third parties and MARENASS 50 that the rural producer group has legal standing to sign a binding contract, maintain bank accounts, and manage project funds before the proposals are submitted to the CLARs for final approval. 24. One o f the eligibility criteria will be for the producer group to include a letter o f agreement with a "market partner," inits business planto ensure a secured market outlet for their proposed production activities. The implementation o f the subproject will be the responsibility o f the rural producer groups, whose representative will sign a contract with the project to abide by all required administrative and fiduciary terms. Figure A4.1 shows a general overview o f the project cycle for the Rural Business Fund. Component2: CommunityDevelopment(US$13.58 million) 25. This component will address socioeconomic risk and insecurity amongthe poor who lack access to basic services and are likely to be left behind even in periods o f broad economic growth. For these families, improving subsistence agriculture might not increase their income, but it will improve their food security, nutrition, and overall well-being as a first step out of poverty and escaping the "safety-first" dilemma that limits their economic choices. The process of designing and collectively implementing productive subprojects, including the technical assistance o f MARENASS andjoint supervision and reporting responsibilities, i s intended to not only increase community resources but help strengthen social capital, capacity, and community productive alliances as well. 26. The component will support the design and implementation o f subprojects to diversify, expand, and improve the assets andproduction o f rural families inareas that have limitedaccess to markets. It i s expected that because o f this lack o f market access most subproject proposals will be aimed primarily at improving natural resources management, reducing vulnerability to risks, and increasing agricultural and livestock production for self-consumption by families and organized rural communities. Examples o f possible subprojects include simple improvements to increase yields, such as using improved cultivation techniques, soil conservation and water retention methods, optimized input use, and plant protection. To the extent possible, opportunities will also be sought to generate excess production for sale inlocal markets. 27. The main output will be implementation o f about 875 community development subprojects with clearly defined and sustainable goals. Its main outcome will be to help an estimated 35,000 rural families attain increased and diversifiedproduction, greater food security, improved standards o f living, and higher income when possible. Subcomponent2.1:Programpromotion and dissemination (US$0.26 million) 28. The objective of this subcomponent i s to (i) public awareness and disseminate raise information about the community development fund and (ii) provide technical assistance in the preparation o f basic subproject proposals. The promotion strategy will be designed and carried out by consultants and contractors under the supervision o f the MARENASS central office in consultation with the community development programcoordinator and regional offices. 29. General promotion will be accomplished through radio programs, television, and distribution of posters and pamphlets in both Quechua and Spanish (and Aymara if necessary). 51 When a competitive fimding window is opened for specific area at the provincial level), the MARENASS regional offices will hold workshops, meetings, and information fairs to disseminate detailed information to potential stakeholders about the scope o f the program, eligibility requirements, evaluation criteria, proposalprocess, andother "rules o f the game." 30. The workshops and information fairs will also provide the guidance and training that rural communities and their designated community program promoters need to establish their eligibility for program participation, define a baseline o f current conditions and production practices, and create "talking map" presentations they can use to illustrate their development plans andrequest preinvestment financing from the project. The training will also be designedto help strengthen community social capital and organizational capacity for planning productive activities in general. Details o f all requirements, criteria, andprocedures will be specified inthe project Operational Manual. 31. The outcomes o f the subcomponent include a highlevel o f interest inthe program among targeted beneficiaries, numerous potential participants with a clear understanding o f the project, trained rural promoters selected by the communities to help develop initial subproject proposals and a substantial number o f high-quality applications for preinvestment (and ultimately investment) financing by the project. Subcomponent 2.2: Preinvestment activities (US$0.23 million) 32. This subcomponent will provide financing and technical assistance to communities or groups of families within communities to help them create subproject profiles or simple business plans that can be submitted to MARENASS for evaluation and selection for financing. The outcomes o f the subcomponent are to help communities and groups o f families conceptualize and illustrate their development plans and translate them into subproject proposals that meet the eligibility criteria o f the project and can be submitted for possible financing under the Community Development Fund. Preinvestment financing will be provided for about 875 subproject proposals. 33. In this stage, MARENASS will review the initial proposals and "talking maps" developed with the guidance provided in subcomponent 2.1, determine whether they meet eligibility criteria and present an appropriate subproject concept, and select proposal to receive awards o f up to $260 per group to help them prepare more detailed subproject profiles or business plans. The communities can use the funds to either hire a professional technical assistanceprovider or to pay other expenses involved indeveloping the profile. 34. The activities will be directly supervised by the MARENASS regional offices with the guidance and collaboration o f the Community Development program coordinator in the central office. Communities and groups o f families will be assisted in preinvestment activities by local professional technical specialists (known as yachaqs) and by volunteer community trainers (known as yachachiqs) or other local technical specialists from the NGO service providers contracted by the applicants and approved by the regional offices. 52 Subcomponent 2.3: Community developmentfund (US$13.10 million of which US$9.04million IBRD, US$1.44government of Peru, and US$2.62million beneficiaries) 35. The objective o f this subcomponent i s to provide financing for community-designed subprojects aimed at improving the assets, food production, living standards, and ifpossible the incomes o f rural families. It will finance about 875 subprojects benefiting about 35,000 families. Groups o f families can submit proposals to MARENASS (through their Community Assembly) to better manage productive resources and assets, carry out productive activities, purchase equipment and inputs, and construct or improve small-scale infrastructure. Each group must include at least 30 families. It i s anticipated that demand will be greatest for activities related to production for self-consumption, but leading also to generation o f surpluses for market sale where feasible. 36. Activities. Subprojects are expected to improve production and productive inputs inareas such as natural resources management, pastures, livestock, small animals, fowl, horticulture and field crops, agroforestry, water storage and irrigation, aquaculture, watershed protection, and soil conservation. The fimd can finance provision o f services (environmental surveys, laboratory tests, natural resources inventory, planningand improvement o f productive assets and practices, etc.), goods (farm equipment, processing machinery, etc.), or small community works or infrastructure(storage andprocessing facilities, water management andirrigation, livestock pens, terraces, greenhouses, etc.). 37. In some cases, the community may use part of the financing as awards for the families whose productive activities yield the best results. This type o f incentive-based competition, combined with formal recognition during community ceremonies or events, has been shown in other projects to provide very powerful leverage for optimizing investments. Financing. The fund will include US$9.04 million inIBRD financing and US$1.44 million from the government o f Peru, and i s expected to generate US$2.62 million inbeneficiary cofinancing. Average subproject funding, not including cofinancing, is expected to be approximately US$12,000, which assumes an average o f 40 families per project and US$300 per family (the maximum per family financing would be US$350). Inaddition to the financing by MARENASS, the communities themselves are required to contribute cash or in-kindcofinancing o f 20 percent for technical assistance, services, and goods. Most cofinancing under this fund will likely be in the form of in-kindcontributions o f labor and local materials. 38. Implementation. Resources for the fimd will be budgeted to the regional offices annually on the basis o f the size o f the local target population, expected demand, and actual demandas the project progresses. Regional offices will open funding windows, with specific amounts o f financing, on a provincial basis. However, participation will be limitedto communities located in districts that have been identifiedinthe Operational Manual as having both highlevels o fpast civil violence and limitedaccess to markets. The communities must also meet additional eligibility and accreditation criteria specified in the Operational Manual to ensure that they are capable o f accepting legal responsibility for an agreement with MARENASS andhave no history o fmisusing public funds. 53 39. Once opened, the financing window in each province will remain open until the end o f the fourth year of the project or until all the funds available for that financing window are awarded (or allocated to another province ifdemand i s insufficient). Information about awards of financing will be publicly available and if all resources available for a specific year have been disbursed, the regional office will inform communities o fwhen additional financing will become available. 40. The proposals will be screenedbythe Community Assemblies andthen submittedby the community representative to the MARENASS regional office, which will make a final decision to award financing based on the eligibility and selection criteria specified in the Operational Manual. Implementation o f the subproject will be the responsibility of the rural communities, whose representative will sign a contractual agreement with the project to abide by all administrative and fiduciary requirements. Rural promoters will be recruited by the communities to work part-time as a link between the communities and the project, which will pay them a small stipend. Figure A4.2 shows a general overview o f the project cycle for the Community Development Fund. 41. Implementation o f the Community Development Fundwill follow key recommendations from the consultations conducted duringproject preparation, such as: a. Encouraging and rewarding proposals that seek to incorporate new technologies and knowledge that is of interest to communities inwhich farmers are ready to make changes in their culture to increase their well-being, improve market access, and learn about business plans. This implies keeping the menu o f subproject options relatively open to allow for innovative proposals such as new irrigation techniques or alternative energy technologies. b. Respecting and taking into account indigenous community organization structures by officially inviting communities to participate rather than relying solely on media campaigns to generate participation, and selecting proposals that enjoy community support and include plans to share experiences and teach the rest o f the community so FigureA4.2. ProjectCyclefor CommunityDevelopmentFund 2. 3. PROMOTION FORMULATION PREINVESTMENT Via radio, Communitiesor groups + Community pamphlets, posters, of families prepare Assemblies workshops, etc. subproject proposals 6. 5. 4. MONITORING Bnd EXECUTION SELECTION EVALUATION e- BYcommunities By MARENASS Communities,third and/orfamilies II regionaloffices parties,and MARENASS 54 that they have a multiplyingeffect that benefits the broader community rather than just the participants. C. Organizing technical training events in the beneficiaries' native language, with the participation and help o f local promoters such as the Yachachiqs who can provide support inpreparingprojectprofiles. d. Demonstrating the commitment of the winners. The winners o f investment financing will show their commitment for joint work through minutes signed in front o f the community presidents. Winners o f performance-based awards within a community will be formally recognized in community events or ceremonies. This approach has been shown not only to substantially improve outcomes but also helps make everyone in the community a winner while increasing incentives for the most entrepreneurial families. e. Actively seeking to involve associations of rural women and youth (who are often the dynamic motor inthe communities) both inthe promotion anddissemination stage and as participants in the investment stage. Proposals that have strong participation as well as sharing o f benefits by women's and youth groups will be favored in the proposal evaluation and selection criteria. Examples o f such organizations that could potentially participateinclude Mothers' Clubs, DiningGroups, andYouth Entrepreneurial Clubs. f. Designing a proposal, selection, and implementation process for subprojects that, where feasible, is linked to indigenous customs and practices and celebration of community events. Some activities in the project such as call for proposals, selection o f winning subproject profiles, initiation o f subprojects activities, awarding o f prizes or financing, and recognition o f subproject achievements and completion should be timed to coincide with the local calendar of "fiestas patronales." Component3: Sierra Coordination,ProjectManagementandMonitoring(US$5.74 million) 42. The aim o f this component i s to (i) efficient and effective coordination o f the ensure project and (ii) establish an adequately functioning M&E system to track progress in achieving the project development objective and other indicators and to feed that information back into enhancing project implementation. This will be achieved through project management and M&E activities and functions including financing the costs o f personnel, staff training, and equipment at the central office and five regional offices o fMARENASS. 43. This component will also support the Peruvian government's efforts to strategically plan, prioritize, coordinate and implement the execution o f an integrated development program for the a Sierra. This development program will include a prioritized investment program for the Sierra, based on priorities, opportunities, and bottlenecks identified through analytical work as well as consultation with stakeholders. The component will also support the government o f Peru in coordination between public and private investment, and ensure synergy in the activities of both 55 nationally and foreign-financed government programs. To carry out this task the government will create a Sierra Development Unit(SDU) within the Prime Minister's Office (PCM)." 44. For Sierra coordination activities implemented by the PCM, the proposed project will support creation of the SDU by financing consultants, technical assistance, workshops, training, and goods to strengthen its capacity to promote economic development in the rural Sierra. The SDU would include national level sectoral committees to represent particular sectors and coordinate activities within the sector and with other sectors, and would also work with the regional andprovincial governments and mesasde concertacih 45. The activities o fthis component will be coordinated with already existingprograms to (i) improve the institutional capacity o f regional and provincial governments, such as the Association o f Municipalities o f Apurimac (AMRA)' and the Improving the Agricultural Competitiveness to Reduce Poverty in the Apurimac Region project,13 and (ii)other private, public, and externally fundedongoingprojects inthe Sierra region. 46. The component's main outputs will include (i)incorporation by 6 regional and 43 provincial governments o f specific programs and budgets for productive development in rural areas into their strategic plans and frameworks, (ii) establishment of information management and M&E systems in 6 regions and annual surveys o f beneficiaries and projects, (iii) 2,200 officials inregional, provincial, and district governments trained in the management system is in operation, (iv) an M&E system i s in operation, and (v) all key reports, including the project implementation plan (PIP), annual operating plans (POAs), audit reports, and M&E reports are systematically prepared and submitted according to the designated schedule, (vi) establishment o f the SDUwithin the PCM (with a coordinator andprivate sector and public sector specialists), (vii) an updated integrated rural development strategy for the Sierra, (viii) creation o f a prioritized investment program for the rural Sierra based on consultations with stakeholders and financing entities, (ix) strategic analytical work to identify key problems and bottlenecks and solutions and define strategic investment priorities, (x) a diagnostic study of local financial institutions, their coverage, and service provision, (xi) promotion or strengthening o f local and regional sectoral roundtables (mesas de comertacidn) and local coordinating councils to coordinate investments in the Sierra, and (xii) government approval and implementationo f an integrated Sierra Development Program. I'The SDU i s also known as the Unidad de CoordinacidnMultisectorialpara el Desarrollo Rural en la Sierra, or CMDRS. l2AMRA was established to promote commercial activities in tourism to generate economic opportunities. It has established a strategic alliance with an NGO specialized in commercial activities and the provincial government to execute a project to promote commercial development through capacity building o f private firms and the local government, strengthening the roundtable o f economic development within the Consejo de Concertacibn Local (CCL), and management o f the sustainable economic development, Similar experiences have been seen in the municipality o f Huamanga and Huuancayo. I3The objective o f this project is to increase household income by improving their competitiveness in response to market opportunities, and by exploiting the comparative advantage o f the area, with the support o f local governments. The project has used call for proposals as a mechanism to promote local initiatives and has created OMPES within local governments to facilitate and channel local supply and demand o f agricultural products and provision o f technical services and information by public and private entities. 56 47. The main outcomes o f the Sierra coordination activities will include, (i)development o f an overall development strategy for the rural Sierra and effective coordination at the national level o f all investments and programs financed by the national government and international donors, and (ii) increased investments and higher priority for Sierra rural development by both local and national government. Subcomponent 3.I:Sierra Development Coordination (US$0.50million) 48. The objectives of this subcomponent are to (i) a SDUwithin the PCM and support create it operationally so that it can become a permanent part o f the government's development planning structure after the project closes, (ii)support the coordination o f roundtables or partnership fora at the local level (mesas de concertacidn para la lucha contra la pobreza) and regional level (mesas de concertacidn de desarrollo rural y pacto territorial) to promote sectoral coordination of investments inthe rural Sierra, (iii) support collaborationwith Local Coordinating Councils (CCLs) in each province and district to ensure cooperation and coordination between local development programs, (iv) update the government's rural development strategy for the Sierra, (v) identify and classify existing public and private sector investments and services within the rural Sierra and perform a gap analysis to identify what investments and services are lacking and how to address these gaps, (vi) conduct strategic analytical work identifying key bottlenecks, problems, and solutions with strategic priorities defined for the rural development o f the Sierra, (vii) conduct a diagnostic study of local financial institutions inthe Sierra and their coverage and service provision to the rural poor, (viii) prioritize the multisectoral investment needs o f the rural Sierra based on analytical work and consultation with stakeholders, (ix) prepare a detailed implementation program and action planto execute the updated Sierra development strategy, and (x) provide the means for the SDU to promote and coordinate the implementation of the action plan. 49. The subcomponent will support the strengthening o f various coordination mechanisms, some may be geographically based, some public (private) actors only, while others may be a combination of public, private, civil society and donors, etc. Mesas de concertaciones and CCLs are examples o f such mechanisms which have been created nationwide. Region-level Coordination Roundtables for Rural Development and Territorial Accord (Mesas de Concertacidn de Desarrollo Rural y Pacto Territorial) would also be promoted to guide policy and planning on a broader geographic scale. The project will support these mechanisms to fbnction effectively in their role as facilitators for local economic development, namely, (i) blend the efforts o f government, civil society, andthe private sector inpromoting local development, (ii) ensure transparency and accountability inthe implementationo f local development programs, (iii) prioritize local investment spending and promote both participatory planning and budgeting, (iv) promote efficiency and synergies in program implementation in the municipal area, avoiding unnecessary duplication. CCLs would become key institutions in the decentralization o f national programs and the formulation o f local ones, (v) identify local rural growth potential and social needs, (vi) promote basic local economic and social infrastructure and seek to tap local niche opportunities, (vii) encourage clustering and to avoid distributing resources too thinly, e.g. establishing economic corridors. They would not, however, have implementation functions. However they could decide on the local investment priorities of municipal governments or other entities (central government programs, NGOs, etc.). 57 50. Inaddition to the coordination, the SDUwill serve as a think tank for rural development by commissioning studies to identifykey problems and solutions, analyzing existing programs, economic opportunities, and bottlenecks, and prioritizing policy and investment actions. Together with the coordination mechanism, the analytical work will serve as a basis for the creation o f the updated integrated rural development strategy for the Sierra. 51. These objectives will be achieved by (i)contracting a coordinator, a public sector program specialist (for donor andNGO activities and investments), and a private sector specialist (for private investment in mining, tourism, commercial forestry, retail markets, and other sectors), (ii)training and capacity building, conducting workshops, dissemination and promotion o f the benefits o f sectoral roundtables for coordinating national and regional investment, and facilitating exchanges o f sectoral roundtable best practices, (iii)training and capacity building, conducting workshops, dissemination and promotion o f the benefits o f CCLs for coordinating local investment, and facilitating exchanges o f CCL best practices, (iv) financing data collection, consultants, and workshops, (v) analyzing the current operational portfolio o f the donor community, identifying donor-fundedprograms that could be extended into the Sierra in support o f the strategy, utilizing data gathered through the gap analysis, identifying investment opportunities, and securing donor, NGO, and private-sector commitments for funding and execution o f new Sierra programs, (vi) financing dissemination activities, workshops, consultants, and travel, and (vii) creating government sectoral committees at the national level to represent their sectors in the SDU and coordinate actions in their specific sector and with other sectors. 52. The outcomes o f the subcomponent include (i) effectively carrying out their roles in staff promoting, facilitating, and coordinating public and private investment inthe rural Sierra, (ii) an updated strategy document and inputs for preparing an implementation program for the Sierra strategy, (iii) a five-year implementation program and action plan for the Sierra development strategy including an investment program and source o f financing for each program, and (iv) sectoral committees established to coordinate actions within specific sectors inthe Sierra. Subcomponent 3.2: Central Project Management and M&E (US$2.67million) 53. A summary o f central project management, monitoring, and evaluation activities and functions4ivided between human resources, equipment, and operating costs-is provided below. A more detailed description o f functions, responsibilities, and associated procedures is found inAnnex 6 and inthe project implementationplanand Operations Manual. 54. Human resources. MARENASS will maintain a central office in Ayacucho (with 20 staff). All staff salaries financed by the project will be paid by the Peruvian government cofinancing. Details o f project staffing are included in Annex 6. All staff assigned to project implementation will be selected through competitive process (unless direct contracting is specifically authorized by the Bank). Annual performance evaluations would be conducted based on benchmarks included inthe terms o f reference for each position. Project related training will also be provided to project staff. The project will also finance a number o f consultancies to carry out technical studies (such as market analysis for local products, natural resource management plans, and social analysis and surveys) to be identified duringproject implementation. 58 55. Equipment.Theprojectwill finance procurement o fbasic office equipment, vehicles, and other goods requiredto carry out project activities. 56. Operating costs and other goods and services. The project will finance operating costs o f managingthe project, including maintenance, insurance, and overhead. Subcomponent 3.3: Regional Project Administration (US$2.57 million) 57. A summary of regional project administration activities and functions-divided between human resources, equipment, and operating costs-is provided below. A more detailed description of functions, responsibilities, and associated procedures is found in Annex 6 and in the project implementation planand Operations Manual. 58. Human resources. MARENASS will maintain five regional offices to help implement project activities at the local level. Each regional office will include a regional coordinator, administrative assistant, technical assistant, promoter/driver, and guard. All staff salaries financed by the project will be paid by the Peruvian government cofinancing. All staff assigned to project implementation will be selected through a competitive process (unless direct contracting i s specifically authorized by the Bank). Annual performance evaluations would be conducted based on benchmarks included in the terms of reference for each position. Project related training will also be provided to project staff. In addition, the project will finance the honoraria of independent evaluators on the Local Resource Allocation Committee that will evaluate subproject proposals under Component 1. 59. Equipment.The project will finance procurement ofbasic office equipment, vehicles, and other goods requiredby the regional offices to carry out project activities. 60. Operating costs and other goods and services. The project will finance the operating costs ofmanagingthe project at the regional level, including maintenance, insurance, and overhead. 59 Annex 5: ProjectCosts PERU: PE Sierra RuralDevelopmentProject Cost (US$ million) Project cost by component and/or activity Local Foreign Total 1. RuralBusinesses A. PromotionandDiffusiono fthe RuralBusinesses 0-40 0.40 B.Preinvestment Activities 0.78 0.78 C. Rural Business Fund 11.74 2.69 14.43 Subtotal Component1 12.92 2.69 15.61 2. CommunityDevelopment A. Promotionand Diffusion o fthe Community 0.26 0.26 DevelopmentFund B.Preinvestment Activities 0.23 0.23 C. Community DevelopmentFund 10.69 2.41 13.10 Subtotal Component2 11.18 2.41 13.58 3. SierraCoordination,ProjectMgmt., andM&E A. Sierra DevelopmentCoordination 0.50 0.50 B.Central Project Management and M&E 2.55 0.12 2.67 C. Regional Project Administration 2.45 0.12 2.57 Subtotal Component3 5.50 0.24 5.74 TotalProject Costs 29.60 5.33 34.93 Front-end Fee TotalFinancingRequired 29.60 5.33 34.93 60 Annex 6: ImplementationArrangements PERU: PE Sierra RuralDevelopmentProject 1. The project will be implemented by two executing agencies: the Ministry o f Agriculture (MINAG) and the Prime Minister's Office (PCM) only for subcomponent 3.1 (Sierra Development Coordination). MINAG will each have responsibility for overall management, supervision, coordination, technical design, fiduciary control, and monitoring and evaluation o f the project. Direct implementation o fproject activities will be carried out by staff from Southern Sierra Natural Resources Management Program (MARENASS), although subcomponent 3.1 will be carried out by the newlycreated SDUinthe PCM. 2. Other key actors will include provincial municipalities (and associations o f municipalities), formally recognized rural communities, producer and business groups, local grassroots organizations, private and community technical specialists and service providers, local chambers o f commerce, universities and technical centers, and various regional and local committees and planning boards. The Prime Minister's Office (PCM) and the ministries o f Women and Social Development (MIMDES), Production (PRODUCE), Economics and Finance (MEF), and Transport and Communications (MTC) will also beimportant partners andwill help oversee project planningand strategy as memberso f the project's Steering Committee. The roles o f these and other actors are described indetail below. Ministryof Agriculture (MINAG) 3. MINAG's mandate is to reduce poverty and improve living conditions in rural areas by integrating small producers and subsistence farmers into the marketplace and supporting them in the areas o fnatural resources management, quality control, technology transfer, and development o fproduction chains to help achieve greater profitability and competitiveness. 4. As the project executing agencies, MINAG and PCM will be responsible for all official communication with the Bank, coordinate project activities with other ministries, and have ultimate fiduciary control and responsibility for their respective components and activities. MINAG will execute its project activities through its staff in MARENASS. The Minister of Agriculture, or the minister's designated representative, will serve as president o f the Steering Committee o f MARENASS, thereby exercising oversight and control o f the project as well as taking the lead in setting overall policy and strategy. PCM will also have a seat on the Committee. SouthernSierra NaturalResourcesDevelopmentProgram(MARENASS) 5. MARENASS i s a permanent unit o f the MINAG with technical, administrative, economic, financial and managerial autonomy and currently i s headquartered in Abancay, Apurimac and i s dedicated to rural development and natural resources management inthe Sierra region. It began operations in 1998 with support from the International Fund for Agricultural Development (IFAD)and had the broad goal o f increasing the amount o f arable land for farmers in Peru's southern highlands and enhancing the commercial value of their productive natural resources. Inaddition to providing technical assistance and promoting technological change, the project used competitive funds to finance small community subprojects in agricultural and 61 livestock management, community planning, soil conservation, forestation, and management o f pastures, water, and other natural resources. Its long-term mission was to promote new productive opportunities and strengthen the management capacity o f communities and families inrural areas. 6. The Feasibility Study for the project, which must be approved by MINAG and the Ministry o f Finance (MEF), includes a proposed Executive Decree through which the structure and function o f MARENASSwill be modified to carry out an expanded role, in a larger area o f the Sierra.14Although the main purpose o f MARENASS initially will be implementation o f the Sierra Rural Development Program, ultimately it i s expected to also take on administration and implementation o f other programs and initiatives inthe rural sierra. 7. Since closure o f the IFAD project in June 2005, activities have continued with government hnding, albeit on a scaled back level. Once the proposed project begins implementation, MARENASS will begin to undertake new activities, its staff will be increased, its headquarters will be moved from Abancay to Ayacucho, some regional offices will be relocated and at least two new regional offices will be opened. The existing staff positions in MARENASS will be maintained and activities that MARENASS has been conducting for the past seven years will continue. In 2006, MARENASS has also started preparation o f a MARENASS2 with IFAD.This proposed operation will move out o fthe Southern Sierra, where the first phase was implemented, and seeks to expand to the Northern Sierra (Cajamarca, L a Libertad, Lembayeque, and Amazonas). Details o f this proposed operation are yet to be defined, but activities will be coordinated among the two proposed project to ensure consistency in the rural development approach. 8. Because the proposed project will be carried out by regular MARENASS staff (and subcomponent 3.1 by P C M staff), no separate project implementationunit will be established. PrimeMinister's Office(PCM) 9. The Prime Minister's Office (Presidencia del Consejo de Ministros, or PCM), is a technical-administrative office that supports the Prime Minister in carrying out his hnctions as the president o fthe Council o f Ministers, and inparticular hisrole incoordinating the exercise o f executive power on behalf o f the President o f Peru. Inthis capacity, the newly created SDU o f the PCM will implement the Sierra development coordination activities as proposed in Component 3 (subcomponent 3.1). The PCM coordinates and supervises the multisectoral policies and programs o f the executive branch o fthe government, and coordinates its interactions with the legislative branch, constitutionally autonomous entities, and other entities and commissions o f the executive branch to align their priorities and ensure the realization o f national goals. l4 The current official name o f the program i s MARENASS, which stands for Southern Sierra Natural Resources Management Project. In addition to the changes in its mandate to enable it to become the main implementation agency o f the proposed project, the Executive Decree proposes a name change to drop the last S as this stands for Southern, to reflect the geographical expansion o f the activities from the IFAD funded project to the proposed project. The Executive Decree will also reflect the transfer o f the central office from the current location o f Abancay to Ayacucho. 62 10. The PCM also manages relations and coordination with regional and local governments, and promotes improvements inpublic management through better organization o fpublic entities, increasing the efficiency o f the national government's human resource management and administrative and procedural systems. It i s the key entity responsible for harmonizing government programs andpolicies. ProjectInstitutionalStructurefor MINAG 11. The overall structure o f the project will include (a) a project Steering Committee to provide high-level guidance, oversight, and control, (b) an Executive Director responsible for overall project implementation, (c) technical units for coordination o f the three subproject investmentcomponents and for project monitoring and evaluation, (d) an administrative unit to handle personnel, financial, procurement, and legal matters, and (e) five regional offices that will have responsibility for implementationo fthe project inthe field. 12. Project headquarters (central office) and all other units and their staff will be located in the city o f Ayacucho. Meetings o f the project Steering Committee will be held in Lima, unless otherwise agreed by the members o f the Committee. There will be five regional offices-ne in each o f the regions in the project area except Pasco, which will be covered by the Huanuco regional office (with an additional liaison representative based inPasco). FigureA6.1 shows the structure and staff o f the current project design. The composition and responsibilities o f the various staff and unitswithin the proposed project are summarized below. 13. Steering Committee. The project Steering Committee will have 12 members. The national government will be represented by the ministries o f Agriculture (MINAG), Transport and Communications (MTC), Production (PRODUCE), MEF, PCM, Women and Social Development (MIMDES), and the National Council on the Environment (CONAM). The other five members will represent government, private sector, and civil society participants and stakeholders from the project area inthe Sierra, with one representative for each of the following groups: regional governments, provincial municipalities (through REMURPE, the Peruvian Network o f Rural Municipalities), Regional Export Promotion Committees, Regional Chambers o f Commerce, and farmer organizations. The Minister of Agriculture will chair the Committee and serve as its official spokesperson. 14. The Committee will (a) define policies and strategies, (b) select the Executive Director, (d) approve implementation plans, annual operating plans, and annual reports, (d) supervise and assess the overall project performance, (e) promote inter-institutional coordination, (f) meet with Bank supervision missions, and (f) assist the project team as needed in other aspects o f technical or financial management. It will have one regular yearly meeting as well as other periodic meetings as required, or on the request o f any of its members. The Project Executive Director will serve as the Committee's Technical Secretary, responding to requests from the Committee, implementing Committee recommendations and decisions, representing the operational and administrative arms o f the project, preparing information and making logistical arrangements for Committee meetings, andrecording and archiving Committee communications and decisions. 15. Executive Director. Direct administration and operational implementation o f the proposed project i s the responsibility of the Executive Director's Office, which includes the 63 vc Director is selecte e authority over all xception of legal a 16. In a ~ ~to his roleias ffic C ~ ~ o ~ ittee's Technical Secretary, the Executive Di r e s ~ o for ~(a)~ r~e ~ ~e ~ s cthe~project in all format tec nical, a d ~ i ~ i ~ ~andr legal~ ~ e , ~ n i n ~ ~ a ~ matters before public and private a ~ t h o ~ r ~(b) e s ,~ i a n d l ~ n ~ t~rac~ions all with the ~ o n ~ ~ n ~ t t ~ ~ , including ~ ~ ~ ~ ofnannual s ~ ~ s reports, oi ~ ~p l e ~ e n t plans, oand any other matter r ~ ~ u i r ~ ~ g a ~ ~ ~ val, (c) ~~~a~~~~all policy, admini he ~ ~or delegated to other~ ~ itfiin the project, (d) patticip j ~ ~ e ~ ctivities and subprojects, Executive Director's Oftice Executibe C.recior Community Development I I v Coordinator * Asstslant iii I I Rural Business 1 I ii I I I II I iI ! I I I DisseminationI Cornmunic. I I I & ~ ~ ~ ~ * Contradedfor one year at the beginningof tho project and for stx ~ o nat~t h~end OX the project ~s ** Each office hasfive staff {I)coordinator,(2) adrninrstrat cal asst ,i4) ~ r ~ ~ o ~ Q r / d(51iguard~ r v Q r The M Pasco officewill be in NuAnucoandwill includean r basedin Pasc~ 8 regionalliaison as 64 overseeing financial matters and coordinating with appropriate authorities within MINAG to ensure the compliance and adequacy o f fiduciary arrangements withinthe project. 17. Administrative Unit. Located inthe project headquarters inAyacucho, the Administrative Unit will include an administrator, treasurer, procurement specialist, legal advisor, accountant, assistant accountant, driver, and a guard. It will operate under the authority o f the Executive Director and be responsible for planning, administering, and carrying out all activities related to financial management, accounting, procurement, disbursements, personnel, supplies, logistics, and property control. It will formulate internal norms and procedures, help develop implementation and procurement plans, prepare quarterly and annual financial reports, and ensure compliance with the terms o f all contracts and loan agreements as well as adherence to national regulations and agreements with international organizations. It will support other units within the project as necessary. Further details o f the financial management and procurement responsibilities o f the Administrative Unit are presented in annexes 7 and 8 o f the PAD and in the Project OperationalManual 18. Technical Units. The central office o f the project will also include technical units for coordination o f the two subproject investment components (rural business and community development), an M&E unit, and a consultant (one-year contract) to supervise dissemination and communication. The technical units will have a very highdegree o f integration and coordination o f activities between themselves and with the other parts o f the project, particularly the regional offices. 19. The technical unitsfor each o fthe project's two investment components, will each have a coordinator and an assistant. They will (a) propose, contract, and supervise any analytical work related to their project components that may be required, including market analysis, demand and supply, institutional capacity, and environmental and social assessments, (b) formulate and evaluate the strategies and design details for implementationo f the components, (c) work closely with the Executive Director, disseminatiodcommunications assistant, monitoring and evaluation specialists, and regional offices throughout all phases o fprogram dissemination, implementation, and evaluation, including participation in training and technical assistance workshops, (d) provide technical support and advice in the review and selection o f subproject profiles and businessplans, and(e) ensure compliance with Bank safeguard policies. 20. Specific activities will vary from component to component, but it is anticipated that all coordinators will spend significant time in the regional offices and in the field to support program implementation. In addition, the coordinator for community development will have a strong professionalprofile in social development and the coordinator for rural business will have a strong professionalprofile in environmental assessment so that they can provide cross-support to the other coordinators and regional offices on social and environmental issues and safeguard compliance. 21. The M&E Unit will include a lead specialist and two assistants who will work closely with the component coordinators and regional offices to design and implement effective M&E systems. While each component will have its own M&E strategy, requirements, andprocedures, when possible they will be developed to complement one another, use comparable formats or protocols, and form a coherent whole interms o f overall project monitoring and evaluation. The 65 M&E specialists will contract and supervise baseline studies, designsurvey and reporting forms, select control groups, determine parameters to be measured, maintain records, analyze results, help monitor contract compliance by beneficiaries, and participate directly in gathering information inconjunction with the regional offices. 22. The dissemination and communications consultant will work with the ExecutiveDirector, component coordinators, and regional offices to identify target audiences, help publicize the program in the project area, disseminate component-specific information to generate interest among prospective participants, and design and planworkshops to directly help interested parties understand the details o f the competitive funds and enable them to participate. Most direct dissemination and communication in the field, particularly at the workshop level, will be the responsibilityo f the component coordinators and the regional offices. 23. Regional Offices. The six regions in the project area will be covered by five regional offices, each o f which will be staffed by a coordinator, administrative assistant, technical assistant, promoter/driver, and a guard. Pasco will be covered by the office inHU~UCO, will have an which additional staff member based in Pasco to act as a liaison. The regional offices will be located in the cities of Andahuaylas (Region o f Apwrimac), Puquio (Ayacucho), Huancavelica (Huancavelica), Huancayo (Junin), and Huhuco (Huhuco and Pasco). Staff in the project's central office in Ayacucho will also act as a second regional office for the Region o f Ayacucho. They will serve the northern part o f the region, while the regional office in Puquio will serve the southern halfofthe region. 24. The regional offices, with the guidance and collaboration o f the Executive Director and Technical Units,are responsible for the direct, decentralized implementation o f the project inthe field. They will identify and contract third-party service providers and technical professionals (Yachaqs) to carry out many o f the activities for which they are responsible. They will, either directly or through third-party contractors where applicable, (a) help carry out the dissemination andcommunication strategy, (b) represent the project at the regional, provincial, and community level, (c) identify prospective participants and providers o f technical assistance and services, (d) hold workshops and training events, (e) work with local stakeholders, governments, and communities in all phases o f the program, (0 facilitate analytical work, (8) receive requests and award funds for preinvestment financing, (h) receive, review, and evaluate final subproject proposals and select, in collaboration with the CLARs and the MARENASS central office as appropriate, which subprojects to finance, (i)provide direct management and oversight o f investment funds awarded to subprojects, (i) help the component coordinators in designing strategies and operational designs, (k) collect data to establish baseline indicators and measure project outcomes, (1) prepare periodic reports on the activities, projects, and programs being implemented intheir regions, and (m) formulate proposals for regional operating plans, budgets, and procurement as inputs for overall project planningby the Administrative Unit and Executive Director. Other Actors 25. Rural Communities (Comunidades Campesinas). Formally organized and recognized rural communities (in eligible districts) will be the primary stakeholders in the Community Development Component and will participate in the program through their Community 66 Assembly. The Community Assemblies will (a) represent the families in their community and help disseminate information about the program, (b) identify local technical professionals (Yachaqs) and community instructors (Yachachiqs) that can help provide technical assistance in developing proposals and implementing subprojects, (c) prescreen proposals and submit them to the project regional offices, (d) sign subproject agreements with the project on behalf o f the community, (e) help implement and monitor the subprojects, and (f) assume responsibility for the use o f finds or award of prizes under the terms o f the subproject agreement. 26. Groups qf small producers. Associations or groups o f small producers, both agricultural and nonagricultural, are the target population and executing entities for the Rural Business Component. These can be existing groups or new ones created specifically to compete for finds, but must meet certainrequirements and be formally organized and recognized as a group so that they are legally capable o f signing aproject execution agreement with the project. 27. Provincial governments (municipalities). Provincial governments will help the MARENASS regional offices to launch Community Development competitions within the municipalities. 28. Local technical specialists and service providers (Yachaas). Professionals and technical experts inthe project area that can be contracted to provide specialized technical assistance and training in Spanish and Quechua (and Aymara if necessary). They will be contacted by MARENASS directly and/or through the dissemination strategy so that they can be informed about the project and promote their participation. They will be contracted by the project and/or by communities and producer groups themselves to help prepare subproject proposals and implement subprojects. They may also assist the project in various phases o f the project such as workshops, technical studies, and monitoring and evaluation activities as necessary. MARENASS already has detailed directories of Yachaqs and Yachachiqs that were compiledby the MARENASS project and will be augmented as the project moves into new parts in the Sierra. These directories already provide the project with network o f human resources that includes 800 men and women with technical and cultural knowledge relevant to rural development inthe Sierra. 29. Community trainers (Yachachiqs). Members o f rural communities with experience in community development projects and peer-to-peer knowledge sharing, who are selected by the communities and trained by the project as needed to provide assistance (in the participants' native language) in developing and implementing subproject proposals. Yachachiqs will primarily be involved in the operational and procedural aspects o f the program rather providing analytical and technical services. They may be paid for incidental expenses related to training or subproject preparation and implementation, but will not be paid by the project for providing services. 30. Community promoters. Members o f rural communities selected by the communities to attend promotion and information dissemination workshops offered by the project so that they can spread information about the program to others in the community. The project may provide limited financial support to the promoters, such as costs for transportation, meals, and lodging while attending workshops, ifnecessary. 67 31. Local Resource Allocation Committees (CLARs). These committees would include representatives o f rural communities, provincial and regional government, business organizations, producer groups, indigenous peoples, NGOs, and donor agencies. Their primary role would be to approve the final selection of subproject proposals under Component 1 (Rural Business) fiom among those filtered through the safeguard review, technical evaluation, and initial selection of MARENASS (with the help of consultants and the participation of Sierra Exportadora). They would be organized by the project at the regional level in consultation with the corresponding regional governments to ensure that their composition i s appropriate. The CLARs would meet every six months (or as required by the terms of each competition) in regions with active competitive funds. Committee memberswith a conflict o f interest related to any of the proposals (family relation, owner of a competing business, etc.) would be required to abstain fiom the selection process. 32. Nongovernmental organizations (NGOs).civil society organizations (CSOs),community- based organizations (CBOs), universities, and technical and research centers. A range o f other NGOs, CSOs, CBOs, and other academic and technical organizations are available to participate and provide technical services during project implementation. The Yachaqs or Yachachiqs are able to provide technical training and advice in Quechua or Aymara (as well as Spanish) to subsistence farmers and indigenous groups. The Yachachiqs can be membersof CLARs or other territorial planning entities, assist in monitoring and evaluation, or participate in institutional strengthening and coordination exercises with regional and provincial government officials. The project already has a directory o f more than 100 CSOs and 200 other contacts, and has mapped 40 good practices during the project preparation and the consultation process (see list of CSO in Annex 10). The area o f intervention of most o f the CSOs i s at the regional and district level. At least half o f the good practices identified are ready to be scaled up, replicated, or expanded to other parts o fthe project area. 68 Annex 7: FinancialManagementandDisbursementArrangements PERU: PE Sierra RuralDevelopmentProject EXECUTIVESUMMARY 1. In view of the implementation arrangements defined for the project, a financial management assessment was conducted for the proposed implementing entity, MARENASS. The assessment was performed in accordance with OP/BP 10.02 and the Manual "Financial Management Practices in World Bank - Financed Investment Operations". The evaluation was carried out on site between November 20 and 24, a follow-up visit between December 12 and 15, 2006, including field visits and discussion meetings with the preparation team. The objective o f the assessment was to determine MARENASS'Scapacity to properly manage and account for all project proceeds and to produce timely accurate and reliable financial statements for general and Bank special purposes. OverallConclusion 2. Project design and implementation arrangements require a robust financial management system, that also considers the associated risks and weaknesses that may prevent the implementing entity from providing the Bank, the Borrower and other interested parties with accurate and timely information regarding project resources, expenditures and activities. Subject to the successful implementation o f the proposed arrangements -including the mitigating measures-, the project's inherent and control risk ratings are modest. However, these ratings could be affected ifthe implementing entity is not able to maintain the proposed arrangements - including qualified staff- throughout the life o f the project, and also, if mitigating measures are not implemented as expected. 3. Onthe basis o f the reviewperformed, the progress reached so far and the actions that are being taken to complete the pending requirements that will be followed-up upon before Board presentation and during implementations, the financial management team concludes that the proposed financial management arrangements are acceptable to the Bank. Finally, it i s important to note that monitoring and supervision o f the operation o f the arrangements defined will be essential to guarantee the adequacy o fthe financial management system. Summaryof FinancialManagementAssessment RiskAssessment andmitigation 4. The following risk assessment constitutes a summary o f the issues considered for the project as a whole. 69 Condition of Risk Negotiations, Board Residual Risk Mitigating Measure or Effectiveness Risk Rating Incorporated into Project Design (r/N) Country level MARENASS Project would be implemented through legislation updatedto MARENASS, a department o f the Ministryof reflect its Agriculture, with technical, administrative, organization, Engagement o f OGAs in economic, financial and managerial autonomy. functions and project procurement and Such conditionneeds to be ratified by competences, inthe financial management MARENASS adjusted legislation that redefines framework o f the functions end-up in the organization, hnctions and competences project, including its cumbersome internal M assigned to MARENASS for the implementation current autonomy. reviewing and approval o f the project. procedures, that may affect Effectiveness (Y) project implementation. The FMprocedures that are being defined for project implementation, will clearly state the Operational Manual functions and responsibilities for different should clearly state levelshnits involved inproject implementation, roles and including OGA, when necessary. responsibilities Rigidity and lack o f Specific procedures, interms o fpreparation o f flexibility inthe budgetary the annual operational plan, budget and local rules, may cause some procurement plan are being defined, to ensure Operational Manual delays inimplementation, M adequate forecast, especially at the regional approved by the Bank taking into consideration the office levels. However, there i s still need to and MINAG demand-driven feature o f define the roles o f the Investment and Planning the project Offices withinMINAG interms o f approving the project's program and budget. Entity level The project design includes the strengthening o f MARENASS MARENASS has almost no MARENASS team with some specialist for ed, specialists are select- and experience inWB's M procurement. Additional special technical fiduciary requirements. assistance form the Bank's side will be required trained before project once the team is complete. implementation begins. Project level Although implementation A Steering Committee including representatives The Committee has been assigned to from National Government (MINAG, MTC, should be formally MINAG, the project PRODUCE, MIMDES) and other established includes and calls for the representatives fromprivate sector, and civil immediately after coordination with several M society will be established. Their main project effectiveness public and private instances responsibilities include the approval o f and definitely before at different levels, including implementation plans, annual operating plans implementation sub-national government. and annual reports. begins. 70 Condition of Risk Negotiations, Board Residual Risk Mitigating Measure or Efectiveness Risk Rating Incorporated into Project Design 0 MARENASS's Duringthe last years, MARENASS has been Legislation needs to dedicated to rural development inthe Sierra. It i sbe up-dated to reflect a well recognized and respectedentity, that has its role and responsi- developed expertise inbuildingcapacity and bilities for the project. Project designincludes obtaining developing decentralization o f funds Effectiveness(Y) flows, and interaction with M Specific simplified procedures are being low-capacity groups. designed by MARENASS for the implementation o f the sub-projects, mainlyin terms o fplanning, disbursing (funds flow) and Operational Manual financial reporting for each component. Those arrangements will be reflected inthe Operational Manual The project design includes some mechanisms to L o w capacity inRural buildcapacity, including the provisiono f producer groups to manage technical assistance by local instructors Operational Manual funds. (yachaqs). Simplified procedures, documents CONTROLRISK Inthe framework o fthe implementation arrange-ments defined for each component, FMprocesses and Budgeting specific FMprocesses and procedures are being procedures were Accounting M designed andor redefined usingMARENASS reviewed during Internal control expertise, inorder to guarantee its adequacy, so appraisal and are as to ensure project funds are used economically being reflected inthe and efficiently. Operational Manual FundsFlow: MARENASS Fromthe Bank's side, the traditional has no experience inBank's disbursement method has beenrecommended. policies and procedures and FMprocesses and on the other side their Funds flow arrangements have been simplified procedures were capacity for preparing M to the extent possible, avoiding the use o f reviewed during reliable forecasts taking into additional tiers such as the regional offices. In appraisal and are consideration its that sense, consultations have been made to be being reflected inthe decentralized model needs to able to process direct bank transfers from the Operational Manual be carefully evaluated. central office to the beneficiaries' bank accounts The core content o f the financial reports has been agreed and MARENASS i s working on refining the classification. Final reports will be FinancialReporting M The SIAF's project module will be usedto delivered to the Bank record transactions, prepare withdrawal one month after application and issue specific financial reports. Negotiations. This will be strengthened with the implementa- tion o f a specific Sub-project module to keep record and control o f individual subprojects. 71 Condition of Risk Negotiations, Board Residual Risk Mitigating Measure or Effectiveness Risk Rating Incorporated into Project Design ( Y N An audit fmwillbe selected within the six Audit TORSwill be months after effectiveness inorder to require preparedandagreed Auditing M interim visits, including field visits to the with the Bank six regional offices to mainlyreview the adequacy months after and operation o fthe internal control system. implementation begins. Weaknesses andactionplan 5. MARENASS has extensively worked on the issues identified during the assessment. However, some processes and procedures need further refinement and therefore some actions will be completedwithin the following month after Negotiations, to make sure all arrangements are inplace for project implementation. Implementingentity 6. MARENASS i s a permanent unit o f the MINAG with technical, administrative, economic, financial and managerial autonomy. The entity has developed important experience in the implementation o f community sub-projects, although it has almost no experience in Bank policies and procedures. Therefore, project design includes the strengthening o f MARENASS with specialized staff, and specific actions to streamline processesandprocedures. Organizationandstructure 7. Although the proposed structure for the administrative unit, both at central and regional level can be considered adequate to beginthe project, it might needto be strengthened as project activities and coverage increase. In addition, the following issues need to be considered, a) the terms o f reference o f different positions are being adjusted to reflect the fhctions assigned under the project, consistently with the processes and procedures defined for the implementation o f different sub-components; b) although the existing MARENASS staff has developed some expertise in terms o f managing external financed projects and implementation of community sub-projects, they will require specific training on Bank's procedures and close monitoring during the first year; and c) at the regional level, the terms o f reference o f the administrative assistant will need to provide for this position to undertake the responsibility for providing support, guidance and supervising the daily fiduciary management o f the sub-projects. To this end, it has been agreed that specific requirements interms o fknowledge and experience to work with community sub-projects as well as knowledge o flocal language, to facilitate the inter-action with localcommunities. ProgrammingandBudget 8. The preparation o f the annual program and budget will follow the local regulations established by the Ministry of Finance through the Direccion Nacional de Presupuesto Publico, and any related Guidance (Directiva) issuedby MINAG. However, those general procedures are 72 being complemented with specific guidelines to be followed by the project, including adequate reviewing and approval procedures, taking into consideration the role o f the different instances established for the project such as the Steering Committee, or MINAG'SPlanning/Investment Offices. The following issues will need to be addressed in order to allow adequate budgetary control: 1) timely preparation o fprogramming, budget and procurementplan, establishinga clear relation among them; 2) proper recoding o f the approved budget in the financial management system, not only following Government required classification (partidas por objeto del gasto), but also a more functional classification by project component and cost category; 3) timely recording o f commitments payments and accruals as needed, allow an adequate budget monitoring and also provide accurate information on project commitments for programming purposes. Accounting Informationsystem - 9. Interms of accounting, the project will comply with the local requirements and they will therefore use the Governmental Accounting Plan implemented in SIAF. However, a complementary chart o f accounts i s being defined on the basis of the components, subcomponents and financing lines for different components, that would also be established in SIAF to allow the recordingo fproject transactions. 10. S I A F offers specific controls interms o f budget execution. This project will benefit from SIAF's project module that i s currently being used for other WB-financed projects and which does not only allow the recording o f project transactions following a functional classification (components and cost categories), but also allows the preparationo f withdrawal applications and financial reports, both inU S dollars and local currency, following the cash basis o f accounting. The system would be complemented by a ring-fenced sub-project module that allows recording and controlling each individual sub-project not only from the financial side. Counterpart Funding 11. Specific policy and procedures for the collection, control and recording o f counterpart funding have been defined. Regarding the in-kind contributions, it has been agreed that those would be valued following a criteria developed by MARENASS on the basis o f their experience, interms of local costs o fgoods and labor. Such criteriawill be explainedand documented inthe Operational Manual. Written proceduresandinternalcontrol 12. On the basis o f the experience developed in the work with rural communities, MARENASS is currently working on the desigdadjustment and/or strengthening of specific procedures for the implementation o f each component, mainly related to payment mechanisms, supportingdocumentation and reporting requirements. Detailedprocedures are beingincluded in the Operational Manual. While setting up the procedures, special attention has beenpaid to the segregation o f duties, clearly stating roles and responsibilities in terms o f review, authorization andapproval, both at centraloffice and especially at the regionaloffices level. 73 FinancialReporting 13. The core content o f the interimfinancial reports, agreed with the Bank, include a section o f sources and uses o f project resources, and a statement o f investment by project component reporting the current quarter and the accumulated operations against ongoing plans. The reports would include loan proceeds, and counterpart funds provided both, by central government and beneficiaries. The reports prepared on a quarterly basis will be submitted to the Bank no later thanone monthafter the endon eachcalendar quarter. Financial Reporting at the community level 14. MARENASS is working on the definition o f the simplified reports that will need to be prepared at the beneficiary levels for rural business and community development sub-projects. Some initial agreement was reached at this level, interms o fthe minimumcontent (sources, uses, cash balance). It is expected that these reports are linked to the physical progress reached by the subproject. Such definitions will be clearly stated inthe financing agreements, and beneficiaries will needto be trained on itspreparation. Auditing 15. In accordance with Bank policy, annual audit reports on project financial statements, includingmanagement letter should be submitted to the Bank, within six months o f the end o f Borrower's fiscal year (December 31). The audit should be conducted by an independent audit firm acceptable to the Bank, and under terms o f reference approved by the Bank. The scope o f the audit would include the review, on a sample basis, o f internal control and supporting documents at beneficiary and regional levels, taking into consideration project specific circumstances, features and responding, as appropriate, to identified risks. Audit cost would be financed out o f loanproceeds and selection would follow standard Bankprocedures. FUNDSFLOWAND DISBURSEMENTARRANGEMENTS 16. Considering the results o f the assessment, the following disbursement method may be used to withdraw funds from the loan, (a) Replenishment, (b) advance, and c) direct payments. 17. Underthe Advance Methodand to facilitate implementation, a Designated Account (DA) inUS dollars willbe opened andmaintainedinthe Banco de laNacioninthe nameofthe project and it will be managed by MARENASS. To process payments, the entity will be able to withdraw the required amount to a local currency bank account from where transfers to the beneficiaries' bank accounts and payments to consultants and supplier would be made. Funds deposited into the DA as advances, will follow the Bank's disbursement policies and procedures, as described inthe legal agreement and Disbursement Letter. 18. The ceiling for advances to be made into the DA wouldbe US$2 million, estimated to be sufficient for project execution for a period o f at least 4 months. It i s expected that eligible expenditures paid out of the DA be reportedon a monthly basis. Supporting documentation for documentingproject expenditures under advances andreimbursement method will be: statement 74 o f expenditures (SOEs) and records for all expenditures above the thresholds to be set in the DisbursementLetter. 19. As described above, MARENASS will also open and maintain a bank account in a commercial institution acceptable to the Bank in Nuevos Soles from which payments and disbursements will be made to different beneficiaries. On its side, Regional Offices will also maintain a local currency bank account to receive the transfers to pay for operating costs or as a bridge to process disbursements to some beneficiaries in areas where direct transfers face some difficulties. 20. Beneflciaries ' bank accounts. Each producer organization/ community will open and maintain a local currency bank account (saving accounts) in a commercial institution acceptable to the Bank, exclusively opened to deposit their counterpart contribution, when it corresponds, and to receive loan proceeds for the implementation o fthe subproject. Disbursementfrom co-fn ancingfu nds 21. Beneficiaries' contributions incashwill be deposited intheir corresponding bank account in accordance with the financing agreement. Evidence o f such deposits should be submittedto the Regional Offices for hrther control and registration. The general mechanism has been defined, and MARENASS has worked on the specific policy and practice to be followed for the collection o fthe contributions. Payment mechanism 22. Taking into consideration, the expected large number o f sub-projectsto be financed, small in scope, and technically simple, both at the community and producer organizations level, it is recommended that payments be made following the lump-sum approach. To this end the project design has included specific mechanisms for providing technical assistance, both from the regional offices and also through the contracting o f local community instructors (Yachachiqs) and local promoters. 23. The Regional Administrative Assistants will conduct an intensive training program and a solid monitoring and supervision program. Payments will be made in various tranches, on the basis o f physical progress and financial reports duly approved by regional staff, both technical and financial as it corresponds. The supervision at regional level will include on-site visits that will focus on the delivery o f products/or completion o f activities agreed in the financial agreement. On such basis and upon request o f the Regional Administrative Assistant, the Treasury Officer would process the transfer o f funds to the beneficiaries' bank accounts. 75 ALLOCATION OFLOANPROCEEDS Amount of the loan allocated Percentage of expenditures to befinanced 100%o fthe amounts disbursed for the (1) Part 1o fthe Project (Rural cost o f goods, works, services, training Business Subprojects) 10.20 andoperating costsundereachRural Business Subproject 100%o fthe amounts disbursed for the (2) Part 2 o fthe Project (Community cost of goods, works, services, training Development Subprojects) 9.38 andoperating costs under each Community Development Subproject (3) Part 3(a) o fthe Project (goods, consultant andnonconsultant services, training and operating 0.0 100% costs) (4) Part 3(b) and 3(c) o fthe Project (goods, consultant and nonconsultant services, training 0.42 100% andoperating costs) (6) Premiafor Interest Rate Caps Amounts payable pursuantto Section and Collars 2.08 (c) o fthis Agreement Amount payablepursuantto Section (7) Front-end Fee 2.04 of this Agreement inaccordance with Section 2.07 (b) o fthe General Conditions (8) Unallocated I TOTAL AMOUNT I 20.00 Financialmanagementsupervisionduringimplementation 24. Considering the results o f the assessment, the identifiedassociated risks and the need o f technical assistance, at least during the first year, FM supervision would include on-site visits (twice a year to the extent possible), and desk review o f interim financial reports and audited financial statements. Readinessfor implementation 25. Since appraisal, important progress has been made by MINAG, through MARENASS, to complete the design of financial management arrangements and the team is currently working on refining the detailed documents, procedures, and reporting formats. Those actions should be completed within a month after Negotiations and be inplace before implementation. 76 Annex 8: Procurement Peru: PE Sierra RuralDevelopmentProject A. General 1. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for pre- qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. 2. Procurement of Works: Minor Civil Works procured under this Project would be in component 1: Rural Business and component 2: Community Development, which would include basic local infrastructure. Use o f International Competitive Bidding (ICB) procedures for procurement o f works i s not expected. Works estimated to cost more than US$250,000 may be procured inaccordance with National Competitive Bidding(NCB), and those contracts for works estimated to cost US$250,000 equivalent or less per contract may be procured with the use o f price comparison from at least three price quotations obtained from local qualified contractors under lump-sum, fixed priced contracts. The procurement will be done using Sample Standard Bidding Documents (SBDs) agreed or satisfactory to the Bank and the documents will be included inthe Project Operational Manual (POM). 3. Procurement of Goods: Goods procured under this project would consist of IT and office equipment, project management software, and vehicles. ICB procedures would be followed for contracts estimated to cost US$250,000 equivalent or more. N C B procedures may be followed for contracts estimated to cost less than US$250,000 equivalent. Shopping procedures may be followed for contracts estimated to cost less than US$50,000 equivalent. Whenever feasible, goods will be grouped in packages. The procurement will be carried out usingthe Bank's SBDs for all ICB and Sample SBDs agreed with or satisfactory to the Bank. 4. Procurement of nonconsulting services (including training-related expenses): Non- consulting services under this Project would include training-related activities as workshops, seminars, and study tours for staff working in Project activities. Expenses to be financed will consist of travel, subsistence, and per diems for trainers and trainees, registration fees, training materials and the logistics for organizing training events for MARENASS,Rural Communities and Community promoters, andwould be procured according to normal business principles and using SBDs agreed or acceptable to the Bank. A detailed Annual Training Plan o f activities, including cost estimates, number o f individuals trained and expected outcomes o f training program, would be submitted each year to the Bank for prior review. The procedures should be described in the Project Operations Manual. Other type o f services will include but are not limited to, printingo f materials, TV and radio air time for promotion purposes as well as internet services ifrequired. 77 5. All procurement notices shall be advertised in the website o f "CONSUCODE`y/SEACE and in at least one local newspaper o f national circulation. ICB notices and contract award information shall be advertised in the UN Development Business online (UNDB online) and in the Development Gateways's dgMarket. CONSUCODE shall also be used to publishinformation on awarded contracts in accordance with provisions o f paragraphs 2.60 o f the Procurement Guidelines and as mandated by local legislation. The negotiated Procurement Plan shall be published inthe Borrower's web site as well as on the Imagebank o fthe WB. 6. Selection of Consultants:Consulting Services under this project would includetechnical assistance for strengthening strategic planning; monitoring and evaluation; project management services; development o f management information systems; and project financial and procurement audits. Legal services may also be financed as required for the establishing o fbrand names as well as for establishing cooperation agreements amongproducers, wholesalers etc. 7. Consulting Firms: most contracts for firms are expected to be procured using Quality- Cost Based Selection (QCBS) method. Consultant assignments, for contracts estimated to cost US$lOO,OOO equivalent or less, o f specific types as agreed previously with the Bank in the Procurement Plan may be procured with the use o f the following selection methods, Least Cost Selection (LCS) and Consultants' Qualification (CQS). Short lists o f consultants for services estimated to cost less than $350,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 o f the Consultant Guidelines. The procurement will be carried out using Bank's standard Request for Proposal (RFP). The Ministry o f Agriculture (MINAG) through MARENASS shall publicly advertise requests o f expressions o f interest as the basis for developing short list o f firms and individual consultants. Universities, Research Institutes, Training Institutions as well as NGOs may also be contracted to provide technical assistance and training. 8, Individual consultants would be selected by comparison o f qualifications o f three candidates and hired in accordance with the provisions o f paragraphs 5.1 through 5.3 o f the Consultant Guidelines. The consultant's fee for the staff o f MARENASS at the central office, the six (6) regional offices, and for the humanresource management o f the P C M (SDU) may be in accordance with the range established in the government and their contracts signed for the expected duration o f the assignment, with escape clauses incase o f non-performance. Inaddition to the services described above, consulting services for employment o f individual consultants under subprojects will be procured by participating communities with the use o f Commercial Practices, acceptable to the Bank, and described in the POM, based on the comparison o f qualifications and criteria such as academic background, experience, knowledge o f local conditions and language, and overall suitability for the assignment. The comparison o f qualifications will be carried out of at least three candidates who shall meet minimum relevant requirements. The consultants will be selected on the basis of the best qualified among the candidates considered for a particular assignment. 9. The website of CONSUCODE/SEACE, a national newspaper and municipalities bulletin boards for remote areas not having internet access, shall also be used to advertise expressions o f interest for consulting firms or individuals as well as opening cycles for subprojects, and to publish information on awarded contracts in accordance with provisions o f paragraphs 2.28 of 78 the Consultants Guidelines and as mandated by local legislation. Contracts expected to cost more than US$200,000 shall be advertised inthe UNDB online and indgMarket. 10. Prior Review By the Bank for Works, Goods and Services (other than Consultant Services) Contracts: ICB contracts for Goods estimated to cost US$250,000 or more, and all Direct Contracting, if any, would be subject to prior review by the Bank. The first process under each method o f procurement and for each calendar year would be also subject to prior review regardless of amount. In addition, the Bank may, however, determine what other contracts should also be subject to prior review as stipulated inthe Procurement Plan. 11. Prior review for Consultant Services Contracts: Consultancy services to be assigned to firms estimated to cost above US$lOO,OOO per contract, consultancy services to be assigned to individuals estimated to cost above $50,000 per contract, contracts o f the Project Executing Agency key staff, and Single Source selection o f consultants firms and individuals would be subject to prior review by the Bank. All contracts under Commercial Practices (subprojects) above US$50,000 equivalent including TOR, CVs, and form o f Contract. 12. Operating Costs: expenses on account of project management and monitoring related activities, including office supplies; insurance, communication expenses; equipment, vehicles and computer operation and maintenance; supervision costs; transport; travel; per diem; which would be financed by the project andprocured usingcomparisonprocedures, whenever possible, and the implementing agency's administrative procedures acceptable to the Bank. Under this category, the Project will finance promotional campaign through radio, television, and press at the regional level and in local newspapers for promotion of the opportunities presented by the project. 13. Others: the project would finance demand-driven subprojects (Grants) proposed by groups o f small rural producers, the promotion and dissemination o f specific information about the rural business hnd, preinvestment activities using matching grant mechanisms under Component 1 and 2: subcomponents, 1.1 - Program promotion and dissemination; 1.2 - Preinvestment activities, 1.3 - Rural business fund, and 2.1 - Program promotion and dissemination; 2.2 - Community development fund. Subprojects would be evaluated and selected in accordance with specific evaluation criteria to be described in the POM. The Operational Manual should indicate the negative list o f subprojects not eligible for financing. (i.e. subprojects dealing with use o f pesticides and other practices potentially harmful for the environment.) 14. For subprojects under component 1.3, the average size will not exceed US$50,000 equivalent per subproject, o fwhich financing from the fimdwill be up to 70 percent o f total cash o f the business plan, with producers cofinancing the rest o f the plan's cost. These subprojects will include technical assistance, training, organizational support for the creation o f strategic businessalliances, non-consulting services, goods, small community works or infrastructure. 15. For Subprojects under component 2.2 the average size will not exceed US$12,000 (same comment as above, question for technical team) equivalent o f which financing from the fimdwill be up to 80 percent o f the total program cash cost, with the remaining percent being cofinanced by beneficiary organizations. These subprojects will include technical assistance, organizational 79 support for the creation o f strategic business alliances, non-consulting services, goods, training, and small community works or infrastructure. 16. Procurement h d e d under subprojects would be carried out as follows: Goods above US$50,000 equivalent per contract and Works above US$250,000 would be procured with the use of N C B procedures and National SBDs agreed with or satisfactory to the Bank, and Bank prior review would be performedto the three first contracts each year. Works below US$250,000 equivalent per contract, goods below US$50,000 equivalent per contract and technical assistance would be carried out with the use o f Community Participation procedures following to the extent possible shopping procedures and comparisono f CVs, as described inthe POM. B. Assessment ofthe agency's capacityto implementprocurement 17. Procurement activities will be carried out by the Ministry o f Agriculture (MINAG) through (1) the Southern Sierra Natural Resources Management (MARENASS) program - central office, and (2) the Prime Minister's Office (PCM) through the proposed Sierra Development Unit (SDU). MINAG will be responsible for coordinating project activities with other ministries, and have ultimate fiduciary control and responsibility. MARENASS unit will be responsible o f Components 1, 2, 3.2, and 3.3. Both units will have responsibility for overall management, supervision, coordination, technical design, fiduciary control and monitoring and evaluation o f their respective components. 18. The existing (MARENASS) structure will operate in coordination with and receive support from staff in MINAG's central administrative unit. The MARENASS Unit will consist o f an Executive Director, Technical Specialists, Administrator, Financial, Procurement, Accounting, Treasurer and Legal Advisor specialists. At the Regional level, Project Staff will be directly responsible o f project's field level activities intheir respective regions. The procurement function will be staffed by a procurement specialist and an assistant. 19. An assessment o f the capacity o f the Implementing Agency to implement procurement actions for the project has been carried out by Maria Lucy Giraldo, Senior Procurement Specialist, from November 28 to 30,2006. The assessmentreviewedthe proposed organizational structure for implementing the project and the interaction among technical staff at the central level, at the regional level andproject staff responsible for procurement. 20. The key issues and risks identified as potentially affecting Project implementation include: (i)MINAG (MARENASS) proposed organizational structure has not been hlly implemented yet; (ii) o f prior experience and skilled staff to implementproject procurement lack under Bank guidelines and procedures; and (iii)lack o f an integrated project management information system with the capacity to carry out monitoring, control and progress reporting to enable efficient project coordination and decision making. (iv) uncertainty o f contractual arrangements for existing staff familiar with the project. 21. The corrective measures which have been agreed with MINAG (MARENASS - PCM) and are included in an Action Plan are: (i)a definition of the organization structure and responsibilities not later than appraisal mission; (ii) hiringa Procurement Specialist, under terms o f reference acceptable to the Bank before project start up and as a short term solution hiringof 80 an experienced procurement consultant to finalize project arrangements; (iii) implementation o f an integrated project management information system acceptable to the Bank, to link Regional offices and other implementing parties for proper coordination, no later than March2007. Such a system (preferably one already in existence at MINAG to be adaptedupdated) will be implemented under terms o f reference to be agreed with the Bank before project start up; (iv) establishing a filing system for procurement documents (both central and regional); and (v) a draft Project Operational Manual (POM) acceptable to the Bank will be submitted for the Bank's no-objection before Negotiations. The POM will describe both institutional and implementation arrangements; the organizational structure and functions proposed for Project implementation and coordination, the roles and responsibilities o f procurement staff to manage the entire procurement cycle o f works, goods, non-consulting services, and consulting services, their relationship with the Technical Units, the participation o f the procurement specialist as an active membero fthe Procurement Committee for ensuring proper use of Bank procurement procedures and for provision o f increased coordination and expediting. The POM will also include the responsibility o f establishing a monitoring and contracting administration system that will interact with the other implementing offices, and hiringof a specialized consultant for design and implementation o f a new project filing system at the central level and regional levels, for the procurement cycle documents with instructions for the users. Standard Project documents for procurement o f works, goods, non-consulting services, evaluation forms, request for proposals, standard letters o f invitation, and forms o f agreement for selection and contracting o f individual consultants agreed for the Project will also be included in the POM. The types and category of subprojects for eligibility for financing under the project will also be specified inthe Operational Manual. 22. The overall project risk for procurement is high. C. ProcurementPlan 23. The Borrower, by negotiation, will present a consolidated procurement plan for project implementation which provides the basis for the procurement methods. This plan has been agreed between the Borrower and the Project Team on March 20, 2007 and i s available at the MINAG (MARENASS) office inLima and inAbancay. It will also be available inthe project's database and inthe Bank's externalwebsite. The Procurement Planwill be updated in agreement with the Project Team annually or as requiredto reflect the actual project implementation needs and improvements inits institutional capacity. D. Frequencyof ProcurementSupervision 24. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the ImplementingAgency has recommended two complete procurement supervision missions to visit the field to carry out post review o f procurement actions and an annual procurement audit carry out by external consulting firm. The post-review ratio i s one in five contracts for procurement of works, goods, and non-consulting services, consulting services (firms and individuals). 81 E. Detailsofthe ProcurementArrangementsInvolvingInternationalCompetition Goods, Works, andNonConsultingServices (a) List o f contract packages to be procured following ICB and direct contracting: No ICBs envisionunder this project (b) ICB contracts estimatedto cost above US$3.0 million for works andUS$250,000 per contract for goods and all direct contracting willbe subject to prior reviewby the Bank. ConsultingServices (a) List o fconsulting assignments with short-list o f international firms. 1 1 2 I 3 1 4 1 5 1 6 I 7 I Review Expected by Bank Proposals Descriptionof Estimated Selection (Prior I Submission Ref. No. Assignment cost Method Post) Date Comments Impact QCBS Prior 06/2007 Evaluation (b) Consultancy services estimated to cost above US$100,000 per contract and single source selection o f consultants (firms) will be subject to prior review by the Bank, and contracts for individual consultants estimated to cost above US$50,000 per contract, single source selection, andPIUkeystaffwill be subject to prior review bythe Bank. (c) Short lists composed entirely o f national consultants: Short lists o f consultants for services estimated to cost less than US$350,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines. F. Special ProcurementProvisions.The following "Special Provisions" would be included in the Loan Agreement (LA) and shall govern the procurement o f goods, works and non- consultants' services with N C B procedures under this Section. (a) No reference value shall be requiredfor publicationinthe biddingdocuments. (b) Award o f contracts shall be based exclusively on price and, whenever appropriate, shall take into account factors that can be quantified objectively, and the procedure for such. quantification shall be disclosed inthe invitation to bid. (c) Foreign bidders shall not be required to authenticate (Zegalizar)their bidding documents or any documentation related to such bidding documents with either, Peruvian Consulates, the Ministry o f Foreign Affairs, or any Peruvian authorities as a prerequisite o fbidding. 82 (d) The Borrower shall use standard bidding documents and standard evaluation formats; all satisfactory to the Bank. 25. In addition and without limitation or restriction to any other provisions set forth inthis Section or the Consultant Guidelines, the following provisions shall govern all employment o f consultants: Foreign consultants shall not be required to be locally registered as a condition o f participationinthe selection process. Foreign consultants shall not be required to authenticate (Zegalizar) any documentation related to their participation inthe selection process with either, PeruvianConsulates, the Ministryo fForeignAffairs, or any Peruvianauthorities as a condition ofparticipation in said selection process. The Borrower shall use standardrequests for proposals and standard evaluation formats; all satisfactory to the Bank. Foreign consultants, either individuals or firms, shall not be required to pay fees to the Peruvian Consultants' Association that are different from those required for Peruvian consultants. No consultant financed out o f the proceeds o f the Loan shall, at the time he or she is carrying out his or her contractual obligations as consultant, hold civil service office or any other position in any agency o f the Borrower, nor shall such consultant have any right to re-entry into any such office or position upon the conclusion of his or her consulting services. 83 Annex 9: EconomicandFinancialAnalysis PERU: PESierra RuralDevelopmentProject Cost BenefitAnalysis Indicators Present Value o fFlows inBaseline Scenario Economic Analysis FinancialAnalysis Net Benefits US$l1.7 million US$4.0million Internal Rate o f Return 29 percent 17 percent Introduction 1. The proposed project will contribute to the Sierra Exportadora program recently launched by the government o f Peru, and the National Strategy o f Rural Development, both aimed at reducing poverty and promoting humandevelopment in the rural space while ensuring: (i)economical, social, and environmental sustainability; (ii)equity; and (iii)democratic local decision-making. Participating communities and producer groups will increase their productive assets and economic opportunities. Communities will prepare and execute investment proposals aimed at improving their natural resource base and production for on-farm consumption and/or market sales. Organized producer groups will prepare and execute feasible and sustainable business plans. Participating producer groups could develop alliances with market partners to benefit from value added. Rural service delivery o flocal governments andpublic institutions will be strengthened to facilitate local economic development efforts. 2. Given that the project would support opportunities to be identified duringimplementation as subproject proposals, with active participation o f communities and producers groups, it does not lend itself to detailed ex-ante cost-benefit analysis. Although the local development constraints and market opportunities are generally known, it will be the interested communities and producer groups who will ultimately determine the nature, scope and mix o f investments. To obtain a broad picture, some potential initiatives were analyzed, based on primary and secondary information. However, more accurate and representative economic and financial estimates should be generated, during project start-up activities, with primary information from a larger sample of preliminary community development and business proposals. Standard procedures should be applied for ex-ante and ex-post impact evaluation. Community development and rural business initiatives would be supported as long as their estimated benefits cover estimated costs. 3. The community development subcomponent will cofinance technical assistance and non- durable goods to communities with eligible investment proposals aimed at natural resource management and productive activities. The rural business subcomponent will cofinance similar items to organized producer groups, with eligible business plans aimed at production, processing andmarketingactivities, preferably engagedthrough alliances with market agents. 84 Ex-anteEvaluation 4. As stated above, some potential investment initiatives were analyzed based on primary and secondary information. Indicative economic, financial and fiscal impact estimates were obtained. Estimated parameters include: annual net benefitdincome; annual labor/employment; net present value (NPV) o f benefit flows at a 12 percent annual discount rate" and internal rate o f return (IRR). Economic and financial switching values16 o f net benefits were calculated. Economic feasibility analysis considered social prices and costs, proposed inguidelines o fPeru's National System o f Public Investment (SNIP). Financial feasibility analysis considered private prices and costs, obtained during the analysis. Fiscal impact analysis essentially considers a net- income tax o f 15 percent of business initiatives and value-added tax (VAT) o f purchased goods. The results o f the analysis are shown in Tables 1-2. Some community development or rural business proposals are likely to divert participants' resources and time fkom on-going activities, such as off-farm non-remunerated work (see feasibility study for details). Benefits basically include increased net income and employment. Investment and recurrent costs include physical assets (facilities and equipment), working capital (resources necessary to cover one production cycle) and services (training, technical assistance), contracted labor and/or family labor and without-project income likely to be forgone (as mentioned above). Flows o f net benefits were generally calculated for ten years, considering the average expected life o f major investment items for the various indicative subprojects. Finally, aggregated project economic and financial NPV and IRR are estimated considering other project costs, namely: institutional strengthening, promotion and preinvestment costs. Benefits and costs relative to project management and the Sierra Development Coordination subcomponent were not included. CommunityDevelopment 5. Community development initiatives include sustainable management o f natural resource together with productive (income-generating) activities. Experience obtained in noteworthy projects was analy~ed'~.Average community investment would be around US$16,200 (80 percent provided by the project and 20 percent by participants). On average, participating communities would involve around 100 families. Participants mainly contribute (inkindor cash) working capital (non-durable goods) and labor. Natural resource management activities generally involve: agro-forestry, reforestation, terrace building, compost production, water-saving irrigation systems, native grassland management and crop rotation. Productive activities typically involve irrigated and non-irrigated crops (such as vegetables, legumes, potatoes and grains), animal production (such as cattle, lamb and cuy production) and other income-generating activities (such as cottage industries, handcrafting and tourism). Some illustrative examples o f community development initiatives are: 6. Irrigated Crops. Small-scale irrigated agriculture is central within the livelihood strategies o f rural communities inthe project area. Major irrigated crops include: potato, maize, beans and fodder (alfalfa). Irrigated production basically covers on-farm consumption, with some surplus for local markets. This proposal aims at improving productivity o f irrigated crops lSStandard discount rate for Peru's National System of Public Investment (SNIP) is 14percent. 16Percentagechanges which turn economic and financial NPV equal or lower than zero. l7MARENASS, CECOSA (Jabonmayo) and INCAGRO. 85 o f interested families within a given community. Project investments include: appropriate technical assistance (essentially through Yachaqs and Yachachiqs); financial rewards for best family investments and/or results (essentially through community contests) and matching grants for community investments. Family investments would involve: improved irrigation technology, compost production and application, improved agricultural practices and incremental working capital. Community-wide investments would involve: rustic reservoirs and improved irrigation infrastructure. The potentialparticipants o f this proposalwould de around 100 families. Financial and Economic IRR are 13 percent and 18 percent respectively. Average on-farm employment is not expected to increase. Average incremental net income per year at private and social values would be US$6,700 and US$7,000-equivalent to US$7O/family (2 percent o f family expenses at poverty level). Financial and economic switching values o f net benefit reductions would be 5 percent and 20 percent respectively. 7. Livestock Production. High-land rural communities heavily depend on livestock production. They have access to native pastures (collectively managed). Major livestock include: cattle, sheep and Llamas. Livestock production basically includes: animals for local markets; and, meat and milk for on-farm processing and consumption, with some surplus for local markets. This proposal aims at improving livestock productivity o f interested families within a given community. Project investments include: appropriate technical assistance (essentially through Yachaqs and Yachachiqs); financial rewards for best family investments and/or results (essentially through community contests) and matching grants for community investments. Family investments would involve: improved livestock infrastructure, silage processing and use, irrigated pastures, improved management practices and incremental working capital. Community-wide investments would involve: water-harvest reservoirs and improved common pastures. The potential participants o f this proposal would de around 100 families. Financial and economic IRR are 13 percent and 18 percent respectively. Average on-farm employment i s not expected to increase. Average incrementalnet income per year at private and social values would be US$29,700 and US$31,200-equivalent to US$300-3 lO/family (8 percent o f family expenses at poverty level). Financial and economic switching values o f net benefit reductions would be 5 percent and 23 percent respectively. 8. Cuy Production.There i s a growing potential to sale quality cuy (guinea pig) production in special market niches (ecologic and fair trade). Interested buyers range from restaurants to supermarkets inthe country, and eventually ethnic markets (Peruvian and Ecuadorian migrants) abroad. Lima i s the major market target-23 percent o f population is interested in consuming quality cuy on a regular basis. This proposal aims at increased cuy availability per family in a given community and increased market sales. Project investments include appropriate technical assistance (essentially through Yachaqs and Yachachiqs) and matching grants for facilities. Family investments essentially involve: improved breeding stocks; improved management, processing and marketing practices; and incremental working capital. The potential participants o f this proposal would de around 100 families. Financial and economic IRR are 16 percent and 25 percent respectively. Incremental annual employment generated would be equivalent to 520 person/days or 5 person/days/family. Average incremental net income per year at private and social values would be US$23,400 and US$26,400-equivalent to US$230-$26O/family (6 percent o f family expenses at poverty level). Financial and economic switching values o f net benefit reductions would be 8 percent and 20 percent respectively. 86 RuralBusiness 9. Indicative rural business proposals include agriculturalhon-agricultural production and value adding activities. Experience obtained in major rural business support projects was analyzed.l8Average business investment amounts to US$17,400 (70 percent provided by projects and 30 percent by participants). On average, business participants generally involve around 15 families. Project contribution i s mainly technical assistance but also includes nondurable goods. Participants mainly contribute (in kind and cash): durable goods, working capital (nondurable goods) and labor. Business activities involve: agro-industry, handcrafts, tourism, aquaculture, honey production, small livestock, commodity grain crops, Andean grain crops, agro-industrial crops, dairy production and processing, floriculture, vegetables and legumes, ornamental plants, potatoes and other tubercles. Some illustrative examples o frural business initiatives are: 10. Aquaculture.Highlandproduction areas face a sizable market demand for fresh trout in medium size cities o f the region such as Lircay, Ayacucho, Huancavelica and Lima (in smaller quantities). Current marketing practices include: sales to intermediaries, direct sales at farm-gate, and supply to local restaurants linked to fish farms. The major problems are at the production level, namely: insufficient knowledge and experience in selecting breeding stocks, deficient spawning and hatching. These constraints translate into reduced productive capacity, high alevin mortality rates, recurrent need to purchase alevin from other hatcheries, and consequently reduced business feasibility. This proposal aims at supporting participating families in association to overcome the above mentioned constraints. Investments essentially involve facilities, training, technical assistance and working capital. The potential participants o f this proposal would de around 15 families. Financial and economic IRR are 25 percent and 38 percent respectively. Participants would divert time from current without-project activities by overall annual employment would not increase. Average incremental net income per year at private and social values would be US$2,500 and US$3,000--equivalent to US$170-200/family (5 percent o f family expenses at poverty level). Income tax would be US$380 or US$2O/family. Financial and economic switching values o f net benefit reductions would be 17 percent and 29 percent respectively. 11. Community Tourism. Tourism is a business which generates significant direct employment, mainly in the highlands. Goods and service providers also benefit substantially from this activity. In community tourism, local people show tourists how they live their traditions. This activity has allowed communities involved to regain self-esteem and identity. They realize that while maintaining identity, the generate income. Older people recover importance within their communities, as they educate younger community members on their traditions. Interested communities receive technical assistance for: proper tourist attention, hygienic food preparation and kitchen improvements. Community tourism does not generate major income entries. Therefore, the activity should be combined with agriculture and handcraft production, to diversify income sources. Investments essentially involve facilities, equipment, training, technical assistance and working capital. The potential participants of this proposal would de around 15 families. Financial and economic IRR are 14 percent and 21 percent respectively. Increased annual employment generated would be equivalent to 480 persoddays or 80 person/days/family. Average incremental net income per year at private and social values 18Microcorredores Socioecon6micos. Corredor Puno-Cusco and INCAGRO. 87 would be US$4,900 and US$5,500-equivalent to US$320-$360/family (9 percent o f family expenses at poverty level). Financial and economic switching values o f net benefit reductions would be 3 percent and 18 percent respectively. 12. Lamb Feedlot. This feedlot activity is undertaken within the framework o f very successfbl technical cooperation initiative. Andean rural economies are generally supported by ovine and bovine production, together with highland agriculture. In this context, lamb feedlot activities are feasible. The business generally involves the purchase o f underweight and sick animals, which are cured and properly fed for three months. This requires appropriate sanitary and management practices. Fat animals are later sold to local markets. The basic idea is to improve pastures and provide opportune sanitary treatment. In terms o f demand, market prices are not very attractive. Profit margins are low, since the business i s generally conducted at family level at a small scale. Inlight o f this, the analyzed proposal involves a community feedlot center, to allow gains in terms o f economies o f scale and quality. Investments essentially involve facilities, equipment, training, technical assistance and working capital. The potential participants o f this proposal would de around 15 families. Financial and economic IRR are 45 percent and 58 percent respectively. Increased annual employment generated would be equivalent to 890 persoddays or 60 persoddays/family. Average incremental net income per year at private and social values would be US$8,900 and US$9,800--equivalent to US$590- $65O/family (16 percent o f family expenses at poverty level). Financial and economic switching values o f net benefit reductions would be 46 percent and 54 percent respectively. PreliminaryProjectEstimates 13. EconomicAnalysis. InTable A9.1, economic or social feasibility indicators and family weighted averages were calculated. In summary, average economic IRR of incremental flows would be 20 percent for community development initiatives and 30 percent for rural business initiatives. Average economic NPV o f incremental flows per family would be US$220 for community development and US$400 for rural business. Average incremental annual employment per family would be equivalent to 2 persoddays both for community development and 30 persoddays for rural business. If project incremental flows are estimated considering other project costs (around US$5.0 million) and assuming 53,600 beneficiary families, aggregate economic NPV and IRR would be US$11.7 million and 29 percent, and aggregate annual employment increase (by the end o f the fifth year) would be equivalent to 270,000 persoddays (over 1,000 persodyears equivalent). 14. Financialand Fiscal Analysis. InTable A9.2, financial or private feasibility indicators and family weighted averages were calculated. In summary, average financial IRR of incremental flows would be 14percent for community development initiatives and28 percent for rural business initiatives. Average financial NPV o f incremental flows per family would be US$80 for community development and US$680 for rural business. Average annual net-income tax NPV per family would be US$lOO for rural business. If project incremental flows are estimated considering other project costs, and assuming 53,600 beneficiary families, aggregate financial NPV and IRRwould be US$4.0 million and 17 percent, and aggregate Tax NPV would beUS$3.9 million (US$1.1 million income tax andUS$2.8 million value-added tax). 88 b % Annex 10: SafeguardPolicyIssues PERU: PE SierraRuralDevelopmentProject Summaryof EnvironmentalAssessment 1. Overview. From an environmental standpoint the activities carried out in individual subprojects in components 1 and 2 are unlikely to have significant adverse impacts and any such impacts would be strictly unintended. The project design includes mechanisms to prevent negative impacts during implementation and specific attention will be given to identifyingand avoiding potential impactsthat the subprojects mayhave collectively. 2. Project Summary. The project objective is to improve the assets and economic conditions o f approximately 53,600 rural families in the selected areas o f Apurimac, Ayacucho, Huancavelica, Junin, Hulnuco, and Pasco, strengthen regional and local capacities for territorial development, and support coordination and implementation o f the government's development strategy in the rural Sierra. This objective would be achieved by financing small subprojects for community development, rural business, and institutional strengthening of regional and local governments. The subprojects would be proposed by the communities, groups o f producers, and local governments themselves. Depending on the component, proposals selected for project financing would be chosen by either the central or regional offices o f MARENASSor by a Local Resource Allocation Committee (CLAR) that represents public, private, and civil society stakeholders. It i s expected that these subprojects would trigger some o f the Bank's environmental safeguards. 3. Project Expenditures. A substantial proportion of the project funds are expected to finance subprojects aimed at improving production and productive inputs in areas such as natural resources management, pastures, livestock, small animals, fowl, horticulture and field crops, agroforestry, water storage and irrigation, aquaculture, tourism and handicrafts, small- scale industries and services, watershed protection, and soil conservation. These subprojects can finance provision of services (environmental surveys, laboratory tests, natural resources inventories, planning and improvement o f productive assets and practices, etc.), goods (farm equipment, processing machinery, seeds, animals, etc.), or small community works or infrastructure (storage and processing facilities, water management and irrigation, livestock pens, terraces, greenhouses, etc.). 4. Positive Environmental Impacts. The project is expected to have positive environmental impacts through financing subprojects that promote sustainable natural resources management, watershed protection, and soil conservation. As a result of subproject activities, the project i s expected to (i) conserve soil, (ii)maintain or improve hydrological functions, and (iii)helpconserve highmountainecosystems andtheir biodiversity. 5. PotentialAdverse EnvironmentalImpacts.An environmental assessment(EA) was developed during project preparation that included identification o f the potential environmental impacts associated with project activities. Given that the exact location and specific nature of subprojects to be developed under the project will be determined only duringproject implementation, the EA evaluated the range ofpotentialtypes of subprojects- and the lands on which they would be implemented-that could be supported through the project. The EA and preliminary assessments confirm that the project area, which ranges from 2,000 meters to about 5,000 meters above sea level, includes highland ecosystems that are ecologically fragile and prone to degradation. Based on the project's EA report and other 91 preparation studies, potential adverse environmental impacts include (i) erosion, (ii) soil loss of biodiversity, (iii)deforestation, (iv) loss, conversion, degradation o f natural habitats, (v) disruption o f hydrological dynamics, (vi) water pollution, and (vii) damage to watersheds. The EA also reviews the legal and institutional context in Peru and its relation to the project as well as the environmental characteristics o f the potential areas o f intervention. Based on the results of the EA, the project EMP-which takes the form o f a framework (EMF) given that the specific investments and their locations are not known-includes a screening process for identifyingthe potential impacts o f proposed subprojects and proposes specific measures to mitigate such impacts. As indicated in the EA and Social Assessment, there has been ample consultation and stakeholder analysis inthe preparation o f the project which included discussions regarding the potential environmental impacts and benefits associated with the proposed project. The EA has been disclosed to the public incountry and will be provided to the InfoShop before appraisal. 6. Environmental Management Plan. As mentioned, since the exact location and nature o f potential activities and subprojects to be developed under the project will be known only during implementation, the Environmental Management Plan takes the form o f an Environmental Management Framework (EMF). The EMF includes the necessary procedures to avoid, minimize or mitigate the potential negative environmental impacts listed above. The EMFis mainstreamed within the overall project rather than being a separate component. The environmental impact review, prevention, and mitigation measures recommended by the EMF will be incorporated into the criteria and procedures of the Operational Manual. The operational rules, which will be finalized prior to disbursement o f subproject financing under components 1 and 2, will reflect the recommendations o f the EMF and any subsequent agreement betweenthe Bank and the borrower. 7. These operational rules include (i) eligibility and prioritization criteria for the clear types o f subproject activities that can be financed; (ii) clear eligibility and prioritization criteria for the types o f lands on which those subprojects can be financed; (iii) review procedures and specific responsibilities within MARENASS to ensure that all subproject contracts are awarded, administered, and supervised in accordance with these criteria; and (iv) environmental management procedures to ensure that projects are implemented and maintained in accordance with environmental best practice. MARENASS, which will have qualified environmental and social specialists on staff (component coordinators and regional office coordinators), will be responsible for supervising overall compliance with the Bank environmental safeguards. The eligibility criteria for subprojects require, inter alia, (i) no clearing or conversion o f forests or other natural habitats to establish new agricultural systems, (ii) agro-forestry or reforestationactivity can only use non-native species ifthey any do not displace native species or natural ecosystems, (iii) any small community works or infrastructure activities strictly adhere to the 3-stage, 15-step EA evaluation process explained below, and (iv) selection criteria will give greater weight to subproject proposals that would directly promote conservation and restorationof degraded natural resources. 8. The EMF provides criteria to (i) subproject proposals by the type o f activity screen (including basic infrastructure) and the sensitivity o f the proposed sites, (ii) identify key potential adverse environmental impacts, (iii) subprojects do not contribute to key ensure environmental problems currently faced inthe Sierra, (iv) determine the environmental legal and institutional requirements in Peru (including the minimumrequirements for institutional capacity), (v) provide measures to mitigate potential adverse impacts, and (vi) carry out the process o f public consultations. These criteria also include a list o f activities that are not 92 eligible for subproject financing. It provides specific guidelines and questionnaires for the process o f reviewing subproject proposals. The EMF also includes measures to ensure consistency with the Natural Habitats (OP 4.04), Pest Management (OP 4.09), and Forest Policies (OP 4.36). These policies are triggered as the project has the potential to, affect natural habitats (including forests), and may support pest management activities as part of productive activities. As such, project and site screening criteria have been defined and are included inthe EMFwithin the Operations Manual. 9. The EMF provides a 15-step evaluation process in three stages: (i) preparation, (ii) prefeasibility, and (iii)feasibility. All subprojects will go through the preparation and prefeasibility stages. Based on the results o f the prefeasibility screening, some subprojects will have to complete the feasibility steps as well. The steps include: a. Preparation (1) Review eligibility criteria (subproject proponents) b. Prefeasibilih, (2) Define typology o f the subproject (3) Determine environmental category (4) Review list o f excluded activities (5) Assess location to ensure compatible with OP 4.04 (6) Go through checklist o f potential impacts (7) Fillout prefeasibility environmental assessmentform (8) Prioritize subprojects based on environmental impact c. Feasibilitv stage of proposals (9) Gather field data (10) Carry out environmental assessment (11) Develop specific environmental guidelines for the subproject (12) Development pesticidemanagement plan (ifrequired) (13) Carry out participatorypublic consultation (14) Fulfillmitigation requirements (15) Monitor and evaluate environmental impacts 10. MARENASS would ensure that the following information is updated in order to identify any subproject proposals having potential for adverse environmental impacts: (i) a list o f all Critical Natural Habitats including existing protected areas (national, departmental, municipal, etc.), proposed protected areas, or other areas o f conservation concern (including habitat to endangered species, etc.), and (iii) identification o f areas o f highenvironmental risk (such as those susceptible to floods, landslides, etc.). No project activities would be eligible within such areas. Cartographic materials will be provided to complement the above- referenced information. 11. Table A10.1 shows some examples o f potential subproject activities that would be mainstreamed and favored by the projectbecausethey promote environmental benefits. 93 TableA1O.l: Examplesof PotentialSubprojectsandActivities with BeneficialEnvironmentalImpacts Agroforestry and silvopastoral systemsthat rely on native trees and bushes (e.g. live fences, Groups o f small producers forestry or fruit species inagricultural plots). Productive Alternative crops with native species (e.g. Groups o f small producers 132 managementof medicinal, aromatic, and ornamental plants) Communities and families naturalresources Small forest plantations (0.5-10 ha) with native or exotic species for the production o f firewood Communities and families 2 andwood for the home construction. I Commercial forest plantations (10-500 ha) with native or exotic species for the production o f Groups o fsmall producers 2 firewood and wood for sale to markets. Creation o f small communal forest reserves(1- 10ha) to conserve or reintroduce native species. Communities and families 2 Reforestation and revegetationto restore eroded Groups o f small producers land. Communities and families 1,2 Conservationand Small works to improve aquifer recharge, reduce drainage, and stabilize slopes ineroded areas or Groups o f small producers restorationof at highrisk o f erosion (e.g. dams, infiltration Communities and families 1,2 naturalresources ditches, and wetland conservation). Creation o f small (10-500 ha) municipal or regional reserves to conserve remnants ofnative Regional, provincial and vegetation and/or reintroduce native species. I district governments - Revegetationand reforestation o f watersheds, stream and river banks. and other water sources. Groups o f small producers 1 Development o f ecological zoning plans (ordenamiento ecoldgico territorial). Communities and families 2 Microregional Development of strategies o f payment for environmental 1environmental services (particularly relatedto Groups o f small producers 1 management water sources). strategies Development o f environmental sanitation projects (e.g. water treatment plans, management Provincial and district 3 o f solid wastes. and sanitarv landfills). governments Compliancewith SafeguardPolicies 12. This project i s designed to comply fully with the letter and spirit o f applicable World Bank safeguard policies, as indicated below. O.P.4.01-Environmental Assessment 13. This project i s classified as Category B, the appropriate classification for projects whose potential adverse environmental impacts on human populations or environmentally important areas are site-specific, reversible, and can be readily mitigated (OP 4.01, paragraph 8). The project could involve natural habitats, but would not lead to any significant loss or degradation (ref. BP 4.04, paragraph 2). In accordance with this classification, an environmental assessment (EA), including an environmental management framework (EMF) has been drafted and reviewed by the Bank. The EA has been publicly disclosed and will be 94 revised and improved during appraisal. While six regions and some specific provinces have been identified as the area for project implementation, the specific location and nature o f the subprojects can only be determined during the implementation phase. The EA and EMF will be revised during appraisal and will specify the criteria and procedures-including operating rules-that will be used during project implementation to avoid or minimize adverse environmental impacts. As per the social and environmental analysis, a number o f public consultations and stakeholder analysis has taken place on project design which has covered environmental aspects (impacts and benefits) o f the project (see social analysis section below). 14. The EA proposes criteria and procedures to carry out the environmental analysis consultations for the specific subprojects (once identified), and provides guidelines and questionnaires for in-depth interviews with stakeholders. O.P. 4.09-Pest Management 15. Since subprojects that include agricultural activities may involve the use o f pesticides, the EA framework covers potential issues related to pest management and considers alternative designs and mitigation measures. The EA framework includes a pest management plan (PMP) and provides guidelines for: (i) identifying the types of pesticides that might be used and their impacts; (ii) analyzing institutions that could implement disease prevention and control programs; (iii) determining what aspects o f current pesticide practices require improvement and technical assistance; and (iv) identifying effective alternatives to pesticide use. Where feasible, the project would seek to promote the use o f biological and/or environmental control methods and reduce reliance on synthetic and chemical pesticides. The project would also avoid supporting projects that imply substantial increases inpesticide use and would seek to provide opportunities for both MINAG and direct participants in the subprojects to develop appropriate pest management policies and procedures. The PMP also provides guidelines for providing technical assistance and training on agricultural intensification to beneficiaries and government agencies. The PMP and Operational Manual will not allow procurement o f pesticides considered Class Ia, Ib or I1in accordance with WHO standards. Any subproject in which pesticides will be used will require targeted training regarding the safe use, storage and disposal o f such chemicals. Likewise, the project monitoring plan will include specific parameters to enable oversight o f such subprojects. 0.P. 4.04-Natural Habitats 16. Based on the recommendations o f the EA, most if not all the investment will take place in areas that have been traditionally dedicated to agriculture, thus no conversion o f natural habitats is expected. The project's environmental management rules will explicitly forbid any project activities in areas supporting critical natural habitats. Any activity in the buffer zone o f a protected area would be designed to help reduce pressure on the protected area itself. OP 4.36-Forests 17. This policy could be triggered by subprojects that involve agroforestry activities, which would be analyzed and monitored carefully during project implementation. The EA provides procedures (and screening processes) to assess impacts and mitigationmeasures for thistype ofactivity. 95 OP 4.11-Physical Cultural Resources 18. The project will only finance small-scale works in already established agricultural or commercial zones where there i s little likelihood o f disturbing archaeological, paleontological, or other culturally significant sites. Such impacts will be avoided through application o f the subproject eligibility criteria, the safeguard screening system, and inclusion of "chance find" procedures inthe contracts for any subproject involvingworks. OP/BP 4.12-Involuntary Resettlement 19. The project does not trigger OP/BP 4.12 because it involves no taking o f land or other assets and requires no physical relocation o f populations. The subproject eligibility criteria and safeguard screening process would exclude any proposal that could involve such impacts. OP/BP 4.1O-Indigenous Peoples 20. It is estimated that roughly 75 percent of the population in the project area are indigenous people. On the basis o f the social assessment and inconsultation with the affected indigenous communities, the principles and elements o f an Indigenous Peoples Plan (IPP) are incorporatedinto the project design. These principles sets out the measures through which the borrower will ensure that (i) indigenous people affected by the project receive culturally appropriate social and economic benefits and (ii) when and if potential adverse effects on indigenous peoples are identified, those adverse effects are avoided, minimized, mitigated, or compensated. Further details are provided inthe remaining text o f Annex 10. PublicConsultationandDisclosure 21. The EA proposes criteria and procedures to carry out the environmental analysis consultations for the specific subprojects and provides guidelines and questionnaires for in- depth interviewswith stakeholders. 22. The EA itself has been disclosed in country and through InfoShop prior to appraisal. Likewise, the EA has beenconsultedinaccordance with OP 4.01. OP/BP 4.1&Indigenous Peoples 23. More than 8 million o f Peru's 27 million inhabitants are indigenous people, most of whom are Quechua and Aymara living in the Sierra region. The six governmental regions that fall within the project area account for about 40 percent o f the 5,680 formally recognized comunidades campesinas in Peru, which are mainly composed o f indigenous people and include roughly 30 percent o f the indigenous population in the rural Sierra. Since about 75 percent o f the population (and expected beneficiaries) in the project area are indigenous people, the project triggers the OP/BP 4.10 but does not require a stand-alone Indigenous Peoples Plan (IPP) because the project document itself i s considered an IPP. The remaining 25 percent of expected beneficiaries are nonindigenous (primarily mestizo). On the basis of the social assessment and in consultation with the affected indigenous communities, the principles and elements o f an Indigenous Peoples Plan (IPP) are incorporated into the project design. These principles sets out the measures through which the borrower will ensure that (i) indigenous people affected by the project receive culturally appropriate social and economic benefits and (ii) and if potential adverse effects on indigenous peoples are identified, when those adverse effects are avoided, minimized, mitigated, or compensated. 96 Social Analysis 24. The government of Peru conducted a comprehensive social assessment(SA) inthe six regions o f the central and southern Sierra that are covered by the proposed project (Ayacucho, Apurimac, Huancavelica, Hubnuco, Junin and Pasco). Copies o f the full report in Spanish and detailed documentation of the extensive consultation process carried out as part o f the SA process are available in the project file. The report i s also available on the project website: http://www.aliadossierrarural.orn/portal. The project includes a communication plan that will use appropriate local media to disseminate information in Spanish and Quechua to promote participation inthe project (and later to disseminate information on implementation and results). 25. The main areas covered by the social assessment include (i) objectives, (ii) social legal framework, (iii) stakeholder groups, (iv) consultations, (v) key inputsto the project, (vi) social characteristics o f the project areas (indigenous groups, gender, potential risks, and impacts), and (vii) monitoring and evaluation arrangements. (0 Social objectives 26. The objectives o f the project from a social and cultural perspective are: w Create opportunities to improve assets and income for poor rural farmers by promoting "strategic partnerships" and local economic development through producer-market alliances. w Build social capital and promote empowerment to improve food and economic security, build capacity among rural inhabitants, and provide cofinancing for productive subprojects. Promote social inclusion to improve equity in benefits for excluded indigenous people, undocumented farmers, women, and youth. Foster social accountability and transparency to enhance investment in public expenditures for rural development and subprojects by strengthening weak institutions and improvinginstitutional coordination. (ii) Legalframework 27. The national constitution stipulates that all Peruvians are equal under the law and that there may be no discrimination on the basis o f race, language, age, sex, or religion. It also states that all individuals have the right to preserve their ethnic and cultural identities. Peru i s a multilingual, multicultural country characterized by long-standing social and economic contrasts and disparities that were sharpened even further by the violence related to Sender0 Luminoso in the 1980s and 1990s. The greatest impacts and most victims o f the violence were in the six regions covered by the project, according to the Truth and Reconciliation Commission created by Executive Decree 065-2001-PCM. The proposed project in part to the need to rebuild the communities and compensate the affected populations identified as a result o f these investigations. The legal framework in Peru also includes indigenous rights to education. 28. Law DL 17716 (1969) for communal lands and organizations, changed from indigenous to comunidades campesinas. As a result o f this law the comunidades campesinas have full legal and organizational status, with each comunidad comprised of families living 97 and controlling a specific territory. The comunidad members are bonded together by their ancestral, social, cultural and economic ties expressed through their ownership o f common property, they engage in mutual assistance and collaborative work, and they observe democratic governance and multisectoral activities. Based on this law the comunidades campesinas are able to submit project proposals, open bank accounts, and function as a legal enterprise for the purposes o f the proposedproject. 29. The current legal framework, which includes secondary laws that recognize communal enterprises and associations for producers, i s particularly favorable for the project. The Sierra Exportadora law recently passed by the Congress could eventually be an opportunity for commercial farmers. (iii)Stakeholdergroups 30. Stakeholders involved in the project can be divided into those that are expected to benefit or be affected directly by the project and those that may act as facilitators in the implementation of the project. Main stakeholders inthe rural Sierra include: . Comunidades campesinas-active rural organizations o f subsistence farmers and indigenous people who share a common cultural and social identity and have communal ownership o f their traditional lands. Households in the comunidades are represented through a community assembly, which in turn elects a president o f the assembly. Although in the past women could attend-the assembly but could not actively participate or vote, the role o f women has evolved through an ongoing process o f empowerment and they now participate in assemblies and in some cases are even elected to leadthe assemblies. The project will actively promote equal access and involvement for women in the subprojects. The comunidades campesinas participate inthe project by submittingproposals under Component 2, which provides . financing for small community development subprojects carried out by rural families and subsistence farmers to increase basic agricultural and livestock production. Associations or groups of producers and small microenterprises-groups o f small producers who already have some access to markets can submit proposals under . Component 1 to receive financing for subprojects that help establish, strengthen, or expand rural businessesthroughproductive alliances and activities. Civil society organizations-there are two types o f civil society organizations that play a role in the project: (i) NGOs with expertise in the geographic and thematic areas o f the project that can provide technical assistance to project beneficiaries, and (ii) mesasdeconcertacidndeluchacontralapobrezaandtheLocalCoordinating the Councils (CCLs), which can play a principal role in coordinating and planning . development investments at the provincial level. Local Resources Allocation Committees-The CLARs will be composed o f representatives of the public and private sector as well as civil society entities. The CLARs are not direct beneficiaries but rather serve as a panel that meets every six months to select winners from among the subproject proposals. The proceedings and . decisions o f the CLARs must be transparent and avoid conflicts o f interest. Union and peasant federations-following the agrarian reform o f 1969, the comunidades campesinas were organized into federations and confederations to 98 represent their interests at the regional level. Each region has a federation, though their institutional capacity varies. The federations are expected to participate in the project both as members o f the CLARs and mesas and possibly as recipients o f training and technical assistance. Farmers and producers not affiliated with comunidades campesinas or organized groups-under components one and two, potential beneficiaries must belong to either comunidades campesinas or legally recognized groups o f producer. The rural poor who do not belong to such groups, or have some other legally recognized form of affiliation, cannot sign contracts or participate in the project. Since this could create problems or conflicts, the project must develop a well-structured communication plan and give unaffiliated farmers enough time to organize groups that are eligible to participate inthe project. (iv) Consultations 31. The Peruvian government's social assessment for the project was based on two main types of information: (i) secondary data sources such as existing studies o f the project area, statistical surveys, census reports, and general bibliography, and (ii) primary data sources such as interviews, focus groups, participatory and consultation workshops, and informal conversations with stakeholders in both Spanish and Quechua. The stakeholders consulted included indigenous people, subsistence farmers, nonindigenous people and mestizos, professional associations, small agribusinesses, nonagricultural businesses, rural youth, and women. 32. A total of 14,240 people were consulted inthe course o f conducting 615 workshops (94 percent with communities, 2 percent with community leaders, 2 percent with regional and provincial authorities, and 2 percent workshops with civil society representatives). 33. Consultations with civil society. Between January and April o f 2006 about 120 CSOs were identified in Ayacucho, Apurimac, Huancavelica, Huhnuco, and Junin as institutions with good practices and experience in rural business and rural development (see Table A10.4). Representatives o f these CSOs attended twelve workshops and were consulted on five maintopics: (i) identification of good practices o fprojects inagriculture, tourism, export, commercialization, and community participation; (ii) opportunities for production and commercialization in the region; (iii) existing and functioning mechanisms for participation by NGOs and building partnerships at the provincial level; (iv) presentation o f the project design and components; (v) recommendations for modifying the project design and components. 34. Consultations with indigenous and subsistencefarmers. Between April and August 2006, the project consultedmore than 10,000 farmers (30 percent o f whom were women). To cover a larger number o f communities, the project team used a cascade approach. First, 579 leaders were selected by their communities to represent them inan initial workshop. Next, the leaders went back to their communities and replicated the workshops for community members, 10,040 o f whom signed declarations welcoming the project in their communities. These workshops were held in 579 comunidades campesinas in eleven provinces within the project area (Vicas Huaman, Andahaylas, Abancay, Chincheros, Talavera, Sucre, Tayacaja, Angaraes, Acobamba, Angaraes, and La Mar). 99 35. The collection o f signatures and some o f the workshop discussions were videotaped to help document the agreement and the cooperative nature o f the workshops and consultation process. These videotapes and signatures are archived inthe project files. 36. Other consultations-The project team also discussed rural business issues in two meetings with members o f the board of the Consejo Directivo de la Convencibn Nacional del Agro Peruano (CONVEAGRO) and its six regional branches. CONVEAGRO involves the agricultural exporters union (AGAP), irrigation user associations, exporter association (ADEX), NGOs, federations and confederations of campesinos, and the rural coordination association. Their main goal i s to consolidate the rural sector, enhance the lives o f rural families, and increase productivity, growth, and the sustainability o f activities and investments in the rural sector. In addition, 12 workshops were organized to consult with local government authorities of the six regions. (v) Keyfindings andinputs to theproject designfrom the indigenous consultations a. Community interest in new technologies and knowledge. Farmers are ready to make changes in their culture to increase their well-being, improve market access, and learn about business plans. This implies that the project should do not be limitedto a traditional menu of subprojects, but rather should be open to innovative subprojects in irrigation, alternative energy technology, and other fields. b. Respect and consideration for community organizations in designing proiect activities. The communities expect to be considered in several project activities and to be convoked to participate in competitions through official invitation and not only through media campaigns. The participants in these competitions must be supported by their communities. The contest winners must share their experiences and teach the rest of the community. The community should provide support to the winners in their subprojects. Mutual support i s needed to produce a multiplyingeffect to enhance the well-being o f the entire community. C. Technical training events for suburoiects. These events should be organized in the participants' native language. Yachachiqs from the Sierra region should be called on to provide support to the trainers and to helpprepare subproject profiles. d. Commitment of the winners. The winners will show their commitment to joint work through minutes signed in front of the community presidents. All presenters are considered "winners," but particularly entrepreneurial proposals will receive more encouragement. e. Inclusion of rural women's associations and youth groups. Rural women, who are often the dynamic force behindcommunity activities, mustbe included inthe project and must be involved inthe communication, training, and proposal stages of the process as well as the subproject implementationitself. Potential women's organizations that can participate inthe project include mothers' groups, soup kitchens, and youth entrepreneur clubs. The following were recommended and have been incorporated into project design and included inthe Operational Manual: Training sessions in Quechua, due to women are mostly monolingual and not bilingual 100 Adjust schedules of the training considering time schedule of women with small children Use o f audio visuals inthe training becausemost o fwomen are illiterate. Promotion o f literacy programs and/or coordinate with the Ministry o f Education or local NGOs dealingwith literacy programs to assist women. Assist women inthe procedures to apply for their DNI, most o f the undocumented people are women, the DNIis a requirement to apply for bank accounts, projects , credits, land title, marriage, exercise civil and commercial rights, and any woman with no DNIwill be exclude inthe project's benefits. According to the Peruvian law 30% of political representative are women, 20 - 30% women inevery activity and task that the project develops. % o fwomen participation and the above bullets should be indicatedinas a project indicator. Incorporation o f indigenous customs and practices. The population invests a great deal o f time and energy in commemorating community events. The project should organize community events around the call for participants, selection o f winning community subproject proposals, launch o f subprojects activities, recognition o f achievements during subproject implementation, and subproject completion. Fostering trust and confidence. The historical gap between the government and campesinos and between mainstream society and campesinos reflects a long history o f mistrustand insecurity. The project mustbuildconfidence and trust withpoor subsistence farmers. This i s even more relevant if we consider that about 75 percent o f the killed or disappeared during the civil conflict in the 1980s and 1990s were campesinos and indigenous people in the Sierra. In this context, the rural development strategy is an opportunity to builda common vision for the future. It would be helpfulto organize more informal conversations with rural farmers in Quechua to share information on the project's activities and next steps. BuildinP on farmers' interest in competitive funds. The emerging movement toward microenterprises and rural business and the participatory consultations themselves have helped familiarize farmers with subproject funding contests and competition and made them more comfortable and more interested in participating in such approaches to awarding financial resources. (vi) Key inputs to theproject designfrom civil society consulted a. Investment activities in the rural Sierra, and particularly those geared toward financing for communal activities must be in keeping with local community practices. These include sending an official letter to the communities formally inviting them to participate inthe project by submitting proposals to the community development fund. Information from printmedia, pamphlets, and radio it is fine but not sufficient; an official invitation i s a formal way o f communication that the communities appreciate. b. A training center should be organized (no infrastructure needed). Public offices and agencies have spaces that can be used as conference rooms to disseminate information and provide training on rural business. In this way, both indigenous and nonindigenous people will receive the same information. This will mitigate any constraints or feelings associated with discrimination or exclusion. Sessions must be conducted in Quechua or Aymara, where applicable. 101 C. It would be useful to involve indigenous activities and concepts related to the Ayni and Minkainplanning efforts, particularlywheninthe Community DevelopmentFund. d. The subprojects proposed should be tailored to the three main altitudinal regions of the Sierra: lower valleys, highervalleys, and highlands. Negative impacts shouldbe avoided. e. A brief summary of the proposals: the provincial municipal government should announce the contests; training should be provided by the district municipal government and rural trade groups; the contests should be run by highly qualified independent professionals who are not associated with institutions that are not trusted by the community; orientation, support, encouragement, and reinforcement should be provided only by MINAGandbyNGOsthat the communities trust; those called on to participate shouldbe from the peasant communities and/or producer associations or organizations; and the yachachiqs should be the projects' principal trainers and facilitators. f. The program should reward the producer associations or organizations and communal businesses that present proposals to work the land and raise livestock according to small economies-of-scale that do not imply the loss o f titling or individual benefits associated with their parcels. g* The impact o f the program consists o f producing successful winners who impart renewed energy into rural areas and communities. The winners in each region should be rewarded inthe presenceofthe presidents ofthe communities ofthe regionina symbolic swearing- in ceremony. The "oath" taken will be to fulfill their roles as rural businessmen and promoters/disseminators o f technology and business management in their communities according to the campesino concept o f "in your area o f work," inthis case the local area o f the groups o f families or producers. This ceremony should begin with an offering according to indigenous practices, and be accompanied by a mix o f typical folkloric and western music. A "payment to the pachamama (Mother Earth)" should be made to conclude the ceremony, with the participation o f the presidents o f the communities and the representatives o f the producer associations. For example launching the Sierra project with a ceremony to the pachamama would be well-received and help foster receptivity and interest inthe competitive funds. (vi9 Social characteristics 37. The six regions (previously called departments) in the project area include about 40 percent o f the 5,680 rural communities inPeruthat are formally registered with MINAG. The total project area spans 4.87 million hectares. Approximately 24-28 percent o f the communities and families inthe project area lack legal property rights. There are three main reasons behind limited access to property rights: (i) lack o f official clearance in titling, (ii) lack o f a personal identity card (DNI); (iii)lack o f sectoral coordination. The target beneficiaries o f this project are rural families, indigenous and nonindigenous, indistricts that experienced a highlevel o f violence duringthe 1980s and 1990s. 38. The indigenous and subsistence farmers maintain their Quechua mother tongue and strong cultural traditions, values, and practices. The Andean culture is based on traditional patterns o f ayni (reciprocity), minka (solidarity), and faenas (community work) mainly inrural infrastructure (roads, irrigation, etc.). The ayni stands for individual reciprocity by giving and receiving knowledge, advice, and support. The minka represents collective work for solidarity with a family member o f the community, and the faenas i s related to community work. The 102 region's culture incorporates distinct rituals and celebrations, cultural events, values, uses, and practices, andpromotes a territorial, cultural, and ethnic identity. There are ample opportunities intheseareas for culturalandruralencountersas well as spiritualtourism. 39. This project will enhance social inclusion and increase economic opportunities for farmers inthe selected areas o fthe rural Sierra. 40. Traditional Investment Activities. The ongoing practices and principles of ayni, m i n k , andfaenas, along with the Quecha language, have been incorporated into the project's design. For example, the promoters' network that began in the Jabonmayo-Cusco Project has been extended into the project area. The promoters, known as Yachachiqs, will be animators and teachers for rural development inthe community. The assumption i s that individuals from the community are more familiar with the needs and experiences o f the group and therefore will make better teachers and transmitters o f business and technological information. The community organization provides a reciprocal mechanism for supporting the families' entrepreneurial activities by providing, for example, plots o f land for family use and manual labor for development. Consistent with the legal system, community organizations are involved inthe participatorybudgetprocesseseither throughwork or service. 41. Among the ancestral traditions that are related directly with productive work, as mentioned inthe social study, we can underline the following: a. Community work, or community labor, used to build small roads, schools, cemeteries, churches, and other community facilities. Community labor can also be seen in productive infrastructure such as irrigation channels, dams, and works commissioned by government offices, NGOs, and international aid agencies. b. &involves works carried out by groups of families and close friends for agricultural, livestock, and other joint productive activities that in Western society are classified as "mutual aid." These practices are known in various Andean locations including Huancavelica, Apurimac, Ayacucho as "Ayni," while inJunin they are called "Ullay." C. Minka involves participation by an important sector of community in helping a particular individual or household. This community group may receive some remuneration or may be paid in-kind with products such as coca, food, cigarettes. Reciprocity may also be established through holdingcelebrations or by agreeing to act as a godparent inbaptisms. d. Faenas involves extended families working as partners and can include uncles, grandparents, and other relatives. It i s an exchange basedon the family relationship that i s supported, respected, and promotedby the community for the delivery o f collective work thrsugh community labor and other community activities. The community encourages family development; in fact, newly wed couples receive plots o f land on which to raise their families. Productive work, whether involving agriculture and livestock breeding services or nonagricultural entrepreneurial activities, i s normally carried out by family groups becausethey have greater mutual trust. e. Another type o f ancestral custom can be seen inthe productive celebrations or `tfiestas patronales" that are widespread inthe regions o f Junin, Huancavelica, and Ayacucho and are found to a lesser extent inHuhnuco, Pasco, and Apurimac. These celebrations are associated with productive, social, and/or spiritual activities and are a discreet way o f expressing ethnic identity through the recognition and support receivedby the local 103 people ina community, district, province, or region. The celebrations can also help generate enthusiasm for the start or completion of community productive works. Insome places, these celebrations are heldto commemorate a business's anniversary or the feast day o f the virgin or saint chosen to protect the enterprise. 42. Languages. Spanish, Quechua, and Aymara are Peru's official languages, and a number of other languages are spoken in the Amazon region. Quechua is spoken by approximately 3.8 million people and Aymara i s spoken by about 350,000. The distribution of Quechua and Aymara speakers is shown in Table A10.3. It i s important to note that while Apurimac, Ayacucho, and Huancavelica are predominantly Quechua-speaking, the regions of Pasco, Junin, and Huanuco also have very large Quechua-speaking populations. The "other" languageslisted inPasco and Juninmainly represent indigenous groups inthe Amazon that are not in the project area. It i s clear that the project's training and information dissemination efforts will have to be carried out in both Spanish and Quechua, and in some cases might requireuse o fAymara as well. 43. Land tenure and access to land titling. Lack of access to land and land title limits assets in the Sierra and created disputes and conflicts between comunidades campesinas. Through its Special Project for Land Titling and Rural Cadastre (PETT), MINAG i s still working to clear up landtitle issues inthe Sierra. 44. Historically, these communities have been discriminated against and excluded from national development. They have had limitedor no access to public services and markets and lack adequate infrastructure. 45. Violence. The ethnic groups in the project area were victims o f significant violence during the conflict between the Shining Path terrorist group and the Peruvian Army during 1980s. This unrest caused mass migration and estimated 75,000 deaths and disappearances. Nearly 300,000 families live in the high-violence districts o f the six regions included in the project. Many communities continue to deal with the aftermath o f the conflict and have shown enormous resilience. The resurgence o f a terrorist group in some areas has increased the government's concern. To address the root causes of this resurgence in violence, in 2004 the government of Peru developed a Rural Development Strategy that i s currently under implementation. TableA10.2: RuralFamiliesand Communitiesby LandPropertyTitle and LandArea Source: Registrationof Communities-PETT 2001, MINAG 104 46. The project area are subject to (i) protests and demonstrations, (ii) conflicts and social disruptive actions (strikes, stoppages, and road blockages), and (iii) high incidence of a abrogation at the provincial level. 47. The ethnic groups in the area include the Aymaras, Ankaras, Chopccas, and Huancas (each with separate traditions). The Sierra has strong potential for successful economic development interventions. The government's decentralization effort i s showing noticeable outcomes, particularly at the provincial and district levels. The regional governments are inthe process o fbuildingthe capacity to carry out their decentralized responsibilities and activities, a process that the project will assist through subcomponent 3.1 (Sierra Development Coordination). 48. Gender, labor market. Women in Peru account for a smaller share o f the labor force (42 percent) than men and also have higher unemployment (11.9 percent for women versus 9 percent for men). Inaddition, accordingto Peru's poverty assessment, women are more likely than men to work in the informal sector and earn 23 percent less than men with the same level o f education and experience. In the six regions o f the proposed project area, women typically are involved in dairy production, maintaining vegetable gardens, raising guinea pigs, andproducing textiles. 49. Evenineducation, where major gains have been achieved, gender disparities remain. Although gender gaps in primary and secondary education have narrowed since 2002, illiteracy rates continue to be higher for women (female adult literacy i s 82.1 percent compared to 93.5 percent for men). Inaddition, a disaggregated analysis o f enrollment rates shows continuing gender disparities in areas o f extreme poverty and in rural areas. For example, in 1991 boys accounted for 94.5 percent o f secondary school enrollment, and in 2002 they still accounted for 90.3 percent. All these factors increase the vulnerability of women and their risk of falling into poverty. Women's lower employment and their prevalence inthe informal sector make them less able to enjoy the economic gains and social protections often available inthe formal sector. 50. Rural youth. Youth and young adults tend to favor modernity and are critical o f tradition. This has led to tensions with community leaders. Inthe six regions o f the proposed project the percentage of the population between 15 and 29 years o f age varies from 25 to 30 percent, with Junin and Pasco having the highest percentages o f young people. Youth continue practicing "sewinacuy, which i s a form of common-law marriage inwhich couples " live together and function within the community as a couple without beingformally married. Table A10.3: Primary LanguageUsedinHousehold, by Region Primary language (% of households) Region Spanish Quechua Aymara Other Total Apurimac 10.3 89.5 0.2 100 Ayacucho 14.0 85.6 0.4 100 Huancavelica 15.9 84.1 100 Huhuco 51.9 47.8 0.2 100 Junin 67.5 31.3 0.03 1.2 100 Pasco 72.2 23.6 0.1 4.1 100 National total 69.9 25.7 3.3 1.o 100 Source: ENAHO2001 -INEI. 105 Marriage is generally only formalized for land tenure purposes. In Junin and Pasco the project is expected to be a vehicle for self-employment and business opportunities for young women and men. Youth are better trained and have better literacy skills, which gives them greater capacity for planning and implementing subprojects. (viii) Potential risks 5 1. The risk that the project will have negative socioeconomic impacts on the ruralpoor is strongly mitigated by the project's operational approach itself, in which communities and stakeholders define priorities themselves and submit proposals for activities that they consider worthwhile and are willing to help finance. The thorough social and beneficiary assessment carried out during project preparation has helped the project to internalize socioeconomic risks and devise mitigation mechanisms. For example, the project will include considerable promotional, educational, analytical, and consultative activities to ensure that all potential beneficiaries (and inparticular indigenous people and marginalized groups) have an equal opportunity to participate. In addition, the project will provide training and preinvestment funding for the subprojects that will be developed and implemented. The project's design has internalized feedback provided by beneficiaries as part o f the SA conducted duringthe project preparation stage. 52. Another risk that the project has to manage i s if the project benefits one group more than others or one area or region more than others. The Western perspective of rewarding individual initiative and providing benefits to the best performers will help optimize the subproject investments, but the project must also be sensitive to and strike a balance with an Andean culture that values maintaining balance and harmony and sharing benefits rather than allowing different levels of expertise to result inmarked inequities that create divisions within the community. The project requires a strong communication plan from the outset and in the first stages of implementation. 53. Local conflicts may arise concerning land tenure, land titling, local political interests and instability, conflicts between private firms and campesinos, opposition from NGOs, and resistance fi-om local governments, among others. Following the experiences o f the mesas de concertacih, the project team will incorporate this mechanism to build consensus and partnership with all the stakeholders inrural development at the local level. (ix) Monitoring andfeedback 54. The data in the SA will serve as a baseline to measure results in the regions. During the consultation a group of farmers decided to form a monitoring group to follow the planning and implementation o f the project, in a voluntary fashion. The monitoring and evaluation arrangements are explained in Annex 3 o f the project document and will be defined evenmore specifically inthe project Operational Manual. 106 TableA10.4: CivilSociety OrganizationsConsulted Institutode DesarrolloAgro Ecologico (IDAGRO). Abancay, Apurimac Agro Acci6n Andina Andahuaylas, Apurimac Asociacion Kusi warma Andahuaylas, Apurimac CAREFortalece Andahuaylas, Apurimac CAREAPURhlAC Andahuaylas, Apurimac s CEPRODECH Andahuaylas, Apurimac CESAL Andahuaylas, Apun'mac Mesa de coordinacidnde LuchaContra la Pobreza, Andahuaylas Andahuaylas, Apurimac PRISMAAndahuaylas Andahuaylas,Apurimac ~ PRODECO Andahuavlas.A~~rimac ASOCIACIONES DE PRODUCTORES Y GREMIOS DE APURhlAC Apurimac Asociacionpara el Desarrollo Empresarialen Apurimac: Andahuaylas, Apunmac Asociacion de ProductoresAgropecuariosde la Provincia de Abancay Andahuaylas Asociacion de Criadores de Vicuna de Apurimac Andahuaylas CornisionOrganizadora de Asociacibnde Hoteles, Restaurantes y Afines de Abancay Andahuaylas FederationAgraria Revolucionariade Apurimac (FARA) Andahuaylas Junta de Usuariosde Riegode Abancay Andahuaylas Mesa de Trabajode Menestras Abancay Mesa de Trabajode Anis Andahuaylas, Apurimac Mesa de Trabajode Apicultura Abancay APEMIPE Andahuaylas Andahuaylas Cadena de Cuy Industrial Andahuaylas Presidentede Associacibnde Ganaderos Andahuaylas ASAPA Andahuaylas 1 CODESEApurimac (Papa Nativa) I Andahuaylas 107 Distrito de Riego de Andahuaylas Andahuaylas I1 AGENDA ADRA SUR II Ayacucho Ayacucho II II CARE ASOCIACION Rasuhuillca Ayacucho IIAyacucho Ayacucho II CARITAS Ayacucho Ayacucho Centro de Desarrollo Agropecuario de Ayacucho -CEDAP. Ayacucho CordinadoraRural de Ayacucho Ayacucho Centro de Culturas Indigenas del P e d-CHIRAPAQ. Ayacucho F M C A Peni Ayacucho 1I Institutopara IIA Ayacucho el Desarrollo del Sector Informal IIAyacucho Ayacucho II I IPAZ I Ayacucho I Red de Municipalidades Rurales de Ayacucho Ayacucho Cooperaci6n TBcnica Belga Ayacucho Servicio Nacional de Voluntarios Ayacucho IIIIII Asociaci6n TADEPA Ayacucho PRISMA Ayacucho Vecinos Ped. Ayacucho Centro de Competitividadde Ayacucho IIII Ayacucho Asociacibn de Productores lacteos de Ayacucho Regional de Productores Organicos de Ayacucho IIAyacucho Ayacucho IIIIII II Red Asociaci6n de Productores de Cuy Ayacucho de Turismo de Ayacucho Ayacucho II Federaci6nAgraria Agraria Departamental de Ayacucho Federation Departamental de Ayacucho, Coordinadoradejuventudes IIII Ayacucho Ayacucho II CajaCONVEAGRO Ayacucho Rural de Ahorro y Credit0 Los Libertadores, Ayacucho II Ayacucho Ayacucho IIIIII 1I CARE ANCARRAS Huancavelica II Huancavelica Huancavelica II CARITAS Huancavelica Centro de Apoyo Rural II Huancavelica Huancavelica IIII Centro de Desarrollo Andino Ruru Inca Huancavelica CEDEPAS Huancayo Huancavelica CEPES Huancavelica Huancavelica CIDIC Huancavelica CITAQ Huancavelica DESCO Huancavelica Huancavelica DESCO Huancavelica Huancavelica Instituto de Desarrollo Local Huancavelica Instituto Ecol6gico para el Desarrollo Huancavelica INIDES de Huancavelica Huancavelica INSTITUTO REDES Junin Mesa de Coordinaci6n de Lucha Contra la Pobreza ' Huancavelica PROYECTO PARA Huancavelica 108 IIII Granja SEDICAN PERU Huancavelica Servicio Nacional de Voluntarios (Holanda) Ayacucho COMITE TEXTIL CAMELIDOS Huancavelica Huancavelica de Cuyess Los Angeles 1III Asociaci6n Caja Municipal Huancayo - Huancavelica IIIII Huancavelica Huancavelica Comitb de Productores Huancavelica Camara de Comercio de Huancavelica Huancavelica II Federaci6n Departamental de Artesanos de Huancavelica Huancavelica Departamental de Comunidades Campesinasde Huancavelica, Presidente. Federach de Comunidades Campesinasde Huancavelica, Vice Presidente. 1IIII Huancavelica Huancavelica IIIIIIIIII rtamentalde Comunidades Campesinasde Huancavelica, Secrtetariade ~ ~ Asociaci6n Paz y Esperanza Huhuco Camara de Comercio e Industnas Huanuco SENATI, Jefe de Unidad Operativa Huanuco 109 Annex 11:ProjectPreparationandSupervision PERU: PE Sierra RuralDevelopmentProject Planned Actual PCNreview 10/23/2003 11/03/2003 InitialPID to PIC 06/08/2004 06/08/2004 Initial ISDS to PIC 08/03/2004 08/03/2004 Appraisal 12/15/2006 12/15/2006 Negotiations 2/02/2007 03/23/2007 Board/RVP approval 02/27/2007 04/24/07 Planneddate of effectiveness 10/30/2007 Planneddate ofmid-term review 03/30/2010 Plannedclosing date 12/31/2012 Key institutionsresponsiblefor preparationofthe project: MinistryofAgriculture (MINAG) Bankstaff and consultantswho worked on the projectincluded: Name Title Unit Mark Austin Sr. Operations Officer/TTL LCSAR MariaDonoso Clark Lead SOC.Dev. Spec/FormerTTL ECSSD Ethel Sennhauser Sector Leader (LCl)/Former TTL LCSSD PeterKoenig ConsultantEonner TTL Consultant Pierre Werbrouck Sr. Agricultural Economist/Former TTL LCSAR Yurie Tanimichi Hoberg Economist LCSAR Maria Elizabeth Dasso Sr. Social Development Specialist LCSSO Jose MariaCaballero LeadAgricultural Economist (retired) Retired RenanPoveda Sr. Environmental Specialist LCSEN Gerard0Segura Sr. Natural ResourcesSpecialist LCSAR Keisgner Alfaro Sr. Procurement Specialist LCSPT Lourdes Linares Financial Management Specialist LCOAA Dino Francescutti Sr. Economist FAO/CP Isabella Micali Drossos Sr. Legal Counsel LEGLA Alejandro Alcala Gerez Legal Counsel LEGLA DineshAryal Operations Officer LCSEN Richard Owen Forestry Specialist FAO/CP EugeneFinkel Rural Dev. Specialist FAO/CP Angie Alva ProgramAssistant LCSSD MaribelCherres LanguageProgram Assistant LCSAR Peter Brandriss Sr. ProgramAssistant LCSEN DineshAryal Operations officer LCSEN PatriciaMc Kenzie Senior Financial ManagementSpecialist OPCFM 110 Kathrin Plangemann DecentralizatiodhstitutionalSpecialist LCSPS Karen Ravenelle-Smith Language Program Assistant LCSAR Evelyn Villatoro Senior Procurement Specialist LCSPT Maria Lucy Giraldo Senior Procurement Specialist LCSPT Xiomara Morel Senior Finance Officer LOAGl Aldo Ortiz Procurement hecialist Consultant Bank funds expended to date on project preparation: 1. Bank resources: US$674,060 2. Trust funds: JPNPHRD(TF051888) US$l.lOm 3. Total: US$1,774,060 EstimatedApproval and Supervision costs: 1. Remainingcosts to approval: US$5,000 2. Estimated annual supervision cost: US$99,000 111 Annex 12: Documentsinthe ProjectFile PERU: PE Sierra RuralDevelopmentProject BankDocuments: Project Concept Note Project Information Data Sheet (PCN stage) IntegratedSafeguards Date Sheet (PCN stage) Minutes o f the PCNreview meeting Project Appraisal Document Project InformationData Sheet (PAD stage) IntegratedSafeguards Date Sheet (PAD stage) Japanese GrantAgreement for preparation(March 29,2004) Country Partnership Strategy, 2006. Country Assistance Strategy for the Republic o fPeru. 2002. CAS Report NO.24205-PE. August l9,2002,33p. AidMemoirs o fthe identification mission o fFebruaryand September 2003 Aid Memoirs o fthe preparation missions o fDecember 2003, May 2004; July andOctober 2005; and January and September 2006 ProjectStudies andReports: MartinValdivia. GRADE.Enero2005. Identificacibny Caracterizacibn de laPoblaci6nObjetivo en el k e a de Influencia del Proyecto. JosC Heredia. Enero 2006. Estudio de Oferta y Demandade 10s Servicios delProyecto. Infonne final. Olga del Carpio. Febrero 2006. Disefio Institucionalpara la Ejecuci6n del Proyecto. Miguel Ordinola. Febrero 2006. Intervenciones Exitosas para Promover las Oportunidades Productivas en la Sierra Rural. Infonne Final. Manuel Glave y Juan Torres. Analisis del Impact0 Ambiental delProyecto. Informe Final Julio Alfaro. Marzo 2006. Evaluaci6n Social de 10s Beneficiarios Indigenas y Campesinos del Proyecto. Alejandro Bernaola. 2006. Evaluaci6n Econ6mica y Financiera y Diseiio del Sistema de Monitoreo y Evaluaci6ndel Proyecto. GeneralDocuments: Banco Inter-American0 de Desarrollo. 2005. Estrategia de Desarrollo Rural.Borrador. Centro Latinoamericano de Economia Humana (CLEH) y la Asociacion Latinoamericana de Organizaciones de Promoci6n (ALOP). 2002. Building local development in America Latina. Experiences' analysis. Christian Von Handelwang. 2000. Nuevos Conceptos de la Politica Regional de Desarrollo. Aportes para la Discuci6n Latinoamericana Contribuci6n de la EconomiaRural a1Desarrollo 112 Dahl-Qlstergaal, T., Moore D., Ramirez V., Wenner M.,Bonde A. 2006. Desarrollo Rural de Autogestion Comunitaria: LquC hemos aprendido? Estudio del Banco Inter-American0 deDesarrollo. Dercon, S. September 2003. Poverty Traps and Development. The Equity-Efficiency Trade- O f fRevisited. Echevarria R. 1998. Estrategia para la reduccion de la pobreza rural. Estudio del Banco Inter- American0 de Desarrollo. Echevarria R. 2000. Estrategia para el Desarrollo Agroalimentario en AmCrica Latina y el Caribe. Estudio del Banco Inter-American0 de Desarrollo. Escobal, J. y M.Torero. GRADE. Julio 2000. Does Geography Explain Economic Differences inPeru? Escobal, J., y M. Valdivia. GRADE. Marzo 2004. Ped: hacia una estrategia de desarrollo para la Sierra Rural. Estudio del Banco Inter-American0 de Desarrollo. A Commission Report. Escobal, J. GRADE. Enero 2006. Desarrollando mercados rurales. Elrol de la incertidumbrey la restriccion crediticia. Fernando Eguren.2003. Las ONG y el Desarrollo Rural: Unensayo para la discusion. MiguelUrioste. LaNuevaRuralidad. Schetjman y Berdeguk. March 2004. Desarrollo Territorial Rural Project Preparation Unit. 2006. Executive Summary o f consulting workshops held in the provinces of Abancay, Huancavelica, Ayacucho andAndahuaylas. Trigo, E., Traxler G.,Pray C., Echevarria R. 2002. Biotecnologia Agricola y Desarrollo Rural en AmCrica Latina y el Caribe. Estudio del Banco Inter-American0 de Desarrollo. World Bank. 2000. Evolving role o f land administration in support o f sustainable development.Agricultural andRural Development Department. World Bank 2002. Legando a 10s pobres de la zonas rurales. Estrategia de desarrollo rural para AmCrica Latina y el Caribe. Region de AmCrica Latina y el Caribe. Departamento de Desarrollo Ambientalmente y Socialmente Sostenible. Sector Rural. World Bank. June 2002. Rural DevelopmentStrategyfor the Peruvian Sierra. Washington, D.C. World Bank. February 2003. Rural extension services. Agricultural and Rural Development Department and Development Research Group.Policy Research Working Paper 2976. World Bank. March 2004. Agricultural diversification for the poor. Guidelines for Practitioners. Agricultural andRural Development Discussion Paper 1. World Bank. 2004. Community based and driven development. Policy Research Working Paper 3209. World Bank. 2005. Agriculture, Rural Development and Pro-Poor Growth. Country Experiences in the Post-Reform Era. Agricultural and Rural Development Discussion Paper 21. 113 Annex 13: Statementof LoansandCredits PERU: PE Sierra RuralDevelopmentProject Difference between expected and actual Project Original Amount in US$ Millions disbursements ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd P101335 2007 PE Prg Fiscal Mgmt& 200.00 0.00 0.00 0.00 0.00 200.00 0.00 0.00 Competitiveness DPL PO95570 2007 PE Decentralized Rural 50.00 0.00 0.00 0.00 0.00 50.00 1.83 0.00 Transport Project PO90116 2006 PE Rural Electrification 50.00 0.00 0.00 0.00 0.00 49.42 1.21 0.00 PO78894 2006 PE Real Property Rights I1 25.00 0.00 0.00 0.00 0.00 24.94 4.60 0.00 PO78813 2006 PE Regional Transport 50.00 0.00 0.00 0.00 0.00 49.88 4.57 0.00 Decentralization PO92834 2005 PE Santa Rosa Hydro Carbon 0.00 0.00 0.00 0.00 0.00 0.40 0.00 0.00 Finance PO88809 2005 PE Inst. Capacity for Decent. 8.80 0.00 0.00 0.00 0.00 7.59 6.76 0.00 T A L PO82625 2005 PE Vilcanota Valley Rehab & 4.98 0.00 0.00 0.00 0.00 4.71 1.36 0.00 Mgmt Project PO82588 2005 PE (APL2)Agric Research 25.00 0.00 0.00 0.00 0.00 19.42 -0.18 0.00 and Extension PO78953 2005 PE-(CRL1)Account. F/ 7.80 0.00 0.00 0.00 0.00 5.32 3.21 0.00 Decent. SOC.Sctr PO74021 2004 PE Lima Transport Project 0.00 0.00 0.00 7.93 0.00 5.08 8.23 0.00 PO73438 2004 PE Justice Services 12.00 0.00 0.00 0.00 0.00 9.58 9.12 0.00 Improvement PO35740 2004 PE Lima Transport Project 45.00 0.00 0.00 0.00 0.00 41.44 32.50 0.00 PO81834 2003 PE Lima Water RehabAdd'l 20.00 0.00 0.00 0.00 0.00 14.19 14.19 0.00 Financing PO65256 2003 PENational RuralWater 50.00 0.00 0.00 0.00 0.00 40.64 35.98 10.43 Supply and Sanitation Project PO68250 2003 GEF PE Participatory Mgmt 0.00 0.00 0.00 14.80 0.00 6.95 4.08 0.00 Prot Areas PO77788 2003 PE Trade Facil. and Prod. 20.00 0.00 0.00 0.00 0.00 13.41 13.41 -0.20 Improv. T. A. PO55232 2003 PE- Rural Education 52.50 0.00 0.00 0.00 0.00 31.74 16.34 11.84 PO72527 2002 EC-Power&Comm.Sctrs 0.00 0.00 0.00 2.84 0.00 1.28 2.84 2.37 Modmiz.&Rural Srvs PO08037 1997 PE Irrigation Subsector 85.00 0.00 0.00 0.00 0.50 5.47 -4.29 2.61 Proiect Total: 706.08 0.00 0.00 25.57 0.50 581.46 155.76 27.05 114 PERU STATEMENT OF IFC's HeldandDisbursedPortfolio InMillionsofUS Dollars ~~ ~~ ~ Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2006 Agrokasa 15.00 0.00 0.00 0.00 11.00 0.00 0.00 0.00 1999 Alicorp 0.00 0.00 20.00 0.00 0.00 0.00 20.00 0.00 2005 Corp. Drokasa 6.41 0.00 0.00 0.00 6.41 0.00 0.00 0.00 2004 EDYFICAR 1.92 0.00 1.oo 0.00 1.92 0.00 1.oo 0.00 2002 FTSA 5.89 0.00 1S O 0.00 5.89 0.00 1S O 0.00 2002 Gloria 23.64 0.00 0.00 0.00 17.64 0.00 0.00 0.00 2002 ISA Peru, SA 15.28 0.00 0.00 5.59 15.28 0.00 0.00 5.59 2003 ISA Peru, SA 0.20 0.00 0.00 0.00 0.12 0.00 0.00 0.00 2001 Inka Terra 4.75 0.00 0.00 0.00 4.75 0.00 0.00 0.00 2004 Interbank-Peru 40.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 Interseguro 0.00 4.00 0.00 0.00 0.00 4.00 0.00 0.00 2003 Interseguro 0.00 0.59 0.00 0.00 0.00 0.59 0.00 0.00 2005 Interseguro 0.00 0.60 0.00 0.00 0.00 0.00 0.00 0.00 2000 Laredo 4.29 0.00 5.00 0.00 4.29 0.00 5.00 0.00 2004 Laredo 0.30 0.00 0.00 0.00 0.08 0.00 0.00 0.00 1998 Latino Leasing 0.83 0.00 0.00 0.00 0.83 0.00 0.00 0.00 2002 MIBANCO 0.33 0.00 0.00 0.00 0.33 0.00 0.00 0.00 2006 MIBANCO 29.08 0.00 0.00 0.00 29.08 0.00 0.00 0.00 1999 Milkito 5.50 0.00 0.00 0.00 3.50 0.00 0.00 0.00 2005 Miraflores 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 2003 Norvial S.A. 18.00 0.00 0.00 0.00 5.90 0.00 0.00 0.00 1998 Paramonga 10.26 0.00 0.00 8.66 10.26 0.00 0.00 8.66 2001 PeruOEH 5.50 0.00 3.00 0.00 1S O 0.00 3.oo 0.00 1993 Quellaveco 0.00 4.67 0.00 0.00 0.00 4.67 0.00 0.00 1996 Quellaveco 0.00 3.98 0.00 0.00 0.00 3.98 0.00 0.00 2000 Quellaveco 0.00 0.45 0.00 0.00 0.00 0.45 0.00 0.00 2001 Quellaveco 0.00 0.57 0.00 0.00 0.00 0.54 0.00 0.00 1999 RANSA 4.38 0.00 0.00 0.00 4.38 0.00 0.00 0.00 2005 RANSA 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 2001 Tecnofil S.A. 3.15 2.00 0.00 0.00 3.15 2.00 0.00 0.00 2005 USMP 9.00 0.00 0.00 0.00 4.50 0.00 0.00 0.00 1993 Yanacocha 0.00 0.33 0.00 0.00 0.00 0.33 0.00 0.00 Totalportfolio: 223.71 17.19 30.50 14.25 150.81 16.56 30.50 14.25 ApprovalsPendingCommitment FY Approval Company Loan Equity Quasi Partic. 2004 W C I1 0.00 0.00 0.00 0.00 2005 DrokasaPCG 0.00 0.00 0.00 0.00 2004 CMAC Arequipa 0.01 0.00 0.00 0.00 Total pendingcommitment: 0.01 0.00 0.00 0.00 115 Annex 14: Countryat a Glance PERU: PE Sierra RuralDevelopmentProject Latin Lower- POVERTYand SOCiAL America middie- Peru 8 Carib. Income Developmentdlamond. 2005 Population,mid-year (millions) 28.0 551 2.475 GNIper capita (Aflasmethod, US$) 2,610 4,008 1.918 Lifeexpectancy GNi (Aflas method, US$ billions) 73.0 2,210 4.747 Average annual growth, 199905 Population (Om) 1.5 1.4 I.o Laborforce (96) 2.9 2.2 I.4 Gross prima0 Most recent estimate (latest year available, 199945) capita enrollmenl Poverty(% ofpopulation belownationalpoverlyline) Urbanpopulation(% of totalpopulafion) 73 77 50 Lifeexpectancyat birth(years) 70 72 70 Infant mortality (per I,000live birlhs) 24 27 33 Child malnutrition(96 of children under5) 7 7 12 Access to improvedwater source Access to an improvedwater source (X ofpopulation) 83 91 82 Literacy(% ofpopulationage f5+) 88 90 89 Gross primalyenrollment (56 of schcd-age populafion) 114 119 114 -PeN Male 114 121 115 Lower-middle-incomegroup Female 114 117 113 KEYECONOMiCRATiOSand LONG-TERMTRENDS 1985 1995 2004 2005 Economicratlor' GDP (US$ billions) 18.8 53.6 68.7 78.4 Gross capitalformation1GDP 18.4 24.8 18.5 18.5 Exportsof goods and ServicedGDP 23.0 12.5 20.9 24.6 Trade Gross domesticsavingslGDP 24.9 19.1 21.1 23.7 Gross nationalsavingslGDP 18.7 17.4 18.3 19.6 T Currentaccount baiance1GDP -0.2 -8.6 0.0 1.3 InterestpaymentslGDP 1.9 0.9 2.0 Total debWGDP 68.4 57.5 45.6 Total debt servicelexports 28.0 15.9 17.1 Presentvalue of debtlGDP 49.2 Presentvalue of debtkxports 211.2 Indebtedness 1985-95 199505 2004 2005 200509 (averageannualgrowth) GDP -0.1 2.9 4.8 5.7 -PeN GDP per capita -2.1 1.2 3.3 5.1 __Lower-middle-incomegroup Exportsof goodsand services 3.7 8.5 14.7 14.5 STRUCTUREof the ECONOMY I985 1995 2004 2005 (96 of GDP) Growthof capitaland GDP ('4 Agriculture 8.8 10.1 9.4 10 Industry 31.0 29.9 32.8 0 Manufacturing 16.8 16.0 15.4 Services ........ 60.2 60.0 57.8 .10 Householdfinal consumptionexpenditure 65.6 71.1 68.7 66.1 -201 Generalgov'tfinal consumptionexpenditure 9.5 9.8 10.1 10.2 Importsof goods and services 16.5 18.2 18.3 19.4 -GCF - O ' G D P 1985-95 199505 2004 2005 (averageannualgrowth) Growthof exports and imports(%) Agriculture 1.5 4.1 2.0 3.2 20 T Industry 0.9 2.3 6.2 7.7 Manufacturing -0.5 2.2 3.0 7.0 Services -1.0 2.9 3.5 5.8 Householdfinalconsumptionexpenditure -0.6 2.4 3.4 4.4 Generalgov'tfinal consumptionexpenditure -0.1 3.0 4.0 9.3 Grosscapitalformation 4.7 -0.8 5.8 8.8 importsof goods and services 7.0 1.9 10.4 10.2 Note: 2005 data are preliminaryestimates. This tablewas producedfrom the DevelopmentEconomicsLDB database. The diamondsshowfour keyindicatorsin the country (inbold) compared with itsincomogroup average. If data are missing,the diamondwill be incomplete. 116 1884 %9$5 2000 2005 263 4 f1 1 3 7 1 8 1663 12 9 5 7 3 4 153 15 1 154 0 6 0 5 1 3 -3 4 -I2 6 7 iQ85 1995 20Q4 2005 5,589 12,817 15,3'11 i,2OQ 2.4.16 711 955 1,438 3 476 3 765 I 7 5 4 9,824 11 TOO 633 722 554 1,754 2.393 2385 26.15 120 I30 140 YB I18 129 122 112 108 1985 $995 2004 2005 Cwnent accountbaknceta GDPf*h) 3,792 6,622 14531 1 2 - 2,790 9,648 12,580 r,002 -2,974 1.950 4 2% -1 1144 -2,462 -3421 -5011 0 832 f ,461 l , f 5 1 4 2 -4.625 -10 1030 513 5,546 2,382 -358 -471 -921 *2,352 *671 4 , 8,588 I2,665 13,790 1 OOE-$ 2 3 3 4 3 3 1984 1495 2006 2005 rniil.) 22,884 30 833 31*%6 723 1 729 2,833 2 B16 0 a O 0 c 104 1.098 1 242 2,732 89 205 2BI 315 0 0 0 0 90 279 1BO 178 316 130 81 43 1.276 1 2.557 1.818 E. I,BJ1 0 171 4 7 110 388 294 132 263 234 192 40 86 189 210 91 116 45 -13 49 1is 92 105 43 -2 4 7 "722 Note Thr~table was pindqieedfrom the ~ ~ e l o p ~EwnomicsLOB database e n l 811306 1E7 Annex 15: Targeting of GeographicalArea and Beneficiaries PERU: PESierra RuralDevelopment Project 1. This annex summarizes the targeting o fthe proposed project interms o fthe geographical area and potential beneficiaries. The project will be based inthe highland area o f Peru, generally called the Sierra region. Section Iwill summarize the unique characteristics and the socio- economic conditions o f the Sierra region. Section I1will outline the project intervention area, i.e. the six selected regions, within the Sierra region. Section I11will describe the two filters used in selecting beneficiaries within the project intervention area, namely i)the degree o f political violence, as defined by the Peace Census of the Truth and Reconciliation Committee; and ii) level o f access to market. Finally, Section IV will summarize planned targeted activities for the project beneficiaries, by each component. I.TheSierraHighlands 2. Geography.A region commonly defined as the part o f the Andean mountain range above 2,000 meters, the Peruvian highlands, or Sierra, occupy the middlezone o f the Peruvianterritory expanding between the eastern coastal strip and the western Amazon basin. The Sierra i s distinct interms o fhistory, culture, topography, climate, economic activity andpopulation settlement. Its climate is harsher, its topography more fractured, crop land scarce and production riskier than in other parts o f Peru. Sierra agriculture i s more geared towards subsistence. Yields and the use o f technology are lower and risks higher. From a physical perspective, diversity and an abrupt topography are the central features o f the Sierra. Thus, it spans high mountains, deep valleys with temperate or subtropical valley bottoms, cold high-altitude plains, and humid subtropical hillsonthe western side ofthe mountainrange. 3. Population. The population of the Sierra is estimated at approximately 10.6 million o f which some 60 percent, or approximately 6.3 million, live in rural areas. Population i s in demographic transition from high to low birth and death rates, and grows at some 1.1 percent annually, 0.8 points less than the national average due to out-migration. Because o f this the Sierra, which untilthe mid-1960s was the most populous part o fPeru, now only accounts for less than 40 percent o f the country's population. The large majority o f residents of the Sierra are indigenous o f Amerindian descent, and many speak a native language other than Spanish, mostly Quechua. Native language speakers are mainly located in the southern and central parts o f the Sierra, where the proposed project will operate. The rural Sierra has 2.4 millionpopulation. 4. The economy. The gross domestic product (GDP) o f the Sierra i s about 22 percent o f national GDP. Long term GDP growth (from the early 1970s to the late 1990s) was 1.9 percent, slightly less than natural population growth, and 0.5 points below that o f national GDP. The economic performance o f the Sierra was, however, steadier than that o f the rest o f the economy due to the diversity and subsistence orientation of a large part o f the Sierra's rural economy. Agriculture i s the main activity, accounting for one-quarter o f GDP. It i s followed by services, industry, commerce, mining, construction, andpublic services (inthat order). Long-term growth of Sierra agriculture has been low, below that o f the region's GDP, and livestock populations have remained stagnant. Main crops are potatoes, white maize, barley, wheat, fodder crops, various legumes, and vegetables. Main livestock products are milk, beef, sheep wool, and alpaca fiber. Average yields are low: 7-9 tons per hectare for potatoes, 0.6-1.1 tons per hectare for legumes, 118 and 0.9-1.2 tons per hectare for cereals. There has been long-term stagnation inyields, with only potatoes showing improvement. 5 . Land andfarming systems. The great majority o frural households are smallholders. There are few mid-size and large farms, and only a small number o f landless farmers. The average operating holding i s 1.8 hectares and is usually fragmented into several plots at different altitudes with different ago-ecological conditions. On averagethere are about three separateplots per farm. Small farmers practice a diversified agriculture that combines crops with various types o f livestock rearing. They grow different crops, frequently using different seeds o f the same crop, combine farming with casual labor in situ or with temporary migration, often complement agricultural production with handicraft production andother activities, andproduce for their own consumption as well as for the market. Their productive strategy responds to a "safety first" principle and the need to employ as mucho ftheir labor as possible throughoutthe year, as well as makingfull use of the opportunities that markets and a diversifiedphysical environment provide. 6. Communities are an important land and territorial organization targeted by the proposed project. There are some 5,680 peasant communities in Peru, the majority located in the Sierra. Their population i s in the order of 2.4 million people. They are formed by groups o f families sharing a common right to land and related resources, and provide an organizational system for local society and for the managing o f its territory and natural resources. Communities are legal entities and enjoy special status with regard to land rights, since communal land cannot be sold or repossessed. Crop land i s usually exploited individually and passed on through inheritance, while grazing land is open-use. Community organization includes a general assembly o f all community members and various positions o f authority periodically elected. Positions o f authority imply responsibilities and personal service to the community. Those elected to positions o f authority administer common resources (land, water, pastures, roads, schools, etc.), regulate agricultural activities, mobilize labor for community work, resolve conflicts, represent the community vis-&vis thirdparties, and promote cultural, recreational and other activities. 7. Violence. The Sierra was the main theater o f the bloody Shining Path (Sender0 Luminoso) violence that affected Peru from the mid-1980s through the early 1990s causing an estimated 75,000 deaths and disappearances. The commission also concluded that three quarters of the victims were Quechua native speakers, reflecting the discrimination and marginalization Table 1: HouseholdPoverty in Peruin 2002 Households (million) Rates (%) Extreme Extreme Regions Poor poor Poor poor Peru 2.88 1.21 46.8 19.7 Lima Metropolitan Area 0.49 0.04 27.4 2.0 Urban Costa 0.39 0.07 36.6 6.7 Rural Costa 0.16 0.06 52.5 18.8 Urban Sierra 0.34 0.11 42.1 13.7 Rural Sierra 1.07 0.71 74.3 49.2 Urban Selva 0.17 0.08 49.0 23.1 Rural Selva 0.26 0.15 63.O 35.8 Project Area 0.35 0.24 73.4 49.4 Source:ENAHO2002 119 against the Andean population which is impregnated in Peruvian society. Rural communities, organizations and institutions in these affected areas were severely impacted by the political violence, and many rural residents were forced to abandon their homes to escape the violence. The economy and society o f many parts o f the Sierra, many o f the areas are covered by the proposed project, were severely disrupted by the violence. The regions forming the proposed project area were selected by the Peruvian government because they were particularly affected bythe violence, and are the target areas o fthe nation's peace andreconciliationplan. 8. Poverty and income. The incidence o f poverty in the rural Sierra i s higher than in any other region: 82 percent o f the population i s poor and 58 percent extremelypoor. The incidence o f extreme poverty inthe rural Sierra i s more than twice that o fthe country at large. 9. The typical poor household in the rural Sierra i s headed by a male with little or no education, with a family o f five members and two or three childrenunder thirteen, who speaks Quechua as mother tongue. The householdtypically has no access to domestic water, electricity anddrainage, andhas aper capita monthlyincome ofUS$40-US$50. 10. Income sources are diversified. Remittances from family and friends living inurbanareas or abroad are an important part o f income, second only to self-employed farming. Shares change according to income quintile. The poor rely on self-employed farming much more than the nonpoor who, inturn, rely more on nonfarm salaried incomes. Table 2: Profileofthe Poorin the RuralSierra andthe ProjectArea Rural Sierra Project Area Extr. Non Extr. Non Characteristic poor Poor poor Total poor Poor poor Total Characteristics of HHHead Age (years) 47.3 49.6 51.4 48.8 46.4 50.3 50.7 48.3 Gender Female (%) 19.4 19.7 20.8 19.8 19.2 22.0 20.2 20.0 Male (%) 80.6 80.3 79.2 80.2 80.8 78.0 79.8 80.0 Education Primary/No education (%) 84.4 76.2 63.4 77.5 82.4 78.8 54.6 74.6 Secondary (%) 14.4 20.1 25.3 18.3 16.2 17.2 31.1 20.2 Higher education (%) 1.3 3.7 11.3 4.2 1.4 4.0 14.3 5.2 Mother tongue (ENAHO 2001) Spanish 33.8 40.2 51.3 39.4 18.4 28.8 43.6 26.9 Indigenous (Quechua) 66.2 59.8 48.7 60.6 81.6 71.3 56.4 73.1 Characteristics of HHs Monthly income per capita (S/. Lima) 128.0 219.2 586.9 264.1 125.8 247.0 611.9 274.4 Household size 5.1 4.2 3.1 4.4 5.1 4.2 3.3 4.4 Number of members inthe HH 0 to 13 years 2.3 1.4 0.7 1.7 2.4 1.5 0.8 1.8 14to 65 years 2.6 2.5 2.1 2.4 2.5 2.4 2.1 2.4 More than 65 years 0.2 0.3 0.3 0.3 0.2 0.3 0.3 0.3 Access to services Water 31.1 40.0 45.3 37.0 26.0 40.1 46.2 34.8 Electricity 19.8 34.8 47.2 30.6 24.0 41.8 53.1 36.0 Drainage 2.2 4.3 12.1 5.3 1.7 4.8 10.3 4.7 Value o f durables (S/.) 230.5 421.2 826.7 415.1 216.9 383.4 908.5 427.0 Source: ENAHO 2002 Note; HH=household 120 11. The pop~1a~~inothe project area also Itas a much lower literacy rate than the national n a ~ ~ e as awe11eas~lower rates of access to ~ ~ ~ ~ basic services sttch as clean d r ~ ~water,n ~ a ~ ~ y k ~ atian, and electric ty (see Table 3). Table 4: Income Shares 12. The project area is the six regions in the s o u ~ h cand central Sierra area: ~ u ~ n u cJunin, ~ o , Pasco, A p ~ ~ Ayacucho, cmd, ~ ~ ~ c a ~(see map), The ~ a - ~ o rof~provinces in these ~ ~ ~ ~ l i c a i y regions arc inthc Sierra h i ~ h ~ a n dabove s ~ 2,000 meters. A ~ t o ~ ethereeare around 4 8 ~ mral~ ~ 0 ~ ~ ~ r ~ ~ o u s e ~ oindthc project area. Project acti~~ties be ~ ~ t r o d ~~c eed q ~ ~into~ the six aregions ~ ~ s wilt t ~ ~ l . En the first phase, ~ e ~at the~j ~ i~l i ~iof~theoproject,~the ~ ~~ ~i i ~ ~1 scr up Its central office in the city o f ~ ~ in region of~~ ~ y ~acand~t ~c ~additional ficld officesc ~ ~ o ,~ ~ ~ inA ~ ~ a 1 i ~ j(Ap~ ~ l a ~ a ~ ~ a ~ c aand~Puqui ~ ~acucho),~to"covcr pilot r ~ ~ a areas tvithin the reg yacucho, and ~ u a ~ ~ a ~Thelpilot~ areas are the rural e ~ a , areas of the proviri hi,and Victor Fajarda in Ayacucho, Abaxicay, ~ ~ ~ i d a ~ uand~ ~ l a s , ~ e, and ~ ~ c o ~ a~n ~~ ~~a ,rand Tayaca.ja, in t a e ~ of H u ~ c a ~ e l i cThese provinces have been selected on the basis of a ~ a ~ i chigh~level,lof~ a , u ~ violence during the 1980and I~ ~ and0 a csc e ~ s ~ bfrom~the field offices. i l i ~ 121 Table 5: Access to Markets and Political Violence in the Project Area Households Poor households Districts Number % Number % Number % Political Violence None 62,833 13.0 38,353 10.8 67 14.4 Low 125,379 25.9 84,539 23.8 143 30.8 High 295,310 61.1 231,865 65.4 255 54.8 Total 483,522 00.0 354,758 100.0 465 00.0 Market Access Very low 165,811 34.3 124,725 35.2 176 37.8 Low 126,508 26.2 102,943 29.0 118 25.3 Middle 125,696 26.0 91,509 25.8 106 22.8 High 65,507 13.6 35,581 10.0 66 14.2 Total 483,522 100.0 354,758 100.0 466 100.0 Source: ENAHO 2002, and Censo por la Paz. 13. By the beginningof the third year, the project will expand to the highviolence districts in rural areas o f Huhuco, Junin, and Pasco, by setting up two additional field offices in Huancayo (Junin) and Huhuco (Huhuco). To determine where to locate these offices, during the first year o f implementation a study will be conducted on the functions and accessibility to beneficiaries o f the existing central and regional offices as well as the infrastructure and capacity o f MINAG'S agriculturalagencies inthe six regions. 111.Project Beneficiaries 14. The maintarget population o f this project is rural households that reside inthe six Sierra regions o f Huhuco, Junin, Pasco, Apurimac, Ayacucho, and Huancavelica (see Table 6 for characteristics o f its residents). 15. The incidence ofpolitical violence suffered duringthe Shining Path violence was different inthe various provinces and districts o f the project area; some suffered it inan acute way, others were moderately hit, and others where little affected. The physical characteristics andproximity to marketso f localities and districts inthe project area also varies. Access to markets is an important economic advantage not enjoyed by localities everywhere inthe Sierra due to difficult topography and paucity of rural roads. These variables are an important indicator o f poverty in the project area.19 For example, regression analysis shows that, controlling for other variables, the probability o fbeingpoor increases 10percent for residents indistricts that experienced ahigh level o fpolitical violence, and decreases 10 percent for residents o f localities with good market access.20 An estimate of 55 percent of districts and 61 percent of households in the project area suffered from high political violence, and 34 percent o f households live in localities with very low access to l 9 Market access i s measured by an algorithm which combines travel time from a locality to the nearest town and the size o f that town. Violence i s measured by the number o f different types o f violent events experienced by a district according to the Peace Census. 2o Martin Valdivia: "Identificacion y caracterizacion de la poblaci6n objetivo en el area de influencia del proyecto de desarrollo rural de la Sierra". Inputpaper for the preparation o f the ALIADOS Project. Lima, December 2005. 122 markets. Access to markets and political violence are important variables for planning the implementationo fthe proposed project. 16. The high violence areas include 295,310 families, which account for 61 percent o f families in the six selected regions, and 255 municipal districts or 55 percent o f municipal districts inthe six selected regions. The highviolence area i s characterized by highpoverty (75- 80 percent o f the population are poor and 50-57 percent are extreme poor) and a high concentration o f native Quechua speakers (71-84 percent). Each component of the project will have specific target populations within the main target population. 17. Based on this result, the target beneficiary of the project will be those that reside in rural areas o f highpolitical violence within the selected project area (for components 1 and 2), and in areas with low access to markets for its community development activities (Component 2). Component 3.1 (Sierra Coordination) will cover issues pertaining to the entire Sierra, and notjust the selected six regions. Table 7 summarizes the target populationby component. Table 6: Characteristics of the Main Target Population (Six Selected Regions) Low violence High violence Low access High access Low access High access No. o f families 93,090 95,121 199,229 96,081 No. o f districts 107 103 187 68 Head of householdcharacteristics Average age 49.4 49.2 47.8 47 YOo f female 17.4 19.7 20 22.9 Education level *** primary without education 30.7 21.8 35.1 29.1 43 44.3 40.2 45.9 secondary or more 26.3 33.8 24.7 25 % poor 73.1 57.7 80.1 75.2 YOextreme poor 50.6 33.1 56.5 49.6 Average per capita income per month (soles) 130.6 193.7 109.3 147.5 Source o f income (%) ****** remittances agri. Salary 3.4 9.2 5.1 6.4 agri. non-salary 27.8 25.1 35.6 36.8 Non-agri. Salary 26.1 26.9 18.9 16.2 Non-agri non-salary 9 13.1 6.6 9.8 rent 1.6 1.2 1.1 1.1 and others 32.2 24.5 32.7 29.7 Access to public services * water 35.7 50.2 29.6 ** electricity 29.4 29.5 64.4 23.3 40.4 sewage 5.6 8.7 3.2 3.1 Note; Access refers to access fo markets. For details of definition andderivation, see "Identificacibn y Caracterizacibnde la Poblacibn Objetivo en el Area de Influencia del ProyectoDesarrollo Rural de la Sierra" (Martin Valdivia, 2005) Source: Valdivia, 2005 123 Component1: RuralBusinesses 18. Component 1 will target poor rural producers who form associations to improve their existing businesses or develop new business opportunities by forming strategic business alliances with other market actors inthe value chain. Many of them are expected to reside in areas where access to markets, in terms o f roads and communication systems, i s not severely limited. The component will target poor rural producers who are entrepreneurial, have a market-oriented mindset, and could thrive from the technical assistance, business plan financing and other subsidies the project offers. The estimated number o f direct participants in this component i s 18,600 rural families or approximately 620 subprojects in the high violence areas in the six selected Sierra regions, assuming an average o f 30 rural families per subproject. Component2: CommunityDevelopment 19. Component 2 will target the rural poor in selected areas o f the Sierra, who lack access to basic services and easy access to markets and are likely to be left behind even inperiods o fbroad economic growth. Many ifnot most o fthese families lack basic food security and are at highrisk for malnutrition. The project aims to support these poor rural residents by helping with the design and implementation o f community subprojects to diversify, expand, and improve their assets and production to improve natural resources management, reduce vulnerability to risks, and increase agricultural and livestock production for self-consumption. The estimated number o f direct participants in this component i s 35,000 rural families (mainly indigenous people) or about 875 rural community subprojects with an average o f 40 families participating in each subproject. The activities o f Component 2 are expected to benefit approximately 18 percent o f all families residing inhigh-violence, low-access districts o fthe six selected regions o f the Sierra. Component3: Sierra Coordination,ProjectManagementandMonitoring 20. Component 3.1 (Sierra Coordination) will help central and regional government entities to more effectively allocate and coordinate direct public andprivate investmentinthe Sierra andwill improve impacts and outcomes for a largepopulationofbeneficiaries throughout the Sierra region. Size of target Expected number of Component Targetpopulation population participants 1. Rural Business Ruralhouseholds inhigh-violence 295,310 families 18,600 families districts within selected6 regions (approximately 1.4 (93,000 people) million DeoDle) 2. community Ruralhouseholds indistricts with high 199,229 families 35,000 families Development violence and low access to markets (approximately 1 (175,000 people) within selected 6 regions million people) 3. Sierra Coordination, Central government entities and NIA NIA Project Management public andprivate stakeholders inthe andMonitoring entire Sierra region. Total project area N/A 483,522 families 53,600 families (approximately 2.5 (268,000 people) million Deople ) 124 1%'.ProjectBenefits 21. ~ ~ ~project ~ ~ n ~e i ~~andl~types~ of benefits targeted ato each group are ~ ~ i ~ ~ ~ 125 Annex 16: DetailedLessonsLearned PERU: PE Sierra RuralDevelopmentProject 1. The key lessons learned from other Bank financed projects, and other relevant non-Bank projects (listed inAnnex 2) have been reflected inthe design o f the proposed project. RuralDevelopmentinthe Sierra 2. Over the years, many rural development initiatives have been carried out in the Sierra region, by the Bank (PRONAMACHCS , FONCODES, INCAGRO, Rural Roads, Rural Education, etc.), bilateral aid agencies (PRA, MSP, REDESA, INCOPA, etc.), other international organizations (MARENASS, Puno-Cusco Economic Corridor, etc.), and NGOs (Jabon Mayo, PROGEIN, etc.). In addition, the Bank has prepared a Rural DeveZopment Strategy for the Peruvian Sierra in2002. Lessons learned from these activities include: Given the limited capacities in management and administration o f many rural communities in the Sierra, projects aimed at them especially need a simple design. Complex designs may hinder execution and cause operational delay. Inpast projects, the delays have led to mistrust by beneficiaries and conflict between the project and certain organizations. Institutional arrangements require well-defined roles and functions as well as mechanisms to ensure transparency and accountability to avoid the project becoming polarized or engulfed in corruption. This is especially pertinent for this project as past projects inthe rural Sierra have experienced both severe politicization and allegations o f corruption. Programs should invest in an effective communication strategy and promotion activities because there has been a history in the Sierra o f unfulfilled promises, poor results, and bad advice. Projects design should be flexible to enable practices to be abandoned or reinforced as necessary. Programs should have a limited geographical scope and respond closely to local needs, while also promoting territorial approaches and improving physical connectivity between geographic areas andbetweenproducers andmarkets. Supporting only agricultural production i s not enough to promote rural growth. Natural resource management, access to markets, linkage to value chains, and off farm employment need to be addressed explicitly. Bundlingo f investments and interventions across sectors within the framework of a territorial strategy helps maximize impacts. The project should be proactive in identifying and referring service providers with good track records and who can work well with rural communities, as they are scarce in the rural Sierra. CompetitiveFundsfor RuralCommunitiesandSmallRuralProducers 3. The instrument o f competitive funds has been tested through many successful projects in the Peru (INCAGRO, PRAY MARENASS, etc.) and elsewhere in the Andes (Colombia 126 Agricultural Technology Development Project, Colombia Productive Alliance Projects, Ecuador Agricultural Research Project, etc.). Lessons learned from these projects include: Programs should leave important design and implementation decisions to beneficiaries, while providing TA and funding for maintenance. Programs should make available a large menu o f possibilities and avoid a predefined eligible activity list. Involving rural people in all stages o f project planning and implementation legitimizes their perceptions andneeds, createsrealistic expectations and reduces controversy. Transferring decision-making power and control over project resources to rural communities increases incomes, assets, and self-esteem. Programs should allocate funds directly to beneficiaries for a wide range o f activities from which beneficiaries can choose. Programs should make use o f transparent competition to provide financial incentives. Programs managed by women's groups tend to be more sustainable than programs managed by men. Productive programs o f any kindshould emphasize strong links to markets. Trained local service providers who speak the local language and understand the unique culture are better able to respond to rural communities' needs. Relationships between local service providers and the rural communities can bridge rural andurbanareas and expand marketingand other small business opportunities. The requirement of cofinancing by beneficiaries is important to optimize resource use and sustainabilityo f subprojects. Support to rural poor producers should be based on the identification o f market opportunities, and not only on satisfying "needs" or "demands" with unclear prospects o f penetrating the market. Involving an external agency in assisting communities in procurement should be done under strict limitations and guidelines as suchpractices are found to be disempoweringto the communities involved. A demand driven approach requires a dynamic M&E system as predefined indicators may be irrelevant giventhe actual types ofprojects to be funded. A CDD project requires close coordination with local authorities for potential fiscal support for both capital and recurrent expenditures to increase sustainability. 127 s 0 0 wid ._ 0 * .-.5; 3* f& e, VI * 0 * 0 2 4 .-M > a e n .-wlE m 4s Q 2 3 3 4E P (A 2x M e ¶ W 3E (A 3 i2 0 2 B wR e m 2 e. 7 U .. 0° 80° 76° 72° 0° P E R U C O L O M B I A SIERRA RURAL DEVELOPMENT PROJECT E C U A D O R PAVED ROADS MARKET ACCESS AND HISTORY OF VIOLENCE GRAVEL ROADS OTHER ROADS HIGH VIOLENCE DISTRICTS: COMPONENT 1: RURAL BUSINESSES 4° RAILROADS 4° LOW MARKET ACCESS COMPONENT 2: AIRPORTS HIGH MARKET ACCESS COMMUNITY DEVELOPMENT SELECTED CITIES AND TOWNS LOW VIOLENCE DISTRICTS: REGION REGION CAPITALS BOUNDARIES LOW MARKET ACCESS INTERNATIONAL NATIONAL CAPITAL HIGH MARKET ACCESS BOUNDARIES DISTRICT BOUNDARIES SUBCOMPONENT 3.1: SIERRA DEVELOPMENT COORDINATION PROVINCE BOUNDARIES P E R U 0 100 200 300 (SEE INSET MAP) 8° KILOMETERS 8° REGION BOUNDARIES Note: Violence classification represents levels of political violence in the 1970s and 1980s as determined by the "Censo por la Paz," a study carried out under a program of the INTERNATIONAL BOUNDARIES B R A Z I L Ministry for Women and Social Development. See Annex 15 for additional information. HUÁNUCO LA 77° LIBERTAD SAN MARTIN 76° 75° PASCO LORETO Pucallpa P A C I F I C O C E A N JUNIN Lima 12° 12° HUANCA- VELICA MARAÑON BOLIVIA APURÍMAC AYACUCHO HUACAYBAMBA 9° San Luis 9° Area of main map ANCASH Monzon 16° 16° Tingo PERUVIAN ANDES, SIERRA REGION, 2000 METERS Tantamayo María A.S.L. AND ABOVE, AND AREA OF SUBCOMPONENT 3.1, SIERRA DEVELOPMENT COORDINATION HUAMALIES HUARAZ HUÁNUCO SIERRA PROVINCES WITHIN THE SIX REGIONS TARGETED BY COMPONENTS 1 AND 2 72° CHILE Recuay Tingo Chico DOS DE HUÁNUCO MAYO Chaglla BRAZIL YAROWILCA 74° 73° HUÁNUCO 10° 10° Bandero PACHITEA Puquio This map was produced by the Map Design Unit of The World Bank. LAURICOCHA AMBO The boundaries, colors, denominations PASCO OXAPAMPA UCAYALÍ and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment DANIEL Goyllaris- on the legal status of any territory, or ALCIDES quizga Oxapampa any endorsement or acceptance of CARRIÓN CERRO DE Mayan Urubamba such boundaries. PASCO Villa Rio PASCO Rica Huacho JUNÍN La Merced 11° Satipo TARMA Palca Rio LIMA YAULI La SATIPO Oroya Chancay JUNIN Cubantia JAUJA Apurimac CONCEPCIÓN Yangas Yauli MADRE Comas Matucana DE Callao DIOS HUANCAYO 12° 12° LIMA HUANCAYO Langa Chupuro CHUPACA TAYACAJA CUSCO Yauyos Colcabamba CHURCAMPA HUANTA Quillabamba HUANCAVELICA HUANCAVELICA ACOBAMBA Lachoj Allccomachay Tambo 13° Cerro Azul Lirca HUANCAVELICA LA MAR 13° San Vicente de Cañete CASTROVIRREYNA ANGARAES AYACUCHO Santa Teresa Castrovirreyna Puente HUAMANGA San Juan Ollantaytambo Chincha Alta CANGALLO CHINCHEROS Cangallo CUSCO Tambo Andahuaylas VICTOR VILCAS Pisco FAJARDO HUAYTARA ABANCAY Ranraccasa HUAMÁN San Martin Huancapi ANDAHUAYLAS ABANCAY HUANCA Tambobamba 14° ICA SANCOS Querobamba APURÍMAC 14° COTABAMBAS P A C I F I C AYACUCHO SUCRE GRAU ICA Chalhuanca Haquira O C E A N Ocaña Antabamba LUCANAS AYMARAES ANTABAMBA Santo Palpa Tomas Puquio Nazca PARINACOCHAS 15° Coracora 15° PAUCAR DEL SARA SARA 0 50 100 150 Incuyo San Juan IBRD APRIL KILOMETERS Acari AREQUIPA 35335 2007 77° 76° 75° 74° 73° 72°