Document of The WorldBank ReportNo. 39673 - PE INTERNATIONAL BANK FORRECONSTRUCTIONAND DEVELOPMENT PROGRAMDOCUMENT FORA PROPOSED LOAN INTHE AMOUNT OFUS$l50.0MILLION TO THE REPUBLIC OF PERU FOR A RESULTSAND ACCOUNTABILITY (REACT) DEVELOPMENT POLICY LOAN April 24, 2007 HumanDevelopmentDepartment Bolivia, Ecuador, PeruandVenezuela CountryManagementUnit Latin America and the CaribbeanRegion This document has a restricteddistribution and may beusedby recipients only inthe performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization. PERU- GOVERNMENT FISCALYEAR January I -December 31 CURRENCYEQUIVALENTS (Exchange Rate Effective as o f (April 24, 2007) Currency Unit Nuevos Soles US$1.oo Sl.3.17 Weights and Measures Metric System ABBREVIATION AND ACRONYMS (as applicable, plus others) CARE Cooperative for Assistance and Relief Everywhere CAS Country Assistance Strategy CCL Local Coordination Council (Consejo de Coordinacidn Local) CCR Regional Coordination Council (Consejo de Coordinacidn Regional) CCT Conditional CashTransfer (Programa de Transferencias Condicionadas) CEM Municipal Education Council (Consejo Educativo Municipal) CENAN NationalCenter for Food andNutrition (Centro Nacional de Alimentacidn y Nutricidn) CFAA Country Financial Accountability Assessment CIAS Inter-ministerial Commission for Social Affairs (Comisidn Interministerial de Asuntos Sociales) CLAS Local HealthAdministration Committees (ComitbLocales de Administracidn de Salud) CONAFU National Council for the Authorization o fNew Universities (Consejo Nacionalpara la Autorizacidn de Funcionamiento de Universidades) CONEAU National Commission for University Evaluation and Accreditation (Comisidn Nacional de Evaluacidn y Acreditacidn Universitaria) CONE1 Institutional Education Council (Consejo Educativo Institucional) CONEACE Council for the Evaluation, Accreditation, and Certification o f Non- UniversityHigher Education (Consejo de Evaluacidn, Acreditacidn y Certificacidn de la Calidad de la Educacidn Superior No Universitaria) CPAR Country Procurement Assessment Report CPS Country Partnership Strategy CRED Child Growth and Development (Sub Programa de Control de Crecimiento y Desarrollo) DFID Great Britain's Department for International Development DIRESA Regional Health Directorates (Direcciones Regionales de Salud) DNPP National Public Budget Directorate (Direccidn Nacional de Presupuesto Publico) DRE Regional Education Directorates (Direcciones Regionales de Educacidn) FA0 Food and Agriculture Organization o f the UnitedNations GDP Gross Domestic Product GIS Geographical InformationSystem GNP Gross National Product GOP Government o f Peru GTZ German Technical CooperationAgency HIS Health InformationSystem IBRD InternationalBank for Reconstructionand Development IDA International Development Association IFC International Finance Corporation IMF InternationalMonetary Fund FOROFFICIAL USE ONLY INEI National Statistical Institute (Instituto Nacional de Estadistica e Informcitica) IPEBA PeruvianInstitute for the Evaluation, Accreditation, and Certification o f Basic Education (Instituto Peruano de Evaluacidn, Acreditacidn y Certifcacidn de la Calidadde la Educacidn Bdsica) JSDF Japan Social Development Fund LDP Letter o f Development Policy MEF Ministryof EconomyandFinance (Ministerio deEconomiay Finanzas) MCLCP Citizen Roundtables to Fight Poverty (Mesas de Concertacidnpara la Lucha Contra la Pobreza) MDGs Millennium Development Goals MIMDES MinistryofWomen and Social Development (Ministerio de la Mujer y Desarrollo Social) MMM Multiannual Macroeconomic Framework (Marc0 Macroecondmico Multianual) MINEDU Ministry o f Education (Ministerio de Educacidn) MINSA Ministry o f Health (Ministerio de Salud) MOE MinistryofEducation (Ministerio deEducacidn) NGO Non-Governmental Organization PAHO Pan American Health Organization PBM Participatory Budgeting and Monitoring (Presupuesto y Monitoreo Participativo) PFM Public Financial Management PIA Initial Budget (Presupuesto Inicial de Apertura) P I M Modified Budget (Presupuesto Inicial Modifcado) REACT REsults and ACcounTability RENIEC National Registry for Identification and Civil Status (Registro Nacional de Identifcacidn y Estado Civil) RUB Single Beneficiary Registry (Registro Unico de Benefciarios) SIAF Integrated Financial Administration System (SistemaIntegrado de Administracidn Financiera) SINEACE National System for Evaluation, Accreditation and Certification o f Education Quality (SistemaNacional de Evaluacidn, Acreditacidn y Certifcacidn de la Calidad Educativa) SIS IntegratedHealth Insurance (Seguro Integral de Salud) SISFOH HouseholdTargeting System (Sistema de Focalizacidn de Hogares) SDR Special Drawing Rights UGEL Local EducationalManagement Units (Unidades de Gestidn Educativa Local) U M C Quality Measurement Unit (Unidad de Medicidn de la Calidad) UNICEF UnitedNations Children's Fund USAID United StatusAgency for International Development WHO World Health Organization WFP World FoodProgramme Vice President: Pamela Cox Country Director: Marcel0 Guigale Sector Director EvangelineJavier Sector Manager: Helena Ribe Country Sector Leader: Daniel Cotlear Task Team Leader: IanWalker This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. PERU RESULTSAND ACCOUNTABILITY (REACT) DEVELOPMENT POLICY LOAN TABLE OFCONTENTS LOANAND PROGRAMSUMMARY 1 I INTRODUCTION . .......................................................................................................... 3 I1 COUNTRYCONTEXT .................................................................................................................... 4 I11 .. ............................................................................................................................. 7 IV. THE GOVERNMENT'S PROGRAM ............................................................................................. BANK SUPPORTTO THE GOVERNMENT'S STRATEGY ..................................................... LINKTO COUNTRY PARTNERSHIPSTRATEGY......................................................... 26 26 COLLABORATIONWITH THE IMFAND OTHERDONORS ........................................ 27 RELATIONSHIPTO OTHERBANK OPERATIONS ....................................................... 28 LESSONS LEARNED .......................................................................................................... 29 -29 V. ANALYTICALUNDERPINNMGS THE PROPOSEDPERUREACTDPLI OPERATIONDESCRIPTION............................................................................................. ........................................................................................ ................................................................................... 30 30 30 VI. POLICYAREAS .................................................................................................................. OPERATIONIMPLEMENTATION .............................................................................................. 41 POVERTY AND SOCIAL IMPACTS ................................................................................. 41 ENVIRONMENTALASPECTS .......................................................................................... 43 FIDUCIARY ASPECTS...................................................................................................... -44 IMPLEMENTATIONMONITORINGAND EVALUATION............................................ 43 DISBURSEMENT AND AUDITING .................................................................................. 47 RISKSAND RISKMITIGATION....................................................................................... 47 ANNEXES ANNEX 1:LETTEROF DEVELOPMENTPOLICY ................................................................................. 49 ANNEX 2 .PeruREACTOPERATIONPOLICY MATRIX 61 ANNEX 3: FUNDRELATIONSNOTE ........................................................................................................ ..................................................................... 68 ANNEX 4: DEBTSUSTAINABILITY ANALYSIS ..................................................................................... 72 ANNEX 5: MACROECONOMICPROJECTIONS .................................................................................... 78 ANNEX 6: COUNTRYAT A GLANCE 80 ANNEX 7: MAPIBRD33465 ........................................................................................................................ ....................................................................................................... 82 FIGURES Figure 1: Budget Transparency Index ................................................................................................................... Figure 2: Public Spending on Education .............................................................................................................. 12 16 Figure 3: Attainment Levels Used inthe MINEDUEvaluation 17 Figure 4: Malnutrition in children under 60 months ............................................................................................. ........................................................................... 22 TABLES Table 1: Key Economic Indicators ("A change) ....................................................................................................... 5 Table 2: PeruFinancingRequirements and Sources, 2003-2009 ............................................................................ 7 Table 3: BirthCertificate and DNIcoverage inPeru ........................................................................................... Table 4. Coverage and attainment levels registered inthe December, 2006 reading census ................................. 10 18 Table 5: Institutional birthcoverage inthe 10 poorest regions o f Peru, 2004 ....................................................... 20 Table 6: Summary of Actions for the Programmatic PeruREACT DPLs ............................................................ 32 Table 7. Targets set by MINEDUfor improving 2nd grade reading attainment, 2004-2011................................ 35 TEXT BOXES Text Box 1: The Citizen Documentation process inPeru..................................................................................... 10 Text Box 2: Strengthening ResultsBased Fiscal Management inPeru ................................................................ .................................... 13 Text Box 4: The Accreditation Challenge inHigher Education........................................................................... Text Box 3: Social sectors decentralization: an opportunity to strengthen accountability 14 19 Text Box 5: Application o f Good Practice Principles for Conditionality inthe REACT DPL............................. 31 Text Box 6: Learning Standards........................................................................................................................... 37 The PERUREACT DPLILoan Credit was preparedby anIBRDteam consisting of IanWalker. Task Manager; David Seth Warren. Alessandra Marini (LCSHS). Livia Benavides. Erik Bloom. Kristian Thorn (LCSHE). Jose Pablo Gomez- Meza (LCSHH). William Reuben. Stefania Abakerli (LCSSO). RossanaPolastri (LCSPE). Luis Schwarz (LCSFM). Carmen Rosa Osorio Llanos. Andrea Portugal (JPAsLCCPE). Patricia Bernedo and Luisa Yesquen (LCSHD). Susana Schapiro (Consultant) . LOANAND PROGRAMSUMMARY Peru RESULTSANDACCOUNTABILITY(REACT)DEVELOPMENTPOLICY LOAN Borrower Government o f Peru Implementing Agency MINISTRY OF FINANCE Amount US$150 million Terms The Borrower has requested a Fixed Spread Loan (FSL) in US$, with a repayment period o f 10.5 years, including 6 years of grace and customized maturity profile; at six-month LIBOR plus fixed spread. The Borrower requested to maintain all the embedded conversion options that FSLs currently offer. Tranching Single tranche; disbursement following the signingo f the loan agreement. Description This i s the first in a planned series o f three DPLs (programmed for FY 07, 08 and 09) to support the strengthening o f the Results and Accountability (REACT) framework in Peru's social sectors. The program builds on the recommendations o f the "RECURSO" AAA report ("A New Social Contract for Peru"). To help basic education, health and nutrition services break out o f prevailing "low quality equilibria", the REACT DPL will promote transparent performance standards and encourage parents and local governments (whose role i s growing due to decentralization) to demand improvements. The ministries o f Education, Health, and WomedSocial Development will set standards for children's learning, health and nutrition outcomes, and establish goals for the proportion o f children achieving them. They will develop monitoring systems to track the performance o f all health posts and schools, and to provide reports for parents on the health, nutrition and learning status o f their children. The operation also supports complementary actions to improve service quality, reduce exclusion, improve targeting and increase the participation o f poor communities in budgeting and program monitoring. The REACT DPL complements a parallel series of fiscal DPLs, which is supporting the development o f the umbrella system o f results- based management inMEF. Benefits The REACT DPL series i s expected to lead to improved outcomes in second grade literacy (especially in rural schools); increased access to institutional births in the 10 poorest departments (covering a third o f the population); and increased coverage of individualized growth monitoring and counseling for children under 24 months o f age in areas with a highincidence o f 1 I Ichronic malnutrition (stunting). Baseline data have been 1 established for each indicator duringpreparation. Risks Political risks: Although there i s strong buy-in at ministerial level in MEF, MINEDU, MINSA and MIMDES, the necessary changes may be opposed by groups within the ministries. Social and environmental risks:There i s some risk o f conflicts - such as staff resistance to greater transparency. There i s also a risk that interventions might not be culturally appropriate and o f inequity in benefits distribution, due to exclusion of indigenous groups. Economic risks:None have been identified. ODeration IDNumber P101086 2 IBRDPROGRAMDOCUMENT FORA PROPOSEDRESULTSAND ACCOUNTABILITY (REACT) DPL TO PERU I. INTRODUCTION 1. The Peru Results and Accountability (REACT) DPL i s the first in a planned series o f three operations (programmed for FY 07, 08 and 09) to support the GoP in strengthening the accountability framework and improving results inhealth, nutrition and education. 2. Over the last 15 years, Peru has expanded the coverage o f basic social programs, but the quality o f services remains poor. There are many causes o f poor quality, but a critical factor preventing change i s the absence o f clearly defined standards and results frameworks, across the social sectors. The consequence i s inadequate human capital formation, as reflected inthe health, nutrition and education status o f children. Ifthese issues are not addressed, the resulting labor supply deficiencies will constitute a major obstacle to the country's medium- term economic competitiveness strategy, undermining efforts to diversify away from traditional exports towards activities with more local value-added, which require a more sophisticated labor force. 3. Although Peru is a middle-income country, with near-universal coverage o f primary education, only 15 percent o f second grade students presently reach full sufficiency inliteracy and roughly half are unable to read at all. Inhealth, 25 percent o f births nationwide are still not institutionally supported - rising to 45 percent inthe 10 poorest departments - hampering efforts to reduce maternal and peri natal mortality. Fully30 percent o f five year old children in Peru are chronically malnourished (stunted). In each case, the outcomes are particularly poor in rural areas and among indigenous communities. For these reasons, the issues o f service quality, results and accountability occupy center-stage in the new Government's economic development and poverty reduction strategy. 4. In this context, the Peru REACT DPL supports actions in primary education, health and nutrition to define standards and set goals for the outcomes which families should expect for their children. This will be coupled with the development o f robust monitoring systems providing up-to-date information on the performance o f health posts and schools and individualized data for parents on the health, nutrition and learning status o f their children. The operation also supports actions to reduce exclusion, rationalize programs, to improve targeting and to increase the participation o f poor communities in budget processes and program monitoring. The REACT DPL series i s expected to lead to improved outcomes in second grade literacy (especially in rural schools); increased access to institutional birth services in the 10 poorest departments (covering a third o f the population); and increased coverage o f individualized growth monitoring and counseling services for children under 24 months o f age in areas with a highincidence o f chronic malnutrition (stunting). 3 11. COUNTRY CONTEXT A. Political Developments 5. Inrecent years, Peruhas strengthened and consolidated its democraticpolitical system. Notwithstanding his low popularity, President Toledo (2001-2006) completed his term in office, maintaining macroeconomic discipline, and economic growth was strong. In2006, for the first time inrecent history, a peaceful democratic governmental transition coincided with a positive economic trend. 6. Alan Garcia o fthe Alianza Popular Revolucionaria Americana (APRA) party won the June 2006 elections with 53 percent o f the votes. He defeated Ollanta Humala o f the Unidn por el Per6 (UPP), who secured 47 percent o f the votes. Mr. Humala's relative success reflected dissatisfaction with the limited gains for the poor from economic growth and with the prevalence o f exclusion -especially the southern Andes, where the Sender0 Luminoso (Shining Path) insurrection o f the early 1990s was centered. 7. This is President Garcia's second term in office. His administration supports sound macroeconomic management, trade openness and competitiveness, coupled with an increase in investment and actions to improve equity and strengthen social programs. His cabinet, led by Prime Minister Jorge del Castillo and Finance Minister Luis Carranza, includes several well-respected technocrats. 8. President Garcia lacks a clear majority in Congress: APRA has 37 seats, compared to 44 for the UPP and 39 seats for five other parties. However, support for the UPP has ebbed following Mr. Humala's presidential defeat, and Mr. Garcia has a window o f opportunity to make good on promises to share the benefits o f growth more fairly and to tackle exclusion in rural areas, working together with the 26 regional presidents and 1,832 municipal governments elected inthe November, 2006 local government elections. B.Economic Developments 9. In the past five years, Peru has had one o f the best-performing economies in Latin America. Based on sound macroeconomic policies and strong demand for commodity exports, real GDP growth averaged 5.7 percent in 2002-2006, and reached a remarkable 8.0 percent in 2006. In contrast to previous upswing episodes, growth has been well-balanced between primary and non-primary sectors, as well as between domestic and external demand. 10. Growth has been led by an upswingin export revenues and buoyant domestic demand. Exports rose at the extraordinary annual rate o f 28 percent in2002-2006. The external current account moved from a deficit o f almost 3 percent o f GDP in2000, to a surplus o f 2.6 percent o f GDP in 2006, supported by hefty terms-of-trade gains o f 25 percent. This was driven by increased commodity prices plus export volume growth linked to new mining and hydrocarbon projects. However, non-traditional exports (such as asparagus, grapes and avocados) have also reported strong annual growth, averaging 20 percent since 2000, and other sectors such as fisheries and textiles have posted significant gains. Private investment, 4 encouraged by the growing economy and sound policies, has also helped fuel growth, rising 20.1 percent inreal terms in2006. Table 1: Key Economic Indicators (YOchange) 2000 2001 2002 2003 2004 2005 2006e Annual GDP growthrate 3.0 0.2 5.2 3.9 5.2 6.4 8.0 Inflation rate(CPI, end of period) 3.7 -0.1 1.5 2.5 3.5 1.5 1.1 OverallPublic Sector BalanceEDP -3.3 -2.5 -2.2 -1.7 -1.0 -0.3 0.6 Public Sector Debt/GDP 45.7 46.1 46.9 47.5 45.1 37.8 32.7 Exports(FOB); changep.a. 14 1 10 18 41 35 37 Imports(CIF); changep.a. 9 -2 3 11 19 23 23 ExternalCurrentAccount/GDP -2.9 -2.3 -2.0 -1.6 0.0 1.4 2.6 Source: BCRP andMEF ( RevisedMarc0 Macroecondrnico Multianual2006-2008) 11. Fiscal and monetary policy has been well-managed in recent years, resulting in steady declines in public sector deficits and low, stable inflation rates. The consolidated non- financial public sector balance moved from a deficit o f 2.5 percent o f GDP in 2001 to a surplus o f 2.1 o f GDP in 2006, the highest budget surplus since 1970. Tax collection for the central government sector rose from 12 percent o f GDP in 2002 to 15 percent in2006, thanks to increased corporate income taxes mainly from mining companies. The turn-around in the deficit stance, coupled with fast nominal GDP growth, has lowered the public debt ratio from 46 percent o f GDP in 2001 to 32.7 percent o f GDP in 2006 (23.5 percent foreign and 8.5 percent domestic). The Central Bank has maintained a successful inflation-targeting framework since 2002, and after five years o f keeping inflation rate within the band the Central Bank lowered the inflation target to 2 percent and reduced the band range. On a year on year basis, the 2006 inflation rate dropped to 0.36 percent, below the lower end o f the 1.5- 3.5 percent target band. 12. Inspite o f Peru's good macroeconomic performance, poverty remains high and many social indicators have stagnated. Over half the population (5 1.6 percent) i s classified as poor. However, since 2003 per capita incomes o f the poor and the rates o f poverty and extreme poverty have started showing improvements. Although the headcount poverty rate was reduced by only two percentage points between 2002 and 2004, the improvement in extreme poverty has been greater, especially inrural areas. Average incomes of the poorest tenth o f the population rose 33 percent between 2001 and 2004. Overall, extreme poverty declined from 24 percent to 19 percent; rural extreme poverty fell from 50 percent to 40 percent, while urban extreme poverty declined much less (from 10 percent to 8 percent). Although no poverty numbers are available since 2004, employment trends in urban areas suggest that growth continued to reduce poverty in 2005-2006. Formal employment in firms o f 10 and more employees has increased by 7.3 percent in 2006, with several provinces with severe poverty rates posting two digits employment growth rates. At the same time, malnutrition remains severe (with 24 percent of under-fives stunted) and has stopped decreasing, and similarly, infant and maternal mortality rates are relatively highand are not declining fast enough. 5 C.Macroeconomic Outlook and Debt Sustainability 13. Economic activity for 2007 i s expected to remain strong. GDP growth is projected to slow only slightly, to between 6 and 5 percent for 2007-09 (from 8.0 percent in2006), in spite o f the expected global economic slowdown and the possibility o f deteriorating terms o f trade. Domestic demand and tax revenues are projected to remain strong, thanks to large investment projects in the mining and gas sectors and the "public investment shock" initiated by the current administration, which will use a public-private partnership model. As a corollary, the consolidated non financial public sector will report a moderate, sustainable deficit, projected at around 0.1 percent o f GDP in each o f 2007 and 0.5 percent o f GDP in2008. 14. The Government is also committed to continuing with an outward-looking trade policy. If ratified by the US Congress, the recently-signed free trade agreement (FTA)' will provide a further stimulus to growth, led by trade and investment. The Government i s also working on trade agreements with Chile, the European Union, Mexico, Singapore, India, China, Canada and Central America; and on expanding the existing agreement with Brazil. At the same time, the government has developed a competitiveness agenda and a Strategic National Export Plan, with the goal o f increasing non-traditional exports from 25 percent to 40 percent o f total exports bythe end o f the current administration. 15. In this context, Peru will be able to continue reducing its fiscal and debt vulnerabilities. The debt service profile and currency and interest risk exposures have been improved by combining funding from multilateral banks, US and EU markets, and local markets, as well as by liability management operations. Re-profiling operations and pre- payments have reduced medium-term public sector borrowing requirements to less than 3 percent o f GDP per year, and have provided amortization relief worth, on average, US$480 million annually between 2006 and 2O1Oa2The government has also relied more on domestic capital markets since early 2003, and on bond debt. Domestically issued debt as a proportion o f total public debt has increased from 15.8 percent o f debt in 2004 to 23 percent in2006, and local currency issued debt increased from 10 percent o f the total in 2004, to 17.7 percent in 2006. 16. Although - as noted above - the budget stance in 2007-2008 will shift back to a moderate deficit, GDP growth will be sufficient for the debt/GDP ratio to fall from 38 percent in 2005 to less than 30 percent by the end o f 2008, (see Annex 4 for details on Peru's debt sustainability, and Annex 5 for macroeconomic projections). This, together with a declining dollarization ratio, will help Peruvian debt move towards investment grade. Inthis setting, the consolidation o f the medium term fiscal stance will require the availability o f sufficient external financing. Total financing needs during 2007-09 are estimated at US$5.8 billion. Projected external sources o f financing represent 66 percent (US$3.9 billion) o f this total, o f which US$1.2 billion i s expected to be budget support. ' The US-Peru Trade Promotion Agreement was signed in April 2006 and ratified by Peru's Congress on June 28, 2006. http://www.ustr.gov/Trade_Agreements/Bilateral/Peru_TPA/Section_Index.html. Debt service projections show that these re-profiling operations will not lead to an unmanageable bulge in amortization commitments after 2010 (see h e x 4 for details on this point). 6 17. In summary, Peru's debt management strategy aims at minimizing the cost of new borrowing, mitigating refinancing risk, increasing the share o f domestic debt in soles, lengthening the maturities o f fixed-rate debt, and developing the market for international sovereign bonds. The medium-term plani s to reduce the ratio o f public debt to 26 percent of GDP at the end o f 2011, which coincides with Bank projections, and to reduce foreign currency participation to 69 percent (from 74 percent in 2005). Table 2 summarizes Peru's net financing requirement flows. 18. An IMF Standby Agreement was signed in January 2007, for the period 2007-2008, for SDRl72.4 million. A previous 26-month Stand-ByArrangement expired inAugust 2006. Like its predecessor, the new arrangement is precautionary. The Government does not expect to make use of the facility, but the macroeconomic credibility associated with an IMF- supervised program will help Peru to move more quickly towards its goal o f achieving investment grade for its debt ininternational capital markets. Table 2: Peru Financing Requirements and Sources, 2003-2009 (US$ millions) 2003 2004 2005 2006 2007e 2008e 2009e Total 2,802 2,296 4,671 -199 996 2,893 1,974 Foreign 2,165 2,499 2,728 608 1,500 970 1,400 Bonds 1,246 1,295 1,682 0 500 0 500 Fast Disbursement Loans 527 862 595 315 450 420 350 of which WorldBank 300 200 150 0 na na na Investmentprojects 328 315 350 293 550 550 550 Domestic 637 -203 1,943 -808 -504 1,923 574 Privatization 51 1 I3 56 0 Bonds 504 760 2,078 821 700 800 700 Deposits 83 -1,076 -191 -1,629 -1,204 1,123 -126 GDP growth 3.9 5.2 6.4 8.0 6.0 5.5 5.0 ConsolidatedGovt Balance% of GDP -1.7 -1...1 -n 1 2.1 -0 5 -n x -n 5 Source: BCRP, INEI and MEFprojections. 111. THE GOVERNMENT'S PROGRAM 19. As outlined in Prime Minister Del Castillo's presentation to the Congress at the start o f the administration, the Government's twin strategic objectives are to accelerate economic growth; and to accelerate poverty reduction and improve social outcomes. On the economy, as outlined in Section 11, the Government aims to maintain macro-economic stability, increase the institutional capacity o f the state and strengthen Peru's physical and social infrastructure. It will promote and regulate private sector-led growth, facilitating integration to the global economy and will take advantage o f the prevailing favorable external conditions to reduce vulnerability to domestic and external shocks in the future. In the social sectors, it will promote human development, socialjustice and the reduction o f extreme poverty. 7 20. Over the last 15 years, Peru has expanded the coverage o f basic social programs, but the quality o f services remains poor- especially in rural areas. Although Peru i s a middle- income country, with near-universal coverage o f primary education, only 15 percent o f second grade students presently reach full sufficiency inliteracy and roughly halfare unable to read at all. Inhealth, 25 percent o f births nationwide are still not institutionally supported - rising to 45 percent inthe 10 poorest departments -hampering efforts to reduce maternal and peri-natal mortality. Fully 30 percent o f five year old children in Peru are chronically malnourished (stunted).Ineach case, the outcomes areparticularly poor inrural areas and among indigenous communities. For these reasons, the issues o f service quality, results and accountability occupy center-stage in the new Government's economic development and poverty reduction strategy. 21. There are many causes o f poor quality, but a critical factor preventing change is the absence o f clearly defined standards and results frameworks, across the social sectors. To address this issue, the Government's Social Sector Reform Program3 aims to reorganize programs and establish robust accountability frameworks, bedded into the budget management system. 22. In this context, the Peru REACT DPL supports actions in primary education, health and nutrition to define standards and set goals for the outcomes which families should expect for their children. This will be coupled with the development o f monitoring systems providing up-to-date information on the performance o fhealth posts and schools and individualized data for parents on the health, nutrition and learning status o f their children. The operation also supports actions to reduce exclusion, rationalize programs, to improve targeting and to increase the participation o f poor communities in budget and program monitoring. The REACT DPL series i s expected to lead to improved outcomes in second grade literacy (especially in rural schools); increased access to institutional birth services in the 10 poorest departments (covering a third o f the population); and increased coverage o f individualized growth monitoring and counseling services for children under 24 months o f age in areas with a highincidence o f chronic malnutrition (stunting). 23. The following sections detail the Government's strategies in four broad policy areas specific to the REACT DPL: the strengthening o f governance, equity and accountability in social programs; education; health; and nutrition. 1. Governance, equity and accountability in the social sectors 24. Fusion, integration and articulation of social programs. The effectiveness o f Peru's social programs has been undermined by the creation o f multiple, overlappingprograms, often with small benefits, and without clearly defined goals. This is particularly marked for food programs. The Government aims to rationalize programs, to clarify objectives and increase effectiveness. The Inter-ministerial Commission for Social Affairs (CIAS) has prepared an inventory o f 81 programs in 12 broad programmatic areas, which may have scope for fusion, rationalization or improved coordination - including 10 dedicated to food distribution and a Decreto Supremo 029-2007-PCM, dated 30thMarch2007. 8 further 9 linked to nutrition. It has estimated that 80 percent o f these programs have administrative costs greater than 10percent o f their b ~ d g e t sThe . ~ Government has established a conceptual framework for fusing the programs which overlap on both objectives and beneficiaries; for integrating programs which pursue similar objectives in different target groups o f the population; and for improving coordination between programs which pursue related, but different, objectives. During2007, it will develop detailed proposals to implement this strategy, to be incorporatedinthe 2008 budget proposal. Ineach sub-sector a coordinating sub-committee o f CIAS will be established to oversee the process. The goal is to improve coverage, reduce leakage o f resources to unintendedbeneficiaries, reduce administrative costs, improve transparency and optimize impacts. 25. Targeting of socialprograms. The process o f rationalization will also be assisted by two initiatives on targeting. The development by MIMDES o f a Single Beneficiary Register (Registro Unico de Benejkiarios, RUB) for social programs, will allow the identification o f duplicated benefits for the same individual through similar programs. During2007, MIMDES will start work on the beneficiary register for the huge, municipally-administered Vas0 de Leche program, which has around a million registered beneficiaries, but i s thought to have a serious problem o f "phantom" claimant^.^ The register will include information on the identity number (DNI), name, and address o f the claimant, and the number o f people inthe household. At the same time, the development o f the Sistema de Focalizacidn de Hogares (SISFOH), to be rolled out in the 30 biggest cities over the next three years, will provide a more transparent basis for objective beneficiary selection for urban social programs. SISFOH will use a proxy means test approach to identify households in the bottom two quintiles o f the income distribution, as a first filter to help program administrators avoid leakage to non-poor beneficiaries. Local targeting units will be set up to help municipalities improve the fairness and transparency o f municipal programs, such as Vas0 de Leche. 26. Identity. The lack o f identification documents i s a serious obstacle to accessing social programs and underlies the continuing socio-economic exclusion o f many Peruvians. The problem is especially serious in indigenous rural areas in the south, where the 1990s guerilla insurgency led many to fear appearing in civil registers. Almost 10 percent o f the adult population i s undocumented: an estimated 1.5 million adults have no DNI identity number. The undocumented population lives largely in rural and urban-marginal areas (the latter include immigrants from the Sierra and the Amazon who fled the armed conflict or to seek economic opportunities). However, coverage o f birth certificates i s higher. According to national household survey data, only 2% o f children o f school age are without a birth certificate. Nevertheless, there are delays in the certification process, as indicated by the fact that 9 percent o f one-year old children still have no birthcertificate (Table 3).6 This is an estimation made by MEF consultants. Although it is being strengthened, the Integrated Financial Administration System (SIAF) still contains incomplete information on the breakdown between administrative costs and direct service provision costs for some programs. Preliminary soundings indicate that as much as a quarter o f the milk rations may not be given to listed beneficiaries. Historically, children have not been issued with a DNI, but have applied on reaching adulthood. This reflects the fact that the DNIhas been linkedprimarily to the right to vote. 9 % ofchildrenaged 7 without abirthcertificate (2006)/1 2% % ofchildrenaged 1 without abirthcertificate (2006)/1 9% % of adults (over 18) without a DNI(2005) /2 9% 27. The lack o f identification documents (birth certificates for children, and DNIs for adults) undermines legal and civil rights. Although having a birth certificate is not a formal a requirement for access to most social programs, undocumented children may still lose access to early childhood programs, health insurance, food supplements and to other social protection and development opportunities, since they are not known to the authorities and so are excluded from planning and targeting processes. Some programs attempt to overcome the lack of comprehensive local civil population registers by carrying out their own local population census, such as are routinely carried out by the health ministry, MINSA, but this imposes additional costs and (inthe absence o f unique identification codes) does not avoid the problem o f beneficiary duplication. Similarly, undocumented adults lack access to property titles, to formal employment opportunities, credit schemes and health services, and to political rights, undermining governance. Indigenous peoples, displaced populations fleeing from conflict, and women tend to experience particularly serious problems o f exclusion (see Text Box 1). Text Box 1: The CitizenDocumentationprocessinPeru Although apparently simple, documentingprocedures are often unclear, costly and time-consuming for the poor to access. The system suffers from inadequate infrastructure, human and economic resources, and lack o f transparency. The first step to identity is to acquire a certificate o f a live birthfrom the MINSA ina hospital or health center. For children born at home (a quarter o f births nationwide and almost halfinthe poorest 10departments), the localreligious, judicial or political authority can issue the certificate. The next step is the acquisition o f a birthcertificate from the municipal registry and finally, the DNIitself, which i requires a S1.23 (US$7.00) payment and passport photo. Inaddition to monetary costs, the indigenous rural poor must also overcome barriers o f culture and prejudice at each step o f the process. Live Birth Certificate Municipal registers Health Ministry 28. The Government has made citizens' identity documentation a highpriority. In2002, a commission was established to tackle the identity problem, led by RENIEC, and including 15 government agencies and NGOs. It has analyzed the legal, institutional and operational bottlenecks in the system, and prepared the "National Plan for the Restitution of Undocumented Persons", which has been incorporated into the 2007 Public Budget Law. The Plan's objectives are: to document the Peruvian population, especially vulnerable groups, to simplify the administrative procedures for getting Live Birth Certificates and full Birth Certificates, and to harmonize and consolidate the country's documentation system. The Plan takes account o f cultural diversity. RENIEC has also been working to find ways to fund the cost o f registration for those unable to pay. In2006, it issued 160,000 DNIdocuments free o f 10 charge, funding this activity with the income it derives from fines levied on non-participants inthe electoral process. 29. The CCT program, Juntos, which works in ex-conflict areas, where identity documentation i s a serious problem, i s also supporting the process, through a requirement that its beneficiaries should get their DNIs within three months o f joining the program. It helps them to comply by funding MIMDES' M i Nombre campaign. Mi Nombre works with RENIEC to promote citizen identification and to resolve documentation problem^.^ As o f December, 2006, Juntos had 170,000 registered beneficiaries, all with their respective DNIs. According to program registers, 22% o f these had acquired their DNIas a direct result o f their incorporation into Juntos. In April 2007, a further 17,000 families which had been pre- approved for Juntos were inthe process o f DNIdocumentation. 30. Most importantly o f all, from the point o f view o f establishing a structurally robust process to guarantee the consistent documentation o f all citizens, the Government has decided (as o f July 2006) to incorporate children's future DNI in birth certificates, in the form o f a Unique Identification Code), (Cbdigo Unico de IdentiJicacibn, CUI). This is linked to a barcode, which will be used in social programs' beneficiary registers. By 2008, all civil registry offices will be incorporating the CUI into birth certificates. Since the coverage o f birthcertification is relativelyhigh(as noted inparagraph 26, only an estimated 2% o f school- aged children do not have a birth certificate), this will help the social sectors to advance with the consolidation o fbeneficiary identification under the RUB (see paragraph 25). 31. Transparency and results orientation in the budgetprocess: Since 2000, the GoP has strengthened the legislative and institutional framework to make social spending more transparent, equitable and effective. The Law o f Transparency and Access to Public Information was approved by Congress in 2002. Inthe context o f decentralization to regions and municipalities, the Government has worked to make the budgeting and delivery o f services at local level more accountable to citizens and users, through the publication of timely and reliable budget information. It has also organized government-civil society roundtables to monitor social policy and decentralization at regional and local level, and has passed a law mandating a Participatory Budget (PB) and citizens' vigilance committees. 32. By 2004, all 16 ministries had implemented transparency portals and had links to respond to citizen questions. The MEF established the transparency portal "Consulta Amigable" ("Friendly Consultation") o f the Integrated Financial Administration System (Sistema Integrado de Administracibn Financiera - SIAF). This portal (http://ofi.mef.gob.pe/transparencia/default.aspx) is among the most advanced in the L A C region. It provides information on economic indicators and projections, summaries o f the strategic plans o f different sectors, central and regional government budgets and expenditures, financial statements o f all public agencies, and information on internal and external public debt. Peru i s one o f only three countries in L A C reporting stable or improving scores on In2007,Juntos plansto start funding RENIECdirectly, rather thanchannelingresourcesthroughMIMDES/ PRONAA. 11 citizen participation in budgets and information quality in the Budget Transparency Index o f the Civil Society Budget Initiative between 2003-2005 (see Figure 1'). Figure1: Budget TransparencyIndex 0 Participacibn r n Ciudadana 2003 Participacibn Ciudadana 2005 0 Calidad Inbrmacion 2003 ICalidad Informacion 2005 33. Consulta Amigable (CA) has become a key source o f reference for civil society organizations monitoring social expenditures. A 2004 stud? found that 35 national and local organizations regularly use the portal. Another study, by Ciudadanos a1 Diu (CAD), a civil society organization hired by MEF to evaluate the C A portal, identified some 30 publications including newspaper and periodical articles and research reports, sourced to the CA. 34. However, the same evaluation identified limitations with CA." It stressed the importance o f publishingthe Modified Budget (PIM for its Spanish acronym), in addition to the initial budget (PIA) and executed budget ("devengado "), in order to avoid confusion and misinterpretation o f the budget information. This i s a critical issue. When the Modified Budget i s not published, civil society agencies working on budget monitoring (see paragraph 37) will have to compare executed spending with the original budget assignments, which often differ significantly from the modified assignments. They might then be inclined to suppose that any discrepancies are due to malfeasance, when in fact they result from administratively mandated reassignments which are consistent with program priorities but reflect updated information on costs and needs. 35. MEF has consulted on the evaluation recommendations with civil society organizations around Peru. This consultation ratified priorities for further improvement o f the portal to support the local accountability o f social spending. There i s consensus among stakeholders, including the MEF, that budget information should offer details o f budget commitments and execution disaggregated by executing unit and including physical goals, in order to lead to more reliable and effective expenditure monitoring. Given limited Internet * Participationand quality of information are among the indicators integrating the BTI. Gamero, Julio; Zoila Cabrera, Juan Carlos CortBs, y Carolina Giba. 2004. Vigilancia loCAD, 2007. Consultoria para la evaluaci6n de la Consulta Amigable del SIAF-SP, (Borrador) Lima. 12 access in many remote communities, it will also be important to use other means o f dissemination (such as print and broadcast media) to complement the web-based dissemination o fbudget information through Consulta Amigable. 36. The 2007 Budget Law supports the deepening o f this process by specifying 11priority areas in the social sectors slated for work to improve the quality o f expenditure through results-based management. The law requires the establishment o f physical goals for each priority area, at national, regional and local level. This reflects an increased emphasis on outcomes in the framework of the Garcia administration's Results Based Budgeting initiative (see Text Box 2). This process is being supported by a Fiscal DPL, approved by the Bank Board inDecember 2006. Text Box 2: StrengtheningResultsBasedFiscal Management inPeru I The Garcia administration has committed to a stronger results orientation inthe fiscal management system. This will build on past initiatives to create piecemeal incentives to produce better outcomes through innovative fiscal devices- such as the Convenios de Administracidn por Resultados, (which provided staff with incentives to meet pre-determined goals, but proveddifficult to calibrate), the Seguro Integral de Salud (which pays health posts directly for the services they produce) and the CLAS system (which transfers resources to local health committees to make sure they are used inthe intendedplace for the intended purpose). Now, the Government seeks to systematize results based management inthe social sectors, putting in place a coherent system including five principal elements: Stronger strategic planning to determine outcome goals and evaluate options for achieving them. 0 Development o f a programmatic formulation o f the budget structure which links spending to outcomes and not just to the cost o f inputs. 0 The specification o f outcome monitoring indicators at national and local level. 0 Strengthening independent evaluation o f programs. Emphasizingthe importance o f transparency and accountability as an integral part o f the results based management system. 37. Participatory budgeting and monitoring at sub-national level (PBM): Inthe context o f the accelerating decentralization process (see Text Box 3), the Government has promoted participatory budgeting and monitoring in local governments. This process allows citizens to influence decisions on priorities and to scrutinize the match between real spending and budget allocations. Civil Society entities such as the Mesas de Concertacidnpara la Lucha Contra la Pobreza have participated in this process at national and local level. Evaluations in the LAC region and beyond have shown that P B M encourages more equitable resource allocation, raises public awareness of the use o f funds and helps limit corruption, by increasing transparency throughout the budgeting process. I'See among others: Baiocchi, G.et al. (2004). Evaluating empowerment: participatory budgeting inBrazilian Municipalities. World Bank draft, December 31; Marquetti, A. (2002) "0 orpamento participativo como uma politica redistributiva em Porto Alegre". IEncontro de Economia Gaucha. Porto Alegre, 16-17 maio. 13 Text Box 3: Social sectors decentralization: an opportunity to strengthen accountability Ineducation andhealth, there is a growing role for localgovernments insupervising andmonitoring basic programs, which is opening new opportunities to strengthen accountability. This text box summarizes the most recent initiatives inthe decentralization process Education Each region inPeruhas a Regional Education Directorate (DireccidnRegional deEducacidn DRE), which reports to the Regional President. The DREreceives a budget allocation directly from MEF. This allocation is mostly earmarked for teacher salaries (about 95 percent) and fungible goods and services. In addition, Local Education Units (Unidad de GestidnEducativaLocal, UGEL)are locatedwithin each region, coinciding approximately, with the national provinces. The UGEL are deconcentrated agencies, sometimes being an executing unit themselves. Inthis case, they have a similar role to that o f the DRE (paying teacher salaries and purchasing fungible goods for the schools). The UGEL also have a supervisory role for the schools undertheir jurisdiction. In2006, the Ministry ofEducation launched apilot decentralization process in56 municipalities, 2 per region inPeru, except for Lima where there are 6 municipalities. The main requirement for the municipalities to enter into the pilot is to establish the Municipal Education Council (Consejo Educativo Municipal)CEM. The objective o f the CEM i s to monitor the decentralizationprocess at the municipal level and includes local government and school representatives. Thirteen municipalities have already established their CEM and will be receiving soon 136 million soles to pay for payroll (of additional teachers, ifnecessary), infrastructure, goods and services. These municipalities include La Molina, Surquillo y Los Olivos (Lima Metropolitana), Bellavista (Callao), Colcabamba (Huancavelica), Olmosy Motupe (Lambayeque), Pacaran (Caiiete), Bel& (Loreto), Morrop6n (Piura), Morales (San Martin), Yarinacocha (Ucayali) y Corrales (Tumbes). Health The Health sector has Regional Directorates (Direcciones Regionales de Salud- DIRESA).The DIRESAsreport to the Regional President and, as MEFexecuting units, receive a budget allocation to pay mainly for personnel salaries and receive reimbursements from SIS. The system also has other executing units, such as hospitals which relate directly to MEF on payroll administration and SIS reimbursements. The DIRESA sign yearly management agreementswith MINSA, where health priorities and monitoring are established and where the DISA commit to achieving specific goals. Under the DIRESAs there are health facilities, organized innetworks. Since health facilities (except for those which have constituted Local HealthCommittees, called CLAS) cannot manage money, they receive the SIS reimbursements inkind, that is, inthe form o fmedical inputs, pharmaceuticals, etc. Incontrast, the CLAS receive the SIS reimbursement incash and purchase their own inputs. The MinistryofHealthrecently issueda pilot decentralization plan for creating a sub-regional (district and municipal) structure, which will include the development o fmunicipal-level performance agreements. The design is flexible and will differ from municipality to municipality, on a demand basis. Under the pilots, the network concept (whose jurisdiction is usually much larger than a district) will be maintained. The decentralization process proposes to some ofthe following functions: (a) water and sanitation, (b) rehabilitation and maintenance o f infrastructure; (c) health promotion and prevention activities; and, (d) operation o f the health facilities (including healthposts, centers andor hospitals). Some o f these functions are already being implementedby local governments, but not necessarily very well. The decentralization process aims to establish performance criteria so that local governments can implement these functions adequately, with technical assistancefrom the line ministry. 14 38. Participatory budgetingwas initiated in Peru in2002, with pilots in nine regions. The 2003 Budget Law mandated its application by all regional governments and provincial and district municipalities.l2In 2005 over 30,000 people participated and more than S/.2,600 million were allocated, financing 12,473 projects; and women's participation outweighed that o f men. However, participatory budgeting still covers only a small proportion o f the total budget o f sub national governments - estimated at between 6 percent and 12 percent depending on the definition chosen - since it is limited to the review o f capital budgets. The Government's agenda for the coming period includes the need to extend participatory processes to cover current expenditures. 39. A 2005 study found that poor people's participation in participatory budgeting is underminedbypoor advertising o f the process, the lack o f easy-to-understand information, the distance and cost o f transportation; and tight timelines. The study also found that participatory expenditure monitoring was weak or inexi~tent'~,due to the lack o f operational guidelines for the working o fVigilance Committees. The development o fparticipatorymonitoring o fbudget implementation, to ensure that funds are used where and how they are supposed to be used, i s a critical challenge for the transparency and accountability dimension o f the results based management strategy, outlined inText Box 2, above. 40. The 2007 Budget Law addresses this through a proposed pilot for participatory monitoring o f local budget execution. Article 11 o f the law specifies a role for Government- civil society roundtables ("Mesas de Concertacidn para La Lucha Contra la Pobreza", MCLCP) in identifylngpriority actions to improve transparency and accountability. MEF has also decided to open regional offices which - inter alia - will support local Participatory Budget processes, in order to improve the participation o f the poorest, increase the role o f the Vigilance Committees, track performance through local report cards, and report anomalies to theNational Comptroller office for further investigation. 2. Education 41. The quality o f education in Peru is low by international standards and shows little tendency to improve. Many students finish second grade without learning how to read. Inthe past two decades, Peru has focused on improving access to education and has made impressive gains in coverage. Peru has already met MDG 2 (universal primary education coverage) and i s well above regional averages in secondary and tertiary cover. The challenge now i s to address the quality issues. The new Government has adopted a strategy focused on clarifylng standards and establishing a stronger accountability system, with greater local participation, inorder to improve educational quality and outcomes. l2Reuben, William and Belsky, Leah. 2006. Voice in the Accountability of Social Policy. In A New Social Contractfor Peru. The World Bank, WashingtonDC. l3Ibid 15 42. Since 1998, Peru has had universal primary enrollment (a net enrollment rate o f 100 percent), and the estimated primary completion rate is inthe range 95 percent to 100 percent. Gross enrollment rates in secondary are around 90 percent, and in tertiary education they are just over 30 percent. Private education accounts for around 14 percent o f primary enrollment and around 17 percent o f secondary enrollment, Although enrollment has been stable, per capita public spending on education increased sharply during the Toledo administration (Figure 2). In 2002-2005, per capita education spending rose, in total, from $234 to $336; in primary, from $157 to $218; in secondary, from $226 to $331 and in tertiary from $510 to $743. Inspite of relatively fast GDP growth, education spending has also risen as a percentage o f GDP (from 2.9% in 2000 to 3.2% in 2005). However, the main factor driving this increase was increases inwages, which were not linked to improvements inperformance. Figure2: Public Spendingon Education 800 300 0 1999 2000 2001 2002 2003 2004 2005 Year 43 I The challenge now is to turn this increase in spending into better educational outcomes for children. Education quality in Peru lags behind other comparable countries in the region and worldwide, based on PISA 2000 (an international assessment o f education quality) and other similar assessments. Peru has a long history o f carrying out assessments o f learning outcomes. In 1996, the Ministry o f Education (MINEDU) created the Quality Measurement Unit (la Unidad de Medicibn de la Calidad, UMC) to measure the quality o f student learning. The U M C has carried out a series o f survey-based national assessments in various subject areas and grades. Ingeneral, these assessmentshave shown little change inthe quality o f the education system, in spite o f increases in education spending. This is not surprising, as the results o f the assessments have not been used as a basis for adjusting teaching standards or teacher training. 44. The U M C surveys classify second grade students into four groups based on three specific attainment levels (1, 2 and 3) with clear, simple meanings (see Figure 3 below). A student in group 0 cannot read and comprehend even the simplest sentence. Reaching attainment level 1 implies the ability to read and comprehend a simple sentence. Level 2 implies the child can read a more complex paragraph but without full comprehension. By the end o f second grade, a child should reach Level 3: the ability to read and fully comprehend a 16 more complex paragraph. The UMC's 2004 survey classified 46 percent o f second grade students nationwide inlevel 0, and only 38 percent were inlevels 2 or 3. Figure 3: Attainment Levels Used inthe MINEDUEvaluation Nivel de logroI Taren lectors 21 &Ou(tsnms toctorasmlizpelestudWtte?f En text08 namCo8 (cumto) e Inlwmatlwas(aviso y orticuioencklopddbo) el estucbanw logra el s#gnlfiuKJode una palabra o kase a pam del cmlenido ctura 'laideaprincipalo %I deunalsclura lema I 3 Reconmor la Iinalidadpara la que fue escritountext0 ~ O ubreamlectorasnallxne1oetudlanteV 6 En rextao narrativas (cuento)e intormmvos (aviso y articulo enciclopfddlco)01 estudlanrehopra 1 Ublcardatm que aparecen aszritos en un tsxlo 2 DeducirIdesque nosslsn exribs en e1 tento,pwo que8e eobrentienden Estas ideas generalmonte Lie ubican ai comlmzo del t w o LO& t a w wtorplnom m aei e8hrdlPnteT t Deducir01sipnrficadodepaiabresporelcontextodekaWura 2 Derfucir la Idea princiwlo lema do un taxto 3 R e c m w la ltnalidad parsla que tue escrfto un texlo LO& taroasieetorssroalizpelastudlilnte? 1 Compfender palabras y oreciones aisladaa os decn fuera de un tento ~ O utamsIeC1DI.snorwllzaeleetudlnme'f d IEnccftllariniormacibnenuntexto 2 Deducirideas que no esstbn escritas en un texto per0 quate robrentionden 45. These findings are consistent with those o f the Bank's RECURS0 AAA activity. RECURS0 carried out a rapid survey o fthe reading ability o f 2ndgraders inrural areas, which found that about half o f rural children in second grade were illiterate or had very limited reading ability.14 The results were presented in a graphic video. The choice o f 2ndgrade was strategic: by that point, all students should be able to read and understand what they read, in order to advance inother subjects. Those who cannot do so will be severely hampered. 46. There i s a growing national consensus, shared by the Government, civil society entities and the private sector, and reflected inthe media, on the need for decisive action to transform education outcomes. The government sees universal testing as the best way to provide feedback on outcomes to the education system and communities, in line with its policy o f increasinglocal participation inmonitoring service delivery. In2006, it established a universal assessment system to document the 2ndgrade reading performance o f each child and school. This will allow parents to know how well their child is doing and will also provide the basis for setting school-specific performance goals. The first assessment, carried out in mid December 2006, evaluated the reading ability o f second grade students nationwide." Although it was organized on a very tight time-line (it was only authorized in October 2006), the assessment reached around 55 percent o f the target l4Similar results have beenfound inother small surveys carried out byNGOs. Is The assessment was mandatory for all students in the second grade, except those in bilingual schools. The government plans to develop instruments for bilingual students inthe next round o f assessments, in2007. 17 population o f schools, and 44 percent o f students. Since many schools had already closed for the year, this is a highturnout. MINEDU is now finalizing plans to disseminate the scores to students, schools, and local governments in the first half o f 2007, as the basis for the development o f school-level plans to improve outcomes. 47. The participation rates and scores recorded in the December 2006 Census are reported inTable 4. Due to the unevenpatterno fparticipation at departmental level, MINEDUhas not published national totals for the attainment levels. However, the Census provides a critical starting point for benchmarking the performance o f specific schools against others in their region and nationwide. MINEDU plans to continue with annual, nationwide assessments of second grade learning attainment, increasing the coverage to eventually reach 90 percent o f schools and 75 percent o f children. MINEDU will also put in place a strong quality control procedure for the census to track the quality o f the data being produced.'At the same time, since the census results will likely reflect inclusion biases for the foreseeable future, MINEDU will continue with representative survey-based studies to track the improvement in learning attainment. Table 4. Coverage and attainment levels registered in the December, 2006 reading census Region Coverage Group 0 Level 1 Level 2 Level 3 Arequipa 81% 10% 25% 32% 34% Tacna 80% 7yo 25% 35% 33% Moquegua 74% 10% 25% 36% 29% Madre de Dios 72% 20% 40% 25% 16% Callao 70% 10% 27% 33% 30% Ica 70% 11% 30% 32% 27% Tumbes 63% 21% 39% 27% 13% San Martin 62% 30% 34% 21% 14% Lima 61% 9% 27% 34% 31% Huanuco 49% 32% 33% 20% 15% Piura 46% 21% 33% 26% 21% Ucayali 46% 33% 33% 21% 13% Junin 44% 18% 29% 30% 24% Pun0 41% 28% 31% 23% 18% cusco 38% 23% 32% 24% 20% L a Libertad 36% 14% 28% 28% 30% Apurimac 31% 37% 27% 20% 16% Loreto 25% 44% 29% 16% 11% Ancash 23% 27% 29% 21% 23% Pasco 23% 17% 33% 28% 22% Lambayeque 20% 15% 25% 27% 34% Amazonas 19% 33% 27% 19% 20% Cajamarca 19% 25% 31% 21% 23% Ayacucho 14% 35% 33% 17% 16% Huancavelica 13% 31% 30% 18% 20% Source: UMC MINEDU 18 48. The government has also carried out a universal assessment for teachers in the basic education (January 2007). The test was mandatory for public school teachers and there were strong incentives to participate. Initial results show that around 90 percent o f teachers participated. The government will use the results to develop training programs and to help individual teachers to choose appropriate training. 49. The Government i s also working to establish a stronger formal accountability framework for quality supervision in education. In May 2006, the Congress approved a law creating the National System for Evaluation, Accreditation, and Certification o f the Quality in Education (Sistema Nacional para la Evaluacidn, Acreditacidn y CertiJicacidn de la Calidad Educativa, SINEACE). This i s an independent entity, which will evaluate and accredit educational institutions at all levels, through specialist agencies for basic education, universities, and for non-university higher education. l6 The law requires SINEACE to establish minimum standards, to set criteria and evaluation guidelines and to provide public information on the quality o f learning. The government has recently posted the implementing regulations o f the SINEACE law for consultation on the Internet - this i s the last step before their formalization. SINEACE'S initial emphasis i s likely to be on the certification o f tertiary institutions, which i s o f strategic importance for the transformation o f quality throughout the system (see Text Box 4). One o f SJNEACE's main aims i s to improve teacher training, which i s one o f the two tertiary areas which will have mandatory accreditation (together with medical training). At a later date, the system will also accredit basic schools. requires a strong tertiary system, to educate the country's technicians, specialists, and researchers and to train the teachers for the rest o f the system. Tertiary education coverage inPeruhas expanded rapidly inrecent years and the system has diversified, especially following the adoption o f legislation authorizing the creating o f for-profit private tertiary institutions. Growth inenrollment and providers has led to a high degree o fheterogeneity, also in terms o f the quality o f the educational services provided. Inthe absence o f accreditation, it is difficult for potential students to distinguish betweengood andpoor quality programs. Historically, there has beenlittle effective oversight o f higher education and the accreditation system is rudimentary.l7The National Council for the Approval ofNew Universities (ConsejoNacionalpara la Autorizacidn de Funcionamiento de Universidades,CONAFU) licenses new institutions, but the process is formal and legalistic, with no requirement for ongoing accreditation o f programs and institutions. Few universities have sought voluntary accreditation from international organizations. Under SINEACE, the government is now creating a modem system o f tertiary education certification and accreditationwhich will increase information available to university administrators, employers and students, allowing them to take action to improve quality. l6 The Peruvian Institute for the Evaluation, Accreditation, and Certification o f Basic Education (Instituto Peruano de Evaluacidn, Acreditacidn y Certijkacidn de la Calidad de la Educacidn Bdsica, IPEBA), The Council for the Evaluation, Accreditation, and Certification o f Non-University Higher Education (Consejo de Evaluacidn, Acreditacidn y Certificacidn de la Calidad de la Educacidn Superior No Universitaria, CONEACES), and The Council for the Evaluation, Accreditation, and Certification o f University Higher Education (Consejo de Evaluacion, Acreditacidn y Certijkacidn de la Calidad de la Educacidn Superior Universitaria, CONEAU). l7The exceptionis for medical faculties that are certified through a separateprocess. 19 50. The decentralizationprocess (outlined inText Box 3 above) will offer opportunities to improve the quality o f the public education system by involving local government in the accountability framework. Peru, which has historically been highly centralized, has moved in recent years towards a somewhat more decentralized and de-concentrated structure. In2003 '*, the Ministry o f Education restructured its education units and established Local Education Management Units (Unidades de Gestidn Educativa Local, UGEL), which operate at the provincial level. Although inmost cases they do not yet contract teachers directly, the UGELs play a major role in teacher supervision and training. Most UGELs are assigned a small budget for supplies and materials and have some flexibility in how they can allocate this budget. In 2006, the government announced a pilot for decentralization o f basic education to the municipal level in 56 municipalitie~.'~The pilot municipalities will assume greater responsibility for the delivery o f basic education within their jurisdiction. The MINEDU is preparing the implementing decree for this initiative, including a definition o f the role of municipalities in providing support and investment to the education system. The government expects decentralization to eventually cover all municipalities, thus allowing the public to influence education through their local elected representatives. 3. Health 51. As elsewhere in the social sectors, the lack o f standards for basic health services in poor regions has contributed in recent years to stagnated outcome indicators. The coverage and quality o f basic primary and secondary care remains low, and improvement trends for maternal and infant mortality are low, compared to LAC, and in relation to Peru's income levels. Based on the most recent survey evidence (ENAHO 2004), institutional births coverage nationwide is estimated to be only 70 percent; falling to 54 percent inthe ten poorest regions (Table 5). Table 5: Institutionalbirthcoverage inthe 10 poorest regionsof Peru, 2004 Region Institutional births coverage(%) Rural Total Urban Rural Gap PoPulation(%) 1 Huancavelica 28.8 64.6 17.0 47.6 75.3 2 Huanuco 51.7 83.3 33.2 50.2 63.1 3 Pun0 39.9 77.0 17.3 59.7 62.1 4 Cajamarca 42.0 90.0 25.8 64.3 74.7 5 Amazonas 51.2 72.6 38.7 33.9 63.O 6 Ayacucho 72.5 87.3 60.1 27.3 54.3 7 Loreto 47.6 65.9 17.1 48.8 37.6 8 Apurimac 94.3 100.0 21.o 90.9 9.1 62.9 9 Ucayali 69.2 94.0 72.9 34.0 10 Piura 66.9 88.0 25.8 62.2 33.9 Poor Regions Avg. 54.1 n.d. n.d. n.d. 55.1 Peru 70.1 92.1 42.9 49.2 30.8 Souuces:-Encuesta Nacional de Hogares 2004 (Instituto Nacional de Estadistica e Informatica); Encuesta Demografica de Salud Familiar 2004 (Instituto Nacional de Estadistica e Informatica) '*Decreto Supremo No 023-2003-ED l9Decreto Supremo No 078-2006-PCM. 20 52. There i s a big difference between coverage in rural and urban areas, with the former averaging 42% nationwide, compared with 92% inurban areas. This will need to be addressed ifthe recent downward trend ininfant mortality rates (down from 46 per thousand livebirths in 1996to 24 in2004) and maternal mortality rates (down from 265 per 100,000 live births in 1996 to 185 in 2000) i s to be sustained. The next phase o f reduced infant mortality will require a strong reduction in peri-natal mortality, which is in turn closely linked to the institutionalization o fbirths. 53, In recent years, to strengthen the accountability framework, management agreements have been signed between MINSA and all the health regions. But these were not supported by adequate incentives, their contents are not well-known to the public and there have been few consequences for not meeting the goals. 54. In 2002, the Government established a health insurance system (Seguro Integral de Salud, SIS), which aims to guarantee funding for the costs o f health care for the poorest people in Peru, and to promote the notion o f a right to maternal and child health services.20 The SIS system i s an important step towards a stronger results focus inhealth: in principle, it provides a basis for a direct link from funding to outputs, by reimbursing health units for the reported production o f services, thus providing incentives to produce the services it finances. In addition, SIS has not yet sufficiently honed its targeting on poor households and regions. The proportion o f SIS funding going to the 10 poorest regions (40%) i s still smaller than their share o f the population (44%); while, if the program was well-targeted, it should be considerably greater. Similarly, 27% o f SIS' resources go to districts in the top two quintiles o f the poverty map; given SIS' intention to focus on poor households, this proportion ought to be lower. 55. This is further compounded by serious weaknesses inthe drug supply system. Access for the poorest populations i s difficult even for the SIS-insured population and treatments, due to supply problems. Similarly, efforts to improve the supply o f health system staff (doctors, obstetricians and nurses) in the poorest rural areas using local contracting through the CLAS (local health committees) have been undermined by a 2006 decision to "officialize" such staff, opening the door for them to seek transfers to urban posts. Recent changes in administrative rules governing their expenditures (applying public sector rules, even though they are privately constituted agencies) have also undermined the CLAS model. As a result, there i s a need to rethink ways to assure that adequate resources are assigned to health systems in poor rural districts on a sustainable basis. 56. The new Government has decided that access to institutional births with good quality will be a key operational standard for the primary health system. The choice o f this indicator reflects the fact that institutional birth access i s a key tracer o f the quality o f primary and secondary medical care. A woman who gives birth in an institutional setting i s likely to have access to a full set o f associated pre- and post-natal services for herself and her child. Inthis context, MINSA has set an aggressive target to improve coverage to institutional births in the 2oSIS has beensupportedby the World Bank'sHealthAPL 1 (Pur Sulud ) project. 21 57. MI'NSA is also d scrvice delivery that mi o ~ ~access~far Womenr o ~ ~ ~ c ~ ~ n i ~ ~targetscfor h e ~centers ~ a n e ~ t ~where b i ~ hhappen, ~ s 58. ilfier years of steady r e ~ ~ c t ~ino n ~ the last: decade the ~ t ~rate~in ~ t has Peru ~ n ~ hardly declined and r e ~ a at 24~percent, ~ n ~ ~ 1.5 miflion ce ~ ~ ~ d~ rfir~ h~, i ~ i ~~ r ~ e i n ~ than expected given per-capita income. On present trends s t ~ ~\vi11 still~staid at~ 22 ~ i j ~ percent in 201I. The ~ o ~ e r n ~ e n ~ ~ s ~ ~ u t s~ ~ ~i ~has~ set the goal ofe n ~ ~ ~ ~ achiez+ng 19 percent by 203 1 (a ~ e d ~ c ~ ~ o n of five ~ e r ~ e points~in~five years). n ~ e 59, By the time they are four years old, ai~nost.30 percent of ~ e ~ ~ ci ha~nl ~ r ~ n suffer from chroilic 1x1 a hutrition (Figure .I)."This causes ~ e ~ d a ~ ~~i ato~ee ~ ~ ~ ~ i ~ ~ I landc physical d e ~ ~ e ~ o paffecting~ ~ t ~ e t ~ a ~ ~ ~ i e future ~ r o d u c ~ ~andi teconomic gmwth ~ y p o ~ e ~ tIt~will .be d ~ ~ ~forc Peru~to advance in reducing i n ~ ~ u a lwhile almost a third uf a ~ u l ~ t y its child e, Srnce Pew sp e $250 miilior~II year on nutrition-related programs, these poor results reflect, in part, the absence o f adequately specified goals and accountability frameworks, together with poor targeting, and program overlap. 60. There i s a growing consensus in favor o f change. President Garcia has highlighted nutrition in his Government's agenda and endorsed the "five points in five years'' goal for reducing stunting. At a major national workshop on nutrition strategy in Lima inMarch 2007, the presidents o f the country's regional governments committed themselves to develop strategies to achieve reductions inmalnutrition rates consistent with the national goal. Work is also underway to tackle the nutrition sector's weak institutional framework by defining more clearly the roles and responsibilities o f MIMDES, MINSA and JUNTOS at national and local level. 61. The main NGOs and international agencies have formed the "Nutrition Initiative" to elevate the issue on the development agenda.22The Auditor General i s scrutinizing feeding program results more carefully (eg. the critical report on Vas0 de Leche published in October 2006)' and the rationalization o f social programs, initiated by MEF in January 2007 (as detailed inparagraphs 24 and 25) will cover manyfood and nutrition programs. 62. The lack o f awareness o f many mothers about their child's nutritional failure, due to the lack o f easily-understood standards, i s a major obstacle to change. The Government agency responsible for setting and monitoring growth standards, CENAN has decided to highlight median height gain and weight gain from the World Health Organization's new standard growth curves, to raise parents' awareness o f their child's nutritional performance as a dynamic process, and one which can be improved. CENAN/MINSA will popularize the importance o f height and weight monitoring and promote simple-to-understand communication tools for use in health posts and by community-level nutrition counseling programs. A communication strategy i s being prepared to this end.23 63. CENAN has a monitoring system (SIEN) which processes data on individual children's growth trajectory (including a unique personal identification number and registering weight and height measurements and data on their age and These data are collected as part o f the child's growth and development monitoring in health posts and centers. This could be the basis for an effective system to monitor outcomes. However, the frequency o f measurement o f most children remains low. On average, according to 2005 SIEN data, children under 12 months are measured only 3.3 times, and for those aged 12-23 months the average is only 1.6. For those children who are measured, the data confirm that insufficient weight gain i s an important problem. Of the 1.5 million children under 24 months 22Members of the NIinclude CARE, PRISMA, the WFP, WHO, PAHO, and AID, among others. The NIhas already launcheda major media campaignraising awareness and is workingclosely with El Comercio, the main newspaper inthe country. 23 The technical specification will be adjusted when the new WHO weight and height gain standards are published, expectedinApril 2007. 24SIEN compares favorably with nutrition monitoring systems in neighboring countries, such as SISVAN, in Ecuador, which does not registerthe raw measurements on height and weight, or the identityof the child, and so cannot beusedto analyzeindividuals'growthtrajectories. 23 for whom the 2005 SIEN system registers a follow-up visit within 120 days, 23% move to a lower decile o f the global standardized weight-for age d i ~ t r i b u t i o nfrom one measurement to ~ ~ the next; while only 19% move up. So there i s a net deterioration o f 4% o f the population in each period. As noted above, as a result o f this attrition, around 30% o f the population becomes chronically malnourished by their second birthday (CENAN). 64. The data in SIEN are not being used to inform actions by the system to correct the problems o f children who are not growing adequately. It i s simply supposed that the local health post staff will advise parents appropriately; but no-one follows up on this. Nor is the SIEN system integrated with other information systems inthe health sector - for example, it i s constructed on a different platform from the Health Information System (HIS). This leads to the duplication o f information processing requirements for health post staff, diverting time away from patient care, and reduces opportunities for analysis. 65. To strengthen the monitoring system, the Government (through CENAN) will set targets for the 10 poorest rural departments for coverage and quality o f height and weight monitoring for under-2s. It will also develop an integrated information system (consolidating SIEN and HIS) which will track weight and height inthe same system which processes other health data (e.g. vaccinations and morbidities). This will reduce form-filling and enable MINSA staff to monitor individuals' nutritional status through time, with effective feedback on children who are not growing well. 66. Reforms to the SIS health insurance system approved in March 2007 have cleared the way for stronger financing for nutritional monitoring and counseling. Thanks to this important change, SIS will now be able to finance the set o f growth and development monitoring services known as CRED, thus increasing incentives to health posts to produce this service. 67. MINSA is developing a plan to strengthen community-level nutritional counseling. MINSA has an estimated 36,000 promoters but they are not integrated into a system o fhealth- center based nutrition monitoring & counseling. A plan is being developed to incorporate promoters into the integrated health & nutrition monitoring system, specifying their roles and establishing sustainable incentives. 68. The Government has also decided to strengthen the nutritional impact o f the Juntos CCT program (established in 2005). Although targeted in nutrition crisis areas, Juntos originally lacked an effective nutrition intervention. It missed the opportunity to work with its beneficiary families to promote greater demand for growth monitoring and nutrition counseling services and instead, simply supported food distribution. Juntos has now incorporated a requirement for children under-24 months to participate in growth monitoring and counseling at least 4 times a year and has increased to 30% the weight given to nutritional indicators inthe targeting o f its roll-out. Juntos has recently remitted to its Board a proposal to further strengthen its nutritional impact, including more effective use o f budget support to 25Based on the WHO 2006 standard. 24 MINSA's basic health and nutrition counseling services, to help them respond to the additional demand occasioned byJuntos' conditionalities. 5. Consultationprocess 69. Peru has a legal framework favorable to civil society participation and to dialogue between the Government and main stakeholders. This framework includes the following laws: The Access to Public Information Law, the legal standard for the creation o f the Transparencia Econdmica portal, with the section o f Consulta Amigable / Friendly Consultation; The Participatory Budgeting Law, The Citizenship Participation Law related to the Municipal Law that involved citizen participation through the CCL (Local Coordination Council / Consejo de Coordinacibn Local) and the Decentralization Law with the CCR (Regional Coordination Council/ Consejo de Coordinacidn Regional), both Councils involve civil society representatives in the public management at the local level; the Law for the creation o f the Round Table Partnership Forum / Mesas de concertacidn de Lucha contra la Pobreza); and the Equal Opportunities Law for improving citizen rights for women and men. 70. Within this framework the Government of Peruhas promoted an extensive dialogue on the policy reforms and actions supported by the REACT operation. Three main events deserve special mention: (i) a wide and decentralized dissemination of the RECURS0 Peru study. This studyset the ground for an ample debate about the improvement o fquality inthe delivery o f basic social services, through a new accountability framework, which engages policy makers, service providers and citizens. The dissemination involved local and national mass media, a series o f workshops with different stakeholders including Regional Presidents, Mayors, teachers, parents, health professionals, and local and national civil society organizations; (ii)a national event chaired by President Garcia for the discussion and dissemination o f policy notes on the state o f education, health, nutrition, voice and participation in Peru, and the necessary reforms and actions to strengthen their quality and social equity impacts; and (iii) the organization of two workshops led by the Prime Minister on the following themes: (a) reduction o f Malnutrition in Peru (with the attendance o f the Presidents o f the Regional Governments), and (b) an Accountable Education with Quality Standards and Capacity Building. 71. Other participatory activities related to policies and actions supported by this operation were: (i)consultations with civil society representatives in the Executive Committee o f JUNTOS Program; (ii) dialogue with members o f the National Congress on institutional a births; and (iii) dissemination to the media o f progress in the implementation on social the policies. In addition, the DPL itself supports actions to improve access to information and enhance the citizens' voice in the accountability o f social programs and increase social inclusion. 72. The Program content was adjusted inseveral important ways as a result o fthis process o f consultation, together with the findings o f the poverty and social analysis o f the program (see paragraphs 120-128). For example, the development of physical goals for priority social programs under the 2007 budget law was the direct result o f a civil society consultation; as was the inclusion if the Modified Budget in the Consulta Amigable; the citizen identification 25 strategy was shifted to emphasize the role o f birth certificates (which are free) rather than DNIs (for which there is normally a charge); and the process o f testing for teachers was adjusted, based on concerns o f the teachers' union, SUTEP. IV. BANKSUPPORT TO THE GOVERNMENT'S STRATEGY LINKTO COUNTRYPARTNERSHIPSTRATEGY 73. On December lgth, 2006, the Board reviewed a new five year Country Partnership Strategy (CPS) with Peru for FY07-FYI1 (Report PE-37913, December lgth 2006), and simultaneously approved a $200 million DPL in support o f the government's macro-fiscal strategy (Report No. 37948-PE). The CPS lays out a strategy to support the GoP to achieve its goals o f sustained annual growth over 5 percent each year in 2007-1 1; and poverty reduction o fbetween 1.5 and 1.8 points per year. The Bank's program o f activities to support the GoP in reaching these objectives i s organized around three pillars and six clusters, as follows: Pillar (i) Economic Growth 1. Maintaining macro stability and reducingvulnerabilities; 2. Accelerating growth and widening its base; 3. Making growth environmentally sustainable; Pillar (ii): Social Development 4. Meeting Basic Needs; 5. Promoting a new social contract in education, health and nutrition; Pillar (iii) Modernization o f the State 6. Modernizing state institutions. 74. Under Cluster 5, the CPS Program envelope includes the series o f three social sectors Results and Accountability ("Peru REACT") DPLs, with the first slated for FY07 (table 3, page 22). The series would support the policy changes needed to develop results orientation in the social sectors inthe context o f the decentralizationo f education and healthprograms to the municipalities. The REACT DPL series lies at the strategic heart o f the CPS. As well as contributing directly to tackling poverty and exclusion (Pillar ii); it will also support the state modernization effort, by establishing effective results-based management inmajor parts o f the social sectors (Pillar iii); and in the medium term, it will also underpin the economic growth strategy (Pillar i)by improving the quality o f the labor force through improved human capital formation in education, health and nutrition. 75. The specific CPS goals and outcomes supported by the Programmatic REACT DPLs are the following (see: I11"A Shared Vision" and Annex B10): e Strengthening Public Sector management: Goal: Promote results-based management and (.,.) increase participation levels; Outcomes: 7 percent o f the national and regional governments' budgets should be linked to performance indicators by the end o f the CPS period. The successful implementation o f the REACT program would fully meet this outcome I 26 target, since in 2006, the primary education sector accounted for 6% o f the executed budget, the food and nutrition sector, 2% andthe health sector, 6%.26 e Social sectors; Goal; Promote the development o f a new social contract in education, health and nutrition by introducing standards and strengthening accountability to support achieving results. Outcomes: Health: Increase coverage o f institutional births to 70 percent; increase coverage o f SIS health insurance to 40 percent, decrease infant mortality to 19 per 1,000 live births. Nutrition: merge nutritional programs; reduce chronic malnutrition for children under-5 by 5 percentage points in 5 years; Education: develop a national system to evaluate and accredit education quality; increase classroom hours in rural primary schools; and improve the functional literacy of children in second grade. COLLABORATIONWITH THE IMFAND OTHER DONORS 76. The Bank has collaborated tightly with the IMF in the development and the implementation o f the Stand-By operation inPeru, which was agreed inJanuary 2007. 77. The Bank has established close linkages with the donor community in Peru, including bilateral and multilateral organizations, which are continuing to develop in the context o f the Country Partnership Strategy (CPS) presented to the Board in December 2006. The most active partnerships have been established around decentralization (with Germany's KFW), education (together with IADB'sjoint program on rural education), transport (with the shared Lima Transport Project with IADB), roads (with IADB), health (inclose coordination with the Health program o f IADB), and public expenditure management (Country Procurement Assessment (CPAR) with IADB). KfW has expressed interest in co-financing the ongoing program o f fiscal DPLs, as a continuation o f their initial support for the DECSAL loans disbursed duringthe previous administration. 78. Under the new CPS, the design o f the policy-based operations is being coordinated with the IADB and the IMF, andwith other agencies (GTZ, USAID, DFID, COSUDE, AECI, Cooperazione Italiana, SNV, etc) involved in supporting policy reforms. This is being complementedby coordination on investment lending, and potential co financing, with IADB (on transport, education, health, fiscal management, competitiveness), with CAF (infrastructure), GTZ (on competitiveness, water and rural development), JBIC (on infrastructure), USAID (on justice and governance initiatives), DFID (nutrition). The WBG i s also strengthening its partnership with the Global Water & Sanitation Program around the government's "Agua para Todos" program. The Bank has been a leading actor in the donor thematic groups, including: decentralization, justice modernization, education, and rural development, and has developed a database tracking system to gather information from the donor community and share common information on our programs inthe country. 79. Of particular interest for the REACT DPL is the strong donor cooperation around nutrition in Peru, which the Bank has played a key role in stimulating through work on the D P L and also work on the Nutrition Results project, presently under preparation. The Bank 26 Source:SIAF-MEF 27 has had extensive discussions with UNDP, UNICEF, PAHO and FAO, The Bill and Melinda Gates Foundation, and the Nutrition Initiative (a coalition o fNGOs, UNagencies and bilateral Agencies interested inpromoting nutrition). RELATIONSHIP TO OTHER BANK OPERATIONS 80. The Peru REACT DPL complements the Fiscal DPL series initiated in December 2006, one o f whose goals is to strengthen the results management framework in Peru's fiscal system through reforms o f the budget process and improvements in the monitoring and accountability framework. In this context, the present operation provides support to the specific results and accountability strategies being adopted in the social sectors. It will play and important part in the roll-out o f results-based management, through the definition o f strategic outcome goals in education, health and nutrition, linked to transparent standards, together with support for the establishment o f effective monitoring systems, based on institutional data, that will allow each service production unit to be held accountable for the developmental results o f its activity. 81. The REACT DPL will also provide an articulating framework for the Bank's HD portfolio o f investment and TA operations in the social sectors inPeru, which include: a rural education project, a health APL (whose second operation is under preparation), and a Technical Assistance loan focused on strengthening accountability in the social sectors in the context o f decentralization. Other relevant activities include the RECURS0 2 programmatic AAA (which will provide ongoing support to the reform process through a combination o f studies and TA) and the Voices o f the Poor activity supported by the JSDF and managed by ESD. 82. Education. The Rural Education Project27supports the provision o f basic education in rural areas. Many o f its activities complement the REACT DPL. The project has strengthened the UMC's capacity in student assessment and developed pedagogical material, focusing on learning outcomes for the rural population. Under the CPS, new investment operations are slated in Basic Education Quality (FY08) and Higher Education (FY10)' further reinforcing the synergy between the REACTDPL and the investment portfolio. 83. Health; The PAR Salud 2 project, presently under review in the SNIP (the public investment office o f the MEF), is expected to be approved at the Board in 2007. This project, which will invest $110 million in the health sector, will strongly complement the REACT DPL. Planned activities include: support for health education (which will have important nutritional components); identity documentation for heath system clients; promotion o f quality improvements and increased health network efficiency; support to the SIS; development o f an integrated health information system; improved accountability for outcomes through effective performance agreements, and regulation o f the supply and quality o f inputs to health establishments o f different sorts. 27ApprovedApril 30,2003. 28 84. Nutrition. The Nutrition Results project, presently under preparation, will help the GoP to develop an effective, evidence-based nutrition strategy, and support the development o f regional and local nutrition strategies, to stronger nutritional monitoring and counseling and to the reorientation o fthe Juntos CCT program towards nutrition. 85. Social TAL (ongoing). This $7.8 million Technical Assistance loan (Report No. 27924-PE, June 18, 2004) supports the strengthening of accountability frameworks in the context o f the social sectors' decentralization. It was approved in the context o f the previous social sector programmatic (PSRL) DPL series and is directly relevant to the agenda o f the REACT DPL. It focuses on targeting and results monitoring in MIMDES and on support to the MEF to establish results-based management of social programs. 86. Voices of the Poor. The JSDF Grant "Giving Voice to the Poor in Influencing, Planning and Evaluating Service Delivery" (TF05 1333) i s supporting participatory budgeting pilots in 12 of Peru's poorest municipalities. It has built capacity o f local authorities and civil society organizations to engage in the municipal budget process. The grant i s implementedby the National Public Budget Direction (DNPP) o f the MEF.This activity was initially linked to the PSRL programmatic series and i s currently complementingthe Social TAL, supporting the demand side o f the accountability framework o f social programs. The DNPP has expressed interest in submitting a new grant request to support o f the new benchmarks for participatory budgeting inthe REACT DPL. LESSONSLEARNED 87. The Bank has a longhistory o fprogrammatic lending insupport o f reform inthe social sectors in Peru, most recently through the PSRL IV operation (2004), which supported improving the anti poverty impact o f public spending; increasing the access o f poor people to quality social services; and improving accountability through greater participation o f poor beneficiaries in the monitoring and evaluation o f social programs. These themes are congruent with the strategic lines o fthe REACT DPL. 88. The most important lesson learned from the PSRL IV - as from reviews o f other similar operations in the Bank, under the scrutiny o f the "results agenda" - is the need for a strong focus on a limited number o f outcomes (provided here by the standards and accountability theme which runs across all the sectors in the operation matrix) together with a clear set o f quantifiable program results with their associatedbaselines.** ANALYTICAL UNDERPINNINGS 89. The REACT DPL builds on the analytical and policy dialogue work o f the RECURS0 study - A New Social Contract for Peru. RECURS0 identified the central theme o f standards and accountability and resulted in the Government's request that the Bank support the implementation o f its results-orientation strategy in the social sectors. The first steps were 28The IEG review of PSRL 4 criticized the program's inability to document the project objectives, which it argued was due to the neglect in the project design o f outcome indicators related to the objectives (Report No. 30113-PE). 29 taken towards the identification o f the Operational Policy matrix at a two day workshop with the MEF and social sector ministries in Lima in October 2006, which started with a presentation o f the findings o f RECURSO. RECURSO argued that to break out o f prevailing "low-level equilibria", in which clients accept mediocre outcomes, it is necessary to establish transparent performance standards, to strengthen regulatory systems by creating effective accountability mechanisms, and to encourage parents and local governments (which are assuming a growing role due to the decentralizationprocess) to demand better outcomes.29 V. THE PROPOSEDPERUREACT DPL I OPERATION DESCRIPTION 90. The proposed Peru REACT DPL operation is the first in a three-part DPL series to strengthen results and accountability in education, health and nutrition. The series supports actions in primary education, health and nutrition to define standards and set goals for the outcomes which families should expect for their children. This will be coupled with the development o f robust monitoring systems providing up-to-date information on the performance o f health posts and schools and individualized data for parents on the health, nutrition and learning status o f their children. The operation also supports complementary supply-side actions to improve service quality, to reduce exclusion, rationalize programs, to improve targeting and to increase the participation o f poor communities in budget processes and program monitoring. 91. The REACT DPL series i s expected to lead to improved outcomes in second grade literacy (especially in rural schools); increased access to institutional birth services in the 10 poorest departments (covering a third o f the population); and increased coverage o f individualized growth monitoring and counseling services for children under 24 months o f age in areas with a high incidence o f chronic malnutrition (stunting). The first operation is slated for May-June 2007, and the subsequent operations will proceed when the GoP has completed the agreed policy benchmarks, as laid out inthe Operation Policy Matrix (Annex 2) (provisionally: mid 2008 and mid2009). POLICY AREAS 92. The Operation Policy matrix for the REACT DPL series is presented in Annex 2 and summarized in this section. The operation will support actions in four broad areas: Governance reforms for equity and accountability in the social sectors; standards and accountability for improved outcomes in education; standards and accountability for improved outcomes inhealth; and standards and accountability for improved outcomes innutrition. The matrix identifies 5 prior actions and 15 benchmarks for the first operation. The actions cover: 29 This line of work is being continuedby the RECURSO 2 programmatic AAA for FY 07-11, which will support the DPL through timely studies and TA activities on the theme of standards and accountability. During FY 07, RECURSO 2 is focused on nutrition, with activities including support to development of communication tools on nutrition standards through a video; the preparation o f a study on the problem o f "low quality equilibrium" in social assistanceprograms; and the provision o f TA to Juntos to develop a stronger nutritional focus. 30 the documentation o f children, the introduction o f results based management in the social sectors; and the definition of standards, baselines and goals for outcomes in education, health and nutrition. Table 6 summarizes the proposed prior actions, triggers and indicative medium-term actions. Text Box 5 reviews actions taken by the Bank during preparation to apply the Good Practice Principles for Conditionality supported by the Board. Text Box 5: Applicationof GoodPracticePrinciplesfor Conditionalityinthe REACTDPL Principle 1 Reinforceownership.The REACT DPL has its roots ina highly successful piece ofupstream - analytical and policy dialogue (AAA) work. The RECURS0 study, "A New Social Contract for Peru", identified the DPL's central theme o f standards and accountability. The dissemination of RECURSO led the incoming Government to request the Bank's support for its results-orientation strategy inthe social sectors. The first steps to identify the Operation Policy matrix were taken at a two day workshop with the MEF and social sector ministries (inthe presence o f the Ministers and Vice Ministers for Education, Health and Women and Social Development with their senior directors and advisors) inLima inOctober 2006. Over the following six months, the Bank has accompanied the government through the difficult and potentially conflictive first phases o f the program, including the carrying out o f national census o f students reading attainment and o f teachers' capacity. Fivemissions were undertaken (between October 2006 and April 2007) before the Operation Policy Matrix was finalized, leading to strong Government ownership (by MEF and also by the social sectors). Throughout this process, the Government has enjoyed strong andbroad-basedpolitical support Erom the media, civil society and political actors; and the teachersunion dropped their initial opposition. The analysis o f poverty, social and environmental impacts indicates no significant areas o f concern around the implementation o f the program. Principle2 -Agree with the governmenton a coordinated accountability framework. The Policy Matrix (which provides the accountability framework for the operation) is consistent with goals supported by other donors working inareas covered by the program (nutrition, health, education, results-based management and the reform of social programs and targeting). I t contains a clear basis for measuring progress under the Program. The quantitative and qualitative dimensions of the policy actions to be completed at each stage o fthe series are well defined, to avoid ambiguity. The Matrix also specifies baselines and methodologies for measuring the Program's developmental impact, prioritizing the use o f existing statistical sources. Principle3 -Customize the accountabilityframework and modalitiesof Bank support to country circumstancesThe Policy Matrix is centered on the GoP's own strategy for results and accountability inpublic programs, which is rooted inPeru's specific circumstances and is strongly ledby President Garcia. The measures to re-organize social programs, strengthen targeting systems and introduce results-based management insocial programs are at the heart o f the Government's Social Programs Reform Plan, which also stressesthe importance o f generating universal administrative data on program results as the basis for meaningful accountability. Similarly, the standards and goals supported by REACT enjoy technical and political approval intheir respective sectors, as do the chosen supporting strategies. Ineducation, Minister Chang has personally led the introduction o f universal testing for students and teachers. The goal o f increased cover o f institutional births is that chosenby MINSA. The focus on improved nutritionoutcomes is sharedby national government agencies (including MINSA,MIMDES andJuntos), andbyprovincialgovernments. Principle4 - Choose only actionscriticalfor achievingresultsas conditionsfor disbursement.The matrix has beenlimited to the minimumsize necessaryto maintain the coherence o f the policy dialogue, including 15 benchmarks and 5 triggers. Since the operation covers three sectors (education, health and nutrition) and related actions inthe Finance Ministry, the Matrix must inevitably contain a significant number o fbenchmarks. However, the Bank has worked with the government to exclude all actions which are not central to the main thrust o f the loan (which is centered on the definition o f standards and goals, the establishment o f monitoring arrangements and accountability systems; and the identification o f supporting strategies which are needed to help improve outcomes). Principle5 Conduct transparent progressreviewsconduciveto predictable,performance basedfinancial - support.The supervision process for the first loanwill coincide with the preparation ofthe subsequentoperation (expected inmid2008). During the intervening period the Bank will carefully monitor advances andprovide support, as appropriate, to ensure that the six triggers agreed for the second operation canbe met ina timely fashion. 31 Table 6: Summary of Actions or the ProgrammaticPeru EACT DPLs Prior Actions Triggers IndicativeMedium-TermActions Theme Operation 1,2007 Operation2,2008 Operation3,2009 1. Govern- From June 2006 RENIEC specifies All registry offices include ance that all birthcertificates must DNInumbers inbirth include a national identify certificates. document (DNI) code. Following a consultationwith civil The MEFhas begun the 20 percent of provincial and 10 society, the 2007 Budget Law: publication inConsulta percent o f district governments -has specified 11priority areas for Amigable o f the adjusted have participatory monitoring improving the quality o f social budget (PIM) for social o f budget implementation. sector expenditure through programs and provides budget results-based management, and execution and physical - requires the establishment of outcome informationfor at physical goals for each o f these least one pilot program ineach priority areas at national, regional o f three o f the priority areas. and local level. 2. Education MINEDUhas carried out a census 2"dgrade reading census has Census o f 2"dgrade reading o f 2"d grade reading comprehen- been repeated and comprehension has been sion, covering 55% o f schools and disseminated. Coverage is repeated & disseminated, 44% o f students nationwide. A 75% o f schools and 60% o f reaching 90% o f schools and bidding process is underway to hire students, and includes 75% o f students and quality has a firm to disseminate the results at bilingual schools. UMC's continued improving. U M C has school level, using easy to quality control shows that the also continued with rigorous understand "report cards" to be census' quality has improved sample-based testing o f ' given to parents, schools and compared with 2006. attainment to measure real mayors. national trends accurately. 3. Health MINSA has fixed access to good Number o f institutional births Numbero f institutional birthsin quality institutional births as a key in 10poorestregions in2007 10 poorest regions in2008 operational standard for the reached 163,000 (around 60%) reached 174,000 (around 65%). primary health system. Ithas targeted increasing the number o f In2007, SIS affiliation for In2008, SIS affiliationfor institutional births inthe 10 poorest MEFinthe 10poorest regions MEFinthe 10poorest regions regions (Amazonas, Apurimac, has risen to 180,000 and SIS has risen to 210,000 and SIS Ayacucho, Cajamarca, spending on women o f child- spending on women o f child- Huancavelica, Huanuco, Loreto, bearing age inthe 10 poorest bearing age inthe 10 poorest Piura, Puno, and Ucayali) to regions increased by 10% in regions increased by 20% in 210,000 by 2011 (up from 143,000 real terms from 2006. real terms, from 2006. in2005). 4. Nutrition MINSA has changed SIS norms to In2007, MINSAfinanced at Average frequency o f SIEN include the CRED (child growth least 10,000 additional CRED monitoring o f children reaches and development) protocol. services for children under-12 4.0 per year inthe 1styear of months inPeru's 10poorest life; and 2.0 per year inthe 2nd departments (increasing the year o f life. total to 165,000). 32 1. Governancereformsfor equity and accountability inthe social sectors 1.1 Consolidating programs, improving equity in resource distribution and ensuring program accessfor thepoorest 93. The first section o f the matrix addresses the three related problems of program overlap, beneficiary overlap and the lack o f good beneficiary identification and targeting systems. The effectiveness o f social programs has been undermined by the creation o f multiple, overlapping programs with small benefits and no clearly defined goals. At the same time, there i s a problem o f beneficiary overlap, especially in urban social programs, which also lack transparent targeting systems, duplicate efforts and are sometimes inequitable. The lack of a unique personal identification number (CUI) undermines program administration and targeting, making it more difficult for the poor to access social services. In response, the Program supports actions to reorganize and optimize social programs (as part o f the effort to clarify the expected outputs); to establish effective and transparent program targeting rules; to ensure that all Peruvian children have birthcertificates with unique personal identify numbers; and to strengthen civil society scrutiny o f budgeting and execution o f social spending at national and sub-national level. The specific benchmarks are as follows. 94. Optimization of social programs. As a benchmark for DPL1, the GoP has completed an inventory o f social programs and published a detailed plan for their reorganization. For DPL 2, during 2007, the proposals for program reorganization will be incorporated in the 2008 budget proposal, in line with benchmarks specified inthe published chronogram. Ineach sub-sector a coordinating sub-committee o f CIAS will be established to oversee this process. For DPL 3, the reorganizationprogram will have been implemented according to the plan. 95. Improving targeting, For DPL1, MIMDES has begun the creation o f a Single Beneficiary Register (RUB) for its programs, as a basis for eliminating duplication. The hiring process i s underway for a consultancy to establish the beneficiary register for the municipally- administered Vas0 de Leche program, where a significant proportion o f resources are believed to filter beyond the intended beneficiaries. In addition, MEF has created and started implementation o f the Household Targeting System (SISFOH). A contractor has been hired and data collection i s underway in 20 cities covering 1.3 million households. For DPL2, RUB will cover at least five major cities and SISFOH will have reached 143 poor districts in 30 cities. The SISFOH database will incorporate identity numbers (DNIs) and targeting reports will have been completed for three programs. For DPL 3, RUB will cover at least 10 cities. SISFOH will cover 3 million households inthe 30 main cities; SISFOH data capture hnctions will havebeen transferred to local level and 20 local targetingunits will be established. 96. IdentiJication documentation for children and adults. Given the multi-faceted importance o f resolving the citizen documentation problem, the Government's policy measures in this area have been designated as a Prior Action for DPL 1 and a Trigger for DPL 2. DPL 1 recognizes the Government's recent actions to document the undocumented population: (a) as o f June 2006, all birthcertificates should include a DNIcode. For DPL 2 all registry offices will be including DNInumbers inbirthcertificates. 33 1.2 Establishing results-based management and increasing transparency and civil society vigilance in the budgetprocess 97. Results based management and transparency. The problems addressed by this section o f the matrix are twofold: i)Scrutiny by civil society organizations, which is an important tool to ensure accountability in social program, i s hampered by the lack o f accessible, reliable, relevant and timely information on budget execution and outcomes; and ii)there i s limited compliance with the 2002 Law o f Participatory Budgeting; underdeveloped civil society monitoring o f budget execution at sub-national level; and no participatory budgeting for current spending. In response, the REACT DPL series will support the strengthening o f the Consulta Amigable ("Friendly Consultation"), an online portal giving civil society access to budget data in the MEF system, in harness with the roll-out o f results based management in the social sectors. 98. As a Prior Action for DPL 1, the 2007 Budget law mandates the development o f results-based management in 11 priority social sector areas, including a requirement to establish physical goals for outcomes at national and sub-national levels. As a Trigger for DPL 2, the MEF will incorporate the adjusted budget into the Consulta Amigable. This is the version o f the budget which i s really executed, making it the appropriate point o f reference for the monitoring o f execution - and MEF will also provide evidence on outcomes for at least three o f the priority programs. Under DPL 3, the indicative benchmark is that MEF will publish details o fbudget execution for the priority programs through the CA, disaggregated by executing unit and program, and including physical outcomes, to allow monitoring o f compliance. 99. Participatory monitoring of budget implementation: The decentralization process in basic education and heath will make local governments a key agency in the accountability system for the social sectors. However, although a 2002 law provides for participatory budgeting in sub-national governments, there i s a lack o f civil society monitoring o f budget execution and participatory budgeting i s not yet implemented for current spending. In this setting, the DPL series will support actions to establish participatory monitoring o f budget implementation, which builds users' capacity to demand improved quality o f service delivery. DPL 1recognizes the inclusion in the 2007 budget law o f a pilot for civil society monitoring o f the implementation o f sub-national budgets. For DPL2, MEF will have begun the pilots for participatory monitoring o f sub-national governments' budget execution; and for DPL 3 the indicative benchmark i s that 20 percent o f provincial governments and 10 percent o f district municipalities will have inplace civil society monitoring arrangements; and the guidelines for the scope o f participatory budgeting in sub-national governments will include current expenditures. 34 2. Standards and accountability for improved outcomes ineducation 100. Peru's success in reaching universal education coverage, as discussed in Section 111.2, i s the result o f a long-term commitment to education for all. Increasingenrollment is relatively easy to pursue: the goals are easy to understand, so the public can hold the government accountable for meeting its target. Likewise, the government can support local authorities, identify those which are lagging behind their targets, and take corrective action. 101. The GoP's new focus on education quality and outcomes poses new challenges. International experience shows that improving quality is a more complex process. First, the system needs to develop clear learning standards, understood by parents, teachers, school administrators, students, and other stakeholders. Second, there should be continuous universal assessments with timely feedback to teachers, schools, and the community, to allow them to understand the nature o f their quality gap. Finally, the system should provide targeted support to help teachers, schools, and regions close the gap. The REACT DPL series will support this effort inPeru. 102. Standards: REACT will support government's efforts to break the "low quality equilibrium" by supporting the establishment, dissemination, and utilization of clear and transparent reading standards at the 2nd grade. As a benchmark for DPL 1, the GoP has defined and publicized a transparent standard for second grade reading attainment based on four clearly defined levels o f reading comprehension, and has set aggressive targets for improving reading outcomes, reducing the percentage o f children in Group 0 from 46 percent in2005 to 25 percent in2011;and increasingthe proportion inlevel 2 or 3 from 39 percent to 60 percent (Table 7). Inthe next phase, these targets will be broken down to school level: for DPL 2, school-level targets for second grade reading comprehension will have been set and consulted with parents and school committees (CONEIs) in at least 20 percent o f primary schools nationwide. The roll-out o f this accountability system has been chosen as an indicative benchmark for DPL3, by which time it i s expected that school-level targets for second grade literacy will have been set and consulted with parents / CONEIs in at least 50 percent o f primary schools nationwide. Table 7. Targets set by MINEDUfor improving2nd grade reading attainment, 2004-2011 Reall1 Projected Projected Performance level 2004 2008 2011 Group 0 46% 41% 25% Level 1 15% 15% 15% Level 2 24% 27% 35% Level 3 15% 18% 25% Total 100% 100% 100% Source: Secretaria de Planificacibn Estratkgica, MINEDU. I/2004 data from UMC survey. 103. Accountability mechanisms. As well as clear standards, it i s also essential to have a system to monitor outcomes and hold the schools accountable for outcomes. For this reason, REACT will support the development o f a new national regulatory structure in education, 35 coupled with the development o f an annual census o f reading attainment as the basis for school-level accountability. 104. Regulatory structure: REACT will also support the development o f a national regulatory system for education, called SINEACE, which i s to be charged with monitoring the quality o f educational institutions. SINEACE will establish accreditation at all levels o f education system. For DPL 1, the GoP has prepared the implementing regulations for the SINEACE law (which are at present posted for consultation on the MINEDU website). For DPL 2; the GoP will budget the creation o f the three quality supervision institutes contemplated in the SINEACE system: IPEBA for basic education, and CONEACES and CONEAU for tertiary education and define their staffing plans and POAs for 2008. The indicative benchmark for DPL 3 i s that SINEACE will develop work plans for 2009-2010 covering: standards and evaluation criteria, self evaluation and accreditation procedures; will complete the accreditation o f at least 10 tertiary programs (5 public and 5 private); and will have assumed responsibility for the licensing o f all new tertiary programs. 105. Reading attainment census: Before 2006, quality assessments in Peru were sample- based. These were useful for identifylng national and regional averages and trends and to inform the development o f the curriculum and standards, but did not permit the monitoring o f individual schools' performance. As detailed above, for the first time, the national assessment in December 2006 produced nationwide school-level data on reading and comprehension skills o f students in the second grade, achieving 55 percent coverage o f schools. The REACT DPL will support the continuing development o f the national literacy evaluation to achieve higher levels o f coverage and its expansion to cover bilingual schools. It will also support the use o f the results to inform parents about their children's performance, explaining the scores in easy-to-understand terms. Municipalities will get reports on the performance o f their schools and targets will be set for improvement. 106. As a Prior Action for DPL 1 the December 2006 Census o f reading comprehension was carried out and delivery has begun o f report cards to schools, parents and the press on the results. As a Trigger for DPL 2, MINEDU will implement and disseminate the results o f a second assessment o f 2ndgrade reading, with coverage o f 75 percent o f schools, including bilingual schools, and quality control system will be put in place for the Census. As an indicative Trigger for DPL 3, the Census o f 2"d grade reading comprehension will be repeated for a third time, with 90 percent coverage. Peru will also continue applying rigorous sample-based measurement o f quality, through the U M C program, and will have finalized plans to participateinthe 2009 international PISA educational quality evaluation. 107. Supporting supply-side actions to improve education service provision. For increased accountability to have a positive impact on learning, it will also be necessary for the education system to respond by allocating the necessary resources to improve defective services. Effective approaches must be developed to teaching reading in rural and small urban areas, together with the availability o f varied reading materials, exercise books, and writing instruments. At present, textbooks for 1'' and 2ndgrades do not incorporate best-practice for literacy. REACT will support actions to improve the quantity and quality of such inputs, including: enhanced training for teachers, improved textbooks, and delivery o f additional books and supplies to the poorest schools. These tools will enable teachers to respond the 36 pressure generated by continuous assessment and increased parental knowledge, to improve educational outcomes. Text Box 6: Learning Standards Standards are the "weights and measures" o f the education system. One o f the primary roles o f the national government ineducation is to establish a set o f learning standards that canbe easily understood by different participants. Teachers have to understand what is expected o f them and o f their students. Likewise, parents have to know what to expect their children to learn. Most stakeholders have an easier time understanding easily quantifiable goals. While it is certainly laudable for students to develop "a love o f reading," it i s much easier to evaluate whether they can "read and understand a complex sentence inless thanone minute." Standards need to be realistic, given teachers' capacity and students' experience and background. A society where most teachers have only one or two years o f tertiary level training likely needs different standards from societies where teachers have post-graduate degrees. A bilingual society needs different standards from a monolingual one. But standards should be national inscope, to allow the best performing schools to serve as benchmarks for the rest o f the country. Currently, Peruhas national standards for all grades and subject materials inthe basic education national curriculum. These standards,however, are largely unknownto bothparents and teachers tend to be qualitative and thus, hard to evaluate ina transparent way. They are also so-calibrated as to be overly demanding for most students. To move forward inimproving quality and accountability inthe education system, Peruwill have to update its standards to make them more relevant for students and more transparent for parents and teachers. 30 108. For DPL 1, a national evaluation has been undertaken to diagnose staffs training needs (January 2007), covering 65 percent o f teachers, and the results have been analyzed and disseminated in the media and the MINEDU website allows on-line verification o f which teachers participated. For DPL 2, MINEDU will design and pilot a TA program focused on reading attainment in the first two grades o f primary, including the development of a specialization in this area. It will also prepare text books and training guides focused on primary reading and design incentives for teachers to work in lSt and 2"d grade. Inaddition, it will provide the schools inthe poorest 25 percent o f municipalities with non-textbook reading and writing materials. For DPL 3, MINEDU will reach pre-defined benchmarks for the implementation o f the TA program in the five regions with the worst test scores and roll-out o f the 1`` and 2"d grade literacy specialization, textbooks and teachers' incentives will have begun. MINEDU will provide the poorest 50 percent o f schools with non-textbook reading and writing materials. 3. Standards and accountability for improved outcomes inHealth 109. Standards. The lack o f standards for basic services in poor regions has contributed to stagnated outcome indicators, with low coverage and quality o f basic primary and secondary care (e.g. institutional births coverage i s only 70 percent nationwide and 54 percent inthe ten poorest regions). This, in turn, threatens to undermine the improvement trends for maternal and infant mortality. In response, the REACT DPL will support the MINSA strategy to increase the coverage o f institutional births in Peru, focusing on the 10poorest departments3', 30This also requires separating "high level" standards that focus on major objectives from "lower level" standards that are important steps to achieve major objectives. 3'Amazonas, Ayacucho, Apurimac, Cajamarca, Huancavelica, Huanuco, Loreto, Piura, Puno and Ucayali (ENDES 2004). 37 where coverage deficits are most marked. The strategic importance o f centering in institutional births is that this service i s a tracer for the quality o f maternal and child health services. Increased coverage i s expected to have a direct impact on peri-natal and maternal mortality rates and to contribute to improved nutritional outcomes for newborn children. As a Prior Action for DPL 1, MINSA has established access to institutional births with good quality as a key operational standard for the primary health system, and has set a target to improve coverage o f institutional births in the 10 poorest departments to 210,000 by 2011 (up from the Baseline o f 143,000 -about 53 percent- in2005). As Triggers for DPL 2 and DPL 3, Peru will reach specified intermediate targets for the number (and implicit proportional coverage) o f institutional births in the 10 poorest departments, o f 163,000 (about 60 percent) and 174,000 (about 65 percent). 110. Monitoring and accountability. The accountability strategy seeks to involve the interested parties - especially regional and local governments - in supporting the goals o f the strategy, informing the population on the advances and challenges. Formal Management Agreements will be signed between national and regional governments; and between regional and local governments, in each o f the 10 departments. These will include annual quantitative goals, and diagnostics o f the obstacles and challenges to achieving the goals in the region, including, for example, the sufficiency o f available human resources to achieve the programmed number o f institutional births.32These Agreements will be coherent with the results agreements promoted by the MEF and with the recent Executive Decree on the decentralizationo f health and education services. 111. The roll-out o f this accountability strategy through the three-part series will be as follows: for DPL 1, the accountability system has been established, based on performance agreements for health networks and regions/municipalities. Regional goals have been set for coverage o f institutional births. Monitoring will be through administrative information systems (HIS and SIS) for each region. For DPL 2, performance agreements will have been established for the 10.poorest regions and pilots will have started for municipal PAS in 2 districts in each o f these regions. MINSA will publish bi-annual updates on performance agreements on the Web Portal. For DPL3, the coverage o f performance agreements will have expanded to 20 districts inthe 10 poorest regions; and the publication o f bi-annual updates on the Web portal will continue. MINSA will publish annual reports for at least 75 percent o f 2008 agreements. Regional public hearings will be held to allow communities to participate in the discussion o f these results. 112. Integral health insurance. For DPL 1MINSA and SIS have agreed an plan to increase coverage and scope o f SIS insurance for women o f childbearing age (MEF) in the 10 poorest Departments o f Peru. At present, women are given access to Plan Cywhich covers only births; the new policy will give them broader coverage. The information system will be upgraded to allow the linking o f each paid service to a specific provider and beneficiary. This will allow 32Preliminary estimates suggest that there will be a need for a 5 percent annual increase inthe number of MINSA doctors, nurses and obstetricians in the 10 poorest regions in2008 and in2009. The baseline is being determined by MINSA. 38 SIS and MINSA to identify the population centers with low coverage and to track the affiliated population using risk-factor analysis. A baseline estimate indicates that 121,000 are affiliated to SIS; and that N S 30 mn o f SIS resources presently fund services for MEF inthose Departments. As a Trigger for DPL 2, MINSA has set a target to increase SIS affiliation for MEF in the 10 poorest departments to 180,000, and increase SIS resources for MEF the 10 poorest departments by 10 percent in real terms 2007 compared with 2006. For DPL3, SIS affiliation for MEF in the 10 poorest departments will reach 210,000, and SIS resources will have increased by 20 percent inreal terms from the 2006 baseline. 113. Medicine availability: The Government will formalize a norm for a "birth package" including the medicines and other materials needed for a high-quality birth. To ensure availability in the networks o f the 10 selected regions, DIGEMIDwill monitor the availability o f the medicines. The benchmarks by operation are as follows: for DPL 1, an operational standard for medicine availability inprimary and secondary health posts has been established, and DIGEMIDand SIS have set targets for medicine availability inhealth centers where births happen; 60 percent are compliant. For DPL2, medicines availability will comply with norms for at least 70 percent o f health centers where births are attended inthe 10poorest regions; for DPL3, this will riseto 80 percent. 4. Standards and accountability for improved outcomes inNutrition 114. Goal and Strategy: For DPL 1, the GoP has committed to a target o f reducing stunting by 5 percentage points in five years, and regional level targets have been calculated by CENAN and adopted by the Regional presidents. For DPL 2 progress on stunting outcomes will be monitored through the MONIN survey and the SIEN system and will be advertised by CENAN; and regional nutrition strategies will have been approved by at least five regional governments. For DPL 3, the monitoring o f progress on stunting will continue and the regional strategies will have met the implementation benchmarks specified for the first year. 115. Communicating nutrition standards. The lack o f awareness o f many parents about their child's nutritional failure, due to the lack o f easily-understood standards, is a major obstacle to change. Therefore, improving effective communication to mothers about their child's nutritional potential and status is a central strategy o f the REACT program. For DPL 1, the Health Promotion Directorate o f MINSA (DGPS) has begun preparation of a communication strategy for popularizing the new WHO growth standards for children under- 24 months. This will center on the median height and weight gain. For DPL 2, communication tools for reporting children's monthly weight gain and height gain to parents and counseling on nutrition will have been designed and piloted in rural areas with high stunting rates. For DPL 3, the communication methodology will have been mainstreamed in rural areas with highmalnutrition. 116. Monitoring system:A stronger national monitoring and counseling system i s needed to generate data on the nutritional conditions o f the high-risk populations to inform resource allocation and program design. To this end, the program supports the strengthening o f the SIEN system for nutritional monitoring, which can track individuals' trajectories on height and weight. The ideal standard i s that children under one year o f age should be monitored 39 monthly, especially in high-risk communities. For DPL 1,baselines have been established for average nutrition monitoring frequency o f children under two at national and regional level through the SIEN system in 2005 (3.3 measurements per year for children under-one and 1.6 per year (pending confirmation) in the second year o f life). For DPL 2, national and regional targets will have been set for nutrition monitoring frequency o f children under two through the SIEN system. MINSA performance agreements, including nutrition monitoring and counseling goals for regions, districts and health posts will have been posted on the Web. As an indicative Trigger for DPL 3, the average frequency o f SIEN monitoring o f children at national level will reach 4.0 per year inthe 1st year o f life; and 2.0 per year inthe 2nd year o f life.33 It i s also expected that for D P L 3, MINSA will have begun implementation o f a plan for health information system consolidation (consolidating SIEN, HIS and SIS). 117. Finance for growth monitoring and counseling: The lack o f earmarked financing undermines incentives for the health system to provide nutritional services such as monitoring and counseling. To address this critical problem, the operation supports the mobilizing o f SIS resources to finance nutritional monitoring and counseling protocols o f MINSA. As a Prior Action for DPL 1, the Government has changed SIS norms to include the CRED (child growth and development) protocol. As a Trigger for DPL 2, SIS will have financed at least 10,000 additional CRED services inPeru's 10poorest departments, taking the total to 165,000 in2007. The indicative benchmark for DPL 3 is that thiswill riseto at least 20,000 additional CRED services inthe 10poorest departments in2008, taking the total to 175,000. 118. Community level counseling: The operation will support MINSA's strategy to strengthen nutritional counseling at community level usingthe health system's promoters. For DPL 2 MINSA will have begun a pilot to involve MINSA promoters innutrition counseling in highmalnutrition rural areas. For DPL 3, the pilot will have been completed and roll-out begun, with supervisionreports being generated ina timely fashion. 119. Strengthening the nutritionfocus of the Juntos CCTprogram:The 20% o f all Peruvian households which are programmed to be covered by Juntos are concentrated in high malnutrition areas and are estimated to include about 38% o f the country's chronically malnourished children. However, Juntos, has lacked an effective focus on nutrition and its liaison with MINSA has been weak. The Government has now decided to re-center the program on nutrition. For DPL 1, the Juntos has remitted to its Board a proposal to re-focus the program on nutrition, including budget support to MINSA's basic health and nutrition counseling services, to help them respond to the increased demand occasioned by Juntos' conditionalities. For DPL 2, 50 percent o f children aged < 24 months inJuntos participate at least 4 times a year inmonitoring and counseling; and for DPL 3, 75 percent o f children < 24 months, inJuntos participate at least 4 times a year inmonitoring and counseling. 33 During the preparation of the second REACT operation, this trigger will be revised to reflect the relevant sub- national targets. I t is expected that these increases in the national averages will be produced mainly by much sharper increases inthe monitoring density achieved inhigh risk populations. 40 VI. OPERATION IMPLEMENTATION POVERTY AND SOCIAL IMPACTS 120. Overall, the REACT program i s expected to have significant positive social impacts. During preparation, the Bank undertook a poverty and social impact analysis to explore the disaggregated social impacts on different stakeholder groups, in order to enhance the positive impacts and minimize and reduce negative impacts and risks associated with the program. The results o f this analysis are presented inthe following paragraphs. 121. The policies supported by REACT include governance reforms in the social sectors (including a consolidation o f social programs to improve quality of services, and the goal of ultimately providing birth certificates including the national identity number to all Peruvians under two-year old) as well as improving the quality o f education, health services and nutrition programs' targeting and impact. Each o f these policies has a likely overall positive poverty and social impact. These potential impacts, along with the potential risks and/or adverse impacts on certain groups and mitigation recommendations are discussed below. 122. Consolidation of social programs to improve quality of services. The proposed program would rationalize social programs to improve quality, reduce leakage o f resources, reduce administrative costs, improve transparency and optimize impacts. This set o f policy changes would improve social services and therefore have overall positive social and poverty impacts. As is the case with any policy change, some social risks can be expected. Some workers could lose their livelihood with the fusiordharmonization. In addition, the individualshouseholds currently being served by more than one program may have to learn how to access and participate in a new system o f benefits with new rules. There i s also a risk that if these households do not have adequate access to information because o f their location or language, then the reorganizatiordfusion process could have the unintended consequence o f reducing coverage. To mitigate this risk, the process will need to a strong communications strategy. 123. Citizen documentation. The program aims to ensure that all birth certificates have a DNI number. Given that many rights o f citizenship can only be claimed if one possesses a birthcertificate and DNI, the goal o fensuringDNIis present on BirthCertificates would have significant positive social impacts-increased enfranchisement, increased access to jobs inthe formal sector, etc. This will need to be complemented by educating the public (in an accessible manner-e.g. by local radio and in appropriate languages) about the importance o f getting birthcertificate for their child and to reinforce the message that no fees are charged for registeringbabies. 124. The Government i s also using the Conditional Cash Transfer program, JUNTOS to facilitate the process o f documenting adults. This will likely have a positive social impact, since the program will cover the costs o f the documentation process. However, access to social programs should not be denied to people without DNInumbers, as there maybe the risk o f excluding the poorest and most remote people and who remain undocumented. Rather, a mechanism for issuingprovisional documentation should be established. Over all, the system 41 should provide incentives that encourage and facilitate the registration and documentation o f formerly undocumented adults and children while not further penalizing or excluding those who are unable to register or for whom registration is either physically or financially inaccessible. RENIEC's recent activities to issue DNIs free o f charge are a strong move inthis direction, and the policy shift to include unique identification codes (CUIs) inbirthcertificates (which are free o f charge) is another important step. 125. Education. Improving standards in schools though better test performance and increased accountability and transparency i s an important step in improving the quality o f education. This reform would be expected to have a positive social and distributional impact. However, in addition to testing, monitoring and "report cards" on school performance, the Borrower should also be aware o f additional factors that could enhance the positive social impacts and reduce the risk o f adverse effects o f the proposed education reforms. 126. Teachers' income and secondjobs. One dimension o f Peru's low quality equilibrium i s that teachers have been historically underpaid and have not been expected to perform to any set standards o f quality. This led to a situation where approximately half o f the teachers in Peru have a second job o f some sort, which could undermine attempts to increase effort levels in schools.34 Teachers' salaries have improved significantly over the last decade, which should open the way to correct the situation, but the issue will need to be carefully addressed. 127. Overcoming teacher opposition. Ineducation, teachers' attitudes will be crucial to the success o f the reform. The best option i s to find a strategy and a pace for change that takes teachers' perspectives into account and provide them with real opportunities to improve their skills and get incentives based on high performance. The positive shift in the attitude o f the teachers' union, SUTEP, towards the reform process during the last six months i s a positive augury from this point o f view. 128. Health and Nutrition. Overall, the proposed policyreforms inhealth and nutrition are expected to have significant positive social impacts. However, the health policy shift towards encouraging more institutionalized births could also have adverse impacts on traditional midwives (particularly in rural and indigenous areas), if they are replaced by formal institutional arrangements. In addition, if rural poor or indigenous people do not trust the formal systems then they might also face adverse impacts. However, both o f these adverse impacts can be mitigated if the midwives and other informal health workers are included and given incentives to refer their patients to formal institutions-clinics and health posts-for delivering babies and measuringbabies' height/weight. 34 For instance, in rural dispersed areas, an estimated 61-65 percent o f tenured teachers engage in "secondary activities" and among other groups (non-tenured andor urban areas) the numbers range from 25-80 percent, according to Eduardo Zegarra and Renato Ravina's 2003 report entitled, Teacher Unionization and Quality o f Education in Peru: An empirical Evaluation Using Survey Data, Inter-American Development Bank." See also IEG 2006 Report entitled, From SchoolingAccess to Learning Outcomes. 42 ENVIRONMENTAL ASPECTS 129. The Bank has evaluated whether the actions supported by this operation might have any significant environmental impacts (positive or negative). The only area o f identified risk i s that associated with the increase in institutional births, which will lead to an increased concentration o f post-partum waste at the health posts. Although it i s easier to manage the proper disposal o f such waste in health posts than if it were dispersed in private dwellings, there i s still a possible risk o f poor management of the waste within the healthposts. This risk i s being mitigated by the Bank's PAR Salud 2 health investment project, which i s directly supporting the promotion o f institutional births. Specifically, in the context o f the preparation o f PAR Salud 2, a review will be conducted to confirm the sufficiency o f MINSA protocols for the disposal o f medical waste and o f compliance with the norms inrural health posts. The policy actions in governance, in education and nutrition should not lead to any issues about waste management, contamination or the impact o f public policies on the sustainability o f natural resources. IMPLEMENTATIONMONITORINGAND EVALUATION 130. For each set of benchmarks or triggers, the Operation Policy Matrix specifies clearly defined baselines, and methodologies for measuring changes over the life o f the operation. The Matrix defines 10expected development outcomes. 131. The actions o f the first part o f the Program, related to Governance reforms, are expected to lead to positive institutional outcomes in the form o f a simplified program structure with clear mandates and goals; a better documented population o f children; improved targeting; and the improved documentation o f outcomes for priority programs. These outcomes will be documented through institutional and programmatic analysis. 132. The reforms supported in education, health and nutrition are expected to lead, symmetrically, to two related development outcomes at household level, one concerned with awareness of standards (a lower level outcome) and one concerned with developmental attainment (a higher level outcome). 133. For education, the set o fpostulated outcomes is: Improved parental understanding o f 2ndgrade reading and math attainment standards and improved correspondence o f parental perceptions with objective indicators o f children's and schools' performance. (Source -household survey, with additional questions to be added to the INE's ENAHO continuous household survey by the end o f 2007). Improved reading comprehension in 2nd grade (national, region-al, school): (a) % o f children in each reading attainment level); (b) average scores on reading standard test. (Sources: annual censuses, U M C surveys). 43 134. Inhealth, the expected outcomes are: 0 Improved women's understanding o f their right to an institutional birth and the standards for a good-quality birth (including cultural adequacy); and improved correspondence o f perceptions o f maternal and infant health service quality with objective indicators o f health posts' performance. (Source- household survey, with additional questions to be added to the INE's ENDES continuous household survey by the end o f 2007). Reduced peri-natal mortality in 10 poorest regions (Source: ENDES continuous household survey). 135. InNutrition, the expected outcomes are: 0 Improved parental understanding o f growth velocity standards for children under-2; and improved correspondence o f parental perceptions with objective indicators o f nutritional status. (Source - household survey, with additional questions to be added to the INE's ENDES continuous household survey by the end o f 2007).) 0 Reduced proportion o f children under-2 in high malnutrition areas with insufficient growth velocities (source: SIEN) and reduced national malnutrition as measured by stuntingrates for children under-5 (sources: ENDESand MONIN surveys; and SIEN). 136. A particular challenge is that o f measuring changes inknowledge about standards and expectations for better outcomes. To track the Program's success in this regard, the Government plans to collect data through nationally and regionally representative household surveys; as noted above, this will be done through the incorporation o f additional questions in established national household surveys, ENAHO and ENDES, both implemented by INE. To generate a richer dataset linking household and facility data, the Bank will also seek funding for a specialized study to be implemented duringthe preparation o f the second REACT DPL. This exercise will provide a robust measurement o f the household-level impact o f the strategies supported by the DPL to improve awareness and raise expectations for better outcomes inthe basic social sectors. 137. However, it should be noted that the M&E strategy outlined here does not purport to test the causal linkages between changes in awareness o f standards and improved outcomes in a scientifically rigorous fashion. That would imply an experimental approach to implementation, which would be hard to achieve in a programmatic operation o f this sort, given the difficulty o f limiting public information campaigns to exclude control groups and also, given the complexities o f the likely causalities (which also include relevant supporting supply-side improvements). However, the evaluation strategy will measure each variable rigorously, to establish whether the evidence supports the possibility o f a causal link. For example, if the higher-level outcomes were to improve without a measurable increase in parents awareness; that would be evidence that the importance o f standards might have been overstated inthe designo f the program. FIDUCIARY ASPECTS Public Financial Management System 138. The Bank reviewed public financial management (PFM) arrangements in Peru. With support from earlier DPL operations, progress has been made since the 2001 Country 44 Financial Accountability Assessment (CFAA). It was observed that in recent years, the country has made important progress in its Public Financial Management (PFM) system and improved transparency inpublic finance through reforms incritical areas. However, the IMF's 2004 Fiscal Transparency Report on Observance o f Standards and Codes (ROSC) and the Bank's draft Country Financial Management Strategy (CFMS), identify important outstanding issues. The Bank i s working with Peru to address these issues through an ongoing work program. 139. The Bank's review looked at public sector financial accountability arrangements; the legislative framework; the application o f appropriate accounting standards and the reporting formats; the competence o f financial staff generally, and the adequacy o f financial management systems and practices, including cash management, planning, control, and supervision o f financial operations. Overall, Peru has made reasonable progress in financial management and transparency, particularly with the implementation o f the Integrated Financial Management System (SIAF), and modernization o f budget processes, institutions and information systems. As documented elsewhere inthis Program Document, respondingto strong nationwide political support for strengthened accountability, the Government is introducing results-oriented budgeting, to improve the efficiency and quality o f public spending and service delivery. However, a number o f problem areas remain, including: (i) lack o f comprehensive legislation governing financial administration; (ii)excessively complex regulations and overly-centralized control by the MEF; (iii)lack o f sufficient fundingto allow the office o f the Auditor General (Contraloria General de la Repziblica-CGR) to maintain its independence and do its job; (iv) the need for further improvement in information provision, to allow Congress and the general public to properly oversee public expenditure; (v) the need to expand SIAF and harmonize its systems with other instances o f public finances; and (vi) under-developed anti-corruption measures. 140. To update the 2001 CFAA, during FY 08 the GoP plans to conduct (with Bank assistance) a PFM Systems Self-Assessment, using the Public Expenditure and Financial Accountability (PEFA) Framework. This exercise provides a common platform for assessing essential PFM systems and monitoring PFM performance. The assessment will cover Peru's oversight environment, accountability and transparency policies, and information systems. The self-assessment will also give the Government and IBRD an opportunity to analyze fiduciary issues, and will provide the government with a sense o f ownership that encourages addressing the identified weaknesses. 141. The implementation o f PFM reforms to increase the transparency o f processes i s likely to reduce transaction costs and generate o f economies o f scale. The Bank's experience in other Latin American countries such as Chile, Brazil and Mexico indicates that efficiency in public financial management generates savings that greatly exceed the government's investment in reforms. Practical observations in the field on the implementation o f integrated PFM systems clearly show that more reliable, transparent, accurate use of date benefits the decision-making process. The Bank will work closely with the Government to create the necessary tools to ensure the provision o f statistical information as part o f these CFMS objectives. 45 142. These Bank initiatives will directly support the government's efforts to improve the quality o f fiscal management and establish stronger links from expenditures to developmental outcomes, as outlined in the REACT DPL matrix - especially the transparency dimension o f the performance-based budgeting strategy (see Text Box 2). Peru's developmental objectives are more likely to be achieved if the government: (i) allocates public resources efficiently and economically; (ii) spends resources for the purpose intended; and (iii) monitors its spending in timely and transparent manner. The proposed PFM strategy will balance country and portfolio issues by focusing on three main areas: a) improving the country's disbursement ratio; b) promoting the anticomption and governance agenda; and c) modernizing and strengthening PFM national and decentralized systems and procedures. 143. Since this DPL operation will provide general budgetary support to the MEF, as part o f the due diligence process, the Bank assessed the performance o f SIAF, and noted several weaknesses, coinciding with the IMF ROSC conclusions in this area. Among the shortcomings that should be addressed are: the need for greater flexibility in report preparation; the provision o f appropriate account details for effective project management; the lack o f reconciliation between the SIAF and other IT systems (which may create information gaps); involuntary errors or mistakes; and o f the need to continue increasing transparency on information management. Recommendations to address these problems include: Adapt the SIAF software to use web-based internet connectivity 0 Extend the SIAF to project implementingunits (PIUS) 0 Use other IT systems only when they are compatible with SIAF or could be connected to SIAF bythe transfer o f archives 0 Incorporateinto the system information on budget amendments Register inthe system monthly and quarterly budget allocations o f executing units 0 Register inthe system the commitments incurred against the available allocations. 144. Much also remains to be done to establish a strong anti-corruption strategy in Peru. The current approach to ethics in government is not supported by comprehensive legislation or funding. To bring Peru into line with other countries inthe region, the CGR has developed an anti-corruption plan, which has been incorporated into the new CGR strategy document, bbLinearnientosEstratkgicos", but has not yet been formalized. One key issue i s the prosecution o f corruption cases. Although the Fiscalia de la Nacidn (the attorney general's office within the judicial branch) has on staff some financial specialists to investigate corruption allegations, there have been few successful prosecutions. CGR argues that this is due to the absence o f specialized courts to try such offenses and the limited resources available to the CGR for preliminary investigation. 145. World Bank diagnostics o f the country public procurement indicate fragmentation o f procurement and limited progress inimplementing institutional reforms that resulted from the findings o f the 2005 CPAR. A joint World Bank / IADBprocurementmission on March2007 confirmed these findings and focused on: (i) recommendations to speed up the "investment shock'' program taking into consideration the integrity and transparency aspects o f procurement, and (ii) suggestions for the preparation o f an action plan to implement the core 46 reforms needed in the procurement system, including strengthening o f CONSUCODE, and the revision o f the Law 28880 / 2006 dealing with the Supplemental Credit to the National Budget. Treasury Account and Funds Flow Arrangements 146. The GoP operates through the Treasury account in the Central Bank (BCRP). The BCRP enjoys statutory autonomy inmanaging monetary policy and its relations with the GoP are clearly defined in law. Its activities are governed by Article 84 o f the Constitution and its December, 1992 charter. The BCRP's Board o f Directors i s appointedjointly by the executive and legislative branches. It i s prohibited from financing or extending collateral or guarantees to the Treasury or official development financial institutions and i s subject to ex post control by the Comptroller General and to supervision by the Superintendent o f Banking and Insurance (SBS). It publishes an annual report (including audited financial statements) and reports on the performance o f the monetaryprogram. 147. The Treasury account makes payments, as authorized by the budget-holding executing entity, which are transmitted to the beneficiary entity, via the banking system. The reform o f the SIAF system will facilitate improvements in financial management by the Treasury, by creating a comprehensive transactions data base, which will improve monitoring o f budget executionby spending agencies. 148. An IMF safeguards assessment found no systematic vulnerabilities inthe safeguards o f the Central Bank as o f 2004. Nothing further came to the attention o f the Bank that caused it to believe that the control environment into which the loan proceeds will flow is other than adequate. N o additional steps are needed to secure acceptable fiduciary arrangements and the audit o f the designated account i s not considered necessary. DISBURSEMENT AND AUDITING 149. Disbursement arrangements for this operation will follow the procedures for DPLs as set out in OP 8.60: "Except as the Bank may otherwise agree (i) the single tranche withdrawal from the Loan Account shall be deposited by the Bank into an account designated by the Borrower and acceptable to the Bank which forms part o f the country's foreign exchange reserves at the Central Bank o f Peru; and (ii) the Borrower shall ensure that upon deposit o f the Loan into said account, such amount or an equivalent amount i s credited inthe borrower's accounting system to an account, acceptable to the Bank, that finances budget obligations." The Government will be required to provide confirmation o f steps (i)and (ii) as soon as the tranche i s received. The proceeds o f the loan may not be used to finance expenditures typically excluded under the Loan Agreement. RISKSAND RISKMITIGATION 150. Macroeconomic risks; The present positive macroeconomic situation o f Peru will inevitably remain vulnerable to possible terms o f trade shifts, which might reduce expert 47 revenues and feed into slower growth rates. However, in the absence o f unexpected policy shifts, the strength o f the underlying fiscal and monetary fundamentals, together with the very strong growth in private investment demand and real GDP, make it unlikely that the macroeconomic situation could become incompatible with continued budgetary support lending duringthe proposed term o fthe REACT DPL series. 151. Political risks: The program i s supported personally by President Garcia, who has made many strong public statements in support o f improving quality and strengthening accountability inthe social sectors. The personal involvement o f the President will reduce the risk that changes at ministerial level might de-rail the program. However, a risk exists that the necessary changes may be opposed by groups within the relevant ministries (MINEDU, MINSA, MIMDES). The strategy o f the project addresses this risk by seeking to mobilize public support for change, as a counterpoint to the conservatism o f established professional "corporations" in the social sectors. In addition, to minimize the risk o f opposition based on technical quibbles, the operation supports the popularization o f standards for which there i s technical acceptance in the sectors, and also supports complementary actions to secure the resources needed to achieve the desired outcomes (thus giving the sectors an interest in the implementation o f the strategy). It should be noted that since the GoP does not have a majority inCongress, the operationhas avoided strategies that requirelegislative approval. 152. Social and environmental risks: The operation promotes the mobilization o f diverse social actors to press for change in service quality, especially in poor rural, communities (many with large indigenous populations). In this setting, although the expected impacts are positive, there i s some risk that conflicts might arise. For instance, there could be staff resistance to greater transparency or to incentives to improve performance. There could be conflicts between local governments and line ministries. There i s also a risk that interventions might not be culturally appropriate and o f inequity in distribution o f the benefits, due to continued exclusion o f minority and indigenous groups. To minimize the political and social risks, during preparation, the Government has undertaken extensive consultations with civil society on the rationale and strategies to be supported by the Operation (as detailed in Section 111.5). As detailed above, the Bank has also carried out a poverty and social analysis which identifies possible negative impacts on vulnerable communities, traces points o f support and resistance and comments on the strategies adopted to offset possible negative impacts and to overcome obstacles (e.g. through the adjustment o f the strategy to avoid unnecessary conflicts; and the adequate design o f communications strategies). 48 ANNEX 1:LETTER OFDEVELOPMENT POLICV "DECENIO DE LAS PERSONA3CON DISCAPACIDADEN EL PERU" "ARO DEL DEBER CIUDADAMO 1 MINISTERIODEECONOMlA Y FII NZ S DespachoMlnisterlal OFlClO No 464 -2007-EF/lO CARTA DE POLmCA SECTORIAL Senor Paul wolf0wit2 Presidente Banco Mundial Presente.- Refemcia: PrBstamo Program&thde ReformasSociales Estimedosenor Wolfawitr, Mediante la presente le manifiesto el cornpromisodel Gobiemodel PresidenteAlan Gamk P6rez de nsducirla pobreza y las brechas de inequidady exclusitin de rn8s de 13millonesy medio de peruanos. Para ello, se ha planteado elevar la eficacia del gasto social mediante una gestibn orienfada a 10s msultados estableciendo como prioridad la rnejora de indicadoresciaves en el campode la educaci6n,salud y nuiricibn. En este marco, se ha d e ~ m l l a d o "Pr6stamoPmgmmMco de Refomas Sociaies" con el el Banco Mundial (BM), soticitado por el monto de US% 150 millones, que comprendertf acclones especlficas en diversas areas de politica social. A continuacion se describe el confexto econbmico del Per&y posteribnnente 10s objatiws y las reformas realizadas y las propuestaspara el pr6stamo solicitado. A. Contexro econdmico En 10s Mh??os aaos, el Pen) ha reallzado avances consoildando su estabilidad macroew~6micae implementando importantes reformes. Sobre la base de un contexto lntemacional favorable, la ewnornla SB ha expandidoa un riimo sin precedentes que lo ha pennitido crecer a un promdio anual de 4,25% desde el aA0 2001. l a infiaci6n sc ha mantenMobaja y la posicidn intemacbnal delpals se ha fortaiecidosignificativament~. ' En cuanto a la politic8 fiscal,el prlncipb que se ha seguido es el de asegurar el equiiibrio o SuperrSvif fiscal en el mediano plaro, acumulando supec3vit flscales en los periodos favombles y permitiendo deficits moderados y no recumntes en periodos de menor creclmiento. En dicho contexto, se han tornado acciones que han permitido incrwmentar la _---..---Minislerio .--.. . 1- . Jr Junin 318,Lima Piso4, Teibfonos (511)428-9630 -deEconmla y Finanzas 1 49 "DECENIO DE LAS PERSONASCON DISCAPACIDAD EN ELPERd" "Af40DELDEBERCIUDADANO" MlNlSTERlO DE ECONOMIAY FINANZAS DespachoMinisterial Luis Carranza Ugarte Ministm recaudacidn lribularia, alcanzando la cifra de 14,996 del PBI durante el 2006, explicadopor el cmimiento de la economla, el favorable context0 internacmnal y por /as acciones de flscalizacidn por pari8 del Esfado. Asimismo, /as cuentas fmcales registraron UII superavit de 2,f% del PBI en el Secfor Pdblico No Flnanciem,la cifra mas alta registrada desde que se pose estadisticasfiscales. Respecto a la deuda PljbliC8,el sa/doto!al a finesde 2006 asciende a US$ 30 488 miflones; sin emb8rgo. como ratio del PRI, la deuda pobblica total disminuy6 de 44,3% del PBI a fines de 2004 a 32,796 a diciembm de 2006. La meta en esta &rea8s reducir paulatinamente la deuda pdblica, espemndo que a1 2007 Bsfa represente el 37,196 del PBI y, al finalizar el 2011, se reduzca e menos de 26%. En pdltlca monefaria, la tasa de lnflacibn a/ conduir el a#o 2006 fue de l,l%, 1nant6n/&?dOSeun Npo de cambio estable que en promedio fue de 3,28.Asimismo, a inicios del aiio 2007 /as Resetvas lnternacionalesNetas (RIN) superamn la suma de US$ 17 275 millones. De esta manera, el desempefio de I8 economiaperuana ha sido posiiivo, registrandoseun crecimientoecondrniw relativamentesblido, bajos niveles de inflaclbn y una melora general en la rnayoria d@indicedores financiems, Sin embargo, se manf{enenimportantes bfechas socialesya que la mitad de la poblaclbn todavla vim debajo de la llnea de pobmza y uno de cada cuatro niffos en el Ped sufre de desnutricion crdnica. El acceso a seivicios basicos corn la educacibn,atencidn de salud y seguridad edn es inadecuado. En esfe confexto, el Gobierno del Ped viene adoptandouna astrategirs inIegra1que permit8 transitar del crecimientoeconbmi'co del pals a1 desamllo sosfenibk, asegurando que sus beneficios Sean compartidos por todos /os peruanos; consolidando la estabilidad maCrOeCOn&nlCa, mduciendo signh7cativamente la pobmza, genersndo politicas de inclusidn socle1y enfrenfando dabitidades estructura/es para ampiiar las perspectivas de crecimientoen el msdianoplazo, 8.Reformasasociadas a1Pmgrama Un aspecto fundamenfal para reduck la pobreza 8s conter con estindares y metas claramentedefinidas en la pmvisibn de 10s setvbios sociales; asi como propiciar un rol mrls actho por parte de 10s padres y gobiemos regionales y locales en el moniforeo de estos sewicios. Conesta finalidad,10s MinistenOs de Educaci6ny Salud vienen estableclendo estdndamsy metas que pemitan evaluar ios resultados en la salud, lectura y nutricidn de 10s nifios. El objetivo es contar con sisremas de monitofeo que permitan observar el desempeiio de /os establecimfenbs de saludy escuelasprimarfas. Minisbrio de Economley Finanzas 2. Jf. Junin 318, Lima Piso4, Tslirfonoa: (511) 428-9630 - 50 "DECENIODE LAS PERSONASCON DISCAPACIDADEN ELPERU" "ARODELDEBERCIUDADANO" MINISTER10DE ECONOMIAY FINANUS Despacho Mlnlsterial Luis CanenzaUgarle Ministro OFIClONoq64 -2007-EF/IO En cada sector, el Gobiemo fambien viene implementando diversas acciones complementarias para elevar la calldad de 10s sefvicios, mjot-ar 10s instrumentos de foca/hA3n y aumenter la participaci6n de /as comunidades en situacidn de pobreza en el monitoreo de 10s pmsupuesfos y programas a nivel regional y locel. A continuacidn, se detallan 10sprfncipales elementosde dicha estrategla. f. Equrdady rendiclon de cuentao en loo sectores sociales Optimizaciondel gasto social Para conttibuir a dlseflarme/ores politicas para /aiucha contra la pobreza, yen general, con respect0 a1 gasfo social, se ha elaborado un plan de accl6n para fotialeoer 10s programas sociaks. E/ objetivo es tmnsltar a un esquema de alta atticulacl6n vertical y horizontal (con programas ya opfirnizados),fortaledendo la Com'si6n Interministerial de Asuntos Sociales (CIAS) e implementando una gestilin de programas bssada en resultados dentro de un proceso de descentmlkacibn. Para ello, se ha considerado fusionar, integrar o arficvlar los programas medianfe fres ejes eslrafdgicos de intarvencidn. desamllo de capacidades humanas, pmmi6n de oportunidades econbmicasy empleoy establecimiento de una red de protecci6n social. Enfm !os msulfados esperadosde esteproceso SB esperalograr un gaslo social de catidad, corn consecuencia de una focalizact6n adecuada, mejor definicibn de /os objetlvos de /os programas socia/es -espracia/menteen fomacf6n de capacidades para la generaci6n de oportunidades economicas-, una provisi6n integral de bienes y servicios y la gestion por resultados. Asimismo, $8 estima que se puede Qsnerar mayor eficacia y sflciencla en el gasto socfal, especlficamente, mayor impact0 social a1 alinear la asignacidn de fecvrsos a progremas sociales reestructurados con la consecuci6n de metas y una mjor caiidad del gasfo a1 Ilmtiar 10s gasfos adi-f?lnlStrdlO'~~S10% del gasto total. Esfe proceso do fusi6n e a/ integraci6n se realizarx3 durante este at70 y se espera que a partir de enem de 2008 /as programas Sociales ya operen bap el nuew esqusma. Ademas, el proceso progresivo de implemenfacidn del presupuesto por resultados empkza el 2007 con acciones priorizadas en salt& educacibn, nutrickh, saneamientoe idenfidad. Slstema de FocaNzae~6nde Hogares e MenUficacMn de benefickrrios Para complementar el nuevo funcionamienfu de 10s prvgfamas sociales, se viens implsmentando el Slstema de Focahacldn de Hogares (SISFOH) en zonas urbanas con el ' &]et0 de proveer lnformacl6na ios programas socfaalespara la ldentiflcacidn y sefecci6nde la prhem etapa de implementacibnde esfe sisfema, se estima mntar con un pad& sus beneficiarmsmediente /a consWucci6nde un pad& de beneficiarios. Durante 2007,que en comprenda el 32% de la poblacidn u h n a . yen una segunda etapa ampliar el padnSn a las 30 ptincipales cfudades del pals, que representan el 80% de la poblacibn urbana. De .-I.-----..I_--- - I ..--.---- _---.. ..-l.. Ministeriode Econmla y Finanzas _.. . .-3. Jr. Junin 319, Lima Piso 4, TelMonos:(511) 428-9630 51 "DECENi0DE U S PERSONAS CON DISCAPACIDADEN EL PER* "ARO DELDEBER CIUDADANO" 4,aucn 5 i l p 6% MINISTER10DE ECONOMIAYFINANZAS DespachoMlnlsterlal 1vis CarranraUgarte Ministro OFiClONo Y66-2007-EF/IO manera simulthnea a este pmeso, se viene registrando infonnacirln de todos 10s beneficiarios actuales de 10spmgramas sociales en un Rsgisim Unico de Beneficiarios. l a ufilizacidn de ambs instrumentos permitid melofar la focalizacilin individual de Ioos prugrarnas sociales. Derechoa la Identmccacl6ny resffrucldn de la identidad La focallzaci6n individual de beneliciarios f10 puede ser apiicada con Bxlto SI la fane de identification de la poblacidn afecta a un significative nomen, de personas, genemlmente en slfuaci6n de pobreza en el Peni Para responder a este problema, el Gobtemoperuano ha establecido recientemenfe de manera obligatoria el Cddigo Unico de Identtdad, de manera que toda persona desde el momento del registm de su nacimiento cuente con una identificaci6n Smica.Asimismo, se viene trabajando en intensivas campanaspara la errtrega del Docurnento Nacional de Identidad,piforizando a las madres y niAos de las zonas mas pobres del pais. De esta manera se espera gradualmente ir logrando le restitticidn de ia identidady su ejerciciopor todos /os ciudadams. Transparenciay vtglfanclade lasociadad civll en el gasropublico En 10s Oltirnosa h s , se han walizadodiversas accionespara asegumr un manejo rnodemo y transparente de la gesti6n ptiblica, con una activa fiscalizacibn de la ciudadanla. Para refonar este proceso, la Ley de Presupuesto del Sector fiscal para el Alio Fiscal 2007 establece la apiioaci6npfugmslva de la gesti6n presupuestariabasada en resultados a todo nivel de gob~erno,asl mmo el acceso a toda la Informacidn rekcjonada a la gesiidn del promso pnsupuesiario del secfor pbblico -a traves de un portal especifico. Esta Ley tambih ha especitkado once Amas prioritarias para el mejoramientode !a celided del gasio social a frav6s de la gestibn por resultados, requlriendo que se establezcan metas fisicas pan cada una de esfas &mas 8 nivel nacionat, regwnal y locai. Adicknalmente, se continuare fortaleciendo el proceso de presupuestc particrpafivo como un instrumento de politlca y de gestibn, mediante el cual Ias autoridades regmnales y locales, y las organizaciones de la poblacibn debidamente representadas, definen en conjunto, cdmo y a qu8 se van a orienfar 10s mcums, teniendo en cuenta /os objetivos do sus planes de desarmllo. Para elio, se vienen iniciando acciones piloto de monitoreo participativo del gasto con 10s gobiernos n?gioneles y/o locales, /as cuaks se espera SB vayan consolidando en 10s siguientes tres aiios. -~-.~ _. MIriiii