Documentof The World Bank FOROFFICIALUSEONLY Report No: 27622-EC PROJECT APPRAISAL DOCUMENT ONA PROPOSEDLOAN INTHEAMOUNT OFUS$20 MILLION TO THE REPUBLIC OF ECUADOR FOR A RURALROADS PROJECT June 23.2006 Finance, Private Sector Development and Infrastructure Department Bolivia, Ecuador, Peru, Repdblica Bolivariana de Venezuela Country Management Unit LatinAmerica and the CaribbeanRegion This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. ECUADORCURRENCY UNIT:US$ FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS AM Associationof Municipalities of Ecuador FMA FinancialManagement Assessment Asociacidn de Municipalidades de Ecuador FMRs FinancialManagement Reports APL Adaptable ProgramLoan FODESEC SectionalDevelopment Fund BCE CentralBank of Ecuador Fondo de Desarrollo Sectorial Banco Central de Ecuador FONDEPRO Provincial Development Fund CAS Country Assistance Snategy Fondo de Desarrollo Provincial CBA Cost Benefit Analysis FTT FieldTechnicalTeam CCE ProjectCoordinationCommittee GCEASVP Proceduresof RuralRoads Socialand EnvironmentalScreening CEA Cost EffectivenessAnalysis GOE Government of Ecuador CEPLAES Centerfor Planningand Social Studies IAS InternationalAccountingStandards CFAA Country FinancialAccountability Assessment IASC InternationalAccountingStandards Committee CGE Controller General IBRD InternationalBankfor Reconstructionand Development ControladorGeneraldelEstado IDB Inter-AmericanDevelopmentBank CMT CentralManagement Team IFAC InternationalFederationof Accountants CODENPE Indigenous People Council IFR IntermediaryFinancialReports Consejo de Desarrollo de las Nacionalidades J Pueblos del Ecuador IGVP Provincial RoadProgramImplementationUnit CONAIE Confederationof EcuadorianIndigenous Communities Instanciade Gesti6nVial de la Provincia Confederacidn Nacional de Indigenas Ecuatorianos IRR InternalRate of Return CONCOPE Provincial GovernmentCouncil ISA InternationalStandards on Auditing DA DesignatedAccount LOREYTF FiscalStability and Transparency Law DGVD Directoratefor DecentralizedRoad Ley de Esrabilidad y Transparencia Fiscal Direccidn de Gesridn Vial Decenrralizada MCA Multi-Criteria Analysis EDV Feasibility Study MEF Ministry of Economy and Finance Estudio de Viabilidad Minisrerio de Economia y Finanzas EIA Environmentaland SocialAssessment Report MEMR RoutineRoadMaintenanceMicro Enterprises ETP ProvincialTechnicalTeam Microempresas de Mantenimiento Rurinario Equip0 Tkcnico Provincial MOP Ministry of Public Works FCCGL FiscalAdjustment Operation Minisrerio de Obras Pliblicas FEI Federationof IndigenousEcuadorians MOU Memorandumof Understanding Federacio'n Ecuaroriana de lndios NEC EcuadorianAccountingStandards FEINE Federationof Indigenous and Afro Ecuadorians Normas Ecuarorianas de Conrabilidad Federacidn de Indigenas y Negros NPV NetPresentValue FENOCIN National Federationof Farmers, Indigenousand Afro Ecuadorians OM OperationalManual Federacidn Nacional de Organizaciones Campesinas,Indigenas J Negras OPG Grass RootsOrganizations FM FinancialManagement Organismos Primer Grado OSG SecondTier Organizations SEA Sectoral Assesment Organismos de Segundo Grado SENPLADES National PlanningOffice PCV Rural Roads Project SENRES Secretariade Remuneraciones Programa de CaminoJ Vecinales SG SectionalGovernments PIA Annual Provincial RoadProgram SIGEF IntegratedFinancialManagementSystem Plan de lmpiementacidn Anual Sistema lntegrado de Gestidn Financiera PIRT RuralTransportationInfrastructureProgram SOE Statement of Expenditures Programa Infraestrucrura Rural de Transporte SUMA UnifiedSystemof EnvironmentalManagement POA Overall Annual Project Operating Plan Sistema Uni/icado de ManejoAmbiental Plan Operativo Anuol TE Provincial Special Account PPS ParticipatingProvinces Cuenta Tip0 Exclusiva PRA Provincial RoadAgency TG Government Transfer Account Indigenous and Afro-EcuadorianPeople PR0DEPINE DevelopmentProgram Cuenta Tip0 Transferencia de Gobierno Programa de Desarrollo de 10s Pueblos Indigenas J Negros "MAX Financial Accounting Software PSP Private Sector Panicipation TR Provincial Account PVPP Provincial ParticipatoryRoadPlan TOR Terms of Reference Plan Vial Provincial Participativo ucv Unidad de Caminos Vecinales QAT Quality AssuranceTeam WB World Bank RED Roads Economic DecisionMaking Model SA SpecialAccount SAPRI StructuralAdjustmentParticipatoryReview Vice President: Pamela Cox Country Director: Marcel0 Giugale Sector Director: MakhtarDiop Sector Manager: Jose Luis Irigoyen Task Team Leader: EmmanuelJames ECUADOR RURALROADSPROJECT TABLE OF CONTENTS Page A. STRATEGICCONTEXT AND RATIONALE .................................................................. 1 1. Country and sector issues .................................................................................................... 1 2. Rationale for Bank involvement.......................................................................................... 4 3. Higher level objectives to which the project contributes..................................................... 5 B. PROJECTDESCRIPTION .................................................................................................. 6 1. Lending instrument .............................................................................................................. 6 2. Project development objective and key indicators .............................................................. 6 3. Project components.............................................................................................................. 6 4. Lessons learned and reflected inthe project design ............................................................ 9 5. Alternatives considered and reasons for rejection............................................................. 10 C IMPLEMENTATION . ......................................................................................................... 11 1. Partnership arrangements................................................................................................... 11 2. Institutional and implementation arrangements................................................................. 11 3. Monitoringand evaluation of outcomes/results ................................................................ 12 4. Sustainability ..................................................................................................................... 13 5. Critical risks and possible controversial aspects ............................................................... 14 6. Loadcredit conditions and covenants ............................................................................... 16 D APPRAISAL SUMMARY . .................................................................................................. 17 1. Economic and financial analyses....................................................................................... 17 2. Technical............................................................................................................................ 19 3. Fiduciary ............................................................................................................................ 19 4. Social ................................................................................................................................. 22 5. Environment ...................................................................................................................... 24 6. Safeguard policies .............................................................................................................. 27 7. Policy Exceptions and Readiness ...................................................................................... 29 Annex 1:Country and Sector or ProgramBackground .......................................................... 30 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies ..................40 Annex 3: Results Framework and Monitoring ......................................................................... 41 Annex 4: DetailedProject Description ...................................................................................... 47 Annex 5: Project Costs ................................................................................................................ 51 Annex 6: ImplementationArrangements .................................................................................. 52 Annex 7: FinancialManagementand DisbursementArrangements ...................................... 61 Annex 8: ProcurementArrangements ....................................................................................... 75 Annex 9: Economicand Financial Analysis .............................................................................. 79 Annex 10: SafeguardPolicyIssues ............................................................................................. 85 Annex 11:Project Preparationand Supervision .................................................................... 102 Annex 12: Documentsinthe Project File ................................................................................ 103 Annex 13: Statement of Loansand Credits ............................................................................. 104 Annex 14: Country at a Glance ................................................................................................ 105 Annex 15: Participatory RoadPlanning (PVPP) Processfor EcuadoreanProvinces ........107 Annex 16: MOP Organizational Chart .................................................................................... 108 Annex 17: Transport Sector Management .............................................................................. 109 Map IBRD34724 ....................................................................................................................... 110 .. 11 ECUADOR RURALROADS PROJECT PROJECT APPRAISAL DOCUMENT LATINAMERICA AND CARIBBEAN LCSFT Date: June 23, 2006 Team Leader: Emmanuel A. James Country Director: Marcel0 Giugale Sectors: Roads and highways (90%);Sub- Sector Director: Makhtar Diop national Government administration (7%); Central Government administration (3%) Themes: Rural services and infrastructure (P);Decentralization (P);Rural policies and institutions (S);Participation and civic engagement (S);Small and medium enterprise support (S) Project ID:PO07077 Environmental screening category: Partial Assessment Lending Instrument: Specific Investment Loan Safeguard screening category: Limited impact [XI Loan [ 3 Credit [ ] Grant [ ] Guarantee [ ] Other: For LoansKredits/Others: Total Bank financing (US$m.): 20.00 r NTERNATIONAL BANKFOR 20.00 RECONSTRUCTIONAND I 9*66 I DEVELOPMENT Total: 22.64 9.66 32.30 Borrower: Republic of Ecuador Responsible Agency: Ministerio de Obras Kblicas Avenida Orellana y Juan Le6n Mera Ecuador Tel: 59322 222 8028 Fax: 59322 222 3076 subsemop@mop.gov.ec ... 111 I I mnual 4.00 10.00 3.00 2.00 1.00 hmulative 4.00 14.00 17.00 19.00 20.00 Project description [one-sentence summary of each component] Ref. PAD B.3.a, Technical 4nnex 4 Component 1 RoadRehabilitation(US$13.1 million):This component consists of a program - aimed at linking rural communities, especially in underserved areas, to the main and secondary road networks. Component2 - Periodicand Routine Maintenance(US$ 7.8 million):It consists of periodic and routine maintenance of rural roads. It does not include any significant earth works but rather the removal of bottlenecks by upgrading key road segments and minor bridge deck repairs. Component3 InstitutionalStrengthening(US$2.7 million):This component will support the - goals o f (i)increasing the administrative capacity of participating provinces as well as national government entities involved in the administration of rural roads; (ii) supporting the formation and training of microenterprises to undertake routine road maintenance; (iii)promoting increased road safety; and (iv) incorporating a participatory approach to social and environmental issues in the planning and implementation of road works. Component 4. EngineeringDesignsand CivilWorks Supervision(US$2.4 million) - This component includes (i) engineering design studies for road rehabilitation and periodic maintenance; and (ii) supervision of the physical works described above. Component - 5. Project Management (US$6.3 million): This component includes the administrative cost of the project at MOP level as well as a small budget for project management units at PPs level. Which safeguard policies are triggered, if anv?Ref:PAD 0.6, TechnicalAnnex 10 iv Environmental Assessment Natural Habitats Cultural Property Indigenous Peoples Forests Significant, non-standard conditions, ifany, for: none Ref. PAD (2.7 Boardpresentation: N o conditions. LoanConditionsand Covenants: Loan Effectiveness Conditions: There are no special conditions of effectiveness. However the standard legal opinion will be required. Disbursement conditions are: The payment of the Front-End Fee. Dated covenants are: (i) WithinonemonthaftertheEffectiveDate,theBorrowerthroughMOPshallensurethat: (1) the accounting system for the Project i s operating effectively; and (2) the DGVD has been staffed with one additional accountant, satisfactory to the Bank; and (3) pilot Participating Provinces acceptable to the Bank have been selected by the Borrower, through MOP. (ii) WithinthreemonthsaftertheEffectiveDate,theBorrowerthroughMOPshallexecute the contract, satisfactory to the Bank, for the provision of the external financial audit (iii) WithinonemonthaftertheEffectiveDate,theBorrowerthroughMOPshalladopt through a resolution, inform and substance satisfactory to the Bank, the Operational Manual (iv) For year 2 andonwards, the MOP will submit the Overall Annual Project Operating Plan (POA) annually by October 15 for Bank review with an Implementation letter that confirms its compliance with the (a) technical criteria; (b) economic feasibility; and (c) environmental and social requirements established for the project. Reporting: (i) TheBorrowerthroughMOPwillprepareandfurnishtotheBanknotlaterthan45days after the end of each calendar semester the interim un-audited financial report for the Project covering the semester, except during the first year of implementation when the said reports will be prepared and submitted quarterly. (ii)TheBorrowerwillsubmitfinancialstatementsauditedcoveringthefiscalyearapplicable inEcuador and deliver to the Bank not later than six months after the end of suchperiod. (iii)TheMOPwillsubmitsemiannualimplementationprogressreportstotheBank. (iv) The Bank will carry out a mid-term review by December 31,2008. V A. STRATEGIC CONTEXTAND RATIONALE 1. Countryand sector issues 1. Ecuador experienced several years of acute economic and political crises in the late 1990s before entering the recent turnaround period that resulted partially from the dollarization program. Following the resignation of former president Luis Gutierrez in 2005, the new Ecuadorean administration announced a medium-term development strategy that focused inter alia on promoting economic reactivation and growth through competitiveness, reducing poverty and exclusion, and strengthening the coverage and quality of education and health services. While the Government's goals are clearly justifiable, it i s clear that in order to attain those, improvements will be needed in the provision and operation of supporting economic infrastructure, in particular inthe road transport sector. 2. The classified road network of Ecuador consists of about 43,200 km of roads, of which about 9,500 km (22%) are national primary and secondary roads that fall under thejurisdiction of the Ministry of Public Works (MOP). The provinces, municipalities, and other local agencies, referred collectively as Sectional Governments (SG), have full or shared jurisdictional responsibility for the remainder of the network, which averages about 140 km per Canton; these are typically classified as the secondary, tertiary and feeder roads. More than half (51%) of the road network i s located inthe Sierra region, 38% in the Coastal region, and the remaining 11% i s dispersed throughout the Amazon region. Most trunk roads have average daily traffic of about 6,500 vehicles per day but this figure drops below 200 vpd for rural roads. Although the size of the vehicle fleet i s commensurate with GDP levels at about 625,000 (with 90% passenger cars, 8% trucks, and 2% buses), the distribution of vehicles i s concentrated in a few provinces (Pichincha and Guayas). Since 1996, there has been increased private sector activity through a concessioning program that has encompassed the rehabilitation and operation of road infrastructure and facilities. In all, approximately 1,244 km of Coastal and Sierra roads have been concessioned to the private sector. However, roads managed by the private sector have relatively low traffic levels when compared to similar roads elsewhere in the region and in most cases, the revenues generated from tolls barely cover operational costs. Still, network-wide it i s estimated that Government expenditures are significantly below the revenues recovered from the sector principally through taxes and duties on the sale of petroleum products, vehicles and spare parts. 3. The level and quality of transport services are not commensurate with the country's needs; the road network provides limited access to many production centers and especially to rural areas, and investment in village roads and footpaths has largely been neglected. Moreover, maintenance and rehabilitation arrangements have been inadequate for most of the road network and in particular for secondary and rural roads. For rural residents, this has all resulted in a sense of isolation and reduced hopes for breaking out of poverty traps. 4. The lack of adequate access to rural economic or social centers has been highlighted in various Bank discussions with stakeholders over the years as well as in workshops held at local levels during project preparation. It i s clear that addressing road transport needs i s a key requirementfor sustaining the economic recovery and meeting the needs of the rural poor. On a country level, the overall road service index i s roughly 3.4 kmper thousand inhabitants, which i s well below the regional average o f 5.4 km per thousand inhabitants, and for poor rural cantons the service index i s still lower than the national average. In sum the rural road network that i s managed b y the Participating Provinces (PPs) offers too limited a coverage and too little of it (40% on average) i s in maintainable condition. Furthermore, in the Sierra region, the topography is very difficult which leads to the buildingof steeply graded, winding roads that are difficult for freight vehicles to traverse and makes travel times inordinately long; this adverse combination results in very high transport costs. This situation has been exacerbated by the lack of road restoration and routine road maintenance and by the relatively high degree of road network vulnerability to natural disasters, such as mudslides, floods, earthquakes and volcanic activity. 5. A sense of economic and social isolation: Many rural communities can be reached only by tracks and trails (bridle paths) that are often suitable for non-motorized transport due to their narrow, steep slopes, multiple river crossings and often unstable soils. Poor rural accessibility has contributed to a general sense of isolation with resultant reduced hopes for improvement in the livelihood of the people affected. Furthermore, during the rainy season, many roads in rural areas are closed or remain impassable for weeks on end which heightens the sense of isolation for the local population. This makes it very difficult and costly to provide services, public or private, to the affected rural resident on a reliable basis. In terms of self-improvement, considerable disincentives face isolated peoples as they can neither take advantage of employment opportunities in the region nor access markets for their goods. In reality, isolated peoples tend to engage in subsistence activities and need transport linkages in order for them to develop exchange economies with other communities. This i s why improved access i s usually one of their most frequently expressed priorities. 6. Lack of comprehensive road maintenance programs: Maintenance plays a key role in minimizing road deterioration, extending the useful life of roads, and reducing vehicle operating costs but it i s not being carried out adequately. Several factors cause this. Key among them are the lack of adequate budgetary allocations and untimely releases of funds, the institutional and other weaknesses in the PPs that hamper the planning and implementation of maintenance, and to a limited extent, the lack of donor funding for maintenance works. There i s a pressing need to develop the institutional capacity of the PPs, which are typically part of the public works department at the provincial or municipal government level. This includes developing the PPs capacity to carry out condition inventories of the roads, design and implement annual and multi- annual road restoration and routine maintenance programs, as well as to seek least cost solutions to technical and engineering problems associated with road and bridge maintenance and to promote the development of the local construction industry. Based on Bank experiences with similar projects elsewhere, it will require a long-term program of technical assistance to help accomplish all of these goals. 7. Incomplete decentralization process: The Government of Ecuador (GOE) had long diagnosed the difficult situation in the road sector and had taken initiatives to transfer the responsibility for managing the secondary and rural roads segments of the network to the provinces and municipalities. The objectives behind decentralization attempt to address economic inequalities and permit the PPs to more directly address local problems. A large measure of the underlying legal and regulatory framework in support o f decentralization has been enacted during the last 10 years. Nevertheless, this process of decentralization has only 2 been partially completed and there remains considerable work to support the GOE in improving its decentralization agenda. 8. Currently, the decentralization law established that roughly 15 percent of the total national budget would be allocated to a general decentralization fund, of which municipalities and provinces would receive 70 percent and 30 percent, respectively. Allocation of funds i s determined according to population and land area, among other criteria. This funding source i s in addition to the Provincial Development Fund (FONDEPRO) and the Sectional Development Fund(FODESEC), which was established in the early 1990s, and is financed by 2 percent of net current revenues of Central Government and petroleum exports, and i s distributed according to population and need-based criteria. On average, own-generated revenues b y local governments represent about 10 to 15 percent of their budgetary expenditures. Thus, most local governments with the exception of Quito and Guayaquil, still depend heavily on revenue transfers from the Central Government. It should be noted, however, that the actual percentage of Central Government funds finally made available to the PPs i s often less than the theoretical level due to procedural complexities in transferring funds to the local governments. Hence, there i s still some risk regarding whether financial resources that are commensurate with the PPs increasing responsibilities for the management of infrastructure will be made available to them on a reliable basis. 9. Unclear institutional roles: Provincial governments have traditionally accepted responsibility for roads in rural areas, however due in no small measure to the unfinished decentralization agenda, overlapping institutions with unclear mandates continue to characterize the rural transport sector. The Government has tried to reduce the level of administrative duplication by defining and classifying three separate road networks corresponding to the national, provincial, and cantonal levels. As the main Central Government entity in the sector, the MOP i s responsible for the administration of the primary road network, but several specialized agencies share the responsibility for overall sector policy setting and regulatory functions. The MOP i s trying to consolidate gradually the planning functions within the sector in order to foster the integration and coordination of road sector activities among provincial capitals and economic centers. In addition to there being overlapping responsibilities among the various levels of government, institutional capacity remains weak, especially in local government entities and including some where decentralization has already taken place. Key issues that have emerged at PPs level road network management include: (i)the dependence on national government transfers; (ii) inconsistent allocation by PPs of funds needed for road network improvements; (iii)inadequate provision for maintenance activities; (iv) lack of available technical data and statistical information that are necessary for decision-making; (v) weak planning units; (vi) inadequate financial management and expenditure tracking systems; (vii) weaknesses in the procurement process which have led to implementation delays and cost increases; and (viii) inadequate numbers of professional and technical staff. 10. Bank support proved essential to the Ministry of Economy and Finance (MEF) in carrying out the first major institutional and financial analyses of all 21 provincial governments inorder to ensure compliance with the Fiscal Responsibility and StabilizationLaw (LOREYTF). The findings of the study showed that there are a set of road management issues that affect the road transport sector in the majority of provincial governments. The study's results also allowed the Government to justify the transfer of loan resources as grants to the PPs. The main findings of the LOREYTF study are presented in Annex 1. It i s worthwhile mentioning that the Ministry of Finance approved the Feasibility Study (Estudio de Viabilidad) for the project in November 2005. 2. Rationale for Bankinvolvement 11. The PPs are still in the initial stages of addressing their road transport needs. These needs are vast given the inadequate attention paid to the provincial rural road network and the demands imposed by the intermittent periods of higher than expected growth. There now exists a strong desire on the part of the PPs to focus primarily on rehabilitation of the network. While there may be arguments in support of this, Bank support could be important at this time to placing emphasis on designing a balanced road improvement program that focuses on the sustainable development of the institutions that manage the sector as well as on the maintenance needs of the road network. Hence, apart from financing needed investments in road rehabilitation, the rationale for Bank involvement includes: (i) helping to improve the planning, funding and implementation of road maintenance; (ii) ensuring that the road sector programs have a strong poverty alleviation focus, especially among indigenous populations which typically lack access to basic infrastructure services; (iii)ensuring that adequate attention i s paid to policy and environmental issues in the sector; and (iv) helping to strengthen the PPs so that they can better respond to the prevailing sector needs. The proposed project i s also fully consistent with the objectives of the CAS. 12. The Bank's focus now should be on becoming involved as quickly as possible and to expand and deepen this involvement as all parties learn over time. The project's approach lends itself to this because a framework can be designed to address both short and medium-term actions. Short term actions could be financed that would assist the PPs to (i) design programs aimed at removing rural transport bottlenecks; (ii) set up rural microenterprises (ME) to carry out essential maintenance; (iii) identify and finance ongoing road rehabilitation and maintenance programs in provinces to be selected; (iv) carry out studies to assess the efficiency of surface transport in the provinces, including inter-modal links, and to identify key impediments and bottlenecks; and (v) prepare the follow on project. 13. For the medium and long term, the project will address in greater depth the decentralization, resource mobilization, investment, environmental, institutional and technical development issues. The objective will be to help PPs to utilize resources available for transport development in an efficient manner, regardless of the source of funds. In this regard, Bank support would also be essential in ensuring that adequate resources and financing mechanisms are inplace for local governments to carry out road sector activities. 14. Project implementation could also help to improve transparency and governance in the sector. Lack of transparency prevents adequate controls, diminishes public auditing and accountability, and contributes to the lack of credibility in key institutions of the Central Government. Surveys show that the population has more confidence in local institutions than in the Central Government and this factor has influenced project design. Also, there are limited controls on the use by the PPs of constitutionally mandated transfer funds in Ecuador and the 4 project will directly address this issue by assuring that the PPs budget i s used transparently for road improvement needs and spent more efficiently and accountably in the sector. The increased transparency can help to recruit civil society and the media as effective allies both in working to promote efficient government and to reduce corruption. The success of such an approach in the road sector could have important demonstration effects for other government fiscal reform efforts as it would be a good case of the consolidation and reorientation of funds toward the more efficient attainment of a key goal while retaining management at the local level. 3. Higher level objectives to which the project contributes 15. The current Country Assistance Strategy (CAS, May 27, 2003) was designed to respond to the long-term challenges of poverty reduction in Ecuador through higher economic growth and the increased provision of basic services to the poor. The CAS takes a four year, medium term perspective of Ecuador's development, covering the full term of the present Government through the next change in Administration in 2007. The Bank Group's technical and financial assistance in this period will focus on promoting economic growth with greater equity and improved governance. Specifically, the Bank will focus on assisting the Government to (i) consolidate the macroeconomic framework and lay the foundations for growth; (ii)broaden access to resources and ensure reforms are socially sustainable; and (iii) strengthen governance to ensure accountable, efficient, and accessible public services. The Rural Roads project i s included inthe CAS and it will be supportive directly of all three strategies. 16. The proposed project will help to improve access in rural areas, especially in the coastal zone and the central highlands (the Sierra), and possibly in the Amazon. Although the rural population accounts for roughly 37 percent of its total 12.4 million total population, the incidence of poverty i s nearly twice as high in rural areas (47 percent) as compared to urban districts (25 percent). Regionally, within the rural areas, 80% of the population in the Sierra region lives below the poverty line. Overall, 75% of the poor population and 30% of the extremely poor inhabit the rural areas. This all translates into there being more poor people in rural areas than in urban zones in Ecuador. The GOE has conceptualized the rural roads program as part of its strategy to reduce poverty and this approach i s appropriate, taking into account that in many Bank rural road socio-economic studies there exists demonstrative proof in rural areas of a direct relation between subsistence economies and the travel distance and the condition of transport routes to urban centers. Inrural areas, poverty i s tied to low wage farm employment as well as to low productivity in other sectors which in turn result partially from inadequate technologies and infrastructure provision, and from inadequate human capital development. About 30 percent of rural residents lack year-round access to basic health care services and only about 7 percent of farmers have completed secondary school. Hence the project can play a positive role through improving the access o f poor rural residents to economic centers as well as to health and education services. The project will help also to strengthen governance by fostering inclusion and the informed participation of the rural poor and other beneficiaries due to the use of a bottom-up, participatory, road subproject investment decision-making process. 5 B. PROJECTDESCRIPTION 1. Lendinginstrument 17. The proposed lending instrument i s a Specific Investment Loan. While the project will incorporate several innovative components for technical assistance, maintenance by microenterprises and participatory planning, the infrastructure works to be financed are traditional ones. 2. Projectdevelopmentobjectiveandkey indicators 18. The main objectives of the project are to strengthen the capacity of PPs to manage the rural road networks, and to provide improved access to markets and social services for residents of poor rural areas. More specifically, the project would improve access and connectivity to the main economic centers for the agriculture dependent and other populations of the mainly rural cantons of the project provinces by: (i)improving the systems and procedures for road maintenance and ensuring that the maintainable network in all project assisted provinces i s maintained satisfactorily; (ii)rehabilitatiodimprovement of selected rural roads, spot upgrading and routine maintenance; and (iii)strengthening institutional arrangements and improving the procedures for planning, programming and budgeting (PPB). 19. The achievement of the project objectives would be measured in terms of the (i) number of microenterprises formed and operating effectively each year in terms of their road maintenance performance; (ii) kilometers of rural roads stabilized each year; (iii) and design implementation of road maintenance plans; (iv) number of staff trained in road sector planning and administration; and (v) number of rural communities and families served by improved rural roads. 3. Projectcomponents 20. There are several justifiable transport improvement options for all aspects of PPs transport infrastructure planning, design, implementation and management. This project will be ambitious in that it intends to address rural road improvement needs in a comprehensive way and at probably the weakest institutional levels. It will in particular accord a high priority to maintenance as this can be seen as both a provider of employment and as a way to keep the 40% of the network that is stable (in good or fair condition) from falling into further disrepair. The proposed project would assist the GOE and the PPs in achieving their objectives by financing: 21. Component 1 Road Rehabilitation(US$13.1million):This component consists of a - program aimed at linking rural communities, especially in underserved areas, to the main and secondary road networks. Many rural population centers are viewed currently as being virtually incapable of bringing their agricultural production to the market in an efficient and competitive manner, especially during the rainy season. Provision of road access i s one of the key inputs required to help these communities market their production, and for the delivery of social services. In accordance with the recommendations of the respective PVPPs (Provincial Participatory Road Plan), the project would finance the road rehabilitation of 600 km. 6 Rehabilitation works would consist inter alia of the introduction of more durable road surfaces, landslide removal, as well as the buildingof drainage and erosion control structures. 22. Component 2 -Periodic and Routine Maintenance (US$ 7.8 million): It consists of spot upgrading and routine maintenance of rural roads. It does not include any significant earth works but rather the removal of bottlenecks along key road segments and minor bridge deck repairs. Hence, it consists of minimal works required to restore year-around efficient transitability for rural roads. It includes: (a) periodic maintenance (US$5.5 million), a pilot subcomponent for improving key segments of rural roads and (b) routine maintenance of rural roads (US$2.3 million), for introducing innovative, cost-effective schemes based on contracting out labor-intensive works to microenterprises. The project will finance 800 km of periodic maintenance and put in place arrangements for the continuous maintenance of about 1945 km of roads in rural areas, which will include the maintenance for the roads rehabilitated under component 1. It i s estimated that about 40 microenterprises will be established and organized to execute key elements of the routine maintenance program which includes both rehabilitation and maintenance works financed underthe project. 23. Component 3 - Institutional Strengthening (US$2.7 million): This component will support the goals o f (i) increasing the administrative capacity of participating provinces as well as national government entities involved in the administration of rural roads; (ii) supporting the formation and training of microenterprises to undertake routine road maintenance; (iii) promoting increased road safety; and (iv) incorporating a participatory approach to social and environmental issues in the planning and implementation of road works. Goods will also be included in this component. Targeted technical assistance in these areas would improve the sustainability of road improvements and possibly other PPs investments. In addition, the formation of the microenterprises for road maintenance i s in line with recent Bank poverty assessmentsfor Ecuador, which highlighted the role of labor-intensive programs as an important contributing factor to poverty reduction. 24. In order to participate in the project, provinces will have to complete their PVPP and agree to fund its routine maintenance needs, as well as to put in place adequate project management arrangements at the provincial level that, where appropriate, will include the financing of resources for project management and implementation purposes. These and other project requirements will be spelt out in the Participating Agreement that each province will sign with the MOP. To date, the preparation of the PVPP, which i s derived from a comprehensive series of bottom-up planning workshops held throughout a province, has been completed substantially in eleven provinces. In the case of Imbabura and El Oro Provinces, where the preparation activities are most advanced, the PVPP process resulted in a comprehensive plan for the rehabilitation and maintenance of about 1800 km o f secondary and rural roads. Most of the rural road rehabilitation works will consist of low cost approaches, spot improvements etc., that will bring the typically narrow (3-5m) roads to maintainable condition. Out of the PVPP listed roads for Imbabura, three strategic rural axes totaling 458 km were proposed for project support of their rehabilitation and maintenance needs in the first year of implementation. Subsequently, detailed technical, economic, environmental and social analyses were carried out in order to certify the eligibility of these components for inclusion in the project's first year program. This process will be repeated as appropriate for each province that wishes to obtain project financing 7 for road rehabilitation components. However, the project will always support the institutional strengthening programs for any province as well as the preparation of its PVPP. 25. It is essential also for the implementation of the project that clear rules for the allocation of funds to participating provinces be made. Hence the MOP has finalized and will make available to all participating provinces a copy of the project's viability report (Estudio de Viabilidad - EdV) that spells out the rules. Basically, plans call for about 60-70% of the funds to initially be made available to provinces on the basis of rural poverty and socio-economic criteria and on road improvement needs. 26. Component 4. Engineering Designs and Civil Works Supervision (US$2.4 million): - This component includes (i) engineering design studies for road rehabilitation and periodic maintenance; and (ii) supervision of the project. 27. Component 5. Project Management (US$6.3 million): This component includes the - administrativecost of the project at MOP level as well as a smallbudget for project management units at PPs level. The cost of administration of the project will be financed with local counterpart contribution. The loan proceeds will finance only the operating cost of the Directorate for Decentralized Roads (DGVD) mainly travel and per-diem expenses for project supervision, training, and for monitoring entities. The total amount for traveling and per-diem expenses will not exceed US$200,000 during the life of the project and it will be limited to US$50,000 per year. This amount will be financed from the assigned project budget for institutional strengthening. 28. The following table presents the project cost and components which are described in Annex 4. Indicative % of Bank- % ofBank- Component costs Total financing financing CUS$M) (US$hlI) 1. RoadRehabilitation 13.1 40.5 9.7 48.5 2. RoadMaintenance 7.8 24.1 5.8 29.0 2.1. PeriodicMaintenance 5.5 17.0 4.1 20.5 2.2. RoutineMaintenance 2.3 7.1 1.7 8.5 3. Institutional Strengthening 2.7 8.4 2.7 13.5 4. EngineeringDesigns & Works Supervision 2.4 7.4 1.8 9.O 5. ProjectAdministration 6.3 1 19.6 0.0 0.0 Total Project Costs 32.3 100.0 20.0 Total Financing Required 32.3 20.0 8 4. Lessons learned and reflected inthe project design 29. Apart from startup difficulties, the main lessons learned from the ongoing, and similar operations in other countries, and that have been applied in this project were that: (i) planning and programming procedures, especially for road maintenance need to be given increased emphasis; (ii) frequent supervision i s needed due to the limited experience of subnational agencies; (iii)sustainable institutional improvements require significant efforts from the Government and support from donors over a long period o f time; and (iv) frequent changes in administration and key staff can adversely affect the implementation of technical assistance and institutional strengthening programs. 30. Sector Decentralization. International best practice regarding decentralization involves first creating the appropriate institutions and the corresponding financing mechanisms at the central level and then setting up the local entities to carry out administrative, technical, and operational activities for road management. Moreover, previous experience in Ecuador suggests that many of the approaches toward achieving decentralization objectives need to be better tailored to prevailing local conditions and to ensure an appropriate delineation of responsibilities between agencies at local and national levels as well as the allocation of adequate financial and technical resources. Within this context, the Central Government needs to keep the role of developing regulations and technical standards for the entire road network and of properly enforcing technical norms at the local levels. Ina general sense, the Central Government should also retain control over coordination and planning for the national road network to improve the integration and continuity of road sector activities among the local government agencies. For decentralization programs to be sustainable over the long-term it i s necessary to provide technical assistance and institutional strengthening activities at all levels of government. Last, but not least, it i s necessary to ensure that the resource transfer process i s commensurate with local needs. 31. Microenterprises. The idea of performing routine road maintenance by contracting with cooperatives or associations of members of the neighboring communities, organized as microenterprises, started in 1984 in Colombia, under the Eighth Highway Sector Loan (2121- CO) and was replicated in Peru, Nicaragua, and Honduras road maintenance projects, among others. This extensive experience has proven that these programs for performing routine maintenance of roads have been highly satisfactory and cost effective. In addition, ME offer many advantages compared to traditional approaches: (a) they have succeeded in creating permanent and reliable employment in rural areas especially in areas where poverty i s the extreme; (b) they have fostered community awareness of the need for sustainable development; (c) entrepreneurial and organizational skills built into the process have empowered the ME to undertake other productive projects and local development initiatives; (d) there have been large spillover effects of benefits into neighboring communities; and (e) most importantly, ME have gained the acceptance and support of communities and government officials, inducing similar initiatives in other sectors. The MEconcept has been accepted in Ecuador and i s being piloted by MOP and a few provincial governments. 9 5. Alternatives considered and reasonsfor rejection 32. Bank Lending instrument: The Adaptable Program Lending (APL) format could in theory be used because it provides greater flexibility in the timing and design of follow-on operations that will be instrumental to the long term approach needed to address the issues. However, the lack of Bank prior experience with this sector in Ecuador rules out the use of an APL. 33. Centralized project execution: A more centralized approach would seemingly be attractive due to the current institutional weaknesses at the PPs level. However, the project was designed to address local development needs and to be consistent with the national government's decentralization agenda. A centralized approach would be less conducive to (i) PPs management of subproject screening, selection and the local participatory processes, (ii) empowering rural communities and local governments to take on more sector management responsibilities, and (iii) the development of institutional capacity at PPs levels. Also, the centralized approach was used for the IDB'spilot project (PIRT) and the PPs have resisted any continued use of this model. 34. Top down approaches: In theory, given the vast rural road improvement needs, it may well be faster and less costly for a province or the national government to simply select road subprojects that meet certain predetermined criteria in terms of quantifiable (e.g. transport time savings) or non-quantifiable (e.g. increased access to social services) benefits and then improve them. However, when dealing with poor rural communities i t i s also likely that such an approach may not capture local priorities as perceived by the intended beneficiary communities. This would not help to build the sense of ownership that i s an important part of long term sustainability of the project improvements and that may more likely be obtained by identifying projects via a bottom up, community participatory process such as used for PVPP preparation. The experiences duringproject preparation with this bottom up approach have been very positive as in addition to selecting roads, the structured consultation process also helped to achieve other institutional goals such as providing a basis for enhancing social cohesion and establishing procedures for the promotion of other community activities. 35. Institutional set up at SG level: One of the alternatives considered was to allow each municipality in a province to deal directly with the MOP for support of its road improvement program needs instead of promoting a pooled provincial/municipal approach. Given that most municipalities have only about 140km o f rural roads and that they traditionally have not been active in rural areas, such an 'atomized' approach would (i) have made it more difficult to foster the development of a core rural roads network that serves more than one municipality; (ii) not have offered scale economies or collective leverage in network planning, implementation and maintenance management as well as in the hiring o f local contractors, consultants and microenterprises; and (iii)have increased the risks to long term sustainability as the municipalities would not have been provided with an adequate forum for working together and for developingjoint approaches to resolve their transport problems. 10 C. IMPLEMENTATION 1. Partnershiparrangements 36. In accordance with Government strategy as contained in the MOP'S Project Feasibility Study (EdV), the project will be financed by the Bank's loan and b y counterpart contributions from the MOP and the Participating Provinces. 2. Institutionalandimplementationarrangements 37. Background. The implementation arrangements were improved due to joint efforts between the Bank, the MOP, and the Ministry of Economy and Finance in order to have a more permanent solution for the management the rural road subsector. The GOE through the MEF carried out a study, whose purpose was to identify ways o f improving technical, financial and project management capacity within public sector. One of the main findings was that the GOE needed to scale down or phase out the various special purpose project and program executing unitsthat are usually created to fill specific gaps but tend to function as parallel institutions with distinct personnel, salary scales and different operating procedures. As a result, these units often do not operate in a harmonized manner with existing government ministries. The study findings are concordant with the IDB and World Bank policy to strengthen public governance through the improvement of the technical capacities of the Ministries and public agencies. 38. Recently, the MEF has reiterated to the Bank that it wishes to strengthen the role of the staff of GOE Ministries and, as soon as possible, to reduce the number of project executing units for administration of Bank financed projects. Along this line, the project team decided to work with MOP in creating and defining an institutional set up for the project within the current organization of the Ministry. During project preparation, the project team assisted M O P staff in the definition of roles and functions for the Directorate for Decentralized Roads (DGVD), including the legal, institutional, technical and financial aspects. Currently, this Directorate has been already incorporatedwithin the Road Sub Secretariat and its activities and functions will be supported by the other Directorates of MOP (See Annex 17 for the MOP organizational chart) 39. InstitutionalSetup for Project Execution. The overall project coordination will be the responsibility of the Roads Sub secretariat of the MOP, through its recently created DGVD.This Directorate was established in keeping with the requirements o f SENRES regarding the organizational structure setup and the budgetary approval of MEF that was required due to the creation of a new post for the Director of the DGVD.Also, all of these tasks hadbeen completed by November 2005. The MOP will appoint a Coordinator who will lead a multidisciplinary team of MOP staff. The Coordinator of the DGVD will be selected with Bank concurrence from a pool of qualified candidates within the MOP. As part of the project conditionality, the MOP will be required to retain the coordinator for the duration of the project. In addition, the Minister will appoint a Director of the DGVD. With respect to personnel of the DGVD, they will be in charge of the day-to-day of project implementation, coordination and supervision of PPs (project co- executing agencies). Also, the various directorates of MOP e.g. procurement, accounting, planning, etc. will be responsible for providing the needed inputs to DGVD, while the PPs will be responsible for executing road rehabilitation sub projects as well as the corresponding road 11 maintenance through the creation of microenterprises. Hence, the project's operational setup would basically be divided between the MOP and the PPs. 40. A central project management team (CMT), consisting primarily of Ecuadorean consultants will be provided when needed to assist the MOP with overall project implementation and coordination (including procurement, disbursement and financial management), and for the preparation of the PVPP incandidate provinces. Ineach participating province, local consultants, organized as a field technical team (FTT) will assist the PPs when needed in day-to-day supervision of road maintenance and improvement works and will focus also on project compliance with Bank safeguard and fiduciary policies. 3. Monitoringand evaluation of outcomeshesults 41. Reporting: MOP will prepare semiannual progress reports for all components of the project that will be sent to the Bank for review. The reports will describe both the progress achieved and the key problems facing project implementation. Each October, the MOP will also submit the draft work program for the subsequent year for all of the participating provinces for review and comment by the Bank. These steps are detailed further in the implementation arrangements described inAnnex 6. 42. Annual Reviews: Each year the Bank and the Government will conduct ajoint review to assess the overall project performance, including the performance of the PPs, and to decide on the adequacy of procedures established for project management. The results of this review will be taken into account in the implementation program for the upcoming year. It will be essential to enforce the maintenance first concept at these reviews and to take steps to ensure that each participant i s discharging its responsibilities towards the project. The project coordinating committee (CCE) will serve as the main GOE counterpart for these annual reviews. 43. Project Supervision: Apart from the annual review, there will be a combination of joint and individual missions by the Bank and the IDB, with their composition and frequency being determined b y the requirements of project implementation at the time. The local office of the Bank will play a key part in supervision of project fiduciary and safeguard aspects 44. Monitoring and Evaluation: The project progress report would be prepared by DGVD on a semiannual basis and submitted for the Bank's review and comments. Said reports will focus on results achieved: (i) number of km of roads rehabilitated, road restoration (spot upgrading, bridge repairs and routine maintenance targets achieved), (ii)routine microenterprises implemented, (iii) PVPP implemented by the PPs, (iv) actions take to improve management and road planning b y the PPs, and (vi) progress made by the PPs in the overall management of the transport sector ineach province. 45. Assessing Outcomes: it i s intended to carryout an outcome assessment: (i) mid-term the review, would focus on a number of project performance indicators and make mid-course corrections, as needed, in project execution; and (ii) update and use the initial impact evaluation as described in Annex 3. The impact evaluation will consist of the final survey of the treatment and control groups (defined under the first Project financed b y IDB) and a full analysis of the 12 results o f the entire study. Responsibility for execution of the survey and analysis will be contracted out b y a private consulting firm. The DGVD will prepare the Project Completion report and submit it to the Bank within 6 months of project's completion of civil works activities. The project monitoring indicators and the results framework are detailed in Annex 3. 4. Sustainability 46. Most of the issues that affect sustainability and the concomitant measures to support it were defined during project preparation to include: (i) ensuring that local governments build up sufficient administrative, technical and managerial capacity to implement road subprojects as well as support the preparation of environmental and social assessments; (ii) supporting the ability of local governments to carry out routine maintenance activities on a regular basis to prevent the deterioration of rehabilitated roads; (iii) ensuring that the appropriate financial mechanisms are in place for local governments to carry out rehabilitation and maintenance activities; and (iv) support for strengthening sector planning and regulatory functions. 47. The cost sharing mechanism, involving basically the provision of counterpart funding by the PPs will also help to ensure sustainability. This mechanism was chosen partially because of financing restrictions placed on the national government by the LOREYTF Law and also because the national government has only a small amount (4%) of budgetary resources available for allocation annually after accounting for salaries, debt service, earmarked and mandated funding requirements and would therefore be a high risk source as a project counterpart. In addition, adequate funds exist at the PPs level for road maintenance and project needs and PPs willingness to finance, with local counterpart contributions, has been strengthened by their participation in project design and also by the fact that they will mostly be required to re- orient rather than increase markedly their traditional allocations for the road sector. 48. In addition, to help ensure the development and implementation of a 'maintenance first' approach, project conditionality would consider the PPs financing and satisfactory completion of the maintenance works listed in the previous year of the PVPP as the trigger for the allocation of project funds for planned rehabilitation works. This mechanism would be put into place, after the second year of the program and would help to ensure that the needs o f the maintainable road network will be accorded priority. 13 5. Critical risksand possible controversial aspects RiskMitigation Measure FromOutputsto Objective M [his is unlikely because of the consistent and pressing PPs unwilling to continue to commit iemands by their residents for road improvements and resourcesto the project or to assume ilso because of the increased leverage and recognition their road management hat project participation will provide them. responsibilities. GOE support for the program M The GOE has committed itself to this program and will weakens. nore likely wish to expand it and to seek additional lonor support. The rural populations are well informed md will ensurethat this program remains a GOE xiority. Changes in PPs officials and policies M rhere is always the risk that newly elected local following elections (political risk). ;overnments may not want to proceed with the plans of :heir predecessors.However, the project design nitigates this risk because it is derived directly from :hepriorities of the residents. Hence it is likely that :lected officials will know this and continue project support; this was demonstrated by the increased support for the project following the October 2004 provincial elections. Local leaders unwilling to accept the M [ t i s unlikely as they will also be consulted during the outcome of the planning and preparation cycle. It could still be an issue following prioritization process. Ehangesin leaders but, given the vast needs, this issue will more likely take the form of demands for a larger or an accelerated program rather than substitutions or withdrawals. FromComponents to Outputs S Inprinciple, this will be unlikely as both the MOP and Unreliable availability of counterpart PPs will include this program among the key programs funds. to be protected and funded appropriately. However, if a major economic crisis returns, severe difficulties could arise. Routine timeliness problems will be dealt with by requiring the PPs to authorize the Central Bank to make quarterly deposits in advance to a counterpart funds account in a local bank. PPs commitment to the institution M The PPs staff has so far been enthusiastic supporters of building objectives falters. project proposals. Adequate training programs will be designed and implemented under the project. The project can provide some of the leverage neededto foster the improvements due to its featuring the informed participation of the beneficiaries. Delays in awarding small contracts S Procurement and payments cycle will be streamlined and in making payments to and standardized. The MOP will monitor this aspect contractors and consultants. closely Inexperienced procurement staff at s Project will start with a program of training for stafj PP levels and there will be close monitoring by DGVD and the Bank 14 IWeak financial management M IAdequate technical assistance and capacity building for capacity at PP levels delaying DGVDand PP levels will be provided implementation. Overall Risk Rating M 15 6. Loadcredit conditions and covenants 49. Given the advanced stage of preparation of the project, only essential standard conditionality has been included. 50. Loan Effectiveness Conditions: There are no special conditions of effectiveness. However the standard legal opinion will be required. 51. Loan Disbursement conditions: The payment of the Front-end-Fee. 52. Dated covenants are: (i) WithinonemonthaftertheEffectiveDate,theBorrowerthroughMOPshallensurethat: (1) the accounting systemfor the Project i s operating effectively; (2) the DGVDhas been staffed with one additional accountant, satisfactory to the Bank; and (3) pilot Participating Provinces acceptable to the Bank have been selected by the Borrower, through MOP (ii) Within three months after the Effective Date, the Borrower through MOP shall execute the contract, satisfactory to the Bank, for the provision of the external financial audit. (iii) Within one month after the Effective Date, the Borrower shall adopt through a resolution, inform and substance satisfactory to the Bank, the OperationalManual. (iv) For year 2 and onwards, the MOP will submit the POA annually by October 15 for Bank review with an Implementationletter that confirms its compliance with the (a) technical criteria; (b) economic feasibility; and (c) environmental and social requirements established for the project. 53. Reporting: (i) TheBorrowerthroughMOPwillprepareandfurnishtotheBanknotlaterthan45days after the end of each calendar semester the interim un-audited financial report for the Project covering the semester, except during the first year of implementation when the said reports will be prepared and submittedquarterly. (ii) TheBorrowerthroughMOPwillsubmitfinancialstatementsauditedcoveringthefiscal year applicable inEcuador and deliver to the Bank not later than six months after the end of such period. (iii) The MOP will submit semiannual progress reports to the Bank. (iv) The Bank will carry out a mid-term review b y December 31, 2008. 16 D. APPRAISAL SUMMARY 1. Economicandfinancial analyses 54. The Rural Roads Project (Programa de Caminos Vecinales-PCV) seeks to maximize the provision of all weather access to as many persons as possible, given the resources to be made available. In order to identify which roads are to be included in the project, a screening and prioritization methodology was developed that was based upon a local consultative process. It starts with local community workshops evaluating road network data in order to define: (i) the universe of roads located in a province; (ii) a priority index for each road; (iii) assessment of an the rehabilitation and maintenance requirements using average unit costs; (iv) a diagnostic of the road sector in a province; and (v) maps with the locations of all roads. It culminates in the formulation of a PVPP derived from the series of workshops held at the Parroquia, Canton, and Provincial levels. 55. Road priorization is based primarily on: (i) Criteria: such as population served per Social km, network of feeder and local roads connected, distance to health and education centers, poverty level in the influence area; (ii)Technical Criteria: days per year without access, investment and maintenance cost per family; (iii) Economic Criteria: traffic volume, cargo being carried on the road, ratio of transport costs to product costs; and (iv) Local importance Criteria: road importance to the Parroquia, Canton and Provincial development plans. A composite index i s defined for each road, which i s used to sort the roads by overall priority. The proposed work program to be implemented in each Province i s defined using the priority index along with an evaluation of the connectivity o f the candidate roads in order to maximize the impact o f the PCV by creating functional strategic rural axes that are well connected to a main road or population center. 56. The project's investments will make roads passable all year and will reduce road user transport costs and travel times. Additional non-quantifiable benefits include social benefits arising from better access to schools, medical facilities, and other social services. Due to the nature of the traffic on the roads, which i s mostly low volume traffic serving the social and economic activities of the local population; a cost effectiveness analysis (CEA) was done for all roads belonging to the first year program. The overall cost-effectiveness ratio for the first year program proved to be highly acceptable at US$130 per beneficiary population. A cost benefit analysis (CBA) was done for the roads belonging to the first year program that carry more than 50 vehicles per day, applying the Roads Economic Decision Model (RED), which compares life cycle road costs with savings in vehicle operating cost and in passenger time. The overall net present value (NPV), extrapolated for the rehabilitation of 1,000 kmo f secondary roads, amounts to US$ 14 million at a 12 percent discount rate, with a corresponding economic internal rate of return (IRR) of 32 percent. This analytical approach will be replicated for all candidate PVPPs in the future as part of the implementation arrangements listed inAnnex 6. 57. The project's financing arrangements represent an important stride towards assigning more responsibility and accountability to the provincial governments. All of the civil works, for both maintenance and road improvement will be co-financedby the provincial governments; this i s a substantive step forward as it means that the PPs will contribute 26% of the project's civil 17 works costs, spot upgrading, engineering studies and works supervision. It should be noted that, based on the findings of a study carried out by the Bank for purposes of compliance with LOREYTF Law, the provinces already allocate about 18% of their expenditure budget for the road sector; for the municipalities the figure i s about 9%. A similar level of financing would be required under the project but much better results would be produced as a PVPP that i s more balanced in terms of allocations for maintenance and road improvements will be implemented. The PPs will have to agree to these financing arrangements in order to participate in the project. Additional contributions by the national government will be small and will be restricted to the counterpart funding requirements of national level technical assistance and institution building programs for the MOP itself. 58. In terms of the fiscal impact, the national government collects revenues from the transport sector by way of taxes, duties and licences on vehicles, spare parts, and fuel that are well in excess of its expenditures in the sector. In addition for this project, no significant additional fiscal burden will be imposed since it really mainly requires the PPs to use their current road sector allocations more efficiently. 59. A brief study was carried out by a specialist to assess further the potential fiscal impact of this project (see project files for the full report). Selected findings are presented in the overleaf box: 18 Box 1:FiscalImpactsof the RuralRoadsProject lollarization stabilized Ecuador's economy and provided the necessary, albeit not sufficient, framework 'or renewed growth. The country also had other stabilization factors such as a World Bank Fiscal idjustment loan (FCCGL) and an IMF Stand-By arrangement. There has been some progress towards ;tability recently. Total public debt had been reduced by 2003 to 50.1 percent of GDP of which external iebt was 41.2 percent anddeclining. To continue this healthy decline and reach a total debt ratio less than 30 percent, the primary fiscal surplus would have to be at least 5 percentage points of GDP for several iears. This is within reach if there is no significant reduction in the price of oil, the country does not ieviate from its fiscal reform program, and if there i s more private investment and better quality and more :fficient public capital expenditures. From the latter perspective, the rural roads program will probably nore than edge out many other public investment programs given that (a) its economic rate of return can )e easily ascertained and i s quite high; (b) its social rate of return i s also high as it permits rural ntegration, including access to schools and health facilities for isolated segments of the population; (c) it w i l l improve the efficiency of the management of SG rural road programs, making for a more rational idministration of assets. 3ven the current critical fiscal situation what would be the effect of the proposed rural road investment loan on the fiscal envelope? Under assumed scenarios regardingfiscal reform and primary fiscal balances the impact of the loan on the primary balance is very small indeed and it makes very little difference on jebt sustainability. Infact, fully financed capital expenditures that have a high rate of returnmay help the zountry to return to an adequate level of capital investment and help to reduce poverty. However, in zoncluding that any potential negative fiscal impact of the loan would be very small we are assuming that Ecuador sticks to its current fiscal reform program and that the FCCGL will achieve a reasonable part of its goals. It i s also important to take into account that any potential negative fiscal effects of the proposed loan would be dampenedfor three reasons: 0 There would be a direct increment in tax receipts of about $2 million per year due to taxes paid on income generatedby the project. 0 With a very conservative investment multiplier (only 2) tax receipts would climb to about $4 millionper year. 0 The increment in GDP generated by the loan would also dampen the increment in the debt/GDP ratio due to the said loan. This ignores the impact of the rate of return of the project. (Extracted from the Rural Roads Project "Fiscal & Macroeconomic Assessment," by Valeriano F. Garcia) 2. Technical 60. There will be no major civil works to be carried out under the project as most road rehabilitation programs will consist of l o w cost improvements, within the existing rights-of way, and only basic designs will be needed. All of the road improvement techniques to be used (gravel surfacing, empedrado, spot improvements, removal of bottlenecks, etc.) have been applied already under the earlier IDB Rural Roads Project. 3. Fiduciary 61. The proposed Financial Management Arrangements (FMA) at the Central level are sound (see Annex 7 for a summary of the results); however, project management capacity at the 19 decentralized level i s weak. As a result of the assessment, an extensive time-bound Financial Management (FM) action plan has been proposed in order to mitigate the risks identified. Successful implementation of the action plan would result in an adequate project FMA in place by the effectiveness date. 62. The entity responsible for implementing the PCV i s the Roads Decentralized Management Directorate, the DGVD, within the Roads Sub Secretariat of the MOP in coordination with its Financial Directorate, and the Participating Provinces (PPs). 63. Project implementation will be executed by the DGVD team under the MOP institutional structure supported by the Financial Directorate. No additional project implementation unit will be created. Designated Financial Directorate staff from the Budget, Accounting and Treasury Departments will be assigned full time to provide support to project execution. The DGVD in coordination with Financial Directorate will implement the components related to institutional strengthening and project management. 64. Since the DGVD has been recently created within MOP, the Financial Directorate has no prior experience with Bank financed operations. Inthis scenario, so far inherent risk and control risks profile has been rated as high. The major issues relate to the risk of weak implementation capacity of PPs, where planning units are considered weak, expenditure tracking systems are inadequate, procurement processes present delays and an organized field Equipo Ticnico Provincial (ETPs) does not exist. Project monitoring and supervision will be demanding for the PPs by the central level where currently there i s not enough personal assigned or hired for project implementation. Also the personnel had no experience in prior Bank Financed Operations and there i s a risk of untimely counterpart contributions. 65. On the basis of proposedproject design the financial management team considers that the project requires robust financial management arrangements, and therefore has identified a minimumset of mitigations actions needed to ensure proper financial management arrangements are inplace for project implementation. 66. The ETPs will assist in the execution of the project at the provincial level. The PPs will be responsible for executing road rehabilitation sub projects, as well as the related road maintenance through the creation of micro-enterprises. In addition, the PPs will be in charge of the PVPP, hiring and execution of economic feasibility studies, designs of engineering, environmental viability, works, control and maintenance. 67. The ETPs will assist in the day-to-day supervision of road maintenance and improvement works, and will focus also on project compliance with Bank fiduciary aspects. The ETP responsibilities will be covered by technical, procurement and financial management specialists. At this time, appointment of the ETP personnel and determination of duties and responsibilities for the project execution are still under definition. Compliance of these requirements at the central and provincial level i s essential to ensure project success. 68. The PCV implementation will be characterized by the selection of a preliminary pilot group of PPs by the M O P in accordance with the Bank. The pilot PPs will be selected for the 20 adequacy of their FMcapacity, experience in the efficient execution o f similar projects, and their institutional capacity. 69. Project disbursements will be transactions based, i.e. against Statements of Expenditures (SOEs), full documentation, direct payments or special commitments. The Special Account (Transfer or T-Account) will be maintained and operated by the MOP in the Central Bank of Ecuador (BCE) in U.S. dollars. Deposits into the Special Account and replenishments up to the authorized allocation set out in the loan agreement would be made on the basis of applications for withdrawals prepared by the MOP and accompanied by the supporting documentation in accordance with Bank disbursement procedures. 70. The proposed average Bank disbursement percentage of 74% for civil works i s below the maximum Disbursement Percentage agreed for Ecuador. The project will be implemented in a decentralized framework and the Provincial Road Management Units in each participating province will maintain separate transfer accounts at the Central Bank of Ecuador and its own funds payment account at a commercial bank. The provincial governments will manage their respective sub-project preparation and implementation cycles. The project will fund consultant services for the annual auditing of accounts, inkeeping with Bank requirements. 71. Procurement activities will be carried out by the MOP and the PPs. The MOP will carry out the procurement of Technical Assistance for Institutional Strengthening and coordinate, assist and oversee the procurement activities carried out by the CPs for the rehabilitation and maintenance of rural roads. An assessment of the capacity o f the MOP to implement procurement actions for the project was completed duringproject preparation. The DGVD within the Subsecretaria de Vialidad of the MOP will coordinate project implementation while the Financial Directorate of the MOP will manage loan disbursements and project accounting. The Project Operation Manual describes these arrangements in greater detail. The key issues and risks concerning procurement for implementation of the project included: (i) of experience lack for implementing projects in a decentralized manner; (ii) uncertain capacity of the provincial implementing entities; and (iii)lack of procurement staff familiar with Bank procurement guidelines and procedures. These have all been taken into account and standard mitigatory measures included inproject design. 72. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Loan Agreement. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for pre- qualification, estimated costs, prior review requirements, and time frame have been agreed between the MOP and the Bank and listed in the approved Procurement Plan. The Procurement Plan will provide the basis for the procurement methods and it will be made available at the DGVD and also in the Bank's external website The Procurement Plan will be updated twice a year or as required to reflect actual project implementation needs and improvements in institutional capacity. Procurement performance will be supervised carefully by the Bank and, in addition to the prior review supervision to be carried out from Bank offices, there will be at least 21 annual supervision missions to carry out post reviews of procurement actions and procurement audits. 4. Social 73. Since 1996, Ecuador has participated in the Structural Adjustment Participatory Review (SAPRI), which has provided an important forum for tripartite discussions between civil society groups, the Government, and the Bank. From these discussions, a national study was prepared entitled Voices ofthe Poor, which compiled the responses from over 500 men and women from urban and rural areas in 11 provinces. Key issues that arose and that are relevant to the preparation of this project include: (i) the rural poor feel isolated; (ii) rural poor want the increased economic opportunities, which can be facilitated b y improved access; (iii) there has been inadequate support for microenterprises and rural producers; and (iv) an agenda for reform must include overcoming rural isolation, providing basic infrastructure, guaranteeing access to health and education services, and creating opportunities for employment. 74. The project outcomes will be markedly social and it will in particular contribute to the reform agenda in item (iv) above. The project will also reduce travel times and vehicle operating costs. In addition, temporary and permanent employment will be generated through the use of labor-intensive methods for road rehabilitation and by the creation of microenterprises for road maintenance. 75. Under the project, financing for rural roads improvements will be available to the PPs that comply with the regulations and procedures which basically will accord priority to provinces and cantons that have high incidences of rural poverty. Accordingly, social and economic factors are strongly reflected in the road candidates selection procedures. The technical specifications for the works, which consist mostly of the rehabilitation of roads to a gravel or stone paving (empedrado) level, with no changes in their alignment, indicates strongly that there will not be significant negative social impacts. Instead the residents in the influence area of the road sub- projects will benefit from: (i)a reduction in travel times, (ii)reduction in transport costs, (iii) a improved facilities for accessing basic social services and (iv) employment generation. The maximization of the possible benefits, through the provision o f local opportunities for employment on road maintenance activities i s also a goal of the road program. 76. The model used for the selection of the programs that form the provincial road plan (Plan Provincial Vial Participativo) i s based on bottom-up, participatory planning workshops that start from the parroquial or basic levels and move up through the entire functional organization of the province. The methodologies to be followed by the M O P and the PPs guarantee the availability of adequate opportunities for dialogue, so that the selection and composition of the projects reflect the wishes of the beneficiary population, through the canton governments, the parochial boards and the social and private organizations active in the local area (See Chart 1). Project improvements include the implementation of a routine maintenance plan for rehabilitated roads that will be designed to be executed with microenterprises that use labor-intensive approaches, thereby further increasingbenefits to local residents. 22 77. Considering the presence at times of different native ethnic groups from the regions, the project includes strategies and procedures that guarantee, besides their participation, respect for their culture, traditions and protection of their physical heritage. These have been designed under the Sectoral Assessment (SEA) and will be implemented by MOPPPs. 78. Rural communities, especially the indigenous, are well organized in Ecuador. There are 13 officially recognized indigenous groups that play a strong social, cultural and political role in national decision making. At the community level, over 2300 grassroots organizations have been formed (OPG -organismos de primer grado - communes, centers and cooperatives). These in turn have formed 160 second tier organizations (OSG) that have various names (association, union, federation) and are frequently affiliated with provincial, regional and national organizations, culminating in 6 national coordinating organizations, of which CONAIE - Confederation of Ecuadorian Indigenous Communities i s probably the strongest. Other principal national organizations are the FEI (Federacidn Ecuatoriana de Zndios), FENOCIN (Federacidn Nacional de Organizaciones Campesinas, Indigenas y Negras) and FEINE (Federacih de Indigenas y Negros). The community groups are formally recognized under the Ley de Organizacidn y Re'gimen Comunal and entered in a Register managed by the Ministry of Agriculture. Alternatively, organizations can obtain juridical status by registering themselves with the Ministry of Social Welfare. The Afro-Ecuadorian communities are spread throughout the country. Although the total number of people i s small, there are scattered groups of Afro- Ecuadorian origin still living in traditional communities. 79. This organizational structure made it readily possible for the PCV to establish links with both the grass roots beneficiary organizations (organismos de primer grado) as well as the national groups to which they belong. Accordingly, the MOP prepared a Strategic Plan for Communications, designed to inform the different actors that participate in the project. The plan identifies the stakeholders invited to participate, the issues to be communicated, the stages of the project cycle, and the means and mechanisms for communication. Hence consultatiodcollaborationwith civil society organizations has been a key element of the bottom- up planning process followed for project preparation. 80. The Program would comply with the environmental regulations in force in the country, the procedures established by the Sistema Unico del Medio Ambiente - SUMA, and the obligations of the specific civil works contract. The MOP will be responsible overall for its socio-environmental management, and will help define sub-sectorial policies and strategies, and offer technical and institutional support to the PPs. Social development actions will be carried out also in a decentralized way with MOP providing the necessary support to the PPs until they can assume full responsibility. The MOP through its local office in each province will define the personnel and procedures that it will need to carry out the strengthening and supporting program with the SG. Among the tentative proposals i s the formation of a Committee for Environmental Management (Comite' de Gestidn Ambiental), comprising the M O P and the PPs road management units that will coordinate management of the program. 81. The project will include a comprehensive project monitoring and evaluation system based on a combination of the following: (i) surveys and data compiled by the project implementation unit to report on selected monitoring indicators agreed upon under the project's logical 23 framework; (ii) participatory workshops; (iii) social assessments focused on a single theme rapid to better understand social links and effects; and (iv) an assessment of the impact of project improvements on the livelihood of beneficiaries. 5. Environment 82. Given the modest nature of the typical proposed project road improvement, no major environmental issues are expected to arise from its implementation. The project entails the rehabilitation of existing rural roads and improving non-motorized tracks. Since these are existing roads and no widening i s considered, the risk o f additional indirect negative impacts linkedwith human activities (e.g. colonization and deforestation) i s very low. Insum, the project will consist of many small but similar road improvement sub-projects that will be dispersed over a wide geographic area. It would be unfeasible to carry out a socio-environmental assessment for each one and hence a three phased approach was adopted that consisted of (i) screening of project candidates using the methodology GCEASPV (Guia para Categorizacio'n y Evaluacidn Ambiental y Social de Proyectos Viales) defined by the Quality Assurance Team (QAT); (ii) carrying out specific environmental and social analyses for a sample o f roads in the first year program in order to confirm the scale of the potential impacts and (iii) preparing a SEA that would establish a framework for setting the safeguard procedures for each road candidate. Through the SEA, the socio-environmental policies were defined for the PCV inparticular but in a manner that could be applicable to the rural roads sector as a whole. This definition of policies was made through a participatory process and by consensus with the different actors involved with the PCV. 83. The specific environmental and social assessments (EIA) were carried out for ten of the roads, totaling 150 km in the first year program. The specific assessments were included within the TOR (Term of Reference) for the detailed engineering of each road link. The TOR was reviewed and approved by the environmental and social specialists who participated in project preparation and carried out field inspections of each road link. The results of the assessment showed that deficient designs and construction techniques in the past may have resulted in modest environmental degradation (erosion, sediment load). These are primarily related to the quarrying and borrow pit activities practiced in the past. The proposed project will improve environmental conditions by introducing better road design and construction techniques, and promoting the use of environmental and social sustainability criteria in the rural roads sector. The EIA includes steps to mitigate any potential impacts identified, together with the respective budgets, responsibility, and schedules of execution. Also, during project preparation, workshops on environmental management best practices for rural roads were held in order to increase the awareness and capacities of.thePPs staff inthis regard. 84. Based on the analyses completed and the scope of the road improvement, no involuntary resettlement i s expected. In terms of Cultural Property the SEA includes chance-find procedures although, given the minor earthworks involved this policy i s not expected to be triggered. In terms of Natural Habitats and Forests policies, based on the SEA findings and project scope, no adverse impacts are expected. However, in the remote eventuality, the screening procedures to be followed under the project would help to ensure that appropriate actions are taken to mitigate any negative impacts. 24 85. For the project as a whole, given its overall scope and that some roads are yet to be identified, it was decided to develop a sectoral assessment approach. This SEA would provide an analytical basis for the safeguards diagnosis, as well as policies, plans and procedures for environmental and social management. The development of this tool was coordinated with the Environmental Unit of MOP and of the Ministry of Environment (ME). The ME has inprinciple agreed to accept the SEA as an adequate instrument to obtain the respective project licensing, in terms of the laws for environmental management in the country. This was an innovative approach for Ecuador and it represented the most efficient and cost effective tool for defining safeguard policies for the project. As a result, some of these policies are that the PCV: 0 Will not includeroads that cross or affect fragile areas, or that require involuntary resettlement. 0 Only under exceptional circumstances will include roads that cross or affect Protected Natural Areas. These cases must be for road candidates (i) that are consistent with the environmental management plan for the area, (ii) a high socioeconomic benefit can where be demonstrated, (iii) where the rules for community participation have been complied with, and (iv) that have met the requirements established in the Ecuadorean Unified System of Environmental Management. 0 Will avoid affecting adversely the customs and cultures of the indigenous and Afro- Ecuadorean population in areas where these communities predominate. The PCV will improve roads that cross or facilitate access to theses areas only when they themselves have selected such roads. 0 Will include programs to strengthen the capacities of the public and private sector agencies involved. 0 Will help to mainstream current Government policies, legislation, and environmental regulations in the project preparation cycle (from planning through execution and maintenance) by designing and putting in place the appropriate management tools (guides, standards and methodologies). 86. Another one of the fundamental aspects developed in the SEA was the definition of four homogeneous zones for the purpose of facilitating and making more efficient the environmental and social assessment of candidate sub-projects. The objective of this zoning was: (i) to identify and map areas with similar socio-environmental risks on the basis of indicators of biotic, physical and socio-economic characteristics; (ii) identify and characterize the potential direct, and indirect socio-environmental impacts; and (iii) select the policy and operational measures needed for the prevention or mitigation andcontrol of the potential impacts. 87. On the basis of these zones, the potential socio-environmental impacts and benefits were identified as well as the respective measures to ensure adequate management in each case. The subprojects that are expected to induce negative impacts, estimated so far to be considerably less than 10 percent of the total road candidates, will still require the preparation of specific Ems.On an as needed basis, there will also be: (i)additional studies aimed at better delinting areas to be 25 protected, including the area of influence of the proposed road sections; (ii)development of a mitigation measures to limit the indirect impact of road works on the environment; and (iii) a definition of the necessary technical and design standards as well as implementation procedures to minimize potential impacts. Further details on the environmental and social analyses are in Annex 10. 88. The project's civil works are of a simple nature and will not cause significant impacts. However, the sectoral EIA includes a plan that contains the following specific products: (a) institutional strengthening for the MOP and the PPs; (b) environmental management plan by homogeneous zone; (c) strategic communication plan; (d) promotion and dissemination plan; (e) community participation plan; and (f) follow up, supervision and control arrangements. An appropriate budget has been included for these activities. 89. The SEA also recommended environmental mitigation measures for each one of the defined homogenous zones in terms of risks, and by the threats of potential natural disasters. It also tailored the procedures for the evaluation of rural road projects, based on the methodology presented in the GCEASPV, for use b y the MOP. Also, the project's operational manual will require that appropriate environmental mitigating measures be applied duringproject design and implementation. 90. Based on the social organization of the community, all of the residents in the area, including women and ethnic minorities, were consulted through the participatory workshops that were held province-wide during project preparation for the selection of roads for the first year program (see Annex 15). Local government officials participated in the screening of road subprojects and in validating the design of selected projects to respond to local needs. The results of environmental screenings were made public. Some of the steps followed in this bottom-up planning cycle included: Inthe preparatory activities for the workshops: Local officials would verify whether indigenous and Afro-Ecuadorean peoples were present inthe influence area of the road. At the parochialworkshops: 0 The presence and ethnicity of indigenous people would be noted. 0 Their native dialect would be specified. 0 Separate or individual workshops would be organized, consistent with the social organization of the community. Translators were provided at workshops for indigenous people, when needed. 0 An act of acceptance or rejection of a road candidate was signed with the indigenous organizations. 26 At Cantonal workshops: 0 The grassroots organizations (organisrnos deprimer grado) are invited. FirstProvincial Workshop: 0 If distinct indigenous communities exist, an analysis is carried out to help define the communities' preferences. Second provincial workshop: 0 The suggestions of grass roots and higher order organizations are to be included 0 This participation program and the process that included the participation of the beneficiary indigenous population satisfy the requirements of the OP.4.20. 0 The project will use the following mechanisms to monitor and measure the environmental impact of the project: (i) annual performance audits to examine the level of compliance with national and local environmental guidelines and specifications; (ii) carrying out of studies of the efficacy of environmental procedures and their application in the field; and (iii) periodic updating of the sectoral screening approaches that were developed during project preparation. This exercise will allow also the fine-tuning of environmental procedures and implementation procedures. 6. Safeguard policies Safeguard PoliciesTriggered by the Project Yes N o Environmental Assessment (OP/BP/GP 4.01) [XI [I Natural Habitats (OPBP 4.04) [XI [ I Pest Management (OP 4.09) [I [XI Cultural Property (OPN 11.03, being revised as OP 4.1 1) [XI [I Involuntary Resettlement (OP/BP 4.12) [I [XI Indigenous .Peoples (OD 4.20, being revised as OP 4.10) [XI 11 Forests (OP/BP 4.36) [XI [ I Safety of Dams (OPBP 4.37) [I [XI Projects in DisputedAreas (OP/BP/GP 7.60)* [ I [XI Projects on International Waterways (OP/BP/GP 7.50) [I [XI 91. Environmental: The project entails the improvement of existing rural roads and bridle paths. It i s not anticipated that the project will have any significant environmental impacts that could adversely affect the natural environment in its area of influence. The civil works projects planned under the project will not require carrying out major changes in road characteristics, such as road widening or changing the alignment. In addition, no supplementary works are * By supporting theproposed project, the Bank does not intend to prejudice thefinal determination of theparties' claims on the disputed areas 27 planned that could affect the direct areas of influence of the proposed subprojects. No involuntary resettlement of population will be required. To ensure an adequate environmental management, slope stabilization, restoration of borrow pits and material deposit areas, control of earthwork management and existing erosion processes, road drainage, and issues related to road and pedestrian safety have been taken into account during the design of the road subprojects. All of these measures will be listed in the Project's Operations Manual and specific environmental clauses will be included in all civil works contracts. All project sites will be screened for potential triggers of the Bank's environmental and social safeguards. All subprojects included in the first package have complied with national environmental regulations (SUMA). In addition, an appropriate budget has been included in the project to: (i)carry out environmental mitigation measures in all sub-projects as a percentage of the rehabilitation costs for each segment; (ii) strengthen the environmental management capacity of all actors involved in the project; and (iii) strengthen the environmental supervision of road construction activities. 92. Indigenous Peoples: The indigenous and Afro-Ecuadorian peoples sum to about 18% of the national population and they live mostly in rural communities. They are well organized and represented. Very few road links are expected to serve purely indigenous areas, but the PCV still features a framework for communications and participation o f indigenous peoples. In order to ensure that the interests of any indigenous peoples in a sub-project's area of influence are adequately protected, a consultative process with communities would be carried out to better assess their specific needs. In this manner, indigenous communities have an active role in selecting the improvements to be carried under the project as well as determining the timing for implementation and it becomes part of their own development plan. Furthermore the capacity of the program to generate high impact benefits in the life and development of these communities, requires that program executors not only institutionalize the participatory planning model in the provinces, but that they also keep the beneficiary communities informed of program progress. For this reason, the SEA includes inter alia: (i) a Communications Plan, (ii) Promotion and a Disclosure Plan, and (iii) monitoring, supervision and control. These will also help to ensure that the PCV will include provision for the dissemination of information, for heightening social awareness, and for promoting respect for cultural characteristics and patterns. This approach fulfills the requirements of the new Ecuadorian political constitution of 1998. Among others, under this law, when indigenous and Afro-Ecuadorian communities are included within the area of influence, it i s mandatory to guarantee that: (i) they will not be adversely affected, (ii) they will be properly informed and consulted, and (iii)specific consultation procedures will be established within the planning model. Steps were followed therefore to: (i) nationally inform representative organizations, and (ii)to define levels of indigenous and Afro-Ecuadorian participation during project identification and preparation. As part of the preparation of each year's program (POA), the convocation for participation of indigenous and Afro-Ecuadorian peoples will be carried out through community-based organizations, which will be convened for participation in community workshops. Participation procedures will be designed with due consideration to the particularities of each indigenous nationality and Afro-Ecuadorian communities. These methodologies will guarantee opportunities for discussions, so that project selection and composition as well as agreements reflect the wishes of communities benefiting from the program. 28 93. Other Considerations: Given that the project focuses really on spot improvements within the existing pavement width and no new roads will be opened, it i s not expected to induce new settlements nor deforestation. However, the SEA does include procedures and specify criteria for (i)excluding risky areas and subprojects and (ii) coordinating with natural resource management agencies to ensure adequate mitigation, if needed. Accordingly, road improvements within any category o f protected areas, though highly unlikely, would only be considered when they are both approved by the protected area's management entity and consistent with the area's management plan. Similarly, given the lack of earthworks and any realignment, it i s unlikely that any archaeological or historical object will be uncovered and OP 11.03 will not be triggered. Still, the sectoral EIA does maintain "chance find procedures" for contractors to follow in the remote case that any such items are encountered. 94. The project's implementation framework (Annex 6) also lists specific environmental and social certifying requirements that mustbe met prior to Bank approval of each annual program. 7. PolicyExceptionsand Readiness 95. N o Policy exception i s needed for the project. The project i s deemed at this stage ready for implementation. The Ministry of Economy and Finance has approved the Internal Appraisal Report (Estudio de Viabilidud) on November 29, 2005, indicating formal Government commitment to the project. 96. The engineering design documents for the first year's activities are complete and ready for the start of project implementation. Also, the procurement plan for the first year's activities i s complete and ready, and the Project Operational Plan for PPs has also been designed and found acceptable to the Bank. The OperationalManual has been prepared and approved in substance by the Bank; only minor editing i s being carried out now to reflect the agreement reached at negotiations. A Model Participation Agreement for the PPs has also been prepared and agreed in substance with the MOP. 29 Annex 1:Country and Sector or ProgramBackground ECUADOR: RURALROADS PROJECT Background: 1. Ecuador experienced several years of acute economic and political crises in the late 1990s before entering the current turnaround that resulted partially from the dollarization program. Despite the abundance of natural resources, annual per capita income i s about US$1450 which places the country in the lower middle income range. Following national elections in 2002, the new Ecuadorean administration announced a medium-term development strategy that focused inter alia on promoting economic reactivation and growth through competitiveness, reducing poverty and exclusion, and strengthening the coverage and quality of education and health services. While the Government's goals are clearlyjustifiable, it i s clear that in order to attain them, improvements will be needed in the provision and operation of supporting economic infrastructure, inparticular inthe road transport sector. 2. The classified road network of Ecuador consists of about 43,200 km of roads, of which about 9,500 km(22%) are national primary and secondary roads that fall under the jurisdiction of the MOP (see Annex 17 for overall sector management arrangements). The provinces, municipalities, and other local agencies, referred collectively as Sectional Governments (SG), have full or sharedjurisdictional responsibility for the remainder of the network, which averages about 140 km per Canton; these are typically classified as the secondary, tertiary and feeder roads. More than half (51%) of the road network i s located in the Sierra region, 38% in the Coastal region, and the remaining 11%i s dispersed throughout the Amazon region. Most trunk roads have average daily traffic of about 6,500 vehicles per day but this figure drops below 200 vpd for rural roads. Although the size of the vehicle fleet i s commensurate with GDP levels at about 625,000 (with 90% passenger cars, 8% trucks, and 2% buses), the distribution of vehicles i s concentrated in a few provinces (Pichincha and Guayas). Since 1996, there has been increased private sector activity through a concessioning program that has encompassed the rehabilitation and operation of road infrastructure and facilities. Inall, approximately 1,244 km of Coastal and Sierra roads have been concessioned to the private sector. However, roads managed by the private sector have relatively low traffic levels when compared to similar roads elsewhere in the region and in most cases, the revenues generated from tolls barely cover operational costs. Still, network-wide it i s estimated that Government expenditures are significantly below the revenues recovered from the sector principally through taxes and duties on the sale of petroleum products, vehicles and spares. 3. In Ecuador as in many other countries, road transport is the dominant mode of transportation. However, the existing road network certainly cannot provide the efficient, least cost surface transport linkages needed to support the economic recovery and to meet the poverty alleviation objectives of the country. The level and quality of transport services are not commensurate with the country's needs, the road network provides limited access to many production centers and especially to rural areas, and investment in village roads and footpaths has largely been neglected. Moreover, maintenance and rehabilitation arrangements have been inadequate for most of the road network and inparticular for secondary and rural roads. For rural residents, this has all resulted in a sense of isolation and reduced hopes for breaking out of 30 poverty traps. The following box summarizes some of the related findings from the Bank's "Voices of the Poor" consultations in Ecuador, and in the subsequent paragraphs some of the other underlying issues that producedthis situation are outlined. Box 1: "Voices of the Poor" identib problems and solutionsfor poverty "In order to be free of poverty, Iimagine there must be a little of everything, electricity, water, land, animals, livestock...the needs of the home.. ." -Consultations with the Poor, Ecuador, July 1999. Ecuador participated together with 22 other countries in a global consultation effort to hear the voices of the poor, as an input into the World Development Report 2000/01. More than 500 men and women, of different ages and ethnic origins, living in urban and rural areas of 11 of Ecuador's 22 provinces, were interviewed in a process led by the Center for Planning and Social Studies (CEPLAES), an Ecuadorean NGO. Topics ranged from the definition of well-being to problems and priorities, "spaces of poverty" related to access to basic services, gender relations, institutionality, and challenges for an agenda for change. Some of the key findings of the voices of the poor echo those of the Bank's SAPRI(Structural Adjustment Participatory Review Initiative) process and of the Bank's CAS consultations: 0 Poverty affects not only material well-being but also psychological well-being, and i s reflectedin the constrained capacity to decide andact, andin feelings of depression and loss of hope; 0 Employment and self-improvement is very important; the poor want opportunities rather than handouts; 0 The poor not only feel alienated from traditional politicians, but also distanced from municipal governments and NGOs with their own agendas; thus they rely mainly on their own organizations; 0 The rural poor feel isolated, while the urban poor feel trapped, subject to insecure living conditions with high rates of contamination, unemployment and crime; An agendafor reformhas to include overcomingisolation, provision of basic infrastructure, guaranteeing access to health and education, and creating capacities and opportunities. 4. The lack of adequate access to rural economic or social centers has been highlighted in various Bank discussions with stakeholders over the years as well as in workshops held at local levels during project preparation. It i s clear that addressing road transport needs i s a key requirement for sustaining the economic recovery and meeting the needs of the rural poor. On a country level, the overall road service index i s roughly 3.4 kmper thousand inhabitants, which i s well below the regional average of 5.4 km per thousand inhabitants, and for poor rural cantons the service index i s still lower than the national average. In sum the rural road network that i s managed by the PPs offers too limited a coverage and too little o f it (40% on average) i s in maintainable condition. Furthermore, in the Sierra region, the topography i s very difficult which leads to the building of steeply graded, winding roads that are difficult for freight vehicles to traverse and make travel times inordinately long; this adverse combination results in very high transport costs. This situation has been exacerbated by the lack o f road restoration and routine road maintenance and by the relatively high degree o f road network vulnerability to natural disasters, such as mudslides, floods, earthquakes and volcanic activity. 5. A sense of economic and social isolation: Many rural communities can be reached only by tracks and trails (bridle paths) that are often suitable for non-motorized transport due to their 31 narrow, steep slopes, multiple river crossings and often unstable soils. Poor rural accessibility has contributed to a general sense of isolation with resultant reduced hopes for improvement in the livelihood of the people affected. Furthermore, during the rainy season, many roads in rural areas are closed or remain impassable for extended periods, which heighten the sense of isolation for the local population. This makes it very difficult and costly to provide services, public or private, to the affected rural resident on a reliable basis. In terms of self-improvement, considerable disincentives face isolated peoples as they can neither take advantage of employment opportunities in the region nor access markets for their goods. In reality, isolated peoples tend to engage in subsistence activities and need transport linkages in order for them to develop exchange economies with other communities. This i s why improved access i s usually one of their most frequently expressed priorities. 6. Lack of comprehensive road maintenance programs: Maintenance plays a key role in minimizing road deterioration, extending the useful life of roads, and reducing vehicle operating costs but it i s not being carried out adequately. Several factors cause this. Key among them are the lack of adequate budgetary allocations and untimely releases of funds, the institutional and other weaknesses in the PPs that hamper the planning and implementation of maintenance, and to a limited extent, the lack of donor funding for maintenance works. There i s a pressingneed to develop the institutional capacity of the PRA, which are typically part of the public works department at the provincial or municipal government level. This includes developing the PRAs capacity to carry out condition inventories of the roads, design and implement annual and multi- annual road restoration and routine maintenance programs, as well as to seek least cost solutions to technical and engineering problems associated with road and bridge maintenance and to promote the development of the local construction industry. Based on Bank experiences with similar projects elsewhere, i t will require a long-term program of technical assistance to help accomplish all of these goals. 7. Incomplete decentralization process: The GOE had long diagnosed the difficult situation in the road sector and had taken initiatives to transfer the responsibility for managing the secondary and rural roads segments of the network to the provinces and municipalities. The objectives behind decentralization attempt to address economic inequalities and permit the SGs to more directly address local problems. A large measure of the underlying legal and regulatory framework in support of decentralization has been enacted during the last 10 years. Nevertheless, this process of decentralization has only been partially completed and there remains considerable tension among sector agencies about responsibilities and fiscal arrangements. The Bank undertook a decentralization study in FYOO that formed the basis for dialogue with the previous Administration on this topic. Decentralization i s a politically sensitive issue and progress i s difficult, as Ecuador has multiple layers of government and has yet to establish well-functioning budgetary and other transfer principles that embody clear responsibilities and appropriate incentives. The Administration i s evaluating its policy options and the Bank plans to take up the dialogue again with the Government, in coordination with other donors, through fiscal decentralization and debt management studies. 8. Currently, the decentralization law established that roughly 15 percent of the total national budget would be allocated to a general decentralization fund, o f which municipalities and provinces would receive 70 percent and 30 percent, respectively. Allocation of funds i s 32 determined according to population and land area, among other criteria. This funding source i s in addition to FONDEPRO and FODESEC, which were established in the early 1990s, and are financed by 2 percent of net current revenues of Central Government and petroleum exports, and are distributed according to population and need-based criteria. On average, own-generated revenues by local governments represent about 10 to 15 percent of their budgetary expenditures. Thus, most local governments with the exception of Quito and Guayaquil, still depend heavily on revenue transfers from the Central Government. It should be noted, however, that the actual percentage of Central Government funds finally made available to the PPs i s often less than the theoretical level due to procedural complexities in transferring funds to the local governments. Hence, there i s still some risk regarding whether financial resources that are commensurate with the PPs increasing responsibilitiesfor the management of infrastructure will be made available to them on a reliable basis. 9. Unclear institutional roles: Provincial governments have traditionally accepted responsibility for roads in rural areas, however due in no small measure to the unfinished decentralization agenda, overlapping institutions with unclear mandates continue to characterize the rural transport sector. The Government has tried to reduce the level of administrative duplication by defining and classifying three separate road networks corresponding to the national, provincial, and cantonal levels. As the main Central Government entity in the sector, the MOP i s responsible for the administration of the primary road network, but several specialized agencies share the responsibility for overall sector policy setting and regulatory functions. MOP i s trying to consolidate gradually the planning functions within the sector in order to foster the integration and coordination of road sector activities among provincial capitals and economic centers. In addition to there being overlapping responsibilities among the various levels of government, institutional capacity remains weak, especially in local government entities and including some where decentralization has already taken place. Key issues that have emerged at PPs level road network management include: (i)the dependence on national government transfers; (ii) inconsistent allocation by PPs of funds needed for road network improvements; (iii)inadequate provision for maintenance activities; (iv) lack of available technical data and statistical information that are necessary for decision-making; (v) weak planning units; (vi) inadequate financial management and expenditure tracking systems; (vii) weaknesses in the procurement process which have led to implementation delays and cost increases; and (viii) inadequate numberso f professional and technical staff. 10. Bank support proved essential to the MEF in carrying out the first mayor institutional analyses study of provincial governments in order to ensure compliance with LOREYTF. The findings of the institutional capacity analyses showed that there are a set road management issues that affects the road transport sector in the majority of local provincial governments. The main findings are presentedbelow: a) Inadequate planning, programmingand budgeting systems in road networks. The study analysis indicates that provincial governments do not have integrated and adequate planning, budgeting, and execution capacity for roads management. Moreover, in most cases, at the provincial level, the operational planning i s not based on technical criteria but rather, responds to the transportation demands of municipalities and communities, as well as to decisions adopted by individual provincial governments. 33 Because they lack of a structured planning program based on technical criteria (a road inventory, a strategic provincial road plan, a project cycle system -technical feasibility studies and final designs-, planning, budgeting, etc.), many of these activities are not being carried out by supporting technical studies, projects report, or studies, and, therefore, they must rely on technical reports, descriptive memoirs, and limitedbudgets. This situation i s mainly the result of direct contracting or direct administration (force account) as the predominant system of execution in these technical areas; a system that considerably limits the application of technical criteria. b) Impact of direct contracting. The predominant road management model in most provincial governments i s the direct contracting of management. This model i s expressed in a specific fashion to plan, organize, execute and use financial resources in order to serve the road system in accordance with its limited own equipment and personnel. In the case of road management, the operational organization of resources (equipment and personnel) i s oriented to the role of executing projects without providing further preventive maintenance, disregarding differentiated interventions in time based on road inventory and road project cycles. Inthe financial aspect,thenegative impact of this modelrestricts the possibilityof performinga greater investment in roads, particularly when greater attention coverage i s expected from direct management. Usually, the provincial decision to make greater investment i s traditionally accompanied by the need to acquire new equipment, and also the need to hire additional personnel on a long term basis. This, in the long term, tends to affect fixed budget costs and to keep them immobilized for other purposes within the transport sector. c) Incipientdevelopmentof the management system through agreementswith the private sector (Outsourcing). In the case of improvement for private sector participation (PSP), it is clear that the outsourcing modality for execution of road-related activities, which are the responsibility of provincial governments, i s still quite limited and inadequate. Inthis context, the study found out that private participation is very limited at the provincial level. Thus, PSP should be developed through a progressive expansion strategy which should also consider as complementary and as alternative for direct contracting. d) Personneland equipment. There is a direct relationship between the predominant model of direct road management of implementation by force-account and the designing and functioning of the institutional and operational capacity within the provinces. This capacity may be expressed under the two components: supply of road equipment and of available personnel. Inthe strategy of implementation by force-account, it is assumed that a greater supply of road equipment will imply better road coverage and capacity for road execution. Nevertheless, in most cases, road equipments have been acquired by provincial governments without adequate planning and without considering local demands regarding road transportation or internal operational capacity. Thus, each new acquisition of road equipment has brought along the creation of new staff positions while the inoperativeness of this equipment has not implied reduction of personnel. 34 Regarding the supply of equipment, it i s noted that in most cases the current road equipment of provincial governments barely allows them to provide periodic maintenance and attention to conventional emergencies, with very little impact on the coverage of the road network while participating in limited road construction, rehabilitation, restoration and routine maintenance. e) Deployment of Personnel. Careful analysis of the situation has highlighted the need to rationalize and improve the pool of personnel dedicated to road networks with regard to the real needs of the provincial organization. It i s also noted that the total number of road network personnel, including professional and technical staff, administrative assistants, and laborers represents between 30 and 50 per cent of all personnel employed by the provincial governments. This situation is aggravated by the lack of trained professionals with experience in serving the road system efficiently. The existence of strong labor unions, have acquired labor rights through old labor agreements, a greater amount of equipment on the verge of becoming obsolete or inoperative, as well as the absence of a better institutional organization structure to optimize direct management or contracting are reflected in a huge economic burden in the provincial current expenditures and in minor road investment by provincial governments. f) Ineffectiveness of public expenditures in road investment. In general, provincial governments lack strategic planning to orient their road investment, and while in some cases the PVPP has been developed, in the majority of cases, it was found that the PVPP has not been implemented nor usedto decide annual and multi-annual road investments within the beneficiary province. g) Problems of institutional organization. The formal structure of the Public Road Infrastructure Directorate considers a unit or road network area (16 cases out of the 22). However, even in these few instances, the provinces hardly ever implemented a clear distribution of responsibilities, functional structure and minimum level of autonomy to efficiently serve the different road demands of the network under the responsibility of the provincial governments. Also, normally, high performance road network authorities, focus on road intervention based on project cycles (activities that are differentiated in useful life of roads, considering the typology, situation, and level of service), but the study showed that, in most cases, the provincial governments limit their functions almost exclusively to tending emergencies and providing corrective periodical maintenance to the road network section for which they are responsible. Moreover, the study found that road construction and rehabilitation activities are very few, and when they do occur, they are carried out partially (in annual installments or by trenches). This i s performed basically as an operative and execution role. In most provincial governments, no mechanisms or systems are applied to follow up or to evaluate road activities conducted during the course of the year. Additionally, provincial governments lack professional and technical teams as well as adequate qualifications to handle these networks. In order to achieve efficient road management, a promoting and developing scale economy strategy at intra-provincial and inter-provincial levels between sectional governments i s required. 35 h) Issues of functional coordination between local provincial governments and municipalities. It was noted that, in most cases, there is an incipient policy of road coordination within municipals and "parroquias" and other agencies that act regarding provincial road networks. This means that although there are agreements and collaboration mechanisms between local provincial governments and municipalities, these are not planned, and are limited to emergencies which mainly provide corrective maintenance. The short and long term goals of the Government organizations involved are not defined and the participation of or support from `users' organizations and beneficiaries of the tertiary networks and neighborhood roads practically are disregarded. The inarticulate interventions of responsible instances as well as the absence of participation of users and beneficiaries determine a chronic abandonment of tertiary networks and neighborhoodroads. 11. As a result of these findings, it is clear that the PPs need to be strengthened institutionally. Also it shows that the project concept has complied with the LOREYTF, based on the institutional weakness of the PPs, thereby permitting and allowing the GOE to borrow from the WB and IDB and transfer the resources to PPs. 12. The need to strengthen governance: The problems of poor governance and high levels of corruption are well known in Ecuador and have been considered as contributors to poverty. While Ecuadoreans are proud of themselves, they express a generalized lack of confidence in national government institutions and a slightly higher level of confidence in provincial governments. The results of detailed surveys, carried out b y the Bank and other agencies, indicate that the issue of corruption i s of considerable concern to Ecuadorean citizens in their daily lives, and more so if they need to win contracts awarded by the public sector, clear items through customs, or conduct transactions in which the public official has considerable discretion. Corruption i s shown in cross-country studies to be associated with worse rather than better service, to impact the poor disproportionately in the allocation of public resources, and to increase public disaffection with the polity. Central to this issue also i s the lack of transparency inpublic expenditures which occurs largely becauseof the combination of (i) truly centralized no public payroll; (ii) a lack of controls on preallocated spending; and (iii) complex budgetary procedures. 13. In general a multi-dimensional reform plan i s needed to focus on three areas: (i) strengthening of existing regulations and institutions inthe fight against corruption, which covers not only the public sector but also the private sector and civil society in general; (ii) educating the population regarding their rights to supervise public functions, which implies the development of mechanisms for monitoring public spending and guaranteeing public access to fiscal accounts; and (iii)improving administrative procedures to prevent corruption in its various forms, especially when linked to specific areas such as the administration of public procurement. The Bank will continue to provide technical assistance on this issue and promote increased transparency through its projects. In the short term this could include modernizing budget management and making information accessible to citizens in electronic form; a good example of this could be the plans for the development of a web site for the proposed rural roads project and its extensive use of an informed public participation process for its preparation. 36 14. The need to integrate environmental and social analysis in the project planning and preparation cycle: An adequate framework and guidelines for environmental and social analyses exist at the national level (SUMA) and to a lesser extent at provincial and local levels today. Usually these procedures tend to be applied somewhat late in the project cycle and are seen typically as bottlenecks or obstacles to project development. Too often this implies also a less than desirable allocation of resources for environmental and social management and the inadequate application of environmental and social policies, plans and procedures at the PPs level. There i s a need to employ a strategic sectoral vision for rural roads, with the aim of: (i) developing environmental and social policies that are appropriate to the sector; (ii) defining an adequate strategy that addresses the long term environmental and social risks, and the indirect and cumulative impacts by eco-region; (iii) developing mitigatory measures to counteract the potential environmental and social effects; and (iv) defining environmental and social management procedures for the staff of PPs road agencies. Sector Issues to be addressed by the project and strategic choices: 15. In its dialogue with the Bank, the GOE has articulated strategies and policies that currently seek to (a) continue the program of decentralization of responsibilities to lower levels of government; (b) support institutional reforms required at all levels for the development of better road management practices especially with regard to maintenance; and (c) carry out rural poverty-focused investments through the rehabilitation and maintenance of the existing network, that would improve connectivity for poorly served localities. The GOE considers the latter item to be a key component of its poverty alleviation strategy. The needs of Ecuador's provinces are vast and if the goal i s to develop adequate transport systems to enable them to meet the challenges of poverty alleviation and to support economic growth, then comprehensive programs of assistance will be needed. The project, therefore, needs to focus on certain key high priority issues that would be consistent with national government plans and can be addressed readily. These include: a) Improving rural accessibilitv through the maintenance and rehabilitation of rural road networks: As discussed, road transport i s by far the dominant mode of transportation for the movement of both passengers and freight in Ecuador. However, the combination o f the limited coverage and the poor condition of the road network results in higher costs to the economy and serves as an impediment to sustained growth and integration of rural communities. The poor condition of extensive segments of the road network resulted from the earlier years of neglect and the lack of adequate maintenance, resulting in the network now being largely unable to support economic growth and to meet the transport needs of rural communities in an efficient way. Inresponse to this situation, under the proposed project, the national and local governments will take steps to formulate and implement comprehensive road maintenance and improvement programs. Doing so would help to address one of the highest priority needs of the transport sector and thereby remove also one of the impediments to sustaining the ongoing economic recovery. Assistance would be given to the PPs for developing efficient strategies, including introducing the use of private contractors and microenterprises for the implementation of maintenance, so as to enable them to better deploy the scarce resources available. Finally, the project would also help to improve the network of footpaths and tracks that serve the needs o f the poorest, particularly isolated and indigenous groups. 37 b) The unfinisheddecentralization agenda and unclear institutional arrangements: The road network i s being managed by three very dissimilar levels (national, provincial, municipal) of Government, which ostensibly are pursuingthe same objectives but with highly variable results. To a large extent, the institutional framework features a somewhat unclear division of responsibilities between the national and the subnational governments, fractious interagency relationships, and a diminished role for policy coordination. There i s also a lack of an effective forum for designing indicators, measuring results, and addressing deficiencies. These are among the reasons why decentralization of the road network management has proven to be problematic as the PPs feel that they have beenassigned additional responsibilities without the commensurate resources needed to carry them out. There i s a need for assistance to PPs to help develop a clear strategy for meeting the transport needs of their rural populations. Similarly, there i s a need to provide appropriate levels of financial, human and technical resources in order for the PPs to deliver services of better quality, wider coverage, and with greater efficiency. The project implementation arrangements will feature a pooling of resources by the PPs so as to help promote scale economies in road management and to lay the groundwork for coordination in the sector. Also, technical assistanceunder the project will be designed to help address these issues. c) Improving road network planning: Currently, planning i s undertaken largely in preparing annual investments. These planning investments are included in the PPs and/or SG budgets. Currently, no PPs really prepare balanced multi-year road rehabilitation programs that include adequate provisions for maintenance. To remedy this situation, the PPs need to further develop their capacity to plan and rank investments in terms of their economic priority and the provincial government's strategic goals, while paying adequate attention to their environmental and social aspects. This will require strengthening of their planning divisions, the training of staff in the use of the Bank's roads economic analysis (RED) and other planning models, and the development of true annual and multi-annual road improvement programs. It will be necessary also to strengthen financial management procedures, to improve revenue and expenditure tracking as well as procurement procedures so as to help ensure the timely execution of works. Under the project, this assistance will involve primarily the analyzing and determining of the condition of paved and unpaved roads, the developing of comprehensive road improvement and maintenance plans (PVPP) that are based on local priorities, as well as the provision of training for staff. A set of very comprehensive, bottom-up participatory planning procedures have been developed and applied for the preparation of the PVPP. The PVPP methodology i s presented in the draft Operational Manual of the Project. Later stages, will require establishing key components of the overall planning capability in a sustainable way in the PRAs as well as expanding it further to enable them to prepare economically prioritized investment programs and to develop budgeting models that can optimize the trade-offs between expenditures for rehabilitation and maintenance. Development of a more efficient annual planning/programming and budgeting (PPB) cycle would enable PPs to focus more on promoting least cost approaches to attaining the goal of providing well-functioning transportation networks. The PPs would thus be in a position to promote balanced road improvement and maintenance plans that have sound economic underpinnings, and also to articulate the rationale for their choices. Environmental and social aspects will also be integrated into the planning cycle and the PPs staff will be trained in the use of Bank approved methodologies for the environmental and social screening of roads. This could 38 help to promulgate the use of cost-effective procedures for preparing adequate environmental and social analyses for the road subprojects. 16. In sum, the proposed project will advance the GOE's goals in the sector by helping to address some of the key needs. The project would improve rural road networks, thereby lowering transport costs and facilitating economic growth in rural areas. Moreover, the project would support the development of a comprehensive road maintenance program that would help to ensure the sustainability of investments. 39 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies ECUADOR:RURAL ROADSPROJECT Sector Issue Project Bank-financed Implementation Development Progress (IP) Objective (DO) Road Maintenance activities Ln.4614-PE, Second Rural S S carried out by microenterprises Roads Project supervised by subnational governments Improving rural access and Ln.3962-PE. Rural Roads S S connectivity in isolated areas Rehabilitationand Maintenance Other Development Agencies IDB:Learningand Innovation Rural Roads Improvement Loan (PIRT) IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U(Unsat Factory), HU(Highly Unsatisfactory) 40 Annex 3: ResultsFrameworkandMonitoring ECUADOR:RURALROADSPROJECT ResultsFramework Use of Outcome Information 'he project would improve 11,130 beneficiaries in the 4aximize impacts on rural ccess and connectivity to the xoject areas. overty reduction and improve lain economic centers for the !O% of rural road network iving conditions. griculture dependent and other ,atisfactorilymaintained. opulations of the mainly rural antons of the project provinces % of Rural Network of PPs in y: (i)improving the systems :ood conditions. ndproceduresfor road naintenanceand ensuring that mprovement inPP's issessment of institutional he maintainable network in all nstitutional capacity level: mpact on the managementof iroject assistedprovinces is 3 PPs with high performance he infrastructuretransport naintained satisfactorily; (ii) evel in road management. ector by PPs. ehabilitation/improvement of 5 PPs with acceptable elected rural roads and tracks; ierformance level in road ,nd(iii)strengthening nanagement . nstitutional arrangements and 3 PPs with initial performance mproving the proceduresfor evel in road management. )lanning, programmingand Results Indicators for Each Use of Results Monitoring Component 'omponent 1: 500kmof rural road 4ssess the implementation of tehabilitate key priority roads rehabilitated. he programand monitor its )fthe provincialruralroad ;ocial impact on local ietwork, improving access to :ommunities oca1communities. Zomponent 2: 800 kmof rural road improved 4ssess the rural road improve transitability and through periodic maintenance. maintenancenetwork in at least ustainability of key rural road 1945 kmof routine good conditions at local ;egments by provincial maintenance through governments. rovernments. microenterprises Zomponent 3: 10PPs executing PVPP. Assess the institutional capacity Buildinstitutional capacity at 40 training courses for PPs of the PPs to effectively 12 PPs and sectional executed. manage their corresponding ;overnments in terms of 20 technical assistance modules road sector. ?lanning, budgeting, for PPs executed. :omacting (outsourcing), 200 PPs and municipal's staff :xecution, control and trained in road management. maintenance of infrastructure services. 40 microenterprises created anc Assess evidence that the operating microenterprises are funded by 10technicaltraining modules the beneficiary sectional for microentemrises executed. governments. 41 Tm Socio economic monitoring of the Rural Roads Program 1. Under the previous project, financed by the IDB, the project financed 415 km of rural roads and 100 km of trunk paths were improved. This project developed a socio-economic impact methodology and the corresponding impact indicators as well as established a baseline under that program. MOP carried out two surveys and assessed the impact of socio-economic changes in the area that may be attributed to the road improvement program. The overall objective of the socio-economic impact study was to collect baseline information on the targeted areas in order to establish their existing socio-economic conditions and social services access by the beneficiaries and to subsequently determine the size and nature of the benefits from rural transport infrastructureproject. 2. The analysis was to be based on the difference-in-differences methodology which compares the means of the changes, especially in headcount and extreme poverty levels for representative surveyed households along both treatment and control roads. A specialized Ecuadorian entity (Prosperar consultants) was responsible for the study, design, survey and evaluation of the results. The evaluation system developed i s presented below. Impact Assessments System for the PCV Activities Strategies Products Other Participants Operation Annual Reports Management 1I Mid-TermReview Implementation Completion Administration (DGVD) Institutional Model-PPs Sector Management 1 1 Community Participation Project Mid-term Monitoring Review and and partial Road Rehabilitationand Evaluation i Spot upgrading t % Assessment -Control -Treatment Communities -Difference of - MOP institutional - strengtheningImpact Impact - Results of the Impact - Evaluation Assessment Sustainability 43 3. In January 2004, after IDB project completion, a final survey was performed in order to analyze and to determine the impact of roads on: a. Income levels of target communities and groups; b. Education and health sectors, particularly access to schools at the primary level, quality of education, drop-out rate, access to health centers, and prevention programs, such as immunization and prenatal care; c. Agricultural economy: Volume, Productivity, production diversification, distribution channels and employment; d. Reduction of travel time, improvements on commercial traffic, employment generation through microenterprises and duringroad rehabilitation. 4. This impact assessment was completed and information was collected to determine the baseline for the proposed project. These socio-economic indicators as well as the impact results will be used as baseline for the project and these information are in the project files. The following table shows the roads selected and the results obtained after project completion. Theses results will be used as roads control. RuralRoads Selected 44 Impact Results of First Pilot Project PlannedOutcomeResult Actual Outcome To the market place: reduction of 14.5%. Reduction of travel time in 20% To the school: reduction of 31.1 %. To the health post: reduction of 35.9%. Commercial traffic increases its frequency by 305 Commercial traffic increased its frequency in 100%. Twelve cantons (communities) with more than 45.000 32 cantones with more than 100,000 people have been people will be benefited with the rehabilitated roads and benefited with better road access. the accessibility has been improved. Employment generation of more than 1,200 temporal non- Employment generation o f 1,885 temporal jobs during specialized jobs for civil works of road rehabilitation. road rehabilitation. Permanentjobs of 150 due to creation of microenterprises. Generation of 146 permanent jobs due to microenterprises -Number for maintenance. of Rural Roads Committees (8 to 12) for trunk Creation of 14Committees for trunk roads. roads. 5. In Ecuador, as in most developing countries, rural transport networks are still underdeveloped and of poor quality. Rural households, and particularly women, spend much time and effort on transport activities to fulfill their basic needs. Driven partly by the Millennium Development Goals (MDG) agenda, in recent years the resultant emphasis for assisting very poor populations through sustained rural development has led governments and donors to accelerate resource flows to rural infrastructure, with a large proportion being directed at improving transport infrastructure. 6. Developing a good rural road infrastructure network i s an essential requirement for rural development, although by itself it i s not sufficient to guarantee success. Without an adequate network, communities will lack the necessary physical access for basic domestic chores, agricultural activities, social and economic services and job opportunities. Without reliable access to markets and productive resources, economic development stagnates, and poverty reduction initiatives cannot be sustained. 7. Poverty reduction strategies require a comprehensive framework for implementation. The simultaneous development of adequate rural infrastructure, productive sectors, social and economic serviies, an appropriate macroeconomic framework, and good governance and local ownership are required for rural poverty alleviation. Effective transport, as a complementary input to nearly every aspect of rural activity, i s essential element of rural poverty reduction. 8. Because transportation has a pervasive influence across a country's economy and its social fabric, it i s hard,totrace and measure the ultimate impact of transport interventions on the welfare of poor households. However, it i s widely accepted that improvements in transport have the greatest impact on poor people when other sectoral interventions are also in place, and that without good transport linkages many of the other sectoral interventions may not reach their potential impacts. For example, well-staffed schools or health centers would be of minimal benefit to poor people who cannot get to them. 9. From a broader perspective, adequate transport services can help reduce poverty in all its dimensions by stimulating economic and social development and inclusion by: creating opportunities for people to market their products and services, providing better access to schools 45 and clinics; facilitating the access to information that is vital to social participation, inclusion and accountability; and enhancing the ability of Government to provide basic services, including security, to the population at large. The availability year-round of reliable transportation can also greatly reduce vulnerability to household-level risks such as medical or family emergencies. 10. Transport i s a derived demand and hence improving it can be considered to reduce poverty not through consumption of transport itself but rather through improving the quality and security of access to work, markets and services, and by releasing or makingavailable increased resources for consumption and production. Tracing the poverty impacts of transport interventions i s thus a very complex challenge. 11. The selection o f road candidates for World Bank-financed transport projects i s usually justified by relatively robust economic appraisal methodologies and no further analysis i s needed in this respect. However socio-economic monitoring can enhance the economic justification by trying to (i) demonstrate how transport interventions contribute to the attainment of a country's poverty reduction objectives; and (ii) define ways in which the performance of the transport sector itself, especially for the delivery of rural transport services, can be improved. More generally, monitoring involves changes over time, not only in transport sector inputs (e.g. investment and maintenance costs, private expenditures) but also in outputs (road condition, extension), and sector outcomes (marketing of crops, access to health facilities, responsiveness to poor people's needs, and improved accountability for sector management) and poverty reduction outcomes (rural incomes, consumption, school attendance). 46 Annex 4: DetailedProjectDescription ECUADOR:RURAL ROADSPROJECT 1. The project comprises four components, namely: (i) rehabilitation of rural roads and selected secondary roads; (ii) and periodic maintenance of rural roads, (iii) routine institutional strengthening; (iv) engineering and rehabilitation feasibility and socio-economic studies; and (v) project administration. A brief description of each component follows and the costs include the counterpart contribution from PPs or MOP. The total project cost i s estimated at US$32.3 million as detailed below. ProjectComponent1-US$13.1million Rehabilitationof ruralroads 2. In the Sierra region of Ecuador, the rural road network offers too limited coverage and too little of it (40% on average) i s in maintainable condition, heightening the sense of isolation for the local population. This situation has resulted from the adverse combination of the difficult topography, which leads to the building of steeply graded, winding roads that are difficult to traverse and make travel times inordinately long, and the relatively high degree of road network vulnerability to natural disasters. 3. In order to help reduce the overall deterioration of the rural road network and ensure accessibility of rural communities to the main and secondary road networks, this component would finance the rehabilitation of about 600 km of the rural road network of the PPs. The proposed works to be undertaken would entail spot improvements to eliminate drainage deficiencies, correcting existing surfaces with regraveling to provide a more durable road surface over poor soils, removing landslides, and constructing additional drainage and erosion control structures. These works would aim at restoring year-round trafficability and ensuring a level of access tailored to the specific transport needs of the local communities. 4. The rehabilitation works would be under a decentralized institutional model for managing the rural road network at the provincial level based on the PVPP which featured broad participation of all PPs in a province. This will improve the current institutional and financial fragmentation at the provincial level. To date, the preparation of the PVPPs, which are derived from a comprehensive series of bottom-up planning workshops held throughout a province, have been completed substantially in 11provinces and are well advanced in two others. Inthe case of Imbabura, the PVPP process resulted in a comprehensive plan for the rehabilitation and maintenance of about 1800 km of secondary and rural roads. Out of the PVPP total roads for Imbabura, three strategic rural axes totaling 458 km have been proposed for project support of their rehabilitation and maintenance needs. 47 Project Component 2 - US$7.8 million Periodic and Routine Maintenance 5. The sense of isolation of the rural communities due to the limited coverage of the rural road network has been exacerbated b y the lack of periodic maintenance and repair of deck bridges as well as routine road maintenance, which has contributed to increase transport costs and to impede economic growth. The lack of maintenance programs i s caused by several factors which include: (i) the lack of adequate budgetary allocations and ultimate releases of funds, (ii) the institutional and other weaknesses in the sectional governments, and (iii) lack of donor the funding for maintenance works. In response to this situation, the project will incorporate, formulate and implement comprehensive periodic road maintenance and improvement programs for about 800 km of routine maintenance and bridge repairs of roads and 1945 km of routine maintenance through micro-enterprise, which includes the road maintenance for the km of roads rehabilitatedunder component 1. 6. These programs would also be under the direct responsibility of the management agencies at the provincial level, which would coordinate and execute jointly with the sectional governments through participatory provincial road improvement plans (PVPP). The project would also develop the institutional capacity of the sectional government road agencies to carry out condition inventories of the roads, design and implement annual and multi-annual routine and periodic maintenance programs, and to promote the development of the local construction industry. 7. In order to increase the benefits from the periodic maintenance of rural roads, this component seeks to set up a routine maintenance system, introducing innovative cost-effective schemes based on contracting out labor-intensive works to microenterprises or local cooperatives. Involving communities and developing small local contractors would increase capacity and assist in strengthening the local construction industry. It i s estimated that about 40 microenterprises will be contracted to execute key elements of the routine maintenance program, including the microenterprises for road rehabilitation. Project Component 3 - US$2.7 million Institutional Strengthening 8. This component would develop further the institutional building program. Its main objectives are to implement the transport sector decentralization agenda trough the strengthening, at the provincial levels, the capacity to execute their own road improvement programs as well as to improve the MOP role as supervisor and regulator of the rural transport sector en Ecuador. The institutional program i s organized into four subcomponents: (i) improving rural transport policy and strategies at the central level (MOP), (ii) improving planning and management of rural roads at provincial, municipal and local levels, and (iii) developing microenterprises for execution of road maintenance. This component will be aimed at improving the management of road sector resources by its PPs, and may have major spillover benefits for the management of all sector resources at PPs level. 48 ImprovingRural Transport Policy and Strategies 9. This project aims at strengthening the MOP with technical assistance and on the job- training program. The project would strengthen MOP'S capacity to: (i) formulate environmental and technical norms and procedures for the improvement of provincial road management; (ii) assist MOP in defining the parameters for enhancing the institutional setup for providing assistance to decentralized entities such as the PPs, and (iii)monitor the performance of provincial road network management and design investment programs needed to further develop the rural transport services. 10. Under this component, the project would provide to the MOP technical assistance to (i) improve its planning and managerial capacity to supervise and evaluate rural roads at the national and sectional government levels, (ii)develop strategy, institutional and financial mechanism, and training modules and materials to create microenterprises for execution of routine maintenance, (iii)train key staff in transport areas such as strategic planning, environment, gender aspects, and administration. ImprovingPlanning and Management of rural roads at the sectionalgovernments 11. This subcomponent would provide technical assistance to the sectional governments to strengthen their capacity to: (i)prepare and execute their participatory provincial road improvement plans (PVPP), (ii) manage the main road network under their jurisdiction, (iii) carry out the rehabilitation of works through outsourcing with local contractors, (iv) perform the road maintenance operations with microenterprises, and (iv) assist the communities in their jurisdiction to organize and maintain the network of community tracks and paths through forms of collective actions. Also, the project will develop and provide on-the-job training to PPs staff in order to strengthen their capacity for monitoring compliance with investment programs and evaluating performance of local engineering firms and contractors, and road maintenance through microenterprises. In addition, the project will design an institutional mechanism to enhance the ability of the sectional governments to work together and build trust among them so greater operational efficiency of the network can be achieved as well as better functional transportation system inthe province can take place. Developingmicroenterprises for executionof routine maintenance 12. The difficulties of ensuring central-government maintenance of a myriad of scattered rural roads, and the failure of traditional municipal force account works, suggest private-sector involvement in the form of contracts with small local engineering firms and road maintenance microenterprises. The proposed technical assistance subcomponent contemplates developing microenterprises to undertake routine and emergency maintenance o f rural roads. Inaddition, the use of microenterprises has some comparative advantages for further developing rural areas: they may act as catalysts for other development initiatives, become contact points for extension services, and even mobilize untapped local resources for local community ventures. This in turn may encourage municipal governments to utilize the microenterprises. The project would finance the following activities related to: (i) promoting and developing of microenterprises among communities and base organizations, (ii)assisting microenterprises throughout their 49 establishment, including legal and technical advice, (iii) contracting out to microenterprises maintenance of all roads rehabilitated under the project and other rural roads that are in good and fair condition, (iv) providing training and technical assistance in the areas of organizational set up, financial management/accounting, and managerial skills for administration of personnel, (v) supervising and monitoring maintenance works, and (vi) communications skills to improve synergy between the communities, municipal staff and the micro entrepreneurs. Project Component 4 - US$2.4 million Engineering Designs and Civil Works Supervision 13. This component includes (i) engineering design studies for road rehabilitation and periodic maintenance; and (ii) supervision of the project. Project Component 5 Project Management- US$6.3 million 14. This component includes the administrative cost of the project at MOP level as well as includes small budget for project management units at PPs level. The cost administration of the project will be financed with local counterpart contribution. The loan proceeds will finance only the operating cost of DGVD, mainly travel and per-diem expenses for project supervision, training, and for monitoring entities. The total amount for traveling and per-diem expenses will not exceed US$200,000 during the life of the project and it will be limited to US$50,000 per year. This amount will be financed from the assigned project budget for institutional strengthening. The project will also finance the costs of the annual financial audits. Total MOPProgram 15. The table below shows the overall MOP program and the Bank financing. The IDB will provide a separate loan for $20million and the remaining financing requirements will be provided by the MOP and the provincial governments. 2. RoadMaintenance 15.67 26.7 5.8 37 3. InstitutionalStrengthening 5.72 9.7 2.7 47 4. Engineering Designs & Works Supervision 4.86 8.3 1.8 37 5. Project Administration 6.30 10.7 0.0 0.0 Total Program Costs 58.76 100 20.0 34 Total Program FinancingRequired 58.76 20.0 50 Annex 5: ProjectCosts ECUADOR:RURALROADSPROJECT A. Rehabilitationof RuralRoads 6.55 6.55 13.1 B.RoadMaintenance 6.20 1.60 7.8 C. InstitutionalStrengthening 2.57 0.13 2.7 D.EngineeringDesignsandWorks Supervision 1.02 1.38 2.4 E.ProjectAdministration 6.30 0.0 6.3 TotalProjectCost 22.64 9.66 32.3 TotalFinancingRequired 22.64 9.66 32.30 51 Annex 6: ImplementationArrangements ECUADOR:RURALROADSPROJECT Background: 1. The Rural Roads project will comprise combined annual programs (POA) for several provinces that will support the GOE and SG efforts to improve the condition of the rural roads network in most of the country's provinces. The project will finance key segments of a province's comprehensive plan (PVPP) that involve only minor works (costing typically < US$20,000/km) which are to be carried out within the existing pavement and will not require design changes. As discussed, comprehensive technical, environmental and social analyses were carried out on a sample of roads from a PVPP for a coastal province (El Oro) and for a sierra province (Imbabura). In sum, the analyses indicated that since the proposed program includes only the rehabilitation and maintenance of existing rural roads along long used rights-of-way, then significant negative impacts on sensitive ecosystems and human settlements are not expected to occur. For the entire program the hundreds of sub-projects to be financed are small scale, dispersed and similar in scope, and it i s neither necessary nor cost-effective to carryout standalone environmental and social analyses for each one. The minor impacts expected are mostly those related to the road rehabilitation works that can be managed readily through the application of good environmental and social measures, and for which the appropriate legal and regulatory basis exists already in Ecuador. The project will help to standardize and enforce these measures consistently through its implementation framework. 2. There will be no need for the acquisition of land nor for the resettlement of people. Field research and consultation carried out during the social assessment indicated that no indigenous lands or natural resources will be affected adversely because the program does not affect new areas. Indigenous populations in the areas visited took part in the selection of the road candidates through the project's bottom-up, consultative planning approach and they expect to benefit from the road improvements as they are often the most isolated communities during the rainy season. Road improvement i s usually their priority demand in virtually every survey of community infrastructure and other needs. 3. Hence on this basis, the objective of this framework i s to establish an implementation framework that ensures continually that the PVPPplanning procedures will be followed and that the project will not cause adverse environmental or social impacts during implementation. It will ensure also that project implementation will comply fully with the relevant Bank safeguard policies, including OD4.20 on Indigenous Peoples and OD4.12 on Resettlement. Key principles: 4. To ensure that the project adheres to the aforementioned Bank safeguard policies, during its implementation the executing agency will comply with the following: 0 Technical: The roads to be improved will be selected annually from each province's PVPP that would have been prepared in keeping with the projects bottom-up, consultative planning framework and have been approved earlier by the Bank. All 52 rehabilitation sub-projects will (i) carried out within the existing right of way and not be require land acquisition; (ii) not require changes in geometric layout; (iii) a design have life of at least 10 years; and (iv) be subjected to a satisfactory cost-effectiveness or cost benefit analysis. The road rehabilitation works will be carried out by contractors to be hired b y the PPs. The maintenance works will be implemented through microenterprises and small contractors and the province must accord budgetary priority to this activity for the protection of roads that are in good or fair condition as established at the time of entry into the program. Environmental: All subprojects will be designed to comply with Bank policies on environmental analysis and will be first screened using the GCEASPV. Road rehabilitation related issues would be managed through the application of environmental clauses in construction contracts that are based on the findings of the specific studies and the sectorial assessment carried out during project preparation. These are expected to be related mostly to the quarrying of materials and the treatment of construction wastes. Tender documents and construction contracts will specify the mitigatory measures to be executed by contractors and enforced by PPs and MOP supervision. Social: The project will include only works that ensure that (i) been selected through have a consultative process with the informed participation of local residents; (ii)no resettlement occurs during implementation; (iii) indigenous populations, where present, benefit from the works, and (iv) mitigatory measures are in place to minimize disruption duringworks implementation. Verification: The MOP will review the annual program of individual provinces (PIA) to verify that it comprises only subprojects that are consistent with this framework as described so far. The MOP and the respective PPs will verify that for each subproject included in each PIA that there i s (i)an adequate right of way and no land tenure issues, and (ii) no risk of resettlement. Communication: The MOP and respective PPs will inform local authorities of the timing and scope of the works to be executed intheir jurisdiction and will take into account their opinion to establish mitigatory measures as necessary in order to avoid/ minimize environmental and social impacts duringworks implementation. 0 Institutional and Budgetary arrangements: The MOP, prior to its approval of a PIA, will ensure that the respective PPs has both put in place the required program management arrangements at the provincial level and budgeted the local counterpart resources needed for its PIA. Implementation Overview: The MOP will assess and comment briefly on the adequacy of arrangements for implementing the entire POA. This assessment may vary for each province's PIA and include comments on the prospects for the opportune availability of resources; the need for any special inter-agency agreements with AME (Asociacih Municipalidades del Ecuador), CONCOPE, etc.; the performance risk of the local contracting industry, and any unique requirements of a province or an area. However, in 53 all cases the MOP must comment on a PPs performance in terms of the design and implementation of its maintenance program. Annual Reviews: 5. In order to ensure compliance with this implementation framework, the following procedures will be followed: The Executing Agency MOPPPs will present to the Bank each October 15 a status report on the implementation of the ongoing year's program as well as a detailed listing of the candidate components for the upcoming year's program (POA). 0 The Bank will review and agree in advance by each November 15 on the work program for the following year, ensuring that the works meet the appropriate technical, economic, environmental and social criteria as defined inthis implementationframework. 0 The Bank's supervision team, will include a social specialist, and will survey a sample of subprojects according to the following criteria: (i) executed in the program of the works previous year; (ii) proposed for the next annual program; (iii) to be carried works works out in or near indigenous areas. 0 The Bank/MOP supervision team will carry out field trips to survey a representative sample of subprojects in order to identify possible social impacts, and/or expected benefits. This process will include a quick consultation with SG and local officials as well as with potential beneficiaries. If municipalities with indigenous populations are involved the field visit will include such municipalities. The Bank and the MOP will agree on mitigatory measures needed to address social and/ or environmental issues if such a potential i s identified. Since no resettlement or land acquisition i s expected, these measures are expected to be related mainly to the impacts duringconstruction. Legal Documents: 6. The implementation framework will be incorporated into the project documentation including (i)Project Appraisal Document, (ii) Agreement; and (iii) Implementation Loan Annual Letter to be provided by the executing agency MOPPPs. A model of the letter for the Year 2007 program i s attached at the end of this annex. These and other project implementation requirements will be spelt out in the Participating Agreement that each province will sign with the MOP. 54 InstitutionalImplementationArrangements: 7. The following Diagram shows the implementation arrangements and the inter-relation functionality betweenMOP, DGVD and PPs. nI Coordination a n d Strategic P lanning Ministry of Public Works I I Road S u bsecreta riat - Di recto rate for Dece ntra Iized Ro a ds Execution I Provincial Govern m ents Municipalities Communities Distributionof PPs: 8. The following table shows the distribution of PPs that each Bank will finance. The Bank will finance 11 provinces. The province of Galiipagos will not receive financing for road rehabilitation and road maintenance. These provinces will participate and benefit only of the institutional strengthening component. 55 Attachment 1 ECUADOR RURALROADSPROJECT Loan -------EC ANNUAL IMPLEMENTATION LETTERFOR: CY2007 October 15,2006 Country Director The World Bank, Washington, DC Iamwritingthisletterinconnectionwiththeselectionandfinalizationofthelistof eligible subprojects proposed for inclusion as the Second year of the program for the rehabilitation and maintenance of rural roads that i s being financed under Loan-----EC. The components listed herein have all been identified directly from the bottom-up, consultative planning framework on which the project i s based. We hope in this way to use the scarce resources available for the key needs of rural populations who as you know, have suffered for years from a lack of adequate transportation facilities. Improved road transport remains essential to supporting economic growth in Ecuador, boosting the productivity of rural peoples and reducing their feelings of neglect by the authorities and sense of isolation from key services and from each other. It i s worth noting also that this program has produced many valuable jobs in the countryside. The methodologies and criteria applied by the MOP for the design o f the ongoing First Year program (POA 2006) have been appraised and found acceptable to the Bank. The purpose of this letter and its supporting annexes i s to reconfirm to you that the same high standards have been maintained in establishing the Second Year program. Hence, we are submitting for your review and no objection a list of subproject candidates (POA 2007) that were selected from the PVPPof 11provinces for project financing. IampleasedtoinformyouthatallsubprojectsinthePOA2007areconsistentwiththe GOE goals and objectives. InAttachments 1and 2, you will find supporting information to prove that all the candidate subprojects meet the implementation criteria, agreed between GOE and the Bank, especially the requirements for their: (i) technical and economic feasibility, and (ii) environmental and social impacts, including consultation with local populations. Consistent with our commitments under this Loan, our social, environmental and legal specialists have reviewed the POA and certified that the rights-of-way have been secured and that there are no land tenure issues associated with the candidate subprojects. Also, where appropriate, the staff have identified any deviations from the criteria mentioned above in the implementation of the POA 2007 program and have described the corrective measures proposed and/or taken. This certification i s further described inAttachment 3 to this letter. Iwould also like to mention that the program has been subjected to periodic implementation reviews by the steering committee. In Attachment 4 you will find some of the important features of the reviews such as assessments of the monitoring of the adherence to the 56 agreed social and environmental policies, especially enforcement of the environmental and social specifications that were included in contract documents for civil works. We await the Bank's no objection to our finalizing and implementingPOA 2007. With best regards Sincerely Yours ________---------- xxxxxx Minister Ministerio de Obras P~blicas Attachments (4) 57 ECUADOR RURAL ROADS PROJECT Loan _ _ _ _ _ _ _ EC ANNUAL IMPLEMENTATION LETTER FOR: CY2007 October 15,2006 Attachment 1:List of Candidatesubprojects (to be designedand drafted by UCV) Length cost Item Description (km) (US$) Traffic Cost/ beneficiary I Totals Province2 (PIA 2): 2007 Implementation Risk Category: (L/M/H) Description Length Cost Traffic Item (km) (US$) Cost/ beneficiary I Totals TotalPOA 2007: Implementation Overview: (L/M/H) Description Length Cost Traffic Item (km) (US$) Cost/ beneficiary I I I I I Totals 58 ECUADOR RURAL ROADSPROJECT Loan ___I-__ EC ANNUAL IMPLEMENTATIONLETTER FOR: CY2007 October 15,2006 Attachment 2: Environmentaland SocialAssessmentSummary Guidelinesfor annual preparation (Preparedaccordingto Annex IO) Background: The criteria following were based on the reviews carried out during project preparation in terms of assessing the social and environmental impact of the First Year program (POA 2006). The subsequent Plans should draw on the lessons learned so far and should be prepared within the following context: Environmental Review: Most proposed subprojects will involve the maintenance and rehabilitation of existing rural roads along long utilized and well established rights-of-way (ROW)and no significant impacts on sensitive ecosystems and human populations are expected. This type of maintenance or rehabilitation works will not entail any resettlement of population along the ROW.Most potential impacts are related to the construction works and can be managed through the application of good environmental practices. As such, the subprojects do not require independent, stand-alone environmental analysis instead the well tested mitigation procedures will be applied. However, the Annual Plans should be designed in a manner to help standardize these procedures through the preparation of standard environmental manuals for road rehabilitation for the Participatory Provinces (PPs). In its annual confirmation MOP should indicate, in a manner consistent with the institutionalization of the manuals of procedures, if the subprojects have met the criteria. Social Review: The MOP will certify that it has been carried out in keeping with the framework outlined inthis annex and further that no resettlement will be needed for POA 2006. 59 ECUADOR RURAL ROADSPROJECT Loan __--.I_ EC ANNUAL IMPLEMENTATIONLETTERFOR: CY2007 October 15,2006 Attachment 3: LegalCertification The MOP legal department will certify that no land needs to be acquired for the POA 2007 ECUADOR RURALROADSPROJECT Loan EC ANNUAL IMPLEMENTATIONLETTERFOR: CY2007 October 15,2006 Attachment4: ProgramMonitoringFindings Monitoring in the environmental and social area will focus on construction related impacts that are to be managed through the application of environmental clauses in construction contracts. These clauses will focus on the implementation of good housekeeping measures to reduce nuisances during construction. These measures include dust, noise and pollution control, protection of construction sites, final landscaping, proper disposal of construction wastes, selection, exploitation and restoration of burrow pits and quarries, traffic management and pedestrian safety, health and safety of workers and public relations. The application of these good housekeeping measures will be ensured by their inclusion in the tender documents and construction contracts. The contractors will be responsible for complying with these measures and the supervision team will help to ensure this. The project monitoring report will summarize and confirm compliance. Poverty related socioeconomic statistics on project beneficiary populations will also be compiled where available. 60 Annex 7: FinancialManagementand DisbursementArrangements ECUADOR:RURALROADSPROJECT 1. A Financial Management Assessment (FMA) of the MOP was performed on January 2004, updated subsequently from March 2005 to April 2006 by the Financial Management Team for Ecuador in connection with the staff of the Implementing Entity. This assessment was conducted in accordance with OPBP 10.02 and the Guidelines for Assessment of Financial Management Arrangements inWorld Bank Projects. ExecutiveSummary and Conclusions 2. Overall Ecuador's fiduciary environment has been diagnosed as weak by the CFAA. The project focuses on a decentralized operation with a significant participation at the provincial level where institutional capacity remains weak. At the central level, Direcci6n de Gesti6n Vial Descentralizada (DGVD) has been recently created within MOP and Financial Directorate has no prior experience with Bank Financed Operations. In this scenario, so far the inherent risk and control risks profile i s rated as substantial, but after the mitigating measures would be successfully implemented the residual rating risk could be considered as modest. The major issues relate to the risk of poor implementation capacity o f Participating Provinces (PPs) (where planning units are considered weak, expenditure tracking systems are inadequate, procurement processes presents delays followed by cost increases and an organized field technical team at PP has not been appointed); project monitoring and supervision will be demanding at PPs by the central level where currently there i s not enough personal assigned or hired for project implementation; personal lacks of experience in prior Bank Financed Operations; risk of untimely counterpart contributions; and possibility of political influence in the procurement processes. 3. On the basis of proposed project design the financial management team considers the project requires robust financial management arrangements, therefore has identified a minimum set of mitigations actions needed to ensure proper financial management arrangements are in place for project implementation, they include: 1) Implementation of detailed minimum arrangements that PPs should fulfill before having access to funds from the Designated Account (they include: Provincial Participatory Road Plan updated and approved by MOP); Annual Provincial Road Program (PIA) and Procurement Plan ready for Project execution; Appointment of an organized field technical team, "Equip0 TCcnico Provincial" (ETP) with defined responsibilities; and definition of the accounting system and reports to be used for project execution); 2) Capacity Building at central and provincial level in Bank disbursement, procurement and financial management procedures in managing Bank-financed investment project; 3) Financial team at the central level needs to be strengthened in order to carry out permanent supervision and monitoring project implementation at provincial level; 4) Creation of sound internal controls that would limit political influence in procurement processes; 5) Development of a robust Operational Manual which encompasses proper financial management arrangements (constitutes a condition of negotiation); and 6) Project activities include strengthening of PPs institutional capacity especially inroad planning and management. 61 Country Issues 4. The first Country Financial Accountability Assessment (CFAA) for Ecuador was carried out on June 30,2005. The study reviewed the practices and systemsof the Central Government Administration. The CFAA concludes that fiduciary risk inEcuador i s currently substantial.' Of particular importance in arriving at this rating are the following weaknesses that undermine efficiency, transparency and accountability: An outdated classification system and significant amounts of extra-budgetary resources hinder budget realism and limit the government's ability to plan, control and direct expenditures. Timely and comprehensive fiscal, revenue and expenditure records and information are not produced, maintained or disseminated to meet decision-making, control, management and reporting purposes. The lack of timely and centralized information for cash and treasury management results incashrationing mechanisms and persistent domestic arrears. The lack of prompt and virtual consolidation of the budget, and the lack of information available to the public undermine transparency and accountability. A weak internal control environment contributes to operational inefficiency and a lack of accountability and stewardship inthe use of public funds; Arrangements for external transparency and scrutiny of public finances b y the legislature and civil society are inherently weak. 5. The Public Sector Financial Management Project will include the design and implementation of a new financial management IT system, the implementation of the main recommendations of the CFAA in MEF and the General Controller Office, and the introduction of transparency mechanisms in the design o f the new system that will positively affect project implementation throughout the country portfolio. 6. Memorandum of UnderstandingA Memorandum of Understanding (MOU) between the Bank and Controller General (CGE) was signed on September 18, 2003. The purpose of this memorandum i s to improve the timeliness and quality of audits of Bank financed projects and strengthens the relationship with CGE. Implementing Entity, Organization Structure and Staffing 7. The entity responsible for implementing the PCV i s the Roads Decentralized Management Directorate, the DGVD, within the Roads Sub Secretariat of the MOP in coordination with its Financial Directorate, and the PPs. 8. Project implementation will be executed by the DGVD team under the MOP institutional structure supported by the Financial Directorate. No project implementation unit will be created. Designated Financial Directorate staff from the Budget, Accounting and Treasury Departments will be assigned full time to provide support to project execution. The Risk classijications for thepurposes of CFAA are: I)low, 2) moderate; 3) substantial; and 4) high. 62 DGVD in coordination with Financial Directorate will implement the components related to institutional strengthening and project management. 9. Even though, the current staff has the adequate skills, they lack prior experience in implementing Bank financed projects. Moreover, considering project operations will be very demanding, it will require constant monitoring, and the strengthening of the financial team incorporating additional staff accordingly to project needs. 10. The PPs' technical team, the ETPwill execute the project at the provincial level. The PPs will be responsible for executing road rehabilitation sub-projects, as well as the related road maintenance through the creation of micro-enterprises. In addition, the PPs will be in charge of the Provincial Participatory Road Plan, hiring and execution of economic feasibility studies, designs of engineering, environmental viability, works, control and maintenance. 11. The ETP will assist in the day-to-day supervision of road maintenance and improvement works, and will focus also on project compliance with Bank fiduciary aspects. The ETP responsibilities will cover by technical, procurement and financial management specialist. At this time, appointment of the ETP personal and determination of duties and responsibilities for the project execution are still under definition. Compliance of these requirements at the central and provincial level i s essential to ensure project success. 12. The PCV implementation arrangements will be characterized by the selection of a preliminary pilot group of PPs by the MOP in accordance with the Bank, during the first year. The pilot PPs will be selected by the adequacy of their FMcapacity, experience in the efficient execution of similar projects, and their institutional capacity. The number of PPs may increase gradually during the second year based on the completion of a number of conditionalities that would demonstrate the appropriate level of FM and institutional capacity. The conditionalities for the selection of PPs are the following: 1. An adequateFMinformation system, 2. An experience FM, procurement and disbursement specialist (one or more professional may be required to comply with this requirement), are available full time to manage the project arrangements, 3. An adequate internal control environment 13. In summary, the eligibility methodology will be based on the financial management assessment procedures follow by the Bank, using a simplified financial management questionnaire to be completed within one month after effectiveness. The assessment will then translate in a qualification table, with possible results from A to D, accordingly to the appropriateness of the fiduciary arrangements, as follows: a. Result "A" represents the province has - Very Good Fiduciary Arrangements, no improvements are required; b. Result "B" represents the province has - Good Fiduciary Arrangements and minimum improvements need to be implemented; 63 c. Result "C" represents the province does not have - Adequate Fiduciary Arrangements and several improvements need to be implemented; d. Result "D" represents the province does not have -Reliable Fiduciary Arrangements and important improvements need to be implemented; 14. Provinces qualified as A and B could participate in the pilot immediately after the assessment i s completed. In the case, of a province qualified as B, it will require starting the implementation of the recommended improvements, in parallel to project implementation. 15. Provinces qualified as C and D will require implementing the recommended improvements, before to be eligible to participate inthe project. A new fiduciary assessment will be required after the improvementswill be completed. 16. A detailed eligibility methodology for the selection of provinces to participate in the project will be described in the operational manual. The Banks' FM and procurement specialist will work jointly with MOP to assess PPs capacity and successful completion of these conditionalities, and provide the no objection to be incorporated as part of the project. PilotFiduciaryEligibilityTable Province Fiduciary Qualification Institutional Capacity Arrangement Criteria (A, B, C or D) Building Improvements Required Name IAdequate FM Iinformation system Experience FM, procurement and disbursement specialist Adequate internal control environment Final Result DisbursementArrangements New eligibility Policy 17. The PCV project will incorporate the Bank's New Policy Framework on Eligibility of Expenditure in World Bank Lending, in line with the Country Financing Parameters (CFP) approved for Ecuador on May 25, 2005 by the Bank's Regional Vice-presidency for Bank financing.2 Disbursement Methods and Documentation 18. Disbursements will be transaction based (Le. against Statements of Expenditure (SOEs), full documentation, direct payments or special commitments). The DGVD in coordination with Financial Directorate of MOP should submit the first withdrawal application (Form 1903) to the OP 6.00 -Bank Financing 64 World Bank requesting funds as needed for initial implementation to be deposited to the Designated Account (DA). Partial advances may be made to the DA, as long as the aggregate amount advanced does not exceed the authorized allocation set at US$ 2,000.000. This authorize allocation will be revised according to project needs and as informed by the Bank in an amendment to the Disbursement Letter. All withdrawal applications will be supported by appropriate supporting documentation. The Bank must receive all withdrawal applications in an acceptable form confirming compliance with procurement procedures and accompanied by acceptable supporting documentation as detailed inthe Disbursement Letter. Flow of Funds 19. Operational Procedures to Open and Manage Funds from Multilateral Institutions in Ecuador - According to new dispositions of MEF and Central Bank of Ecuador, funds from multilateral institutions will be managed separately from local counterpart funds. For this purpose separate bank accounts will be created to differentiate financing resources. 20. The DGVD in coordination with Financial Directorate of MOP and PPs are responsible for opening the necessary bank accounts at Central Bank of Ecuador, (including the Designated Accounts for lBRD financing), TR Account for local counterpart sources as well as at private banks allocated for project implementation under project's name in accordance to local requirements3 and in US.Dollars. In addition, Payment Accounts linked to each funding source would be opened at the private Banks appointed by BCE. WorldBank Sources Local Sources Entitv BCE4 Private B S Private Bank Bank MOP (central Designated Account - Payment TR'- Payment level) TE5 Account Account Account PPs7 TE8-Resources Payment TR- Payment (provincial level) transferred from the Account Account Account Designated Account 21. The Central Government level expenditures are directly related with disbursement categories 4 and 5. At the ProvincialLevel 22. Loan proceeds are characterized by two different modalities. The proceeds would be based on reimbursements of eligible expenditures already paid by the participating province, at Operational Procedures to Openand Manage Fundsfrom Multilateral Institutions in Ecuador. 4 Central Bank of Ecuador Cuenta designadapara recursostransferidos por el Banco Mundial 6 Cuenta Transferenciaspara Gobiemo 7 Participating Provincial Governments 8 Cuenta de Tip0 Exclusivafor Banks'financing sources 65 the initial stages of project implementation. Duringproject implementation, PPs will be eligible for advances against planned expenditures to be incurred for disbursement categories 1,2 and 3. 23 Under the disbursement modality of advances, the DGVDat the central level will transfer funds to selected PPs, in accordance to source's share of financing. The amount of the advance will be based on a 60 days resources requirement of the PPs, accordingly with the Annual Provincial Road Program named "Programa de Inversi6n Annual" (PIA), and a Flow of Funds Calendar named "CalendarioValorado". Within 60 days after the respective transfer i s effective, the PPs will provide a report including the justification and support documentation of the eligible expenditures carried out. Once this information i s reviewed by MOP Financial Directorate, the withdrawal application accompanied by the required supporting documentation would be sent for Bank's reimbursement. A report for each o f the advances will be prepared by the respective PP including information of the contracts total amount, the amount paid, the expenditure invoice, the financing source, the pending amount to be paid to beneficiary and the amount requested to be transferred. In addition, a reconciliation of prior advances should also be included. A designated project technical supervisor or "fiscalizador", in coordination with the project financial management specialist at DGVD, will certified the correctness of the information included in the report before sending it to the MOP. The DGVD i s entitled to stop transfers to PPs if the advance report i s not submitted for the Financial Directorate review. The cause of delays should be established and assessed, in order to make a final decision to continue or not the transfer of resources. All supporting documentation will remain in the PPs and a scan electronic copy will be attached and sent to the MOP for Bank's supervision and auditing purposes at any time. 24. Inorder to prevent lack of timely local counterpart funds from PPs, MOP will use a "fideicomiso" schema at the BCE. The purpose of the fideicomiso i s that Central Bank retains (from the approved budgetary allocations of PPs), the amount already committed by each PPs with the intention of participate in the project. The retained amount would be deposited by BCE into DGVD TR bank account. DGVD would transfer local funds to PPs - TR accounts in accordance to payment demand. 25. Since the institutional capacity of these institutions remains weak', the decentralized nature of the project requires the PPs to comply with minimum FM arrangements, in order to ensure funds will be used for the intended purposes in an adequate financial management environment. These requirements are the follow: 0 An adequateFMinformation system, 0 An experience FM, procurement and disbursement specialist (one or more professional may be required to comply with this requirement), are available full time to manage the project arrangements, 0 An adequate internal control environment i s inplace 0 A Provincial Participatory RoadPlan- PVPPupdated and approved by MOP. 0 A PIA and Procurement Planfor Project execution. 26. The DGVD will have to request the Bank access to Client Connection System which i s a 9 Institutional Analyses Study of Provincial Governments in compliance withLOREYTF. 66 secure website that would offer the project implementing agencies with useful information in a quicker access about their portfolio, disbursements status, withdrawal applications formats and guidelines. ILf-&r-- ial Account Institutional TR-Local Funds 1 Strengthening I 1 i MOP PaymentAccount Project Management MOP I iii Payment Account Beneficiary I I Rehabilitation of rural roads Periodic-Routine Maintainance I I Beneficiary Beneficiary 1 i Table of Loan Proceeds: Category Amount of the Loan Percentageof Expendituresto be financed 1 Allocated (expressedin USD) (1) Eligible Rehabilitationand Periodic 13,800,000 74% Maintenance Works (2) Eligible Routine MaintenanceWorks 1,700,000 74% (3) Eligible Consulting Services for 1,800,000 74% Engineering Designs and Civil Works Supervision (4)Consulting Services except those covered 2,000,000 100% inCategory (3) above (5) Goods and Training 700,000 100% TOTAL AMOUNT 20,000,000 67 InformationSystem 27. Integrated Financial Management System (SIGEF). Since the early 1990's, successive Governments have viewed the modernization of public financial management as crucial to aligning expenditure more closely with policy priorities. In accordance with Agreement No. 181 of December 9, 1999 published in the Official Government Gazette No. 344 of December 22, 1999, the Government of Ecuador makes official the use and application of the SIGEF in the entities and agencies that conform the non Financial Public Sector. Currently, the Government of Ecuador has demonstrated interest inreforming the SIGEF. 28. The Financial Management System - SIGEFio i s the accounting system to be used during project implementation. In this context, Project transactions will be recorded as part of the MOP'S accounting records. The information to be recorded within SIGEF will be classified according to local requirements. Project transactions will be recorded in detail in the SIGEF Agreements Module and reports will be generated by component, category and beneficiary. Subsequently, SIGEF i s intended to provide both general information on the project and detailed information via its Agreements Module. According to the Financial Directorate of MOP, PPs manages different accounting systems. The accounting system to be used by each PP will be a disbursement condition before transfer of funds starts from MOP to PPs. The participating Agreement (or subsidiary agreement) between MOP and PPs will contain covenants regarding the importance of having an adequate accounting system. Operational Manual 29. Project financial procedures regarding financial management, disbursement and procurement arrangements will be documented within an Operational Manual (OM) customized for project purposes. DGVD and Financial Directorate have been working on a draft o f the operational manual. The financial management and procurement team has reviewed previous versions and submitted suggestions that were incorporated in the OM. The revised version o f the OM includes: accounting policies and procedures, chart of accounts, format of project financial statements, Intermediary Financial Reports (IFRs) format, internal controls, administrative procedures for processing payments to beneficiaries, accounting system description, disbursement mechanisms, flow of funds details and audit arrangements. Financial Reporting and Monitoring 30. The DGVD in coordination with Financial Directorate i s the entity responsible for preparing all the financial statements and reports required for ensuring that all the necessary information are available for decisions making, audits and supervision missions. PPs will be responsible for submitting all the necessary information required b y the DGVD including a statement of sources and uses o f funds, bank account reconciliations, reports of payments by contracts, etc. loAcuerdo No. 181of December 9, 1999 - Registro Ofcial No. 344 of December 22, 1999submitted by the Ministry of Economy and Finances. 68 Financial Directorate will be in charge o f the consolidation process of the PCV financial statements and furnish to the Bank not later than 45 days after the end of each quarter interimun- audited financial reports for the Project covering the semester. The interim un-audited financial reports requiredby the Bank would include: a) FinancialReports (Statement of Sources and Uses of Funds; Statement of Cumulative Investments); b) Physical Progress Reports and c) Procurement Reports. The financial statements would include all sources and uses of funds of the whole project and would be available by categories and components. They should be prepared in the local currency in accordance with the accounting principles used in Ecuador, which are compatible with the IASC's accounting standards. The financial statements should include accounting policy adopted and explanatory notes to the financial statements and any other useful additional information. Most of the accounting, disbursing and recording arrangements will be set out inthe participating agreements (or subsidiary agreement) between MOP and each PP. External Audit 31. Inaccordance with the Memorandum of Technical Understanding, the Controller General of the State would be responsible for hiring independent private financial auditors acceptable to the Bank under a multi-year contract. MOP will prepare Terms of Reference for hiring an audit firmacceptable to the Bank inEcuador and submitit for the World Bank's approval. 32. Annual project financial statements will be audited in accordance with International Standards on Auditing (ISAs) issued by the International Federation o f Accountants (IFAC). The audited financial statements should reflect all project activities, financing and expenditures, including the part financed by the Bank and local counterpart funds. Acceptable audit reports should be submitted to the Bank within the six months of the end of the Borrower's fiscal year. Audit costs would be covered b y loan proceeds. 33. Auditors would submit an opinion on: a) project financial statements; b) an additional opinion on the Statement of expenditures; and c) a Management Letter. The Management Letter should include weaknesses in the internal controls systems, inappropriate accounting policies or practices; non-compliance with covenants and any other matter consider significant for the auditor. 34. Auditors are expected To have a good understanding of project execution, close follow-up on internal control, accounting and budgeting processes and procedures. It i s expected that this understanding would not affect their independence and objectivity. External auditors would have the opportunity to assist or guide the project in correcting any deviations from the procedures to avoid any possible problems duringthe fiscal year. There i s no need to wait until the end of the fiscal year to perform the audit review; therefore auditors should carry out two visits before the end o f the closing year. 69 w 2 8w 3 h m Financial Management Action Plan 35. The financial management team has identified a set of actions needed to ensure proper financial management arrangements was put in place during negotiations in order to mitigate the control risks. L Action Responsible leadline Status 1 Submission of draft Project DGVD I 'rior to Completed Operational Manual Manual1Reviewed by Financial iegotiations Directorate 2 Submission of final Project DGVD I Nithin 1 month Inprocess Operational Manual Manual1Reviewed by Financial ifter effectiveness the Bank Directorate .__ 3 Appointment or assignment Professionals hired and DGVD I Within 1month Pending of an additional FMspecialist ready for project Financial ifter effectiveness for the DGVD and ETPs implementation. Directorate 4 Selection of Participating Pilot Participating DGVD I Within 1month Inprocess Provinces Provinces selected Financial ifter effectiveness Directorate 5 Definition of institutional and Criteria agreed DGVD I luring Completed FMconditionalities criteria Financial iegotiations Directorate 6 Submission of Project Chart Draft reviewed by the DGVD I Prior to Completed of Accounts, IFRs format and Bank Financial iegotiations provincial funds advance Directorate request 7 Presentation and Approval of Notification of approval DGVD I To be defined Completed Budget for 2006 by MEF Financial during - Directorate negotiations 8 Definition of the composition Dutiesand DGVD I During Completed, is and characteristics of the responsibilities defined. Financial negotiations part of the ETPs members(Equip0 A financial management Directorate Operational Tecnico) specialist or accountant Manual. selected. 9 The accounting system is The accounting system i s DGVD I Within 1month Inprocess operating effectively. installed and operating Financial after effectiveness effectively. Directorate 10 Preparation of Terms of Audit Terms be part of DGVD I Prior to Completed Reference for external audits the Operations Manual Financial negotiations (financial and technical) and reviewed by the Directorate Bank. - 11 Appointment of External Signed contract for DGVD I Auditors provision of external Financial after effectiveness financial audit. Directorate 73 Supervision Plan 36. The Financial Management team would conduct a combination of off-site and on-site supervision. Off-site supervision would consist of quarterly desk reviews of the interim financial statements and financial monitoring reports and annual reviews of the external audit reports. Given the residual risk profile, two on-site supervision missions would be conducted during the first year of implementation and once a year thereafter. Thereafter ongoing supervision should be performedthrough at least one mission per year. Type Timing Mechanism Objective Visit (on site Twice a year for first Integrating supervision Review FMsystem. supervision) year missions as much as Supervise Designated account possible. reconciliation. Use of funds. Follow up on external auditors recommendations1raised issues. Review staffing. FMR Review Quarterly The FMR submitted to the Review FMR information Bank. consistency. Raise issues disclosed inFMR. Audit Review IOnce a Year The audit report submitted Review audit report. to the Bank Raise issues disclosed in audit reDort 74 Annex 8: ProcurementArrangements ECUADOR:RURAL ROADSPROJECT A. General 1. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Legal Agreement. The various items under different expenditure categories are described in general below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for pre- qualification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated twice a year or as required to reflect the actual project implementation needs. 2. Procurement of Works: Works procured under this project would include: (a) rehabilitation of roads in rural areas, (b) periodic and routine maintenance o f roads inrural areas, and (c) partial rehabilitation of critical structures in rural roads. Procurement will be done using SBD agreed with or satisfactory to the Bank for NCB and Shopping. Periodic and routine maintenance works of rural roads estimated to cost less than $50,000 equivalent per contract can be contracted out with community-based rural micro-enterprises, and may be procured by direct contracting method as agreed inthe Procurement Plan. 3. Procurement of Goods: Goods procured under this project would include vehicles, furniture, office supplies and computer equipment. Procurement will be done using the Bank's SBD for ICB and SBD agreed with or satisfactory to the Bank for NCB and Shopping. 4. Selection of Consultants: Consultant services to be procured under this project would include: (a) technical assistance for Institutional Strengthening to (i) increase the administrative capacity of municipal, provincial and national government entities involved in the administration of rural roads, (ii)supporting the formation and training of micro-enterprises to undertake routine road maintenance, (iii) promote increased road safety, and (iv) incorporate a participatory approach to social and environmental issues in the planning and implementation of road works; and (b) consultant services for the design of roads in rural areas, and supervision of construction contracts. Short lists of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 o f the Consultant Guidelines. The selection of consultants will be done usingBank Standard RFP documents. 5. The procurement procedures and SBDs to be used for each procurement method, as well as model contracts for works and goods procured, are presented inthe Project Operation Manual. 6. Operational Costs: Operational Costs have been identified in the Procurement Plan. 7. Training: The project will finance the procurement of goods and non-consulting services related to training tasks and expenses such as training facilities, transport and per diem of 75 trainees, training fees, training materials, costs of logistics, transportation, materials, etc. Contracts shall be procuredto the extent possible following shopping procedures from quotations obtained from at least 3 qualified suppliers and usingstandard documents agreed with the Bank. Thresholds for Procurement Methods and Prior Review Expenditure ContractValue Contracts Subject Category (Threshold) Prwurement to Method Prior Review US$ thousands US$ millions 1. Works >3,000 ICB All - None 250< Contract < NCB Firsttwo contracts 3,000 each year <250 Three Quotations Firsttwo contracts; and Annual Procurement Plan Periodic & Routine <50 Direct Contracting Maintenance 2. Goods and Non Consulting Services >250 ICB All 50< Contract <250 NCB Contracts => 100and first 2 contracts each year <50 IS, N S Firsttwo contracts each year 3. Consultants Firms >200 QCBS All 10050 See Section V of All (TOR, contract, Guidelines CV) < 50 Annual Selection Total value of contracts subject to prior review: [$7.85 millions] B. Assessment of the agency's capacityto implement procurement 8. Procurement activities will be carried out b y the Ministry of Public Works (Ministerio de Obras Pu'blicas, MOP) and by nine Provincial Councils (Consejos Provinciales, CPs).The M O P will carry out the procurement of Technical Assistance for Institutional Strengthening and coordinate, assist and oversee the procurement activities carried out by the CPs for the rehabilitation and maintenance of rural roads. 76 9. An assessment of the capacity of the MOP to implement procurement actions for the project was carried out by Marcelo Osorio, PAS, on March 7, 2005. The Direccio'n General de Vialidad Descentrulizudu (DGVD) within the Subsecretaria de Vialidad of the MOP will coordinate project implementation while the Financial Directorate of the MOP will manage loan disbursements and project accounting. The Project Operation Manual describes project organization arrangements. 10. The key issues and risks concerning procurement for implementation of the project have been identified and include: (i) discrepancies between the national procurement law and the Bank's guidelines; (ii)lack of country's legal framework and experience for implementing projects in a decentralized manner; (iii) uncertain capacity of the provincial implementing entities; (iv) lack of procurement staff familiar with Bank procurement guidelines and procedures, and (v) possibility of political influence inthe procurement processes. 11. The following actions to be taken have been agreed to mitigate the above risks: The Loan Agreement includes provisions to govern Procurement following National Competitive Bidding,specifying mandatory national advertisement for this procurement method. By 3 months after effectiveness: (a) DGVD will create and/or update a Register of Contractors (for contracts to be awarded based on Quotations) and Consultants. During Project Implementation: (a) submit to the Bank final audit reports each year six months after the end of fiscal year; and (b) submit to the Bank procurement audit reports carried out b y an independent auditor six months after completion each year. 12. The overall project risk for procurement i s High. C.ProcurementPlan 13. The Borrower submitted a satisfactory Project Implementation Plan and, based on it, has prepared a Procurement Plan that was discussed and agreed during negotiations. The final version will be available at the DGVD and will also be available in the project database and in the Bank's external website The Procurement Plan will be updated annually or as required to reflect actual project implementation needs and improvements in institutional capacity The Procurement Plan will provide the basis for the procurement methods. D.FrequencyofProcurementSupervision 14. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended yearly supervision missions to carry out post review of procurement actions and yearly procurement audits. 77 E.Detailsof the ProcurementArrangements InvolvingInternationalCompetition 1.Goods, Works, and Non ConsultingServices (a) List of contract packages to be procuredfollowing ICB and direct contracting: 1 2 3 4 5 6 7 8 9 Ref. Contract Estimated Procurement P-Q Domestic Review Expected Comments No. (Description) cost Method Preference by Bank Bid-Opening (yestno) (Priort Date Post) None (b) ICB contracts for procurement of goods and non-consulting services estimated to cost above $250,000 per contract; for works estimated to cost $3.0 million or more per contract; and all contracts for goods, non-consulting services and works procured under direct contracting will be subject to prior review by the Bank. 2. Consulting Services (a) List of consulting assignments with short-lists of international firms. 1 2 3 4 5 6 7 Ref. Descriptionof Estimated Selection Review Expected Comments No. Assignment cost Method by Bank Proposal US$million (Prior / Submission Post) Date None (b) Consultancy services estimated to cost more than $100,000 per contract for the selection of consulting firms; individual consultant assignments estimated to cost $50,000 or more per contract; and the employment of consulting firms and individual consultants under single source selection will be subject to prior review b y the Bank and submission by the relevant procurement agency of a technical justification for consideration. (c) Short lists composed entirely of national consultants: Short lists of consultants for services estimated to cost less than $200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 78 Annex 9: Economicand FinancialAnalysis ECUADOR:RURALROADSPROJECT 1. The objective of the civil works i s to improve access and connectivity of the rural population to the main economic centers by rehabilitation and improvement of selected rural roads and tracks. The investments will make roads passable year round and will reduce road user transport costs by lowering vehicle operating costs and travel times. A Multi-Criteria Analysis (MCA) was used to select the project roads. For roads that serve a social function, typically with very low local daily traffic, a Cost Effectiveness Analysis (CEA) was used to evaluate the investment needed to provide basic access per beneficiary population. For roads that carry local and long distance traffic and serve an economic function, typically with daily traffic higher than 50 vehicles per day, which could merit higher investments and a better level of service than basic access, a Cost Benefit Analysis (CBA) was done, thereby evaluating the economic Net Present Value (NPV). 2. The CBA of road investments was done using the Roads Economic Decision Model (RED), which compares life cycle road costs and vehicle operating cost and passenger time savings. It was done for the four of the first year program roads with traffic higher than 50 vehicles per day, consisting of rehabilitating 62.1 km of unpaved roads inpoor condition `with an investment of US$1.41 million. The table below summarizes the CBA results, which indicates that the overall program Net Present Value (NPV), extrapolated for the rehabilitation of 1,000 km of roads, is US$13.6 million, at a 12 percent discount rate, and the overall Internal Rate of Return (IRR) i s 32 percent. The overall cost-effectiveness ratio for all the first year program roads i s US$130 per beneficiary population. Benefits (US$million) 29.1 Costs (US$million) 15.5 Net Benefits (US$million) 13.6 Internal Rate of Return (9) 329 MainAssumptions 3. The road network in Ecuador i s divided into five road categories with Primary and Secondary roads being managed by the MOP, and tertiary, feeder and local roads, which are the focus of the project, being managed by Provinces and Municipalities. The table below summarizes the current network length statistics. Primary 5,610 13% Secondary 3,880 9% Tertiary 11,110 26% Feeder 22,150 51% Local 450 1% Total 43.200 100% 79 4. To identify which roads are included in the project, a screening and prioritization methodology was developed based upon a local consultation process, which i s being followed in each Province and consists of defining a Participatory Plan for Road Works derived from a series of workshops held at the Parroquias, Cantones, and at the Provincial level. Local communities evaluate the data collected at the workshops in order to define: (i) the universe o f roads located in a Province; (ii) priority index for each road; (iii) assessment of rehabilitation and a an maintenance requirements using average unit costs; (iv) a diagnostic of the road sector in a Province; and (v) maps with the locations of all roads. For example, the tables below present the rehabilitation and maintenance needs for the Province of Imbabura by traffic level and surface type, which indicates that 65 percent of the network needs reconstruction or rehabilitation. SurfaceType RoadWork Total Percent Earth Gravel Stones Reconstruction 492 1I69 57 617 33% Rehabilitation 298 176 127 602 32% Periodic Maintenance 123 14 191 328 18% Total 1,024 328 510 1,863 100% Percent 55% 18% 27% 100% RoadWork Average Daily Traffic Range(AADT) Total Percent c10 110-25 125-40 150-100 100-200 >200 1 I 1 N.A. N.A. -NotAvailable 5. The participatory process priority index for each road i s defined using MCA, which includes the following criteria. 0 Social Criteria: population served per km, network of feeder and local roads connected to the road, distance to health and education centers, and poverty level; 0 Technical Criteria: days per year without access and investment needs per family; 0 Management Criteria: index of municipal management capability; 0 Economic Criteria: cargo being carried on the road and ratio of transport costs per product costs; and Local Importance Criteria: road importance to the Parroquia, Canton, and Province. 80 6. A composite priority index was defined for each road, which was usedto sort the roads by an overall priority. The work program to be implemented in each Province under the project was defined using the priority index and eligibility criteria along with an evaluation of the connectivity of the candidate roads in order to maximize the impact of the investments by creating functional sub-networks that are well connected to a main road or population center. The impact of the work program was evaluated by performing a CEA on all project roads and a CBA on all roads with traffic higher than 50 vehicles per day. 7. Road works costs were estimated in financial and economic terms (net of taxes), economic costs being on average 85 percent of financial costs. Average unit costs estimates are given on the table below. Table 5: Typical FinancialRoadWorks Costs Road Work Type IUnit Cost Reconstruction with Stone Pavement I30,000 Reconstruction with Gravel Layer 18,000 Rehabilitation with Stone Pavement 25,000 Rehabilitation with Gravel Laver 15.OOO Resurfacing Surface Treatment 20,000 Resurfacing Gravel Layer 6,000 Resurfacing Stone Pavement 2,000 8. Vehicle fleet characteristics and economic vehicle unit costs were defined for seven motorized vehicle types. The following table presents the average vehicle fleet characteristics. Table 6: AverageVehicle FleetCharacteristics Vehicle Type Annuat Annual Service Private Use Number Operating Utilization Utilization Life (%IPassengers Weight (Km) (hours) (years) 81 9. The following table presents average fleet economic costs. Pickup 13,996 51 0.13 1.74 3.17 3.12 12 0.82 Bus 42,500 I93 0.08 2.66 6.34 6.24 12 0.82 Linht Truck " 25.500 101 0.08 1.74 3.17 3.12 12 0.82 Medium 42,500 193 0.08 2.66 6.34 6.24 12 0.82 Truck Heavy 71,730 197 0.08 2.66 7.93 6.24 12 0.82 Truck Articulated 95,000 197 0.08 2.66 7.93 7.80 12 0.82 10. The following table presents typical economic unit vehicle operating costs, in $ per 1000 vehicle-km, for a roughness equal to 4.0 IRI. Vehicle Fuel Lub. Tires Spare Maint. Crew Depreciation Interest Total Oil Parts Labor CX 10.6 1.1 1.8 20.3 8.7 0.0 31.3 17.6 91.5 ~ Pickup 13.7 1.7 3.1 33.8 9.1 37.4 35.9 28.0 166.2 Bus 14.0 5.6 11.8 51.7 57.9 82.5 49.3 24.1 296.8 Light 12.7 3.3 5.9 45.0 28.6 44.1 53.9 27.0 220.6 IMedium I 14.2 I 5.1 I 11.8 I 114.2 I 71.1 1 83.4 1 49.3 I 16.6 I 365.8I I Heavy 130.8 I 10.4 I 19.9 I 205.9 1 114.6 I 95.9 I 69.6 I 32.3 1 579.3 I I Articulated I 48.4 1 11:6 1 38.5 I 296.0 I 119.6 I 112.7 I 91.3 I 40.2 I 758.2 I 11. The following table presents typical total economic unit vehicle operating costs, in $ per vehicle-km, for different roughness levels. 82 Pickup 0.16 0.17 0.18 0.20 0.23 0.26 0.29 0.32 0.34 0.37 Bus 0.28 0.30 0.33 0.38 0.42 0.47 0.52 0.57 0.62 0.67 Light 0.21 0.22 0.25 0.28 0.31 0.35 0.38 0.42 0.45 0.49 Truck Medium 0.34 0.37 0.41 0.45 0.50 0.55 0.61 0.67 0.72 0.78 Truck Heavy 0.54 0.58 0.65 0.71 0.79 0.88 0.96 1.05 1.14 1.22 Truck Articulated 0.71 0.76 0.85 0.95 1.06 1.18 1.29 1.41 1.53 1.65 Truck 12. Local communities estimate the daily traffic of each road during the preparation of the Participatory Plan for Road Works to be used on the MCA and the CBA. For example, the table below presents the traffic distribution for tertiary, feeder and local roads on the Province of Imbabura, which indicates that most of the network managed by the Provinces and Municipalities carries very low traffic with 83 percent of the network carrying less than 50 vehicle per day and 42 percent of the network carrying less than 10 vehicle per day. Table 10 Network Traffic inlmbabura Traffic Level Percentofthe Network I <10AADT 1I41.8% I 10-25AADT 24.1% 25-50 AADT 17.0% -50-100AADT 10.9% 100-200AADT 5.7% >200 AADT 0.4% 13. The table below presents the typical daily traffic composition on the Province of Imbabura, which indicates that (i) more than half the traffic i s composed of light vehicles, with cars, pickups and light trucks comprising on average 78 percent of the daily traffic, and (ii) the percent of medium and heavy trucks increasingwith the daily traffic. Car & 57% 57% 57% 50% 49% 61% Pickup Light 32% 26% 23% 21% 22% 13% IMediumI 7% I 9% I 15% I 22% I 23% I 23% I IHeavy I 4% I 7% I 5% I 6% I 6% I 3% I 83 14. On the CBA, for discounting future costs and benefits to compute NPV and as a cut off point for IRR, a discount rate of 12 percent has been used; the evaluation period used was 10 years; and the construction period used was 1 year. Considering a relatively low economic activity at the project roads area, traffic growth rate was conservatively assumed to grow at 1.0 percent per year during the first five years of the evaluation period and 1.5 percent per year afterwards Sensitivity analysis/ switchingvalues of critical items: 15. The C B A sensitivity analysis shows that all works of the first year program will continue to show rates of return above the cutoff of 12 percent in the event of a 20 percent increase in investment costs or a 20 percent decrease inbenefits. The following table summarizes the results of the CBA sensitivity analysis. The CEA sensitivity analysis shows that in the event of a 20 percent increase in investment costs, the overall cost-effectiveness ratio for the first year program i s US$156 per beneficiary population. PrOViIlW Road IRR Base Cost Benefits 20% - ElOro PanamericanaVia a Guayaquil- 18% 13% 12% ElGuayacAn - ElOro Saracay-Piedras -La Bocana- 65% 54% 52% ElIngenio - ElOro Jumon -San Jacinto -L a Florida - 105% 87% 84% San Jose - ElOro Portovelo-Lourdes - Chorrera - 53% 44% 42% Morales -Curtincapa Total 66% 55% 53% 84 Annex 10: SafeguardPolicyIssues ECUADOR:RURALROADSPROJECT 1.Background 1. The Rural Roads Program (PCV) i s based on improvements to the model established under the Rural Infrastructure Transport Program (IDB financed PIRT project) especially in terms of environmental and social analysis dimensions that were not included in the PIRT. Although the project focuses on modest repairs and rehabilitation of rural roads within their existing pavement formation, comprehensive environmental and social analyses were carried out inorder to comply with the country's laws, to ensure the project's longterm sustainability, and to apply the Bank's Safeguard Policies. 2. The majority of the rural roads are impassable during the rain season, limiting possibilities for rural sector development and forcing the rural population to live in a state of partial isolation, restricting their access to social services such as health care and education, and also limiting their access to markets. Table 1presents selected demographic information. Table 1 RuralPopulation-Ecuador - Coastal 1,848,683 0.8 10.0 29.9 % TOTAL 4,649,935 13.8 5.2 Source: SIISE *Indigence: Incidence of Extreme Poverty (by Consumption) 2. RuralRoadsProgram(PCV) 3. The PCV has been designed as a program that proposes an improved management system for rural roads. Provinces that fulfill the requirements for providing adequate counterpart funds and for the preparation of a participatory provincial road improvement plan (PVPP) may participate inthe program. 4. The PCV has the following goals: The institutionalization of an efficient rural road management system in 11 of the country's provinces." For Civil Work Components, the provinces of Guayas and Pichincha are not included in the PCV scope due to their relatively advanced state of provincial development. Nor were the Galapagos included due to their protected island status. They will however participate in the institutional strengthening component. 85 0 The rehabilitation of 600 km of rural roads and completing 800 km of periodic maintenance. 0 Formation of 40 microenterprises for routine road maintenance activities. The sustainable maintenance of 1,965 kmof roads 5. As stated before the project will consist of many small but similar road improvement sub- projects that will be dispersed over a wide geographic area. It would be infeasible to carry out a socio-environmental assessmentfor each one and hence a three phase approach was adopted that consisted of (i)screening of project candidates usingthe GCEASPV methodology defined by the QAT; (ii) carrying out detailed environmental and social analyses for a sample of roads in the first year program in order to confirm the scale of the potential impacts and (iii) preparing a sectoral socio-environmental analysis (SEA) that would establish a framework for setting the safeguard procedures for each road candidate. Through the SEA, the socio-environmental policies were defined for the PCV in particular but in a manner that could be applicable to the rural roads sector as a whole. This definition of policies was made through a participatory process and by consensus with the different actors involved with the PCV. 3. Criteria for Selection of RuralRoads 6. Of a total of 11 provinces expected to participate eventually in the Bank's program, 6 of them have reached the appropriate level of planning required for the project's technical, economical, financial, institutional and/or legal aspects. The provinces of Pichincha and Galapagos will be eligible only for the project's training and strengthening program. 86 overview for the generation of environmental and social risks and to identify their impacts, for the purpose of assuring that the program will include adequate environmental management provisions. The following activities associated with the rehabilitation, improvement and maintenance of roads may generate environmental impacts: Prior to work execution: 0 Selection of areas for construction material borrow pits 0 Selection of areas for the final disposition of wastes 0 Construction of road access to borrow pits 0 Construction of road accessto borrow pits 0 Cutting and clearing vegetation in the right of way Fuel and lubricants transport During construction: 0 Operation of borrow pits 0 Transport of material andearthworks Transport of wastes Road base stabilization 0 Construction of drainage works (ditches, vaults, culverts, etc.) Recovery of borrow pit sites 0 Handling of waste material depots 0 Revegetation of affected areas Identification of potential environment impacts: Air Pollution 9. It can arise from machinery and equipment used for construction, operation of borrow pits; and material transport. 88 Archaeological sites 10. If encountered, there is a potential risk of affecting these zones. Solid waste 11. It could be generated during construction, for example due to discarded mechanical products like filters, pneumatic tires, spare parts, oil depot, garbage, among others. Noise and/or vibrations 12. Excessive noise levels could be generated through the use of machinery and equipment duringthe phasesof site preparation, operation of materialbanks, and improvement of the road. Visual impact 13. The lack of environmental criteria in the operation of quarries, the final disposition of waste material, and in the removal of vegetal coverage in the right of way, can alter the existing landscape. Protectedareas 14. The execution of projects in zones declared under a regime of environmental protection or in zones of high sensitivity may require careful management. As a rule, the project does not finance roads in such zones. Slope stabilization and eroded zones 15. Project investments may help to improve the characteristics of roads that may have problems of stabilization and erosion. Classificationof the PCV 16. The Program, consists of executing rehabilitation and improvement for rural roads that are not expected to generate significant environment impacts. In this sense the PCV has been classified "Category B" according to the Bank's Operation Manual [OP 4.011. This classification i s due to the fact that the proposed road improvement will take place along existing alignments and there will not be significant changes in characteristics such as width or alignment. Sectoral Environmental Assessment of the Program: 17. Given the overall scope of the program and that some roads are yet to be identified, in order to guarantee the environment sustainability of the PCV, the IDB and the World Bank, decided with the MOP team to develop a sectoral assessment approach for the Program. This analysis would provide an analytical basis for the subsector diagnosis, policies, plans and 89 procedures for the environment management. The development of this tool was coordinated with the Environmental Unit of MOP and of the Ministry of Environment (ME). The ME has in principle agreed to accept the SEA as an adequate instrument to obtain the respective project licensing, interms of the laws for environmental management inthe country. 18. A copy of the SEA report was sent to the Public Information Center and i s also included in the Project Files. This was an innovative approach for Ecuador and it represented the most efficient and cost effective tool for defining safeguard policies for the project. These policies are mainly: 0 The PCV will not include roads that cross or affect fragile areas. 0 The PCV will not include roads that require involuntary resettlement. 0 The PCV only under exceptional circumstances will include roads that cross or affect Protected Natural Areas, Protected Forests, or Fragile Ecosystems. These cases must be for road candidates where a high socioeconomic benefit can be demonstrated, the rules for community participation have been complied with, and the requirements established in the Unified System of Environmental Management (SUMA), including for Environmental licensing, must have been met. 0 Avoid affecting adversely the customs and cultures of the indigenous and Afro- Ecuadorian population in areas where these communities predominate. The PCV will improve roads that cross or facilitate access to these areas only when this i s demonstrated to be inkeeping with the freely expressed choice of these communities. 0 Strengthen the capacities of the public and private sector agencies involved in the socio- environmental evaluation of the PCV. 0 Strengthen citizen participation so that they become more involved and aware of their roles in decision-making and the realization of the benefits that are to be derived from appropriate management of the socio-environmental aspects of the project. 0 Mainstream current Government policies, legislation, and environmental regulations in the project preparation cycle (from planning through execution and maintenance) by designing and putting in place the appropriate management tools (guides, standards and methodologies). 19. Another one of the fundamental aspects developed in the SEA was the definition of Homogeneous Areas for the purpose of facilitating and making more efficient the environmental and social assessment o f candidate sub-projects. The objective of this zoning was: (i) to identify areas with similar socio-environmental risks on the basis of indicators of biotic, physical and socio-economic characteristics, including their digital mapping; (ii)identification and characterization of the potential direct, and indirect socio-environmental impacts; and (iii) selection of the policy and operational measures needed for the prevention or mitigation and control of the potential impacts. 90 20. As a result of this work, 4 homogeneous areas were classified. Area A has a very high socio-environmental risk, and it includes fragile areas with greater protection needs as they may belong to the Protected Areas System or may at times be areas of very highbio-diversity. Area B represents a high risk zone; it could include the national system of protected areas, protected forests, and fragile areas (moors, mangroves and wetlands). Area C would have moderate socio- environmental risk; this could be an area that pertains to the forest heritage of Ecuador (not included in the protective forests), may have unstable soils, and/or be an area with indigenous or Afro- Ecuadorianpresence, and have cultural, historical or archeological value. Area D would be low-risk; these areas are not part of the of national parks system, o f protected forests, of fragile ecosystems, nor of the forest heritage of Ecuador. 21. On the basis of this zoning, the potential socio-environmental impacts and benefits were identified as well as the respective measures to ensure adequate management in each of these areas. It i s noteworthy that it includes methodologies for implementation of its recommendations. 22. With regard to the fulfillment of requirements of the Ministry of the Environment, given that the SEA i s a new approach for Ecuador the SUMA procedures had in the past not included SEA as a basis for the licensing of projects. However, duringproject preparation the Ministry of the Environment agreed to accept this evaluation approach for the program. Furthermore, for those special project candidates, that i s when a project may affect a B-type area, the Ministry reserved the right to require the application of the traditional SUMA (preparation of a site specific analysis) for the respective licensing. This will rarely be triggered as there will be few project candidates in B-type areas (and none inA-type areas) Environmental analysis of the First vear package 23. The first package of projects consists of 10 roads (5 in El Oro and 5 in Imbabura) that were included in each PVPP. In this first package all the projects were subjected first to screening with the GCEASPV (Guia para Categorizacidn y Evaluacidn Ambiental y Social de Proyectos Viales) and subsequently a specific environmental assessment was completed as a part of the Engineering Studies, with the purpose of guaranteeing the incorporation of the environmental dimension in the design of each project. The GCEASPV, issued by the QAT includes a checklist of environmental and social issues that are consistent with the Bank's Safeguard Policies. 24. As a result of this evaluation, it was determined that 6 projects should be classified as level 3 (low level of environmental risk), and 4 projects classified as level 2 (moderate environmental risks). The moderate risk classification i s due basically to the need for works such as the stabilization of slopes or to the presence of beneficiary indigenous groups. A summary of the environment characterization of each sub-project follows: 91 Table 3 Summaryof the environmentalcharacterizationof the first packageof projects - ElOro: EO-01 Panamericana- Via Guayaquil - El GuayacAn 6.2 EO-02 Jum6n - San Jacinto - L a Florida - San Jos6 10.6 EO-03 L a Victoria - L a Quebrada - Enlace Santa 13.0 EO-04 Rosa/Bella 25.0 EO-05 Saracay - Las Piedras - L aBocana - ElIngenio 20.3 Portovelo - Lourdes - Chorrera - Morales - CurtincaDa Imbabura: IB-06 San Pablo - Zuleta 16.0 IB-07 Guaranguisito - Rancho Chico - Rio Chorrera 15.0 IB-08 Pimampiro - San Francisco 17.0 IB-09 San Jer6nimo - Buenos Aires 32.0 IB-10 Eugenio Espejo - ElLecher0 - Circunvalacibn 7.0 II II TOTAL I 162.1 Conclusionsof the environmentalassessment 25. The projects proposed in the first package entail the rehabilitation and improvement of existing rural roads, and therefore significant environmental impacts that could jeopardize the natural environment intheir area of influence are not likely to occur. 26. Deficient design and construction techniques of the road network in the past have resulted in some environmental degradation (erosion, sediment loads, and encroachment). The proposed project will improve environmental conditions by introducing better road design and constructiontechniques, and promoting the use of environmental and social sustainability criteria inthe rural roads sector. 27. No new roads will be built. Sub-projects will be for the improvement of existing roads, which have appropriate characteristics and where it won't be necessary to widen the existing road. Similarly, there are neither changes foreseen in the existing alignment, nor supplementary works that could affect the project's direct influence area. 28. Most of the roads in the first year program do not have quarries or material exploitation areas, which i s why most of the environmental investments most likely will be targeted to mitigate impacts caused by borrow pits and quarry exploitation. Because of the project's financing of only low cost projects, it i s necessary to minimize the cost of hauling materials so contractors will try to find material sources close to the road that meet the required standards. In this sense the contractor's supervision is very important in order to assure that the chosen sites will be environmentally appropriate. It i s also important to insist upon adequate measures for the 92 exploitation and subsequent restoration of the areas. It i s recommended that when recuperating the areas (reforestation), the community shouldbe includedinthe work force. Province of ElOro 29. Some brief points on each of the roads analyzed indetail follow: 0 EO-01 Route Guayaquil ElGuayach: - The road crosses an extensive flat zone close to a banana plantation, and no significant negative impacts are expected. However, standard procedures should be enforced during construction of a minor bridge so as to avoid affecting the river. 0 EO-02Jum6n San Jacinto Florida- San Jose - - It traverses flat terrain with no fragile zones but attention needs to be paid to signaling and road security since the route crosses several populated centers. 0 EO-03 L a Victoria L a Quebrada Connection Santa Rosa/Bella Maria - - The road links two very well defined productive zones; from L a Victoria to L a Quebrada where banana plantations predominate and then from L a Quebrada to Bella Maria, where cattle predominates. The road crosses an environmentally homogeneous flat area. It does not cross any fragile zones. 0 EO-04 Saracay -Las Piedras L a Bocana-ElIngenio - The first section was rehabilitated recently by the PPs but the second section i s in poor condition and requires rehabilitation. There are recreational areas along the river due to the existence of small beaches that have tourism potential. The route crosses a zone of mountainous topography and parallels the Arenillas river. One issue observed during the field visit was the operation of one of the quarries located to the left of the road close to its beginning. The quarryingprocedures seemed to be incorrect as there was potential for landslides that could affect both the road and the river. This road has been classified Level 2 due mainly to the presence of the quarry, accordingly about 6% of the investment cost will be used for environmental mitigation measures. 0 EO-05 Portovelo Lourdes Chorrera Morales Curtincapa - - - - The road i s located in a mountainous zone, with moderate slopes and stable soils. These are diverse economic activities in the zone including: sugar cane cultivation, corn and vegetables, poultry rearing and small scale cattle ranching. The environmental risks are low but safety must be taken into consideration during construction due to the considerable volumes of traffic, especially public transport. Province of Imbabura 0 IB-06 San Pablo Zuleta - 30. The road i s located near the slopes of Imbabura volcano and serves several small communities that total about 3000 inhabitants. The road crosses a rolling topography, with well consolidated and stabilized slopes. There i s considerable legal forestry activity inthis area. 93 0 IB-07Guaranguisito-RanchoChico RioChorrera - It crosses a mountainous zone and is the link between Rancho Chico - Manzano Guarangui and Guaranguisito. The slope of the first section i s fairly steep and although the environmental risk i s low, this led to the allocation 4% of investment costs for mitigatory measures. This road serves also some indigenous communities. 0 IB-08Pimampiro SanFrancisco - The road crosses a mountainous zone with a steep slope. Its rehabilitation will benefit several populated centers along the route: Pueblo Nuevo, San Miguel and San Francisco, dedicated to agriculture and cattle ranching for milk processing. Although the road passes near the river, the works required for this project will not put the stability of the slopes at risk nor affect the river. 0 IB-09SanJer6nimo BuenosAires - The road and crosses a mountainous zone and is close to zones of secondary forest with a predominance of grass for cattle grazing. All improvements will be carried out within the existing pavement and no widening nor major earthworks will be needed. 0 IB-10EugenioEspejo-ElLechero-Circunvalacih The road serves a zone of high tourist potential and provides access to two sites with high potential ecotourism (El Lechero and El C6ndor). There are some indigenous communities in this area. Changes in approaches to the built-up areas were recommended during the field inspection. Mitigation i s estimated at 4% of the investment cost. 5. EnvironmentalManagement ImplementationPlanof the SEA 31. The Implementation Plan contains the following specific products: (a) institutional strengthening for the MOP and the PPs; (b) environmental management plan by homogenous area; (c) strategic communication plan; (d) promotion and dissemination plan; (e) community participation plan; and (0follow up, supervision and control arrangements. 32. The SEA recommended environmental mitigation measures for each one of the defined homogenous zones in terms of risks, and by the threats of potential natural disasters. It also tailored the procedures for the evaluation (checklist) o f road projects, based on the methodology presented inthe GCEASPV, for use by the MOP. 33. The specific environmental analysis of the first year package was included within the Terms of Reference for the Engineering for each road link in order to assess and mitigate and/or compensate the potential environment risks. This Environmental Assessment (EM) includes steps to mitigate impacts identified with their respective budgets, responsibility and schedules of execution. The TOR for the EM was reviewed and approved by the environmental and social specialists who participated during project preparation and carried out field inspections of each link. 94 6. EnvironmentalBudget 34. The budget for mitigating the impacts of the specific projects that will comprise the rural roads program i s shown below. It represents about 2.6% of the total investment to be financedby the project. This estimate is based on the findings of the specific social and environment evaluation of the first 10projects, which can be considered to be a fairly representative sample of the entire PCV. 7. SocialAssessment 35. Given that the PCV works will be done along existing roads, significant rehabilitation impacts are unlikely. On the contrary, these works are expected to: (i) reduce isolation of rural populations, (ii) improve access to education and health centers, (iii) reduce travel time and costs, (iv) increase localjob opportunities by creating microenterprises to undertake routine road maintenance, and (v) strengthen local management through involvement in planning processes for road identification, execution and maintenance. Sectoralenvironmentaland social assessment of the PCV 36. Inorder to guaranteeenvironmental and social sustainability of the PCV, the IDB andthe World Bank, as part of their strategy to provide support to the Government of Ecuador (GOE), agreed to carry out a SEA for the PCV in order to: (i) provide the executors with a tool for makingtimely decisions, (ii) cumulative project effects, (iii) reliable information on foresee offer environmental and social risks and opportunities during the first stages o f planning, (iv) incorporate criteria for sustainability of each project; and (v) recommendmitigatory measures. 37. The SEA was developed along two main themes: the actual assessment and its implementation. For the environmental assessment stage, environmental and social risk, hazard, and opportunity maps have been elaborated, which will in turn, during the provincial road selection phase, provide SGs with information regarding homogenous environmental zones, from an environmental, social and ethnic perspective. 38. The new diagnostic tool, together with the list of possible PCV impacts, will allow the SGs to make inferences, for each homogeneous zone, regarding potential impacts and opportunities associated with the implementation, execution, operation and maintenance of the Program. PublicParticipationPlanning 39. The participatory planning model adopted to select roads to be included in the PCV, originated in workshops organized at parroquial level and encompasses the entire functional structure of the province. The proposed methodologies guarantee opportunity for discussions, so that project selection and composition as well as agreements reflect the wishes of the communities benefiting from the program. Provincial governments led participative processes for road planning, with the Canton Governments, Parroquial Boards, and social and private organizations of the provinces assuming an active role. 95 40. The planning model fulfills requirements of the New Political Constitution of 1998 mandating that the State must defend the nation's Natural and Cultural Heritage, protect the environment, and advise communities of decisions potentially affecting them. 41. When indigenous and Afro-Ecuadorian communities are included within the area of influence, it i s mandatory to guarantee that: (i) they will not be adversely affected by the PCV, (ii) willbeproperlyinformedandconsulted, and(iii) they specific consultation procedures will be established within the participatory planning model. Steps were therefore followed to: (i) approach CODEMPE and PRODEPINE12, (ii) inform nationally representative organizations, and (iii)to define levels of indigenous and Afro-Ecuadorian participation during project identification and preparation. . 42. As part of the preparation of each year's program (POA), the convocation for participation of indigenous and black peoples will be carried out through community-based organizations, which will be convened for participation in community workshops. Participation procedures will be designed with consideration to the particularities of each indigenous nati~nality'~,and the characteristics of the Afro-Ecuadorian organization^'^. Specific recommendations regarding languages, social and political organization, historical identity and culture, will also be included as necessary. Identification of stakeholders i s a requirement to be complied with during the participation preparation stage. Representatives of national indigenous and peasant organizations of Ecuador must be included in order to inform them of the PCV proposals, for defining participation procedures and to agree upon the scope of the road maintenance plan be agreed upon. Identificationof social impacts 43. As has been stated, during the implementation and execution of the PCV, no significant adverse social impacts are expected. It must be emphasized that no significant changes will occur inthe social environment and, that mitigation and restitution should be possible inthe event that any do occur. 44. The capacity of the program to generate high impact benefits in the life and development of rural communities, requires that program executors not only institutionalize the participatory planning model in the provinces, but that they also keep the beneficiary communities informed of program progress. For this reason, the SEA will include a: 0 Strategic Communications Plan l2 National Indigenous Organizations. l3 "Nationality refers to the unity of history, language and culture of a social group." "Within a nationality there may exist subgroups denominated "ethnic groups" which, although sharing the general characteristics of the nationality, are grouped according to kinship and contain some different cultural elements." Lilyan Benitez and Alicia GarcCs. Culturas ecuatorianas ayer y hoy. Ediciones ABYA-YALA, 1993,7th edition. The black population dispersed throughout the country is present in significant numbers in the provinces of Imbabura in the Chota valley, Carchi in the Mira River basin, and Esmeraldas. 96 0 Promotion and Disclosure Plan 0 Community ParticipationPlan 0 Follow-up System, supervision and control 0 Ex-post Evaluation System 45. The MOP i s aware that there will be indigenous communities among the beneficiaries of the rehabilitation works, and for this reason strategies are being deployed to undertake specific procedures and methodologies in each identified homogenous zone from the ethnic perspective. Socialassessment of the annual operational plan (POA) 46. In addition to completing the SEA, the MOP has carried specific environmental and social analyses of the first year road program for El Oro and Imbabura provinces. This consisted O f Identification of impacts and classification of projects according to the Bank's Direct Rural Roads Environmental and Social Screening Guide (GCEASPV),developed by the Quality Assurance team QAT, in the Bank; 0 Inclusion of specific recommendations within the terms of reference for Civil Works Design Contracts. Identification and SocialAssessment Procedures 47. In2003, environmental and social screening of the proposed roads for the provinces of El Oro and Imbabura was carried out, following the guidelines in the GCEASPV. MOP staff and PPs authorities were present during the field inspections of the roads and local inhabitants were interviewed also. 48. Applying the methodologies proposed in the GCEASPV resulted in the clas~ification'~of each of the projects as a function of its social and environmental risk, and the requirements for studies and future plans. 49. By following the GCEASPV, it was possible to suggest some changes in the design of roads in the PVPP and to reach the following conclusions: No projects of socially or environmentally highriskwere identified (Level 1); l5 According to the GCEASPV, projectsreceive different ratings, according to their level of environmental or social risk. Projects determined to be high risk (Level 1) need a complete EIA and its corresponding Management Plan. Moderate risk projects (Level 2), must define mitigation measures during the design stage for any foreseen impacts. Projects of low risk (Level 3) only require Good Practices of engineering with respect to the environment, as the risks they present are minimal. 97 0 The rehabilitation of the roads making up the POA of 2004 does not require the acquisition of land nor population resettlement; 0 Six of the 10roads making up the sample are classified as low social and environmental risk (Level 3); 0 Four of the 10 roads in the sample were classified inthe moderate risk category. O f these four roads, the three belonging to Imbabura province are located in areas of mixed populationwhere some indigenous peoples are present; 0 The indigenous peoples include the Quichua nationality, and Otavalo and Karanki ethnic groups, all of which speak Spanish and Quichua; 0 The communities inhabiting the project area of influence could benefit from decreased transport costs and transit times, and opportunities for access to health and education services and markets. 50. Given the social aspects, the following recommendations were included in the terms of reference for the civil works design contracts: 0 Participation of a socio-environmental specialist inthe design studies; Establishment of conditions conducive to dialogue, guaranteeing the presence of persons of both genders and different age groups at public meetings; 0 Utilization of the appropriate language in order to guarantee comprehension of information by the indigenous communities and to establish conditions that facilitate the expression of concerns and preferences; 0 Notification of the presence of any sites of historical, cultural, or religious interest within the area of influence: 0 Identification of cultural practices, religious beliefs and lifestyles which could be altered as a result of roadrehabilitation projects. 51. The public disclosure and communications program recommends holding three meetings in coordination with the MOP, the sectional governments and community leaders: (i) first the meeting upon initiation of work by the Consultant; (ii) second meeting upon completion of a field work by the consultant, and conclusion of the economic fezsibility studies and the preliminary design, in order to discuss and agree upon the principal aspects of the rehabilitation works; and (iii) after approval of the final technical design, a third and last meeting to present the final details of the engineering design, including technical specifications of the project and the environmental assessment results. 52. The routine maintenance program to be carried out by microenterprise, composed o f inhabitants of the population centers to be connected by the roads, does not require any 98 additional social analysis. Suffice it to say that the local residents will benefit from the employment opportunities. 53. When the roads cross heavily indigenous areas, special consideration will be given to ancestral and cultural characteristics in establishing and operating microenterprises for the carrying our of routine maintenance works. Inthis way, based on Bank experience with the Peru Rural Roads projects, continuous employment and an unprecedented stream of benefits will be generated for indigenous peoples. 8. Institutional and legal framework for the rural roads program Institutional aspects 54. Social management of the PCV will be conducted with the participation of the following actors and institutions: a Local capacity-building through (i) training, consultation and participation, (ii) execution and coordination of environmental and social management for the PCV, and (iii) formation of and assistance to microenterprises for routine maintenance. This capacity- buildingis the responsibility of the MOP and the PPs. a The regulating environmental authority i s the Ministerio del Ambiente (Ministry of the Environment). a Training for community participation i s the responsibility of the AME. a Supervision and execution of the PVPP i s to be carried out by the MOP and the PPs. a Microenterprises will be responsible for routine maintenance of roads being improved. 55. InEcuador the existence of 13 indigenous nationalities of social, cultural and political significance i s recognized. Among indigenous organizations at the national level the following are noteworthy: El Consejo de Desarrollo de las Nacionalidades y Pueblos del Ecuador CODENPE, the Confederaci6n de Nacionalidades Indigenas del Ecuador CONAIE composed of regional organizations CONFENAIE, ECUARUNARI and COICE, the Federaci6n Ecuatoriana de Indios FEI in Imbabura and Cayembe, the Federaci6n Nacional de Organizaciones Campesinas, Indigenas y Negras FENOCIN combining a coastal land peasant organization and mountain indigenous communities, the Federaci6n de Indigenas EvangClicos FEINE which unites communities and churches in Chimborazo, Tungurahua and Cotopaxi, the Confederacibn de Nacionalidades y Pueblos Independientes del Ecuador CONAIPEA, L a Federaci6n Unica de Afiliados a1 Seguro Social Campesino FEUNASAC, and the Uni6n de Campesinos Ecuador UCAE that represents indigenous people in the central mountain range. 99 56. Within the setting of the parroquial workshops, local actors16will: indicate roads needing rehabilitation, provide labor for road improvement, and promote and form the microenterprises for routine maintenance in association with the parroquial boards. Legal and regulatory aspects 57. To assure compliance with environmental legislation and regulations in force, to ensure the incorporation of environmental management, and to establish an incentive model of sustainable environmental management during PCV execution, the following basic aspects must be considered: 0 Application and compliance measures for the environmental management plan (SUMA). 0 Measures to guarantee compliance with safeguard policies. 0 Procedures for inclusion of environmental assessment in all stages of the project cycle. 0 Design, application, oversight, and control of preventive and mitigation measures as requiredby some projects. Compliance by the PCV with the following laws and standards i s mandatory: 58. Socio-Environmental Assessment: Environmental Management Law No 99-37 of 1999, the Special Law for State Decentralization No 27 of 1997 and Ministerial Agreement No. 057 of 2000. 59. Participation: The Organic Law of the Parroquial Boards, Official Registry No. 193 of 27-X-2000. 60. Indigenous Participation: Political Constitution, Articles 1, 23, 84 and 88. L O Convention No.169 of 1989. 9. Budget 61. The budget for public participation, information and disclosure mechanisms i s included inthe estimated budget shown inTable 4 of this annex. l6 Actorsinclude:theProvincialPrefect,membersofProvincialCouncils,municipalmayors,PresidentsofParroquial Local Boards, Second-Level Social Organizations,Non-GovernmentalOrganizations, Community-BasedOrganizations,leaders and representativesof Institutions associated with the rural roads. IO0 10. Timetable for the socialmanagementplan of action Implementationof October 2006 recommendations 2006 Consultant incivil works design Adoption of SEA October 2006 DGVDIWB Document draft recommendations should already be incirculation. Implementationof October 2006 July 2008 MOPPPs WB environmental and social Management Plan Environmental July 2006 October 2006 MOPPPsM. licensing del Ambiente procedures POA 2006 Hiringof local October 2006 December MOP WB specialist in 2006 indigenous issues Analysis of October 2006 December MOP/WB alternatives for the 2007 microenterprises 101 Annex 11:Project Preparation and Supervision ECUADOR: RURAL ROADS PROJECT Planned Actual PCNreview 07/10/2003 07/10/2003 InitialPID to PIC 07/29/2003 Initial ISDS to PIC 07/29/2003 Appraisal 05/08/2004 05/24/2004 Negotiations 05/14/2006 06/14/2006 Board approval 07/20/2006 Planned date of effectiveness 11/20/2006 Planned date of mid-termreview 12/15/2008 Planned closing date 30/06/20 11 Key institutions responsible for preparation of the project: MOP, DGVD Bank staff and consultants who worked on the project included: Name Title Unit Emmanuel James LeadTransport Specialist LCSFT Patricia Mc. Kenzie Sr Financial Management Specialist LCOAA Marcel0 Amador Osorio Consultant,Procurement LCOPR Oswaldo Patifio Consultant, Institutional Planning LCSFT JosC Yeng Consultant, Institutional Planning LCSFT Xiomara A. Morel Senior Finance Officer LOAGl Isabella Micalli Drossos Senior Counsel LEGLA Ana Lucia Jimhez Consultant, Financial Management LCSFM Pilar Gonziilez Senior Counsel LEGLA Juan D. Quintero Senior Environmental Specialist LCSEN Marco Zambrano Consultant, Environmental Specialist LCSFT Elena Correa Senior Social Scientist LCSEO Margarita de Castro Consultant, Social Specialist LCSFT George Tharakan Peer Reviewers SASE1 Aureio MenCndez Peer Reviewers EASTR 102 Annex 12: Documentsinthe ProjectFile ECUADOR:RURALROADSPROJECT A. ProjectImplementationPlan 1. Programade Caminos Vecinales, Documento Conceptual del PCV; July 2003. 2. Plan Vial Provincial Participativo para (i)Imbabura (ii) Oro; January 2004. El 3. Manual de Operaciones del PCV; Marzo 2004. 4. Operational Plan for the first year of execution. B. BankStaffAssessments 1. Financial Management Assessment, January 2004, revised March2005. 2. Assessment of Agency's Capacity to ImplementProcurement; January 2004, revised March 2005. 3. Assessment of Institutional and Financial Capacity of the PPs, 2004. C. Other 1. Evaluaci6nAmbientalEstrategia(EAE)Programade Caminos Vecinales, UCV, Febrero 2004. 2. Evaluaci6n Ambiental (IA) de 10s Caminos de Imbaburay El Oro Provincias, UCV, Marzo 2004. 3. Plan Operativo Anual (POA) del Primer Afio, UCV, Marzo 2004. Decreto de Creaci6n del IGVP, UCV, Marzo 2004. 4. Ecuador: Fiscal andMacroeconomic Assessment, Valeriano F. Garcia, October 2003.The Benefits of Rural Roads: Enhancing Income Opportunities for the RuralPoor; Javier Escobal andCarmenPonce. GRADEWorking Paper#40-1,2002. 5. Manual de Priicticas Mejoradas de Caminos Forestales, Gordon Keller, USDA Forest Service. 6. Estudio de Viabilidad TCcnica, Econbmica, Financiera, Social y Ambiental del PCV, Ministerio de Obras Ptiblicas, Agosto 2005 103 Annex 13: Statementof Loansand Credits ECUADOR:RURAL ROADSPROJECT Differencebetween expectedand actual Original Amount inUS$Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd PO83856 2005 EC Scnd. FiscalConsolid& Comp. Growth 100.00 0.00 0.00 0.00 0.00 100.00 100.00 0.00 PO85302 2004 EC InstitutionalReform 20.00 0.00 0.00 0.00 0.00 20.00 4.67 0.00 PO77257 2004 EC INDIGENOUSPEOPLES2 34.00 0.00 0.00 0.00 0.00 34.00 3.17 0.00 (PRODEPINE2) PO66752 2003 GEFEC NT PARKS/BIODIVER 11 0.00 0.00 0.00 8.00 0.00 3.28 2.48 0.00 PO74218 2002 EC Public SectorFinancialManagement 13.86 0.00 0.00 0.00 0.00 10.46 10.46 0.00 PO72527 2002 EC-Power&Comm.Sctrs Modmiz.&Rural 0.00 0.00 0.00 2.84 0.00 2.16 2.81 0.95 srvs PO63644 2002 EC Power&Comm.Sect Moderniz.&Rural 23.00 0.00 0.00 0.00 2.00 14.26 16.26 1.54 Semi PO39437 2002 EC RURALPOVERTY (PROLOCAL) 25.20 0.00 0.00 0.00 0.00 9.48 6.94 2.61 PO49924 2001 EC RuralWater Supply & Sanitation 32.00 0.00 0.00 0.00 0.00 5.46 5.46 1.26 PO39084 1998 EC- HEALTH SERVICES 45.00 0.00 0.00 0.00 0.00 12.15 12.15 12.15 MODERNIZATIONPROJ. Total: 293.06 0.00 0.00 10.84 2.00 211.25 164.40 18.51 ECUADOR STATEMENT OF IFC's HeldandDisbursedPortfolio InMillions of U S Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic 2004 BPC Ecuador 2.00 0.00 0.00 0.00 2.00 0.00 0.00 0.00 1998 Concessionaria 11.50 0.97 0.00 15.00 2.93 0.00 0.00 3.82 1999 FV Ecuacobre 2.50 0.00 4.00 0.00 2.50 0.00 4.00 0.00 1998/03 FavoritaFruit 12.86 0.00 0.00 0.00 7.86 0.00 0.00 0.00 2004 PRONACA 20.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 Total portfolio: 48.86 0.97 4.00 15.00 20.29 0.00 4.00 3.82 ApprovalsPendingCommitment FY Approval Company Loan Equity Quasi Partic Total pendingcommitment: 0.00 0.00 0.00 0.00 104 Annex 14: Countryat a Glance ECUADOR:RURALROADSPROJECT Latin Lower- POVERTY and SOCIAL America middle- Ecuador & Carib. income 1 Development diamond' 2004 Population,mid-year(millions) U2 541 2,430 GNIpercapita (Atlas method, LS$) 2,180 3,600 1,580 Lifeexpectancy GNI(Atlas method, US$bfllfons) 28 9 1,948 3,847 T Average annual growth, 1998-04 Population (%) 16 14 1.0 Laborforce (4 2 6 0 9 0.7 GNI Gross per primary Most recent estimate (latest year available, 1998-04) capita nrollment Poverty (%of popuiation belownatfonalPOvertyline)/a 45 Urbanpopulation (%of totalppulatfon) 62 77 49 Lifeexpectancyatbirth (years) 71 71 70 I Infant mortality (per /OOOIive births) 24 28 33 Childmalnutntion (%of children under5) 14 11 Access to improved water source Access to animproved water source (%ofpopulation) 86 89 61 Literacy (%of populationage 5+) 91 89 90 Gross pnmary enrollment of schaoI-agepopulation) 17 e 3 114 -Ecuador Male 17 P6 115 i Lomr-middle-incomegroup Female ll7 P 2 113 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1984 1994 2003 2004 Economic ratios' GDP (US$ bfllions) 114 186 272 30.3 Gross capitalfonnation/GDP 6 3 219 27.7 27.8 Exportsof goods andsewices/GDP 258 246 23.8 26.5 Trade Gross domestic savings/GDP 8 8 202 22.6 25.7 Gross nationalsavingsiGDP 114 159 23.7 27.0 Current account balanceiGDP -05 -49 -17 -0.5 Interestpayments/GDP 7 9 2 6 3.6 4.0 Total debt/GDP 729 810 62.0 55.7 Total debt service/exports 383 203 26 5 36 0 Presentvalue of debt/GDP 68.8 Presentvalue of debt/exports 26.3 Indebtedness 1984-94 1994-04 2003 2004 2004-08 (averageannualgrowth) GDP 2 8 2 0 2 7 6.9 3 2 -Ecuador GDP percapita 0 5 0 3 I1 5.3 1.8 Lover-middle-income a r o u ~ ~ STRUCTURE of the ECONOMY pk of GDP) '984 1994 2003 2 Agriculture u.9 8.8 7.7 Industry 42.4 26.3 28.7 30.8 Manufacturing 21.3 14.6 m.7 Services 43.6 56.9 63.6 Householdfinal consumption expenditure 65.5 67.8 67.9 65.3 .,OO 1 Generalgov't final consumption expenditure 15.7 P.0 9.5 9.o Importsof goods andsewices 23.3 26.4 28.8 28.7 -GCF -GDP - (average annualgrowth) 1984-94 lSg4-O4 2o Agriculture -2.8 3.7 15 Industry 3.1 0.8 5.3 Manufacturing -02 0.9 3.1 Sewices 3.9 2.6 13 Householdfinal consumption expenditure 2.1 2.4 2.6 Generalgov't finalconsumption expenditure -12 0.5 11 Grosscapitalformation 1.6 2.8 0.2 Importsof goods and services 3.3 3.4 0.8 ---Exports &Imports 105 Ecuador ~~ ~ PRICES and GOVERNMENT FINANCE 1984 1994 2003 2004 Domestic prices Inflation (%) I (%change) 150 T Consumer pnces 312 27.4 7.9 2.7 100 ImplicitGDP deflator -2 0 7.8 9.0 4.1 50 Government finance ("of GDP.includes currentgrants) 0 Current revenue 21.8 25.4 26.9 -50 Current budget balance 6.3 6.6 7.6 Overallsurplusideficit 0.5 17 2.3 1 -GDPdeflator -CPI 1 TRADE 1984 1994 2003 2004 (US$millions) Export and import levels (US5 mill.) Totalexports (fob) 2,622 3,843 6,038 7,655 10,000 T Oil 1,835 1,185 2,372 3,899 Bananas t36 708 1,099 1,023 6,000 Manufactures 684 1,564 1.658 6.000 Total imports (cif) 1,529 3,622 6,534 7,861 Food 4,000 Fuelandenergy 63 x)4 664 785 2.000 I Capital goods 555 1,390 1,789 2,054 0 Exportprice index(2000=WO) x)l 75 x)5 im 98 99 00 01 02 03 04 Import price index(ZOOO=WO) t35 10 99 x)3 Ihports E Imporis Terms of trade (2000=WO) 75 67 x)7 115 1 i: BALANCE of PAYMENTS 1984 1994 2003 2004 (US$ millions) Exportsof goods andservices 2,849 4,601 7,079 8,734 Imports of goods andservices 2,064 4,894 7,858 9,301 Resource balance 785 -293 -779 -567 Net income -660 -940 -1,465 -1,493 Net currenttransfers 20 322 1,772 1,894 0 Current account balance -56 -911 -472 -166 -5 Financingitems (net) -44 t38 447 Changesin net reserves x)O 774 -609 x37 -281 -10 Memo: Reserves includinggoid (US$ millions) 736 2,ox) 1,161 1,245 Conversion rate (DEC. local/US$) 1.0 1.0 10 1.0 EXTERNAL DEBT and RESOURCE FLOWS 1984 1994 2003 2004 (US$ millions) Composition of 2004 debt (US$ Total debt outstanding anddisbursed 6,306 15,061 16,864 8,868 IBRD 206 830 888 834 A. 834 B 16 IDA 35 28 18 16 I G 1516 Total debt sewice It20 1,000 2290 3,731 I iBRD 38 153 0 3 1t3 IDA 1 1 1 1 Compositionof net resourceflows Official grants 25 46 81 II Official creditors 220 81 61 -311 Privatecreditors 4x) -44 604 596 Foreigndirect investment (net inflows) 50 576 1,555 1,BO Portfolio equity(netinflows) 0 7 9 I World Bank program Commitments 0 64 114 0 1 A IBRD - E Bilateral - Disbursements 67 lt2 152 29 6-IDA D-Othermultilaterd F-Private Principalrepayments 20 95 93 83 G - Short-term 106 Annex 15: ParticipatoryRoadPlanning(PVPP)Processfor EcuadoreanProvinces ECUADOR:RURAL ROADSPROJECT * Province agrees to develop P V P P The levels o f participation o f c t v i l society and p u b l i c sectors are defined * T h e ranking o f parroquial roads is presented T h e Cantonal Prioriration n i t r a c k s and trails i s approved * Canton w i d e information i s presented Assessment o f issues in Provincial R o a d M a n a g e m e n t IS reviewed Provincial System o f R o a d M a n a g e m e n t presented ( o p t i o n a l l S u m m a r y o f achievements so far Provincial assessment o f R o a d n e t w o r k LS approved * Prioritation M a t r i x for L o c a l Roads ISanalyzed, and the Prioritized Listing .. and Roads B u d g e t are approved T h e objectives and strategies for P r o v i n c i a l R o a d M a n a g e m e n t defined M o d a l i t y o f R o a d M a n a g e m e n t o f the Province approved (prelimlnarly) W o r k s h o p The Drafting Committee for the P V P IS nominated M o d e l o f the Decree for the Corporation for R o a d M anagement IS given rovincia - T y p e o f contribution f r o m Private S e c t o r and c i v i l Society IS approved M o d a l i t y o f M a n a g e m e n t o f the Financial Resources 1s approved Issuance o f t h e "Carla de F i d e i C o m i s o " Agreements signed 107 Annex 16: MOPOrganizationalChart ECUADOR:RURALROADSPROJECT Captacionde Subsecretaria Superv isionde General Conservacionde Desconcentrados IaRedVialEstatal Subsecretariasy Direcciones Analisis de EstudiosTecnicos Controldelas Concesiones - Asesoramiento - Planificacionde la seguridad nacional, - Gestionde 10s -Cornunicacion recursos humanos 108 Annex 17: TransportSectorManagement ECUADOR:RURALROADSPROJECT N vI E L N A C I 0 N A L I 109 Map IBRD 34724 IBRD 34724 81° 80° 79° 78° 77° 76° San Lorenzo 1° ESMERALDAS 1° Rio C O L O M B I A Rio San Esmeraldas Miguel TULCÁN CARCHI P A C I F I C ESMERALDAS Bonita O C E A N IMBABURA Rosa Zárate IBARRA Otavalo Rio San Miguel Lago Agrio S U C Puerto el Cayambe U M Carmen de 0° 0° PICHINCHA QUITO B I OPutumayo Santo Domingo Puembo Shushufindi S de los Colorados R i o A g u a r i c o M A N A B I Puerto Francisco R i o Bahía de Caráquez de Orellana N a p o N A P O COTOPAXI Nuevo Archidona R i o Yasuni Rocafuerte Manta Calceta LATACUNGA TENA 1° 1° Velasco Ibarra Quevedo PORTOVIEJO AMBATO R i o C o n o n a c o Sucre LOS TUNGURAHUA Baños Mera R i o Daule RIOS PUYO C u r a r a y GUARANDA Rio BOLIVAR RIOBAMBA P A S T A Z A Rio Palora BABAHOYO Manglaralto CHIMBORAZO Rio R i o P i n t o y a c u 2° 2° G U A Y A S Babahoyo R i o Naranjito Pastaza Bobonaza Salinas GUAYAQUIL Cumandá MACAS Sucua M O R O N A - C A Ñ A R S A N T I A G O Posorja Naranjal Mendez Rupano 76° AZOGUES Cangaime General L. Rio G u l f o f Plaza Gutiérrez 3° 3° A Z U A YCUENCA E C U A D O R G u a y a q u i l MACHALA Zamora R U R A L R O A D S E L Rio 78° 77° P R O J E C T Huaquillas Gualaquiza O R O GALAPAGOS ISLANDS PAVED ROADS ZAMORA- OTHER ALL-WEATHER ROADS Yantzaza 91° (ARCHIPIÉLAGO DE COLÓN) CHINCHIPE ISLA PINTA RAILROADS LOJA ISLA MARCHENA 4° Catacocha AIRPORTS ZAMORA ISLA GENOVESA L O J A 79° PORTS P A C I F I C O C E A N 0° 0° RIVERS PROVINCE BOUNDARIES ISLA SAN SALVADOR INTERNATIONAL BOUNDARIES P E R U ISLA FERNANDINA ISLA SANTA CRUZ ISLA The boundaries, colors, denominations and any other information shown on 5° 5° ISABELA 0 25 50 75 100 ISLA SAN CRIST BAL this map do not imply, on the part of 1° 1° The World Bank Group, any judgment KILOMETERS ISLA on the legal status of any territory, or SANTA MAROEA any endorsement or acceptance of 0 25 50 75 100 ISLA ESPA OLA such boundaries. 81° 80° KILOMETERS 91° 90° APRIL 2006