program document for a proposed fourth...
TRANSCRIPT
Document of The World Bank
FOR OFFICIAL USE ONLY
Report No. 301 13-PE
PROGRAM DOCUMENT
FOR A PROPOSED
FOURTH PROGRAMMATIC SOCIAL REFORM LOAN
IN THE AMOUNT OF US$100 MILLION
TO
THE REPUBLIC OF PERU
November 8,2004
Human Development Department Bolivia, Ecuador, Peru and Venezuela Country Management Unit Latin America and the Caribbean Region
This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World Bank authorization
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ATPDEA
CAR
CAS CdG
CGR
CIES
CLAS
CND
CONSUCODE
CPAR
cv
DECSAL
DFID
DISAs
PERU - PROGRAMMATIC SOCIAL REFORM LOAN I V
CURRENCY EQUIVALENTS (Exchange Rate Effect ive as o f 09/30/2004)
Currency Un i t = Nuevo Sol
US$1 .oo = SI. 3.35
Government Fiscal Year
January 1- December 3 1 Weights and Measures
Met r ic System
ABBREVIATIONS AND ACRONYMS Andean Trade Promotion and Drug Eradication Act Results Management Agreement (Convenio de Administracion por resultados) Country Assistance Strategy Management Agreement (Convenio de Gestion) Audit General Office (Contraloria General de la Repliblica) Consortium for Social and Economic Research (Centro de Investigacidn Econ6mica y Social) Local Committee o f Health Management (Comitt! Local de Administracidn de Salud) National Council for Decentralization (Consejo Nacional de Descentralizacih) National Council for Contracts and Procurement (Consejo Superior de Contrataciones y Adquisiciones del Estado) Country Procurement Assessment Report Cedula Viva (Special Retirement Scheme for Civ i l Servants- Law 20530) Decentralization and Competitiveness Structural Adjustment Loan Department for International Development Regional Health Departments (Direcciones Regionales de Salud)
DNPP
DPL EMBI ENAHO
ESSALUD
FESE
FPTL
FRTL
FTA GDP GOP INEI
JSDF
M&E MEF
MIMDES
National Office o f Public Budget (Direccidn Nacional del Presupuesto Pfiblico) Development Policy Loan Emerging Markets Bond Index National Household Survey (Encuesta Nacional de Hogares) Health Social Security Institute (formerly known as IPSS) Socio Economic Assessment Score Cards Fiscal Prudence and Transparency Law (Ley de Prudencia y Transparencia Fiscal) Fiscal Responsibility and Transparency Law (Ley de
Transparencia Fiscal) Free Trade Agreement Gross Domestic Product Government o f Peru National Institute o f Statistics and Informatics (Instituto Nacional de Estadistica e Informktica) Japan Social Development Fund Monitoring and Evaluation Ministry o f Economy and Finance (Ministerio de Economia y finanzas) Ministry o f Women and Development Affairs (Ministerio de la Mujer y de Desarrollo)
Responsabilidad Y
MINED
M I N S A
MMM
M S M
P C M
PRONAA
PSP
PSRL
SEACE
Ministry o f Education (Ministerio de Educacih) Ministry o f Health (Ministerio de Salud) Mult i-Annual Macroeconomic Framework (Marco Macroecon6mico Multianual) Mul t i - Annual Social Framework (Marco Social Multianual) Prime Minister’s Office (Presidencia de Consejo de Ministros) National Program for Food Assistance (Programa Nacional de Asistencia Alimentaria) Priority Social Programs (Programas Sociales Priorizados) Programmatic Social Reform Loan Electronic Procurement and Contracting System o f the State (Sistema E lec t rh i co de
Contrataciones del Estado) Adquisiciones Y
SIAF
SIAF-GL
S IME
SIS-MI
SNP
SPP
TAL VAT
FOR OFFICIAL USE ONLY Integrated System o f Financial Administration (Sistema Integrado de Admin i s t rac ih Financiera) Integrated System of Financial Administration -Local Governments (Sistema Integrado de Admin i s t rac ih Financiera - Gobiernos Locales) Information, Monitoring and Evaluation System (Sistema de In fo rmac ih , Monitoreo y Evaluac ih) Integral Health System for Mother and Child (Sistema Integral de Salud - Materno Infantil) National Pension System (Sistema Nacional de Pensiones, L e y 19990) Private Pension System (Sistema Privado de Pensiones) Technical Assistance Loan Value Added Tax
Vicepresident David de Ferranti Country Director, LCC6C Marcel0 Giugale Lat in America and The Caribbean Human Development Director Health, Nutrition and Population Sector Manager Social Protection Sector Manager Sector Leader Daniel Cotlear Task Team Leader Rafael Rofman
Ana Maria Amagada Evangeline Javier Helena Ribe
This document has a restr icted distr ibut ion and may be used by recipients only in the performance of their of f ic ia l duties. I t s contents may n o t be otherwise disclosed [wi thout W o r l d Bank authorization. I
TABLE OF CONTENTS
I . INTRODUCTION ...................................................................................................................... 1
I1 . THE ECONOMIC AND SOCIAL SETTING ....................................................................... 2
A . POLITICAL CONTEXT ................................................................................................................ 2
C . POVERTY AND SOCIAL INDICATORS ......................................................................................... 5 3 . MACROECONOMIC CONDITIONS AND OUTLOOK .................................................................... 2
D . RECENT TRENDS IN SOCIAL EXPENDITURE ............................................................................. 7
I11 . THE GOVERNMENT’S MEDIUM TERM STRATEGY ................................................ 11
A . THE NATIONAL AGREEMENT ................................................................................................. 11 B . THE STRATEGY FOR POVERTY REDUCTION .......................................................................... 12 C . THE DECENTRALIZATION PROCESS ....................................................................................... 14
I V . THE SOCIAL REFORM PROGRAM ............................................................................... 16
THE SOCIAL SECTORS IN PERU AND THE PSm: THE RATIONALE OF THE OPERATION ......... 16 A . IMPROVING THE ANTI-POVERTY FOCUS OF PUBLIC EXPENDITURES .................................... 22 A.l. POVERTY REDUCTION STRATEGY 22 A.2. SHIFTING TO PRO-POOR EXPENDITURE 22 Activities supported by PSRL I. I1 and I11 ..................................................................................... 23 Triggers. Benchmarks and Monitoring Indicators under PSRL IV ............................................... 25 A.3. TARGETING OF SOCIAL PROGRAMS: PENSION REFORM 27 Government Strategy ..................................................................................................................... 28 Activities supported by PSRL I. I1 and I11 ..................................................................................... 29 Triggers. Benchmarks and Monitoring Indicators for PSRL IV ................................................... 30 Perspectives and Sustainability of Reforms ................................................................................... 30 A.4. TARGETING AND DECENTRALIZATION OF SOCIAL PROGRAMS . WORKFARE, RURAL INFRASTRUCTURE AND FOOD PROGRAMS 31 Government Strategy ..................................................................................................................... 31 Activities supported by PSRL I. I1 and I11 ..................................................................................... 32 Triggers. Benchmarks. and Monitoring Indicators for PSRL IV .................................................. 33 Perspectives and Sustainability o f Reforms ................................................................................... 34 B.l. HEALTH CARE 35 Government Strategy ..................................................................................................................... 35 Activities supported by PSRL I. I1 and I11 ..................................................................................... 36 Triggers. Benchmarks and Monitoring Indicators for PSRL IV ................................................... 39 Perspectives and Sustainability of Reforms ................................................................................... 39 B.2. EDUCATION 40
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Government Strategy ..................................................................................................................... 40
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Activities supported by PSRL I. I1 and I11 ...................
Perspectives and Sustainability of Reforms .....................................
Activities supported by PSRL I. I1 and I11 ............
............................................................. 41 Triggers. Benchmarks. and Monitoring Indicators for PSRL IV ................................. 44
c . TRANSPARENCY AND PARTICIPATION OF THE POOR ............................................................ 46 ............................
Government Strategy ..................................................................................................................... 46 ................................................................. 46
Triggers. Benchmarks. and Monitoring Indicators for PSRL IV .................................................. 48 Perspectives and Sustainability of Reforms ................................................................................... 49 D . TRANSPARENCY OF FINANCIAL MANAGEMENT AND PROCUREMENT ADMINISTRATION . 50 Government Strategy ..................................................................................................................... 51 Activities supported by PSRL I. I1 and I11 ..................................................................................... 52 Triggers. Benchmarks. and Monitoring Indicators for PSRL I V .................................................. 53 Perspectives and Sustainability of Reforms ................................................................................... 54
V . THE PROPOSED LOAN ....................................................................................................... 55
A . LINK TO COUNTRY ASSISTANCE STRATEGY AND OTHER BANK OPERATIONS .................. 55 B . PROGRAM OBJECTIVES AND PRIOR ACTIONS ........................................................................ 57 c . COOPERATION WITH OTHER MULTILATERAL AGENCIES AND DONORS .............................. 60 D . FIDUCIARY ARRANGEMENTS AND LOAN DISBURSEMENT .................................................... 61 E . R I S K S ........................................................................................................................................ 62
V I . PROGRAM BENEFITS AND SOCIAL AND ENVIRONMENTAL IMPACTS ........... 67
A . POVERTY AND SOCIAL IMPACT .............................................................................................. 67 B . ENVIRONMENT, FOREST, AND NATURAL RESOURCE ASPECTS ........................................... 68 C . PARTICIPATION ....................................................................................................................... 68 D . FIDUCIARY ASPECTS ............................................................................................................... 69
ANNEX 1 . PSRL I V POLICY MATRIX .................................................................................. 71
ANNEX 2 . THE ACCREDITATION PROCESS ..................................................................... 78
ANNEX 3 . LETTER OF POLICY FROM THE GOVERNMENT OF PERU ..................... 82
ANNEX 4 . SOCIAL INDICATORS AND RESULTS MONITORING ............................... 105
POVERTY AND OTHER WELFARE INDICATORS ......................................................................... 105 POVERTY HEADCOUNT ............................................................................................................... 105 EXTREME POVERTY ................................................................................................................... 105 NUTRITION .................................................................................................................................. 106 EDUCATION ................................................................................................................................. 108 HEALTH ....................................................................................................................................... 109 SOCIAL EXCLUSION AND THE LIVING CONDITIONS OF THE INDIGENOUS POPULATION ........ 110
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ANNEX 5 . FUND RELATIONS NOTE .................................................................................. 111
IMF PRESS RELEASE ON STAND-BY ARRANGEMENT FOR PERU ........................................... 111 PERU: GROWTH ENHANCING POLICY ACTIONS FOR 2004 IN FUND PROGRAM .................... 113
ANNEX 6 . PERU-KEY ECONOMIC INDICATORS ........................................................... 114
ANNEX 7 . PERU KEY EXPOSURE INDICATORS ............................................................ 116
ANNEX 8 . OPERATIONS PORTFOLIO (IBRDADA) AND GRANTS ............................. 117
ANNEX 9 . STATEMENT OF IFC’S HELD AND DISBURSED PORTFOLIO .............. 118
ANNEX 10 . PERU AT A GLANCE ......................................................................................... 119
ANNEX 11 . MAP: PERU .......................................................................................................... 121
Tables Table 1 . Evolution of Poverty Rates ................................................................................................ 6
Table 2 . Social Expenditures as percent o f GDP . 2000-2004 .......................................................... 9
Table 3 . Medium term goals set by Peru’s Government as part of the poverty reduction
strategy .................................................................................................................................. 14
Table 4 . PSRL Key Actions over the four-year period .................................................................. 20
Table 5 . Peru: Priority Social Programs ........................................................................................ 24
Table 6 . SIS Ma in Performance Indicators .................................................................................... 38
Table 7 . Adult members o f first quintile households . Participation in social organizations ......... 50
Table 8 . PSRL IV Triggers, as planned in PSRL I11 and current status ........................................ 58
Table 9 . Risks and Mitigating Actions .......................................................................................... 64
Figures Figure 1 . Economic Activity ............................................................................................................ 3
Figure 2 . Employment and Unemployment ..................................................................................... 3
Figure 3: Inflation ............................................................................................................................ 3
Figure 4: Exchange Rate .................................................................................................................. 3
Figure 5 . Fiscal Trends and Social Spending .................................................................................. 8
Figure 6 . Ratio o f Social Spending to GDP ..................................................................................... 8
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Figure 7. Spending in Priority Social Programs ............................................................................ 10
Figure 8. National Agreement Development ................................................................................. 12
Figure 9. National Plan for Poverty Overcoming: 2004-2006 ....................................................... 13
Figure 10. The Education Sector’s Human Resource System ....................................................... 44
The PSRL IV Loan was prepared by an IBRD team consisting o f Messrs/Mmes. Keisgner Alfaro, Leah Belsky, L i v ia Benavides, Patricia Bernedo, Daniel Dulitzky, Pablo Lavado, Rony Lenz, Jose Roberto Lopez CAliz, Patricia M c Kenzie, Isabella Micalli-Drossos, Xiomara Morel, Kathrin Plangemann, Wi l l iam Reuben, Rafael Rofman, Carolina Sanchez-Paramo, Annika Silva-Leander, and Luisa Maria Yesquen Solari
This team was led by Rafael Rofman, and worked under the general guidance o f Messrs./Mmes. Ana Mar ia Arriagada, Marcelo Giugale, Daniel Cotlear and Helena Ribe
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REPUBLIC OF PERU FOURTH PROGRAMMATIC SOCIAL REFORM LOAN
Loan and Program Summary
Borrower: Republic of Peru
Amount and Terms: US$100 mil l ion
Implementing Agency: Ministry o f Economy and Finance
Description: The Government o f Peru (GoP) has requested a loan to assist in the reform o f the social sectors. This i s the fourth and final stage o f a four-year program, which uses a Programmatic Development Policy Loan instrument to support reforms aimed at increasing access, transparency, and efficiency in service provision. The reform process, initiated in 2000, has had very important achievements in the different sectors. The main goals of the program are to (i) improve the antipoverty focus o f public expenditures; (ii) increase access o f the poor to quality health and education services; and (iii) enhance the transparency o f social programs, while empowering their beneficiaries in their design and implementation. The proposed loan w i l l achieve these objectives by supporting efforts to complete and consolidate reforms in five areas: (i) social expenditures management, (ii) redesign, targeting, and administration o f social protection programs, (iii) access to health services, (iv) access and efficiency in education, and (v) transparency and accountability in the social sectors.
Macroeconomic indicators in Peru are strong, and in this sense, the country i s in an excellent position to advance and consolidate reforms. However, the political and institutional context for reform i s more complex, as the political climate in i s not fully supportive o f the current administration and Congress i s often engaged in short term political conflicts. Sti l l , there has been strong support for social program reforms and significant ownership of the PSRL program by the government. The program has enabled continuity in social reforms.
Benefits and Risks: Benefits. The PSRL program was designed to support structural reforms in the social sectors, rather than to provide transitional income support for the poor. These reforms aimed to increase access to and improve the quality o f basic services. They were designed to foster human capital accumulation and,
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as a result, improve the l iving conditions o f the poor in the medium term by expanding their social and economic opportunities. Thus, this program must be evaluated not in terms o f i t s impact on income poverty but in terms o f i t s impact on social indicators such as enrolment rates and access to primary health care.
Although the nature o f the reforms i s such that their full realization w i l l take years, available information on selected indicators suggests that some o f the expected improvements have already started to materialize. For example, on the fiscal front, the program has had a positive effect on the protection o f priority social programs and on the reform o f the c iv i l servants pension regime; regarding equity and transparency, i t has supported the development o f a monitoring and evaluation system for the PSPs; finally, as a result o f the measures completed in the health sector, access to health services has improved dramatically with the rapid expansion o f coverage for the Integrated Health System -SIS
Risks. This being the last stage o f a programmatic loan, the most serious risk i s sustainability, as there w i l l be no future operations to continue support o f this exact reform program. Also, a serious weakness that goes beyond the PSRL i s the low political support for the current administration. Isolated but growing regional unrest and continued low levels of public support and the uncertainty surrounding the 2006 presidential elections are putting pressure on the Government to limit reforms and increase expenditure. The advances in decentralization, while positive in theory, could result in negative effects in the social sectors if they are decentralized without the necessary safeguards and controls to ensure sustainability in service provision.
Two factors reduced the probability that these r isks w i l l affect the program’s sustainability. First, through the PSRL, core mechanisms o f a poverty reduction strategy have been adopted b y the Peruvian government and built into management and budgetary structures. Also, PSRL has promoted a participatory approach in the design and implementation o f social policies, with active participation o f c iv i l society at different levels o f government and consultations wi th sub-national governments. This active involvement o f numerous actors in the implementation and provision o f social policies and services w i l l enable reforms to be further protected f rom instability within the central government. The implementation o f a transparent evaluation and monitoring scheme, support for expansion o f the CLAS model in health services provision,
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and changes in procurement are a few examples of policies that w i l l result in more sustained and better involvement b y NGOs and beneficiaries as well as increased ownership and demands for accountability. This expanded base of political support w i l l enable the long term continuity o f reforms.
The second mitigating factor i s that while PSRL w i l l not continue, the Bank w i l l remain closely associated with reforms, supporting them through other operations and sustaining a policy dialogue. The continuing operations include the Decentralization and Competitiveness Programmatic Loan (“DECSAL”) and the Technical Assistance Loans for the Social Sectors and Decentralization. DECSAL w i l l continue to support the implementation of decentralization in the Social Sectors, while the Technical Assistance Loan w i l l finance further development of specific activities included in PSRL. Also, a new ESW on the social sectors (“RECURS0 PERU”) w i l l provide an opportunity for the Bank to maintain and deepen the policy dialogue in preparation for upcoming social sector operations, helping to increase the sustainability of PSRL reforms.
An additional risk i s generated b y the high level o f dollarization o f Peru’s economy, which makes i t vulnerable to external interest rate or exchange rate shocks. However, the Government has strongly supported a sound macroeconomic environment to diminish this risk, by implementing a stabilization program, improving the fiscal balance and increasing debt sustainability over time.
Schedule of Disbursement: The loan i s expected to be disbursed in a single tranche o f US$lOO mil l ion in December 2004/January 2005, upon fulfillment of all conditions for effectiveness.
Project ID Number: PE-P083968-LEN-BB
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I. INTRODUCTION
1. The Programmatic Social Reform Loan IV (PSRL IV) i s the fourth and final stage in a series o f programmatic development policy loans supporting Peru’s social reform agenda. I t i s a loan for US$lOO million. The PSRL series was initiated in 2001 with the Transition Government that followed the demise o f the Fujimori Government. PSRL I emphasized transparency and budgetary protection o f key social programs. PSRL 11 was prepared during the first year o f the Toledo Administration and supported the design and launch o f longer term reforms in anti-poverty programs and social reforms. PSRL I11 focused on consolidating existing reforms and, within the context of decentralization in the social sectors, creating the necessary fiscal space and legal and institutional framework for a smooth transition towards the new model. Finally, the focus o f PSRL IV i s to increase sustainability of the reforms, by promoting transparency and monitoring at local and national levels o f program execution, increasing efficiency, improving targeting for al l programs, and ensuring that service delivery continues to improve while decentralization i s implemented.
2. The PSRL program has extended over more than a four year period. In a changing institutional and economic environment-adapting to two different governments, at least sixteen ministers, and many more lower level officials in the three social sectors- the program has preserved i t s three original goals to (i) improve the antipoverty focus o f public expenditure; (ii) increase access o f the poor to quality health and education services; and (iii) enhance the transparency o f social programs, while empowering beneficiaries in the design and implementation o f programs.
3. The main achievements o f PSRL IV consist in: (i) sustained support for Priority Social Programs (PSPs), in the context of overall fiscal restrictions; (ii) important advances towards the development o f a more accessible and equitable pension system; (iii) continued expansion in the coverage o f basic health care and in the development o f instruments to articulate national priorities in a more decentralized system; (iv) significant changes in the administration o f human resources in the Education sector, resulting in better assignment o f resources and more transparency; (v) the implementation o f a monitoring and evaluation system o f PSPs with participation o f c iv i l society; and (vi) important changes in the procurement system which promote transparency and efficiency in PSPs.
4. While PSRL IV i s the last stage o f the programmatic loan designed to support reform in the social sectors, other projects are part o f the Bank’s continuing support to the Peruvian government. These include the Decentralization and Competitiveness Programmatic Loan (DECSAL), two sectoral investment projects- the Rural Education Project and Health Reform Project, two technical assistance loans for fiscal decentralization policies and decentralization o f the social sectors, and a new analytical program, RECURSO PERU, which focuses on the social sectors within a decentralization context and aims to provide conceptual support and dialogue between the Bank and central and sub national authorities.
5. As the PSRL program has covered reforms in a wide range o f areas, the World Bank teams working on this program have come from many different sectors, wi th members from different networks bringing their experience and expertise to the team.
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11. THE ECONOMIC AND SOCIAL SETTING A. Political Context
6. After a decade o f the Fujimori regime and a short transitional government, President Toledo was elected to office amidst an economic recession. Beginning i t s term in July 2001, the new government received support from the international community at the Madrid Consultative Group Meeting in October 2001 and signed a two-year Stand-by Agreement with the IMF in February 2002. Though the economy has been stable since then and i s growing, the government’s agenda continues to face political challenges. The government lacks a majority in Congress, and there have been five cabinets in less than three years, and opinion polls indicate that the administration political base has weakened. The political problems have made implementation o f major reforms difficult. However, recent changes in Congress have led to a more collaborative environment that may defuse anti-government sentiment and make Peru more governable.
7. In order to seek support for i t s policy agenda in the last two years o f i t s administration, the government recently put forward a Roadmap (Hoja de Ruta, 2004). This initiative builds on the original National Agreement (‘Acuerdo Nacional’) signed in July 2002, which aims to build consensus between the major political actors, parties, unions and civ i l society. I t also builds on the government’s ongoing goal o f decentralizing the social sectors in order to empower local governments and beneficiaries. The Roadmap comprises o f about 180 new or existing government programs and projects grouped under eight policy areas. The roadmap was perceived as a positive way to lay out short-term priorities, but the public and opposition political parties have largely received the Roadmap with scepticism, most l ikely due to the lack of detail i t contains regarding program implementation. However, i t i s s t i l l too early to predict how effective the Roadmap w i l l be.
B. Macroeconomic Conditions and Outlook
8. Peru’s macroeconomic performance has been positive in the last few years. Following the severe economic slowdown o f 1999-2001, which produced negative per-capita rates, growth recovered in 2002 and has remained steady, with GDP averaging 4.5 percent in 2002-04, higher than the original CAS projection o f 3.7 percent, with strong growth in mining, manufacturing-textiles and food-and construction. The annual inflation rate o f 2.5 percent (end-of period) was among the lowest in the region in 2003 and i s projected to remain low at 3.5 percent in 2004. Guided by the inflation-targeting framework, inflation expectation surveys have consistently forecasted 12-month inflation around the bottom o f the target band, thus contributing to reduced lending rates at the Central Bank and at other domestic banks. Unemployment has showed a moderate declining trend since March 2003. However, unemployment in Lima has not fallen and most employment increases have been concentrated in large firms.’ Finally, international reserves also increased in 2003 by about US$600 mil l ion (equivalent to about 1 percent o f GDP) due to a dynamic export performance and strong private capital--namely foreign direct investment--inflows into sizable mining investment projects, which put moderate pressure on the Nuevo Sol to appreciate.
Data are from the Central Reserve Bank o f Peru and the Ministry of Labor.
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9. The economic program under the Toledo administration has focused on maintaining macroeconomic stability, including moderate fiscal adjustment, with the purpose o f supporting a sustained recovery in economic activity and employment, maintaining low inflation, limiting external vulnerability, and laying the basis for a marked reduction in poverty over the medium term. Sound macroeconomic fundamentals have provided a cushion against external shocks, including global growth weakness and regional financial turmoil. International markets have reacted favorably to Peru's economic stability, and since i t s return to international markets in January 2002, the Government o f Peru has successfully placed seven bond issues at favorable terms.
Figure 1. Economic Activi ty Figure 2. Employment and Unemployment (Employment index, October 1997 = 100)
99 00 01 02 03 I 2002 2003 2004
Figure 3: Inflation Figure 4: Exchange Rate I ' 5 I I ; 4
I 3
i 1 ~2
0
-1
. . . . . . , . . . . . . . . . ., . , , . , . . , ., . ,
I Core Inflabon -2 1
1 2001 2002 2003 2004
7 I 1 O ~ 3.7 ,
10. Based on successful compliance with the 2002-2003 IMF agreement that ended in February 2004, the Government has negotiated a new US$422.8 mi l l ion precautionary IMF Stand-by Agreement covering the period June 2004-August 2006. The new agreement aims to reduce Peru's primary vulnerabilities associated with high debt stock and financial dollarization, lower poverty, and raise employment in the context o f prudent macroeconomic policy and strengthened structural reforms. The agreement projects an average real GDP growth rate of 4.5 percent for 2004-06, average annual inflation around 2.5 percent, and high international reserves. Key fiscal targets under the agreement include gradual combined fiscal deficit reduction from the current 1.7 percent to 1 percent over the final two years o f the agreement.
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11. Peru’s economy has seemingly defied continuous political turmoil. However, strong growth performance and prudent macroeconomic management have had limited impact on employment and poverty levels. Economic growth has averaged 4.4 percent a year for the period 2002-03, while employment grew by a mere 1 percent during the same period and more than half of the population remains below the poverty line. Poverty increased rapidly between 1997 and 1999 and has remained stable since then. Moreover, the accumulated rate o f per capita GDP growth since 1997 has been negative (-0.24 percent). The decline i s even more pronounced when output growth relative to the potential labor force rather than total population i s considered. At the same time, employment gains in leading sectors such as construction, manufacturing, and retail have lagged and have been mostly concentrated in Lima. The continuous political turbulence and stressful social conditions reflect a widespread discontent given that recent growth has not yet overcome losses in per capita income suffered during the 1998-2001 period.
12. Peru’s continued commitment to macroeconomic policy discipline in 2003 and 2004 has resulted in l o w inflation and a stable exchange rate, rapid growth o f exports, high official reserves, a rising trade surplus, a declining current account deficit, and a well capitalized banking system. GDP real growth in 2003 was led by private investment (5.4 percent) and exports (5.9 percent), and to a lesser extent by public investment (5.0 percent), and i s projected to grow at 4.2 percent in 2004 driven by private investment and export demand. Private investment was boosted b y the Camisea pipeline, a natural gas project that was completed in August 2004.
13. Exports grew strongly - aided by the surge in commodity prices - in 2003 at 16.4 percent in dollar terms. They reached US$8.9 bi l l ion and are on track to reach a record US$11 bi l l ion in 2004. As a result, a trade surplus o f US$731 mi l l ion was reached in 2003, compared to US$306 mil l ion in 2002. The 2003 current account deficit narrowed to 1.8 percent o f GDP, from 2.0 percent o f GDP in 2002, and i t i s projected to continue declining to a record l ow 0.6 percent o f GDP. Peru’s external position i s l ikely to continue improving in the next year, though this i s contingent on a favourable external environment.
14. Inflation has been at its lowest level in the last 40 years. Supported by the inflation targeting framework adopted in 2002, inflation remained at 2.5 percent during 2003. Interventions in the foreign exchange rate market b y the Central Bank have helped stabilize the exchange rate against the U.S. dollar. In addition, the Peruvian banking system has been gradually strengthened on the basis o f a steady consolidation since 1998, recent asset quality improvement, and reforms to the financial regulation and supervision framework. Despite al l these positive developments, Peru’s sovereign rating i s s t i l l below investment grade. The sovereign rating i s mostly constrained b y a relatively large public debt (47.7 percent o f GDP) and a political environment that has limited progress in structural reforms.
15. Fiscal policy has been prudent, leading to a steady improvement in public accounts. The combined public sector deficit narrowed from 2.1 percent o f GDP in 2002 to 1.7 percent o f GDP in 2003. Fiscal figures thus far for 2004 suggest that the 1.4 percent o f GDP fiscal deficit target w i l l be met comfortably. Furthermore, the Government intends to reduce the fiscal deficit and established a 1 percent o f GDP target in the 2005 budget that was recently sent to Congress. If this happens, for the first time in Peru’s modern economic history, the fiscal deficit w i l l have fallen for five consecutive years without jeopardizing growth. Despite
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strong spending pressures, a small primary surplus was achieved in 2003 for the first time since 1998, as revenues rose at a faster pace than expenditures. The surplus i s projected to grow even more in 2004, reaching 0.8 percent o f GDP. However, the decline in public investment that started in 2001 has not been reversed. I t reached only 2.9 percent of GDP in 2003, i t s lowest level since the 1980s.
C. Poverty and social indicators
16. After the economic crisis o f the late 1990s, Peru enjoyed a period of sustained and, more recently, fairly strong GDP growth. However, GDP per capita growth during this same period was much more modest and benefited r ich households disproportionately. This was due to the fact that growth was initially concentrated in sectors with high capital-to-labor ratios (biased growth), and when i t later expanded to the rest o f the economy GDP growth failed to generate new jobs or investments (non-inclusive growth) that translated into higher income for poor families.
17. As a result, recent economic growth has not been accompanied b y a decline in poverty. After the increase caused by the 1998/99 economic crisis, the poverty rate remained stable between 2001 and 2003, at around 55 percent, while the extreme poverty rate declined from 24.4 to 21.6 during this same period. This implies that due to population growth, the number of poor increased b y 400,000 people, while the number o f extreme poor fel l b y 550,000 people2.
18. In 2003, the latest year for which data can be found, rural poverty rates in Peru were significantly higher than those in urban areas. In 2003104 the rural poverty rate has almost doubled the rate for urban areas, and the extreme poverty rate in rural areas i s five times higher than in urban areas. More than three-quarters o f Peru’s rural population lives in poverty, and 46 percent lives in extreme poverty. In Metropolitan Lima, 36.5 percent o f the population i s poor, and the rate goes up to 48.5 percent for the remaining urban areas. Extreme poverty for L ima and other rural areas i s much lower, at 1.8 percent and 14 percent respectively. Nevertheless, since approximately 72.2 percent o f the population i s urban, a majority o f the poor l ive in urban areas. The incidence o f poverty varies significantly across the different regions o f the country. Poverty rates on the coast, where near half o f the Peruvian population lives, are much lower than in the sierra (highlands) or the selva (‘jungle). Extreme poverty i s also more severe in these areas, where around 40 percent o f the population consumes less than what i s defined by the extreme poverty line.
Due to improvements i n the ENAHO’s sampling framework in 2000, a consistent poverty series cannot be constructed for 1997-2003. Instead we present two sets o f poverty numbers: one for 1997-2002, where the figures for 2001 and 2002 have been adjusted to make them comparable to those of 1997-2000; and one for 2001-2003. Although the level of poverty varies across series, poverty trends are similar
5
Table 1. Evolution o f Poverty Rates Headcount index
Old sample I~
1997 Poverty
National Metropolitan Lima
Other Urban" Rural
Extreme poverty National
Metropolitan Lima Other Urban"
Rural
42.7 25.4 33.0 66.3
18.2 2.3 7.6
41.5
1998 1999
42.4 47.5 24.1 31.4 34.0 37.3 65.9 71.8
17.4 18.4 2.4 2.7 7.5 6.3
40.0 44.4
2000
48.4 38.9 35.3 70.0
15.0 1.6 6.1 35.6
200 1
49.8 28.3 42.6 76.9
19.5 1.7 10.0 46.3
2002 - - ~
50.0 34.3 39.0 74.3
18.7 3.3 8.2
42.4
200 1 2002 2003"" Poverty
National Metropolitan L ima
Other Urban' Rural
Extreme poverty National
Metropolitan L ima Other Urban*
Rural
54.8 31.9 50.0 78.4
24.4 2.3 15.9 51.3
54.3 34.7 48.0 77.1
23.9 2.8 15.2 50.3
54.7 36.5 48.5 76.0
21.6 1.8 14.0 45.7
Source: INEI, World Bank estimates Notes: (*) Excludes Metropolitan L ima
(**) Data for 2003 i s based on World Bank estimates, using a quarter-based set o f the 2003/04 ENAHO database, to ensure comparability. The figures are somehow different f rom those published by INEI, as they present the annual-based estimates for 2003/2004.
19. Inequality in Peru continues to be relatively high by international standards. Between 1997 and 2002, inequality (measured by the Gini coefficient for per capita consumption) remained almost unchanged, reflecting the weak growth in GDP per capita during the whole period. Inequality within urban areas (other than Lima) i s s t i l l substantially greater than in rural areas, (with Gini coefficients o f 0.34 and 0.30, respectively). L ima i s the most unequal region in the country (0.40) and the rural areas in the Coast and Sierra have the lowest amount o f inequality (0.26).
20. Nonetheless, access to services in Peru has improved considerably. The proportion of households with household water connections rose from 54.8 percent in 1997 to 66.1 percent in 2002. Moreover, the fraction o f households wi th electricity rose from 69.2 percent to 71.8 percent in the same period. Finally, 53.1 percent o f the households were connected to the
6
sewerage system in 2002, up from 45.6 percent in 1997. The poor population benefited most from the expansion in the access to these services.
21. In 2000, immediately before the start o f PSRL, the infant mortality rate in Peru was 33 per thousand. 185 mothers died in every 10,000 births. 25 percent o f children were suffering from malnutrition and only 51.3 percent o f children were at the age-appropriate level in grade 6. As part of i t s medium term program, the government adopted a set o f goals for these indicators, to be achieved by 2006. Infant mortality rate i s expected to decline to 26 per thousand, maternal mortality rate to 160 in 100,000 l ive births, chronic malnutrition rate to 20 percent, and the percentage of children who are at age-appropriate level in grade 6 to 55. While there i s no recent survey data available to assess the advance towards these goals (a National Demographic and Health Survey was carried out in 2004, but i t s results w i l l not be published until early 2005), some indirect indicators show that there may have been some improvements in recent years. The proportion o f poor households with access to nutrition and feeding programs among the poor grew significantly in several regions (in rural areas grew more than 10 percentage points between 2001 and 2003), and the proportion o f births attended b y qualified personnel went from 43 per cent in 2000 to 60 percent in 2003. Finally, estimates for maternal mortality indicate a decline o f nearly 100 points f rom 2000 to 2003.
D. Recent trends in Social Expenditure
22. Since 2001, the poverty reduction strategies o f the Peruvian government have faced the big challenge o f increasing social expenditure and o f bringing budget protection to priority social programs in a context of fiscal retrenchment. Both the National Dialogue Agreement and the Estrategia para la Superacio'n de la Pobreza call for a gradual and sustained increase in social expenditure. The National Dialogue proposes a minimum annual increase of 0.25 percent o f GDP in the national budget to education, until it reaches a benchmark 6 percent o f GDP.3 In a s i m i l a r vein, the Estrategia para la Superacio'n de la Pobreza calls for a 2 percent GDP increase in the overall budget assigned to social expenditure in 2010. Recognizing that these targets are ambitious and subject to budget constraints derived from fiscal sustainability, the Bases also calls for a significant restructuring o f poverty alleviation programs in order to make them more efficient and effective.
23. Supported by successive PSRLs, the Government has implemented a countercyclical social policy successfully. Between 1999 and 2004, whereas the combined fiscal deficit decreased from -3.2 percent o f GDP to -1.4 percent o f GDP and the share o f total expenditure to GDP decreased from 21 percent in 1999 to 18.8 percent in 2004, social expenditure as a percentage o f GDP remained steady, ranging from 6.8 to 6.9 percent during the period (Figure 5). All o f these outcomes reflect both the fiscal retrenchment that characterized successive years o f fiscal adjustment and an active effort b y authorities to offset i t s impact on the social sectors through the implementation o f counter-cyclical social policy.
~
The recently approved General Education Law also states the 6% of GDP target.
7
Figure 5. Fiscal Trends and Social Spending (% of GDP)
25.0
20.0
15.0
10.0
5.0
0.0 1999 2000 2001 2002 2003 2004
National budget fEB3Social Expenditure +Combined Fiscal Balance, RHS
0.0
-0.5
-1 .o -1.5
-2.0
-2.5
-3.0
-3.5
24. The sum o f three key components (“functions”) o f social expenditures in the Peruvian budget--education, health and social assistance--have also been constant, but their internal composition has varied. The global share o f these three functions remained steady at about 6.8-6.9 percent o f GDP between 2000 and 2004 (Table 2). However, i t s composition has suffered modifications: As a percentage o f GDP, education increased from 2.7 percent to 3.1 percent o f GDP, whereas social assistance decreased from 1.1 percent to 0.7 percent o f GDP during this period. For i t s part, the share assigned to the health sector did not change. Thus, overall social expenditure gained little from the cutback in defense spending, which decreased from 2.9 percent to 2.3 percent during this p e r i ~ d . ~
Figure 6. Ratio o f Social Spending to GDP
1 7 0 3.5
I 6.0 3.0
I 5.0 2.5 I 4.0 2.0
1 3.0 1.5
j 2.0 1 .o
1 0.0 0.0
I 1.0 0.5
2000 2001 2002 2003 2004 1 -Total Social Expenditure, LHS +Education, RHS 1 +Health and Water, RHS 1 - - - Defense / Securitv. RHS
+Social Assistance, RHS
The fiscal space obtained from savings in the defense budget rather served to reduce the fiscal deficit and to finance nascent decentralization.
8
Table 2. Social Expenditures as percent o f GDP. 2000-2004
2000 200 1 2002 2003 2004( budget) Education 2.7 2.7 2.9 3.1 3.1 Social Assistance 1.1 1.1 0.8 0.7 0.7 Health and Sanitation (w/o Essalud) 1.6 1.6 1.7 1.6 1.6 Essalud 1.5 1.5 1.5 1.4 1.4 Total Social Expenditures 6.9 6.9 6.9 6.8 6.8
Defense/Security, LHS 2.9 2.5 2.2 2.3 2.3
25. A more important shift in expenditure patterns has taken place in favor o f the six priority social programs (PSPs) protected under PSRLs. The PSPs are those expenditures for basic education, health, and community assistance that are not devoted to salary and pension expenditures but are oriented toward investment and other current expenditures that finance critical inputs, such as textbooks, medicines, and food supplements. All PSPs have been instrumental in implementing a countercyclical social policy effectively. They have more than doubled their share from 0.5 percent o f GDP in 1999 to a budgeted 1.04 percent of GDP in 2004 (Figure 7), and remain steady at such level in the draft 2005 Budget Law. In this way, the Peruvian government has been providing budgetary protection and expanding those expenditures that play a crucial role in reducing the vulnerability o f the poor.
26. The results gained from improved targeting in education and health expenditure w i l l not be realized in the short term, as most reforms require several years to be completely implemented. Relocation of schools and health clinics i s difficult and the funding and building of new facilities takes time. Spending in priority social programs i s progressive. This i s a result o f the Government’s effort to improve targeting in programs such as the Integral Health Insurance (Seguro Integral de Salud-SZS), which guarantees free access to a package o f health services mostly for mothers and children, and that puts emphasis in the poorest departments. In education, a WB financed rural education project i s being implemented, targeting rural areas were poverty i s higher and quality o f education i s lower, i s being implemented. Social assistance programs, such as food-aid programs and rural infrastructure programs are now in the process o f being decentralized to local governments following pro-poor distribution criteria for transfers. These programs have also improved targeting in the past year: expenditures o f food-aid programs in the first quintile districts have gone up from 30% in 2002 to 35% in 2003 and 38% in 2004 budget.
9
Figure 7. Spending in Priority Social Programs (Percent of GDP)
1 40
1.20 I
1 1.00
I
0 80 I
1 0.60
I 1 0.40
0.20 I
1 0.00 1999 2000 2001 2002 2003 2004
0.50
0.40
0.30
0.20
0.10
0.00
0 Total Social, L H S 1 + Pre-Primary Education
+Primary Education
--t Secondary Education
*Individual Health
-H- Collective Health
--t Social and Community Assistance
10
111. THE GOVERNMENT’S MEDIUM TERM STRATEGY
A. The National Agreement
27. In July 2002 the government, representatives o f the major polit ical parties, religious groups and c i v i l society signed a common statement called “Acuerdo Nacional” (National Agreement). The document included a set o f basic goals and policies that wou ld be supported by a l l participants. I t included 29 state policies directed toward accomplishing four objectives: (i) Democracy and State o f Law; (ii) Equity and Social Justice; (iii) Competitiveness; (iv) Efficiency, Transparency and Decentralization. The relevant policies aimed at poverty reduction and the social sectors state that the Government will:
0
0
0
0
Assign an increasing proportion of public expenditures to investments in education and health care, improve their efficiency, and target them towards the poorest;
Favor citizen participation in the identification of needs, the design of solutions, and the management of social programs;
Establish systems for the identification, attention, and promotion of employment for people unable to support themselves;
Encourage institutional development, efficiency, equity, and transparency of the State in resource allocation, especially on programs oriented toward reducing poverty and encouraging participation and supervision by civil society organizations;
Guarantee the exercise of rights and access to justice administration for the population that lives in poverty;
0 Encourage a culture of prevention and control of risks and vulnerabilities, assigning resources for prevention, assistance, and reconstruction.
28. In mid 2003 a 30th state pol icy was approved, “Elimination o f Terrorism and affirmation o f the National Reconciliation” after the publishing o f the f ina l report o f the “Comisidn de la Verdad”. In April 2004, the National Agreement Forum signed the “Political, Economic and
Social Short Term Commitment,” which defines short term actions that are in l ine with the Hoja de Ruta. The topics include reforms in Basic Service Delivery, Education, Health and Public Administration. More recently, in June 2004, a “Social Pact o f Reciprocal Commitments for Education” was prepared by six organizations under the leadership of the National Council o f Education (Consejo Nacional de Educacidn). The main pillars o f this agreement are: (i) mobilization for quality learning; (ii) teacher development strategy; (iii) moralization o f the sector and (iv) education financing, including compliance w i th the annual increase in the education sector budget o f 0.25% o f the GDP.
29. The National Agreement has played a crucial ro le strengthening the acceptance o f reforms and placing some o f the main problems of the country on the public agenda. Wh i le there i s general support for the basic goals and general policies defined in the document and in later revisions, there have been pol i t ical disputes about their implementation. Opposition polit ical parties have criticized the Government for not implementing the policies adequately, but the recent signature o f the Political, Economic and Social Short Te rm Commitment appears to have eased the tensions and revamped confidence in the National Agreement.
11
Figure 8. National Agreement Development October 2002- April 2003
Elaboration o f the matrices were not Briefings o f the National
March 2003 Final versions o f the
matrices o f the 29 State policies. published
approved or -
Agreement on school texts
July 2004 _ x x
Two years o f the National Agreement
\ I
1 I
I
The 29 matrices of the National Agreement are approved and published
i
I
Jume 2004
A National Agreement edition in Quechua i s I I
i\
~ * * _ * a", ~ _ _ I * * " a -
May 2004 April 2004 January 2004
Approval o f the Social Approval o f the Creation o f Pact o f Reciprocal Political, Economic an workgroups Commitments for Social Short Term State reform Education Commitment * Investment and
Employment
May 2003
Unidad Nacional, one o f the strongest opposition parties, retires from the National Agreement Forum
June 2003
The 30th State policy i s approved
January 2004
Technical Secretary o f the National Agreement
APP
B. The Strategy for Poverty Reduction
30. The "Bases para la Estrategia de Superacio'n de la Pobreza y Oportunidades Econdmicas para 10s Pobres - ESPOEP", which were approved in January 2003, set the framework for government actions directed towards sustained poverty reduction. The ESPOEP works on three pillars: (i) Dignity, (ii) Equity and (iii) Institutionality and ethics. The in i t ia l priorities set b y the ESPOEP are:
0
0
0
0
31. On February 2004, the PCM published a Supreme Decree to strengthen the social programs and projects and the implementation of the Social and Overcoming Poverty Pol icy (Politica Social y de Lucha contra la Pobreza), strengthening the impetus to prioritise
Guarantee standards or minimum essential levels in basic social services delivery (health,
Reassign resources towards the two lower income quintiles, located in rural and urban-
Integrate protection of human capital, giving priority to children and pregnant mothers. Encourage economic opportunities, promoting decentralization and local potentialities.
education and hood securityhourishment) which include the poorest groups.
marginalized areas.
12
programs and coordinate and articulate actions to improve the efficiency of social public expenditure. I t also announced the creation o f a Multi-sectoral Social Technical Committee in charge o f the coordinating with public institutions on the execution o f the Social Policy, the consistency o f Strategic and Operative Plans, and the reassignment o f priorities on the social agenda. The Food Security Committee, the Overcoming poverty and Economic Opportunities Committee, and the Rural Development Multi-sectoral Commission were merged and their functions were assumed by the new Committee, except for the Food Security Committee whose functions were assumed by the Inter-sectoral Commission for Social Affaires (CIAS).
32. However, the main advancement made in this area was the elaboration o f the Plan Nacional para la Superacidn de la Pobreza 2004-2006 (National Plan for Poverty Overcoming - hereafter PNSP). This plan includes (i) a General Plan; (ii) Sectoral Plans for Poverty Overcoming; (iii) Thematic Strategies and Plans; (iv) Regional and Local Plans and (v) a National Agenda for Overcoming Poverty.
33. This plan considers the problems associated with the current social expenditure programs and policies and proposes a program to improve the quality and efficiency of social public expenditure through five mechanisms: (i) priorization, (ii) reassignment to target population, (iii) reorientation, (iv) accountability; and (v) results-based management.
Figure 9. National Plan for Povertv Overcoming: 2004-2006
&as
Dt?Jeil:l~l>lell! Of numan rapabilities and respect of fiit:dsmeiitai r!ghts
Promotion o! ecomonic oportiiiiities atid mpsbiities
GQAS
Protect hiiir:nr: and sncial capital of social grotips at risk slid soc!ai vuliierahiiiiy
incrcagi the famiiy and commiinily assests $!id improve income a i d periiiaiwl! einpioyment
STRnTEGlC PRlORiTlES
Proteclion of ail clMwi iiixler nge of 2 from any demagtl !hat may harm ?hoir ueveiopiiieiit and potential
Pievewve !mainter iarice and yeiieration Of i ~ l i ~ * ~ t r ~ l : l t l ~ * and dPveiopmon1 of social productive inititalives
I *Fsrniiy and b
i community assests. Iiorising. road ti?fras:;iicture. ,,,j toieGonittnicatioiis i and eieclrilioation 1
\fi .Technicai ~ capacitation i .Rutai development 1 I .income iiiiprovemeiit I
1 I I
Prolezlim lor tiiosi
34. The PNSP also address the development o f a monitoring and evaluation system. This system consists o f three modules: (i) the policies and programs module, with a main set o f 20 indicators settled b y the Estrategia and second level indictors that w i l l be defined b y the sectoral plans; (ii) the investment module, which already operates as an instrument to follow up projects and the construction o f infrastructure; and (iii) the budget execution module, which monitors compliance with budget goals.
13
35. As part o f the poverty reduction strategy, the GOP identified twenty goals to be achieved by 2006. Eight of these goals are directly related to social program reforms supported by PSRL. While the government defined these medium term indicators, no monitoring process was set up, so assessing the progress Peru has made in these exact indicators i s not possible. However, other indicators presented in the Program Document do suggest that the country i s performing well. The eight relevant medium term indicators are presented in table 3.
Table 3. Medium term goals set by Peru’s Government as part of the poverty reduction strategy
Sector Goal Poverty Proportion of population below the poverty line reduced from 54.8%
in 2001 to 49% in 2006 Extreme poverty rate reduced from 24.4% in 2001 to 20% in 2006 Proportion of youth completing primary and secondary education in 11 Year increased form 20.9% in 2000 to 25% in 2006
Education
Proportion of youth at age appropriate grade level in sixth grade raised from 51.3% in 2000 to 55% in 2006 Proportion of students in 6” grade of primary education who achieve satisfactory performance in the standard ability test in 2006 improves as comDared to the 2001.
Health Proportion o f births attended by health professionals raised from 57.9% in 2000 to 61% in 2006 Infant mortality rate lowered from 33 per thousand in 2000 to 26 per thousand in 2006 Chronic malnutrition rate among children below age 5 reduced from 25 Dercent in 2000 to 20 Dercent in 2006
C. The Decentralization Process
36. As part o f the effort to modernize the State and increase transparency, efficiency and participation, in 200 1 the Toledo government launched a gradual decentralization process. As this process began several years later than i t had in other countries in the region, Peru was able to build on i t s experience and define a strategy that should result in a successful transfer o f programs and resources to regional and local authorities. The process has three basic principles that guide al l actions. First, decentralization should be fiscally neutral, implying that increasing expenditures at the regional and local level should be compensated b y reductions in the central government budget. Second, the process must be gradual, to guarantee that there i s continuity in service provision and that regional and local governments are ready to receive the programs, functions, and resources to be transferred to them. Finally, decentralization should enhance economic competitiveness b y promoting private sector development at the regional and local levels.
37. The Decentralization Framework Law was approved in July 2002, defining the basic rules o f the process, and the process has advanced with new Laws, regulations, and the actual transfer o f some programs. The Bank has been actively supporting the decentralization process through sustained pol icy dialogue and, beginning in 2003, through a
14
programmatic loan specifically designed for this (Decentralization and Competitiveness Programmatic Loan - DECSAL). In addition, two Technical Assistance Loans for decentralization w i l l accompany and follow up on the PSRL (which only address some parts o f the initial transition stage o f decentralization in the social sectors) In particular, the T A L “Accountability for Decentralization” w i l l address key decentralization issues in the social sectors in more detail as they arise over the next years, particularly regarding the decentralization o f social programs. The DECSAL and the TALs w i l l thus be the key instruments to support the decentralization process, while the PSRL addresses decentralization only to the extent that i s has become relevant in the specific sectors at this time.
38. In the Social Sectors, some programs already have been decentralized (in the area of social protection) while others are expected to be transferred a later stage, when necessary legislation i s approved and management systems are improved. The PSRL program was not designed to support decentralization as a goal in itself, but it has adapted to and accompanied the process. As Peru moved towards decentralization, the operation was adapted to respond to changing government requests. Triggers and benchmarks were revised to ensure that access and quality o f service delivery in social protection, health, and education are protected during the transfers, especially in the most risky init ial transition period of decentralization, and that opportunities to improve them were exploited. The PSRL continues to focus on improving social sector services and outcomes, particularly enhancing service delivery in this changing governance context. Thus, while this operation i s not designed to support the decentralization process, several actions proposed in the policy matrices o f this and previous loans have a direct link to it.
15
IV. THE SOCIAL REFORM PROGRAM
The Social Sectors in Peru and the PSRL: The rationale of the operation
39. After the Fujimori government fe l l in 2000, the new administration found i tse l f in a critical situation where social services provision was insufficient and inefficient, wrought with access problems and a lack of transparency or monitoring. As the transitional government began i t s term, efforts in the social sectors were focused on guaranteeing continuity o f whatever programs existed and beginning a redesign process to improve the overall program. In that context, the Bank provided support though the Programmatic Social Reform Loan, approved in April 2001, with a focus on social expenditure, transparency, and rationalization.
40. Since PSRL I was approved, there have been many changes in Peru. While the macroeconomic front has stabilized and reached a sustained growth path, the political climate has been more volatile, with President Toledo losing popular support rapidly. These changes have implied different approaches for policy implementation in the social sectors. The backbone o f the program has maintained the same goals, namely, looking to (i) improve the anti-poverty focus o f public expenditures, (ii) improve access o f the poor to quality health and education services, and (iii) improve the transparency o f social programs, empowering their beneficiaries in the design and implementation o f programs.
41. Although changes in authorities, political power balance, and economic and social conditions led to necessary adjustments in the overall strategy, the actions supported by each PSRL have consistently aimed at advancing these three goals. To achieve this, the program has supported the adoption o f policies and actions in five areas: (i) social expenditures management, (ii) redesign, targeting, and administration o f social protection programs, (iii) access to health services, (iv) access and efficiency in education, and (v) transparency and accountability in the social sectors:
(i) The Shift to Social Expenditures and Countercyclical Social Policy:
a. Since PSRL I, the program has promoted the adoption o f a medium term strategy in the assignment o f resources to the social sectors. With Bank support, the Government began to consider social policy as part o f the budget preparation process, making the procedure to assign resources to functions and programs more transparent and efficient. In 2001 the GOP prepared a Statement of Social Development Policy, a first step in defining a medium term view. In 2004, this work has evolved and resulted in the preparation o f a Macro Social Framework (MSF), as part of the Multiannual Macroeconomic Framework 2005-07. The M S F defines priorities and criteria for spending in the social sectors. Similarly, the 2005 draft budget law also publishes, for the first time, social policy goals and benchmarks for key monitoring indicators.
b. Under PSRL, budget allocations to priority social programs (PSPs) have been protected in the context o f fiscal retrenchment, initially to implement countercyclical social policy, and lately, to sustain pro-poor spending. Aiming to preserve the safety nets and increase the access o f the poor to basic social services, the Bank has actively promoted budgetary protection o f six
16
PSPs: initial, primary, and secondary education, individual and collective health, and social assistance. While most agreed spending targets have been achieved, sometimes with marginal under compliance, the continuous support in this area has had a significant effect in raising and stabilizing key social expenditures during the four-year period. From 1999 to 2003 expenditures on PSPs have doubled from 0.5% to 1% o f GDP.
(ii) Redesign, Targeting and Administration o f Social Protection programs:
a. PSRL I, 11, and I11 supported the design and implementation o f an emergency workfare program, “A Trabajar”, which played an important role in providing a safety net to poorer groups affected b y the economic crisis. A Trabajar became a critical tool to compensate the effects o f the economic crisis, acting as a countercyclical program. During the two years of maximum coverage (2002 and 2003) the program generated approximately 70,000 six-month jobs in urban areas and 125,000 four-month jobs in rural areas. A Trabajar began to reduce the number o f projects in 2004, as the economic situation improved, to approximately 40,000 beneficiaries.
b. Food programs required deep revision to improve targeting and transparency. The Bank supported the development and use o f poverty maps to improve targeting and the redesign o f programs. Due to political constraints, efforts to consolidate nutrition and food programs had limited success, but increased transparency and adoption o f explicit rules on management and procurement (as discussed in point e.iv) have resulted in a more efficient overall program.
c. Two critical areas o f the pension system were revised with support from PSRL. First, the c iv i l servants scheme, a highly subsidized and unequal program, was reformed, reducing fiscal and equity problems. Also, the institutional design of the sector was improved, defining responsibilities for strategy and policy making decisions and adopting the goal of coverage expansion as an overall objective o f the system.
(iii) Access to health services:
a. With support from PSRL, Peru has reformed i t s basic model o f health management, provision, and financing. The increasing role of the regional health departments (“DISAS”) improved the accountability and transparency o f the system, as DISAS are signing results agreements with the Ministry o f Health and publishing monitoring indicators. B y supporting the expansion o f community managed health centers (“CLAS”), the program empowered local communities and beneficiaries. Finally the creation o f a basic health insurance scheme (“SIS”) resulted in a large scale increase in the provision o f health services for mothers and children. B y the end of 2003-2004, this program covered nearly 2.5 mi l l ion children and 725,000 pregnant women, indicating that coverage i s almost universal. This i s an impressive result for a program that i s just a few years old.
(iv) Access and efficiency in education:
a. The PSRL program on education supported reforms aimed at improving efficiency, equity and quality o f education in Peru by: (a) increasing
17
financing o f the sector while ensuring improved efficiency (total budget for education went from 2.7% of GDP to 3.1% from 2000 to 2004); and (b) reforming the teaching career in order to improve the quality of all teachers, particularly those working in rural areas (by developing better control and an incentives scheme).
b. While political changes and other restrictions made advances in this area especially difficult, the education sector has made some important achievements, some of which would not have occurred in the absence o f the PSRL Program. One o f the most relevant achievements i s the development and implementation o f the Human Resources system that w i l l make i t feasible to plan and develop sector policies. In addition, and linked to the human resources management system, MINED has developed an incentives system focusing on hardship incentives for rural teachers and universal merit incentives. Finally, transparency in the sector was significantly increased with PSRL support. Student performance results are now published regularly, and participatory school councils are being created nationwide to monitor school performance.
(v) Transparency and Accountability in the social sectors:
a. The program was initiated during the post-Fujimori transition and supported the strategy o f the incoming Government to enhance a weakened governance context characterized b y a lack of government transparency, increased levels o f corruption, poor accountability, and little opportunity for citizen participation. Later on, when the GOP decided to embark in a process of decentralization, the program supported additional measures to improve the transparency and accountability o f this process, particularly in what relates to the social programs.
b. With support from the PSRL program, the GOP created a legal framework and information portal to guarantee citizens access to information, improved the transparency and efficiency in procurement procedures, and strengthened the government’s capacity for fighting corruption. As the decentralization process expanded, PSRL promoted the adoption o f a legal framework that could guarantee a manageable transition. The new legal framework strongly promotes citizen participation in public policy and budgeting at the municipal level, helping to promote a culture o f participation that has resulted in substantial consultations between the MEF and c iv i l society on draft laws and other initiatives, such as in participatory budgeting.
c. PSRL strongly endorsed the development o f “Ventana Amigable”, a web based public information system which i s providing timely, trustful and disaggregate information that enables c iv i l society organizations and citizens to track budgets and public expenditures, as well as the institutionalization o f all participatory processes, by incorporating them into a results-based monitoring and evaluation (M&E) system. The M&E system, coordinated b y the MEF, has institutionalized links to existing monitoring systems in the health, education, and social protection sectors, thus providing a unique opportunity to integrate tracking o f national social policy and decision- making. As decentralization proceeds in the social protection programs, new
18
tools for M&E are becoming available (Management Agreements and Accreditation Regulations) including incentives and links to results for monitoring and participation. These tools w i l l help government track the progress in reaching the objectives o f the PSPs, within a decentralized context, while contributing to transparency, quality, and efficiency o f social expenditures, and giving citizens and service users a voice in decision- making.
d. PSRL supported important changes in procurement procedures for the social sectors that resulted in increasing transparency, economy, and efficiency. An e-government was introduced (with the creation o f a web based procurement portal for more than 600 public agencies) and the supervision and control rules in public procurement were unified.
42. Table 4 gives a history o f key actions completed within each stage o f the PSRL program, placing the key actions o f PSRL N within a historical trajectory and presenting some indicators of progress (quantitative and qualitative) in the different areas.
43. A more detailed discussion of each area o f the program i s presented next including a brief description o f the challenges for policy design and implementation identified at the early stages o f the program, the strategy designed by the Government to develop solutions, advances obtained during the implementation of PSRL I, 11, and 111, the rationale and goals o f actions included in PSRL N, and finally, a comment about the perspectives and sustainability o f reforms in each sector.
19
Table 4. PSRL Key Actions over the four-year period
Issue PSRL I PSRL I1 PSRL I11 PSRL I V Progress Indicators
1. Social Expenditures Management Public Expenditures MEF issued a Letter need to be o f Social appropriately Development Policy allocated to Peru's setting strategic social priorities spending increases for
the social sectors and decreases for defense and security.
Congress approved MEF executed at least MEF published the From total lack of the 2002 global 95% of the global Macro Social planning, Social budget floor budget for the three Framework as part of Policy i s now part o f allocations to the priority social the Multi-annual Multi-annual three priority social functions in 2002. Macroeconomic Framework sectors-Education, Framework. Health, and Social Assistance)-equal or greater than the 2001 executed budget.
Fiscal retrenchment The Intersectoral The total executed The global executed The executed budget Expenditures in and pro-cyclical spending pattem risk do not ensuringe minimum financing requirements of the PSPs in support o f the GOP Social Protection Strategy
Social Commission approved the l is t o f Priority Social Programs and their allocations for 2001, no lower in real terms than aggregate 2000 budget.
budget allocations for the PSPs were maintained at agreed- upon levels for 2001, and the total approved budget for PSPs i n 2002 remains protected, no lower in real terms than the aggregate 2001 budget.
budget for the six selected PSPs was maintained at i t s 2002 agreed budget level and budget reallocations from under-performing to over-performing PSPs were not above 50 percent o f their minimum agreed budget levels, and the total approved budget for PSPs and at least four individual allocations for PSPs in 2003 remain protected, no lower in real terms than the
hudeet aggregate 2002
for the six selected PSPs in 2004, for the months prior to the appraisal, reached 87% of i t s global 2003 agreed target, with individual reallocations not above 30% of their minimum agreed budget levels (target measured according to average seasonality o f 2001, 2002 and 2003.
Priority Social Programs went from 0.54% of GDP in 1999 to 1.04% in 2004
_ _ _ 2. Redesign, Targeting and Administration of Social Protection Programs Lack of counter- A multi-sectoral Task Executive launched In 2002, the A A targeted, cyclical social Force reviewed the the implementation of Trubujur program was countercyclical protection program safety net, including the emergency implemented workfare program was such as an the Vaso de Leche, workfare program "A successfully, with at created,which offered employment Comedores Escolares Trabajar", with at least 50% of i t s protection during the (workfare) program and PRONAA least 42% o f i t s spending directed crisis and was scaled
programs. budget focused on toward the 1" quintile down as the economy first quintile urban urban households and recovered districts, and 37% of 44% toward the 1" rural districts. quintile rural
Food programs are MEF signed an Executive merged An Intergovemmental Executive issued Transfers o f food going to be agreement with PRONAA and Transfer Law was norms for the transfer programs funds to decentralized but they program directors on MINSA school submitted to Congress b f food programs to municipalities are do not have clear a targeting strategy breakfast and pre- establishing the rules municipalities, targeted, and objectives, which includes a new school feeding for decentralization of including the use of a compliance with rules monitoring and poverty map and programs. the food programs and pro-poor formula, i s enforced evaluation i s weak updated targeting the 2004 budget for performance and targeting and tools in several key food-aid programs i s agreements, and transparency needs social programs. distributed to monitoring further strengthening. municipalities arrangements.
households.
following a pro-poor formula.
High cost, publicly- MEF set to develop MEF published a A strategy o f old age subsidized pension an old age income pension strategy income security was programs that benefit protection strategy. document and i t s adopted and i s being a privileged minority corresponding action implemented, reducing of the population; plan i s under inequities and majority population implementation. increasing efficiency
20
Issue PSRL I PSRL I1 PSRL 111 PSRL IV Progress Indicators
social insurance coverage: distortions limit expansion of coverage under the private AFP system. 3. Access to Health Programs Desoite exoanded Executive unified a l l Executive amroved SIS surpassed the SIS continued to Health coveraw of .. provision of health MINSA mother and new instruments infant and matemal services. a significant child health care necessary to raise coverage goals set in proportion of the poor programs, creating SIS-MI coverage PSRL 11, reaching population remains the Seguro Integral de 544.876 pregnant without access to Salud-Matemo women and 2,013.923 basic health services. Infantil (SIS-MI) in kids under age 5.
13 health departments, and increasing the proportion of public primary clinics run by communities (CLAS) from 15% to 20%.
- increase i t s coverage, children and pregnant reaching at least 2.4 woman became almost million children and universal, thanks to 560,000 women. and implementation of SIS refocusing on primary and secondary care. Percentage of births
attended by qualified personnel went from 42.5% in 2000 to almost 60% in 2003
Number of matemal deaths registered by MINSA declined bv 15% in 2000-2003
4. Access and Efficiency in Education Inefficient human Suureme Decree Executive amroved MED designed the MED exoanded Nearlv 90% o f resources system due to lack of controls i n amounts paid through the payroll system or in the linkage between the position level and the individual’s salary
. I
instructing that the and implements the payroll o f teachers Ley de Nonibramrenro wi l l be processed de Muesfros, hiring under one system in 22,000 teachers under five regions. the Law, which
required teacher evaluation at the entry level.
1
education sector’s Human Rsources System. to include the linkage between payroll and positions. as well as the
hardship and merit incentives
development of
implementation o f the Human Resources System for Education nationwide, including payroll. linkage to positions, and automated direct payment. Hardship and merit incentives in the piloting phase.
teachers under more transparent Human Resources System
Children in appropriate grade in primary education went from 52% in 2000 to 54% in 2002; in secondary education went from 22.7% to 26.9%
5. Transparency and Accountability in the Social Sectors Limited transparency MEF signed an MEF made budget Congress approved a MEF designed a A M&E system has and public Agreement with available for Law of Transparency Monitoring and been designed and accountability. program directors to implementation of and Access to public Evaluation system, isbeing implemented, Inconsistent ensure full ENAHO I V at Information and its which i s participatory, with participation from application of transparency of public departmental level, regulations; SIAF transparent, results- civi l society and local program norms. over- expenditures; set an and included a became available oriented, and focused communities charging for public information campaign module of public through an intemet on the implementation services, lack of and complaint system perceptions regarding portal “Consulfa of the PSPs, and in public awareness of i n the Office of the transparency, Arnigable ”, and a pilot the context o f the citizens’ rights, and Public Ombudsman practices and system for people’s decentralization responsibilities of for social programs. attitudes. assessment of process. public servants. and organized a Task government services
Force for the design and implementation of social control mechanism to increase citizen oversight.
was launched.
Improving MEF issued a policy CGR and MEF and MLVDES More strict, transparency and guide for the CONSUCODE issued issued regulations for transparent efficiency in procure- implementation of an oversight and the purchase o f food procurement rules are ment procedures, and electronic supervision for aid decentralized being used. strengthening the government regulations concerning programs. govemment’s procurement system. public procurement for capacity for fighting mandatory use of all corruption. govemment agencies.
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A. Improving the anti-poverty focus of public expenditures.
44. The Government of Peru (GOP) i s improving the anti-poverty focus of public expenditures to reinforce targeting and increase effectiveness. To this end, four groups o f activities (described below) are being implemented: (i) formulation and initial implementation o f a poverty reduction strategy, (ii) reorientation o f public expenditures towards social programs that benefit the poor, (iii) improvements in targeting social expenditures by reforming pension systems, establishing a well-targeted anti-cyclical workfare program, and improving targeting o f infrastructure rural programs, and (iv) reform o f food distribution programs through integration, improved targeting, and focusing o f results.
A. 1. Poverty Reduction Strategy
45. The lack o f a strategy has weakened the impact o f Peru‘s anti-poverty efforts during the last decade. Absence o f clear objectives, coexistence and overlapping social programs in different sectors, a lack o f coordination between sectors and programs, inadequate designs, and insufficient accountability and monitoring and evaluation systems were some o f the main problems in this area. These problems were reinforced by a clientelistic and opaque use o f the anti-poverty programs. This has led to inefficiencies, increased administrative costs, poor targeting o f beneficiaries, and the presence o f programs that do not contribute to reducing poverty or increasing human capital.
46. During the transition government, and under PRSL1, a “Social Letter”(Carta Social) was approved b y the Mesa de Concertacidn de Lucha contra la Pobreza. The Social Letter established broad guidelines for poverty reduction via social and economic policy adopted b y the State, c iv i l society, the Catholic Church, and international cooperation agencies. During the preparation of PSRL 11, in December 2001, President Toledo issued a Social Policy Letter stating the “pillars” that guide the government’s social policy (Dignity, equity and institutionality). In July 2002, the National Agreement (Acuerdo National) was signed by representatives o f political, religious, c iv i l society and Government groups, approving 29 State policies, including one for poverty reduction. The poverty reduction strategy was further developed during the preparation o f PSRL I11 with the publication o f the Bases para la Reduccidn de la Pobreza. The Buses are described in section 1II.B.
47.Under PSRL N, the anti-poverty strategy wil l become part o f the Governments’ mainstream planning and budgeting process through the adoption o f a macro-social multi- annual framework within the macroeconomic multi-annual framework. This policy w i l l have several advantages: (i) the macroeconomic multi-annual framework i s institutionalized and has to be approved each year by the council o f ministers, (ii) it w i l l set the base for multi- annual budgeting in the social sectors and could provide clearer protection for priority programs, (iii) it w i l l establish clearer objectives, goals, and policies for social policy in a medium-term strategy, and (iv) i t w i l l help the institutionalization o f social programs within the decentralization process.
A.2. Shifting to Pro-Poor Expenditure
48. Budgetary protection under PSRLs has played a critical role in preserving, augmenting, and improving the quality o f pro-poor social expenditure. Between 1999 and 2004, a set o f Priority Social Programs (PSPs) has doubled the budget execution assigned to them (Table
22
5). Execution has also shifted from low performing education programs to high performing health and social assistance programs that are devoted to extreme poverty and w i l l be executed by local governments. Deviations between planned and executed priority expenditures have also decreased over time, except for secondary education and collective health. This shows that the budget i s increasingly being used as a guide for allocations, and budgetary protection i s thus playing a critical role in planning and execution.
Activities supported by PSRL I, II and III
49. The rationale for budgetary protection has evolved. Whereas i t was previously seen as playing solely a countercyclical role under PSRL I, in PSRL I V i t i s seen as a key financing tool o f the Peruvian poverty reduction strategy. The Government initiated a social protection policy in the 2001 budget. Initially, i t selected 11 budget programs distributed among eight sectors (budgetary functions): education and culture, health, transport, justice, social and community assistance, sanitation, agriculture and energy. Initially, budgetary protection consisted in assigning a minimum envelope for the 11 programs equivalent to US$1 bi l l ion (NW3.5 billion), 9.9 percent o f the national budget or 1.9 percent o f GDP. I t focused on what i s a priori-defined as quality pro-poor social spending: non-salary current (non-wage, benefits or pension) and capital outlays. Yet, the following year, it became apparent that both the number o f programs and the amount o f the budget protected were excessive. Furthermore, what began in Peru as a tool for preserving a minimum level o f quality social investment through fiscal adjustment soon became an instrument for guaranteeing the financing required for the achievement o f Peru’s poverty reduction goals in the medium- term.
50. Thus, under PSRL 11, the Government not only complied with the execution o f the 2001 budget for the protected programs, but also started to fine-tune i t s policy. Spending in these programs surpassed the target--reaching US$ 1 . 1 billion--despite recessionary trends, reflecting a desired anti-cyclical behavior that i s a-typical in social expenditure. However, upon review of the experience o f 2001, four issues were identified: (i) budget protection at the level o f aggregate sector expenditure (functions) was also needed to guarantee the “floor” spending needed to make progress towards medium-term development goals; (ii) the broad coverage o f protected programs and large amount assigned to them augmented budget rigidity; (iii) a few individual programs exhibited significant deviations between planned and executed expenditures, with all education programs showing a significant under-execution, and social and community assistance indicating over-execution; and (iv) critical monitoring and evaluation o f protected spending was missing. Consequently, the protection policy was refined. Budgetary protection at the level o f aggregate sector expenditure was also introduced. Protection was limited to 6 selected programs in 3 sectors (down from 11 programs in 8 sectors), which reduced budget rigidity. The global allocation to the reduced set o f PSPs became equivalent to 1.2% o f GDP, slightly up from 1.1% o f GDP in 2001 (Table 5). To deal with deviations between planned and executed expenditure, individual targets for each o f the programs were again defined for 2002, but with flexible contingency clauses in the event of a budgetary resources shortfall and to allow up to 30 percent spending reallocations from under executing to over executing programs. In addition, there was an agreement to develop pilots for user-friendly monitoring and evaluation tools for PSPs, supported by the SIAF, and in some cases, performance management contracts for specific
23
projects (sub-categories o f the PSPs) l ike A Trubujur or the Mother and Child Health Insurance (SIS-MI).
51. Under PSRL 111, the Government continued to perform wel l in the implementation o f budgetary protection. The global executed expenditure for the three priority social sectors- education, health and social assistance-and six programs exceeded their aggregate targets (adjusted in real terms) in 2002. In addition, the original individual execution targets, which allowed inter-program transfers o f up to 50 percent o f their original allocations for the three education PSPs--pre-primary education, primary education and secondary education, were also met. Authorities also approved four individual 2003 budget allocations to PSPs that were above their executed 2002 level, adjusted in real terms. T o ban further diversion o f funds from the PSPs in education, the 2004 Budget Law (art. 8) introduced an explicit prohibition against this practice. Indeed, in 2001 and 2002, failure to comply wi th education priority expenditures (mainly textbooks and internet connections in schools) was due to budgetary malpractices wherein reallocation o f funds to payroll increases or the hiring o f new teachers were allowed. Finally, to improve the execution capacity, the Government and the Bank jointly prepared a Technical Assistance Loan (TAL) for increased accountability o f the Social Sectors. Approved in July 2004, the Loan aims to develop a monitoring and evaluation system in the social sectors, with an initial focus on close monitoring o f the PSPs.
Table 5. Peru: Priority Social Programs Non-Salary Current and Capital Ordinary Budget (Mlns Soles)
Program
Pre-Primary Education Primary Education Secondary Education
Collective Healtl
Individual Healtl Social & Comm. Assistance3
TOTAL
% National Budget % o f GDP
Notes: (" Targets in 2
- 1999
xecuted
74
141
84
117
29 1
238
- -
94s
3.28%
0.54% -2002 W€ -
- 2000
xecuted
74
154
99
155
3 57
341
1,180
3.54%
0.63% 100% of
- -
-
2001
arget Executed
132 66
467 151
467 107
180 152
471 660
331 682
2,048 1,818
5.73% 5.09%
1.09% 0.97% dget, in 2003-200,
2002
'irget Executed
230 124
229 142
212 123
180 150
835 735
635 1,089
2,321 2,363
6.49% 6.61%
1.17% 1.19% 95% of approved bi
2003
arget' Executed
107 128
182 154
230 146
173 105
754 743
773 898
2,219 2,114
5.35% 5.24%
1.05% 1.03% et
2004
arget' Executed2 ~~
55 73
186 166
155 146
84 85
768 914
1029 957
2,211 2,341
5.16% 5.31%
1.01% 1.04%
Projected, based on preliminary data for January- August 2004. (3) Includes food supplementary programs transferred from Collective Health. Vas0 de Leche, Comedores Populures and FIDE are
(4) PSRL I1 reduced the number of PSPs from eleven to six in 2002. The 2001 ratio excludes the amount allocated to the other five. excluded. A Trubajur i s included.PSRL I1 reduced the number of PSPs to six in 2002.
Includes food supplementary programs transferred from Collective Health. Vuso de Leche, Comedores Populares and FIDE are excluded. A Trabajur i s included.
52. Decentralization, however, brought new challenges to budgetary protection policy. While in theory decentralization can help increase the efficiency o f social expenditures, make social programs more responsive and more responsible to local demands, and enhance
24
the transparency and accountability for more effective service delivery, at least in i t s initial stages, decentralization faces serious challenges. Aside from the diversion of funds and low execution capacity, five new issues related to decentralization have arisen since 2003: (i) the extent to which the six social programs w i l l continue to be implemented by sub national governments has been opened for review; (ii) significant uncertainty has arrisen from the timing o f the transfer o f education and health sectors to regional and local governments, since the actual date for the transfer has not been set; (iii) pressure for budget under-funding to PSPs has intensified from concurrent needs to finance additional spending required by the installation o f sub national governments (still in a context o f fiscal retrenchment). This has led to a mutual commitment between the Government and the Bank: whereas 2003 global execution was reduced to at least 85 percent for 2003, the room for budget reallocations from under-performing to over-perfonning programs decreased from 50 percent to 30 percent; (iv) the social community and assistance program was redefined so as to let the Government merge social programs dealing with extreme poverty -food supplementary, social and economic infrastructure investment and family assistance-under MIMDES, thus gradually decentralizing their execution at the municipal level; and (v) given newly decentralized programs, the lack o f a monitoring and evaluation system at the local level has become critical. The set o f SIAF supported pilot monitoring indicators in three projects, whose resources are part o f the PSP envelope: the SIS-MI, the food supplementary program (PRONAA), and the urban emergency employment creation program (A Trabujar) has become insufficient. The need to speed-up the development o f a SIAF for local governments (now known as SIAF-GL) with the support o f the TAL has also become apparent.
Triggers, Benchmarks and Monitoring Indicators under PSRL IV
53. In response to the need to preserve national policy priorities through decentralized programs, a Marco Social Multianual (MSM) was presented as a chapter o f the Marco Macroeconomico Multianual (MMM). The MMM provides an annual consensus on national macro/fiscal priorities. I t i s approved b y the Cabinet every year, subject to quarterly reviews, and published by the media. Introduction o f a social chapter reflects a medium-term commitment by the Cabinet to the social priorities o f the national agenda, a commitment that should be ratified through participatory budgeting processes with sub national authorities.
54. I t was agreed that new legislation to preserve priority social spending through conditioned (programhticas) transfers of the education and health sectors would be submitted to Congress, but such decisions have not yet been implemented and w i l l likely not be in the future. Authorities have indicated that this i s due to the Executive’s decision to delay decentralization o f the education and health sectors unti l 2006, and to the fact that some aspects o f such a bill can be retained through the bill recently approved on the accreditation o f sub national governments (and i t s regulations under preparation).
55. The global execution benchmark for PSPs in 2003 was missed b y a marginal amount (less than 2 percent), thus partially reflecting the under-funding associated with the fiscal costs o f decentralization. However, to offset this and comply wi th minimum floor spending, the Government approved two supplementary budget allocations, in June and October 2004. These allocations have allowed i t to maintain the 2004 global allocation and reach no less than three individual budget allocations for the PSPs. In a s imi lar vein, the government has submitted a draft 2005 budget law containing global allocation levels and four individual
25
allocations greater than their 2004 levels, adjusted in real terms. On the other hand, the government overcomplied with de-seasonalized minimum levels o f execution on the PSPs agreed for 2004, during the months prior to appraisal of this loan (January-August 2004). The level reached (87%) was above the target o f 85 percent o f the agreed global amount, and preserved individual reallocations between PSPs below 30 percent o f their targeted amount. Reallocations, based on January-August 2004 execution were- initial education (12%); primary education (-24%); secondary education (-20%); individual health (1 %); collective health (-14%); and social assistance (-21%).
56. In response to the uncertainty introduced by MIMDES over the future o f social programs supported b y the TAL, the Government has continued to complete the regulatory framework with the approval of an Accreditation Law, improving targeting, issuing complementary norms, and developing local capacity so as to prevent deterioration o f service provision in food-aid and infrastructure programs being gradually decentralized (see Section on Food Programs below).
57. Based on the successful pilot experiences and supported b y the TAL, the SIAF-GL i s also being introduced to 80 percent o f local governments. In the future, this w i l l contribute to improving PSPs focus, efficiency, transparency and proper monitoring mechanisms o f decentralized programs. SIAF-GL i s being complemented by SIME (Sistema de Informaci6n de Monitoreo y Evaluacih), a system specially designed to track and control transfers to local governments by MIMDES linked to SIAF and aimed at monitoring not only physical and financial benchmarks agreed for the PSPs but also compliance wi th performance management contracts by local governments, targeting requirements, and other accreditation mechanisms.
58. PSRL I11 also supported the preparation o f a draft Law o f Conditioned (ProgramBticas) Transfers, regulating the process for decentralizing social services, but i t was not approved. Following the publication o f the Annual Schedule for Sectoral Decentralization on March 2004, which did not mention Education and Health as sectors-to-be decentralized in 2005, i t became clear that the Executive considered that their decentralization was not a short-term priority, as the institutional and political environment were not ready for the decentralization o f these sectors. The Bank agreed with such assessments. To partially offset this, Authorities then decided to introduce key aspects o f the previous bill in (a) the recently approved Accreditation Law, which allows for Cooperation Agreements between the Central and regional and local governments, and in (b) the 2004 and draft General Budget Law, whose draft has been prepared and i s expected to be approved before November 30, 2004, that authorize the signing of Management Agreements between multiple entities o f the Central and Sub-national Governments. Once in place, these legal norms w i l l allow MEF and the Ministries o f Education and Health to sign management agreements (Convenios de Administracion de Resultados--CARs) with regional or local governments referring to specific functions or competencies associated with the resources transferred b y the Central Government, as well as with other results-oriented mechanisms. In the meantime, the Ministry o f Health has already signed 23 out o f 26 management agreements wi th i t s Regional Directorates in order to decentralize the administration o f specific health competencies, effective from January lSt, 2005.
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A.3. Targeting of Social programs: Pension Reform
59. With more than half a century of history and several major reforms, including the introduction o f a funded scheme in 1992, Peru’s pension system has yet to achieve i t s main goal o f providing income security to the elderly. As of 2003, Only 14 percent of the labor force contributed to one o f the existing programs, and 25 percent o f the elderly received a benefit. Considering that nearly 40 percent o f the population aged 65 and older lives on an income below the poverty line, and that participation in the pension system i s strongly correlated with income level (only 0.5 percent o f the workers in the poorest quintile make contributions to Social Security, and coverage among the poorest quintile o f the elderly i s 2.3%), i t i s safe to assert that the system i s in need o f a serious assessment and reforms. The situation in Peru i s one o f the worst in Latin America, since, o f the fourteen countries with information on the percentage o f economically active population contributing to the Social Security system, only Bol ivia and Paraguay have lower rates.
60. While the system’s coverage i s low, Peru makes a significant fiscal effort to finance i t s pension systems from general revenues, partly as a result o f the transition costs generated b y the 1992 reform and partly due to the deficit o f the C iv i l Servants program. The deficit o f the public pension systems i s close to 2 percent o f GDP, equivalent to 69 percent o f the amount set aside to service Peru’s external debt; 63 percent of public spending on education; 1.8 times the government’s expenditure on healthcare; and 1.4 times the amount set aside to alleviate poverty.
61. The pension system in Peru has three main components. The Private Pensions System (Sistema Privado de Pensiones-SPP), created in 1992, which covers wage earners from both private and public sector and operates as a funded, privately managed scheme. The system i s run by four pension fund managers (“AFP”, for i t s acronym in Spanish), wi th approximately 3 mil l ion affiliated workers (of which one third, or close to 8% o f the labor force, make regular contributions). While the system i s supposed to operate under competitive rules, most workers lack the necessary information and interest to make the market work, and fees have been too high. The supervisory agency has been trying to promote new regulations that would reduce costs and increase efficiency, with mixed results.
62. The second component o f the pension system i s the National Pensions System (Sistema Nacional de Pensiones-SNP), a traditional PAYG scheme for workers who choose to stay in a publicly managed scheme, instead o f the SPP. The system pays a defined benefits pension after 20 years o f contributions and 65 years o f age. SNP also pays benefits to workers retired before the 1992 reform and provides a transitional bond to those who joined the SPP but had previously contributed to the public system. The program i s managed b y a central pension office (“Oficina de Nomal izac ih Previsional”- ONP), an autonomous agency attached to the Ministry o f Economy and Finance. In 2004 there were 970 thousand contributors to this regime and 409 thousand beneficiaries, with a total expenditure o f S./ 3.0 billion, or 1.5% o f GDP. Seventy seven percent o f this expenditure had to be financed b y the treasury. Several parametric reforms introduced b y Law 27617 in early 2002 have corrected a medium to long term tendency to increase deficits, and current projections indicate that the cost w i l l slowly decline to around 0.2 percent o f GDP in the medium term.
63. Finally, a c iv i l servants program called CCdula Viva (CV) offers very generous benefits and runs a large deficit, close to 2 percent o f GDP in 2003. Workers can retire after fifteen
27
years o f service, with no minimum age, and benefits are equal to 100 percent of the wage o f active c iv i l servants. While the system i s formally closed since the early 1970s, legal challenges and pressures have limited the effect of this restriction and many workers and officials have been able to obtain benefits under this regime. As o f this year, the system had approximately 23 thousand active contributors and 295 thousand beneficiaries, and was paying SJ4.7 bi l l ion a year (approximately 2% o f GDP) o f which 99% was financed b y the treasury.
64. The most critical problem in Peru’s pension system i s the very low coverage, especially among the poor, and the lack of a reasonable strategy to overcome it. While the main cause of this can be linked to weak labor markets and extended informality, specific measures can be adopted to improve access, without generating additional fiscal pressures or creating negative incentives for labor force formalization. As fiscal resources are limited, efforts should be made to increase compliance within the existing systems by improving enforcement and by increasing incentives to reduce undesired subsidies to mid and high income beneficiaries and to protect the poor elderly excluded from the system. New, targeted, non-contributory benefits designed to complement the pension system benefits could be created to provide basic assistance to the poorest elderly, preserving the fiscal sustainability. A medium term strategy should be developed to attain these goals, but until recently, this responsibility was not held b y any government office. Until mid 2003, most strategic decisions were made at the Ministry o f Economy and Finance, despite the fact that the Ministry did not have a unit or any staff officially in charge o f the area.
65. The fiscal cost o f C V and SNP l i m i t s the possibility of developing a targeted anti- poverty program for the elderly. Expenditures in these two programs are inflexible. Sti l l , they should decline over time, provided that there are no new successful challenges to the legal framework. Simulations prepared b y World Bank staff indicate that expected savings in the next few years should be enough to finance a targeted, non-contributory benefit to cover poor individuals aged 75 and older.
66. The Private Pension System, SPP, has some important efficiency problems, which affect the cost o f the system for active workers and reduce the incentive to participate. Both at the accumulating stage and after retirement, the level o f competition among providers i s low, resulting in high costs for workers and high returns for fund managers. (In 2002 the average return on equity for pension fund managing companies was close to 80 percent). The excessive costs in the accumulating stage result in lower income for workers, and on top o f that, high fees in the annuity markets result in lower retirement benefits. The regulatory framework was designed assuming a competitive environment, but the industry appears to have an oligopolistic structure, as i t does in other countries in the region.
Government Strategy
67. The Government’s view o f the pension system has been strongly focused on the fiscal implications o f the two public schemes. Many attempts to close the “Cedula Viva” program have failed since the early 1960s, as legislators refused to support the reforms or they were overturn b y the Judiciary. On the SNP front, a major factor in deciding the 1992 reform was the expected high cost the system would have in the medium term and the serious difficulties of financing it. In this context, the main goal o f the Government, throughout most o f the
28
1990s and also in recent years, has been,to reduce exposure to fiscal pressures from both public systems and to promote the transfer o f workers to the new private scheme.
68. The strategy has focused on limiting benefits in the public schemes (especially for C V beneficiaries), while making the SPP more attractive. With this goal, attempts to control the civ i l servants scheme have included regulations to obtain information on i t s beneficiaries to verify their legal status and monitor the system, and measures that make the system less appealing to workers. In 1996 the ONP (Pension Normalization Office) was able to collect information at the national level for the first time, and a special commission created in 2001 recommended a number o f changes in the system to reduce i t s cost.
69. More recently, a Legislative Decree (817) and a Law (26835) established maximum benefits and reduced survivors benefits, but they were declared unconstitutional by the Constitutional Court in 1997. In 2003 a Supreme Decree (043-2003-EF) required that all public agencies paying C V benefits with funds from the National Treasury had to prepare a report for ONP with detailed information on active workers and retirees, and this information has slowly been sent b y the different agencies
70. Regarding SNP, the Government has made a sustained effort to improve the administration and management o f the system. Processing time for issuing recognition bonds has been reduced, and important efforts have been made to reduce inequities between SNP and SPP. In recent years, new legislation allowing early retirement for some workers (such as miners and workers who could retire early in SNP but not on SPP) in SPP and the approval o f a minimum pension for SPP beneficiaries (which was originally set in the 1992 legislation, but never implemented) have reduced pressure from some groups to switch back from SPP to SNP. Earlier this year a new Law was approved, authorizing workers to switch back when i t i s clear that their rights were negatively affected by joining an AFP, a measure that significantly reduced the political pressure to open unlimited switching among the two regimes.
71. Finally, the work to improve efficiency and reduce costs in SPP has been permanent. In the last year an important change in the process for hiring insurance companies for disability and survivor benefits resulted in a reduction o f average fees charged by AFPs. In September 2004 the SBS announced new measures, including the authorization for internet-based transfers among AFPs, simplification o f transfer procedures, and the authorization o f discounts in fees for workers that remain on AFP for certain lengths o f time. All these measures should result in improved transparency and competition, and, consequently, a reduction in fees in the medium term.
Activities supported by PSRL I, II and III
72. While the problems o f the pension system were not included in PSRL I (when the focus was on the social and economic emergency), PSRL I1 supported the approval and implementation o f Law 27617. This law introduced several changes in the three pension systems, reducing costs for the C V regime and making the SNP and SPP more equitable and transparent. Among the main aspects o f the new legislation, there were: a reduction o f benefits to survivors under the Cedula Viva regime, from 100% o f deceased’s benefits to 5096, creation o f a new Recognition Bond, for workers who made contributions to SNP and then joined SPP, compensation for contributions made unti l December 2001 (otherwise,
29
workers were penalized for switching to SPP), reestablishment o f the minimum pension for beneficiaries o f SPP, and early retirement allowed for some workers under SPP with benefits equivalent to SNP.
73. PSRL I11 focused on the institutional and transparency problems o f the system as a whole and supported the approval o f MEF’s resolution RM326-2003-EF/I 5, which assigned to the “Direcci6n General de Asuntos Economicos y Sociales (“DGAES”) o f the Ministry the task o f designing a strategy to increase coverage and efficiency o f the system and collecting and disseminating information about the system as a whole.
74. Also, PSRL I11 supported two laws approved in July 2003 which established a special contribution to C V that would be made b y beneficiaries receiving more than S/43,600 a year, increased contribution rates for C V participants from 6% to 12% immediately with further increases to reach 27% by 2009, and created a maximum benefit for new retirees under C V of S/3100. These laws should make the C V regime less appealing to current and future workers l imit ing the pressures to bend the rules and enrol in the system.
Triggers, Benchmarks and Monitoring Indicators for PSRL IV
75. Following advances under PSRL I1 and 111, PSRL I V i s supporting the consolidation o f reforms aiming at improvements in the institutional framework, reductions in inequities and softening o f fiscal pressures from the public pension schemes. As expected in PSRL 111, the DGAES has prepared a strategy document, called “Plan de Acci6n de 10s Sistemas de Pensiones en el Peni” (Action Plan for Pension Systems in Peru), where a clear diagnostic i s presented and concrete measures to reduce costs and increase coverage (including quantitative goals) are proposed. DGAES has also prepared and published a statistical report for Peru’s pension system as a whole, integrating the information o f the different systems.
76. Laws 28046 (establishing contributions o f C V beneficiaries to a solidarity fund) and 28047 (increasing contributions to CV) have been implemented and savings or additional contributions are being registered. While law 28047 has been ful ly implemented for most o f 2004, Law 28046 suffered some technical delays but was finally implemented b y mid 2004. Total collection from the application of both laws has been approximately S./ 75 mi l l ion per year.
77. Finally, the Government has unexpectedly moved towards a new attempt to completely close the C V regime. To avoid the traditional constitutional problems, the Government has proposed a Constitutional Amendment to modify the clauses that protect C V participants. This amendment was approved on a first review in May 2004, with wide support (96 out o f 112 Congress members supported the reform), and a second and definite vote i s schedule for the second semester o f 2004. If the amendment i s finally approved, new legislation eliminating the CCdula Viva scheme w i l l be immediately introduced in Congress.
Perspectives and Sustainability of Reforms
78. After years o f minor changes and frustrated reforms, the Government o f Peru started a strong push towards rationing and increasing the efficiency o f i t s pension schemes. The decision to promote a Constitutional Amendment shows the level o f commitment and ownership o f these reforms, and the support this proposal has received in Congress indicate
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that the compromise includes most political parties. Once the amendment i s approved, the Government will, for the first time, have the capacity to effectively close the C V system, eliminating a long-live source of fiscal problems and inequity.
79. For the first time in decades, Peru now has a government area in charge o f designing and supervising pension policy. The DGAES has assumed the task seriously, creating a team to work on this and producing solid background analysis and documents. As expected, the strategy document not only defined actions but i t set clear indicators and objectives within a timeframe. Among the most relevant data, the strategy aims to reduce the transfers o f funds from the Treasury to Cedula Viva from the current 10.6% o f the total budget to 8.6% by 2008 and to increase coverage in the SPP from the current 11.2% of the EAP to 14.5%, also by 2008.
80. The Bank w i l l continue to support the consolidation o f this policy beyond the PSRL. Through continuous policy dialogue and financing through the Accountability for Decentralization in the Social Sectors Technical Assistance Loan approved on July 15,2004, different activities o f the DGAES w i l l result in an institutional strengthening o f this area within MEF.
81. While it was not included explicitly as part o f the policy matrix, the private SPP scheme has also registered some advances. A review o f the rules to contract l i fe and disability insurance b y pension fund managers has resulted in a reduction of total fees paid b y workers of approximately 1096, and the changes announced in September 2004 about procedures to switch funds and fees’ structures could result in higher competition and lower costs, creating incentives for higher participation and coverage. These measures were contemplated in the strategy document prepared by the government.
A.4. Targeting and Decentralization o f Social Programs. Workfare, rural infrastructure and food programs
Government Strategy
82. The economic crisis of the late 1990s resulted in serious problems in the labor market and affected the income o f the poor. The poverty rate grew b y 7 percentage points in four years, and urban unemployment reached 9 percent. In September 2001 the Government launched “A Trabajar”, a workfare program with rural and urban components. Whi le the urban component was designed as a “pure” workfare program (with l ow wages, high proportion o f expenditures in unskilled workers and secondary relevance o f outputs), the rural component was closer to an infrastructure program, where the main goal was to renovate decaying structures and build new ones. The programs expanded rapidly, and b y 2002 and 2003 generated almost 200,000 short term jobs, in more than 4,000 projects.
83. As the economic situation improved, the Government decided to start phasing out the programs. The urban component was scheduled to be closed during 2003, and the rural component would continue as a better designed infrastructure program. However, both programs have continued throughout 2004, at a smaller scale than in previous years.
84. Since the 1990s, Peru has had a number o f nutrition and supplementary food programs that tended to overlap, with inadequate funding, little planning, and no monitoring or
31
evaluations. While some programs had clear nutritional objectives, other used the food aid as a conditional transfer to reach other goals, such as income redistribution, school attainment, etcetera. Beginning in 2001 the Government started an attempt to reorganize the sector, to improve i t s overall efficiency and access b y the poor. Then main goals in this process have been:
a. Retargeting, i.e. allocating funds and resources to those who need them most
b. Decentralization, through transferring administration and implementation of programs to sub-national governments
c. Transparency, b y promoting accountability and c iv i l society participation in the monitoring o f programs.
85. The GOP administers about 14 different food programs, not all o f them with national coverage, with varied objectives and institutional arrangements. In 2003 total spending in food programs was about S/. 850 mil l ion or about 0.45 percent o f GDP. The main program, Vaso de Leche, i s decentralized, as i t i s administered and implemented by the district municipalities. The other main programs --comedores populares, desayunos escolares, al imentacih infantil, and papilla infantil, with a total budget in 2003 o f S/. 505 million, are still centrally administered by PRONAA, within the MlMDES, and have started a process o f decentralization.
Activities supported by PSRL I, II and III
86. Beginning with PSRL 11, the Bank has actively supported the implementation o f A Trabajar, as the main tool in Peru’s anti-cyclical policy for the labor market. The focus of the programs was to improve targeting by requiring that at least 67 per cent o f workers in the urban component and 49 percent in the rural component belong to the first and second (poorest) quintiles. Also, i t was agreed that the urban program would spend at least 75 percent of i t s budget on unskilled labor, while for the rural scheme the percentage was reduced to 40 percent, recognizing the important role o f the program for the rural infrastructure situation. Finally, an impact evaluation o f the programs was prepared under the support of PSRL 11.
87. PSRL I11 continued to support the development and implementation o f A Trabajar, requiring improvements in the targeting (as the percentage o f workers f rom the first two quintiles would have to by 80 percent). The participation o f unskilled labor in total budgets was maintained and new impact evaluation analyses were required.
88. As the program was expected to be phased out, i t was not considered when the triggers and benchmarks for PSRL I V were first discussed. While there has been a change in this policy and A Trabajar has not been completely eliminated, a major overhaul has taken place, as the program i s now a better defined counter-cyclical policy instrument. This redesign and i t s implementation have received direct support from IDB and some bilateral donors, making any additional support from the World Bank redundant. Hence, PSRL IV i s not supporting policies related to this program.
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89. In 2001 and 2002, with the support o f PSRL I and 11, the government placed most food and nutrition programs under the direction o f one single institution, PRONAA. I t also reduced the budget o f bad performing programs in order to protect better targeted, well performing ones. In turn, the PSRL I11 supported the government in the initiation o f the decentralization process, by supporting the transfer o f programs to municipalities.
90. The transfer of social programs to regional and local governments i s a long term project, and some food programs have been the first to be transferred to municipalities. The Government has implemented these transfers slowly, beginning with the Comedores Populares program. Under PSRL I11 the GOP presented a draft law o f “Intergovernmental Transfers” to Congress to formalize the transfer o f resources to sub-national governments. This law had three objectives: (i) to protect resources from being diverted to other uses in the context o f increasing decentralization; (ii) to formalize the use of a pro-poor formula in later years for allocation to municipalities; and (iii) to establish that the resources would be transferred following performance agreements signed between a central agency and local governments with a participatory monitoring mechanism.
Triggers, Benchmarks, and Monitoring Indicators for PSRL N
91. At the time PSRL I11 was approved, the GOP and the Bank had assessed that the Intergovernmental Transfer Law presented to Congress would be approved smoothly. Within that context, a set o f four conditions were defined, to ensure (i) proper application o f the pro- poor formula in the budget distribution, (ii) the signature o f performance agreements with executing municipalities to guarantee service delivery; (iii) the production and diffusion o f monitoring information for local communities; and (iv) the existence o f a mechanisms to ensure compliance with targets in each municipality
92. However, the political debate stalled the draft law discussion, forcing the Government to explore alternative ways to assure that the food programs w i l l be protected during the vulnerable f i rst transition period to decentralization. Congress approved an Accreditation law in June 2004, regulating the system to certify the management capacity of regional and local governments, as described in detail in Annex 2, as well as a supreme decree defining the way programs are to be targeted. The accreditation law makes reference to the criteria for the transfer o f responsibilities and resources to local governments, but given i t s general nature, it does not specifically include information on how compliance with targets w i l l be a criterion for the transfer o f resources for food programs to the municipalities where performance agreements have been signed (point (iv) in the trigger). However, the regulations o f the Accreditation Law - the current draft to be approved this year - make the link between the accreditation process and performance management agreements.
93. In addition, M IMDES has also passed several ministerial resolutions addressing specifically the transfer o f social programs, including one that stipulates a set o f incentives and penalties for compliance with agreed targets, which i s part o f the performance agreements signed with municipalities, and a Supreme Decree issued in September 2004 requires the use o f pro-poor criteria in the distribution o f funds for social programs.
94. The target o f 50 performance agreements has been exceeded. In the case o f food programs, out o f the 67 municipalities accredited to administer the Comedores Populares program, 64 have signed management contracts with MIMDES and the other three have
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requested MIMDES to administer the program on their behalf. Another 27 performance agreements have been signed between the MLMDES and district municipalities on the transfer o f Social Fund resources. These management contracts aim to ensure more efficient and effective management o f resources and guarantee minimum levels of service-delivery. They specify the resources transferred, the purpose for which they can be used, the targets that need to be complied with, and the monitoring requirements that need to be submitted periodically to the MIMDES.
95. I t should be noted that the performance agreements refer only to a subset o f food programs, and do not include nutrition programs, which have not been decentralized (with the exception o f Vas0 de Leche). I t i s expected that performance agreements related to nutrition programs w i l l be signed in the short term.
96. Another 58 provincial municipalities and 165 district municipalities are expected to receive the transfer o f their respective food and social fund projects later this year. These transfers w i l l also be complemented b y management contracts, signed between the MlMDES and these local governments, and linked to the accreditation process.
97. Even though performance agreements for food programs specifically establish that compliance with targets i s a criteria for the transfer o f food programs funds to the municipalities, at present there i s no mechanism to determine corrective actions for underperforming municipalities. I t i s expected that the GOP w i l l present a proposal in the next few months.
98. With regards to the retargeting o f programs, the 2004 budget for nutrition programs has been designed using a pro-poor formula, as agreed in PSRL 111, and actual spending follows that formula too.
99. Given the previous considerations, the trigger was rewritten in order to reflect the actual actions taken b y the government, maintaining the original goals. Thus, the new text w i l l read: “There is a normative framework in place assuring the implementation of transfers of food programs to municipalities: ( i ) budget for nutrition programs is being allocated following the pro-poor formula, ( i i ) pel3‘ormance agreements related to Comedores Populares have been signed with 50 municipalities and are being monitored by a central government agency, ( i i i ) monitoring information is available to the communities of these 50 municipalities, (iv) compliance with targets is a criteria for the transfer of resources to these 50 municipalities ”.
100. In addition to the change in wording regarding approval o f the intergovernmental transfers law, points (i) and (ii) have been clarified, as (i) refers exclusively to nutrition programs and (ii) to “Comedores Populares”, which i s one o f the food programs currently functioning in Perk
Perspectives and Sustainability of Reforms
101. The reforms introduced in the social programs during the duration o f the PSRL have aimed to improve access and targeting, increase efficiency, and promote transparency as a tool to facilitate monitoring by the Government and social sectors. The level o f success on each goal has been significant, but i t i s critical to sustain this trend into the future.
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102. The improvements in targeting have been consistent through the program, both in terms of regulations and actual results. Pro-poor formulas are now included in the budget to assign resources, and the different agencies have been improving their performance year by year. Similarly, the system i s now better organized and more efficient than i t was a few years ago, with less programs, better definition o f areas o f responsibility, and clearer objectives. Finally, management capacity and transparency have improved through the development of monitoring instruments, use o f performance agreements, and the public dissemination (through web pages) o f information on performance.
103. The advances registered in this sector have been important, but there i s s t i l l much to be done in the short and medium term to ensure sustainability for the new model. The Bank’s main instrument to continue to support decentralization reforms and promote the fiscal, institutional and cross-sectoral decentralization framework and i t s sustainability (which w i l l include policy actions related to the decentralization o f social programs, management contracts, and the monitoring and evaluation systems) w i l l be DECSAL and the TAL for the social sectors, which are supporting the implementation o f the M&E model cross-sectoral and specifically for social programs. Government commitment i s important, both at the Ministry o f Economy and Finance and at the sector, where ownership o f reforms has been strong. Local authorities are also very interested in managing the food programs, providing important political and social support to the reforms. This i s being reinforced through increased social vigilance by c iv i l society at the local levels, expanding support and sustainability o f the new model.
B.l. Health Care
104. The Peruvian government, as part of i t s strategy to overcome poverty, and consistent with the goals o f equity and social justice, expressed in the Acuerdo Nacional, i s committed to increasing access to health services for the poor. In this context, inequity in access to basic health services and inefficiencies in health financing are two main issues that are necessary to confront. Increase in health supply i s not enough to ensure that the poorest o f people, particularly those who l ive in rural areas, have access to health services. Economic and cultural barriers contribute to making inequity persistent, and specific actions need to be taken to reduce their effect on equity in access.
Government Strategy
105. With the purpose o f breaking down economic barriers facing the poor, the GOP has promoted the development o f an Integrated Health System for Mother and Child, which focuses on rural areas and on the poor. Besides, to overcome cultural barriers, i t has adopted a CLAS model, with actions oriented towards strengthening local communities so that they w i l l be able to manage their own primary health facilities.
106. Simultaneously, M I N S A has developed a strategy to promote efficiency within the Ministry and in the health sector. On one hand, the realization of “Acuerdos de Gesti6n” (performance agreements) between the Ministry o f Health (MINSA) and the Direcciones Regionales de Salud (DISAs) w i l l be a powerful tool to link performance and outcomes in health. On the other, better coordination between MINSA and ESSALUD -the two most important health providers in Peru- could be achieved so as to promote health services
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exchange. The impact o f this action should be important, considering that one o f them exhibits unused supply capacity and the other faces unsatisfied demand.
107. Two laws have generated a new scenario and have introduced new challenges for the government strategy. First, the Decentralization Law establishes the future decentralization o f health services to regional and local levels, but i t does not specify the mechanism and timing for the transference. Since this has created an environment o f uncertainty, MINSA i s working on a technical proposal to make possible the transfer of the health network to the regional governments, while protecting the regulatory role o f the Ministry. Meanwhile, SIS and the performance agreements are seen as instruments to implement the decentralization process. Secondly, the Law 28006 (June 2003) gave economic, financial, and budgetary autonomy to ESSALUD, making coordination with M I N S A more difficult.
Activities supported by PSRL I, II and III
108. Under PSRL I, the GOP launched the “Seguro Materno-Infantil”, a basic health insurance to cover poor mothers and children. This insurance was merged in 2001 with an existing school-based insurance known as “Seguro Escolar”. The Seguro Integral de Salud (SIS) born from this union eliminates users’ fees by reimbursing public providers for all variables costs incurred in the service provision (mainly essential drugs and medical supplies). A fee-for-service mechanism i s used to induce providers to supply the basic health interventions included in the benefit package. SIS i s organized into five health plans: Plan A, for children between 0-4 years; Plan B, for schoolchildren; Plan C, for pregnant women; and Plans D and E, for adults.
109. Under PSRL 11, the coverage o f the SIS in Plans A and C increased beyond initial expectations. In the year 2002, the coverage goal o f 339,000 pregnant women and 823,000 children was exceeded. The SIS reached 544,876 pregnant women and 2,013,923 children. Legal and administrative measures aimed at securing financial and managerial status for SIS were also taken. Financial resources for SIS have been secured through general revenue. A close monitoring o f SIS management b y the MINSA and MEF guarantees good performance o f this institution. Preliminary data shows that the SIS has been an effective instrument in increasing the production o f the basic services contained in the benefit package and reducing the costs that poor people have to access health services, such as prenatal care, skilled birth attendance and ambulatory pediatric visits.
110. The connection between community and health services has been strengthened, as a means to reduce cultural barriers to access. PSRL I and PSRL I1 supported the participation of local communities in the management of primary health care facilities b y facilitating the discussion o f local health plans and agreements with the health authorities. During these phases, approximately 25 percent o f all basic care health services in Peru became “Comites Locales de Administracih de Salud” (CLAS), that is, local associations o f citizens authorized to participate in planning and managing primary health care.
11 1. With the purpose o f increasing efficiency in the MINSA operations, previous stages o f the program introduced results-oriented instruments in the sector. Performance agreements were first signed between MINSA and DISAs during 2002, as part o f PSRL 11. The initial agreements were limited to aspects dealing wi th individual health services.
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I The CLAS Model
The CLAS (Comites Locales de Administracibn en Salud) are public community managed health facilities, created in 1994. Each CLAS has a board composed o f 6 community members (half elected by the community and half selected b y the chief doctor from community health organizations) and the local health clinic head doctor, with the task of administering their local health clinic. Each health center that turns into a CLAS became, legally, a private, non-governmental organization and must be approved b y the Ministry of Health before i t i s inscribed in a public register. Although legally independent, each CLAS i s related to the regional health authority o f the Ministry (in the case o f Lima) because the CLAS are mainly financed b y the primary budget provided b y MINSA for these clinics - principally staff salaries. The CLAS health infrastructure i s public property.
I
The CLAS are allowed to use revenue obtained through user fees for clinic improvements and to perform plans designed b y the board. The CLAS model involves an innovative decentralization approach, transferring administration o f local health posts to community representatives rather than to the municipality or local governments. The model was developed in part to achieve the objective o f making health clinics more efficient and promote equity. A more efficient management o f the primary facilities relies on the fact that:
I i) The CLAS members are required to approve a local community health plan each year, 1 promoting responsiveness to the specific needs o f the community; ii) The health workers are hired directly by the CLAS members, and are also evaluated on an annual base. This increases labor productivity and promotes a user satisfaction approach because workers are supervised b y local community members, who monitor their daily work. On the other hand, CLAS has not proven to be as effective in the supervision o f the quality o f services, because the CLAS members are not necessarily competent in this field. B y 2003, more than 700 CLAS existed, managing more than 2.000 health centers along al l Peruvian territory.
112. In an effort to improve coordination o f the health networks, pi lot exchange agreements between MINSA and ESSALUD were established in two departments. Unfortunately, political instability, which led to changes in the chief o f ESSALUD and his management team, hindered the implementation o f a comprehensive managerial plan for the social insurance system that was being contemplated b y the GOP. Most recently, approval o f the Autonomy Law for ESSALUD further distanced the institution from control by the central government.
113. The purpose of PSRL I11 in health issues was to consolidate and intensify efforts to achieve greater equity and efficiency in the public sector, paving the road for decentralization. The policy actions under PSRL I11 were oriented to: (i) Improve access to health services for the poor b y expanding and consolidating the SIS and the CLAS model; and (ii) Reduce inefficiencies in MINSA b y going forward in the use o f the performance agreements and b y promoting coordination between MINSA and ESSALUD.
114. PSRL I11 focused on maintaining SIS targeting among the infant and maternal component and the poorest people, as wel l as on strengthening i t s insurance function and expanding i t s coverage. In 2002 the initial affiliation targets where significantly surpassed, reaching 544,876 woman and 2,103,923 children by the end o f the year. T o prevent deviation o f financial resources to others plans, namely adults and complexity care mostly in
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urban settings, the GOP set rules so that no less than 75 percent o f the SIS total budget can be expended in primary and secondary health care, and no less than 60 percent in plans A and C (infant and maternal, respectively).
115. Additionally, the government took actions to strengthen the SIS managerial capacity: (a) integrating i t s information systems; (b) being fiscally responsible (every change in target and benefit plan needs a budgetary allocation); (c) assuring financial resources to achieve all the proposed aims; and (d) reimbursing services providers so as to ensure correct incentives. Additionally, a performance agreement was signed between MEF and SIS to closely monitor i t s activity.
116. Under, PSRL 111, 762 CLAS associations were functioning throughout the country, including 2,091 health centers (more or less 35 percent o f all first level facilities), up from 1,416 that existed at the beginning o f 2002. Thus, the CLAS model serves more than 8 mil l ion citizen, mostly in poor and rural settings, wi th a budget o f 9.73.2 millions, 5,800 health care workers and 4,900 active community members.
Table 6. SIS Main Performance Indicators SIS Main Performance Indicators
TOTAL Plan A Plan B Plan C Plan D and E (adults) Indicator (0-4 years) (school age) (Pregnant women)
Coverage December 2004 (Goals) 2,458,480 5,212,292 576,95 1 * 552,277 8,223,049
(Aug 31,2004) 2,635,043 4,604,063 501,441 208,396 7,948,943
December 2003 2,496,012 4,142,797 726,150 206,343 7,571,302 December 2002 2,013,923 3,109,962 544,876 194,926 December 2001 395,000** n.a. 154,000*** n.a. n.a.
Services Delivered (2003) 47 % 29% 22% 2% 18,603,827 services (2002) 42% 3570 21 % 2 70 15,170,607 services Percentage of Total Production Cost (2003) 37% 24% 33% 5% S/. 288.4 mill ion soles (2002) 34% 30% 30% 6% S i . 228.5 mill ion soles Average Cost per Service (2003) S/. 12.14/soles S/. 12.83/soles SI. 23.92/soles S/. 79.87/soles SI. 15.51/soles (2002) S/. 12.30/soles S/. 12.90/soles S/. 21.80/soles S/. 41.80/soles S/. 15.06/soles
Annual Services per Affiliate (2003) 4.2 2.5 5.1 1.3 2.8 (2002) 3.2 1.7 5.8 1.5 2.6 Notes: * The goal i s less than the figures achieved in 2003, mainly because of the expected effects o f the application of the socio-economic assessment scorecard (FESE). * * Anual projection based on january-august 2004 values. *** From the PSRL-I1 Source: SIS, Informations Systems, 2004
(618,876**)
117. In 2003 and under PSRL 111, MINSA signed management agreements wi th the 34 DISAs. More comprehensive health indicators were included in these agreements, including SIS coverage rates, disease surveillance results, and immunization rates, among others. A close monitoring process over the management agreements o f 2002 and 2003 was conducted
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by MINSA and discussed with the DISAs. The agreements have contributed to align policy and decision making in the public sector.
118. Regarding attempts to improve the efficiency in ESSALUD, PSRL I11 focused i t s efforts on securing basic coordination in service exchange between ESSALUD and MINSA in five departments (Tacna, HuBnuco, Huancavelica, Loreto and Ucayali). The purpose o f this was to improve access by the uninsured population o f M I N S A to complex care services in ESSALUD facilities, and simultaneously allow affiliates o f ESSALUD to accede to the basic health services o f MINSA.
Triggers, Benchmarks and Monitoring Indicators for PSRL IV
119. The objectives o f this fourth step o f the PSRL are to strengthen two key policy instruments, SIS and management agreements, for the new decentralized environment, while maintaining the former achievements. PSRL IV w i l l recognize the SIS effort to keep expanding coverage o f infant and maternal populations -to over 560,000 pregnant woman and 2,400,000 children under 5 years, improving skilled birth attendance and introducing changes in design and operational features that help to control excessive allocation in tertiary care. At the same time, PSRL IV supported the increased focus o f SIS efforts among the poor in rural areas.
120. Since coverage o f pregnant women (726,150) surpassed the mentioned goal in December 2003, the opinion o f SIS authorities i s that a more decisive focus on the poor must be applied. In that sense, SIS i s working on a socio-economic assessment scorecard (FESE) that w i l l contribute to concentrate resources on poor people, restricting access for high income women, as happened in 2003. This explains why coverage o f pregnant woman w i l l fall as a whole, while more equity w i l l be gained.
121. SIS i s trying to concentrate i t s financial efforts on poor people. On one hand, more than 75,0% o f the expenditures on plans A and C are expected to be allocated on health centers o f levels I and I1 ( in 2003 this figure -broadly measure- was 82,7% based on the valued production). This i s intend to avoid pressures to allocate resources to complex care in national hospital and institutes in L ima used mainly b y people o f higher income quintiles. On the other hand, although there are no explicit targets in this field, because of SIS universal coverage, the percentage o f expenditures directed to the poorest quintiles, I and 11, i s closed monitored (40,6% in 2003).
122. Management agreements are seen as critical instruments for M I N S A to strengthen i t s regulatory capacity and promote better management performance o f DISAS. The agreements w i l l be maintained between the national and sub national health authorities, including close monitoring o f results, which w i l l be made public in order to reinforce accountability and citizen participation.
Perspectives and Sustainability of Reforms
123. The main feature in the Peruvian health sector for the next years w i l l be the impact that the decentralization process w i l l have in the organization o f service provision and financing in the Ministry o f Health. This scenario provides both threats and opportunities to achieve better health indicators, mainly in child and maternal care. The scenario threatens to
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fragment weak health nets even more, reduce doctors’ availability in regions, lower quality o f services, and increase inequity because of inadequate initial distributions o f infrastructure and human resources. On the other hand, the possibility o f strengthening responsiveness of health services to local needs, increase technical efficiency o f hospitals and health facilities through a closer monitoring of regional and local governments, and extending separation of provision and financing function are major opportunities.
124. The strengthening o f SIS - to increase mother and child health care as a national goal- and the use o f management agreements -to enhance efficiency in the public sector- are instruments well established in MINSA that w i l l probably be key tools in the handling o f the decentralization process. The World Bank w i l l s t i l l be present in the Peruvian health sector, mainly through the Health Sector Reform Project, co-financed with BID and executed b y PARSALUD, which w i l l continue to assist SIS and the priority DISAS where poverty and exclusion i s severe.
B.2. Education
125. The education sector in Peru has shown important advances in the last few decades, with primary education enrolment at near universal levels, and secondary education at around 80 percent. These achievements were obtained with relatively low expenditure levels (at around 3 % of GDP, versus an average o f 4.5% in the region), but the high coverage and access has not always been accompanied by s i m i l a r levels o f internal efficiency and quality.
126. Repetition rates are high, and there are strong inequities across regions and social groups that have been neglected. Rural women have an average o f less than four years of education, less than half of what their urban counterpart achieve. As o f 2000, only 42.5 percent o f rural children completed the sixth grade at the appropriate age, and absenteeism was high.
127. Quality o f education i s o f particular concern. Results from the first standardized test in 2001 showed that only 13.0 percent o f urban sixth grade students and 2.4 percent o f rural students passed the language test, and 9.9 percent o f urban and 1.1 percent rural sixth grade students passed the math test. The 2000 PISA (Program for International Student Assessment) results showed that around 54 percent of 15 year old students in Peru cannot understand what they read. This hampers their capacity to expand their knowledge and those abilities that would allow them to become l i fe long learners. These results had a significant impact on public opinion in Peru, leading the Ministry o f Education to declare the sector to be in a state of emergency.
128. The quality and motivation o f human resources in the sector has been identified as one of the key problems, with poorly trained teachers and administrators, little incentive to improve within the career path, and inadequate distribution vis-a-vis student distribution. Teachers typically show strong resistance to go to rural or remote communities, as the system provides little if any compensation for those who are wil l ing to do so.
Government Strategy
129. The Government has openly recognized these problems, and improvement in the quality o f education and increased access to education services has been key in the national
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agenda. Education i s an important component of the “Acuerdo Nacional” which was signed by major political groups and other key actors in Peru. This document identifies priority education policies and indicators, including quantified goals for 2012. The “Estrategia de Superacion de la Pobreza, Lineamientos de Politica” also calls for improving the quality o f education services for the poor.
130. In recent months, the Acuerdo Nacional produced a “Pacto Social de Compromisos Rec@rocos por la Educacidn. 2004-2006” (Social Pact o f Reciprocal Commitments for Education), which defined a set o f basic agreements and common goals among the participants in the National Agreement. The pact includes a l i s t o f policies and actions to be developed in four dimensions:
0 Mobilization for quality learning; Teacher development strategy;
0 Moralization of the sector; and 0 Education financing
131. While this document does not describe specific policies, i t represents an important advance in the process o f modernizing and improving the education sector in Peru, as i t implies that the basic debate around the education system w i l l now be excluded from the political arena and that different political sectors w i l l be able to collaborate in designing and implementing the necessary reforms.
132. The results o f the standardized and PISA tests led the Ministry o f Education to declare the sector in emergency and introduce a reading comprehension, writing, and math sk i l l s strengthening strategy, starting in April 2004. The implementation o f the strategy was planned for 2003, but was delayed due to changes in the Minister and staff in the institution. I t was started during the 2004 school year.
Activities supported by PSRL I, II and IIl
133. The PSRL Program has supported GOP policies on education since 2001, through three objectives: (a) improved teacher quality and motivation; (b) increased access to excluded populations; and (c) increased accountability for school performance. Achievement o f these three objectives has not been ful ly successful. In particular, during the preparation o f PSRL 11, the Bank encountered a new team in the Ministry which expected to implement a number o f reforms aiming at improving equity, efficiency, and quality in the sector. However, the frequent changes and difficult political context did not allow for successful implementation o f this ambitious program o f reforms. During the preparation process for PSRL 111, the Bank and Government o f Peru agreed to reduce the number o f benchmarks and triggers, and the education component kept two benchmarks. In this process, the first objective was prioritized as i t was identified to be the most critical and difficult to achieve through other instruments, such as investment projects. On the other hand, the second and third objectives are now being addressed through the Peru Rural Education Project, which was approved in May 2003, that is, during the preparation process o f PSRL 111. The remainder o f this section provides a summary of the policies addressed throughout the Program.
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134. Improved teacher quality and motivation. The GOP has long recognized that teacher quality and motivation need to be addressed in order to ensure overall improvement in the quality o f education. This objective was approached through two strategies: (i) the introduction o f new systems to allow for greater efficiency in human resource management; and (ii) development of policy instruments to increase teacher motivation.
135. As part o f the first strategy, PSRL I supported an important effort to try to clean-up the payroll and career management system in order to make i t more transparent and efficient. The new payroll system was implemented in six payroll processing units reaching a coverage o f 45% o f the teachers nationwide. As a result o f the implementation o f this system, the Ministry o f Education (MINED) was able to detect teachers who were no longer in the system but were s t i l l being paid, or teachers who were not being paid appropriately with respect to the position that they were holding. Subsequently, under PSRL 11, MINED requested the Bank to support an overall reform o f the teacher career, as part o f an extremely ambitious vision that would lead to a new Teacher Career Law. Although this vision has been sustained in MINED, the timing was far too optimistic, given the country’s political context. A teachers strike, in May 2003, showed that al l reforms would require a difficult negotiation process for which the GOP needed to develop instruments which i t did not have at hand.
136. Under PSRL 111, the Government re-evaluated i t s strategy with respect to reforming the teaching career and decided that the human resource management system was the key prior action for decentralization of the sector. (The box below shows the various components o f the system.) In addition to the payroll system, previously supported under PSRL I, the government implemented other components o f the system with the objective o f ensuring that teachers are paid within their appropriate rank, that no duplications occur, and that the system i s safe from inappropriate handling. Efforts were made with respect to (a) the expansion o f the payroll system to reach a total coverage o f 51 percent o f MINED staff. This system establishes parameters for salaries, according to rank and other factors; (b) the implementation o f the teachers position system in L ima and Callao, reaching a coverage o f 30 percent o f education staff. This system links teachers to teacher positions, avoiding two key problems, f i rst that more than one teacher i s allocated to a position, and second that staff are paid within the appropriate category; (c) the rationalization o f contracted teachers in two pilot districts, identifying that approximately 20 percent o f teachers could be redeployed to areas where they are in greater need, or whose contracts can be cancelled; and (d) the automated payment o f teacher salaries through the SIAF system, thus hindering manipulation in this step o f the process.
137. As part o f the second strategy to support improved teacher quality and motivation, MINED identified teacher incentives as key policy instruments, particularly for rural areas where teacher quality i s lowest. A study carried under PSRL I identified that the following incentives were necessary to ensure teacher quality in rural areas: (a) financial incentives for rural teachers, scaled to the distance between the school and the provincial capital. The study recommended that assistance should be paid upon compliance with the teachers’ attendance in the classroom; (b) financial incentives for teacher’s ability to speak the local tongue fluently; (c) l iv ing facilities, and (d) appropriate training for multigrade environment. Under PSRL 11, MINED initiated a pilot program to provide incentives to teachers in rural areas, but the results from this pilot were ambiguous as teacher attendance was not verified. O f the
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approximately US$ 6.5 mil l ion that was originally committed to financing this pilot, only about US$ 300,000 was used to pay incentives and train teachers. Under PSRL 111, MINED re-launched the pilot in three rural areas of Peru, covering 1000 teachers. The pilot, which has a semi-experimental design, includes a control area, and student performance evaluation.
138. Increased access to education to excluded populations. Under PSRL 11, two priority excluded population groups were identified: (a) pre-school children and (b) indigenous children whose mother tongue i s not Spanish. It was agreed that these excluded groups should be targeted in the prioritization o f education investments in order to achieve the Millennium Development Goal o f Universal Primary Education. During the preparation o f the PSRL I11 loan, the Government and the Bank agreed that targets would be monitored under the Rural Education Project, approved in M a y 2003.
139. Zncreased accountability for school peformance. PSRL I1 introduced this objective, which was to be implemented through two strategies addressing (a) participatory school governance, and (b) transparency. With respect to participatory mechanisms, MINED committed to the reorganization o f schools through the creation o f strong school councils in order to promote dialogue between the school and the community and to promote accountability at the local level. School councils were expected to participate in the preparation, implementation, and evaluation o f the Institutional Education Plan, evaluate the use of school and Parent Association funds and link the community to school activities. Under PSRL 111, the strategy with respect to school councils changed. The GOP decided that school councils would continue to be promoted, but within the context o f the teacher incentives pilot. Thanks to the contribution o f DFID, council members were trained to carry out the monitoring o f teacher assistance. In addition, the Rural Education Project supports school autonomy and school councils, as part o f the management component.
140. The GOP has made an overall effort to ensure transparency. MINED was inserted in this process and carried out a number o f activities towards this end: Under PSRL I, MINED published all the results for the 1998 student assessment data and the comparative analysis o f the 1996 and 1998 data. This information had been kept secret because o f the very poor results. Under PSRL 11, in November 2001, MINED carried out the student performance assessment, including, for the first time, children in rural multigrade schools and Quechua and Aymara speakers, having published preliminary results. Also, under PSRL, 11, the final report o f the Commission for National Consensus on Education was published as inserts in newspapers with national distribution - “Propuesta de Acuerdo Nacional por l a Educacih” and “Las Voces del Pais” and a complaints hotline and center was installed. Issues o f transparency are now being addressed through the Accountability for Decentralization o f the Social Sectors Technical Assistance Project, approved July 2004.
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Figure 10. The Education Sector’s Human Resource System
.................................... .: 1 Teacher : Career I..... .+ i Files : .................................... ;
.
Teacher and Administrative Staff Position
System (Nexus)
Links teachers or administrative staff to: a) their current professional level, and b) specific position in the school or management
unit, for example second grade teacher in school #xxx.
Ensures that: a) staff are paid according to their level, b) only one staff member is assigned to a
position.
Pays teachers based on parameters set by current legislation. Ensures that: a) appropriate salary is allocated (avoiding
discretional manipulation to modify salaries), b) a transparent system that allows monitoring of
staff within a transparent framework. ............................................
payment through
............................................ STAF
Receives amounts to be paid from payroll system, and issues electronic request for direct payment to individual’s account. Ensures a tight system that avoids manipulation of the payment database.
Triggers, Benchmarks, and Monitoring Indicators for PSRL IV
141. The fourth phase o f PSRL has focused entirely on the objective o f teacher quality and motivation through two benchmarks: (a) implementation o f the Human Resources Management System nationwide, and (b) development o f teacher hardship and merit incentives system. To date, MINED has progressed significantly towards the achievement o f the agreed benchmarks, surpassing some o f the goals, as described below.
142. With respect to the Human Resources Management System, MINED has committed to (a) reach a coverage o f more than 80 percent o f the staff in 75 percent o f the sector’s executing units; (b) introduce at least 50 percent o f staff in the teacher and administrative staff positions system; (c) pay more than 50 percent o f staff through the automated SIAF module; and, (d) rationalize more than 50 percent o f contracted staff through redeployment or cancellation o f their contracts. MINED has fully complied wi th i t s commitments and i s currently paying, through the payroll system, 86 percent of teachers in more than 90 percent o f the sector’s executing units. I t has also crosschecked teachers and administrative positions for 69 percent o f staff and i s paying 90 percent o f the sector’s staff through the automated payment module. Finally, the rationalization effort has gone beyond that o f contracted teachers. In an initial effort, b y June 2004, approximately 60 percent o f teaching positions held b y term-contracted staff were rationalized. MINED then initiated a second
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round in which the Regional Offices were declared to be under restructuring. This has allowed for relocation o f both term-contracted and open ended staff. Initial calculations show that this process i s generating approximately U S $40 mi l l ion in savings per year. MINED i s planning to allocate these savings to finance school infrastructure and inputs within the context o f the emergency program.
143. With respect to the Teachers Incentives System, MINED committed to (a) continue implementing the rural teachers incentives pilot during the 2004 school year; and (b) publish for consultation a study on a proposed system-wide pay scale reform that would include teacher incentives. MINED has drafted a proposed Incentives System which has been initially consulted with c iv i l society representatives and has a consultation schedule for the remainder o f the year with regional representatives, school communities, and the teachers union. The system identifies two types o f incentives, hardship and merit. The hardship incentives i s already being piloted in rural areas, as part o f the GOP’s commitments under this loan. The pilot continues to be successfully implemented and has shown initial positive results in terms o f teacher assistance to rural schools. In particular, the participation o f school councils in monitoring teacher assistance has been very successful. Parents feel that they can contribute to the school through clearly specified roles. In addition, an initial merit incentives pilot has been initiated in 12 schools, covering 189 teachers.
Perspectives and Sustainability of Reforms
144. The Education sector w i l l continue facing serious challenges with respect to equity, efficiency, and quality. Solving these problems i s not easy for a sector where, even when appropriate interventions are implemented, results tend to be observed in the medium term. This i s particularly difficult in Peru where, traditionally, Ministers last less than one year and higher level staff come and go with them.
145. Despite the weak institutional context, the GOP has identified the key problems and i s trying to address them. The Sector has been declared in emergency, excluded groups have been identified, and significant effort i s being put into instituting major reforms, particularly those linked to the teaching career. Some o f the processes are now institutionalized, including the human resources system, the implementation o f school councils and publication o f test results. Other processes s t i l l need further support, including the implementation of better targeted programs.
146. The Bank w i l l continue to support the Government in the process o f implementing and consolidating reforms in the sector. In particular, the Rural Education Project supports efforts linked to all three PSRL objectives: improved teacher quality and motivation, increased access to education to excluded populations, and increased accountability for school performance. In addition the Accountability for Decentralization in the Social Sectors Technical Assistance Project w i l l finance the implementation o f integrated transparency and social monitoring procedures across all three social sectors (education, health and social assistance programs). Finally, the DECSAL program w i l l continue to oversee the decentralization process for education, including providing support for c iv i l service reforms and management contracts with regions on education financing and management.
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C. Transparency and Participation of the poor
Government Strategy
147. The transition Government that came to power in 2001 had to tackle a context o f weakened governance characterized by a lack o f government transparency, increased levels of corruption, poor accountability - both within the state and towards citizens - and little opportunities for citizen participation in the formulation and monitoring o f policies and programs directly affecting them.
148. To address these issues, the Government launched a strategy to improve governance by building more transparent, accountable, and democratic institutions with the aim o f contributing to more effective poverty reduction. Emphasis was placed on enhancing transparency o f government actions and use o f public resources and opening up channels for citizen participation in policy making and monitoring of public programs.
Activities supported by PSRL I, 11 and III
149. Within the PSRL, this translated into improving transparency in social programs and expenditures and empowering civ i l society and users to participate in the policy and budget process, and monitoring service delivery. The specific objectives were to i) provide access to information for all citizens, restoring i t s credibility and enhancing i t s timeliness and quality; ii) provide citizens with the means to plan, budget and oversee the services provided to them and thereby ensure that their voice i s heard and reflected accurately in government actions and policies; and iii) provide an institutional framework and recourse mechanisms for citizens to seek resolution in the case o f abuse o f public functions or funds.
150. These objectives were defined through a broad consultative process and national dialogue which involved the GOP, the World Bank as well as other key stakeholders o f the reform, such as public sector representatives, the private sector, c iv i l society and the donor community.
151. During PSRL I, PSRL I1 and PSRL 111, the COP has made important advances in improving governance, increasing transparency, strengthening accountability and enhancing user power in the provision o f social services and citizen participation in the pol icy process.
152. In the area o f transparency, a legislative framework was created to guarantee citizens access to information with the approval o f the Law of Transparency and Access to Information and i t s corresponding regulations. The framework stipulates the rights o f citizens with regard to public information and establishes the obligations o f public sector entities and the mechanisms they have to put in place to ensure the fulfil lment o f these rights and obligations. I t also establishes sanctions for non-abidance and requires an annual reporting to Congress on the implementation o f the Law.
153. One of the main mechanisms to facilitate public access to Government information has been the creation o f the Transparency Portal (“Consulta Amigable”), which i s aimed at making budget information and public expenditures easily accessible and useful to citizens as a source for influencing and monitoring public action. The portal, managed b y the Ministry o f Finance, now provides information (updated monthly) on budget allocations and
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expenditures of all sectors and public programs, including all PSPs, at the national and regional level.
154. While increasing i t s efforts to make government information publicly available, the GOP also implemented measures to ensure that the information made accessible was accurate and reliable. This was done by depoliticizing and strengthening the technical capacities o f the National Institute o f Statistics and Informatics (LNEI).
155. The GOP also made important progress in opening up spaces for greater citizen participation in public policy formulation, implementation, and monitoring. These efforts have been facilitated by the on-going decentralization process, which has provided an enabling context for greater citizen participation in budgeting, planning, and monitoring of public services at the local level. The new institutions created within this process promote citizen participation, as processes and mechanisms to institutionalize citizen involvement have been defined and established. This new framework for participation makes Peru one of the countries in Latin America with the most advanced legislative frameworks for citizen participation in public policy and budgeting processes. Some o f the key elements of the framework include:
a. The recognition o f citizen participation as a fundamental right established throughout the legal framework for decentralization and the approval of a Law o f Citizen Participation.
b. The creation o f Regional Coordination Councils and Local Coordination Councils. Building on the positive experience with the Mesas de Concertacion de Lucha Contra la Pobreza, they seek to establish a forum for coordination and consultation between government and c iv i l society. With 35 percent and 40 percent c iv i l society representation respectively, these bodies have consultative and oversight functions over regional and municipal governments.
c. The development of regional, provincial and district development plans, based on consultations with c iv i l society and participatory planning processes. Likewise, input from civ i l society i s required for all sub-national investment plans.
d. The institutionalization o f participatory budgeting at the municipal level, making Peru the first country in Latin America to institutionalize this process in a Law of Participatory Budgeting.
156. In relation to the PSPs, the GOP has tested innovative mechanisms aimed at providing greater voice to the users o f social programs concerning the quality and transparency o f the services received. A pilot applying the citizen report card methodology to evaluate the performance o f a selected number o f social services as experienced by users, was implemented in 2003 and the results were disseminated b y high-ranking government officials in an event that brought together the media, government, and c iv i l society representatives. The method i s aimed at providing a channel for users o f public services, particularly the poor, to evaluate the quality of these through a national survey and through
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the public debate o f the results, create pressure for enhancing the accountability o f public service delivery.
157. The health and education sectors promoted the establishment o f local mechanisms l ike the CLAS (Local Health Administration Committees) and C E I (Institutional Education Councils) which offer their clients the opportunity to influence and participate in service delivery. Currently, more than 760 CLAS and 7200 C E I have been established.
158. Finally, in order to measure the impact o f all the afore-mentioned actions and to enhance citizens' voice on issues of corruption, the GOP has committed to assess public perceptions o f transparency and corruption, b y incorporating a module on governance and transparency into the ENAHO national survey. A baseline was established in 2003 and the annual application o f the survey w i l l enable to monitor the change in perception over time.
Triggers, Benchmarks, and Monitoring Indicators for PSRL I V
159. Building on the efforts initiated during the previous PSRLs to promote transparency and participation, the PSRL lV seeks to further institutionalize these processes b y incorporating them into a results-based and participatory monitoring and evaluation system o f the PSPs. The implementation o f a transparent, participatory, and results-oriented Monitoring and Evaluation (M&E) system w i l l help put in place a system through which the government w i l l be able to effectively track progress in reaching the objectives o f the PSPs within a decentralized context, while contributing to enhancing the transparency, quality, and efficiency o f social expenditures and giving citizens and users the opportunity to influence decision-making. The M&E system w i l l track and evaluate the levels and appropriate m i x o f spending on the PSPs at the national, regional, and when applicable, at the municipal level, the critical inputs and outputs, and the level o f satisfaction o f users measured through user-satisfaction monitoring methodologies.
160. In order to ensure the neutrality, objectivity, and cross-sectoral character o f the M&E system and i t s connection to results-based management and decision-making processes, a multi-sectoral Technical Committee has been established to oversee the implementation o f the M&E system. I t consists o f representatives from MEF, CIES-PCM, the three ministries o f the PSPs (Education, Health and MIMDES) and representatives from regional and municipal governments through the CND. A working group within MEF responsible for designing and implementing the M&E system has started operating and a f i rst proposal for the functioning o f the integrated system has already been elaborated. The proposal includes a participatory assessment o f potential users o f the system (including c iv i l society), recommendations for means o f dissemination, periodicity o f reporting, coverage, indicators, stakeholder participation, and a calendar o f gradual implementation o f the system. The working group i s currently consulting an initial set o f monitoring indicators with different stakeholders, which have included the Council o f Ministers, each o f the social sectors, universities, research centres, and civ i l society organizations.
161. The working group has already produced an in-depth analysis o f expenditures of PSPs by region and according to poverty criteria, which has helped to identify continued targeting flaws and under-execution o f budgets. The analysis, as w i l l the subsequent periodic M&E reports, has been made publicly available on the Transparency Portal.
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162. In parallel, each ministry (MIMDES, Health and Education) has started designing and implementing i t s own sectoral M&E system. Teams of the sectoral systems coordinated with the MEF team to make them compatible with SIAF. These systems are adapted to each sector’s decentralization mode and pace, to ensure that regional and local governments can gradually start monitoring the implementation o f their programs, both regarding targets, such as inputs and outputs, as well as process, such as participation. In order to make effective use o f the information derived from the M&E system and to adjust program performance, so that any detected weaknesses can quickly feed into program management and be translated into performance improvement, the M&E system i s linked to the Performance Management Agreements o f those programs which have been decentralized (FONCODES and PRONAA). By September 2004, 122 municipalities had signed management agreements and 69 had established management committees involving users in decisions concerning the food and local infrastructure programs and tracking results. Management agreements tie MIMDES monitoring systems to decision-making and results through a Ministerial Directive defining sanctions and incentives. Additionally, 33 social auditing committees (Comites de Vigilancia) created by the Participatory Budget are tracking expenditures, procurement, and targeting o f decentralized food programs, and all provinces have set up procurement committees (Comites de Adquisiciones) involving c iv i l society representatives who are democratically elected.
163. As the Transparency Portal i s a key tool o f the M&E system, i t has been expanded to accommodate the information needs o f the system. Gradually, municipal governments are creating their own Transparency Portals, with information on expenditures, the social services they offer, users’ rights, eligibility criteria, and geographical coverage. Terms o f reference to evaluate and improve friendliness o f the portal have been issued. The evaluation, to be made by an expert independent organization, w i l l include the organization o f a panel o f users o f the Portal involving c iv i l society representatives, local governments, community radios and communication experts. In the meantime, a search engine has been added to the Portal in order to expedite information searches o f non-expert users. The appraisal mission o f the Bank held in September 2004 strongly encouraged the GOP to speed up the evaluation and improvement o f the Portal, understanding that friendly access to budget and public expenditure information b y non-expert users i s key to the participatory dimension o f the M&E system.
164. In order to increase the sustainability o f citizens’ report cards, the INEI has permanently incorporated modules into i t s national household survey (ENAHO), generating information on levels o f users’ satisfaction wi th the health and food programs. So far, INEI has made three monthly applications o f the new questionnaire as part o f the continuous- survey modality recently adopted by ENAHO. I t i s expected that the integrated M&E system as well as the monitoring systems o f the social sectors w i l l systematically use this information to set up their own report card mechanisms aiming at improving the quality and equity in access to the services they deliver.
Perspectives and Sustainability of Reforms
165. The establishment o f new mechanisms o f accountability and participation in the social sectors and in the process o f decentralization have opened opportunities for citizen participation in service delivery and policy formulation. Results f rom E N A H O indicate a
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significant increase in the levels o f participation, particularly among the poor, as shown in the table below.
Table 7. Adult members o f first quintile households. Participation in social organizations. 2003 2002 200 1 2000 61.2 71.8 82 86 38.8 28.2 18 14 100 100 100 100
Source: ENAHO 2000-2003.
166. The actions initiated under the PSRLs w i l l be continued through the recently approved Social TAL, which provides technical assistance resources to build the capacity o f the central, regional and municipal governments to continue implementing and perfecting the M&E system. The Social TAL w i l l s t i l l face the challenge of getting a stronger buy in all sectors involved in the M&E system.
167. A Japan Social Development Fund (JSDF) grant w i l l further complement these efforts by strengthening the capacity o f c iv i l society to participate in the participatory budget and monitor the performance o f PSPs. I t w i l l also seek to improve access o f the poor to the information contained in the Transparency Portal by creating interfaces tailored to their needs and through complementary mean such as community radio, bulletin boards and community media, as the Internet s t i l l remains out o f reach for many o f Peru’s poor.
168. Additionally, the Law o f Transparency and Access to Information i s under effective implementation. I t supports and enforces the dissemination o f information on PSPs and other decentralized social programs to communities. In the case o f the decentralized PSPs it contributes to strengthening the transparency and outreach o f regional and municipal governments.
169. The Bank, in collaboration with DFID and other partners, has initiated a study and broad dialogue on the accountability o f Peru’s social policy. This initiative aims at improving existing and newly developed transparency and accountability mechanisms and institutions in the context o f decentralization and ensuring their sustainability through demonstrating effectiveness and expanding their ownership to sub-national authorities, political parties, users of the social programs, and civ i l society organizations.
D. Transparency of Financial Management and Procurement Administration
170. Peru’s overall risk level assigned in procurement i s average according to the CPAR study carried out in 2001. This rate implies that lending operations and investments under Bank-financed projects in Peru are viable but should adhere to transparency as much as possible since the CPAR identified procedures and practices that don’t conform to international procurement standards and practices, such as the selection and hiring o f consultants.
171. Procurement initiatives agreed to in the context o f the PSRL have supported the objectives of increasing transparency, economy, and efficiency in public procurement, and strengthening the roles o f state entities responsible for supervision and control o f government agencies with responsibility in management o f public procurement such as the
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Audit General Office (Contraloria General de la Repdblica --CGR) and CONSUCODE (Consejo Superior de Contrataciones y Adquisiciones del Estado). The aforementioned objectives are ful ly consistent with those proposed in the Peru CPAR Action Plan agreed with the Government in 2001.
Government Strategy
172. In Peru, transparency in public procurement has been weak due to a limited and timely access o f bidders to procurement notices and documents related to management of bidding processes. Also, lack of clear oversight and control mechanisms needed to enforce compliance o f government agencies with the provisions o f the local procurement framework has contributed to weak enforcement o f procurement regulations.
173. The above has prevented many bidders from being able to submit tenders, leading to management o f bidding processes that have limited competition, bidder complaints, and a public perception o f lack o f transparency.
174. Although the public sector in Peru has both an Audit General’s Office responsible for auditing and control and a national procurement agency in charge o f administration and oversight o f the local procurement framework, considerable overlapping has existed between those agencies in carrying out their respective assigned roles. In the past, such overlapping, far from contributing to ensuring transparency and increasing effectiveness in control of public procurement led to dispersion, inefficiency, and poor results.
175. Consistent with the objectives for increased transparency and supervision and control in public procurement identified in the Peru CPAR, the Government, in the context o f the PSRL implementation, outlined a two-pronged strategy grounded on: a) the signing o f an inter-institutional agreement between CONSUCODE and CGR for increased coordination and efficiency in performing control and supervision functions in public procurement, and b) the issuing o f a Policy Guide thereby the Government outlined broad guidelines towards development and gradual implementation o f an E-Government System (Sistema Electr6nico de Adquisiciones y Contrataciones Estatales - SEACE) for the procurement o f goods and services, and works.
176. SEACE’s conceptual framework envisaged overall implementation o f the e- government procurement system in three sequential phases: i) a web page for advertisement o f bidding notices and documents in the CONSUCODE Portal; ii) an e-government system for purchase o f minor goods and services and; iii) an e-government system for procurement o f major goods and c iv i l works contracts. Development and implementation o f the f i rs t two phases (the latter one to be implemented on a pilot basis) were agreed on as benchmarks for the PSRL 111.
177. The scope o f the institutional agreement encompassed the preparation o f regulations and procedures which w i l l guide supervision and control tasks by CONSUCODE and CGR and later the issuing o f a single consolidated manual for the use o f those agencies’ staff and public procuring entity staff.
178. The Government has been committed to improving transparency and access to information and to promoting better governance and administration o f public finances. The
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Country Financial Accountability Assessment (CFAA) conducted in 2001 concluded that the financial tools at the disposal o f the Congress and Executive Branch comprised o f (a) a robust financial administration legislation (b) highly dedicated staff and (c) an effective integrated financial management system (SIAF).
Activities supported by PSRL I, II and III
179. At the design phase o f the PSRL, the identification in the Peru CPAR Action Plan o f tasks proposed for implementation o f an e-Government procurement system and the strengthening of the roles of state entities responsible for control and oversight o f public procurement served as a basis for outlining the Government strategy described above and later on as triggers for PSRLII and subsequent phases.
180. Thus, PSRL I envisaged only indicative benchmarks and minimum triggers to mark progress in the program development towards implementation o f PSRL 11. Consistent with this, the Government of Peru issued the Supreme Decree No.031-2002-PCM a Policy Guide on which basis an E-Government procurement system aimed at increasing transparency and efficiency in public contracting w i l l be phased and gradually implemented. Electronic means for advertisement o f bidding opportunities and procurement information through SEACE w i l l become mandatory for public agencies, and training to public procurement servants and goods and services suppliers w i l l be delivered. CONSUCODE was appointed as the Government agency responsible for developing and implementing the SEACE, as provided in the Decree.
18 1. The signing o f the inter-institutional agreement between CONSUCODE and CGR aimed at strengthening oversight and increasing coordination and efficiency of both agencies in carrying out their respective oversight and control roles in public procurement was signed in December 2001. With the issuing o f the Policy Guide, as a trigger, and the signing of the Inter-institutional Agreement, as a benchmark, agreed conditions for the PSRL I1 were successfully met.
182. Later on, the PSRL I1 embedded benchmarks and triggers as conditions for PSRL 111, namely, the implementation o f a Web Page in the CONSUCODE Portal (Portal de Compras), including the incorporation o f approximately 600 public agencies regularly advertising bidding notices and other equally relevant procurement information, as a benchmark; and the preparation and issuing o f control and supervision guidelines and directives in public procurement b y both CONSUCODE and CGR for mandatory use o f public contracting agencies, at all government levels, as a trigger. By end o f June 2003, a total o f 648 public agencies was regularly advertising in the Web Page information on procurement plans and management of procurement processes, and CONSUCODE and CGR developed and issued a set o f directives and guidelines on supervision and control on public procurement through a joint technical committee created to that end.
183. The major recommendations of the CFAA, related to (a) more effective oversight b y Congress o f the budget process and review o f the allocations o f available funding, (b) more detailed and frequent reporting on expenditures to Congress, and (c) unfettered surveillance and reporting b y the Controller General o f the acts and reports of the executive. In response to the CFAA, three (3) indispensable elements o f a sound fiduciary framework were built into the policy framework for the PSRL 11: (1) Strengthening of the congressional oversight
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of the use o f public funds (2) Increased independence of the Controller General, and (3) Expansion o f the scope and coverage o f the integrated financial management system SIAF.
184. Strengthened Legal Framework: The National Control Law N o 27785 was approved on July 22, 2002 and ensures functional autonomy o f the Controller General’s Office (CGR), in accordance with the provisions o f the Constitution. The CGR i s now exercising ex-post control according to i t s legal mandate, over the finances of the Ministry o f Defence and other security services, and a special audit has been carried out.
Triggers, Benchmarks, and Monitoring Indicators for PSRL IV
185. At the design phase o f PSRL 111, consideration was given to the expansion o f the CONSUCODE Web Page in order to increase the Portal’s capacity for advertisement and create a single comprehensive manual on supervision and control guidelines joint ly prepared by CONSUCODE and CGR. This would enable the performance o f their supervision and control roles in public procurement to be more integrated and coordinated. The accomplishment o f this tasks was proposed as a benchmark for PSRL IV. However, towards the end of PSRL I11 design, the Bank, in agreement with the Government, decided to transfer those initiatives to the DECSAL Project, then under preparation.
186. This decision was based on the Government’s advances towards decentralization of administrative responsibilities and functions to the sub-national governments and on the expected limited impact o f implementing those initiatives within one sector while decentralization was already underway, and on anticipated Government difficulties o f facing challenges and risks posed on transparency, control, supervision, and prevention o f corruption at all government levels. B y then, the Government had decided that the E- Government procurement system (SEACE) was to be implemented as part o f a component (E-Government) designed under an IADB-financed State Reform and Modernization Project.
187. The Government’s attention then focused on the social protection programs and the need for maximizing the impact and benefits o f PRONAA’s food aid programs decentralized to approximately 67 provincial municipalities by issuing more transparent regulations for purchases o f food; carrying out a wider dissemination o f procurement notices; and increasing public access to procurement information through the CONSUCODE Web Page and other means o f advertisement.
188. The preparation and issuing of revised regulations by CONSUCODE and MIMDES respectively was agreed as a benchmark for the PSRL IV. Pursuant to the Supreme Decree No. 002-2004-MIMDES, dated on 03/18/2004, the Government issued new procurement regulations for mandatory use o f local governments and PRONAA. The new regulations - implemented as o f 03/25/2004- are ful ly consistent now with the principles and provisions o f the local procurement law and replaced previous regulations that lacked transparency and applied procurement procedures that did not conform to the local procurement framework. New regulations explicitly give CONSUCODE the mandate o f overseeing management o f food purchase processes and deciding on submission o f any claims b y bidders.
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Perspectives and Sustainability of Reforms
189. Despite the fact that food purchases are targeted to social protection programs, successful implementation of new procurement regulations may provide valuable insights for assessing management o f food purchases and bring valuable lessons for replication and quality improvement in public procurement across sectors.
190. The new regulations for purchases o f food incorporate basic principles underlying the public procurement framework, as described in the local procurement law (Ley de Contrataciones y Adquisiciones Estatales). Procedures and practices for procurement notices, bid submission and evaluation, and contract award, as outlined in the new regulations for food purchases are -to a large extent- now consistent with those in the procurement law.
191. Notwithstanding the above, some limitations should be recognized in a transition period o f decentralization from PRONAA to local governments with respect to transparency, institutional capacity, and monitoring and oversight, provided that efficient implementation and the appropriate impact o f the food aid programs at a national level are achieved.
192. be accompanied b y complementary actions. A few recommendations follow immediately:
The efficient implementation and continuous improvement o f new regulations should
193. CONSUCODE should issue directives making i t mandatory for PRONAA and local government agencies to advertise their procurement notices and bidding documents in the CONSUCODE Portal. This would enable increased dissemination o f procurement opportunities to the local business community and give c iv i l society access to information on public procurement, with expected benefits in competition and transparency.
194. CONSUCODE should implement standard bidding documents for mandatory use o f all government agencies involved in purchases o f food in social protection programs. Streamlined structure and content may help government agencies -with a wide range o f technical capacities- to use such documents in a right and efficient manner. Standard documents may enable CONSUCODE to provide training to agency staff in a straight forward and standardized fashion and carry out a quality supervision o f food procurement processes, as mandated b y the Supreme Decree No.001-2004-MIMDES.
195. In social protection, the implementation o f nutrition and social investment funds programs in a decentralized context i s much more intensive in procurement of goods and services. Purchase o f food as a vehicle to ensure positive impact and results in food aid programs i s instrumental, but i t cannot be achieved overnight and thus requires sustained oversight and monitoring efforts on the Government side.
196. Periodic evaluation o f procurement management in a representative sample o f municipalities i s a good means o f assessing performance and quality o f results and retrofitting the procurement regulatory agency for improvement o f regulations and MIMDES-PRONAA on how well a decentralized procurement strategy i s being implemented and what adjustments need to be introduced.
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197. I t i s therefore highly recommended that an initial study be carried out over a pilot sample of municipalities in order to determine the degree o f selected agencies’ compliance with procurement procedures and practices, as defined in the regulations, to assess the overall quality o f procurement processes and results, and to identify critical issues for the achievement o f better results in terms of transparency, competition, and efficiency. If all in all, procurement capacities are deemed adequate and leading toward good results, then the transfer of programs may be easier and more expeditious. Conversely, i t may be that results suggest that current procurement capacity levels are low and that the transfer o f programs should be undertaken with more intensive technical assistance to agencies and training to staff in the search for increased institutional capacity and certification o f procurement staff.
198. I t i s expected that a continuous use o f this kind o f approach w i l l help improve quality o f results and effectiveness o f food aid programs over time and increase country-wide quality o f public procurement.
199. During 2003, two important regulations were issued to support the Control Law issued during 2002. The first regulation institutionalises the role and function o f the internal auditor at all levels of government (central, regional, local) and the second regulates the designation o f eligibility of private audit firms to perform financial and operations audits o f public entities, including the procedures for registration, evaluation, designation, public competition, and ex-post quality control by the CG.
200. Through the Portal de Transferencia and the Ventana Amigable, a wide range o f financial and economic data i s made available to the public in general. Information i s available on Macro Economic Projections, Strategic Plans o f each Central Government entity, consolidated data on budget execution, transfers to Regional and Local governments, consolidated debt position (internal and external), execution o f investment projects. Given the accelerated scheme o f fiscal decentralization, there i s a need to ensure that the authorities with overall responsibility for accounting, financial reporting, and external control keep abreast with the decentralization effort and have adequate institutional arrangements in place to discharge their individual roles.
V. The proposed Loan A. Link to Country Assistance Strategy and Other Bank Operations
201. The proposed loan i s part o f the PSRL program, included in the CAS discussed by the Board in August 2002. That document assigned the PSRL a central role in two o f the three objectives o f the Program Matrix (“Equity and Social Justice” and “Institutionality”), because PSRL i s supporting important reforms in the social sectors and the institutional improvements necessary for improved service delivery.
202. While the CAS document envisaged two PSRL operations (PSRL I1 and PSRL 111) for a total o f US$200 million, the solid economic performance of Peru since i t s approval resulted in the satisfaction o f the four triggers established for operating in the CAS’ high lending scenario. As a result, PSRL I11 was approved for US$ l50 mil l ion and an additional (and final) PSRL I V for US$lOO was included in the lending program in late 2003. Consequently, the total PSRL operation w i l l be for US$450 million. The Bank i s currently revising the Peru CAS. This revision w i l l recognize the role o f PSRL in supporting
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government efforts to promote improvements in l iving conditions and poverty in Peru, and w i l l confirm the assessment that made i t possible to move Peru to a high-case scenario and propose a PSRL IV. In the future, i t w i l l include several venues for support to enhance the reforms undertaken under the PSRL IV.
203. In addition to the series of PSRL operations, the Bank has been actively involved in the development and implementation o f social policies in Peru. Support for the Government has been provided through AAA products, other adjustment operations, several investment loans, and technical assistance loans. The design and supervision o f PSRL benefited from the analysis carried in a 2000 Health Report (Peru: Improving Health Care for the Poor), a 2000 Education Report (Peru: Education at a Crossroad), a 2002 Public Expenditure Review (Peru: Restoring Fiscal Discipline for Poverty Reduction), and a 2004 Pensions Report (Peru: Restoring the Multiple Pillars o f Old Age Income Security). Also, two studies currently under preparation, a Poverty Assessment and a study on Governance and Accountability in Social Policy, have produced useful information and analysis for the preparation o f a loan and w i l l continue to promote policy dialogue with the government.
204. Three investment operations, including one in health (Health Reform APL), one in education (Rural Education APL) and one in water and sanitation (PRONASAR) have supported several o f the actions described in the different PSRL. Also, the second part o f a different programmatic adjustment loan (Programmatic Decentralization and Competitiveness Structural Adjustment Loan - DECSAL) i s now under preparation, covering aspects o f decentralization not included in PSRL. The DECSAL wil l strengthen the policy-dialogue undertaken by the PSRL and expand important reforms undertaken under the PSRL IV. In addition, two technical assistance loans (“Peru: Accountability for Decentralization in the Social Sectors” and “Institutional Capacity for Sustainable Fiscal Decentralization”) were approved on July 2004 to support the implementation o f decentralization policies in Peru. An ESW on governance and accountability in the social sectors i s currently being carried out, expanding the dialogue on key PSRL pillars.
205. In particular, the DECSAL I1 and the PSRL IV are mutually reinforcing and complement each other through strategic support in carefully selected areas. The DECSAL continues to support the fiscal and institutional framework for decentralization, ensuring that sub national governments have the capacity to manage the social sector responsibilities and resources that w i l l be assigned to them. I t has several important linkages to the PSRL. I t promotes the cautious and gradual decentralization o f social sectors though i t s support o f the accreditation process, management contracts, including contracts between the central and regional government levels on health and education. I t supports the design and implementation o f fiscal transfers, including earmarked transfers, such as those for social infrastructure programs. I t strengthens the transparency and participation theme o f the PSRL by promoting participatory budgeting. I t also complements the teacher reforms b y broader c iv i l service reforms, such as the legal framework for the c iv i l service and automatic payroll support, through the SIAF, another reform supported both by PSRL and DECSAL loans. Finally, i t complements the support o f the PSRL and social TAL for the elaboration o f a cross-sectoral performance-based M&E system aimed at generating greater efficiency and effectiveness in expenditures.
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B. Program objectives and Prior Actions
206. The main objective of PSRL has been, since the beginning o f the program in 2001, to support Peru’s medium term social policy reforms. The PSRL program started in 2001 supporting the emergency actions implemented by the transition government, while PSRL I1 focused on the development o f long term strategies, and PSRL 111 aimed to advance the implementation of these strategies. PSRL IV i s the fourth and last stage o f the programmatic loan and has a particular focus on consolidating the reforms and increasing their sustainability into the future.
207. While the policy matrix has had some changes during the four stages of the operation, the basic objectives, described in the program document o f PSRL I, have been maintained through the whole operation: “...The objective of the PSRL is to support [...I build[ing] the bases for a transparent and participatory resource allocation mechanism, rationalization of expenditures, decentralized implementation and systematic performance- tracking of social programs.. .”
208. To reach these objectives, the PSRL focused on three basic goals, which guided the different actions throughout the four years. These goals are to (i) improve the antipoverty focus o f public expenditure; (ii) increase the access o f the poor to quality health and education services; and (iii) enhance the transparency o f social programs, while empowering beneficiaries in their design and implementation.
209. During PSRL I11 negotiations the Government and the Bank defined a l i s t o f proposed actions to be adopted before PSRL IV appraisal. These include actions in budget management, a legal framework for decentralization, food programs, pension policy, reforms in health and education, implementation o f a monitoring and evaluation system, and improvements in the procurement system. Among the fourteen actions expected to be completed b y appraisal o f PSRL IV, there were eight triggers and six benchmarks. O f those, one trigger had to be replaced, due to changes in the pace o f the decentralization process. The remaining triggers and benchmarks w i l l be met b y appraisal, albeit some minor changes were made to the phrasing, to clarify them.
210. The eight triggers were focused on the eight main areas o f the social policy, and advances in each o f them reflect the overall effort o f Peru’s government to reform the social sectors. As each o f these triggers are expected to by ful ly met at the time o f appraisal, they w i l l be presented to the Board o f the Bank as the Prior Actions for this operation.
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Area Original Trigger Status
Legal norms in place allowing MEF, and the M in i s t r i es of
Education and Health, when applicable, to sign management
agreements (Convenios de Administraci6n por Resultados
-CAR) wi th entities a t the national, regional and local
Public Expenditures
Allocation
Legal Framework in place establishing a regulatory role for the M in i s t r i es o f health and Education in the Planning and monitoring o f Health and Education resources channeled to the regions. Regulations would include criteria
o f efficiency, targeting, participation, transparency and fiscal responsibility
21 1. The first trigger i s the only one that had to be replaced. This trigger was prepared in the context o f the decentralization process, as i t was expected that these two sectors would start to decentralize in the short te rm and, hence, i t was critical to have an adequate legal framework to guarantee that access and quality o f services would not decline and would improve thanks to opportunities created through decentralization. However, during 2004, the Government made i t clear that i t i s not planning to advance with decentralization of these sectors in the short term because i t considers current conditions inadequate, as the institutional and political environments are not adequate. This situation reduced the relevance and feasibility o f the planned legal framework. Decentralization of health and
Priority Social Programs (psps’
Protection
Reform Food Programs
Reform Pensions
Improve Access o f the poor to health
services
Improve Quality access to
Education Enhance
Monitoring and Evaluation o f
Social Programs, with social
participation Improve
transparency and efficiency in procurement
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levels. Fo r 2004, the execution o f the PSPs fo r the months pr ior to the appraisal of PSRL I V
reached a t least 85% of i ts global target w i th individual reallocations not above 30%
The legislation fo r the transfer o f food programs to municipalities is being
Met
Replaced for clarification by: There i s a normative
framework in place assuring the implemented implementation o f transfers o f
food programs to municipalities The Government published a strategy
document describing policies to increase coverage and efficiency o f existing systems and i ts corresponding action plan and schedule and
has initiated i t s implementation There has been sustained progress in the main
areas o f the PSRL I11 health component, including SIS coverage rates and actions to
correct SIS’ tendency o f rising expenditures in tert iary care
Human Resources management system under nationwide implementation
Monitor ing and Evaluation system which i s Participatory, transparent and w i th a focus on
results has been designed and i s under implementation fo r the PSPs, in the context o f
the decentralization process
Improved regulations for purchase o f food fo r food-aid programs are implemented by provincial municipalities as mandatory
Met
Met
Met
Met
Met
education sectors are the last stage in the government chronogram of decentralization. The adoption o f formal laws in the short term was therefore neither urgent nor feasible. Meanwhile, some actions taken during 2004 have improved the ability of the government to control the decentralization process and avoid disruption o f social programs. The Law on Accreditation, approved in June 2004, establishes rules regarding the minimum conditions local governments must satisfy before they can receive decentralized programs and defines the authority o f the central government to take back program execution i f municipalities do not hold an adequate standard o f operations. Also, the Government has advanced in the institutionalization of management agreements (Convenios de Administracih por Resultados -CAR) as a tool to regulate, monitor, and enforce compliance with goals by local authorities as different programs decentralize. The CARS w i l l be ful ly regulated through the Permanent Budget Law, the framework legislation that sets the requirements for the annual budgets, which i s expected to be approved b y Congress before November 30, 2004. While specific laws on Health and Education w i l l be necessary to proceed with a smooth decentralization of these sectors, the steps taken during 2004 certainly show an advance in right direction. Given these considerations, the team considered i t reasonable to replace the original trigger with one that i s more consistent wi th the slower advances o f decentralization in the social sectors, while providing evidence that the Government has maintained i t s commitment to the protection o f social programs during the decentralization process.
212. The phrasing in the trigger about the food programs was corrected to make i t clear that the required regulations are not implemented exclusively though laws, and that it refers only to the programs that have been decentralized. The trigger had four specific goals: (i) to have the budget for nutrition programs allocated following a pro-poor formula, (ii) to ensure that performance agreements related to Comedores Populares have been signed with 50 municipalities and are being monitored by a central government agency, (iii) to have monitoring information available to the communities o f these 50 municipalities, (iv) and to require that compliance with targets i s a criteria for the transfer o f resources to these 50 municipalities. These goals were satisfied through a combination o f laws, decrees, regulations, and Ministerial directives, as the actual enforcement depended on different authorities.
213. The remaining six triggers have been met, and in several cases, the expected goals were exceeded. Budget execution for the six PSPs in the January-August 2004 period was 87% o f the global target; on pensions, the Government not only published the strategy document but i t took a very proactive attitude towards the Civ i l Servants program, proposing (and receiving an overwhelming support from Congress in a first vote) a Constitutional amendment that would allow the closing o f this extremely unfair and expensive scheme. Coverage goals in the Health Insurance program were largely exceeded, for both children under 5 years old and pregnant women; and the implementation o f the new human resources system in Education proceeded at a much faster pace than expected, wi th nearly 90% o f executing units using the unified payroll system, a major improvement in comparison to the situation just a few years ago. Finally, the development o f a participatory, transparent monitoring and evaluation system for the social programs and the modifications in the procurement system have proceed as expected and should result in better accountability and social participation in the design and implementation o f social programs.
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214. In addition to the triggers, a group o f six benchmarks were included in the matrix. All o f them have been met. They include (i) the publication of the Macro Social Framework, providing a medium term framework to the social policy planning; (ii) the protection o f PSPs at the budgeting stage, as the 2004 budget continued to be equal or higher in real terms than in 2003, and the planned 2005 budget w i l l continue this trend, (iii) the implementation o f two laws increasing the contribution rates and reducing high benefits in the Cedula Viva pension scheme, which w i l l generate savings o f approximately S./75 mil l ion per year, and the collection o f information from agencies managing the scheme, (iv) the signature and monitoring of management agreements between Ministry o f Health and the Regional Health Departments (DISAs). Agreements have been signed with 29 DISAs (only L ima and Callao did not sign due to institutional problems within the DISAs) and results are being monitored in all regions (including Lima and Callao), (v) a teacher’s hardship and merits incentives system has been developed and i s under consultation, and (vi) the Law o f Transparency and Access to Information has been implemented, allowing communities to access information in order to assess the implementation of social programs.
215. The overall advance o f the programs, considering the triggers and benchmarks that have been met, as well as the proactive attitude o f Peru’s authorities to continue advancing in their social reform program has been important, as i t has not only an immediate effect on social policies but also consolidates previous reforms and confirms a sustained path.
C. Cooperation with other multilateral agencies and donors
216. PSRL IV i s a World Bank operation, wi th no participation b y other agencies or donors. However, the team has been in contact wi th specialists in this area at the IDB, which i s currently preparing a social sectors loan. The IDB operation aims at increasing equity at the regional and individual level, b y improving programs’ targeting and developing a system to monitor the quality o f expenditures in the social sectors.
217. Several activities included in the IDB operation are linked to PSRL actions, both in this fourth stage and in the previous loans. In this way, IDB loan continues the support for some o f the most critical areas in social policy reform, enhancing their sustainability over time.
218. The World Bank and the IMF have engaged in an interactive and continuous dialogue on the World Bank’s country assistance implementation, as wel l on the subsequent programmatic loans, Social Reforms Loans and Decentralization and Competitiveness Loan. The DECSAL I1 Program has been coordinated with the IMF at all stages. The dialogue has concentrated on the macroeconomic background, setting of triggers, overall loan conditionality, and risks and estimation o f fiscal implications o f Banks’ operations. On issues related to decentralization, the IMF has taken the lead in assisting in the design o f tax reform, the Bank has taken the lead on the design and implementation o f decentralization of the social sectors and pro-poor spending policies, and on the area o f monitoring and evaluation o f public expenditures. Joint work in particular continues in the area fiscal decentralization and competitiveness. The Bank has contributed together wi th the Fund on drafting laws and regulations for fiscal decentralization. In addition, a joint IMF-World Bank-IaDB mission has taken place in September 2004 for a pilot study on Public Investment and Fiscal Policy.
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219. At the request of the Peruvian authorities, the IMF Executive Board approved a 26- month Stand-By Arrangement on June 9, 2004 (see Annex 5), which the authorities are treating as precautionary (Peru has not made any drawings under IMF arrangements since 1997 and intends not to do so under this arrangement). The program for 2004-06 aims at consolidating macroeconomic stability, fortifying confidence, strengthening the basis for sustainable growth and employment creation so as to reduce poverty. I t focuses on the consistent implementation o f the authorities’ inflation-targeting framework and on fiscal consolidation, with a view to continue reducing vulnerabilities associated with public debt and financial dollarization, while increasing the scope for priority social and infrastructure investment. Discussions o f the first review under the Stand-by Arrangement were held on September 2004. The IMF staff‘s initial assessment notes that the economy has continued to perform well in 2004 and that the medium term outlook remains favorable. The political situation i s viewed as a main risk to the program, but this i s tempered by an apparent political consensus for prudent macroeconomic policies and certain structural reforms. To help achieve the program objectives, the staff has indicated that further structural progress needs to be made, including in the areas o f competitiveness and fiscal decentralization. Both issues are being addressed by the Government with the support o f the proposed DECSAL 11.
D. Fiduciary Arrangements and Loan Disbursement
220. During the preparation o f this fourth phase loan, the Bank team has performed a review o f the current status of the PFM reforms achieved during the program implementation of prior PSRLs and as a result o f the CFAA conducted in 2001, concluding that these reforms continue to be in force and sustainable. Over the l i fe o f the program, the Government has continued to strengthen public financial management on i t s own initiative and the Bank has supported those initiatives through complementary operations in the country portfolio, namely the DECSAL I and I1 and the supporting two technical assistance Loans, namely Institutional Capacity for Sustainable Fiscal Decentralization and Accountability for Decentralization in the Social Sectors loans.
221. The Bank’s due diligence included desk review of available information such as the annual external Audit Report o f the Central Bank, which contained an unqualified opinion; a review o f the results o f a Special Examination performed o f the Central Bank b y the Controller General’s Office; and meetings with Government Officials including the Controller General o f the Republic. The IMF Safeguards Assessment o f 2001 concluded that the Central Bank procedures and controls to manage resources, including IMF disbursements, appear generally adequate. Recommendations made by the fund included:- 1) Strengthening o f the special external audit committee 2) Implementation o f International Accounting Standards as appropriate to the annual financial statements 3) Enhancement in the follow of external audit recommendations b y the Internal Audit Office. These recommendations have been ful ly implemented. The Fund i s currently carrying out an update o f the 2001 Assessment.
222. Disbursement arrangements w i l l fol low the procedures for DPL approved b y the Board on August 2004. Except as the Bank may otherwise agree: (i) all withdrawals from the Loan Account shall be deposited b y the Bank into an account designated b y the Borrower and acceptable to the Bank; and (ii) the Borrower shall ensure that upon each
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deposit of an amount o f the Loan into said account, such amount or an equivalent amount i s credited in the borrower’s accounting system to an account, acceptable to the Bank, that finances budget obligations. The proceeds o f the loan may not be used to finance expenditures typically excluded under the Loan Agreement.
E. Risks
223. PSRL lV i s not without i t s risks and challenges. Being the last stage of a four-year program, i t s sustainability becomes the most serious challenge, as there i s no legal commitment from the Government to sustain some policies after this operation and Presidential elections approach. Political instability persists in Peru, and some o f the policies supported by this program may become the subject of sectoral pressures.
224. The country’s main weaknesses include low public support for the Government, some regional unrest, continued low levels o f public investment, and the uncertainty surrounding the 2006 presidential elections, which are also prompting opposition leaders to put pressure on the government to increase expenditure. Social demands and conflicts have escalated in recent month^,^ and this could place additional pressure on weak public finances and social service-delivery at a time when decentralization i s underway. The proposed decentralization reforms, including the accreditation o f sub-national governments are politically sensitive. The design and management o f these mechanisms could cause distortions in fiscal and functional assignments at the sub-national level with negative consequences for social service-delivery and the overall credibility o f the decentralization process. This reinforces one o f the most serious risks for the PSRL, which i s the risk o f a dominance o f political over technical criteria as the country i s moving towards presidential elections.
225, Diverging views on the goals, instruments, and methodologies of decentralization between key actors at the central level could further limit the progress and sustainability o f the reforms. In a highly unequal society, such as Peru, opposition f rom vested political or economic interest groups might also reduce the progress o f programs or, depending on social movements and the next administration, reverse some reforms. This i s further compounded b y growing support for the opposition. Substantial progress has been made with reforms, but the remaining agenda i s great and the government faces important challenges ahead in implementing it. Greater consensus between key sectors at the central government level w i l l be needed to ensure greater sustainability o f the reforms. This includes the need for a change o f management and a communication strategy to address the unrealistic expectations about decentralization shared by large parts of the population and many sub-national governments. Reforms w i l l need to heighten the level o f transparency at the national and regional and local levels o f public administration, where corruption continues to be a challenge.
Since taking office, the current administration has faced cycles o f damaging political protest against some o f i t s key policies. The Arequipa riots, in June o f 2002, were a response to efforts to privatize state-run energy companies in southern Peru. These demonstrations resulted in virtually ceasing privatization in 2002 and 2003. In 2003, the government faced similar protests by coca workers, which were only resolved after promises were made that were then largely unfulfilled. The government also faced a strike by teachers, which forced it to offer a wage increase. Social unrest continued in 2004 and escalated when on April 2004 the mayor o f the small town o f Ilave, in the department o f Pun0 was accused o f corruption and killed by a horde.
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226. There are two mitigating factors that have reduced the probability that these risks w i l l affect the program’s sustainability. First, PSRL has actively supported (with an important degree o f success) the adoption o f core principles (bases) of a poverty reduction strategy. These principles have been endorsed by a national dialogue, coupled with the Roadmap, and helped create greater consensus in the social sectors and increased commitment to reforms. Also, PSRL has promoted a participatory approach in the design and implementation of social policies, with active participation o f c iv i l society at different levels of government and consultations with sub-national governments. The implementation o f a transparent evaluation and monitoring scheme, support for expansion o f the CLAS model in health services provision, and changes in procurement are a few examples o f policies that w i l l result in more sustained and better involvement b y NGOs and beneficiaries, demand for accountability and their ownership over the programs, and thus expand political support of the reforms in the long term. Most recent progress in the Ministry of Education, for example, in the human resource management, underlines the increased ownership o f reforms in key ministries beyond the MEF where ownership continues to be strong.
227. Secondly, the Bank w i l l continue to support the reform o f social programs through several different operations, among which the Decentralization Loan (“DECSAL”) and the Technical Assistance Loans for the Social Sectors and Decentralization are most important. DECSAL w i l l continue to support the implementation o f decentralization in the Social Sectors, while the Technical Assistance Loan w i l l finance further development o f specific activities included in PSRL. The ESW on the social sectors currently undertaken b y the Bank also provides an opportunity for the Bank to maintain and deepen the policy dialogue in preparation for upcoming social sector operations, helping to increase the sustainability o f PSRL reforms and adding further international experience to the specific social sector analysis undertaken. Also, IDB i s currently working on a Social Sectors Loan that i s ful ly in line wi th PSRL objectives and w i l l aim at consolidating and deepening the reforms implemented in the last four years.
228. The best protection against sustainability risks i s ownership o f reforms by the Government. When government officials have close involvement in the definition and implementation o f policies, they are much more l ikely to support them when other sectors propose changes. In the case o f Peru, ownership has been relatively high, as policies and programs have been designed b y the Government, and the Bank had a supporting role. As in other reform programs, the commitment by authorities in different areas has not been uniform, but even after many changes in the Cabinet, the government has continued to sustain the basic framework o f PSRL as the core o f i t s social policy, indicating that i t w i l l continue to do so after the PSRL program i s completed.
229. Given the high level o f dollarization throughout Peru’s economy, there i s a sustainability risk linked to possible external interest rate and exchange rate shocks. While it i s not possible to completely eliminate this type o f risk, the Government has developed a sustained effort to diminish it, by carefully implementing i t s stabilization program, including particularly i t s efforts to achieve fiscal and debt sustainability.
230. A more detailed set o f r isks related to the different components o f the program are presented in the next table, indicating the level o f risk we assign to each problem, the
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specific mi t igat ing actions that the Government has taken or wi l l take in the near future, and the ro le o f WB instruments to support these mi t igat ing actions.
1
2
- 3
- 4
Risks
MacroRinancial Risk. High dollarization o f public and private liabilities create vulnerabilities in case o f sudden depreciation o f local currency Pressure for High Spending: Pre- electoral pressures may destabilize expenditures control
Inadequate Fiscal Decentralization Framework: Lack o f adequate framework may put at risk service delivery Protecting the budgets o f PSPs
Geographical Targeting: Political and other pressures might affect effectiveness o f targeting
Table 9. Risks and M i t i na t j Level o f Risk
M
H
L
H
M
” Mitigating Actions
Sound macroeconomic policy and sustained economic growth to reduce exposure.
1. Positive IMF review o f Stand B y arrangement. Application o f “Hoja de Ruta” may reduce conflicts and increase governance.
3. Accreditation Law passed and provisions in the General Budget L a w to be approved b y November 2004 provide GOP with adecuate framework 4. The 2005 Draft Budget L a w protects Health and Education PSPs in 2005. Other regulations protect pro-poor expenditures and health and education systems beyond 2005.
2005 Budget L a w distributes anti- poverty PSPs to municipalities according to pro-poor formula. Supreme Decree established the principles for geographical targeting and required MEF to
; Act ions Key Assumptions
Tax Reform provides additional revenues to finance pending promises (teacher wages,
Regional Governments, Agricultural Credit) General Budged L a w i s approved in November 2004 as proposed
requests by
2005 Budget L a w and General Budget L a w are approved as proposed
2005 Budget L a w i s approved as required, MEF holds enough political power to enforce compliance
WB instruments to support mitigating x t ions DECSAL
DECSAL and TAL “Accountability for Decentralization”
Health Sector Reform APL, Rural Education APL
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5
6
Risks
Pension Reform: Insufficiency in advances
Health and Education: Stalling in reforms
Level of Risk
7
M
M
M Monitoring & EvaluationRransp arenc yParticipatio nlQuality
o f strategy SIS financing for 2005 - included in draft budget, and performance agreements wi th DISAS in execution. In Education, Ministry o f Education near completition of HR reform “Consulta Amigable” in operation and accessible. System o f monitoring indicators in designed and being consulted
The Government gives strong political support to the implementation o f a Monitoring and Evaluation svstem
WB instruments to support mitigating actions
Social Sectors TAL
Social Sectors TAL Health Sector Reform APL, Rural Education APL
Social Sectors TAL, JSDS
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VI. Program Benefits and Social and Environmental Impacts
231. Following the guidelines of OPBP 8.60, this section reviews possible effects of operation implementation. We consider the program’s impact on the poverty level and social conditions, i t s impact on the environment, the role o f c iv i l society in the design and implementation of the policies proposed here, the development o f the program, and fiduciary aspects.
A. Poverty and Social Impact
232. The proposed loan w i l l provide financial support to the ongoing reform program for the social sectors. As such, i t w i l l accompany existing processes, rather than trigger new ones, so as to maximize their overall effectiveness and poverty reduction impact. In order to achieve the goals o f increased access to and improved quality o f social services, the loan policy matrix provides continuity for the retargeting o f selected social programs, such as the Feeding and Nutrition Programs, while supporting coverage expansion of basic services, such as primary education, health care and, in the medium term, pensions.
233. Better targeting of resources, together with coverage expansion, are expected to improve the overall allocation o f public resources for the social sectors, while increasing access and quality o f services for the poor and vulnerable. As a result, we do not foresee any negative distributional impact associated with such measures, nor any significant social opposition to the continuity o f the program.
234. Wi th regard to the indigenous population, the implementation o f PSRL should result in an improvement in quality o f living, as the different actions in the policy matrix aim to improve the conditions o f all social groups, particularly those who are poorer and more vulnerable. The M&E system supported by the PSRL has incorporated indicators that w i l l track differentiated access and quality o f service delivery o f the social programs according to ethnic, gender, and age groups. The system w i l l therefore help the adoption o f corrections in the delivery system to improve social inclusion. Additionally, special attention i s given to the needs o f dispersed and indigenous groups b y some protected social programs, as well as Bank-financed projects (education, health, Indigenous and Afro- Peruvians Peoples Development LIL). Also, the GEF-financed Indigenous Management o f Protected Areas in the Amazon Project w i l l help regularize issues related to land-tenure and environment in the Amazon area.
235. The policies supported by this program are not expected to have a direct impact on income poverty, as they are not directly focused on income provision but on improvements in services received b y the poor. Thus, the effect o f the program should be seen not in the level of income poverty but in other social indicators, such as health, education, and nutritional status, especially in poor and vulnerable groups.
236. Annex 4 o f this document presents a detailed review o f available indicators on poverty and social conditions. While availability o f data for recent years i s limited, information collected from the upcoming Poverty Assessment, the report under preparation
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by UNDP on the Millennium Development Goals, and the most recent National Household Survey show that while income poverty has not changed significantly in recent years, other social indicators have improved.
B. Environment, Forest, and Natural Resource Aspects
237. Following OP8.60, the operation was reviewed for any relevant aspects for the environment, forest and natural resources. As the loan focuses on reforming social policies and institutions at the macro level, the operation i s not l ikely to have significant effects on the environment, forests and natural resources in Peru. Actions included in the policy matrix aim to increase access to basic social services by the poor by improving fiscal and financial conditions and strengthening the institutions involved in service delivery.
238. While some o f the proposed actions are related to the health system, they do not have, directly or indirectly, an environmental effect, since they focus on the institutional arrangements between the central government and local authorities, the development o f mechanisms to improve community control over health services quality, and a financial scheme to provide care for mothers and children under five years old.
C. Participation
239. Participation o f c iv i l society has been a major component o f PSRL since i t s beginning, through three different channels. Firstly and most importantly, the Government has systematically engaged in national and sectoral consultations with c iv i l society and other stakeholders on the policies and mechanisms supported by the loan. In fact, the PSRL I was the result discussions held in the National Dialogue -a national forum led by the Government o f Peru-, which involves all sectors and branches o f the government, political parties, the private sector, and civ i l society representatives. Subsequently, the evolution o f most o f the pillars o f the strategy included in the matrix derived from consultations carried out by the Government, such as decisions to protect priority social programs, enhance access to public information, and decentralize. Sectoral fora such as FOROSALUD and the Education Forum, which involved main stakeholders o f each sector, also contributed with feedback and backing to important actions supported b y the loan. Even some o f the specific measures and mechanisms contained in the matrix were objects o f broad consultations led by respective governmental sectors or institutions.
240. The preparation o f PSRL itself has also been a participatory process, as MEF officials and the Bank team have met with representatives of Mesas de Concertacion de Lucha Contra l a Pobreza, the National Association o f NGOs (ANC) and other c iv i l society organizations and think tanks in every mission, maintaining a continuous dialogue about the different components of the loan. In the context o f operations linked to the PSRL, l ike the JSDF Grant and the Social TAL, Bank teams have promoted seminars and workshops involving c iv i l society organizations and experts on topics related to specific measures supported by the PSRL. All previous program documents have been disclosed following the Bank’s policy.
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241. Finally, promoting higher participation i s explicitly and prominently included in the policy matrix as a critical action that the government needs to implement to improve the overall quality o f the social sectors. The details o f this component o f the matrix, as well as the important advances registered in each o f the four stages o f the program are discussed in the corresponding section o f the program document.
242. system are satisfactory from the standpoint o f OPBP 8.60.
Overall, the extensive consultations with c iv i l society carried out by Peru and i t s
D. Fiduciary Aspects
243. information and to promoting better governance and administration o f public finances.
The Government has been committed to improving transparency and access to
244. The Country Financial Accountability Assessment (CFAA) conducted in 2001 concluded that the financial tools at the disposal o f the Congress and Executive Branch included robust financial administration legislation, a highly dedicated staff, and an effective integrated financial management system (SIAF). The major recommendations o f the CFAA related to (a) more effective oversight by Congress of the budget process and review o f the allocations o f available funding, (b) more detailed and frequent reporting on expenditures to Congress, and (c) unfettered surveillance and reporting b y the Controller General o f the acts and reports o f the executive. Three indispensable elements o f a sound fiduciary framework were built into the CAS and policy framework for the PSRL 11: (1) strengthening congressional oversight o f the use o f public funds, (2) increasing independence o f the Controller General, and (3) expanding the scope and coverage o f the integrated financial management system SIAF6.
245. SIAF was implemented in 1998 as a mandatory internet-based system for recording data related to expenditures and revenues for the national budget. SIAF i s a powerful repository o f financial transactions. At the central government level, there are four modules: Treasury Budget Execution, Accounting, Financial Statements Generation and Debt Management. Budget classifications are integrated into the Chart o f Accounts. Information and are put to good use by the MEF and spending agencies. The implementation o f the system has promoted effective control, optimum cash management, and informed decision making. The SIAF i s also used b y some Bank-Financed Projects, and Basic financial Statements are generated directly f rom the government’s system.
246. With regard to procurement procedures, the review o f the country’s legal procurement framework, including the development o f specific local regulations for selection and contracting o f consultants and the implementation o f local standard biddinghelection documents, i s also paramount. As emphasized in the CAS, i t should
Some SIAF core subsystems are under development. These modules include: a) Human Resource Management-essential for civil service reform; b) National Assets- for due registry of state assets; and (c) Monitoring and Evaluation of public expenditure, with a special focus on the tracking o f PSPs spending. They should be fully implemented by early 2005. Others have not been designed yet, l ike a Contingent Liabilities module for due registry and to make proper provisions for in future budgets.
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enable the achievement o f increased transparency and efficiency in public procurement. Although the GOP has recently conducted a review o f the procurement law and a revised draft proposing specific changes and i s expected to submit i t to Congress, it wi l l not address issues regarding procedures and practices that are in conflict with international accepted procurement standards. The preparation and implementation o f national standard procurement/selection documents has not yet started.
247. Actions supported by this loan a im to improve the procurement procedures, with particular regard to the purchase o f food for food-aid programs at the local level. These actions, which have already been implemented, have resulted in increased transparency and economy in bidding processes and enhanced public access to procurement information.
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ANNEX 2. The accreditation process 1. The transfer o f responsibilities and resources to sub national levels o f governments can be the most important challenge in designing and implementing an effective decentralization model. Within the fiscal federalism model, o f the three functions assigned to the public sector, namely macroeconomic stabilization, income redistribution, and resources allocation, generally only the last function can be transferred to sub national governments wi th the goal o f optimizing allocative efficiency. Ln designing intergovernmental fiscal relations and in particular the transfer system, the principles o f subsidiarity, economies o f scale and o f scope and institutional and fiscal capacity need to be balanced. International experience indicates that a strategy i s needed to mitigate key r isks such as an (i) asymmetry between assigned responsibilities and revenues and expenditures, potentially leading to duplication, inefficiencies and macroeconomic deficits (ii) deterioration o f service delivery, (iii) limited accountability due to a mismatch between transferred responsibilities and resources, and (iv) politization o f the transfer process in which political interests prevail over technical and fiscal criteria, which can jeopardize the sustainability o f the decentralization process.
2. Peru has chosen an unusual and innovative path to the transfer o f competences and resources: Regional and local governments need to pass their accreditation, showing that they have the sufficient management capacity to adequately exercise the functions and resources to be handed over to them. As a specific system for the transfers process to ensure an orderly and piecemeal process, the accreditation process thus becomes an expression o f the gradualism o f decentralization - one o f the three guiding principles o f decentralization in Peru. At the same time, the gradual approach helps to limit the r isks mentioned earlier, above al l the fiscal risks that might endanger the fiscal sustainability o f the decentralization process - embodied in another guiding principle o f Peru’s decentralization model, the goal o f fiscal neutrality. B y making competitiveness an important requirement for accreditation, the system i s based on the third guiding principle, the goal o f using the decentralization process to promote sub national competitiveness. Given the unclear functional assignment expressed in the legal framework so far in Peru, where shared, quite general responsibilities abound, the accreditation process can be an important instrument to manage the overall transfer process - unless it becomes a v ict im o f political pressures.
3. Init ial experiences with accreditation have underlined the complexity o f the challenges, and the limitations o f managing the accreditation system. In light o f the lack o f an accreditation system, so far, a simplified and provisional system o f accreditation has been started to be implemented. This only applies to the decentralization o f social programs, the first stage o f the transfer process. 67 provincial goverments have been accredited under this simplified version for the transfer o f food programs, and 241 district municipalities for the transfer o f social infrastructure programs. For 2004, the proposed budget for the transfer o f food programs amounts to S/.26,700,000 for the transfer to the 67 provincial municipalities and for social fund projects it i s projected at S/.47,900,000 for the 241 district municipalities. This process has been based on two resolutions by the C N D on verifications o f mechanisms and basic conditions for the transfer by the MIMDES. Conditions for their accreditation were quite formalistic in nature, such as requirements o f the existence o f key sub national institutions (such as Coordination Councils), a participatory development plan and participatory budgeting process and basic administrative and competitiveness requirements. The simplified accreditation process helped municipalities to prepare for the transfer and initiate basic steps to convert the system into a monitoring and evaluation system. However, there are also serious shortcomings which should provide lessons for the general accreditation system. From anecdotal evidence, the conditions sometimes became a very basic checklist for the MIMDES, in which independent o f the quality o f the instruments provided, without further evaluation, the simple existence o f such instruments and plans were sufficient t o grant
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accreditation. There was very limited actual verification o f the conditions and a more systematic follow-up and monitoring was generally missing. Whi le there were examples o f a strong local commitment and ownership, in other cases, i t became clear that within a region the same development plan was written for a number o f municipalities, merely changing the name of the locality. Very limited dissemination about this simplified accreditation system, the need for it and the means to do it contributed to a very limited understanding o f the system. In other cases, partisan politics encouraging elected local authorities to refuse any imposition f rom the top, discredited the accreditation process.
4. The accreditation process has also been further complemented b y so called management agreements between the central level and local governments. In the case o f food programs, 64 management contracts have been signed between the M I M D E S and the provincial governments. Another 27 have been signed between the MIMDES and local governments on the transfer o f Social Fund resources. These management contracts aim at ensuring more efficient and effective management o f resources and guaranteeing minimum levels o f service-delivery . They specify resources transferred, the purposed for which they can be used, targets that need to be complied wi th and monitoring requirements to be submitted periodically to the M I M D E S Another 58 provincial municipalities and 165 district municipalities are expected to receive the transfer o f the respective food and social fund projects later this year. These transfers w i l l also be complemented by management contracts, signed between the M I M D E S and these local governments, and linked to the accreditation process.
5. Congress has approved the general Accreditation L a w on June 16, 2004. The law sets the legal framework for accreditation across sectors starting wi th this year’s transfer plan. The underlying substantial divergences on the need for accreditation, the process, methodology and i t s monitoring have resulted in a law that i s quite diverse in i t s content and formulation. Currently, i t s regulations are being elaborated.
6. The regulations o f the Accreditation law that are currently elaborated with support of the Bank offer the opportunity to address some weaknesses of the law. Regulations should include a focus on the SIAF in the role o f verification o f criteria for accreditation, building on the existing S I A F currently expanded at the local level. The information needed to verify i f accreditation criteria are met should be generated and obtained from the S I A F as the only effectively viable system currently in place for these purposes. This would avoid duplication and contradictory outcomes between the information managed between the SIAF and the proposed system b y the CND.
7. For greater transparency, public disclosure o f the accreditation assessments should be made obligatory (including, for example through MEF’s Consulta Amigable). T h i s could include publication o f the requirements o f the accreditation system, progress achieved, and the names and achievement o f those sub national governments already accredited, including the assessments o f these governments. This could further be improved if the accreditation o f sub national governments could also made public through a legal norm, such as a ministerial resolution or a supreme decree.
8. The regulations should emphasize the need to make the accreditation system as simple, efficient and cost-effective as possible, avoiding to set up any huge, lengthy and bureaucratic hurdles, but rather to set adequate incentives to ensure that the transfer o f responsibilities takes place in a gradual and fiscally responsive fashion in which through a correspondence o f functions and financing service-delivery, accountability and fiscal discipline can be ensured to the greatest extent possible. In particular, the link between the annual transfer plan and the accreditation should be reinforced to ensure the correspondence between the responsibilities and resources transferred and avoid duplication.
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9. The institutional set-up should be revised, strengthening the outsourcing part and limiting the responsibilities o f the C N D which cannot be in charge o f deciding on the accreditation and be the instance o f appeal for conflict-resolution.
The Accreditation Law: K e y content
The accreditation law reflects the consensus reached on various highly diverging issues: Accreditation i s understood as the process ranging from the demand for the transfer o f resources, the fulfil lment o f the accreditation requirements, the accreditation itself, the transfer o f functions and resources to conflict resolution and the possible signing o f cooperation agreements between parties for the preparation and implementation o f the accreditation process.
Contrary to earlier intentions, i t addresses both regional and local governments.
0 The accreditation law aims at certifying the management capacity o f sub national governments for decentralization on the basis o f technical and transparent criteria, and to create management information systems for decentralized public management.
0 T o be accredited, sub national governments need to fulfill certain sectoral, fiscal and management requirements, including a number o f mainly institutional and administrative conditions, such as a development plan, an institutional development plan, a participatory plan and budget, fulfil lment o f the rules o f fiscal transparency - conditions which are simplified for the poorest municipalities.
The criteria for the elaboration o f management indicators are quite broad and weak, stretching f rom management capacity, fiscal and economic management, competitiveness and transparency and participation.
For the design, execution and monitoring o f the accreditation process, the C N D has been given the leading role, but the possibility o f outsourcing the decision on the fulfil lment o f the accreditation requirements exists as well.
10. There i s no link to the management contracts or other specific M&E arrangements, but the law foresees the possibility o f medium-term framework agreements for the transfer o f resources.
11. A stronger link need to be established wi th the simplified accreditation system for social programs to ensure the continuity o f the process already advancing and that those sub national governments already accredited do not lose their accreditation, including an emphasis on national minimum sector standards should be emphasized to ensure adequate levels o f service-delivery . The regulations should ensure continuity o f the processes started by MIMDES and CND, so that on- going and future accreditation processes are well harmonized and reinforce each other.
12. The accreditation process also needs to be monitored closely. The system should allow for the transformation o f the accreditation system into a system o f monitoring and evaluation, including solid systems o f reporting, and accounting. A revision o f the accreditation should take place periodically to ensure that any feedback f rom the M&E can be incorporated into the process and that potential init ial shortcomings can be corrected swiftly. Procedures for monitoring and ex ante and ex post evaluation o f fiscal balances o f sub national governments should be clearly specified as part o f the accreditation process. Compliance with targets agreed i s particularly important for the transfer o f social programs, such as food programs.
13. Links to the management agreements CdGs and the CARS should be introduced to complement the accreditation process and ensure the efficiency and effectiveness o f transfers. In particular for the transfer o f health and education to the regions and the transfer o f social programs
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to the municipalities, i t i s crucial to have a clear link between the accreditation system and these management agreements.
14. Indicators for the accreditation process should specify criteria o f efficiency, targeting, participation, transparency and fiscal responsibility. This i s particularly relevant for the decentralization o f health and education where the legal framework should also establish the regulatory role for the Ministries of Health and Education in the planning and monitoring o f health and education resources channeled to the regions.
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Annex 3. Letter o f Policy f rom the Government of Peru
MlNlSTERlU DE ECCNOMIA Y F I N M A S Despacho Ministerial
Pedro-Pablo Kuczynski Ministm
Sefiof James Wolfensohn P residenfe Banco Internac.und de Reconstrumkh y Foment0 Presante. -
Referencia: Prf5sfamo Progmmatica de Reforma Social IV
Es grato d i n g h e a usted medisnte elpresente para remitirle la Carta de Poiifica Social cmspondiente ai Pr&tamo Pmgramhtim de Reforma Social IV, la cual recoge !os compromisus asumidos 8nfeFionnente y toma en consideracjdn la actual polifica genemi y los lineamienios de pdifica socia/ y de superacih de la pobreza que el Gobiemo del Presidenfe Toledo, en particular el Gabinete del Primer Minist”, doctor Carlos Ferrem, ha decidido poner en march en el cwto y mediano plaza.
La Catta de Politica Social adunta mama 10s Compromisas y Prioridades que en Polfiica Social han sido definidos demrmllar en el period0 2004-2006, con Is finalidad de orientar el gasto social hacia el cumplimienio de pditicas sociales priorifarias en un m a m de des#r?tmlizaciOn. LEI primdad es garantizar e( acceso universal a ServicioS Msicos de calidad (saiud, educacidn, ntrtrici6n) para evitar fa p W i d a de potencia! humanu. Adicionalmente, es necesario incrementar las opoitunidades econbmicas para la poblacibn pobre incidiendo, principalmenfe, en el manfenimienfo preventivo de la infraesfrudura social y productiva; asf como mejomr la eficiencia y transparencia de la gestidn pObiica.
Es propicia /a oportunidad para reitemrle (os senfimienfos de mi especial considemcibn .
MINISTERID BE ECONOMA Y FINAWZAS
CARTA DE POLfTKA SOCIAL 2004-2006 PriOridades y comp"1ssos
1. RESUMEN
La pollfica saciai del Gobiemo es uno de ios insttumrttos claves en la iucha contra la pbreza. La prioridad e$ garantiar el acceso universai 8 semk5crs bgsicos de calidad [salud, educecidn, nufFiGirjn] para evifar la p6rdida de pofencial humano. Adicionaimente, es necesario incrementar /as oportunidades emndmicss para la pablad6n pobre incidiendo, phcipalmente, en el manfen;miento preveniivo de ia infraesfructura social y productive (pstas, escudas, vias, canales de regadlo, f3tC.l. De oiro kda, se tmta de mejomr la eficiencia y transparencia de la gesticin pljblica ai mismo tiempo que protegsr y raab"izar el gasto social, en el contexto de la desceniralizacibn y sobre la base de 10s msos que ya han sido asignadm a los sectms.
Genemr apodunidades de h h j o digno y pmductivo es el gran desafh para tuda la souedad. La inversidn, produwidn y pmducfividad son responsabilidad pn'ncipaimente del sector privado. La accidn del Estado sal0 genera condiciones y fiende un puente a /as cmunidades con familias que no pueden expresar sus demandas en el mercado y adolecen de un afto deficit de cansumo. La inversjbn social adidmal se guia por fas seeales de aktta basadas BR las demandas de ias famitias en riesgo, lo que permite rntegrar y Simplificar {as acciones que se derivan del diagn6stico.
Teniendo como antecedentes e/ Acuemb Nacional, la Carte de Pdfica Social, el Plan Nacional para Is SuperacitK, de la Pobreza 2004-2006 y el Marcu Macroeconcknico Muftienual 2005-2007, este documento contiem; diagn&s!im y objetivos de b politica m;al, pdoridades y compromises para el perrw'o 2004-2006, culmhando en /as ecciones de pditicas pmgmmadas para gamntizar SLI cumplimlento.
II. DIAGNOSTIC0
Mds del 50 por ciento de penranos -en propoddn coincidenfe con qUieneS se encuentrsn en eI svbempieo y desempleo- vive con menos de U S 2 diaries', la mitad en areas nrrales {7,4 miilones de personas) y la mitad (7.2 millones de personas) en el &?tea urbana, inchiyendo Lima Mehpd;tana. La pobfeza extrema afecta a 5 7 mitlones de personas c u p ingeso es menor a un ddlar a/ dia, y no alcanza a cubrir necesidades bbsicas de aiimentacibn. Ei 73,PA de la poblacidn rural es pobm y el 42,6% SB encuentm en pobreta extrema. En ei &rea urbana, hduyendQ Lima Metropolitans, 2,45 millones de personas son pobres extremas.
' Encuesta Nacional de Hogares Mayo 2002-Abril2004.
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MlNlSTERtO DE ECONOHIA Y FIHANZAS
El deficit de consumo se expresa en la cantidad adicr’ona/ de recursos monefaHos anuaies que /as familias pobres necesitarian generar para sdir be la pobreza. €1 deficit de mnst” bAsico que afecta al total de pobres (Le. la diferencia entre el cosh promedia de la canasta basiw de consumo per &pita, aproximadamente U S 2 djanos, y el gash per &pita de cada familia) se esfima en S. 72.667 millones para el aKo 2004, mientm que el deficit de consumo alimentarb que afeda a/ total de pobres extremes (i. e. la diferencia entre el cosfo pmedio de la canasta bhsica de alimenfos per chppita, aproximadamente US$ I diario, y el gasto per &pita de cada familia) SB estima en EX 2.610 mitlones pam ei mismo aiio,
Proyecclones de dYdt de consumo (SA)
€1 CrBCimiei7tO economico 8s hdispensabk para la reduccidn de la pobmze. En el periodo f994-1997, caractetkado par un importank crecimiento econbmim, se produjo una disminucibn de la pobreza y pobreza extrema, svbw fodo en ias zonas uhanas, siendo as; que en ias Breas nrrales la pobreza est6 vinculada a factores m8s permanentes. Luego de superar /a fase de estancamiento iniciada en I S M , la ewnomia peruana creci6 en 4,9 por dento en el aiio 2002, la mayor tasa de los Oltitrios cinco aiios jograda en un context0 de turbulencia econdmica y pditica en /a region; mientras que en el aiio 2003, la fasa de crecimiento fue de 4 1 par ciento. Sin embargo, ei crecimieota no es condt’cidn sd7ciente, se requiem asegurar su car$cter inciusivo y su efecto redistributive, alineando Ia politica econdmica y la poliUca social en funcion del objetivo cum&? de reducir la pobreza. Se trata de superar la sifuaci6n actual del mercado de trabajo -caracterirado por una alfa proponitin de trabajo independiente y familiar en unidades #e escasa pruductividad- asC mmo el desaroh incipienfe de la infmestructum pmducfiva bhsica y /os mercados locales en las zonas ruraies; recanmiendo, al mismo fiempo, que la discriminacibn cultural y la debiiidad en el ejercicio de la dudadanla se suman a /os fadores econdmicos para explicar la pobreza.
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MINISTER10 DE ECONOMIA Y FIflANZAS
Aeeiones de Politlca: . EI Gobierno ha apmbado normafiva que regula la transferencia de kw programas nutricionales a 10s gobiemos subnacionales y ha firmado convenios de gestidn para la impiemsntacion progresiva de estos programas por pa&? de los gobiemos mmspondientes, 10s cuales vienen siendo evaluados par el Mhisteifo de la Mujer y Desamilo Social (MIMDES) como enfe recfw. De igual hrma, se ha defininido crilerios para fa asignacibn presupuestal slguiendo una ohentad& equitativa. Publicadbn, por parte de/ Ministerio de Econamla y Finanzas, de una estrategia de pdiiicas para la mejom de 10s indimdotes de erkiencia y cobedum be 10s sislemas de pensiones. Mejommienio del sistema de pensmnes, estabien'endo medHas corr6ctivas de las disforsiones generadas por el siStem8 de CtWUla Viw, limitando beneficios y estableciendo contribuciones mayores a los afiiados.
.
Parte dei pmceso de fortdedmienfo de la gesfion de pdfiicas sociales canside en la inoorpomcion de mecanismos de participacidn, transparencia, rendicidn de cuentas; asl como en el desarrollo de &femes de seguimiento que refiejen estas cualidades y acerqoen el quehacer de la pofifica social del Estado a \os ciudadanos.
Acciones de Potitica:
* incorporacidn de un capitulo social en el Marc0 Macroeconbmim Mukianuaf. Desarrolla de un sistema de seguimiento de /a calidad del gasto sociat cm et?fasis en ios programas socides prioritarios, que i n m p r e en su implementac5h mecanismos parfidpafivos y de transparencia. Este sisfema permifid identificar !os ptincipdes pmbkmas en materia de ejecucidn del gasto; afender la insufiriencia y paca articulaci6n de /os sisfemas de informaci6n sxisfentes; incmmenfar e! conocirn;ei?to de la ofeerta de informa&?; pmmover la parficipacidn de la sm'edad a traves del ejercicjo de la vigilancia social; y cmtribuir en la medida que sea pasible a la reffexh sobre la efiuencia, eficacia y equidad de la$ politicas scciaies vigenfes. Incorporacidn de ebmentos de saiisfaccion de usuarios en !ails encuestas de hogares Mejummiento de la transpencia y eficiencia de las compras pObhas, medianie el establecirniento de nonnas porpavte de Consejo Superiar de Contratacjones y Adquisiciones del Estado {CONSUCODE). Establecimiento de convenios de gestih, coma instrumentus de seguimiento de/ desempeno de !os gobiemos subnacionales, para el cas0 de /os programas alimentaarios transfetfdos. . Proceso de mejora de la Cansulta Amigable del Sistema fntegrado de Administtaabn Financier;, (SIAF), de modo de haceria m& accesible. Estabkcimiento de sidemas de seguimiento focal, en el marw del desamf!o de Presupuesto Paficipa fivo.
- .
90
MINISTER10 DE ECONOMlG Y FtNAMZAS
Firente de Val?res basales InbrmacMn (20061 O B J E T I W hdicadores
Reducch de la {r;, Tasa de Pobreza GENS0 y ENAHO (i) 52.0%
(ii) Tasa de Pobreza lii) m.796
pobieza Totaiy Total P o t " Exirema.
Exfrems h+@a del accesc li] Tssa de famiiias ENAHO. (0 25% infegraJ a !us send& bbsicas de fienen a-0 a sewbias sa!ud, etlucacitjn y de sahd, coiegios nutricl6n de !as nacidnales y a pobres extremes. programas de
afimenm'h de! .€sfado.
de ius disfritos a la municjPatidaUea infomcibn sobe la Uist~ftales qua fjenen qecuck3n flslca y a c c ~ s o a Consulk presupuesfai de 10s Amigable, la cual induye pmgrames sociales. ejecocidn
deacenlmlizada de
educaciih y salud.
e x t m a s p&?w que
Aumertiar e/ acc~so (1) Pofceotaje de SlAF ' (j] 0%
p " a s smales y &
Meta 2o06
(0 49%
(ii) 20%
(51 29%
(I] 100%
91
MINISTER10 DE ECONOMIA Y FINANUS
FaaiizaciOn de ' programs sociales.
COR'IY) PLAZO flnwiacf& enfre WMM, Pdilica Social, W3Ek.4 y Pol
Desamllo de dstema de seguimiento y evaluaddijo
base de respecti'vos PESEM
Diario H Pervano
1
Agem'a
(ii) 100% de {ii) 100% de muniwpalidades mlrnicipalidades disfdiaks disttib1.m csffificadas. cert8cadas.
(0 Norma (l) Norma pubficada y en puhticada yen viwocia vigencia
92
MlMlSTERlO DE ECONOMIA Y FINGIZAS
Aumento de transparencia en gestion U@ pbiemos nacrbnales, regiwdees y localas de 10s pmgramas sociale~.
iii) Infume SlS
Informe MlNSA
ii) ' 67%
:VI 100%
v) 700%
i) 85%
[ii) Si)%
(if0 69%
iv) 70Q%
(iiq 75%
93
MINISTER10 DE EEONOMIA Y FINANZAS
MMIDAS DE GOBIERNC) DE
. ,,, CURT0 PiAZd Mefa $2W5
(i) Midulo de satisfaccj6n de usvaricls incoporah en la ENAHO.
(i;) Norma en vigencia
Lima. octubm de 2004
94
2004-2006 Social Policy Letter Priorities and Commitments
Unofficial translation
I. SUMMARY
The Government’s social policy i s one o f the key instruments in fighting against poverty. The priority i s to guarantee universal access to basic quality services (health, education, nutrition) to prevent loss o f human potential. Additionally, i t i s necessary to increase economic opportunities for the poor population, mainly by preventive maintenance o f social and productive infrastructure (health care centers, schools, roads, irrigation canals, etc). On the other hand, i t i s important to improve efficiency and transparency o f public management while at the same time social expenditure i s protected and rationalized within the context of decentralization and based upon resources already allocated to different sectors.
Generating dignified and productive work opportunities i s the great challenge for the whole society. Investment, production and productivity are mainly the responsibility o f the private sector. The State actions only generate conditions and build a bridge between communities and families that cannot express their demands in the market and who suffer a high consumption deficit. Additional social investment i s guided b y alert signs based upon the demands o f families at risk, which permit to integrate and simplify the actions deriving from diagnostics.
Taking into account the National Agreement, the Social Policy Letter, the 2004-2006 National Plan for Overcoming Poverty and the 2005-2007 Multi-annual Macroeconomic Framework, this document contains: social policy diagnostic and objectives, priorities and commitments for the 2004-2006 period, to then end in actions corresponding to scheduled policies to guarantee their compliance.
II. DIAGNOSTIC More than 50 percent o f Peruvians -coincidently those who are underemployed and unemployed- live with less than US$2 a day. 10 Half o f these people l ive in the rural areas (7.4 mi l l ion people) and half in the urban area (7.2 mi l l ion people), including Metropolitan Lima. Extreme poverty affects 5.7 mi l l ion people whose income i s less than one dollar a day and i s not enough to cover basic food needs. In the rural population, 73.6% are poor and 42.6% are extremely poor. In the urban area, including Metropolitan Lima, 2.45 mi l l ion people are extremely poor.
The consumption deficit i s expressed in the additional amount o f annual monetary resources poor families would need to generate to get out o f poverty. The basic consumption deficit affecting all the poor people (Le. the difference between the average cost o f the basic consumption basket per capita, approximately US$ 2 daily, and the per capita expense of each family) i s estimated at S/. 12,667 mi l l ion for 2004, while the food
lo Household National Survey May 2004-April 2004.
95
consumption deficit affecting a l l the extremely poor (i.e. the difference between the average cost o f the food basic basket per capita, approximately U S $ 1 daily, and the per capita expenditure o f each family i s estimated at S/. 2,6 10 m i l l i on for the same year.
Consumption Deficit Projections (SI.)
14000 12667 12 334 11 983 11 579
2004 2005 2006 2007 Basic consumption deficit c Food consumption deficit
Economic growth i s essential for reducing poverty. In 1994-1997, a period with important economic growth, there was a decrease in poverty and extreme poverty, most o f a l l in urban areas. However, in rural areas poverty i s l inked to more permanent factors. Af ter overcoming the stagnation phase started in 1998, Peruvian economy grew by 4.9 percent in 2002, the largest rate in the last five years, attained during a period o f economic and pol i t ical turmoil in the region. Meanwhile, in 2003, the growth rate was 4.1 per cent. However, growth i s not sufficient. I t needs to be inclusive and redistributive, aligning economic and social po l icy to the common objective o f reducing poverty. The idea i s overcome the current labor market situation -characterized by a high proportion o f independent and family work in l o w productivity units- as we l l as to develop the basic productive infrastructure and local markets in rural areas. At the same t ime we must acknowledge that cultural discrimination and weak exercise o f c i v i l rights are added to economic factors in explaining poverty.
Poor Population
(“10)
60.0 i
1991 1994 1997 1998 1999 2000 2001 2002 2003/04
0 Nationwide I L i m a Source: ENNIV 1991-1994; INEI 1985-1986; ENAHO 1997-2004.
96
The State’s social expenditure also increased in the 90s. However, the assistance approach and the lack o f efficiency in many programs limited i t s impact. The State social function coverage and effectiveness i s now being increased through a number o f measures aimed at improving management and redirecting the use o f funds to better serve priorities and guarantee transparency, committing a l l government levels in this regard.
III. SOCIAL POLICY OBJECTIVES The Social Pol icy aims at reaching full development o f human, social and institutional capacity and seeks equity and social justice. I t i s expressed in the set o f guidelines and actions defined by the Government to assure a l l Peruvians dignified living conditions and access to publ ic goods and services.
I t s objectives coincide with the Equity and Social Justice Objectives o f the National Agreement, which contains the fol lowing policies:
a) Poverty reduction b) c) d) e) f)
Access to Free and Quality Basic Public Education Access to Health and Social Security Services Guarantee Child Nutr i t ion and Promotion o f Fami ly Food Security Promote Digni f ied and Productive Employment Promote Equal Opportunities without Discrimination
Thus, a social po l icy directed at reaching full development o f human capacity and seeking social equity must be expressed in a number o f guidelines and actions defined by the Government to assure a l l Peruvians dignif ied living conditions with development possibilities. The basic courses o f action regarding said po l icy are contained in the 2004- 2006 Roadmap o f the Peruvian Government - Topical Proposal VI: Overcoming poverty with improvement in social expenditure quality and emphasizing health, education, labor, housing and basic sanitation. it i s also expressed in the Equity and Social Justice objective o f the National Agreement, which prioritizes the fo l lowing policies: a) Poverty reduction; b) Access to Free and Quality Basic Public Education; c) Access to Basic Health and to a Social Security Package; d) Guarantee Child Nutr i t ion and Promotion o f Food Security; and e) Promotion o f Dign i f ied and Productive Employment.
I K 2004-2006 SOCIAL POLICY PRIORITIES AND COMMITMENTS Priorities and commitments are established in a decentralization and resource scarcity context, taking in to account the urgent actions required o n issues that are essential t o l i fe and comprehensive development, main ly o f extremely poor and vulnerable population. This implies work ing by redirecting public expenditure according to efficiency, productivity and equity in spending criteria.
In this regard, the main actions shall be directed to human development and social protection o f priori t ized groups and then at actions towards a healthy environment and at generating economic opportunities. To do so, core strategic priorities are established, as
97
well as a number o f complementary actions, according to intervention areas that align Government actions towards prioritized groups.
Therefore, in terms o f social policy the following basic guidelines ordered by priority are proposed:
Reducing human capacity loss, including access of the population to a basic package o f health services, nutritional programs aimed at children under 3 years o f age mainly in poor and extremely poor populations, as well as quality pre-schooling and primary education. I t guarantees access to basic justice, understood as assurance o f people’s fundamental rights and access to appropriate ways o f preventing disputes and solving them. Promoting the development o f the basic capacities pointed out above, starting by improving access to secondary education, higher complexity health services and access to water and sanitation services. Promoting from the State while considering i t s subsidiary role, investment on infrastructure (roads, energy, communications, sanitation), information and technical assistance, as the necessary complement to leverage human capacities and expand the market mechanisms in charge o f the private sector. Supporting temporary actions to generate employment b y executing public asset maintenance.
In this regard the social priority in the country i s to guarantee universal access to quality basic services (health, nutrition and education) to prevent loss o f human potential. Once this priority i s cared for, social expenditure must be directed to increase poor population’s access to basic justice and preventive maintenance o f social and productive infrastructure.
The abovementioned policy guidelines lead to the following criteria to prioritize social expenditure:
First Criterion: Ensure efficient and effective use of goods and services (expenditure quality) provided through Priority Social Programs (Pre-schooling, Primary Education, Secondary Education, Individual Health, Collective Health, and Community Social Promotion and Assistance) and Basic Justice (first level settlement o f disputes).
Second Criterion: Ensuring operation and maintenance o f social investments o f the six Priority Social Programs (Pre-schooling, Primary Education, Secondary Education, Individual Health, Collective Health, and Community Social Promotion and Assistance) and Basic Justice (first level settlement o f disputes).
Third Criterion: Improving access -coverage- of people to basic health services (preventive healtwpregnant mothers and children between 0 and 3 years o f age) and education (pre-schooling and primary). These services should also reach those areas in which they are s t i l l not present, i.e. the rural area.
Fourth Criterion: In case o f State actions not belonging to the six Priority Social Programs or to basic justice, the following spending guidelines shall be applied:
98
.
. It i s important to mention that during the last four years substantial progress has been made on identifying priorities. In this regard, the social reform program loans agreed with the World Bank in the last few years have been circumscribed to this orientation based on three main axes: strengthening social policy planning, improving poor people access to quality basic services and promoting social participation and transparency in public management.
Ensuring that goods and services are a complement to actions aimed at developing human capacities. Ensuring operation and maintenance o f social investments to complement actions aimed at developing human capacities. Prioritizing execution in extremely poor areas.
IV. l Budgetary Priorities Priorities are financed in two ways, depending on the origin o f financial resources: 1) b y reallocating currently allocated resources, as a result o f improving the quality o f expenditure, to each one of the three main areas; and 2) wi th budgetary increases in a scenario o f fiscal prosperity.
In order to apply i t s priorities, the Government has defined a budgetary policy directed at gradually increasing resources for these activities and investment within the framework of fiscal balance.
This budgetary policy i s reflected in the following directions that have been applied and shall be maintained in the near future:
i) Give preference to the budget intended for education and culture, health and sanitation, and social assistance: o In 2004, at least the same budget executed in 2003 wil l be executed. o A larger amount than that o f 2004 has been budgeted for 2005 in the draft law
submitted to Congress on August 30. o A Macro Social chapter has been included in the Multi-annual Macroeconomic
Framework Protecting the budget aimed at the 6 priority social programs (pre-schooling, primary education, secondary education, individual health, collective health and community and social assistance), particularly regarding non salary or pension expenditures : o A higher global amount was budgeted for 2004 and the amounts for 3 of these 6
programs were higher than those o f the previous year. At least 85% o f this global amount w i l l be executed.
o The global amount and budget of 4 of these programs has been increased in the 2005 budget draft law, replacing the community and social assistance program with the social and the poverty reduction programs transferred to local governments. In the 2004 Budget Law and in the 2005 budget draft law an article has been
included to prevent that budgets directed to this goal be transferred to salary expenditures or other programs.
i i )
o
IV. 2 Objectives and policies by sector
99
Basic Health: 0 Objectives: Guaranteeing access and quality care to the population, particularly those
who l ive in poverty, prioritizing execution of preventive activities at large and those related to mother-child and families at risk in particular. Ensuring public subsidy in a Guaranteed Health Plan for the poorest families.
0 Policy Actions: o Improving the Integral Health Insurance (SIS, in Spanish) to increase access
to priority health services, especially to mothers and children, expanding coverage. In order to promote SIS efficiency and to improve i t s financial sustainability, the 2005 budget shall prioritize resources directed to the first and second level o f resources directed to hospitals, so as to prevent complex health care, which i s less equitable and less cost-effective, from capturing most of the budget. Developing result driven management through Management Agreements
between the Ministry o f Health (MINSA, in Spanish) and Health Directorates (DISA, in Spanish), with the exception o f L ima and Callao. However, in these two places management goals shall also be established and assessed by the Sector from i t s Headquarters.
o
Basic Education: 0 Objectives: Improving quality of learning in the new education system, solving
coverage and equity deficits, particularly in rural areas, prioritizing pre-schooling and primary education, particularly improving attendance, effective hours and educational materials -as well as secondary education b y assuring eleven years o f schooling- and basic educational achievements for all. Improving teacher and student attendance to attain 1000 annual effective hours. Ensuring timely registration o f boys and girls (according to regulatory ages) in the first grade o f primary school and increasing the number of boys and girls attaining the sixth grade o f primary school at the regulatory age. Providing special attention to uncovered population, particularly bilingual, rural groups and children under 5 years o f age. Priority: Improving basic education quality and reducing coverage deficit, mainly concerning pre-schooling and secondary education.
0 Policy Actions: o Developing an incentive system in human resource administration, to assure
a minimum number o f class hours, prioritizing rural areas. To do so, pi lot projects are being implemented, including one of incentives to teachers in rural areas.
o Implementing a nationwide job control and payroll automated system to avoid “ghost” teachers, analyzing teacher load and rationalization processes and facilitating the application o f criteria to pay incentives regionally and locally.
Social Protection: 0 Objective: increasing equity and efficiency in provision o f nutritional programs and in
the pension system, particularly in the first case, taking measures for an appropriate management that takes into account the decentralization process underway.
100
0 Policy Actions: o The government has approved the regulations on transferring nutritional
programs to sub-national governments and has signed management agreements for the gradual implementation o f these programs b y the corresponding governments, which are now being evaluated b y the Ministry o f Women and Social Development (MIMDES, in Spanish) as the regulatory entity. Likewise, criteria have been defined to allocate budgets following an equitable direction.
o Publication by the Ministry o f Economy and Finance o f a policy strategy to improve the pension’s system efficiency and coverage indicators. Improving the pension system b y establishing measures to correct distortion generated by the “Ckdula Viva” system (a system that increases pension holders’ salaries every time new increases to workers are agreed), limiting benefits and establishing larger contributions to affiliates.
V. GOVERNANCE REFORMS IN SOCIAL SECTORS
Part of the social policy management strengthening process i s including participation, transparency, and accountability mechanisms. Also important i s the development o f follow-up systems to reflect these qualities and approach the State’s social policies to citizens.
Policy Actions: o Including a social chapter in the Multi-annual Macroeconomic Framework. o Developing a monitoring system for social expenditure quality, emphasizing
priority social programs that include participatory and transparency mechanisms in their implementation. This system w i l l permit to identify the main problems concerning expenditure execution, solving insufficiency and lack o f articulation in existing information systems, increasing knowledge on information supply, promoting participation o f society through social surveillance, and contributing as possible to the evaluation o f efficiency, effectiveness and equity o f the current social policy.
o Including user satisfaction elements in household surveys. o Improving transparency and efficiency o f public procurement b y
establishing regulations within the Higher Council for State Contracts and Acquisitions (CONSUCODE, in Spanish).
o Establishing management agreements as an instrument for following up the performance o f sub national governments for the case o f transferred food programs.
o Improving the Friendly Consultation (“Consulta Amigable, in Spanish) in the Financial Management Integrated System (SIAF, in Spanish), to make i t more accessible.
o Establishing local monitoring systems within the framework o f developing a Participatory Budget.
VI. FOLLOW-UP AND EVALUATION OF SHORT TERM GOVERNMENT MEASURES
101
Taking into account three main axes: poverty reduction, improvement o f poor population access to basic services and increased participation in and transparency of social programs, these are the following targets for 2006:
Baseline Values (2004)
(i) 52.0%
(ii) 20.7%
(i) 25%
OBJECTIVES
Reduction o f Total Poverty and Extreme Poverty
Target in 2006
(i) 49%
(ii) 20%
(i) 29% Improvement o f comprehensive access to basic health, education and nutrition services among extremely poor people.
Indicators
(i) Total Poverty Rate
Increasing access o f districts to information and physical and budgetary execution of social programs.
Information Source
CENSUS and
(ii) Extreme Poverty Rate
(i) Rate of extreme poor families with access to health services, public schools and State Food Programs.
(i) Percentage o f district municipalities to that access Friendly Consultation, including decentralized execution o f social education and health programs.
ENAHO
ENAHO
SIAF
Government Short Term measures
(i) 0% (i) 100%
Information Baseline Values 2005 Source (2004) Target Indicators
I
Zelationship between Multi-annual Macroeconomic 'ramework (MMM, n Spanish), Social Policy, PESEM and POI
To assess progress and complying these 2006 objectives, i t i s important to follow the indicators that periodically measure progress made by government in the short term. Each one of these indicators has targets to be reached in 2005.
(i) MMM includes Social Chapter.
(ii) Social PESEM prepared based on MMM's social chapter definitions
and evaluation system responsible for leading follow-up and
I efficiency and coverage Developing follow-up I (i) National institution
:i) El Peruano, 3fficial Gazette
[ii) DGPMSP Suideline No 002- 2003-EFl68.01, Art. 4".
(i) MEF communication
(i) MMM 2004- 2006 contains social Chapter.
(ii) 100%
(iii) None
(iv) Published policy
(i) Appointed and functioning institution
[ii) (i) MMM 2005-07 contains social Chapter.
(ii) 100%
(iii) 100%
(iv) Published policy being implemented. (i) Appointed and functioning institution
102
Institutionalizing PSP r programs
programs
Increasing mother- child coverage at SIS in Health centers and posts.
I
:valuation.
ii) Periodical report on 'ollow-up indicators.
,iii) Percentage of listricts followed in their lecentralized execution i f social programs.
:i) Budget Act, ncluding Article to xotect budget for PSP.
:i) Regulations on jecentralizing nutritional ind productive social nvestment programs.
:ii) Percentage of social ?reductive investment xograms in project -esources transferred to local government budgets.
[i) Executive Branch Regulation establishing improvements on equity o f social program resource allocation. (i) Coverage of pregnant mothers affiliated to SIS.
(ii) Coverage of children under 5 years of age affiliated to SIS.
(iii) Percentage of SIS budget executed in Health centres and posts.
(iv) Percentage o f DISAs for which management follow-up indicators have been established.
(v) Percentage o f DISA for which management indicators have been followed on a quarterly basis.
:ii) Economic rransparenc y ?ortal.
,. . . \111) Eco iomic rransparency Portal.
El Peruano, the 3fficial Gazette
El Peruano, the Official Gazette
El Peruano, the Official Gazette
(i) S IS Report
(ii) SIS Report
(iii)SIS Report
(iv)MINSA Report
(v)MINSA Repor
i i ) First public eport
iii) qone
i) 2004 Budget \ct includes article in PSP.
i) Published and :urrent regulations
lii) 100% of ertified district iunicipalities.
[i) Published and surrent regulation.
(i) 540 thousand
(ii) 2.0 million
(iii) 67%
(iv) 100%
( V I 100%
ii) Two semester eports.
iii)lOO%
i) 2005 3udget Act ncludes article on 'SP. i)Published and :urrent regulations
ii) 100% of :ertified district nunicipalities.
:i) Published and xrrent regulation.
li) 560 thousand
[ii) 2.2 mil l ion
(iii) 67%
(iv) 100%
103
'onsolidating teacher nanagement system UCPS)
ncreasing ransparency of social xograms in national, aegional and local Sovernments.
Fostering social surveillance and malysis o f user 3erception o f public services.
Strengthening ?rocurement processes executed by national, regional and local governments
(i) Percentage of teachers paid by the unified payroll system.
(ii) Percentage o f MINEDU executing units with the single payroll system.
(iii) Percentage of executing units that have integrated single payroll systems.
(iv) Rural teacher incentive Pilot program.
(i) Number o f PSP followed under Friendly Consultation.
(ii) Percentage o f Local Governments with participatory budgeting and an approved participatory budget. (i) Number of programs for which users' satisfaction questions have been included in the national household survey. (i) Executive Branch legislation establishing improvement in procurement processes for decentralized social programs.
(i) MINEDU Report
(ii) MINEDU Report
(iii) MINEDU Report
(iv) MINEDU Report
(i) Follow-up System Report
(ii) National Public Directorate Report.
(i) ENAHO-INEI Survey Module.
El Peruano, the Official Gazette
(i) 85%
(ii) 90%
(iii) 69%
(iv) Pilots being implemented with intermediate evaluation
(i) 0
(ii) 50% for municipalities which population exceeds40000
(i) Users satisfaction module included in ENAHO.
(i) Published and :urrent regulation
[i) 90%
(ii) 95%
(iii) 75%
(iv) Pilots being implemented with intermediate evaluation
(ii) 75 % for municipalities which population exceeds40000
(i) users satisfaction module included in ENAHO.
(i) Current regulation
Lima, October 2004
104
Annex 4. Social Indicators and Results Monitoring 1. The four operations grouped under the Programmatic Social Reform Loan I to IV have supported a series o f reforms in the education, health and social protection sectors, aimed at improving service provision, both in terms o f coverage and quality, and, through these investments in human capital, welfare.
2. Although the full impact o f most o f these reforms w i l l take years to unwind, some positive trends can already be identified. We briefly describe here the recent evolution of poverty and selected social indicators in Peru. Our choice o f indicators i s based on two basic criteria: their relevance in terms o f the policies contemplated in the loan's program matrix, and the availability of up-to-date information.
Poverty and other welfare indicators
3. The national poverty rate increased significantly between 1997 and 2001 as a consequence o f the 1998/99 economic crisis, especially in urban areas. After this increase, the poverty rate remained stable between 2001 and 2003, at around 55 percent, while the extreme poverty rate declined from 24.4 to 21.6 during this same period". This implied that, due to population growth, the number o f poor increased by 400,000 people, while the number o f extreme poor fe l l by 550,000 people.
Table A4.1. The national poverty rate increased between 1997 and 2000 as a consequence of the 1998/99 economic crisis.. .
Headcount index 1997 1998 1999 2000 200 1 2002
Poverty headcount National 42.7 42.4 47.5 48.4 49.8 50.0 Metropolitan L ima 25.4 24.1 31.4 38.9 28.3 34.3 Urban* 33.0 34.0 37.3 35.3 42.6 39.0 Rural 66.3 65.9 71.8 70.0 76.9 74.3 Extreme poverty National 18.2 17.4 18.4 15.0 19.5 18.7
Urban* 7.6 7.5 6.3 6.1 10.0 8.2 Rural 41.5 40.0 44.4 35.6 46.3 42.4 Source: Authors' calculations using ENAHO 1997.W-2002. IV. Notes: (*) Excludes Metropolitan Lima
4. Poverty figures are not comparable to those presented in Table A4.2 below due to changes in the ENAHO' s sampling framework. There exists, however, significant variation across different areas o f the country, wi th poverty fall ing in rural areas and increasing in urban areas, especially in metropolitan Lima. Across regions, poverty rates in both the Costa and the Sierra remained stable, while those in the Selva improved significantly.
Metropolitan L ima 2.3 2.4 2.7 1.6 1.7 3.3
l1 Due to changes in the ENAHO's sampling framework in 2000, a consistent poverty series cannot be constructed for 1997-2003. Instead we present two sets of poverty numbers: one for 1997-2002, where the figures for 2001 and 2002 have been adjusted to make them comparable to those of 1997-2000; and one for 2001-2003. Although the level of poverty varies across series, poverty trends are similar.
105
Table A4.2. . . . and i t remained stable after 2001. Headcount index
Poverty Extreme Poverty 2001 2002 2003** 2001 2002 2003**
National 54.8 54.3 54.7 24.4 23.9 21.6 Metropolitan L ima 31.9 34.7 36.5 2.3 2.8 1.8 Urban areas* 50.0 48.0 48.5 15.9 15.2 14.0 Rural areas 78.4 77.1 76.0 51.3 50.3 45.7
Source: Authors’ calculations using ENAHO 2001.W-2003.W. Notes: (*) Excludes Metropolitan Lima.(**) Data for 2003 is based on World Bank estimates, using a quarter-based set of the 2003/04 ENAHO database, to ensure comparability. The figures are different from those published by INEI, as they present the annual-based estimates for 2003/2004. Poverty figures are not comparable to those presented in Table A4.1 above due to change sin the ENAHO’s sampling framework.
5. In contrast, the Unmet Basic Needs (UBN) index declined slightly between 2001 and 2003, due mainly to improvements in housing conditions and access to basic services among the population o f metropolitan Lima.
6. Differences between the evolution of monetary poverty and the UBN index are due to the fact that both measures capture different aspects o f poverty. Whi le monetary poverty i s very sensitive to cyclical changes in income and employment, the UBN index reflects a more structural dimension o f poverty and changes with secular trends in social and other investments.
Table A4.3. Housing conditions and access to services improved in Lima and deteriorated in rura l areas
Unmet Basic Needs index 200 1 2002 2003
National 41.9 Metropolitan L ima 23.9
Urban 30.2
39.9 20.2 28.6
40.3 15.4 30.0
Rural 68.7 67.9 71.3 Source: Authors’ calculations using ENAHO 2001.W-2003.IV. Nutrition
7. Malnutrition rates, especially among children, declined consistently during the 1990s, f rom 10.8 percent in 1992 to 7.1 in 2000, due to both long-term gains in welfare and the creation and expansion o f a series o f nutrition and feeding programs serving different population groups.
8. At the time when the f i rs t PSRL was negotiated with the Government o f Peru, however, these programs were poorly targeted and suffered f rom significant resource leakage. For these reasons, the PSRL I-IV have strongly supported the rationalization o f Peru’s feeding and nutrition programs. In particular, especial attention has been paid to the retargeting o f benefits to the most vulnerable and to the elimination o f service overlap between different programs.
Table A4.4. Ma lnu t r i t i on rates decl ined signi f icant ly during the 1990s
1992 1996 2000 National 10.8 7.7 7.1 Urban 6.2 3.9 3.2 Rural 17.7 13.5 11.7 Source: INEI
106
9. As a result o f these measures, a significant amount o f the resources managed by these programs has been redirected from urban to rural areas, where poverty rates and malnutrition are highest.
Table A4.5. Access to nutrition and feeding programs increased among the poor in rura l areas and decreased in L i m a and other urban areas
Percentage o f household benefit f rom at least one program Costa Sierra Selva Rural Urban Rural Urban Rural Urban L ima
200 1 2002 2003 National 33.3 35.8 33.5 Metropolitan L ima 18.7 24.1 31.1 Urban 32.1 33.5 34.2 Rural 46.6 47.7 40.4
Total 200 1 40.9 61.0 75.7 29.5 98.4 48.8 47.8 2003 57.8 30.1 68.6 33.9 64.6 34.0 21.5
Extreme poor 200 1 59.7 61.8 70.8 68.7 72.2 44.7 70.8 2003 66.3 50.4 81.0 57.9 74.3 57.0 48.4
Poor 200 1 50.8 42.7 55.0 52.1 64.3 37.6 44.1 2003 62.6 47.6 67.6 49.0 76.2 41.1 40.7
107
Education
12. Net enrolment rates among children of primary-school age and literacy rates among young adults are above regional averages and, although some deterioration was observed in the early 1990s, most o f it was remedied by 2002.
Table A4.7. Li teracv and urimarv education enrolment rates are high.. . . 1991 1994 1997 2001 2002
Net enrolment rate A 90.57 86.86 86.37 91.1 1 89.52 Literacy rate 98.22 97.87 96.33 97.08 96.64
Source: INEI A Percentage of children, ages 6 to 14, enrolled in primaly school
13. Other education indicators more closely link to learning and performance, such as completion and adequate advancement rates, although starting f rom l o w levels, have shown substantial improvements in recent years. The primary education completion rate increased from 22 to 35 percent between 1991 and 2002, with half the total gain being made between 2001 and 2002 alone. Similarly, adequate advancement rates, both at the primary and secondary levels, improved between 1991 and 2002, especially in rural primary schools.
Table A4.8. . . .whi le complet ion rates and adequate advancement rates, although low, have improve significantly in recent years.
Percentage of children enrolled that complete primary education
Percentage of 15-24 year-olds
1991 1994 1997 200 1 2002 Comdet ion rate 22.07 19.41 25.83 28.19 34.86
National 50.4 51.8 52.7 54.2 Urban 62.0 62.8 63.9 64.9 Rural 26.6 30.3 31.4 33.6
1999 2000 200 1 2002 National 25.6 22.7 25.7 26.9 Urban 33.4 29.3 33.5 35.0 Rural 7.1 7.4 7.9 8.4 Source: Censo Escolar, Ministerio de Educacio'n and INEI.
14. both in urban and rural areas, while they remained stable in secondary schools.
Finally student-to-teacher ratios in primary schools declined steadily f rom 1999 to 2003,
Table A4.9. Student-teacher ratios in p r imary schools improved s l ight ly in recent years Primarv education
2003 1999 2000 200 1 2002 Urban 24.3 23.7 23.6 23.2 22.5 Rural 27.0 26.4 25.9 24.9 24.4
-I--.--- X"IIIIII_".".".."._
Secondarv education 1999 2000 200 1 2002 2003
Urban 17.4 16.8 16.8 17.0 16.5 Rural 14.3 14.3 14.8 14.7 15.0 Source: Ministerio de Educacion.
108
15. In the absence of direct measures of schooling quality and student performance, these changes seem to suggest that the system has become more effective over time, at least in what regards the retention and advancement o f enrolled students through primary education. Moreover, a large share of the observed improvements in completion and adequate advancement rates have taken place since the beginning o f the PSRL program in 2000. Although i t i s impossible to attribute any causality to the program itself, the fact that these changes occurred at the time when the reforms where being implemented i s encouraging.
Health
16. Infant and maternal mortality have declined significantly over time. Mortality rates among children under 5 fe l l by almost 50 percent during the 1990s, f rom 81 per thousand in 1991 to 47 per thousand in 2000, while the same numbers for children under 1 were 57 and 33 per thousand respectively. Unfortunately no data i s available for recent years. At the same time, maternal mortality also showed significant improvements, fall ing f rom 769 to 555 deaths per 100,000 l ive children between 1997 and 2003.
Table A4.10. Infant and maternal mortality have improved dramatically in recent years.. . 1992 1996 2000
Infant mortality (children under 5)a 81.0
57.0 Infant mortality (children 0- 12 months)a
59.0
43.0
47.0
33.0
1997 1998 1999 2000 200 1 2002 2003 Maternal deathsb 769 739 69 1 655 656 567 555 Source: INEI and Direccion Nacional de Salud ‘Per thousand.
Number of deaths, as registered by MINSA. The matemal mortality rate also showed improvements between 2000 and 2003, declining from 185 to 168 per 100,000 live births.
17. Declining infant mortality has coincided wi th improvements in vaccination and a reduction in infant morbidity, especially diarrhea (although a increase in the number o f cases can be observed in 2002 that deserves further exploration). Similarly, birth conditions, measured b y both the fraction o f births that were assisted by qualified personnel and the fraction o f underweight infants, have shown significant progress since 2000.
1997 1998 1999 2000 200 1 2002 Vaccination against smallpox 95 92 97 97 95 (9% o f children under 5) Diarrhea 607,871 606,544 515,424 553,854 538,245 665,624 (number o f children under 5) Source: Ministerio de Salud
Table A4.12. ... and immoved birth conditions. 2000 200 1 2002 2003
Births attended by qualified personnel 42.55 44.19 51.14 59.83 (% of total) Underweight births 5.52 4.92 4.79 (9% o f l ive births) Source: Ministerio de Salud
109
18. Although it i s impossible, given the available information, to trace these changes back to the specific policies supported by the PSRL program, it i s not unlikely that some o f the observed improvements (especially those related to better delivery conditions) respond to the higher coverage rates among infants and pregnant mothers and the retargeting o f resources towards health centers located in poor areas achieved through the program.
Social exclusion and the living conditions of the indigenous population
19. In evaluating progress in Peru, be i t in terms o f poverty or social indicators, i t i s important to remember that national averages hide a substantial amount o f variation across regions and demographic groups-particularly, across indigenous and non-indigenous groups.
20. Although the majority o f the measures contemplated in the PSRL program does not target the indigenous population explicitly, most o f the criteria applied for coverage expansion and retargeting o f resources w i l l tend to favor areas where this group represents a large share o f the beneficiaries (Le. poor rural areas).
21. Unfortunately, information on the indigenous population i s not collected regularly or systematically in a nationally representative manner through household surveys, or otherwise. We therefore present here 2001 figures (the last year for which information i s available) wi th the objective o f documenting the differences that exist between this group and the rest o f the population, and with the understanding that some o f the overall improvements described above must reflect improvements in the education and health outcomes o f the indigenous population.
Table A4.13. Poverty rates are higher and access to infrastructure l o w e r among indigenous people
Indigenous Non-indigenous __.--
Poverty rate 63.8 42.0 Extreme poverty rate 35.3 16.6
Percentage in rural areas 45.2 28.2
Access to potable water Access to electricity Access to telephone N o sanitation system
52.5 60.9 10.5 36.6
66.1 74.3 26.7 17.0
Net primary enrolment rate 96.0 97.0 Literacy rates (15-24) 71.0 72.0 Literacy rates (all) 64.0 73.0 Source: Authors’ calculations using ENAHO 2001.IV.
110
Annex 5. Fund Relations Note
IMF Press Release on Stand-By Arrangement for Peru
Press Release No. 04/112 June 9,2004
International Monetary Fund 700 19th Street, NW
Washington, D.C. 2043 1 USA
IMF Approves 26-month US$422.8 Mi l l ion Stand-By Arrangement for Peru
The Executive Board of the International Monetary Fund (IMF) today approved a 26- month SDR 287.3 mil l ion (about US$422.8 million) Stand-By Arrangement for Peru to support the country's economic program through mid-2006. The approval enables the release o f a first drawing o f SDR 80 mil l ion (about U S S l l 8 million) under the arrangement. However, the authorities have indicated their intention to treat this arrangement as precautionary.
Following the Executive Board discussion, on Peru, Rodrigo de Rato, Managing Director and Chairman o f the Board, said:
"Peru's recent economic performance has been favorable, wi th solid growth and low inflation. Substantial buffers, including a high level o f international reserves and a well- capitalized banking system, have been built up to further reduce vulnerabilities associated with high dollarization and public debt, and there has been progress with structural reforms. The authorities' program for 2004-06 aims at consolidating macroeconomic stability, fortifying confidence, strengthening the basis for sustainable growth and employment creation so as to reduce poverty, and further reducing financial vulnerabilities. I t focuses on the consistent implementation o f their inflation-targeting framework and on fiscal consolidation, with a view to continue improving public debt dynamics and increasing the scope for priority social and infrastructure investment.
"The program also includes a broad set of growth-enhancing reforms aimed at reducing the high levels o f unemployment and poverty. In 2004, the authorities plan to foster private investment by establishing commercial courts and improving collateral registries. They also plan to grant operating concessions to the private sector and enter into targeted public- private partnerships (PPPs), which w i l l be implemented in a prudent manner and accounted for transparently in the budget. The reform program w i l l also improve public resource management, modify public pension regimes-including the preferential CCdula Viva- reduce labor costs, and strengthen bank supervision and the legal framework for fiscal decentralization.
"The authorities' firm commitment to implementing prudent economic polices in the context o f a challenging political and social environment i s commendable. Strengthening political consensus for critical reforms w i l l be crucial to press forward with the reforrr momentum of recent years and reduce the vulnerabilities facing the economy and reinforce confidence in the continuity o f prudent policies. This w i l l help boost broad-based and
111
sustainable growth and employment and reduce poverty, while strengthening the basis for Peru's successful exit from the series o f Fund-supported programs," the Managing Director said.
Recent economic developments
Peru made progress in stabilizing its economy and adopting growth-enhancing structural reforms, under the 2002-03 Stand-B y Arrangement with the Fund. Economic growth averaged 4.5 percent a year, inflation remained low under the inflation targeting framework o f the central bank, and substantial buffers were built to mitigate financial vulnerabilities. These buffers included a high level o f international reserves and a well-capitalized banking system. Progress was also made in structural reforms, including in the areas o f decentralization, pension reform, clarifying fiscal rules, strengthening the financial system, and reorienting the privatization program towards granting concessions.
In 2003, Peru's GDP grew by 4 percent in real terms and inflation was limited to 2.5 percent. Fiscal consolidation was in line with the government's target-the deficit o f the combined public sector was reduced from 2.2 percent o f GDP in 2002 to 1.7 percent of GDP. Revenues were boosted b y tax measures introduced in mid 2002 and mid 2003. Peru's external position also strengthened in 2003 and financial indicators improved. The external current account deficit fe l l f rom more than 2 percent of GDP in 2002 to about 1.75 percent, driven b y commodity export growth. Private capital inflows remained strong, particularly foreign direct investment in the natural resource sector. Gross international reserves rose b y about US$500 mi l l ion during 2003 and b y a further US$250 mil l ion during the first four months o f 2004, to US$10.5 bi l l ion at end-April 2004. The L ima stock exchange index surged by 75 percent during 2003, reflecting higher mineral product prices. Peru's sovereign spread continues to be among the lowest in the region.
Program summary
The objectives o f the program for 2004-2006 are to maintain macroeconomic stability, foster robust growth and employment, further reduce vulnerabilities, and diminish poverty. The program aims at enhancing the basis for strong economic growth, which i s projected to average about 4.5 percent a year during 2004-06. I t focuses on the continued implementation o f the inflation-targeting framework and on fiscal consolidation, with a view to lowering the debt-to-GDP ratio f rom about 47.5 percent in 2003 to about 41 percent in 2006. Successful implementation o f the program w i l l enhance the basis for defining Peru's exit strategy from Fund supported programs.
The fiscal program i s based on reducing the overall deficit o f the combined public sector from 1.7 percent o f GDP in 2003 to 1.4 percent in 2004, and to 1 percent a year in 2005-06. Over this period, about one third o f the adjustment effort o f the central government i s to be achieved through higher revenue, and the remainder through a containment in current expenditure growth.
Monetary policy w i l l continue to be managed within the inflation-targeting framework. While preserving i t s floating in the exchange rate regime, the authorities intend to maintain a solid cushion o f foreign reserves to mitigate potential external shocks and political uncertainties in the period up to the 2006 elections.
112
Boosting economic growth and employment creation depends critically on the sustained implementation o f a broad set o f reforms. The program includes growth enhancing reforms aimed at strengthening the investment climate, including the establishment o f commercial courts to speed up contract enforcement and improvements in the functioning o f collateral registries. To bolster infrastructure investment, the authorities plan to grant operating concessions to the private sector and enter into Public-Private Partnerships in a fiscally prudent and transparent manner. Also, the authorities intend to improve resource management in the public sector, modify public pension regimes, reduce labor costs, and strengthen the legal framework for decentralization. The program includes efforts aimed at further strengthening the regulation and supervision of financial intermediaries. Peru joined the IMF on December 31, 1945, and i t s current quota i s SDR 638.4 mil l ion (about US$939 million). I t s outstanding use of IMF financing currently totals SDR 80.3 mil l ion (about U S $ l l 8 million).
Key Structural Reform Measures in SBA 2004-06 to be implemented in 2004-05 Grant concessions or enter into Public-Private Partnerships for the construction and maintenance o f at least two major roads.
Put in place a commercial court module in Lima
Announce a plan to improve collateral registries. Submit to Congress legislation to eliminate by end- December the special wage tax (IES). Complete a census of government employees and pensioners
Peru: Growth Enhancing Policy Actions for 2004 in Fund Program
WB/ZDB/ZMF Loans supporting the reform coverage IDB Competitiveness loan. W B Facility to guarantee private sector
USAID TA grants IDB Competitiveness loan W B Decentralization and Competitiveness
loan IDB Competitiveness loan
obligations (being negotiated)
W B TA credit to support improved government financial management (at all levels)
Develop action plan for reforming the pension regimes for the police and the military. Introduce in congress a constitutional amendment and, once approved, introduce in Congress draft laws to allow a comprehensive reform o f the Cidula Viva. Implementation o f a satisfactory law clarifying shared functional responsibilities among the national, regional, and local governments.
Implementation of a satisfactory law providing
IDB 2002 fiscal reform program (supported studies and some legal changes, but not change in the constitution)
W B Decentralization and Competitiveness
IDB Decentralization and Modernization
W B Decentralization and Competitiveness
loan
Program ( in execution)
objective criteria for certifying that regional governments have the administrative capacity to take on devolved expenditure (Ley del Sistema
Decentralization and State Modernization Program (in execution)
IDB
Nacional de Acreditacidn). Put in full operation a system within the SBS to I W B I FSAP 1 measure currency risks.
113
Annex 6. Peru-Key Economic Indicators
Actual Estimate Projected Indicator 1999 2000 2001 2002 2003 2004 2005 2006 2007
National accounts (as % of GDP) Gross domestic producta
Agriculture Industry
100 100 10 10 31 28
Services 59 61
Total Consumption Gross domestic fixed investment
Government investment Private investment
Exports (GNFS)b Imports (GNFS)
81 82 22 20 5 4
17 16
15 16 17 18
Gross domestic savings 19 18 Gross national savings' 18 18
Memorandum items Gross domestic product 51,597 53,044 (US$ million at current prices) GNI per capita (US$, Atlas method) 2,110 2,080
Real annual growth rates (%, calculated from 1994 prices) Gross domestic product at market prices 0.9 2.8 Gross Domestic Income 0.2 2.7
Real annual per capita growth rates (70, calculated from 1994 prices) Gross domestic product at market prices -0.8 Total consumption Private consumption
Exports (GNFS)b Merchandise FOB
Imports (GNFS? Merchandise FOB
Resource balance Net current transfers Current account balance
Net private foreign direct investment Long-term loans (net)
Balance of Payments (US$ millions)
Official Private
Other capital (net. incl. errors & ommissions)
Change in reservesd
Memorandum items Resource balance (% of GDP) Real annual growth rates ( YR94 prices) Merchandise exports (FOB)
Merchandise imports (CIF) Manufactures
-1.6 -2.1
7696 6088 9028 6743
-1331 994
-1919
2263 694 483 212
-1813 775
-2.6
11.8 -4.1
-18.0
1.2 1.7 1.7
8555 695 1 9702 7366
-1147 999
-1557
917 1046 625 422
190 -596
-2.2
10.4 19.3 3.6
100 10 28 61
83 19
3 15
16 18
17 17
53,639
1,990
0.3 -0.4
-1.5 -0.4 -0.3
8,517 7,007 9,618 7,221
-1,101 1,042
-1,183
1,063 783 595 188
-215 -448
-2.1
4.5 12.1 2.0
100 11 29 61
82 18 3
15
17 17
18 17
56,490
2,040
4.9 4.9
3.3 2.4 3.0
9,267 7,723 9,947 7,417 -680
1,043 -1,127
2,156 540 121 419
-737 -832
-1.2
6.2 -0.4 1 .o
100 10 29 60
81 19 3
16
18 18
19 17
60,577
2,140
3.8 4.2
2.2 1.4 1.5
10,664 8,986
10,864 8,255 -200
1,221 -1,060
1,317 586
-450 1,037 -364 -479
-0.3
9.0 6.2 9.0
100 10 30 60
80 19 3
16
19 18
21 18
70,242
2,240
4.2 4.5
2.6 0.6 0.5
13,032 11,276 11,847 9,038 1,185 1,208 -309
948 625
36 589
-595 -669
1.8
15.0 2.8
10.9
100 10 30 60
79 19
3 16
19 18
20 18
70,543
2,390
4.5 4.4
2.9 3.3 3.4
13,738 1 1,677 12,617 9,533 1,121 1,236 -521
1,000 1,076 -220
1,296 - 1,502
-53
1.6
3.6 1 .o 5.4
100 10 29 61
79 19 3
16
20 18
23 19
76,000
2,530
4.5 4.4
2.9 0.9 0.5
14,765 12,475 13,545 10,159
1,220 1,278 -696
1,000 365
-381 746
-596 -73
1.6
5.0 3.5 4.0
100 10 29 61
79 20
3 17
20 19
22 19
80,318
2,670
5.0 5.2
3.4 3.7 3.9
15,604 13,362 14,654 11,355
95 1 1,163 -919
1,000 301
-358 659
-293 -89
1.2
5.4 5.2 6.1
114
Peru - K e y Economic Indicators (Continued)
Actual Estimate Projected Indicator 1999 2000 2001 2002 2003 2004 2005 2006 2007
Public finance (as % of GDP at market prices)e Current revenues 14.6 Current expenditures 14.7
-0.1
Foreign financing 0.6
Current account surplus (+) or deficit (-) Capital expenditure 3.4
Monetary indicators M2lGDP Growth of M 2 (%)
26.6 13.4
Price indices( YR94 =100) Merchandise export price index 90.8 Merchandise import price index 105.6 Merchandise terms of trade index 85.9 Real exchange rate (US$/LCU)' 108.5
Real interest rates 3.5
GDP deflator (% change) 4.0 Consumer price index (% change)
15.0 14.4 15.2 15.1 -0.2 -0.7 2.8 2.2 1.9 1.7
25.6 26.2 2.2 4.0
94.5 90.1 111.1 107.7 85.1 83.6
107.3 103.2
3.8 2.0 3.0 1.4
14.4 15.0 14.7 15.0 -0.3 0.0 2.0 1.9 2.8 1.6
26.3 25.0 5.8 1 .o
93.5 100.1 108.8 114.9 85.9 87.1
100.4 98.9
1.5 2.5 0.7 2.2
15.1 15.5 15.4 15.4 14.7 14.9 14.3 14.2 0.4 0.6 1.1 1.2 1.8 1.9 2.0 2.1 0.9 1.2 0.3 0.1
24.3 23.3 22.4 21.7 6.9 2.5 3.0 3.6
116.1 112.1 113.3 114.6 119.0 117.6 119.0 120.5 97.6 95.3 95.2 95.1 97.2 97.7 99.2 99.9
3.7 2.4 2.5 2.5 5.7 2.3 2.6 1.8
a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use of IMF resources, e. Consolidated central govemment. f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.
115
Annex 7. Peru Key Exposure Indicators
Actual Estimate Projected Indicator 1999 2000 2001 2002 2003 2004 2005 2006 2007
Total debt outstanding and disbursed (TDO) (US$m)”
Net disbursements (US$m)”
Total debt service (TDS) (US$m)”
Debt and debt service indicators ( % o )
TDOIXGSb TDOIGDP TDSKGS ConcessionalflDO
IBRD exposure indicators (70) IBRD DSIpublic DS Preferred creditor DSIpublic DS (%a)’ IBRD DSKGS IBRD TDO (uS$mf IDA TDO (US$mld
IFC (US$m) Loans Equity and quasi equity I C
MIGA
29,217 28,710 27.612 28,106 29,857 31.469 30.545 32,604 33,171
-1.294 298 -34 131 1,314 625 1,076 365 301
2.542 2,560 2,189 3,379 2,547 4,177 3,668 3,765 3,756
380.4 335.5 323.5 303.3 280.0 215.3 211.2 199.1 185.4 56.6 54.1 51.5 49.8 49.3 45.2 44.1 42.1 40.0 33.1 29.9 25.6 36.5 23.9 29.6 24.6 23.6 21.7 13.2 13.7 13.6 14.4 0.0 0.0 0.0 0.0 0.0
11.2 12.5 14.0 10.2 12.4 13.9 13.6 13.0 10.3 34.9 46.9 43.0 31.9 41.6 38.4 35.6 33.9 32.4
2.7 2.8 3.0 2.9 2.4 2.3 2.2 2.1 2.0 2,417.3 2,590.1 2,625.5 2,609.0 2,789.0 2,860.0 2,935.0 3.070.0 3.216.0
0 0 0 0 0 0 0 0 0
66 99 127 131 201 178 31 58 59 65 66 58
MIGA guarantees (US$m) 230.7 329.8 271.4 297.5 154.1 148.1
116
L
! ? a f r - :
Annex 9. Statement of IFC’s He ld and Disbursed Portfolio - As of 10/20/04
(In U S Dollars Millions)
Held Disbursed
FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 2000 Agrokasa 0 0 3.6 0 0 0 1999 Alicorp 2004 EDYFICAR 2002 FTSA 2002 Gloria
2002/03 ISA Peru, SA 2001 Inka Terra 2004 Interbank-Peru
2002/03 Interseguro 2000/04 Laredo
1998 Latino Leasing 2002 MIBANCO 1999 Milkito 2005 Miraflores 2003 Norvial S.A. 1998 Paramonga 2001 Peru OEH 1994 Peru Prvtzn Fund 1994 Peru Prvtzn Mgmt
1999 RANSA 2003 TIM Peru 2001 Tecnofil S.A. 2001 UPC
1993/96/00/01 Quellaveco
1993199 Yanacocha
Total Portfolio:
0 3
7.5 25
16.56 5
40 0
7.14 5.34 1.67 3.5 10 18
13.01 9.7
0 0 0
6.25 70 4.5 5.5 20
3.6
275.27 27.69
0 0 0 0 0 0 0 0
4.59 0 0 0 0 0 0 0 0
7.9 0
12.87 0 0 2 0
0.33
20 0
1.5 0 0 0 0 0 5 0 0
3.5 0 0 0 0 0 0 0 0 0 0 0 0
0 0 0 0
6.71 0 0 0 0
0 0 0 0
10.98 0 0 0 0 0 0 0 0
25
0 0
7.5 0
16.56 5 0 0
7.14 5.34 1.67 3.5
0 0
13.01 5.7
0 0 0
6.25 70
4.5 5.5 10
0 0 0 0 0 0 0
4.59 0 0 0 0 0 0 0 0
7.9 0
12.84 0 0 2 0
0.33
30 42.69 165.3 27.66
20 0 0 0
1.5 0 0 0 0 6.71 0 0 0 0 0 0 5 0 0 0 0 0
3.5 0 0 0 0 0 0 10.98 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 25
30 42.69
118
Annex 10. Peru at a Glance
POVERTY and SOCIAL
2003 Population, mid-year(millfons) GNI per capita(Aflas method, US$) GNI (Atlas method, US$ billions)
Average annual growth, 1997-03
Population (“9) Labor force (77)
Most recent estimate (latest year available, 1997-03)
Poverty (“7 of population below national poverty line) Urban population(“ of total population) Life expectancy at birthlyears) Infant mortality(per 7,000 live births) Child malnutrition(% ofchildren under 5) Access to an improved water source9 ofpopulabon) Illiteracy (“A ofpopulation age 151) Gross primary enrollment (79 of school-age population)
Male Female
KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1983
GDP (US$ bilhons) 19 1 Gross domestic InvestmenUGDP 24 3 Exports of goods and ServiceslGDP 19 7 Gross domestic savings/GDP 24 5 Gross national savingsiGDP
Current account balance/GDP Interest paymentdGDP Total debtiGDP Total debt serviceiexports Present value of debVGDP Present value of debvexports
-6.8 2.4
59.3 34.0
1983-93 1993-03 (average annual growth) GDP -0.7 3 4 GDP per capita -2.7 1.6 Exports of goods and services 1.0 8 4
Peru
26.9 2,160 58.2
1.7 2.9
49 74 69 30
77 9
128 128 127
1993
34.8 19.3 12.5 15.4 12.9
-6.6 2.2
67.7 59.4
2002
4.9 3.2 7.2
Latin America & Carib.
525 3,280 1,721
1 5 2.2
76 71 28 9
86 11
129 131 126
2002
56.5 18 8 16.5 18.0 17.2
-2.0 2.0
49.8 32.5
2003
3.8 2.2 5.0
Lower- mlddle- income
2,408 1,400 3,372
0 9 1.2
49 69 32 9
81 13
112 113 111
2003
60.6 18.8 17.7 18.9 17.5
-1.8 2.1
49.1 23.8
2 0 0 3 - 0 7
4.2 2.6 6.8
I Development diamond,
Life expectancy
-
i
~ GNI Gross per primary
1 capita enrollment
I i I Access to improved water source
--- Peru Lo wer-middle-lncome group
1 Economic ratios’
Trade
T
I Indebtedness
Peru 1 m v m m
1 ~ Lower-middle-income arouo
STRUCTURE of the ECONOMY
(% of GDP) Agriculture Industry
Services
Private consumption General government consumption Imports of goods and services
Manufacturing
(average annual growth) Agriculture Industry
Services
Private consumption General government consumption Gross domestic investment Imports of goods and services
Manufacturing
1983
8.6 35.2 30.3 40.1
64.3 11.2 19.5
1983-93
1.4 0.3
-0.3 -1.5
-0.8 -1.6 1.5 2.6
1993
8.2 25.3 16.2 57.3
76.5 8.0
16.3
1993-03
5.2 2.6 2.6 3.5
3.0 3.8 1 .o 3.7
2002
9.5 26.0 14.8 54.9
71.7 10.3 17.3
2002
6.0 6.6 4.0 4.0
4.4 0.2 4.5 2.1
2003
9.3 26.5 14.6 54.6
71 .O 10.1 17.6
2003
1.5 5.4 2.1 3.1
3.1 2.9 4.5 3.3
Growth of investment and GDP (%)
20 T
Growth of exports and imports (Ye) I
~~~
Note: 2003 data are preliminary estimates. Group data are for 2002 ’ The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond wil
be incomplete.
119
PRICES and GOVERNMENT FINANCE
Domestic prices (“7 change) Consumer prices Implicit GDP deflator
Government finance (“7 of GDP, includes current grants) Current revenue Current budget balance Overall SurDlusideficit
TRADE
(US$ millions) Total exports (fob)
Gold Fishmeai Manufactures
Total imports (cif) Food Fuel and energy Capital goods
Export price index (7995=700) Import price index (7995=700) Terms of trade (7995=700)
BALANCE of PAYMENTS
(US$ millions) Exports of goods and services Imports of goods and services Resource balance
Net income Net current transfers
Current account balance
Financing items (net) Changes in net reserves
Memo: Reserves including gold (US$ millions) Conversion rate (DEC, loca//US$J
EXTERNAL DEBT and RESOURCE FLOWS
IUS$ millions1 Total debt ouistanding and disbursed
iBRD IDA
Total debt service IBRD IDA
Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Portfolio equity
World Bank program Commitments Disbursements Principal repayments Net flows interest payments Net transfers
1983
110.8 104.0
1983
1983
3,726 3,687
39
-1,130 -219
-1,310
1,276 34
0 1.63E-6
1983
11,342 527
0
1,307 68 0
95 400 913 38
0
21 1 77 28 49 40 9
1993
48.6 47.1
13.6 0.1
-3.6
1993
3,516 208 542
1,007 4,123
476 32 1
1,143
79 88 89
1993
4,353 5,535
-1,182
-1,619 508
-2,293
2,702 -409
3,842 2.0
1993
23,578 1,369
0
2,758 1163
0
236 668 178 759
1,226
392 975 681 975 482 975
2002
1.5 0.6
14.4 -0.3 -2.2
2002
7,723 1,501
823 2,256 7,417
546 975
1,842
82 99 83
2002
9,267 9,947
-680
-1,491 1,043
-1,127
2,112 -985
9,989 3.5
2002
28,106 2,609
0
3,379 304
0
273 749
2,156 -9
100 146 163 -17 141
-158
2003
2.5 2.2
15.0 0.0
-1.7
2003
8,986 2,045
742 2,602 8,255
564 1,377 1,984
88 104 84
2003
10,664 10,864
-200
-2,082 1,221
-1,061
1,657 -596
10,662 3.5
2003
29,857 2,789
0
2,547 278
0
-7 1,184 1,317
243 344 163 181 115
66
Inflation ( O h )
10 T
98 99 00 O i 02 03
ama9*GDP deilator *CPI
Export and import levels (US5 mill.)
3.m T
97 98 99 CQ 01 02 03
Exports Imports
Current account balance to GDP (So) 1
I Composition of 2003 debt (USS mill.)
I G: 2,576 A: 2,789, ~~
A - IBRD E - Bilateral B . IDA D . Other multilaterai F - Private C - IMF G - Short-term
120
MAP SECTION
