World Bank Document€¦ · Institutional Education Council (Consejo Educativo Institucional)...

Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No. 47 104-PE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT

FOR A PROPOSED LOAN

IN THE AMOUNT OF US$330.0 MILLION

TO THE

REPUBLIC OF PERU

FOR A

SECOND RESULTS AND ACCOUNTABILITY (REACT) DEVELOPMENT POLICY LOAN-DEFERRED DRAWDOWN OPTION

March 5,2009

Human Development Sector Management Unit 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. I t s contents may not otherwise be disclosed without World Bank authorization.

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PERU - GOVERNMENT FISCAL YEAR January 1 - December 31

AAA APEC BCRP CAS CCT

CENAN

CFAA CFH CGR CIAS

CLAS

CONEAU

CONE1 CONEACE

CPAR CPS CRED

CUI cus DFID DNI DIRESA DNPP

FA0 FDI FONCODES FONIPREL

CURRENCY EQUIVALENTS Exchange Rate Effective as o f January 6,2009

Currency Unit = Nuevo Sol US$l.OO = S/.3.14

ABBREVIATION AND ACRONYMS

Analytical and Advisory Activities Asia-Pacific Economic Cooperation The Central Reserve Bank o f Peru Country Assistance Strategy Conditional Cash Transfer (Programa de Transferencias Condic ionadas) National Center for Food and Nutrition (Centro Nacional de Alimentacidn y Nutricidn) Country Financial Accountability Assessment Community Health Fund Office o f the Comptroller General Inter-ministerial Commission for Social Affairs (Comisidn Interministerial de Asuntos Sociales) Local Health Administration Committees (Comite's Locales de Administracidn de Salud) National Commission for University Evaluation and Accreditation (Comisidn Nacional de Evaluacidn y Acreditacidn Universitaria) Institutional Education Council (Consejo Educativo Institucional) Council for the Evaluation, Accreditation, and Certification o f Non- University Higher Education (Consejo de Evaluacidn, Acreditacidn y Certificacidn de la Calidad de la Educacidn Superior No Un ivers itar ia) Country Procurement Assessment Report Country Partnership Strategy Child Growth and Development (Sub Programa de Control de Crecimiento y Desarrollo) Unique personal identity number (Cddigo Unico de Identidad) Committee o f Health Beneficiaries (Comitb de Usuarios de Salud) Great Britain's Department for International Development National Identity Number (Documento Nacional de Identidad) Regional Health Directorates (Direcciones Regionales de Salud) National Public Budget Directorate (Direccidn Nacional de Presupuesto Ptiblico) Food and Agriculture Organization o f the United Nations Foreign Direct Investment Network Fondo de Cooperacih para e l Desarrollo Social (Social Funds) Fondo de Promotion a la Inversion PGblica Regional y Local

1


GDP GOP GTZ H I S IB IBRD IDB IFC IMF INEI

IPEBA

JSDF LAC MCLCP

MEF

MIMDES

MINEDU MINSA NGO OPIC PAHO PAS PBL PBM

PER PFM PHRD PIA PIM PRONAA

PSIA REACT RBB RENIEC

ROSC RUB SIAF

SDR

Gross Domestic Product Government of Peru German Technical Cooperation Agency Health Information System Institutional Births International Bank for Reconstruction and Development Inter-American Development Bank International Finance Corporation International Monetary Fund National Statistical Institute (Instituto Nacional de Estadistica e Informhtica) Peruvian Institute for the Evaluation, Accreditation, and Certification of Basic Education (Instituto Peruano de Evaluacidn, Acreditacidn y Certificacidn de la Calidad de la Educacidn Bdsica) Japan Social Development Fund Latin America and the Caribbean Region Citizen Roundtables to Fight Poverty (Mesas de Concertacidn para la Lucha Contra la Pobreza) Ministry o f Economy and Finance (Ministerio de Economia y Finanzas) Ministry o f Women and Social Development (Ministerio de la Mujer y Desarrollo Social) Ministry o f Education (Ministerio de Educacidn) Ministry o f Health (Ministerio de Salud) Non-Governmental Organization Overseas Private Investment Corporation Pan-American Health Organization Regional Performance Agreements Public Budget Law Participatory Budgeting and Monitoring (Presupuesto y Monitoreo Participativo) Public Expenditure Review Public Financial Management Japan Policy and Human Resources Development Fund Initial Budget (Presupuesto Inicial de Apertura) Modified Budget (Presupuesto Inicial Modificado) The National Food Assistance Program (Programa Nacional de As istencia Alimentaria) Poverty & Social Impact Analysis Results and Accountability Results Based Budget National Registry for Identification and Civil Status (Registro Nacional de IdentiJcacidn y Estado Civil) Report on the Observance o f Standards and Codes Single Beneficiary Registry (Registro Unico de BeneJiciarios) Integrated Financial Administration System (Sistema Integvado de Adm in is tracibn Financ iera) Special Drawing Rights

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.


SINEACE

SIS SISFOH TSA UGEL

U M C UNDP UNICEF USAID UST WHO

National System for Evaluation, Accreditation and Certification o f Education Quality (Sistema Nacional de Evaluacidn, Acreditacidn y Certificacidn de la Calidad Educativa) Integrated Health Insurance (Seguro Integral de Salud) Household Targeting System (Sistema de Focalizacidn de Hogares) Treasury Single Account Local Educational Management Units (Unidades de Gestidn Educativa Local) Quality Measurement Unit (Unidad de Medicidn de la Calidad) United Nations Development Program United Nations Children’s Fund United States Agency for International Development Universal Standard World Health Organization

Vice President: Pamela Cox

Sector Director: Evangeline Javier Sector Manager: Helena Ribe

Country Director: Carlos Felipe Jaramillo

Task Team Leader: Ian Walker

... 111

PERU

SECOND RESULTS AND ACCOUNTABILITY (REACT) DEVELOPMENT POLICY LOAN- DEFERRED DRAWDOWN OPTION

TABLE OF CONTENTS

LOAN AND PROGRAM SUMMARY .......................................................................................................... 1 I . INTRODUCTION ............................................................................................................................. 4 I1 . COUNTRY CONTEXT .................................................................................................................... 5

RECENT ECONOMIC DEVELOPMENTS IN PERU ........................................................ 5 THE GLOBAL FINANCIAL CRISIS AND THE GOVERNMENT'S RESPONSE ........... 8 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ................................ 8

THE GOVERNMENT'S PROGRAM AND PARTICIPATORY PROCESSES ......................... 9 BANK SUPPORT TO THE GOVERNMENT'S STRATEGY ..................................................... 30

LINK TO CPS ...................................................................................................................... 30 COLLABORATION WITH THE IMF AND OTHER DONORS ........................................ 31 RELATIONSHIP TO OTHER BANK OPERATIONS ....................................................... 32 LESSONS LEARNED .......................................................................................................... 33 ANALYTICAL UNDERPINNINGS .................................................................................... 33

I11 . I V .

V . THE PROPOSED SECOND RESULTS AND ACCOUNTABILITY (REACT) DEVELOPMENT POLICY LOAN-DEFERRED DRAWDOWN OPTION ............................................................................. 34

POLICY AREAS .................................................................................................................. 36 OPERATION IMPLEMENTATION .............................................................................................. 42

POVERTY AND SOCIAL IMPACTS ................................................................................. 42 ENVIRONMENTAL ASPECTS ......................................................................................... -44 IMPLEMENTATION. MONITORING AND EVALUATION ........................................... 45 FIDUCIARY ARRANGEMENTS ....................................................................................... 45 DISBURSEMENT AND AUDITING .................................................................................. 47 RISKS AND RISK MITIGATION ....................................................................................... 47

V I .

ANNEXES

ANNEX 1: LETTER OF DEVELOPMENT POLICY ................................................................................. 49

ANNEX 3: FUND RELATIONS NOTE ........................................................................................................ 67 ANNEX 4: DEBT SUSTAINABILITY ANALYSIS ..................................................................................... 68 ANNEX 5: COUNTRY AT A GLANCE ....................................................................................................... 71 ANNEX 6: MAP IBRD 33465 ........................................................................................................................ 73

ANNEX 2: PERU REACT I1 . OPERATION POLICY MATRIX ............................................................ 60

iv

FIGURES Figure 1: Children without birth certificates by age group and ruraVurban (2006) ..................................... 15

TABLES

Table 1: Key Economic Indicators ....................................................................................................................... 5 Table 2: Poverty Rates. 2004-2007 ....................................................................................................................... 6 Table 3: Key Economic Indicators by Scenarios. 2009-2011 ............................................................................. 9 Table 4: Institutional Birth coverage in Peru .................................................................................................. 23 Table 5: Institutional birth coverage in the 10 poorest regions of Peru. 2007 ............................................... 23 Table 6: Consultations and Dissemination activities ........................................................................................ 29 Table 7: Analytical and Advisory work underpinning the REACT DPL series ........................................... 35 Table 8: Prior Actions for REACT I1 ................................................................................................................ 37 Table 9: Summary of Revised Prior Actions and Triggers for the Programmatic Peru REACT DPL series ............................................................................................................................................................................... 38

TEXT BOXES

Box 1: Improving procurement and supply chain management in the Vaso de Leche program .................. 12 Box 2: Identity - the numbers ............................................................................................................................. 15 Box 3: Participatory Budgeting Monitoring in Junin ...................................................................................... 18 Box 4: Alternative approaches to assessing early reading performance ......................................................... 19 Box 5: What can a regional government do to improve education? The case of Junin ................................. 22 Box 6: Offsetting the private costs of accessing Institutional Births: the experience o f the Honduran CCT program. PRAF ................................................................................................................................................... 24 Box 7: Application of Good Practice Principles for Conditionality in the REACT DPL .............................. 39 Box 8: Overcoming cultural and economic obstacles to Institutional Births ................................................. 45

The PERU REACT DPL I1 Loan was prepared by an IBRD team consisting o f Ian Walker (LCSHS) Task Manager. Alessandra Marini (LCSHS). Rafael Cortdz (LCSHH). Ines Kud6 (LCSSE). William Reuben (LCSSO). Ana Maria MuRoz Boudet (LCSPG). Rossana Polastri (LCSPE). Oscar Calvo Gonzalez (LCSPE). Xiomara Morel (LCSFM). Patricia Hoyes (LOAFC). Claudia Maria Sanchez Lanning (JPA. LCCPE). Mariana Montiel (LEGLA). Patricia Orna (LCSHS). and Sara Burga (LCSHD) .

V

LOAN AND PROGRAM SUMMARY

PERU

SECOND RESULTS AND ACCOUNTABILITY (REACT) DEVELOPMENT POLICY LOAN-DEFERRED DRAWDOWN OPTION

Implementing Agency Financing Data

Operation type M a i n Policy Areas

Rembl ic o f Peru MIN ISTRY OF F INANCE Fixed-spread loan o f $330,000,000 United States Dollars with a repayment schedule linked to commitments and with al l the conversion options. Fee equal to one quarter o f one percent (-25%) o f the loan amount, payable up front f rom the Borrower’s own proceeds. Loan payable in 21.5 years, including a 12.5-year grace period with a level repayment schedule with repayments on each 1’‘ April and lSt October respectively. DPL/DDO This i s the second in a planned series o f three DPLs (programmed for FY 07, 09 and 11) to support the strengthening o f the Results and Accountability (REACT) framework in Peru’s social sectors. The program builds on the recommendations o f the “RECURSO” AAA report (“A N e w Social Contract for Peru”). To help basic education, health and nutrition services break out o f prevailing “ low quality equilibria”, the REACT DPL promotes transparent performance standards and encourages parents and local governments (whose role i s growing due to decentralization) to demand improvements. The ministries o f Education and Health have set standards for children’s learning, health and nutrition outcomes, and established goals for the proportion o f children achieving them. They are developing monitoring systems to track the performance o f health posts and schools, and to provide reports for parents on the health, nutrition and learning status o f their children. The operation also supports complementary actions to strengthen the links between budgeting and outcomes (through the roll-out o f performance budgeting in the social sectors), to improve service quality, reduce exclusion, improve targeting and increase the participation o f poor communities in budgeting and program monitoring. The REACT D P L complements a parallel series o f fiscal DPLs, which i s supporting the development o f the umbrella system o f results-based management in MEF.

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Key Outcome Indicators

Program Development Objectives and Contributions to CAS/ Country Partnership Strategy

Risks and Risk Mitigation

Improved outcomes o f priority social programs, as follows: Identity: Peruvian children born after 2008 will automatically receive a unique identification number (CUI) when their birth i s registered. Education: Improved 2"d grade reading comprehension reflected in an increase in students registered as fully proficient from 16 percent in 2007 to 35 percent by 20 1 1 ; and improved 2"d grade math performance reflected in an increase in students registered as fully proficient from 7 percent in 2007 to 30 percent by 201 1. Health: Rural Institutional Birth coverage increases from 49.4 percent in 2007 to 70 percent in 201 1. Maternal mortality i s reduced from 164 per 100,000 live births in 2007 to 120 in 201 1 ; and Neo- natal mortality i s reduced from 15.2 per 1,000 live births in 2007 to 14.6 in 201 1. Nutrition: Average frequency o f nutritional monitoring o f children reaches 4.0 CRED controls per year in the 1 st year o f l ife; and 2.0 per year in the 2nd year o f l i fe in 2009. Stunting rates for children under-5 are reduced from the baseline o f 28.5 percent in 2007 to 23 percent by 20 1 1 , on the new WHO standard. The REACT DPL series supports policies which are expected to lead to: (1) improved parental understanding o f expected outcomes in education, health and nutrition; (2) to improved outcomes in second grade literacy (especially in rural schools); (3) reduced maternal and neo-natal mortality; and (4) better nutrition outcomes. These are all highlighted as key development outcomes o f the CPS. Political risks: The decentralization process has led to Regional Presidents assuming a growing role, which opens up opportunities for improving outcomes but also offers scope for conflicts between national and sub-national governments about the sufficiency o f funding. Social and environmental risks: In education, the fear that universal standard testing o f education outcomes might lead to conflicts with the teachers has proved unfounded; the vast majority o f schools nationwide are now participating. It will be important to institutionalize the use o f the results in a way that i s perceived as supportive (and not threatening) by the teachers. In health, there i s a risk that birth services might be culturally inappropriate, leading to inequity the exclusion o f indigenous groups. A PSIA study has been undertaken to identify cultural obstacles to increased coverage o f institutional births and based on the findings, compensating measures have been introduced into the policy matrix. Economic risks: The Country's strong macro-fiscal position might be eroded by the global economic and liquidity crisis, leading to increased borrowing needs and more difficulty accessing finance. This operation will help mitigate that risk by increasing Peru's access to budgetary support to tackle fiscal

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contingencies on advantageous terms, under the DDO arrangement. This, in turn, wil l reduce the risk faced by commercial lenders when undertaking operations in Peru,

Operation ID Number helping reduce the spread on such operations. P 10 1 177

3

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (IBRD) PROGRAM DOCUMENT FOR A

PROPOSED SECOND RESULTS AND ACCOUNTABILITY (REACT) DEVELOPMENT POLICY L O A N TO PERU

I. INTRODUCTION

1. The Peru Results and Accountability (REACT) D P L i s the second in a planned series o f three operations (programmed for FY 07, 09 and 11) to support the GoP in strengthening the accountability framework and improving results in health, nutrition and education.

2. Over the last 15 years, Peru has expanded the coverage o f basic social programs, but the quality o f services remains poor. There are many causes o f poor quality, but a critical factor preventing change i s the absence o f clearly defined standards and results frameworks, across the social sectors. The consequence is inadequate human capital formation, as reflected in the health, nutrition and education status o f children. If these issues are not addressed, the resulting labor supply deficiencies will constitute a major obstacle to the country’s medium- te rm economic competitiveness strategy, undermining efforts to diversify away from traditional exports towards activities with more local value-added, which require a more sophisticated labor force.

3. Although Peru is a middle-income country, with near-universal coverage o f primary education, at the start o f the REACT program only 15 percent o f second grade students reached full sufficiency in literacy and almost ha l f were unable to read at all. In health, 25 percent o f births nationwide were s t i l l not institutionally supported - rising to 45 percent in the 10 poorest departments - hampering efforts to reduce maternal and peri natal mortality. Thirty percent o f five year old children in Peru were chronically malnourished ‘(stunted). In each case, outcomes were particularly bad in rural areas and among indigenous communities. For these reasons, service quality, results and accountability were placed at center-stage in the Garcia administration’s economic development and poverty reduction strategy.

4. The Peru REACT D P L series i s supporting actions in primary education, health and nutrition to define standards and set goals for the outcomes which families should expect for their children. This i s coupled with the development o f robust monitoring systems which provide up-to-date information on the performance o f health posts and schools and individualized data for parents o n the health, nutrition and learning status o f their children. The operation also supports actions to reduce exclusion, rationalize programs, to improve targeting and to increase the participation o f poor communities in budget processes and program monitoring. The REACT D P L series i s expected to lead to improved outcomes in second grade literacy (especially in rural schools); increased access to institutional birth services; and increased coverage o f individualized growth monitoring and counseling services for children under 24 months o f age in areas with a high incidence o f chronic malnutrition (stunting), leading to better nutrition outcomes.

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11. COUNTRY CONTEXT

RECENT ECONOMIC DEVELOPMENTS IN PERU 5. The political context in Peru has been stable over the last three years and allowed for continuity o f pro-growth policies. The Garcia administration (which took power in 2005) has been able to maintain a majority coalition in Congress that has supported i t s policy initiatives, despite relatively low popularity levels related to lack o f follow-through on some electoral promises. Government efforts have deepened Peru’s openness to trade and foreign investment, and include the successful negotiation and approval o f free trade agreements with the U.S., China and Canada. The summits o f leaders o f LAC-EU (May 2008) and APEC (November 2008) held in Lima served to showcase the Peruvian economy and to attract significant new investment commitments and trade opportunities.

6. As a result o f strong economic policies and a favorable external environment, in recent years, Peru has been one o f the best-performing economies in Latin America. GDP growth accelerated to 7.6 percent in 2006 and to a remarkable 9.0 and 9.3 percent in 2007 and 2008, respectively (see Table 1). The effects o f strong growth on employment and incomes have spilled into areas beyond Lima, yielding an important decline in poverty rates (see Table 2). The national poverty rate dropped by 9.3 percentage points between 2004 and 2007, from 48.6 percent to 39.3 percent. During the same period, extreme poverty fe l l by 3.4 percentage points, from 17.1 percent to 13.7 percent. While these gains are significant, poverty rates remain high for a country o f Peru’s income level and extreme poverty rates remain high in broad areas o f the Andean and Jungle regions.

7. Peru has also experienced steady improvements in fiscal indicators. The combined non-financial public sector balance has improved steadily since 200 1 , moving from a deficit o f 2.5 percent o f GDP in 2001 to surpluses in 2006, 2007 and 2008. The improvement in fiscal accounts i s explained by robust revenue growth due to booming mining exports and strong overall growth as well as by prudent expenditure management. Public debt has declined rapidly from 46 percent o f GDP in 2001 to around 23 percent o f GDP in 2008. Along with improvements in external indicators, the strengthened fiscal position explains Peru’s promotion to investment grade status by several international rating agencies in 2008.

Table 1: Key Economic Indicators

Annual GDP growth rate Real Domestic Demand Inflation rate, CPI (end o f period) Inflation rate, CPI (average) NFPS Balance/GDP Public Sector Debt/GDP Exports (FOB); change p.a. Imports (CIF); change p.a. Trade Balance/GDP External Current Account/GDP Terms o f Trade (deterioration -) Net International Reserves (US$ billion) 14.1 17.3 27.7 31.2 Note: e=expected. Source: Ministry o f Economy and Finance, Central Bank o f Peru and IMF.

2005 6.4 5.7 1.5 1.6

37.8 35.0 23.0 6.4 1.4 5.6

-0.3

2006 7.6 10.3 1.1 2.0 2.1 32.7 37.0 23.0 9.6 2.8

27.4

2007 9.0 11.8 3.9 1.8 3.1

29.2 17.5 31.8 7.1 1.4 3.6

2008e 9.3 13.2 6.7 5.8 2.1 23.3 12.8 44.7 2.4 -3.3 -9.5

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Table 2: Poverty Rates, 2004-2007

Total Poverty Extreme Poverty Region 2004 2005 2006 2007 Region 2004 2005 2006 2007 Total 48.6 48.7 44.5 39.3 Total 17.1 17.4 16.1 13.7 Urban Coast 37.1 32.3 29.9 25.1 Urban Coast 5.6 4.0 3.0 2.1 Rural Coast 51.2 50.0 49.0 38.1 Rural Coast 13.8 13.4 14.4 10.5 Urban Sierra 44.8 44.4 40.2 36.3 Urban Sierra 13.6 11.6 10.3 8.5 Rural Sierra 75.8 77.3 76.5 73.3 Rural Sierra 44.0 46.6 46.5 40.8 Urban Selva 50.4 53.9 49.9 40.3 Urban Selva 18.7 22.5 18.1 11.0 Rural Selva 63.8 65.6 62.3 55.3 Rural Selva 30.4 28 24.6 23.4 I Metropolitan Lima 30.9 32.6 24.2 18.5 Metropolitan Lima 1.3 2.0 0.9 0.5 I Source: National Institute o f Statistics (INEI).

8. A significant policy challenge has been the rise in inflation since mid-2007, reflecting higher international food and fuel prices and rapidly expanding domestic demand. Though s t i l l low by regional standards, inflation reached 6.7 percent by the end o f 2008, higher than the rate achieved in 2007 (3.9 percent) and above the Central Bank’s target range o f 1-3 percent. Inflationary pressures have been addressed through measures including lower tariffs, reductions in fuel excises taxes, and tighter monetary policy. Inflation i s expected to recede gradually in coming months, aided by the decline in agricultural commodity and international fuel prices, as well as with the expected slowdown in domestic demand.

9. Peru i s facing the global financial crisis with strong macroeconomic indicators and sound policies in place. I t has relatively high international reserves, a healthy financial sector, a manageable external current account and a strong pipeline o f foreign investment commitments. Export commodity price windfalls have been saved into a Fiscal Stabilization Fund, and could be used for countercyclical fiscal policy as needed. In addition, while exports are s t i l l concentrated in minerals, export destinations are now more diversified.

10. However, although Peru i s facing the global economic and financial crisis from a position o f strength, the downside risks are substantial. For example, net international reserves f e l l from 15 months o f imports in August 2008 to 13 months in January 2009, though net international reserves are s t i l l close to 4.9 times the stock o f short-term external debt and 2.2 times the stock o f foreign currency deposits at banks. Nevertheless, Peru needs access to contingent financing to reinforce i t s capacity to manage growing macroeconomic risks and to maintain priority social expenditures in the face o f the downturn.

11. The global financial crisis i s affecting key sectors o f the economy. A slowdown in economic activity has been detected since the third quarter o f 2008, driven by falling mineral prices and lower external demand. Economic growth in November 2008 stood at 5.1 percent, the slowest pace in more than two years. Falling export prices and deteriorating international conditions are adversely affecting fiscal revenues, external accounts, and stock market valuations. As a result, the estimated fiscal surplus for 2008 has been revised downward to 2.1 percent o f GDP; while the estimated current account deficit o f the balance o f payments has increased to 3.3 percent o f GDP. The stock market index exhibited a large decrease o f 60 percent in 2008, driven by the drop in commodity-linked stocks. The crisis has also prompted significant capital outflows, which explains the moderate depreciation o f the Nuevo Sol since September and significant sales o f reserves by the Central Bank. The financial accounts reveal a slight rebound in the dollarization o f assets and liabilities. Financing conditions have

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deteriorated for both public and private borrowing, as evidenced by higher spreads and diminished access.

12. The deterioration in the international environment has weakened the near term outlook for Peru. With lower global growth, lower commodity prices, higher r isks and financing costs, economic activity for 2009-1 1 i s expected to slow down considerably. Growth forecasts for 2009 point to a strong deceleration o f about three percentage points o f GDP under the baseline scenario, and this could deepen f ir ther if the crisis intensifies. Fiscal revenues will be affected by lower commodity prices and lower global demand, as one third o f tax revenues are commodity related. The forecasted fiscal surplus for 2009 is currently expected to be around 1.1 percent o f GDP, down from 2.1 percent o f GDP in 2008. The external current account i s expected to remain in deficit at about 3 percent o f GDP in the near term. The financing o f the current account deficit wil l depend on maintaining a reasonable amount o f FDI inflows, which are sensitive to global demand and credit conditions.

13. The downside risk scenario has become more l ikely in the current uncertain and volatile external environment. A l o w case scenario was simulated (with lower external demand and a 40 percent fal l in the prices o f Peru’s main metals) to assess the economy’s medium term outlook. This scenario predicts a significant decline in growth, a larger deterioration o f the current account balance and a shift o f the fiscal accounts into deficit (see Table 3 further below). Although the l o w case scenario would lead to a deterioration o f public and external indebtedness, the medium-term path remains sustainable, thanks to strategic debt management, strong GDP growth and fiscal surpluses in the past, which have lowered Peru’s debt burden indicators and improved the country’s debt profile. However, in this scenario there i s a risk that some o f the poverty gains made in recent years would be reversed.

14. Social tensions could be exacerbated if economic activity decelerates significantly as a result o f the global financial crisis. Frustrations due to unmet expectations, higher food prices, and tensions in the context o f the decentralization process have already resulted in some social unrest and incipient conflict in some regions. Despite progress in the system o f checks and balances, there was a recent corruption scandal, involving bidding in international contracts in the extractive sector. President Garcia responded swiftly with changes in his cabinet o f ministers. An investigation i s underway and some o f the officials who were involved are in custody. The new Prime Minister, a former Regional President, i s expected to help advance the decentralization agenda and has pledged commitment to a new anti-corruption plan.

15. Peru i s wel l poised to resume i t s high growth path once the global economy stabilizes, but the next two years will be dominated by negative external conditions and government efforts to mitigate their impact. The government i s wel l aware o f the risks associated with the global financial crisis and i s responding through the design o f a policy package, which includes greater contingency lending from the World Bank (under the REACT, Environment and Fiscal D P L series, al l o f which have been increased to meet the Government’s demands and now incorporate a D D O modality) and from other lenders. The government i s also taking measures to prevent a reversal o f recent advances in poverty reduction. These include many o f the policies supported by the REACT D P L series, including increased funding for the universal health insurance program, SIS and the restructuring o f the Juntos conditional cash

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transfer program. The Government i s also promoting increased infrastructure investments in rural areas.

THE GLOBAL FINANCIAL CRISIS AND THE GOVERNMENT’S RESPONSE

16. Peru i s facing the global financial crisis with strong macroeconomic indicators and sound policies in place. In this setting, the authorities have been able to implement policy measures to maintain confidence and mitigate the foreseen adverse impact that the global crisis could have on economic activity. These measures include:

Easing Monetary Policy: The Central Reserve Bank o f Peru (BCRP) has increased liquidity facilities to avoid a potential credit squeeze, including the creation o f rep0 loans in U S dollars with CDs as collateral, and resumed issuance o f US dollar-linked CDs. Additionally, BCRP approved in October 2008 a regulation to allow pension funds to participate in rep0 operations. BCRP has also reduced the marginal reserve requirements on both local and foreign currency deposits.

Intervention in the foreign exchange market: Following a lengthy period o f moderate appreciation, the Peruvian Sol has depreciated by around 7 percent since August 2008. BCRP has intervened in the foreign exchange market to smooth fluctuations and prevent a rapid depreciation o f the currency, using nearly USS4.5 bi l l ion in the last two months o f 2008. In the event o f further depreciation pressures, BCRP has room to intervene, since international reserves as o f end-January 2009 stood at US$30.2 bi l l ion (or around 23 percent o f GDP).

Counter cyclical fiscal policy: The authorities have announced an ‘anti-crisis plan’ that envisages a fiscal stimulus o f around US$3.2 bi l l ion (or 2.4 percent o f GDP) to help support a growth rate target o f at least 6 percent per year for 2009-10. Under this scenario, public investments would be accelerated as needed, and more funds would be allocated to social and infrastructure expenditures, with emphasis on those programs that have a direct impact on vulnerable families. While in a base scenario, such a boost in expenditures may not require incurring a fiscal deficit, authorities are making arrangements to secure contingent l ines o f credit f rom IFIs in case access to bond markets remains costly. In the short term, authorities have announced their intention to explore long-term bond issuance if windows o f opportunity arise.

Measures to Sustain Private Investment: In addition to the above, the government i s working to minimize the effect on private investment flows o f changing risk perceptions. In coordination with private commercial banks, authorities are identifying mechanisms to discourage reduced lending for investments in equipment, capacity expansion and construction. As part o f this effort, talks are underway with the IFC to intensify i t s presence in Peru through equity investments, long term funding, mobilization and issuance o f partial guarantees to cover risks. Other institutions that have announced their intention to collaborate in these efforts include IDB, OPIC and JBI. Public financial institutions would also continue channeling resources to productive sectors.

0

0

0

MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY

17. Table 3 shows the Peru’s revised medium term outlook under two different scenarios o f global crisis impacts. The baseline scenario reflects the challenging external environment

8

of global economic slowing-down, l o w commodity prices, and high risks and financing costs. The l o w case scenario assumes a lower external demand and a 40 percent fa l l in the prices o f Peru’s main mineral exports. This scenario has become more l ikely under the current uncertainty and external environment volatility. I t i s associated with a significant decline in growth, larger deterioration o f the current account balance and a shift o f the fiscal accounts into deficit. But although in this scenario, public and external indebtedness would deteriorate, the medium-term path remains sustainable, thanks to strategic debt management, strong GDP growth and fiscal surpluses in recent years, which have lowered Peru’s debt burden indicators and improved the country’s debt profile.

Table 3: Key Economic Indicators by Scenarios, 2009-201 1

2009p 2010p 2011p Base Low Base Low Base Low

Annual GDP growth rate 6.0 3.5 5.5 4.0 5.5 5.0 Real Domestic Demand Inflation rate, CPI (end o f period) Inflation rate, CPI (average)

NFPS Balance/GDP Public Sector Debt/GDP

Exports (FOB); change p.a. Imports (CIF); change p.a. Trade BalanceIGDP External Current Account/GDP Terms o f Trade (deterioration -)

5.9 4.7 7.1 3.4 7.6 3.9 3.0 5.0 2.5 3.0 2.0 2.0 4.4 5.0 3.3 3.0 2.4 2.0

1.1 -1.5 0.9 0.2 2.2 0.8 22.2 23.5 20.0 22.1 17.4 18.7

8.7 2.2 10.8 4.5 10.2 6.1 2.8 5.5 12.4 5 . 5 12.4 6.3 0.0 -1.5 -0.3 -2.6 1.4 -1.8

-3.0 -5.0 -3.0 -4.7 -2.2 -2.5 -8.3 -10.5 -1.6 -3.2 -4.0 -4.0

Net International Reserves US$ billion 33.9 24.9 34.1 26.3 32.1 27.8 Percent o f short-term external debt 349.9 257.0 378.9 271.5 356.7 286.9 Percent o f foreign currency deposits at banks 198.7 145.9 199.9 154.2 242.5 162.9

Note: p=projected. Source: Ministry o f Economy and Finance, Central Bank o f Peru, and IMF.

18. IMF relationship: In January 2007, Peru signed a 25-month Stand-By Arrangement in the amount equivalent to SDR 172.4 mi l l ion (27 percent o f quota) with the International Monetary Fund (IMF). The program has been on track and the fourth and final review o f Peru’s economic performance under the arrangement was completed by the IMF Board on January 30, 2009. The Public Information Note i s in Annex 3 o f this document, and Annex 4 contains an up-to-date IMF debt sustainability analysis for Peru which i s consistent with the analysis presented above. The Peruvian authorities have treated the arrangement as precautionary and have not made any drawings, as was the case in the two previous ones.

111. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES

19. The Government’s twin strategic objectives are to accelerate economic growth; and to accelerate poverty reduction and improve social outcomes. On the economy, as outlined in Section 11, the Government aims to maintain macro-economic stability, increase the institutional capacity o f the state and strengthen Peru’s physical and social infrastructure. I t i s promoting private sector-led growth, strengthening regulation, facilitating integration to the global economy and in the last three years, has taken advantage o f favorable external

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conditions to greatly reduce vulnerability to domestic and external shocks, which has proved prescient in the light o f recent global events. It i s now concentrating on putting place effective counter cyclical policies to minimize the impact o f the global downturn in Peru.

20. In the social sectors, i t i s promoting human development, social justice and the reduction o f extreme poverty. Over the last 15 years, Peru has expanded the coverage o f basic social programs, but the quality o f services remains poor- especially in rural areas. Although Peru i s a middle-income country, with near-universal coverage o f primary education, at the start o f the REACT program only 15 percent o f second grade students were reaching full sufficiency in literacy and roughly hal f are unable to read at all. In health, 25 percent o f births nationwide were still not institutionally supported - rising to 45 percent in the 10 poorest departments - hampering efforts to reduce maternal and neo-natal mortality. Fully 30 percent o f five year old children in Peru were chronically malnourished (stunted). In each case, the outcomes were particularly poor in rural areas and among indigenous communities. For these reasons, the issues o f service quality, results and accountability occupy center-stage in the government’s economic development and poverty reduction strategy.

2 1. There are many causes o f poor quality, but a critical factor preventing change i s the absence o f clearly defined standards and results frameworks, across the social sectors. To address this issue, the Government’s Social Sector Reform Program’ i s working to reorganize programs and establish robust accountability frameworks, embedded in the performance budgeting system.

22. In this context, the Peru REACT D P L i s supporting actions in primary education, health and nutrition to define standards and set goals for the outcomes which families should expect for their children. This i s coupled with the development o f monitoring systems providing up-to-date information on the performance o f health posts and schools and individualized data for parents on the health, nutrition and learning status o f their children. The operation also supports complementary actions to strengthen the l i n k s between budgeting and outcomes (through the roll-out o f performance budgeting in the social sectors), to improve service quality, reduce exclusion, improve targeting and increase the participation o f poor communities in budgeting and program monitoring. In terms o f development outcomes, the REACT D P L series i s expected to lead to improved second grade literacy (especially in rural schools); increased access to institutional birth services; and increased coverage of individualized growth monitoring and counseling services for children under 24 months of age in areas with a high incidence o f chronic malnutrition (stunting), leading in turn to improved nutrition outcomes.

23. The strategy adopted by the GoP was described in detail in the P D for REACT 1 (Report 39673-PE) which was presented to the Board in June, 2007. The strategy includes actions and goals in four broad policy areas specific to the REACT DPL: the strengthening o f governance, equity and accountability in social programs; education; health; and nutrition. The fol lowing sections detail the development o f the Government’s strategies over the subsequent 1 8 months, commenting on the advances achieved, explaining the changes made to strengthen the strategy and documenting the outcomes which are observable at this point.

Decreto Supremo 029-2007-PCM, dated 30, March 2007. 1

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Governance, equity and accountability in the social sectors 24. Fusion, integration and articulation of social programs. Between 2006-2008, the Government implemented a program o f integration and rationalization o f social programs which aimed to fuse programs which overlap on both objectives and beneficiaries; to integrate those which pursue similar objectives in different target groups o f the population; and to improve coordination between programs which pursue related, but different, objectives. The goal is to improve coverage, reduce leakage o f resources to unintended beneficiaries, reduce administrative costs, improve transparency and optimize impacts.

25. A goal was set to eliminate 56 o f 82 programs which had been identified; eleven supreme decrees were issued to that end. At the same time, the MEF worked to strengthen accountability and results frameworks for the remaining consolidated programs. During 2008, in the context o f the 2009 budget cycle, it created a reserve o f S/.700 millions (about US$210 million) to be assigned to programs which conformed to the objectives o f the reform process.

26. In 2008, the Government requested the Bank to carry out a mid-term evaluation o f the social program reform process. The evaluation concluded that the original rapid diagnostic had confused some programs and sub-programs, leading to problems with the scope o f the fusion process. I t recommended that in the next phase, the emphasis should be placed on improving the targeting and effectiveness o f the major programs, which account for over 80 percent o f social spending (outside health and education). These include the “Juntos” CCT program, the social fund (FONCODES), the new investment fund, FONIPREL, the workfare program (Construyendo Peru, previously A Trabajar Urbano), and the major food programs (Vaso de Leche and PRONAA). I t also recommended that the reform process should engage sub-national governments by using budgetary incentives, linked to the performance budget system, to encourage improved targeting and effectiveness in programs run by local government, such as the Vas0 de Leche food program.

27. Based on these findings, the next phase o f the social program reform process will concentrate on improving the performance o f the major programs, including: the municipal food program Yaso de Leche; the food programs o f M I M D E S (PRONAA); the health insurance program SIS; the rural conditional cash transfer program Juntos; the urban workfare program (Construyendo Peru, previously A Trabajar Urbano); and the new social fund FONIPREL. In each program, the government will work to clarify objectives, improve targeting and establish effective accountability mechanisms.

28. Targeting of socialprograms. The Government has initiated two related initiatives on targeting. A household a targeting system, the Sistema de Focalizacidn de Hogares SISFOH, has been created in the 30 major cities. SISFOH uses a proxy means test approach to identify households in the bottom two quintiles o f the income distribution, as a first f i l ter to help program administrators avoid leakage to non-poor beneficiaries. SISFOH already covers 3 75 districts and 1.85 mi l l ion households (almost 7 mi l l ion individuals). The register includes the unique personal identity number (Cddigo Unico de Identidad, CUI) which i s issued to each person in their DNI or birth certificate (see below). In the next phase, municipal targeting units will be set up to keep the register updated as an effective tool to improve the fairness and transparency o f programs such as Vas0 de Leche. The SISFOH system will also be used to target the universal health insurance system, SIS, in urban areas.

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29. In parallel with the creation o f SISFOH (which aims to identify households which should be covered based o n objective poverty criteria) the Government has also advanced work to determine which households are actually covered by existing programs. This will provide a basis for correcting errors o f inclusion. The creation o f a Beneficiary Register (Registro Unico de Beneficiaries, RUB) for Vuso de Leche has been undertaken by the statistical institute, INEI under contract to MEF. Vas0 de Leche has an estimated three mi l l ion beneficiaries nationwide, but i s thought to have a serious problem o f “phantom” claimants. The register includes information on the identity number (DNI), name, and address o f the claimant, and the number o f people in the household. By the end o f 2008, INEI had completed a register o f the 1.6 mi l l ion beneficiaries in the 30 main cities o f Peru. The Bank i s supporting the reform o f Vuso de Leche through the Recurso programmatic AAA program. In 2008, a study was completed o f procurement and supply chain management issues which identified great scope for savings by improving the selection o f products and modernizing the procurement system (see Box 1).

Box 1: Improving procurement and supply chain management in the Vaso de Leche program

In 2008, at the request of the Government, the Bank’s Recurso AAA program funded a study o f procurement and supply chain management of Vas0 de Leche. The aim was to identify ways to reduce costs and improve administrative efficiency in the face of the global food price crisis. The crisis posed a critical challenge to the fiscal viability of Vas0 de Leche, as rising input costs stretched the ability of municipalities to reach the intended target population with the planned level of nutritional support.

The report identifies two key factors making the program’s costs higher than necessary: uncompetitive procurement; and suboptimal specification o f the nutritional content o f the VdL rations. Among the elements contributing to uncompetitive procurement are: the lack of standardization o f products, the lack o f a reference price system; excessive use o f direct purchases; the small size o f many procurements, which makes them unattractive to competitive bidders; the banning o f imported content; and the selection o f products largely based on the preferences of VdL committees rather than best value evaluation. The key problem with the sub-optimal composition of the food rations i s that evaporated milk i s the preponderant type o f milk used, even though i t s nutritionally-equivalent cost i s 80 percent above that o f fresh milk.

The report recommends actions that couldreduce the program’s costs by up to 40percent. First, using effective competitive norms for acquisition of products could save an estimated 15 percent of the program’s cost, by using standardized product specifications; a regionalized reference price system; the elimination o f brand specification; permitting imported products to be purchased; and organizing larger procurements by combining several municipalities. Second, cost effectiveness analysis showed that the use of fresh milk instead o f evaporated milk could produce savings in the order of 26 percent, without reducing the nutritional value o f the rations. This estimate i s based on detailed analysis o f the costs reported by the 14 municipalities studied in-depth for the report. Even maintaining the use of evaporated milk, a more careful design o f the food content o f the ration to minimize the cost of reaching the nutritional goal o f the program would save an estimated 12 percent.

Source: Improving procurement, supply chain management and cost effectiveness in Peru’s Vas0 de Leche aromam. World Bank. Julv 2008.

30. Identity. The lack o f identification documents underlies the continuing socioeconomic exclusion o f many Peruvians. Citizen identification is central to ensuring access to social programs. Without good data on the distribution o f the population, it i s difficult to identify coverage gaps and plan the expansion o f programs. And without legal status as a citizen, it i s difficult for individuals to exercise their rights to program access. As was detailed in the P D for REACT 1, at the start o f the D P L series, almost 10 percent o f the adult population was undocumented: an estimated 1.5 mi l l ion adults had no DNI identity number.

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The undocumented population lives largely in rural and urban-marginal areas. The latter include immigrants from the Sierra and the Amazon who fled the armed conflict or to seek economic opportunities.

31. The Government has made citizens’ identity documentation a high priority. The “National Plan for the Restitution o f Undocumented Persons” was incorporated into the 2007 Public Budget Law (PBL). Identity was included as one o f the strategic programs to be monitored under the 2008 Performance Budget (see paragraph 39 below), and funds were assigned to RENIEC for the first time to implement i t s programs. Among the identity-related goals being monitored are the number o f birth certificates issued at the national and regional levels; adult and infant DNIs issued national and regionally.

32. Arguably the most important step taken over the last two years was the incorporation in al l new birth certificates o f a unique personal identification number (CUI), which will remain with the individual through their lives and be incorporated into the National identification Document (DNI). RENIEC has modified the registry books so that al l new birth certificates include a C U I and the barcode associated with it. These new books have been distributed country-wide and survey evidence confirms that 75 percent the new birth certificates issued to children under three now incorporate a CUI2. This will help the social sectors to advance with the consolidation o f beneficiary identification. Since coverage o f birth certificates in Peru for the present generation o f children i s high (reaching 98 percent o f children according to the 2007 Census), if every chi ld with a birth certificate has a CUI, the basis will be established for near universal citizen identification. Since birth certificates (unlike DNIs) are free, there i s no economic exclusion factor3.

33. Another important initiative to strengthen identification for children and adults has been the agreement between RENIEC and the Juntos CCT program to support Juntos’ beneficiaries to acquire identification cards (DNIs), free o f cost. To date (December, 3 1 2008), 387,668 DNIs have been issued for this group, o f which 386,211 were for children and 1,457 for adult^.^ However, some problems have been identified with getting the DNI documents to the beneficiaries in isolated areas, due to the lack o f funds for delivery.

34. The next steps in the strategy to strengthen citizen identification systems are (a) to ensure that birth certificates are issued in a timely way to al l children (at present many children do not get their certificates until they start school, so they may miss out on early childhood programs); and (b) to establish a national electronic register o f al l the birth certificates issued, including the CUI.

35. To support the f i rs t o f these goals, an in-depth quantitative and qualitative study o f coverage and exclusion from birth certification has been completed, with Bank support (see B o x 2). The qualitative study found evidence o f cases in which the lack o f documentation became an obstacle to accessing jobs and social services. The study highlights problems getting access to registry offices as a key factor in delaying the emission o f certificates. I t recommends focusing identification campaigns in populations with pockets o f undocumented

Reference: ENAHO 2008, second quarter. However, the travel costs for rural households to process copies o f birth certificates in registry offices are an

important obstacle. These can increase considerably when the families migrate, because there i s no national database that would allow other registries or RENIEC to issue the document, so they must return to the original registry office.

Source: RENIEC, January 2009.

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children (which were identified by the study); and targeting health posts (which deal with babies in remote areas before other public offices) to ensure timely emission o f birth certificates.

36. On the second point, RENIEC i s exploring ways to centralize all new birth certificates into a single database for consultation and use by social programs. In addition to making available registry data to social programs, this measure will allow families who have migrated from the place where their birth certificate was originally issued to process copies o f the document in any municipal registry or RENIEC office. The plan i s to take advantage o f the broadband capacity o f the financial administration system SIAF to remit the data from municipal registry offices. The computer-based interface will reduce birth registration error (currently estimated at 34 percent). This, in turn, will facilitate issuing o f DNI cards later on (since registration errors must be corrected at that point), reduce costs for individuals, improve access to public services when the lack o f documentation i s an obstacle and facilitate the use o f a single identification number by all social programs. As an interim step, RENIEC wi l l establish a central database o f the births registered across the system, containing basic information, such as the details o f the registry office, the name, date o f birth and sex o f the child and the CUI assigned. Although this will not have transactional value for the emission o f certificates, it will provide vital information for planning social programs.

37. Transparency in the budgetprocess. As was outlined in the PD o f REACT 1, the GoP has greatly strengthened the legislative and institutional framework to make social spending more transparent, equitable and effective. Under the 2002 Law o f Transparency and Access to Public Information, a l l 16 ministries have implemented transparency portals and with l i n k s to respond to citizen questions. The MEF has established the transparency portal “Consulta Amigable” (“Friendly Consultation7’) o f the Integrated Financial Administration System (Sistema Integrado de Administracidn Financiera - SIAF). This portal i s among the most advanced in the LAC region (http://ofi.mef.aob.pe/ transparenciddefau1t.aspx). It provides information on economic indicators and projections, summaries o f the strategic plans o f different sectors, central and regional government budgets and expenditures, financial statements o f all public agencies, and information on internal and external public debt. 38. In 2008, a further important step was taken, when the GoP began publishing in Consulta Amigable the modified budget (Presupuesto Inicial Modijicado, PIM), which i s used by government agencies during budget execution. Previously, only the original budget had been published. This change - which was recommended by a 2007 evaluation o f Consulta Amigable’ - will facilitate civil society monitoring o f budget implementation. P IM data i s now available for consultation back to 2004. An additional advance in 2007 was the publication o f P IM for local governments through the SIAF GL (Local Government) system. All 1,834 municipalities’ budgetary information can now be found on Consulta Amigable. For civil society agencies working on budget monitoring, access to P IM allows users to compare executed spending with the actual budgetary assignments, increasing accountability o f social spending. A pending issue i s to establish a link between Consulta Amigable and the budget data being produced by the performance budget system (see next section) and create a manual for Consulta Amigable users portal on how to access the RBB information.

39. Performance budgeting. The Garcia administration i s committed to linking the budget process to performance evaluation. With support from the World Bank’s PREM team, a

CAD, 2007. Consultoria para la evaluaci6n de l a Consulta Amigable del SIAF-SP, Lima.

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results-based budget (RBB) framework and office has been created in MEF. In parallel, Human Development team has been supporting the roll-out o f the performance budgeting system in the fields o f education, health, nutrition, and citizen identification. The 2007 and 2008 Budget Laws specified priority areas for work to improve the quality o f expenditure (1 0 in 2008, 17 for 2009). These areas have now been grouped into strategic programs, and expected outcomes have been set for each o f them for 20 1 1. The strategic programs related to the social sectors are: Nutrition; Maternal and Neonatal Health; Educational Attainment; and Identity.

Box 2: Identity - the numbers

Coverage o f birth certificates i s higher. According to the Census around 300 thousand people o f al l ages do not have birth

years o f age, and 22.6 percent are between 3 and 5 years old. Once children reach school age (6 and over) birth certificates are often obtained and issued as part o f the process o f

pockets o f children without birth certificates are located in the Selva and in the Metropolitan area o f L ima (Maps 1 and 2).6

certificates. Of these, 48.6 percent are under 3

school enrollment (Figure 1). The main

I 2% s 0-5

10% a'6-13

90,0

6% 5%

305

oo,o

Nacional Urbano Rural

Figure 1 : Children without birth certificates by age group and ruraUurban(2006)

A geographical assessment o f location based on Census data was undertaken for the preparation o f REACT 2. The study noted differences in data depending on the instruments used. The Finance Ministry uses the yearly Household Survey to monitor coverage o f birth certificates. This overestimates the numbers in comparison with the Census, especially for regions with more un-registered children.

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40. For each strategic program, the budgetary system has been analyzed to determine the relevant financing sources and service providers. These include: MINSA, SIS, MINEDU, the Presidency o f the Council o f Ministers, MIMDES, the National Health Institute, RENIEC and the Regional Governments. The RBB process identifies the corresponding budget line items; and physical output targets have been established for each budget l ine at national, regional and local level (for each budgetary executing unit or Unidad Ejecutora). A baseline has been established for the high-level outcomes o f each program’ and progress on expenditures and intermediate physical outputs i s being monitored quarterly for each executing agency o f 31 health and nutrition programs, including institutional births and nutrition consultations’.

41. The next step will be to complete an assessment o f the performance budget process, including: negotiation with the sectors, goals selection, choice o f output indicators, and M&E processes. This analysis will aim to improve understanding o f the relationship between the physical outputs (being monitored through administrative systems) and the programs’ expected development outcomes (which are being monitored by household surveys). I t w i l l also aim to improve the alignment o f the main actors with sector priorities, improve efficiency and effectiveness o f financial allocation and cost analysis; and identify critical bottlenecks in the process. Other areas for future development o f the system include: (i) linking the system goals to incentives for budget executing units, by creating ‘budget headroom”, beyond the pre- committed l ine items, for results-based implementation by the accountable actors (line ministries and regional governments); and (ii) ensuring that the incentives o f service producing units (below the level o f budget executing units) are fully aligned with the high- level goals o f the system. The reforms underway in the health insurance system, SIS are addressing this issue (see paragraph 67 o f this Project Document).

42. Participatory budget monitoring (PBM) at sub national level. In the context o f decentralization to regions and municipalities, the Government has promoted participatory budgeting and monitoring in local and regional governments. The aim i s to make services more accountable to citizens and users, through the publication o f timely and reliable budget information. Civi l Society entities such as the Mesa de Concertacidn para la Lucha Contra la Pobreza and church and social organizations have participated in this process. Evaluations in the LAC region and beyond have shown that PBM encourages more equitable resource allocation, raises public awareness o f the use o f funds and helps limit corruption, by increasing transparency throughout the budgeting processg.

43. Participatory budgeting was initiated in Peru in 2002. The 2003 Budget Law mandated i t s application by all regional governments and provincial and district municipalitieslO. In 2008 over 53,000 people representing local organizations participated and more than 20 thousand projects were prioritized, representing about S/.2.3 billion (US$730 million)”. The

’ For the baseline, a special inter-institutional agreement was signed with INEI in order to add a module to ENAHO and ENDES. In education, the Universal Standard Tests are being used to monitor students’ attainment. * See htt~://www.mef,gob.oe/DNPP/tmto por resu1tados.php ( seguimiento / metas fisicas) and http://www.mef.gob.pe/DNPP/PpWSGMT/reporte UE 1ITrim.pdf).

See among others: Baiocchi, G. et al. (2004). Evaluating empowerment: participatory budgeting in Brazilian Municipalities. World Bank draft, December 3 1 ; Marquetti, A. (2002) “0 orqamento participativo como uma politica redistributiva em Porto Alegre”. I Encontro de Economia Gahcha. Porto Alegre, 16- 17 maio.

Reuben, William and Belsky, Leah. 2006. Voice in the Accountability o f Social Policy. In A New Social Contract for Peru. The World Bank, Washington DC.

Source: MEF, DNPP (2008) Aplicativo del Presupuesto Participativo.

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I O

16

2007 Budget Law (Article 11) calls for Government-civil society roundtables (“Mesas de Concertacibn para La Lucha Contra la Pobreza”, MCLCP) to be involved in identifying priority actions to improve transparency and accountability. However, participatory budgeting s t i l l covers only a small proportion o f the total budget o f sub national governments - estimated at between 6 percent and 12 percent depending on the definition chosen - since it i s l imited to the review o f capital budgets.

44. The Government’s agenda for the coming period includes the extension o f participatory processes to cover current expenditures and to give increased priority to participatory monitoring o f budget implementation and results. Participatory monitoring aims to ensure that funds are used where and how they are supposed to be used and that the allocations produce priority results. This a critical challenge for the transparency and accountability dimension o f the results based management strategy. Several evaluations o f the Participatory Budget have been carried out in Peru. They have normally assessed the participatory process itself, but lack quantitative evidence o f impacts on pro-poor allocation, transparency and spending efficiency12. An exception i s an evaluation carried out by MEF in Junin (2007), which shows positive results regarding pro-poor spending and i t s capacity to influence the investment envelope (Box 3).

45. MEF is broadening the scope o f the local participatory budget monitoring strategy beyond municipal programs, making it an intrinsic part o f the Performance Budgeting system. To this end, it is promoting a role for municipalities and c iv i l society in tracking budget execution o f national and regional government programs within their jurisdiction. The 2007 Budget Law announced a participatory monitoring (PM) process for the products and results prioritized by the Performance Budgeting system. The 2008 Budget L a w calls for MEF to implement pilots o f PM. These will be implemented in two regional governments, two provincial municipal governments and six district municipalities, to be selected based on their budget capacity, poverty and development levels, and the availability o f information. The aim i s to make PM an effective element o f the strategy to increase expenditure quality.

As part o f i ts 2009 ESW program the World Bank i s carrying out an ESW on the Impacts o f the PB in Peru

17

and i t s interface with RBB.

Box 3: Participatory Budgeting Monitoring in JunCn In 2007, MEF conducted an evaluation o f the Participatory Budgeting process in Junin to assess: (i) its pro-poor focus, (ii) the character and size o f the projects being prioritized, (iii) whether projects’ prioritization was being taken into account in defining the initial budget (PIA) definition and the operational budget (PIM). The main findings were:

The budget allocation was clearly pro-poor, based on district poverty maps. The average investment amount per capita was higher in poorer areas. O f 60 projects covered by the participatory budget exercise, half were new, and half already currently in execution, with a total cost o f S1.73.2 millions. 54 percent o f the cost was roads and 46 percent for education. O f the 60 projects, 93 percent were included in the PIA, and they accounted for 61 percent o f the PIA. 73 percent o f the projects in the P I M arose from the l is t prioritized by the participatory budgeting process. 53 percent o f the projects included in PIA and P I M were under execution, accounting for 43 percent o f the budget. 47 o f the 60 projects were rated as viable by the MEF investment appraisal unit, SNIP

.

1

. Source: MEF evaluation o f Participatory budget process in Junin, 2007.

Education

46. As was detailed in the PD for REACT 1, Peru has near universal primary education coverage and i s well above L A C regional averages in secondary and tertiary cover. The challenge now i s to address quality issues, in the context o f a rapid decentralization process in which regional governments are becoming important actors in the Peruvian education system.

47. Standards and goals for educational quality improvement. Education quality in Peru lags behind comparable countries in the region and worldwide, based on PISA 2000 (an international assessment o f education quality) and other similar assessments. Since 1996, the Education Ministry’s Quality Measurement Unit (Unidad de Medicidn de la Calidad, UMC) has carried out survey-based national assessments in various subject areas and grades. However, these assessments have shown l i t t le change in the quality o f the education system. This i s not surprising, as the results o f the assessments have not been used as a basis for adjusting teaching standards or teacher training.

48. The U M C surveys have classified second grade students into four groups based on three specific attainment levels (1,2 and 3). A student in group 0 cannot read and comprehend even the simplest sentence. Reaching attainment at Level 1 implies the ability to read and comprehend isolated words and simple sentences. Level 2 implies the child can read an age- appropriate paragraph, with good literal comprehension o f the facts and events described in the text. Level 3 (which i s the expected attainment level at the end o f Grade 2) implies the ability to fully comprehend the paragraph, including the capacity to infer the meaning o f words from the context and to understand the motivation behind the text.

49. Measured against these benchmarks, the performance o f the primary education system has been very poor. The UMC’s 2004 survey classified 46 percent o f second grade students nationwide in group 0 and 16 percent in level 1. Only 23 percent were in Level 2 and 15 percent in level 3. This has serious implications for learning outcomes through the rest o f the primary cycle. Students in grade 3 need adequate reading comprehension to be able to advance in other subjects. Those who cannot read well enough are severely hampered.

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Box 4: Alternative approaches to assessing early reading performance A recent World Bank study evaluated students’ reading performance in a typical region o f Peru, using

two common approaches to measuring reading skills: an individually-administered oral fluency test, and the group-administered written comprehension test, designed by the Ministry o f Education for the 2006 universal standard test of second grade reading comprehension. These two approaches have sometimes been presented as alternatives, but analysis of the data shows that it i s better to use them together, as complements.

region. Based on psychometric analysis, it finds that both tests adequately measured students’ reading abilities. The results also show that reading fluency and comprehension scores are correlated: fluent readers are more likely to understand what they read than non-fluent readers. The strength of the fluency-comprehension relationship depends on the level of fluency, the difficulty of the questions, and social characteristics of the school.

central element o f a system of accountability for results. They propose a model for reporting test results which i s designed to highlight the importance of reading standards, to mobilize the education community to reach them, track progress, and identify students in need of extra support.

The paper compares the results in both tests in a random sample o f 475 third-graders in the Junin

The authors recommend using improved versions o f both tests to evaluate early grade reading skills, as a

Source: Kudo, I. & J. Bazan. Measuring beginner reading skills: An empirical evaluation o f alternative instruments and their potential use for policymaking and accountability in Peru. Working Paper Series, WPS4812. Washington, DC: The World Bank, January 2009.

50. These diagnostics have led to a national consensus, shared by the Government, c iv i l society entities and the private sector, and reflected in the media, on the need for decisive action to transform early grade education outcomes. In response, the Garcia administration has adopted a strategy focused on clarifying standards and establishing a stronger accountability system, with greater local participation, coupled with supporting actions to help regions and schools to improve educational quality and outcomes. It has set an aggressive goal to cut the proportion o f students at the end o f grade 2 whose reading comprehension level i s in group 0 from 46 percent to 25 percent by 20 1 1 , and to increase those in levels 2 or 3 from 39 percent to 60 percent.

5 1. National monitoring system based on universal standard testing. Historically the U M C made rigorous, sample-based measurements o f attainment, but school level data were not available. That made it hard for schools and teachers to know how they were doing and to target improvements. But if individual schools don’t improve, the overall average also remains the same. T o overcome this obstacle, in 2006 the government established a universal standard testing system to provide feedback on outcomes to the schools, communities and parents on how wel l their children are doing and to provide the basis for setting school- specific performance goals. The f i rs t assessment was carried out in December 2006. It was organized on a tight timeline and was resisted by some sections o f the teachers’ union, SUTEP. Nevertheless, it reached around 55 percent o f the target population o f schools, and 44 percent o f students.

52. In 2007, the exercise was repeated, with much better coverage, reaching 91 percent o f schools and 80 percent o f children. The tests were extended to cover bilingual schools and a mathematical logic test was added. In November 2008, the tests were repeated for the third time, maintaining the same high level o f coverage. The design o f the questions (“items”) in

19

the tests was refined to improve the continuity in the difficulty level, which in turn will facilitate a more accurate analysis o f findings. l3

53. In 2008, the U M C built into the Universal Standard Test a rigorously controlled sub- sample which will facilitate quality control o f the findings. This will also permit a precise estimation o f outcomes at national and regional level, as it will be weighted according to the population o f each region14. The evidence to date suggests that increased attention to early grade reading i s already producing impressive improvements in outcomes. In 2007, the proportion o f students classified in “group 0” was down to 30 percent, compared with 46 percent in the 2004 survey. Although this might in part reflect methodological changes and sampling error, the scale o f the reduction makes it highly likely that the situation on the ground has already begun to improve.

54. Results dissemination at school level. The universal standard tests are not being carried out only to track outcomes. The fundamental idea i s to establish an accountability system at school level, which will support a transformation o f outcomes. The results o f the 2007 tests were published, including specific reports for each region, each school and for each child. They were disseminated through the local education offices (UGELs) in mid 2008.The next challenge i s to strengthen the feedback process and ensure that local school systems use the results o f the testing system to inform their school improvement strategies. In 2007, logistical difficulties hindered the transmission o f results f rom the UGELs to school and parent level. This reflects a general weakness in the supervision and support system. A Bank study undertaken in Junin as part o f the Recurso 3 AAA program found that UGELs are seriously under-resourced and cannot provide their schools with appropriate support (such as support teachers).

55. To overcome the problem o f limited UGEL capacity, in 2009, the results o f the 2008 UST are being distributed directly to schools and a media campaign will be organized to advise parents to request their child’s scores and to encourage school communities to discuss their results and target future improvements. With support from the PHRD Grant for preparation o f REACT 2 DPL, MINEDU has commissioned a consultant to pi lot approaches to the discussion o f the outcomes with schools, parents and communities (compared with relevant benchmarks) and supporting decisions about ways to improve outcomes next time round. The results o f this pi lot study will feed into further strengthening o f the national dissemination strategy for the 2009 standard tests, for implementation at the start o f the 2010 school year.

56. Supporting strategies for the transformation of reading attainment. At the same time, MINEDU and regional governments are working to strengthen support systems in order to improve outcomes. In January 2007, MINEDU completed a national mandatory evaluation o f teachers’ capacities (attaining a participation rate o f 65 percent o f a l l teachers in spite o f union opposition). Based on the results, it has implemented training to address the identified

l3 Analysis o f the raw reading scores i s undertaken using standard psychometric transformations to produce Rasch scores. Students are then categorized by attainment level. For a detailed analysis o f this process, see Kud6 and Bazan, (2007).

When universal standard tests do not achieve 100 percent coverage and exclusion i s systematic, not random (eg teachers encouraging weaker students to stay at home on test day); or if there are non-random errors in the results (due to incorrect application or fraud) the results might be unrepresentative o f the national or regional populations. As well as facilitating a precise measurement o f the real time-trend in outcomes, the introduction o f a rigorously controlled sub-sample allows UMCE to measure such effects and design strategies to address them.

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14

weaknesses, including training on reading and math teaching in early grades. This has been accompanied by the designing o f workbooks for reading and math in grades 1 and 2.

57. Decentralization: a new source of impetus for education quality. Peru, which has historically been highly centralized, has moved in recent years towards a more decentralized and de-concentrated structure. The decentralization process offers new opportunities to improve the quality o f the public education system by involving local government in the accountability framework. In 2003 15, the Ministry o f Education established Local Education Management Units (Unidades de Gestidn Educativa Local, UGEL), which operate at the provincial level under the auspices o f regional governments. The UGELs are supposed to play a major role in teacher supervision and training. However, as i s highlighted in the 2007 Junin study of options for improving education outcomes, which was supported by the Bank’s Recurso programmatic AAA (see Box 5); most UGELs are under-resourced and are remote from the schools they are supposed to be supporting. The next challenge i s to institutionalize the delivery o f more resources to school level and to greatly strengthen the support teacher (”amauta”) system, to help teachers improve their classroom effectiveness.

58. MEF has also supported the process o f empowering schools to address their own needs. In a nationwide pilot in 2008, 35,434 schools (84 percent o f all schools in Peru) were given maintenance budgets for their direct execution as school level. A total o f W.270 million - around S/.8,000 per school on average - was transferred. This helped to overcome the difficulty o f transferring resources down below UGEL level. In 2009, the transfer o f resources to school level for security-related and sanitary costs wi l l be institutionalized. A budget o f W.290 million has been established for this purpose, fully funded by MINEDU.

59. National quality certification system, SINEACE. The Government i s also working to establish a stronger formal national accountability framework for quality supervision in education. In May 2006, the Congress approved a law creating the National System for Evaluation, Accreditation, and Certification o f the Quality in Education (Sistema Nacional para la Evaluacidn, Acreditacidn y Certificacidn de la Calidad Educativa, SINEACE). This i s an independent entity, which will evaluate and accredit educational institutions at all levels, through specialist agencies for basic education, universities, and for non-university higher education.’6 The law requires SINEACE to establish minimum standards, to set criteria and evaluation guidelines and to provide public information on the quality o f learning. SINEACE’s initial emphasis i s on the certification o f tertiary institutions, which i s o f strategic importance for the transformation o f quality throughout the system. One o f SINEACE’s main aims i s to improve teacher training, which i s one o f the two tertiary areas which wi l l have mandatory accreditation (together with medical training). This, in turn, wi l l make an important contribution to the quality o f early grade education. During 2008 the SINEACE system has been fully organized. The 2009 budget includes funds for all three o f SINEACE’S

l5 Decreto Supremo No 023-2003-ED l6 The Peruvian Institute for the Evaluation, Accreditation, and Certification o f Basic Education (Znstituto Peruano de Evaluacidn, Acreditacidn y Certificacidn de la Calidad de la Educacidn Bdsica, IPEBA), The Council for the Evaluation, Accreditation, and Certification o f Non-University Higher Education (Consejo de Evaluacidn, Acreditacidn y Certificacidn de la Calidad de la Educacidn Superior No Universitaria, CONEACES), and The Council for the Evaluation, Accreditation, and Certification o f University Higher Education (Consejo de Evaluacion, Acreditacidn y CertiJicacibn de la Calidad de la Educacidn Superior Un iversitar ia, CONEAU) .

21

component agencies and the Bank i s preparing a tertiary education loan to support the system’s development.

Box 5: What can a regional government do to improve education? The case of Juntn I I

In the context o f regionalization, many regional leaders and policymakers are asking themselves: given the current legal framework, our region’s fiscal situation, and the balance o f political forces in the education sector, what can we do to improve education outcomes? In an effort to answer this question, in 2007, the World Bank conducted a study o f education services in Junin region at the request o f the Regional President. The study formed part o f the RECURS0 programmatic AAA, which i s focused on improving accountability and results in the social sectors (education, health and social protection). The findings are useful not only to the Regional Government o f Junin but also to other regional governments committed to improving education.

surveys, field interviews o f stakeholders, classroom observations, and reading assessments to over 1600 primary school students at 86 schools, randomly selected across the region. The results show that primary and secondary education services in Junin have reached high coverage but achieve low quality, both in terms o f school infrastructure and learning outcomes. Although regional and national education expenditures have increased considerably over the past six years, this growth was concentrated on salaries, while non-salary spending remains very low.

book highlights a worrying reality: low quality outcomes are the norm right across the board. This i s evident in the poor results obtained by relatively well-endowed schools (Le. urban full grade), which receive substantially more resources than those serving the poorest, most vulnerable children. The study concludes that the root o f these deficiencies i s poor management, and not just resource constraints.

regional and local levels. This i s a challenge to the education sector, as it works to refine and consolidate the role o f regional governments in improving education quality. The elements o f a solution include increased administrative autonomy in the use o f resources for regions and schools, coupled with the definition o f clear standards and goals for improved outcomes and an effective system for monitoring progress and holding actors accountable for their attainments.

The study triangulates qualitative and quantitative information gathered from national databases and

As expected, the worst problems are to be found in rural areas and at single teacher schools. But the

In response, the book highlights the need to strengthen management capacity and accountability at the

I Source: Banco Mundial.iQu6 puede hacer un Gobiemo Regional para mejorar la educacibn? El Caso de Junin. Lima (2008). I Health

60. Institutional births coverage: a tracer indicator for the performance of the primary health system. The lack o f standards for basic health services in poor regions has contributed in recent years to stagnated outcome indicators. The quality o f basic primary and secondary care remained low, and improvement trends for maternal and infant mortality lagged in relation to LAC trends and to Peru’s income levels.

61. To revert this trend, the Ministry o f Health (MINSA) set a strategic target to increase the quality o f institutional birth (IB) services and achieve coverage at least 70 percent by 201 1 in the rural areas o f poorest regions in the country. IBs are an important “tracer” indicator (indicador bandera) o f the performance o f the primary health system, since achieving access to IB services implies a high likelihood o f participation in prenatal and post natal controls, o f timely vaccination and o f the incorporation o f newborns into the growth and nutrition monitoring system (CRED)”. I t also requires sufficient capacity in the health facility to deal with births, which i s likely to be reflected in the overall quality o f services. For these reasons, the goal o f increased IB coverage i s being supported by the performance budgeting system as

” Normal IBs are classified as a primary health service in Peru; births with any element o f risk or complication are secondary or, in extremis, tertiary services.

22

a key intervention to contribute the high-level development goals o f reducing infant and maternal mortality.

62* As a Of this strategy, the last Table 4: Institutional Birth coverage in Peru decade has seen a significant increase in IBs in Peru, attributable in large part to the support o f YO 2000 2005 2007 the SIS universal health financing system, Total 48.7 72.1 76.0 which started in 2001 '*. Data from the ENDES Urban 69.9 91.7 93.6

82.8 97.7 97.8 58.8 90.6 94.3 27.7 54.0 60.3 33.6 58.8 58.6

survey show that nationwide, IB coverage has 19.2 42.2 49.4

increased steadily, from 49 percent in 2000, to 72 percent in 2005 and 76 percent in 2007 (Table 4). This was made possible by sharp increases in rural areas, from 19 percent in 2000 to 49 percent in 2007 - but rural coverage s t i l l lags well behind the near-universal coverage o f urban areas (94 percent). The main remaining challenges are in the Sierra and Selva regions.

Lima Metropolitma

Sierra Selva Source: ENDES, INEI,

Rest o f Coast

63. poorest regions of Peru. SIS has increased i t s coverage the i o poorest regions of Peru, 2007 from 75,000 births in 2001 to 122,000 in 2007 in the ten poorest regions. Based on the estimated number of births Region reported by the 2007 Census, SIS coverage reached 70.6 Amazonas

The improvements have also been reflected in the Table 5: Institutional birth coverage in

% covered Births by SIS . 8358 68,l%

percent o f the total births in these ten regions for 2007 Apurimac 8320 92,8% (Table 5). I t i s expected to reach 75 percent by 200919. Ayacucho 11994 90,8%

Caj amarca 27620 73,4% 64. Cultural factors and access limitations are the key Huancavelica 9320 69,0% challenges that need to be addressed to continue Huanuco 15369 81,7% increasing IB coverage. Much o f the population who are Loreto 25042 65,1% s t i l l excluded from the service, or not using it, live in Piura 34397 55,6%

Pun0 22413 70,9% Ucayali 10643 71,3%

severe poverty conditions. A PSIA study carried out by Total 173476 70,6%

remote areas, belong to indigenous communities and face

the Bank as part of the preparation for REACT 11 (whose Source: Births data from 2007 Census and IB findings are summarized in Box 8 on page 44, below) datafromSIS.

found that the economic costs o f accessing a health facility may be a key problem limiting further increases in demand for IBs. While SIS covers the institutional costs o f births, it doesn't cover additional economic costs for the mother, such as transport and food. A possible option to deal with this problem i s to provide a one-off payment to offsets such costs - as has recently been done in Honduras (see Box 6). There i s also an ongoing need to ensure full compliance with the norms for cultural sensitivity and adequacy o f birthing services, in order to minimize women's reluctance to use these services.

'* REACT i s supporting the development o f SIS - see paragraph 66 below. The estimated baseline o f 54 percent IB coverage in the 10 poorest departments in 2005, reported in the

REACT I Project Document, was underestimated, due to inflated population projections. The 2007 Census provides an accurate measurement o f the number o f births and so allows a correct estimation o f the coverage of IBs at regional level using administrative data on IBs.

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19

Box 6: Offsetting the private costs o f accessing Institutional Births: the experience of the Honduran CCT program, PRAF

The PRAF family allowance program, dating from 1990, i s one o f Honduras’ main social protection programs. It i s focused on the poor rural population, o f which a large proportion i s indigenous. A study o f PRAF’s target population, carried out in 2007, showed that 66 percent o f pregnant women had given birth in their homes and only 25 percent in hospitals. In response, the PRAF Institutional Birth Program (Zncentivo de Parto Znstitucional, IPI) was created, to help program beneficiaries to access public hospitals for child birth.

The IPI program provides additional funds to cover the costs o f mothers who give birth in one o f the health care centers identified in the referral network. The funds are administered by the Volunteer Health Service User Committees (Comitb de usuarios de salud -CUS) which have been formed in each community, as part o f the ongoing decentralization process in Honduras’ basic health services. Each committee receives US$ 900 per year for a Community Health Fund (CFH) - this includes US$750 to cover the estimated costs o f transporting ten pregnant mothers and their companions to maternallinfant health care clinics or hospitals, allowing them to give birth safely with the participation o f a midwife. In the case o f Lenca families, who constitute about half o f all program beneficiaries, indigenous midwifes can accompany the mother which helps ensure that birth procedures respect Lenca traditions, such as vertical delivery, ritual massages and the preservation o f the placenta.

There has been a marked increase in the take-up o f institutional births in the beneficiary communities, but no formal impact evaluation has been undertaken, so i t i s not yet possible to quantify the precise difference made by the program. However, there i s clear evidence that the incentive i s popular among PRAF beneficiaries.

65. Accountability framework: the performance budgeting (RBB) system. The Government’s strategy for institutionalizing these goals has changed since REACT I was designed. At that time, regional performance agreements (PAS) were the proposed instrument for documenting commitments at health network level on goals for increased production o f IBs. However, since then, the roll-out o f the RBB system has eclipsed the role o f the PAS. As noted in paragraph 40 above, the RBB system has now established physical and financial goals for IB production o f each budgetary executing unit o f the health system (DIRESAs or health networks) and quarterly updates are being published on the RBB website. The next challenge i s to ensure full commitment o f the regional authorities to meeting these goals and continue the upwards momentum. This, in turn, will require the provision o f budgetary headroom to allow the DIRESAs to address strategic challenges, together with the configuration o f clear incentives for health networks to continue increasing IB coverage.

66. Expansion and reform of the health financing system. These budgetary and incentives challenges are intimately related to the future development o f the health insurance system, SIS, which was created in 2001, to finance improved access for the uninsured population. Since then, SIS has undergone a series o f piecemeal reforms, most recently through Decreto Supremo 004-2007, which extended insurance coverage to the entire population in quintiles 1 and 2. This led to large increases in coverage for poor families. Based on SIS administrative data, the coverage in December 2008 had reached 10.5 mill ion insurees - almost 40 percent o f the population - up from 6.98 (26 percent) in 200720. The strong upwards trend in SIS coverage i s also evident in the 10 poorest regions, where coverage rose from 3.45 mill ion in 2007 to 5.22 mill ion in 2008. This i s also reflected in financial commitments: the SIS budget increased from S/.267 mill ion in 2006 to S/.420 mill ion in 2008, which i s an increase o f around 50 percent in real terms. In the 2009 budget, 36 percent o f SIS budget i s allocated to the 10 poorest regions.

~~ ~

The 2007 household census reported SIS coverage o f 18 percent. The difference i s partly attributable to timing 20

differences -the Census took place in mid year - but also reflects the tendency o f administrative data to over- state insurance cover.

24

67. A major reform o f health insurance, the Ley Marco de Aseguramiento Universal, has been remitted to Congress. This i s part o f a strategy to make universal health insurance a reality in Peru. The reform, which i s supported by the 2007 Plan Nacional Concertado de Salud (National Health Plan), centers on the definition o f an Essential Plan o f Health Insurance (PEAS in Spanish), which would cover 45 percent o f the estimated total burden o f disease. All health providers and insurers will be required to offer at least this minimum plan, including MINSA, sub-national government services, ESSalud, the armed forces and police health insurance systems and private providers, and SIS will focus o n financing access for the poor (Q1 and Q2), restricting its activities to rural areas and to urban households who have been identified by the SISFOH proxy means test system.

68. The plan would be rolled out through the period 2009-2014, by which time i t would cover al l 26 regions o f Peru, with treatments o f guaranteed quality for 185 conditions. I t would begin in 2009 in Apurimac, Ayacucho and Huancavelica (the entire regions) plus 20 pi lot districts in L a Libertad, Lambayeque, Piura and San Martin, initially covering access to treatment for 112 conditions and guaranteeing quality for 52 o f them (with an emphasis on maternal and chi ld health and nutrition).

69. The proposed reform would imply a significant boost to public spending on health in Peru, which has grown significantly in recent years, but i s st i l l low, at 1.9 percent o f GDP, compared with a L A C regional average o f 3.4 percent. The PEAS, in its ini t ial variant, has an estimated cost for the public health system o f S/.204 per persordyear, o f which S/. 126 i s for fixed costs (staff and plant), to be channeled through the regional DIRESAs, and 9 .78 for variable costs (medicines and consumables), to be channeled through SIS. In the regions and districts included for 2009, coverage is projected at 1.56 mi l l ion people, with an estimated cost o f S/.318 million, which implies a considerable increase in the health budget for these places, f rom the W.177 mi l l ion presently provided. In 2010 the roll-out would reach 4.4 mi l l ion people in 7 complete regions and 5 pilot regions, with a cost o f S/.890 mi l l ion (again, roughly double the present provision in those places).

70. At the same time, the incentive structure o f SIS finance to the health system i s also under review. In an effort to improve the predictability o f funding flows related to preventive care and reduce transactions costs, a capitation system for the primary health funding o f SIS i s being piloted in three regions (Apurimac, Ayachucho and Cajamarca) with the support o f the Belgian cooperation agency. The system will make payments o f S/SO per person per year, tied to contracts which specify performance standards on quality indicators. To ensure that incentives in the system are properly aligned with the goals o f the performance budget system, it will be critical to ensure these funds reach down to the health networks (not just the regional directorates) and to link the funding f l ow to performance criteria at health network level on IBs and other key performance indicators. One possible model for this i s Plan Nacer in Argentina, where capitation payments are disbursed against 10 performance standards which are independently monitored, and health networks are given wide discretion to use the funds to improve their performance.

7 1. Improved medicine uvuiZubiZity. Finally, the health sector reform process also involves shoring up the sufficiency o f medicine supply in public health centers. At the start o f the REACT program, a standard was set for medicine availability in primary and secondary health posts which attend births. By 2008, 80 percent o f health posts in the 10 poorest regions were estimated to be norm-compliant. This i s projected to reach 90 percent by 2009.

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Nutrition

72. A national strategy to tackle malnutrition. Stunting, or chronic malnutrition, causes permanent damage to intellectual and physical development, affecting future productivity and economic growth potential. It has come to be regarded as the most important non-monetary indicator o f poverty.21 The stunting rate in Peru stagnated in the 1990s. In 2000 it remained at 25.4 percent o f under-fives on the old OMS standards, and since then has declined only slightly, to 22.9 percent in 2005 and 22.6 percent in 2007. Using the new OMS standard, it stood at 30 percent in 2000, 28 percent in 2005 and 28.5 percent in 200722. These levels are far higher than expected, given Peru’s per-capita income. It will be difficult for Peru to advance in reducing inequality while a third o f i t s children start l i f e with such a disadvantage.

73. These poor results reflect, in part, the absence o f adequately specified goals and accountability frameworks, together with poor targeting and ineffective programs23. There i s a growing consensus in favor o f change. President Garcia has highlighted nutrition in his Government’s agenda and endorsed a “five percentage points in five years” goal for reducing stunting to 23 percent by 201 1. This goal i s being tracked by reliable national surveys, such as INEI’s health and demography survey, ENDES, which has 2,500 observations on children under five. To complement ENDES, the Nutrition Institute, CENAN has completed a new MONIN anthropometric survey. The results o f MONIN 2008 wi l l be available shortly.

74. In 2007, the Government launched the Articulated Infant Nutrition Strategy, CRECER, an inter-institutional coordination platform involving the Juntos CCT program, the MIMDES food program PRONAA, PRONAMA, PRONAMACHS, PRONASAR, RENIEC and SIS under the leadership o f the Inter-ministerial Commission for Social Affairs (CIAS). This initiative seeks to benefit a million children at the national level, in the 880 poorest districts of the country, and emphasizes participation o f sub-national governments. A major national workshop on nutrition strategy was held in Lima in March 2007, where regional presidents committed themselves to reductions in malnutrition rates consistent with the national goal. The regional governments o f Apurimac, Ayacucho and Huhnuco have already approved their nutrition strategies.

75. Popularizing transparent standards for nutrition outcomes. The Government and Bank have identified the need to change parental expectations on their children’s growth as a key to reverting the depressing trends o f recent years. The lack o f awareness o f many mothers about their child’s nutritional failure, due to the lack o f easily-understood standards, i s an important obstacle to changing outcomes. A parent who does not understand their child i s not growing properly i s unlikely to do anything about it. The Bank’s recent analytical work in the Andean region shows a clear empirical link from a lack o f nutritional knowledge about normal growth to deficient outcomes for children24. Stunting can be observed only using careful

21 The World Bank. Repositioning Nutrition as Central to Development. 2006 22 INEI data from ENDES 2000,2005 and 2007. A child i s considered chronically malnourished if it i s more than two standard deviations below the mean for i t s age and sex. In 2006 the OMS recalibrated the global standards for normal growth based on a rigorous cohort study of a representative population o f properly cared-for children, leading to an upwards re-statement o f stunting rates in most countries. 23 On the lack o f effectiveness o f Peru’s social protection programs, see The World Bank. Proteccidn Social en Perli - cdmo mejorar 10s resultados para lospobres? 2007. 24 Nutritional Failure in Ecuador. The World Bank, 2006.

26

measurement o f height against age. The children are not skeletal, nor do they have grotesquely swollen bellies -they are simply far too small for their age. This i s an invisible epidemic.

76. As part o f the strategy to reduce chronic malnutrition, to help parents visualize how their children ought to grow, MINSA has introduced new technical norms for child nutritional status, based on median expected child height gain according to the WHO curves (24” and 12”, respectively, in the first and second years o f life).25 The goal i s to raise parents’ awareness o f their child’s nutritional performance as a dynamic process, and one which can be improved. The CRECER program has started promoting simple-to-understand communication tools for use in health posts, through the dissemination o f the video “ M i futuro in mi primeros centimetros”. Hard-hitting TV and radio “spots” are reinforcing the same message. At the same time, the Juntos CCT and SIS health insurance programs are working closely with MINSA and reinforce incentives to promote the importance o f height and weight monitoring and o f community-level nutrition counseling programs. The next step will be to design protocols for height gain reports to be generated automatically in CRED (nutrition counseling) consultations in the health system.

77. Monitoring and accountability for the nutrition strategy. The key health intervention relevant to improving nutrition outcomes i s the intensification in high malnutrition areas o f CRED growth monitoring and nutrition consultations that are provided by the health system. CRED coverage i s very low, reflecting poor effective access to good quality health services. MEF’s Performance Budgeting (RBB) system has prioritized results and accountability for all social sector outcomes. It includes nutrition among the five strategic programs (see paragraph 39 above), and goals have been set at Executing Unit level for CRED consultations. This process i s supported by the National Nutrition Institute, CENAN, which has established regional goals for increasing the intensity o f CRED consultations, consistent with raising the national average to 4 consultations in the first year o f l i f e and two in the second year o f l i fe . To reinforce this process, MINSA has changed the norms on ideal numbers o f consultations to 11 in the f i rs t year o f life, and six in year two.

78. In l ine with the Performance Budgeting system’s emphasis on the use o f administrative data to establish accountability for service providers, health sector information systems are being strengthened to monitor these developments. This i s an important advance towards the plan o f an integrated information system, which could soon see the consolidation o f SIEN and the SIS information system in areas where SIS operates. The new SIS system will track weight and height data together with other health data (e.g. vaccinations and morbidities). This will improve the timeliness o f data, since the SIS system i s transactional and processes data in a timely manner26. I t will also reduce duplicated form-filling. By tracking the same individual from CRED consultation to CRED consultation, it will enable MINSA staff to monitor individuals’ nutritional status through time and give immediate feedback on children who are not growing well. The new SIS system will be piloted in Apurimac in December 2008. The government wi l l thus be able to monitoring the growth

25 Ministerio de Salud, 2008, Norma Te‘cnica de Salud para la Implementacidn del Listado Priorizado de Intewenciones Sanitarias Garantizadas para la Reduccidn de la Desnutricibn Crbnica Infantil y Salud Materno Neonatal, Lima, Perk 26 Many o f the data in the SIS system generate budgetary transactions linked to payment for service production, giving health posts an interest in keeping the system up to date.

27

trajectory o f children in the poorest areas o f the country, where SIS operates, using administrative data, to complement the national level tracking o f nutrition outcomes through surveys such as ENDES and MONIN.

79. SIS support to the expansion of CRED. There has been a strong increase in SIS support for nutrition counseling over the last two years. In 2007, SIS funded CRED consultations in the 10 poorest departments rose by 9 percent, reaching 1.01 million. In 2008 (based on real outcomes through September) SIS projects there will be a further increase o f 27 percent, with the total reaching 1.3 million. The SIS reforms, documented in paragraph 67 above, will also have positive implications for nutrition, including the pi lot for per-capita payments o f primary health and nutrition interventions, underway in Apurimac.

80. Nutrition promotion strategy. MINSA i s developing a new strategy o f health promotion, focused on behaviors that are changeable and are known to have a nutritional impact. The strategy will include extra-mural activities (such as community based education sessions and demonstration sessions) and will be piloted in Apurimac. MINSA’s ongoing work to train health promoters in nutrition counseling will add a further impetus to this process. To date, nearly ha l f the promoters are in training (1 3,000), about a third o f the total.

8 1. Juntos’ support to attacking malnutrition. The conditional cash transfer program, Juntos, i s being harnessed to support CRECER. Juntos was established in 2005 to improve the quality o f l i fe for the rural population in QI (the poorest 20 percent). It i s based on a philosophy o f shared responsibility, aiming at improving take-up o f education, health and nutrition services. The program is currently targeting the 638 poorest districts o f the country and reaches 4 17,000 beneficiary households. A further 2 1,000 households are eligible for the program but have benefits suspended for non-compliance with co-responsibilities. However, shortcomings have been identified in the design o f the transfer scheme; in the verification o f compliance with co-responsibilities; and in the deficient capacity o f health service supply.

82. With help from World Bank technical a~s i s tance~~ , a multi-sector think-tank, composed o f representatives from Juntos, CIAS, MEF, MINSA and SIS i s developing plans to increase Juntos’ nutritional impact and transform it into a driver o f social policy in Peru by better articulating the demand and supply sides o f the program and adjusting operational procedures. The restructured program will shortly be re-launched. The Government i s currently testing operational processes and the articulation between Juntos, MINSA and SIS in Sun Jerdnimo, Apurimac. Changes to the processes include: (i) the adoption o f a cash transfer scheme under the Mexican 1-2-3 model2*, (ii) readjusting the incentive scheme (i.e. the amount, co-responsibilities, and frequency; and possibly create a one-off payment to defray the private costs o f participating in institutional births), (iii) guarantee supply o f health through priority packages, and (iv) strengthening the monitoring and evaluation system.

83. The Juntos incentives for more regular growth monitoring and counseling sessions are expected to help improve frequency o f chi ld growth monitoring and counseling. Available data (from the M O N I N survey) indicate that Juntos beneficiaries have 30 percent more CRED

27 World Bank Peru Nutrition Non Lending Technical Assistance. ** The 1-2-3 model refers to the process o f 1) verification o f co-responsibilities by beneficiaries; 2) payment definition; 3) transfer o f payment.

28

check ups per year than children who are not in the program (4.5 versus 3.5). Improvements in Juntos and in its coordination with SIS and MINSA are expected to further increase the frequency o f growth monitoring and improve nutritional outcomes.

Type Objective Participants Workshop Present the preliminary findings on RENIEC, MEF,

the qualitative and quantitative study Defensoria del

Consultation process

Organizer World Bank and CIES (Consorcio de

84. To minimize the political and social risks, during preparation, consultations have been undertaken with c iv i l society o n the rationale and strategies to be supported by the Operation. (see summary o f activities in Table 6). The Bank also carried out a poverty and social impact analysis o f the promotion o f institutional births (see B o x 8, below), which identifies possible negative impacts on vulnerable communities. The study traces points o f support and resistance through a “mapping” exercise, and comments on the strategies adopted to offset possible negative impacts and to overcome obstacles (e.g., through the adjustment o f the strategy to avoid unnecessary conflicts; and the adequate design o f the social marketing strategy).

Workshop

Workshop

[nterviews

‘heme . Governance: dentity

’articipatoly Jon it or ing

about the profile o f the undocumented population in Peru and i t s barriers to access the documentation.

Gather opinions from staff o f the National Office o f Public Budget in the MEF, regarding the guidelines outlined in the Participatory Monitoring component.

Collect comments from experts on the topics of participation for the proposed implementation o f the Participatory Monitoring.

Collect feedback on the usefulness and feasibility o f the proposed Participatory Monitoring.

. Education:

Pueblo, INEI, ONGs, UNDP, Oxfam GB and Local Universities.

MEF - DNPP (Direccibn Nacional de Presupuesto Pdblico).

Investigacibn Econ6mica y Social)

Result-based Budget team in the MEF

Municipalities, representatives o f Local Coordination Committees, Vigilance Committees o f Participatory Budge- ing o f the Sullana Morropon- Chulucanas.

GTZ

Experts on Participation: Eduardc Ballbn, Carlos Monge Jose Lbpez Ricci, Luii Chirinos, Mario Solezi, Edgardo Cruzado.

:i) Work- ;hop

dTZ

Present the study: For quality Journalists, Regional Catholic University o f education in Peru. Directors in Peru, World Bank

Education, Post grade students, professionals working on social responsibility

29

’heme

. Health

Type Objective Participants Organizer

(ii) Tech- Discuss the methodological aspects Education specialists World Bank nical o f measuring student learning and the of the Bank, workshop use o f results for improving policy MINEDU, MEF and

and outcomes. academia.

. Nutrition

iii) Zducation :orum

jv) Presen- ation

Workshop

Technical Workshop

Iorld Bank Create a space for reflection and Regional dialogue on the progress and Governments, challenges o f decentralization o f the Ministry of Education education system in Peru. MEF and main

stakeholders such as PREAL, GRADE,

b) Present the main outcomes and Colegio de Profesores recommendations o f the study “How Radio Programas del Regional Government can improve Ped. the education - Case of Junin. Present preliminary findings from a MINSA, Ministerio de World Bank Poverty and Social Impact Analysis la Mujer y Desarrollo (PSIA) on study o f the demand and Social, Juntos, MEF, supply side obstacles to increasing Mesas de Concer- institutional birth coverage in poor t a c h , Defensoria del communities. Pueblo, Salud sin

Limites, IDB, PAHO, UNICEF, PAR. MINSA, SIS, IDB, Discuss the restructuring of Juntos

Program. World Bank. Bank. MINSA and World

IV. BANK SUPPORT TO THE GOVERNMENT’S STRATEGY

LINK TO CPS 85. On December 19, 2006, the Board reviewed a new five year Country Partnership Strategy (CPS) with Peru for FY07-FY11 (Report PE-37913, December 19, 2006), and simultaneously approved a US$200 million DPL in support o f the government’s macro-fiscal strategy (Report No. 37948-PE). The CPS lays out a strategy to support the GoP to achieve i t s goals o f sustained annual growth over 5 percent each year in 2007-1 1; and poverty reduction o f between 1.5 and 1.8 points per year. A CPS Progress Report was presented to the Board in January 2008 (Report No. 46944-PE).

86. Under the CPS, the Bank’s program o f activities to support the GoP in reaching these objectives i s organized around three pillars and six clusters, as follows:

Pillar (i) Economic Growth 1. Maintaining macro stability and reducing vulnerabilities; 2. Accelerating growth and widening i t s base; 3. Making growth environmentally sustainable;

Pillar (ii): Social Development 4. Meeting Basic Needs; 5. Promoting a new social contract in education, health and nutrition;

Pillar (iii) Modernization o f the State 6. Modernizing state institutions.

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87. The REACT DPL series l ies at the strategic heart o f the CPS. Under Cluster 5, the CPS Program envelope includes the series o f three social sectors Results and Accountability (“Peru REACT”) DPLs, with the first slated for FY07 (Table 3, page S), to support the policy changes needed to develop results orientation in the social sectors in the context o f the decentralization o f education and health programs to the municipalities. As well as contributing directly to tackling poverty and exclusion (Pillar ii); REACT i s also supporting the state modernization effort, by establishing effective results-based management in major parts o f the social sectors (Pillar iii); and in the medium term, this will also underpin the economic growth strategy (Pillar i) by improving the quality o f the labor force through improved human capital formation in education, health and nutrition.

88. The specific CPS goals and outcomes supported by the Programmatic REACT DPLs are the following (see: I11 “A Shared Vision” and Annex B10): e Strengthening Public Sector management: Goal: Promote results-based management and (...) increase participation levels; Outcomes: 7 percent o f the national and regional governments’ budgets should be linked to performance indicators by the end o f the CPS period. The successful implementation o f the REACT program would fully meet this outcome target, since in 2006, the primary education sector accounted for 6 percent o f the executed budget, the food and nutrition sector, 2 percent and the health sector, 6 percent.29 e Social sectors: Goal: Promote the development o f a new social contract in education, health and nutrition by introducing standards and strengthening accountability to support achieving results. Outcomes: Health: Increase coverage o f institutional births to 70 percent; increase coverage o f SIS health insurance to 40 percent, decrease infant mortality to 19 per 1,000 live births. Nutrition: merge nutritional programs; reduce chronic malnutrition for children under-5 by 5 percentage points in 5 years; Education: develop a national system to evaluate and accredit education quality; increase classroom hours in rural primary schools; and improve the functional literacy o f children in second grade.

COLLABORATION WITH THE IMF AND OTHER DONORS 89. The Bank has collaborated tightly with the IMF in the development and the implementation o f the Stand-By operation in Peru, which was agreed in January 2007. The fourth program review was successfully completed in January 2009.

90. The Bank has established close linkages with the donor community in Peru, including bilateral and multilateral organizations, which are continuing to develop in the context o f the Country Partnership Strategy (CPS) which was presented to the Board in December 2006. The most active partnerships have been established around decentralization (with Germany’s KFW), education (together with IADB’s joint program on rural education), transport (with the shared Lima Transport Project with IADB), roads (with IADB), health (in close coordination with the Health program o f IADB), and public expenditure management (Country Procurement Assessment (CPAR) with IADB). KfW has expressed interest in co-financing the ongoing program o f fiscal DPLs, as a continuation o f their initial support for the DECSAL loans disbursed during the previous administration.

91. Under the CPS, the design o f policy-based operations i s being coordinated with the IADB and the IMF, and with other agencies (GTZ, USAID, DFID, COSUDE, AECI,

29 Source: SIAF-MEF.

31

Cooperazione Italiana, SNV, etc) involved in supporting policy reforms. This is being complemented by coordination on investment lending, and potential co financing, with IADB (on transport, education, health, fiscal management, competitiveness), with CAF (infrastructure), GTZ (on competitiveness, water and rural development), JBIC (on infrastructure), USAID (on justice and governance initiatives), DFID (nutrition). The WBG i s also strengthening its partnership with the Global Water & Sanitation Program around the government’s “Agua para Todos” program. The Bank has been a leading actor in the donor thematic groups, including: decentralization, justice modernization, education, and rural development, and has developed a database tracking system to gather information from the donor community and share common information on our programs in the country. In the framework o f PARSALUD evaluation, the IADB is conducting an evaluation o f service provider and user’s perceptions o f the maternal services, with a focus o n institutional birth access. Given the synergies with the analysis conducted under the PSIA, a j o i n policy note will be produced and published, followed by a national seminar to discuss the issue.

92. O f particular interest for the REACT D P L i s the strong donor cooperation around nutrition in Peru, which the Bank has played a key role in stimulating through work on the DPL and also work on the Nutr i t ion Results project, presently under preparation. The Bank has had extensive discussions with UNDP, UNICEF, P A H O and FAO, The Bill and Melinda Gates Foundation, and the Nutri t ion Initiative (a coalition o f NGOs, UN agencies and bilateral Agencies interested in promoting nutrition).

RELATIONSHIP TO OTHER BANK OPERATIONS 93. The Peru REACT DPL complements the Fiscal D P L series initiated in December 2006 and whose second operation was processed during 2008, one o f whose goals i s to strengthen the results management framework in Peru’s fiscal system, through reforms o f the budget process and improvements in the monitoring and accountability framework. In this context, the present operation provides continuing support to the specific results and accountability strategies being adopted in the social sectors. REACT i s playing an important part in the roll- out o f results-based management, through the definition o f strategic outcome goals in education, health and nutrition, linked to transparent standards, together with support for the establishment o f effective monitoring systems, based on institutional data, which allow each service production unit to be held accountable for the developmental results o f i t s activity.

94. The REACT DPL also provides an articulating framework for the Bank’s HD portfolio o f investment and TA operations in the social sectors in Peru, which include: a health A P L (whose second operation is under preparation), a tertiary education loan (under preparation) and a Technical Assistance loan focused on strengthening accountability in the social sectors in the context o f decentralization. Other relevant activities include the RECURS0 4 programmatic AAA (which i s an FY09 deliverable that provides ongoing support to the reform process through a combination o f studies and TA focused o n the health sector and social program reform process) and the Voices o f the Poor activity supported by the JSDF and managed by ESD.

95. Education. A new investment operation i s being prepared in Higher Education (FY lo), further reinforcing the synergy between the REACT D P L and the investment portfolio. A new NLTA on education and decentralization i s in the process o f being designed.

32

96. Health: The PAR Salud 2 project will be approved at the Board in early 2009. This project, which will invest US$15 mi l l ion in the health sector, plus additional funds from the IDB, will strongly complement the REACT DPL series. Planned activities include: support for health education (which will have important nutritional components); identity documentation for heath system clients; promotion o f quality improvements and increased health network efficiency; support to the SIS; development o f an integrated health information system; improved accountability for outcomes through effective performance agreements, and regulation o f the supply and quality o f inputs to health establishments o f different sorts.

97. Nutrition. The Nutr i t ion NLTA, presently underway (FY 09 deliverable) i s helping the GoP to develop an effective, evidence-based nutrition strategy, and support the development o f regional and local nutrition strategies, to stronger nutritional monitoring and counseling and to the reorientation o f the Juntos CCT program towards nutrition.

98. Social TAL. This US$7.8 mi l l ion Technical Assistance loan (Report No. 27924-PEY June 18, 2004) supports the strengthening o f accountability frameworks in the context o f the social sectors’ decentralization. It was approved in the context o f the previous social sector programmatic (PSRL) DPL series and i s directly relevant to the agenda o f the REACT DPL. It focuses on targeting and results monitoring in M I M D E S and on support to the MEF to establish results-based management o f social programs.

99. Participatory budgeting and decentralization. MEF is currently involved in an Africa- L A C Peer-to-Peer learning initiative on results-based participatory budgeting. A j o i n ES W between HD, SD and P R E M on decentralization i s being implemented as per MEF requests. One o f its components will evaluate the participatory budgeting to increase i t s compatibility with the results based budgeting to make full use o f both models’ to improve pro-poor expenditure.

LESSONS LEARNED 100. The Bank has a long history o f programmatic lending in support o f reform in the social sectors in Peru, most recently through the PSRL IV operation (2004), which supported improving the anti poverty impact o f public spending; increasing the access o f poor people to quality social services; and improving accountability through greater participation o f poor beneficiaries in the monitoring and evaluation o f social programs. These themes are congruent with the strategic lines o f the REACT DPL.

101. The most important lesson learned from the PSRL IV - as from reviews o f other similar operations in the Bank, under the scrutiny o f the “results agenda” - i s the need for a strong focus on a limited number o f outcomes (provided here by the standards and accountability theme which runs across al l the sectors in the operation matrix) together with a clear set o f quantifiable program results with their associated baseline^.^'

ANALYTICAL UNDERPINNINGS 102. The R E A C T D P L builds on the analytical and pol icy dialogue work o f the RECURS0 AAA study - A New Social Contract for Peru. RECURS0 identified the central theme o f standards and accountability and resulted in the Government’s request that the Bank support

30 The IEG review o f PSRL IV criticized the program’s failure to document its objectives, which it argued was due to the neglect in the project design o f outcome indicators related to the objectives (Report No. 30 113-PE).

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the implementation o f i t s results-orientation strategy in the social sectors. The f i rst steps were taken towards the identification o f the Operational Policy matrix at a two day workshop with the MEF and social sector ministries in Lima in October 2006, which started with a presentation o f the findings o f RECURSO. RECURSO argued that to break out o f prevailing “low-level equilibria”, in which clients accept mediocre outcomes, it i s necessary to establish transparent performance standards, to strengthen regulatory systems by creating effective accountability mechanisms, and to encourage parents and local governments (which are assuming a growing role due to the decentralization process) to demand better outcomes.

103. This l ine o f work i s being continued by the RECURSO programmatic AAA for FY 07-1 1 , which supports the D P L through timely studies and TA activities on the theme o f standards and accountability. During FY 07, RECURSO 2 was focused on nutrition, with activities including support to development o f communication tools on nutrition standards through a video; the preparation o f a study on the problem o f “low quality equilibrium” in social assistance programs; and the provision o f TA to Juntos to develop a stronger nutritional focus. RECURSO 3 (FY OS) focused on sub national programs including the municipal Vas0 de Leche program and support to improving education outcomes in Junin. RECURSO 4 (FY 09) focuses on strengthening accountability and incentives systems in the health sector and on supporting social program reform. As detailed in previous sections o f this PD, many o f these activities have fed directly into the design o f REACT 11. Further details o f the program o f AAA supporting REACT are provided in Table 7.

V. THE PROPOSED SECOND RESULTS AND ACCOUNTABILITY (REACT) DEVELOPMENT POLICY LOAN-DEFERRED DRAWDOWN OPTION

104. The proposed Peru REACT I1 DPL operation i s the second in a three-part D P L series to strengthen results and accountability in education, health and nutrition. The series supports actions in primary education, health and nutrition to define standards and set goals for the outcomes which families should expect for their children. This i s coupled with the development o f robust monitoring systems providing up-to-date information o n the performance o f health posts and schools and individualized data for parents o n the health, nutrition and learning status o f their children. The operation also supports complementary supply-side actions to improve service quality, to reduce exclusion, rationalize programs, to improve targeting and to increase the participation o f poor communities in budget processes and program monitoring.

105. The REACT D P L series i s expected to lead to improved outcomes in second grade literacy (especially in rural schools); increased access to institutional birth services in the 10 poorest departments (covering a third o f the population); and increased coverage o f individualized growth monitoring and counseling services for children under 24 months o f age in areas with a high incidence o f chronic malnutrition (stunting), and to improved nutrition outcomes. The f i rs t operation was approved in June 2007; this second operation i s slated for a Board date o f March 2009, and the subsequent operation wil l proceed when the GoP has completed the agreed pol icy benchmarks, as laid out in the Operation Policy Matr ix (Annex 2) (provisionally: mid 20 10).

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Table7: AI Activity

RECURSO 1 - 2006

RECURSO 2-3-4 Programmatic AAA 2007-201 1

Peru Institutional Births PSIA ,2008

Study on Undocumented Children in Peru 2008

Evaluation of SIAF’s Consulta Amigable 2007

ytical and Advisory work underpinning the REACT DPL series Brief description

RECURSO I identified the central theme o f standards and accountability and resulted in the Government’s request that the Bank support the implementation o f i t s results-orientation strategy in the social sectors. The report and policy notes and dialogue derived from the study identified the prevalence o f “low-level equilibria” in social services, in which clients accept mediocre outcomes. RECURSO advocated establishing transparent performance standards, strengthening regulatory systems by creating effective accountability mechanisms, and encouraging parents and local governments (which are assuming a growing role due to the decentralization process) to demand better outcomes, in order to break out o f these perverse equilibria. The l ine o f work initiated by RECURSO 1 i s being continued by the RECURSO Programmatic AAA for F Y 07-1 1, which supports the DPL through timely studies and TA activities on the theme o f standards and accountability. During FY 07, RECURSO 2 was focused on nutrition, with activities including support to development o f communication tools on nutrition standards through a video; the preparation o f a study on the problem o f “low quality equilibrium” in social assistance programs; and the provision o f TA to Juntos to develop a stronger nutritional focus. RECURSO 3 (FY 08) focused on sub national programs including the municipal Vuso de Leche municipal food program and support to improving education outcomes in Junin. RECURSO 4 (FY 09) focuses on strengthening accountability and incentives systems in the health sector and on supporting social program reform. As detailed in this PD, many o f these activities have fed directly into the design o f REACT 11. The purpose o f the analysis was to examine the issue o f lagging coverage of institutional births in the poorest departments o f Peru, especially among indigenous women. The first stage o f the study consisted o f a qualitative analysis o f prevailing economic and cultural barriers limiting the access o f the poor to institutional births. Among the factors identified were: (a) high private financial costs o f having an IB, including transport, clothing and food; (b) access problems to reach the facilities; (c) issues related with cultural appropriateness; and (d) poor quality o f the patient-health care professional interaction (that is, perceived bad treatment o f indigenous women by health system staff). The study i s now being complemented with an in-depth quantitative appraisal o f coverage gaps. A quantitative and qualitative study o f birth certification in Peru was conducted in 2008. I t focused on factors contributing to documentation gaps affecting children in Peru. It established a strong correlation between poverty, geographical factors, education o f the parents, and the lack o f access to birth certificates. The qualitative analysis found that prevailing documentation procedures also played an important role in limiting access to the birth certificate. The study presents a set o f recommendations to address the issue, some o f which have been incorporated by the Government into the REACT operation policy matrix. This evaluation was supported by the Bank’s Social T A L and conducted by Ciududunos AI Diu, an independent Peruvian NGO. It identified the main obstacles preventing citizens and civil society organizations from accessing and using Consultu Amiguble to track public expenditures in the social sectors. The study recommended the publication o f the modified budget as a key action to improving budget transparency and civil society monitoring.

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POLICY AREAS 106. The operation supports actions in four broad areas: governance reforms for equity and accountability in the social sectors; standards and accountability for improved outcomes in education; standards and accountability for improved outcomes in health; and standards and accountability for improved outcomes in nutrition. The specific Prior Actions for REACT I1 cover: the documentation o f children; the publication o f operational budget data and introduction o f results based management in the social sectors; and policy actions to target improved service standards and outcomes in education, health and nutrition. Table 8 details the advances achieved on the triggers for REACT I1 which were established in the REACT I Project Document. All the six have been completed. Table 9 summarizes the three-part DPL series, showing how the prior actions for REACT I and I1 and the revised triggers for REACT 111, fit together in a coherent way. The following section explains the rationale for choosing these prior actions.

107. The Policy Matrix (Annex 2) details the whole o f the government’s reform program, showing how the prior actions which have been chosen as formal conditions for the REACT program fit into the broader strategy whose rationale and development was described in Section I11 o f this document, and specifying (in the right hand column) the expected development outcomes together with the related baselines and sources for verification. As can be seen there, an impressive rate o f advance i s has been registered in the government’s advance in the reforms laid out in the Operation Policy Matrix as a whole.

108. Box 8 reviews actions taken by the Bank during preparation to apply the Good Practice Principles for Conditionality supported by the Board.

1. Governance reforms f o r equity and accountability in the social sectors

109. The first Prior Actions for REACT I1 and I11 focus on strengthening identification documentation for children. This l ine o f policy reform was chosen because the development o f citizen identification for children i s recognized as a key challenge for reducing exclusion in Peru’s social programs. Historically, citizen identification numbers (DNIs) were only issued to adults, linked to the establishment o f voting rights. But now, as a result o f reforms supported by REACT I and REACT 11, and implemented by the national population registry, RENIEC, Peruvian registry offices are including unique personal identification (CUI) codes in birth certificates. The CUI will eventually be incorporated in adult identification documents. As a result, from the moment o f their birth certification, Peru’s children will have a unique identification number which can be used to ensure their incorporation in social programs. The related Trigger proposed for REACT I11 i s the creation o f a national database which will be established in RENIEC, to consolidate birth certificate data and CUI’S issued by local registry offices. This will facilitate program planning and targeting. RENIEC and MEF wi l l explore the possibility o f transferring the data making use o f SIAF’s broadband capacity.

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MEF in the 10 poorest regions has risen to 180,000 and SIS spending on care for women o f child-bearing age in the 10 poorest regions increased by 10 percent in real terms compared with 2006.

and i s implementing health insurance expansion plans. Indicator: SIS budget increased from S/. 267 million in 2006 to S/. 420 million in 2008. Affiliation regions. SIS coverage o f women and SIS rose from 3.45 million (2007) to 5.22 million (2008) in the 10 poorest regions; and from 6.98 million to 10.5 million nationwide. Goals for CRED production are agreed between the health sector and the PBB system for each health GoP’s goals for CRED consultations Executing Unit (DIRESA or health funded by SIS. The goal - which i s network), and quarterly updates are tracked in the Outcomes column o f the published on the RBB website. policy matrix - has been more than met:

There was an increase o f 85,000 (9%) CRED consultations in the 10 poorest departments in 2007.

and expansion o f the SIS health insurance system which has led to Peru comfortably surpassing the expected expansion o f coverage in the poorest

spending in the 10 poorest regions both surpassed the government’s targets.

In 2007, MINSA financed at least 10,000 additional CRED services for children under 12 months in Peru’s 10 poorest departments.

Met The Prior Action highlights the work o f the RBB system to set and monitor the

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Tablc

Theme 1. Govem- ance

2. Educa- tion

3. Health

4. Nutrition

: Summary of Revised Prior Actions I

Prior Actions Operation 1,2007

RENIEC established the policy that all birth certificates must include a national identify document code (CUI).

Following a consultation with civil society, the 2007 Budget Law has specified 11 priority areas for improving the quality o f social sector expenditure through results-based management, and requires the establishment o f physical goals for each o f these priority areas at national, regional and local level. MINEDU has carried out a universal standard test (UST) o f 2”d grade reading comprehension, covering 55 percent o f schools and 44 percent o f students nationwide. A bidding process i s underway to hire a firm to disseminate the results at school level, using easy to understand “report cards” to be given to parents, schools and mayors. MINSA has fixed access to good quality institutional births (IBs) as a key operational standard for the primary health system. I t has targeted increasing the number o f institutional births in the 10 poorest regions (Amazonas, Apurimac, Ayacucho, Caj amarca, Huancavelica, Huhnuco, Loreto, Piura, Puno, and Ucayali) to 210,000 by 201 1 (up from 143,000 in 2005).

MINSA has changed SIS norms to include the CRED (child growth and development) protocol.

d Trimers for the Programmatic E Prior Actions

Operation 2,2009 Al l registry offices include CUI numbers in birth certificates.

MEF has begun publication in Consulta Amigable o f the adjusted budget (PIM). Performance-based budgeting (PBB) goals have been defined in education, health, nutrition and identity and the MEF website has published budget execution and physical data for 3 1 outputs o f these programs for 2008. MINEDU repeated 2”d grade UST in 2007 & 2008 and expanded i ts coverage. Indicator: In 2007 it covered 9 1 percent o f schools and 80 percent o f students & results were disseminated to UGELs & schools.

Goals for IB production have been established by the PBB system for each health budget executing unit, and MEF publishes quarterly reports through the RBB website.

SIS has received increased budget and i s implementing health insurance expansion plans. Indicator: SIS budget increased from S/. 267 million in 2006 to S/. 420 million in 2008. Affiliation rose from 3.45 million (2007) to 5.22 million (2008) in the 10 poorest regions; and from 6.98 million to 10.5 million nationwide. Goals for CRED production are agreed between the health sector and the PBB system for each health Executing Unit (DIRESA or health network), and quarterly updates are published on the RBB website.

ru REACT DPL series Triggers

Operation 3,2010 A national database has been established in RENIEC o f birth certificate data and CUIs issued by registry offices.

MEF has analyzed the relation o f outputs to outcomes for the strategic programs in identity, education, health and nutrition and on that basis, has refined and prioritized the targets and intensified progress monitoring. In 2009 results were delivered directly to schools and a media campaign was organized to advise parents to request their child’s scores and to encourage schools to discuss their results and target future improvements.

PBB system has continued to set and monitor targets for IBs and performance improves. Baseline: In 2008, 30 percent o f executing units met their goals.

SIS i s making capitation payments for primary services directly to health networks and CLASS, linked to performance indicators, in at least 3 regions.

PBB system continues to set and monitor CRED targets and performance improves. Baseline: In 2008 30 percent o f executing units met their goals.

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Box 7: Application of Good Practice Principles for Conditionality in the REACT DPL Principle 1 - Reinforce ownership. The REACT DPL has i ts roots in a successful piece of analytical and advisory (AAA) work. The RECURSO study, “A New Social Contract for Peru”, identified the DPL’s central theme o f standards and accountability. The dissemination of RECURSO led the incoming Garcia administration to request the Bank’s support for its results-orientation strategy in the social sectors. The first steps to identify the Operation Policy matrix were taken at a two day workshop with the MEF and social sector ministries (with the Ministers and Vice Ministers for Education, Health and Women and Social Development and their senior directors and advisors) in October 2006. Over the following six months, the Bank accompanied the government through the difficult and potentially conflictive first phases of the program, including implementing the universal standard test of second grade reading attainment. Five missions were undertaken during 2006/7 before the Operation Policy Matrix was finalized, leading to strong Government ownership (by MEF and the social sectors). This policy o f engagement continued during the preparation of REACT 11. In 2008/9, four missions visited Peru for identification, preparation and appraisal o f the operation. In parallel, the RECURSO programmatic AAA activity continued, providing of TA for the reform o f the Juntos CCT program; supporting a nutrition video on growth standards for children under-2; and preparing studies and workshops on social safety net effectiveness, regional education strategy in Junin; on the use of alternative measures o f reading attainment; and on procurement effectiveness in the Vaso de Leche program. Additional support for preparing REACT I1 has come from a US$1 million PHRD grant, administered by the GoP. Throughout this process, the Government has enjoyed support from the media, civil society and political actors for improving the accountability and quality of social programs. The updated analysis o f poverty, social and environmental impacts included in this Program Document indicates no significant areas o f concern around the implementation of the program. Principle 2 - Agree with the government on a coordinated accountability framework. The Policy Matrix (which provides the accountability framework for the operation) i s consistent with goals supported by other donors working in areas covered by the program (nutrition, health, education, results-based management and the reform o f social programs and targeting). I t contains a clear basis for measuring progress under the Program. The quantitative and qualitative dimensions o f the policy actions to be completed at each stage of the series are well defined, to avoid ambiguity. The Matrix specifies baselines and methodologies for measuring the Program’s developmental impact, prioritizing the use o f existing statistical sources. During the preparation of REACT 11, the team has worked with the Government to incorporate developments in implementation strategy into the matrix and to adjust the indicators used based on the availability o f reliable data. Principle 3 -Customize the accountability framework and modalities of Bank support to country circumstances The Policy Matrix i s centered on the GoP’s own strategy for results and accountability in public programs, which i s strongly led by President Garcia and Finance Minister Valdivieso. The measures to reorganize and decentralize social programs, strengthen targeting systems and introduce performance management are at the heart o f the Government’s Social Programs Reform Plan, which also stresses the importance o f generating universal administrative data on program results as the basis for meaningful accountability. Similarly, the standards and goals supported by REACT enjoy technical and political approval in their respective sectors, as do the chosen supporting strategies. In education, Minister Chang has personally led the introduction o f universal standard testing. The health sector goal of increased cover o f institutional births i s that chosen by MINSA. The focus on improved nutrition outcomes i s shared by national government agencies (including PCM, CIAS, MINSA, MIMDES and Juntos), and by provincial governments. Principle 4 - Choose only actions critical for achieving results as conditions for disbursement. The matrix for REACT I1 has been limited to the minimum size necessary to maintain the coherence o f the policy dialogue, including 6 prior actions and 18 benchmarks. Since the operation covers three sectors (education, health and nutrition) and related actions in the Finance Ministry, the Matrix must inevitably contain a significant number of benchmarks. However, the Bank has worked with the government to exclude actions which are not central to the main thrust o f the loan and to simplify the Prior Actions proposed for REACT 3. Principle 5 - Conduct transparent progress reviews conducive to predictable, performance based financial support. The supervision process for the f r s t loan coincided with the preparation of REACT 11. The Bank has carefully monitored advances and provided support, as appropriate, to ensure that the triggers agreed for the second oDeration could be met in a timelv fashion. This will continue vis-&-vis REACT 111.

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110. The second set o f Prior Actions supports performance budgeting and transparency in the social sectors. The development o f performance budgeting i s a central plank o f the Government’s results and accountability strategy. The Government and Bank place high importance on the participatory dimension o f this process - which, in turn, requires the timely availability o f budget information through the Consulta Amigable (“Friendly Consultation”) system, an online portal giving civil society access to budget data in the MEF system. REACT I1 recognizes an important step taken by the Government to strengthen the Consulta Amigable system, through the incorporation o f the adjusted budget (PIM). This i s the version o f the budget which i s really executed, making it the appropriate point o f reference for the monitoring o f budget execution by civil society organizations. In addition, in order to provide meaningful context for the data reported in Consulta Amigable, MEF’s Performance Budgeting office has defined goals in education, health, nutrition and identity and i s publishing on the website quarterly budget execution and physical data for 19 health and nutrition outputs. To maintain the emphasis on the development o f a strong performance budgeting system in the social sectors, as a Trigger for REACT 111, MEF will analyze the relation o f outputs to outcomes for strategic programs in identity, education, health and nutrition and on that basis, will refine and prioritize the targets and intensify progress monitoring.

2. Standards and accountability for improved outcomes in education

11 1. The GoP’s efforts to break the “low quality equilibrium” in education center on the development o f clear learning standards, understood by parents, teachers, school administrators, students, and other stakeholders. This provides the basis for continuous universal assessments with timely feedback to teachers, schools, and the community, to allow them to understand the nature o f their quality gap. The government aims to provide targeted support to help teachers, schools, and regions close the gap. The REACT DPL series i s supporting this effort in Peru.

112. In this context, the prior actions supported by REACT I and I1 have supported the development o f a system to monitor outcomes, through a universal standard test (UST), as the basis for school-level accountability in primary education. The UST results provide each school and child with information about their performance. As a Prior Action for REACT 11, MINEDU undertook a second universal assessment o f 2nd grade reading and math attainment in November 2007, with coverage o f 91 percent o f schools, including bilingual schools, and 80 percent o f students (well ahead o f what was originally targeted), and has disseminated the results of. I t repeated the UST once again in November 2008.31 In future years, the Bank will continue to support the government further to develop i t s testing system to incorporate higher grades and other subjects. It wi l l also continue to support the effective use o f the test results as an accountability mechanism. The agreed trigger for REACT I11 i s that in 2009 the UST results w i l l be delivered directly to schools and a media campaign wi l l be organized to advise parents to request their child’s scores and to encourage schools to discuss their results and target future improvements.

113. As was noted in Section 111, the evidence to date suggests that increased attention to early grade reading i s already producing impressive improvements in outcomes. In 2007, the

3 1 Results will be published at the end o f February 2009.

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proportion o f students classified in “group 0” was down to 30 percent, compared with 46 percent in 2004. Although this might in part reflect sampling error, the scale o f the reduction makes it highly likely that the situation on the ground has already begun to improve.

3. Standards and accountability for improved outcomes in Health

114. The lack o f standards for basic health services has contributed to stagnated outcome indicators. This, in turn, threatens to undermine the improvement trends for maternal and infant mortality. In response, the REACT DPL i s supporting the MINSA strategy to increase the coverage and quality o f institutional birth (IB) services in Peru as a key standard for the performance o f the primary health system, focusing on rural areas and the poorest department^^^, where coverage deficits are most marked.

115. The strategic importance o f institutional births i s that access to this service helps leverage improved take-up o f maternal and child health services, in general, and also helps promote the documentation o f new-born children. Increased coverage and improved quality o f IB services are expected to have a direct impact on neo-natal and maternal mortality rates and to contribute to improved nutritional outcomes for newborn children. As indicated by the Bank’s PSIA study o f constraints to the expansion o f institutional births among rural indigenous women (see Box 8 on page 44), there i s also a positive feedback loop between coverage and quality. As IB service quality improves, women’s demand for this service will also improve. For these reasons, the government’s continuing efforts through the performance budgeting system to program and monitor advances in coverage o f IBs - especially in rural areas - are recognized as a Prior Action for REACT 11. REACT I11 wi l l continue to support this strategy o f programming outputs for service producing units, and it i s expected that the proportion o f health sector budget executing units (DIRESAs or health networks) which meet their targets for IB outputs will increase from the baseline observed in 2008.

116. The available data (from the ENDES household survey) suggest that this policy i s already reporting positive outcomes. In 2007, IB coverage in the 10 poorest regions reached 71 percent. National IB coverage rose from 73 percent in 2005 to 77 percent in 2007; and in rural areas, it rose from 44 percent to 5 1 percent.

117. REACT I1 also supports the development o f Peru’s health insurance system, SIS. SIS funding i s critical to expanding IB coverage. For this reason, the government’s policy actions to increase SIS coverage and funding in the poorest regions o f Peru are recognized as a Prior Action for REACT 11. The SIS budget rose from W.267 mill ion in 2006 to U.420 million in 2008, and SIS affiliation in the 10 poorest regions rose from 3.45 mill ion in 2007 to 5.22 million in 2008. Nationwide, it rose from 6.98million to 10.5 million. In 2009, 36 percent o f the SIS budget i s slated for the 10 poorest regions. This i s proportional to their share o f the population, confirming that SIS has overcome the risk that expensive tertiary programs in the main urban centers might absorb the lion’s share o f resources. In the next phase o f the program, REACT wi l l support qualitative improvements. SIS has started a pilot o f results- based capitation payments to finance primary health programs in Apurimac, Ayacucho and

32 Amazonas, Ayacucho, Apurimac, Cajamarca, Huancavelica, Hucinuco, Loreto, Piura, Puno and Ucayali (ENDES 2004).

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Cajamarca, linked to performance standards. The roll-out o f the resulting reforms i s flagged as a Trigger for REACT 111. Specifically, in at least three regions, SIS capitation payments for primary services wil l be given directly to health networks and linked to performance indicators.

4. Standards and accountability for improved outcomes in Nutrition

11 8. As noted in Section 111, the GoP has set an ambitious target to reduce stunting o f children under five by nine percentage points, to reach 15%, in five years. The lack o f awareness o f many parents about their child’s nutritional failure, due to the lack o f easily- understood standards, i s a major obstacle to achieving this. Improving communication to mothers about their child’s nutritional potential and status is therefore central to the government’s strategy. For this reason, the REACT series supports the development o f a stronger national monitoring and counseling system which can track individuals’ trajectories on height and weight and provide parents with timely advice about how to improve their children’s nutritional status. This advice i s provided in the context o f MINSA’s “CRED” (crecimiento y desarrollo) consultations.

1 19. REACT I supported a change in the rules o f the SIS health insurance system to allow it to fund CRED. Fol lowing this, as a Prior Action for REACT 11, goals for CRED production have been agreed between the health sector and the performance budgeting (RI3B) system for each health Executing Unit (DIRESA or health network), and quarterly updates are being published o n the RBB website. As a trigger for REACT 111, it i s expected that RBB system will continue to agree CRED targets with DIRESAs, and to monitor the outcomes, and it i s expected that the proportion which meet their targets will increase from the baseline observed in 2008. These pol icy measures are expected to help Peru to meet the Government’s declared target o f increasing the average frequency o f nutritional monitoring o f children reaches 4.0 CRED controls per year in the 1st year o f life; and 2.0 per year in the 2nd year o f l i f e in 2009.

VI. OPERATION IMPLEMENTATION

POVERTY AND SOCIAL IMPACTS 120. The REACT program i s expected to have significant, positive social impacts. A poverty and social impact assessment was undertaken to explore the disaggregated social impacts on different stakeholder groups, in order to enhance the positive impacts and minimize negative impacts and risks associated with the program. The policies supported by the REACT program include governance reforms in the social sectors (including the consolidation o f social programs to improve service quality, and providing birth certificates including the national identity number to al l Peruvians under two-year old), as well as improving the accountability and quality o f education, health and nutrition programs. In each o f these areas, the l ikely overall poverty and social impact for poor and vulnerable groups i s significantly positive. The main potential positive and negative impacts and risks are summarized below.

121. Birth certification. A Bank-funded study o f birth certification in Peru, carried out in 2008, established a strong correlation between poverty and the lack o f access to birth certificates. The likelihood o f having an undocumented chi ld i s significantly associated with

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social factors such as illiteracy o f the parents, access o f the household to electricity, and unsatisfied basic needs in the household33. The REACT program aims to ensure that al l birth certificates incorporate a unique identity number (CUI), at no cost to al l parents. This C U I will eventually be incorporated into the child’s identity card (DNI). Since many basic rights o f citizenship can only be claimed if one possesses a birth certificate and DNI, the insertion o f the C U I in al l new birth certificates i s expected to have significant positive social impacts- such as increased enfranchisement, increased access to jobs in the formal sector, the establishment o f a national data-base o f birth certificates available to social programs, and easier children’s access to social programs. The creation o f a digitalized national database o f birth certificates will help detect and correct registry errors and will reduce the cost o f issuing duplicate birth certificates to migrants.

122. There remains a risk that registration officials might try to charge illegal fees that would limit the effectiveness o f this policy on the poorest. To offset this risk, measures should be taken to educate the public (e.g., through local radio, using appropriate languages) about their right to get birth certificates at no cost. Monitoring should be undertaken to ensure that no illegal fees are charged for registering babies and a mechanism should exist to reporting illegal fees through the local centers o f the Ombudsperson’s Office.

123. There i s also a risk that, as access to Peru’s social programs becomes linked to DNI numbers, in an effort to improve targeting and eliminate duplication; this might lead to unintended consequence o f exclusion o f the poorest and most remote people, who remain undocumented. To mitigate this risk, it i s important to facilitate the documentation o f those who are s t i l l un-documented - rather than excluding them from programs. An example o f this strategy i s the Government’s use o f the CCT program, Juntos to facilitate the process o f citizen documentation among i t s beneficiary population. The initiative has already documented 386,211 children in 2008. This should be reinforced by targeted ambulatory documentation drives, making use o f geo-referenced census data which show where most o f the undocumented people are living, coupled with local media campaigns.

124. Education. Improving standards in schools though better test performance and increased accountability and transparency i s an important step in improving the quality o f education. This policy reform will have significant positive social and distributional impacts. However, in addition to testing, monitoring and “report cards” on school performance, the borrower should also be aware o f additional factors that could both enhance the positive social impacts and reduce the risk o f adverse effects o f the proposed education reforms.

125. Teachers’ secondary job. One dimension o f Peru’s l o w quality equilibrium i s that teachers have been historically underpaid and have not been expected to perform to any set standards o f quality. Over the last decade, this historical trend has led to a situation where approximately hal f o f the teachers in Peru have a secondary activity to earn enough money to support their families.34 Teachers’ salaries have improved significantly over the last decade,

33 CIES, Cuenca, R. and Diaz, R, (2008) Estudio Cuantitativo de 10s Indocumentados en Peru. 34 For instance, in rural dispersed areas, an estimated 61-65 percent o f tenured teachers engage in “secondary activities” and among other groups (non-tenured andor urban areas) the numbers range from 25-80 percent, according to Eduardo Zegarra and Renato Ravina’s 2003 report entitled, Teacher Unionization and Quality o f

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which should open the way to correct the situation, but this issue needs to be properly monitored and complemented by making available incentives linked to performance.

126. Overcoming teacher opposition. In education, teachers’ attitudes are crucial to the success o f reforms. The best option is to find a strategy for change that takes teachers’ perspectives into account and provides opportunities to improve their skills and get incentives linked to performance. Since REACT I, teachers’ buy in to the reform has increased and resistance to the application and dissemination o f the Universal Standard Test has diminished considerably. At the same time, the dialogue with the teachers’ union SUTEP has shown a constructive shift.

127. Health and Nutrition. The policy reforms supported by REACT in health and nutrition are also expected to have significant positive social impacts. Institutional births are closely related with maternal mortality rates. The leading causes o f maternal mortality in Peru are hemorrhages during delivery (47 percent), infections during and after delivery (1 5 percent), and arterial hypertension during pregnancy (1 2 percent). Early identification o f potential complications through the recognition o f danger signs and timely referral and arrival at an appropriate facility are critical. Rural indigenous women in the Sierra region experience these potential delays due to lack o f skilled care, distance and cultural barriers that prevent them for accessing a health facility with the appropriate level o f care in a timely fashion. Recent years have seen sharp increases in coverage o f institutional births, which has tripled in rural areas since 2000 (from 15 percent 50 46 percent). This progress has been achieved largely by the creation o f a network o f maternal waiting homes, the expansion o f the health system network, SIS coverage o f institutional births costs; and the integration o f institutional and traditional concepts and practices o f childbirth into the medical practice. Nevertheless, poorer and less educated women remain far more likely to give birth at home. Only 46 percent o f rural women in the Sierra had an institutional delivery in 2007 - compared with the national average o f 76 percent. As part o f the preparation for REACT 111, a qualitative study was undertaken to assess women’s attitudes and identify possible measures to overcome cultural and economic barriers to giving birth in hospital and qualified health centers. The main findings and recommendations are summarized in Box 8 below.

ENVIRONMENTAL ASPECTS

128. The actions supported in this operation are not likely to have any significant positive or negative effects on environment, natural resources and forestry. The only area of identified risk is that associated with the increase in institutional births, which will lead to an increased concentration o f post-partum waste and, possibly, other medical waste (such as disposable syringes) at the health posts. Although it is easier to manage the proper disposal o f such waste in health posts than if it were dispersed in private dwellings, there i s s t i l l a possible risk o f poor management o f the waste within the health posts. This risk i s being mitigated by the Bank’s P A R Salud 2 health investment project, which i s directly supporting the promotion o f institutional births. Specifically, in the context o f the preparation o f P A R Salud 2, a review has been conducted to confirm the sufficiency o f MINSA protocols for the disposal o f medical waste and o f compliance with the norms in rural health posts. The pol icy actions in

Education in Peru: AN empirical Evaluation Using Survey Data, Inter-American Development Bank.” See also IEG 2006 Report entitled, From Schooling Access to Learning Outcomes.

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governance, in education and nutrition should not lead to any issues about waste management, contamination or the impact o f public policies on the sustainability o f natural resources.

Box 8: Overcoming cultural and economic obstacles to Institutional Births During preparation o f REACT 11, and as a part o f the Poverty and Social Impact Assessment (PSIA), a qualitative study was conducted to evaluate the policy challenges facing Peru in increasing coverage o f institutional births - especially amongst indigenous women. This included a qualitative study undertaken among indigenous women and their partners in four districts in the regions o f Ayacucho, Huancavelica and Pun0 to identify the reasons why they were not opting for institutional births. The study covered families that live within reach o f a health center qualified to attend births within reach. Among the factors identified were: (a) non- cultural demand constraints such as the private financial costs o f having an IB, including transport, clothing and food; (b) Perceptions o f access problems to reach the facilities; (c) Issues related with cultural appropriateness; and (d) The poor quality o f the patient-health care professional interaction. Based on these findings and a review o f international experience (which also forms part o f the PSIA), the study made the following recommendations for Peru to increase demand and facilitate access to institutional births: 0 Reduce financial barriers by providing cash payments to cover private costs o f participating in institutional

births, such as transport, food and other material needs or requirements by the health system. 0 Ensure fill implementation o f the existing norm on Culturally Adequate Birth and increase women’s

knowledge o f women on institutional births and their rights in relation to culturally-relevant demands. 0 Encourage mothers to make a Birth Plan (Plan de Purto) expressing their personal preferences and assuring

them that these wil l be respected in the health post attending their birth. 0 Improve patient-health professional interaction using intermediaries such as traditional birth attendants to

refer women to health centers and/or as ‘chaperones’ o f women who are accessing the system for the first time. Such roles can also be played by women who already had an IB. Re-state the importance o f the participation o f the partner or other family members in the birth process. 0

IMPLEMENTATION, MONITORING AND EVALUATION 129. The PD for REACT 1 laid out the general framework for monitoring and evaluation o f the operation. During 2008, contracting has been completed for an innovative household and facility survey to provide the basis for robust measurement household-level associations between awareness o f standards and basic development outcomes in education, health and nutrition. The field work will be completed in April 2009 and the report will be finished by June 2009.

FIDUCIARY ARRANGEMENTS 130. During the last year, in the context o f the preparation o f a series o f DPLs, including the Environmental DPL, the Second Programmatic Fiscal Management and Competitiveness DPL and the REACT DPL, the Bank has undertaken an on-going review o f Peru’s public financial management (PFM) and o f progress made in critical reforms o f i t s underlying systems. These reforms, which are supported by the Fiscal DPL program, are based on the recommendations o f the 2001 CFAA, the 2004 IMF Fiscal ROSC, the 2005 CPAR, and other Government initiatives to modernize i ts public institutions over the last several years. The Bank’s review i s based on meetings with GoP officials from MEF, the Central Bank and the Office o f the Comptroller General (CGR) together with desk reviews o f the IMF Art icle IV Consultation (Staff Report, January 14,2009), the IMF’s Second Review Under the Stand-By Arrangement (Staff Report, July 2008), the last annual external Audit Report o f the Central Bank, which contained an unqualified opinion.

131. PFM in Peru has significantly improved since the 2001 CFAA, which found significant areas in need o f improvement, such as: (i) the uneven application o f the existing

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tools in the system, (ii) under-funding o f the CGR, (iii) the need for greater oversight by the Congress, and (iv) the need for more effective external reporting. In recent years, GoP efforts to strengthen public finance administration have focused on: (i) strengthening supervision o f the legislative branch’s use o f funds, (ii) increasing the independence o f the CGR and strengthening the legal and regulatory framework for the supervision o f public spending, (iii) expanding the scope and coverage o f the integrated financial administration system (SIAF) at different levels o f government, with greater control and transparency, and (iv) modernizing the budget process and i t s related monitoring tools to improve the efficiency o f public spending.

132. The most critical reforms to improve the management o f public finances and efficiency o f public spending are well advanced. These are: (i) a new budget classification system for the 2009 budget has been implemented in line with international standards and aligned with the accounting chart o f accounts; (ii) significant progress has been achieved in the implementation o f the Treasury Single Account (TSA) at Central Government level; and (iii) performance-based budgeting and a new monitoring and evaluation system are being progressively institutionalized to improve the transparency, accountability, and allocation o f public spending. Continued efforts are needed to accomplish fhll implementation o f the TSA, and ensure common standards and timely / adequate budget and financial reporting by all levels o f government (central and sub-national). The efforts to modernize the budget and improve the PFM could be scaled up by prioritizing activities within the PFM reform agenda and focusing on performance indicators and benchmarks to measure progress systematically.

133. The SIAF i s a cornerstone in the country’s reform process. The adoption o f SIAF at sub-national level has helped to improve the transparency o f public finances. In 2008, following an independent evaluation by external consultants, the GoP decided that the current platform o f the SIAF (which as been in place for more than 10 years) needed an overhaul to revamp the system completely. However, the GoP i s conscious o f the importance o f a smooth migration into a new system (which may take 4 -5 years) and i s ensuring that the considerable advances attained so far will not be interrupted or reversed. The design o f the new system and i t s platform have already started and Terms o f Reference have been prepared for a consultancy to develop the conceptual framework.

134. On transparency, Peru ranks about average among Latin American countries, comparing favorably to Brazil and Mexico, but lagging behind Chile and Uruguay which set standards in Latin America. In the last few years, Congress approved a Law o f Transparency and Access to Public Information (2003) and i t s regulations; also, SIAF became available through an internet portal “Consultu Amiguble”, and a pilot system for users’ assessment o f government services was launched. With the further development o f the new SIAF and continued dissemination o f budgetary information through the web, Peru’s ranking should considerably improve.

135. To confront upcoming development challenges, Peru needs to further modernize and strengthen the PFM. As it develops into a stable middle income country, it will require systems capable o f keeping up with a modernizing economy in a variety o f sectors and at all levels o f the government. The need for ongoing reform i s further amplified by decentralization, which calls for strengthening o f capacity o f regions and municipalities to

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execute public funds. In the context o f the CPS (Modernization o f the State Pillar), the Bank i s supporting the GoP with (i) a governance program focusing on sub-national government public administration systems, and (ii) an integrated PER which integrates a fiduciary assessment. The scope o f the fiduciary assessment includes the P F M system as a whole. The assessment will establish a P F M system performance baseline using the Public Financial Management Performance Measurement Framework (PEFA) and OECD-DAC for procurement. The assessment, which is in i t s final stage, has been carried out with other development partners (EU and IADB) and with the participation o f the GoP. The reports will make recommendations for strengthening the public financial management and public procurement systems in a prioritized and actionable manner.

DISBURSEMENT AND AUDITING 136. Disbursement arrangements will fo l low the procedures for DPL D D O and the deferred drawdown provisions as set out in OP 8.60. The GoP may draw down the funds allocated to the single tranche fol lowing one or several requests for withdrawal unless it has received prior notification from the Bank that a review o f the drawdown conditions (i.e. adequate macroeconomic pol icy framework and/or satisfactory program implementation) i s necessary. Upon acceptance o f a drawdown o f funds: (i) the Bank will deposit the funds into an account designated by the Borrower which forms part o f the country’s foreign exchange reserves at the Central Bank o f Peru; and (ii) the Borrower shall ensure that upon deposit o f the funds into said account, such amount or an equivalent amount i s credited in the borrower’s accounting system to an account that finances budgeted expenditures. The GoP will be required to provide confirmation o f steps: (i) and (ii) as soon as funds are received. The proceeds o f D P L DDO may not be used to finance expenditures typically excluded under the Loan Agreement.

137. The completed 2007 IMF off-site Safeguards Assessment was not available. However, as per the IMF Country Report No. 07/241, the Safeguards Assessment concluded that there were no significant weaknesses in the Central Bank‘s safeguards framework, identifying few measures to address minor weaknesses related to the duration o f the appointment o f the external auditor and the terms o f the Organic L a w on recording unrealized revaluation gains. Given that the Bank’s review o f the borrower’s current P F M i s satisfactory and the conclusion that fiduciary arrangements are adequate, the Bank will not require a dedicated account at the Central Bank for loan proceeds and as such no audit will be required for the deposit account.

RISKS AND RISK MITIGATION 138. Macroeconomic risks; Peru’s recent history o f strong macroeconomic management will help it cope with the impact o f the global economic downturn. Nevertheless i t will inevitably remain vulnerable to possible terms o f trade shifts, which will reduce export revenues and feed into slower growth rates. The downside risk scenario has become more likely in the current uncertain and volatile external environment. As discussed in paragraph 13 (above), as part o f the preparation for this operation, a l o w case scenario was simulated (with lower external demand and a 40 percent fal l in the prices o f Peru’s main metals) to assess the economy’s medium term outlook. This scenario predicts a significant decline in growth, a larger deterioration o f the current account balance and a shift o f the fiscal accounts into deficit. Nevertheless, although the l o w case scenario would lead to a deterioration o f public and external indebtedness, the analysis shows that the medium-term path remains

47

sustainable, thanks to strategic debt management, strong GDP growth and fiscal surpluses in the past, which have lowered Peru’s debt burden indicators and improved the country’s debt profile. In this scenario there is a risk that some o f the poverty gains made in recent years would be reversed. However, in the absence o f unexpected policy shifts, the strength o f the underlying fiscal and monetary fundamentals make it unlikely that the macroeconomic situation could become incompatible with continued budgetary support lending during the proposed te rm o f the REACT DPL series.

139. Political risks: The program i s supported personally by President Garcia, who has made many strong public statements in support o f improving quality and strengthening accountability in the social sectors. The personal involvement o f the President will reduce the risk that changes at ministerial level might derail the program. However, a risk exists that the necessary changes may be opposed by groups within the relevant ministries (MINEDU, MINSA, MIMDES). The strategy o f the Project addresses this risk by seeking to mobilize public support for change, as a counterpoint to the conservatism o f established professional “corporations” in the social sectors. In addition, to minimize the risk o f opposition based on technical quibbles, the operation supports the popularization o f standards for which there i s technical acceptance in the sectors, and also supports complementary actions to secure the resources needed to achieve the desired outcomes (thus giving the sectors an interest in the implementation o f the strategy). I t should be noted that since the GoP does not have a majority in Congress, the operation has avoided strategies that require legislative approval.

140. Social and environmental risks: The operation promotes the mobilization o f diverse social actors to press for change in service quality, especially in poor rural, communities (many with large indigenous populations). In this setting, although the expected impacts are positive, there i s some risk that conflicts might arise. For instance, there could be staff resistance to greater transparency or to incentives to improve performance. There could be conflicts between local governments and l ine ministries. There i s also a risk that interventions might not be culturally appropriate and o f inequity in distribution o f the benefits, due to continued exclusion o f minority and indigenous groups. To minimize the political and social risks, during preparation, the Government has undertaken extensive consultations with c iv i l society on the rationale and strategies to be supported by the Operation (as detailed in Section 111.5). The Bank has also carried out a poverty and social analysis which identifies possible negative impacts on vulnerable communities, traces points o f support and resistance and comments on the strategies adopted to offset possible negative impacts and to overcome obstacles (e.g. through the adjustment o f the strategy to avoid unnecessary conflicts; and the adequate design o f communications strategies). Finally, as was discussed in paragraph 128, the Bank has addressed the environmental risks associated with increased institutionalization o f births through a detailed review o f M I N S A protocols for handling medical waste, which was carried out as part o f the preparation o f the P A R Salud I1 project.

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ANNEX 1: LETTER OF DEVELOPMENT POLICY

"DECENID DE LAS PERSONAS CON DISCAPACIDAD EN EL PERw "AN0 DE LA UNldN NACIONAL FRENTE A !A CRISIS EXTERNA"

LUIS CARRANZA UGARTE MINISTRO

OFICIO No 4 2 8 -2009-EF/IO

CARTA DE POLITICA SECTORIAL

Seiior ROBERT 6. ZOELLICK Presidente Banco Mundial Presente. - Referencia:

Estimado seiior Zoellick,

Mediante la presente le manifiesto el compromlso del Gobierno del Presidente Alan Garcia Perez de continuar con la lucha contra la pobreza y la mejora de diversos indicadores sociales como la desnutricion, el acceso y la calidad de 10s servicios de educacion, salud y saneamiento.

En este marco, se ha desamllado la segunda operaci6n del "P&stamo Programatico de Reformas Sociales /I" con el Banco Mundial (BM), solicitado por el monto de US$ 330 millones, que comprenderA acciones especificas en diversas Areas de politica social, Cabe indicar que este prestamo continuard /as reformas comprendidas en la primera operacih, suscrita en el 2008.

A continuacibn se describe el wntexto, econbmico del Penj y posteriormente 10s objetivos y /as reformas realizadas y /as propuestas para el prestamo solicitado.

Prestamo Programatico de Reformas Sociales I1

A. Confexto economico

La economia peruana enfrenta un contexto internacional dificil. La crisis de la econornia americana generada en el mercado hipotecario se ha trasladado a 10s mercados financiems obligando a la intervencibn del Gobiemo a traves de un paquete de rescate, aprobado por el Congreso Americano. A esto, hay que sumarfe el aumento que hubo de 10s precios internacionales del petrdleo y 10s alirnentos lo que ha desatado una oleada mundial de inflaci6n. En nuestro pais$ a pesar de este entorno adverso, el crecimiento econbmico contin0a sblido, vinculado principalmente a la dinemica de la demanda intema. Durante el ario 2008, el P5I real crecib 9.1% impulsado por el aumento de 11.9% en la demanda intema. Este crecirnienfo estd explicado par el mayor gasto privado en un contexto de expectativas empresariales altas, aumenfo significativo de las importaciones (36.5% en el aiio 2008) y el crMito bancario a1 sector privado (32.5% en el aiio 2008).

Jlr6n Junln N' 319, Lima 1 - TeYfonos 31 1-9900 31 1-5930

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@ m 'DECENIO DE LAS PERSOhAS COh D SCAPACIDAD EN E. F t R d " "ARO DE LA UNldN NACIONAL FRENTE A LA CRISIS EXTERNA"

LUIS CARRANZA UGARTE MlNlSTRO

OFlClO N' {Ll? -2009-€F/lO

Para esfe aiio se prev6 un crecimiento del PBI 5.0% con una variaci6n porcentual de demanda inferna de 6.8%, por lo que en 10s siguienfes meses el PBI se estarla ubicando aljn por encima de so nivel potencial (que esfimamos alrededor de 6%). La polltica macroecondmica que el Gobiemo est6 implemenfando tiene por objetivo moderar esta expansidn con el objeto de haceria consistente con el crecimiento potencial. De esfa manera, se evitan las presiones inflacionarias y se garantiza un crecimiento sostenido y no vol6til.

Por otro lado, feniendo en cuenta tanto la disminuci6n de 10s t6rminos de infercambio y el exceso de la demanda interna sobre el producto, el resultado de la balanza en cuenta corriente externa se ha vuelto negativo esfe aiio, luego de tres aAos de super&$. Durante el 2008 se obtuvo on deficit en cuenta corriente de 3.2% del PBI. Este cambio en la cuenta corriente no constituye un riesgo macroecondmico debido a que se financia principalmenfe con flGos de inversi6n extema directa. Sin embargo, es un hecho que no debe perderse de vista cuando se diseiian /as polfficas macroecondmicas de corto plazo y es importante lograr superhvit fiscales altos en estos aAos. Estos superavits tienen cardcter preventivo debido a1 deferioro del ahorro privado originado por el exceso de wnsumo. De esfa manera, frenie a una reduccidn del ahorro privado, el ahom plsblico debe aumentar con el objeto de amenguar /as presiones sobre la cuenta comente de la balanza de pagos.

B. Reformas asociadas a1 Programa

Un aspect0 fundamental para reducir la pobreza es contar con esthndares y metas claramente definidas en la provisidn de 10s servicios sooales, que permitan evaluar 10s resultados en salud, logros de aprendizaje y nutricidn de 10s nifios.

Dichos esthndam y metas vienen siendo desamllados por 10s Ministerios de Salud y Educacidn, con el objefivo de contar con sistemas de monitorso que penitan obsewar el desempeno de 10s esfablecimienfos de salud y de /as escuelas primarias, propiciando un rol m6s acfivo por parte de 10s gobiemos regionales y locales.

En este sentido, el Estado viene implementando diversas acciones complementarias para elevar la calidad de 10s sewicios, mejorar 10s insfrumentos de focaiizacidn y aumentar la participacidn de /as comunidades en situacion de pobreza en el monitoreo de 10s presupuestos y programas a nivel regional y local. A continuacidn, se detallan 10s principales elementos de dicha estrategia.

I. Equidad y rendicicin de cuentas en 10s sectores sociales

Optimizacion del gasto social

Para contribuir a disefiar mejores pollticas para la lucha contra la pobreza durante 2007 se elabor6 un esquema de fusion de 10s programas sociales, a fin de transitar a un esquema de alta articulacidn vertical y horizontal, fortaleciendo la Comisidn Interministerial de Asuntos Sociales (CIAS) e implementando una gestidn de programas

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"DECENIO DE LAS PERSONAS CON OISCAPACJDAD EN EL PERO" "AQO DE LA UNION NACIONAL FRENTE A LA CRISIS EXTERNA"

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basada en resultados dentro de un proceso de descentralizacibn. En este sentido, acfualmente se encuentra en proceso de evaluacibn /os avances y efectos iniciales de esta fusidn, asi como la realizacidn de evaluaciones dpidas de 10s grandes programas sociales como el Programa Juntos y 10s programas alimenfarios.

De otro lado, en el presupuesto publico de 2009 se ha conslderado un fondo de contingencia de 10s programas sociales para financiar posibles expansiones de aquellos programas que muestren resultados positivos en elevar 10s niveles de la poblacion en situacidn de pobreza, a fin de expandir y pmfundizar su alcance. Adicionalmente, se viene evaluando implementar una red de ventanillas irnicas a nivel nacional que simplifiquen 10s costos administrativos y fortalezcan la articulacion de programas sociales complementarlos entre SI, lo cual contribuifFi a evifar duplicidades en /as intewenciones y mejorar la calidad del gasto social. A partir de ello, durante 10s siguientes meses se implementah /as medidas necesarias a fin de mejorar la eficlencia e impact0 del gasto social sobre la poblacibn.

Mejorar la identificaci6n de beneficiarlos de programas sociales

El Ministerio de Economia y Finanzas se encuentra cornprometido en la construccitrn e implantaci6n del Sistema de Focalizacibn de Hogares (SISFOH) como una estrategia para mejorar la calidad del gasto social. El SISFOH es un sistema de informacion que proporciona informacion relevante sobre 10s hogares en situaci6n de pobreza y vulnerabiiidad, que serd utilizada por 10s programas sociaies para identificar y seleccionar a sus beneficiarios. En este marco, se ha continuado ampliando el alcance del Padrdn General de Hogares del SISFOH, de manera que entre junio del 2007 y abril del 2008, se ha visitado a 1.86 millones de hogares residentes en 10s sectores socioeconbmicos medios y pobres en 30 principales ciudades del pais, que comprenden al80% de hogares urbanos en situacibn de pobreza. Asimismo, se viene concretando la utilizacion del SISFOH por el Seguro Integral de Salud, y posteriormente con 10s progmmas del Vas0 de Leche y Tech0 Propio.

De otro lado, la focalizaci6n individual de beneficiarios no puede ser aplicada con exito si la falta de identflcacidn de la poblacion afecta a un significativo numero de personas, generalmente en situacidn de pobreza. En esta linea un avance importante ha sido lograr que todas las oficinas registrales incluyan de manera obiigatoria un Cddigo Unico de Identidad en las partidas de nacimiento, de manera que toda persona desde el momento del registro de su nacimiento cuente con un numero de identificacibn ljnico que corresponda con el Documento Nacional de Identidad. Se espera gradualmente ir logrando la restituci6n de la identidad y su ejercicio por todos 10s ciudadanos.

Articular e integrar el presupuesto por resultados a la polifica y gasto social

Desde el aAo 2007, se viene aplicando progresivamente la gestibn presupuestaria basada en resultados a todo nivel de gobierno, asi como el acceso a toda la informaci6n relacionada a la gestion del proceso presupuestario del sector publico -a traves de un portal especlfico. En este sentido, durante el 2008 en adicion a 10s programas estmtegicos en educacibn, salud, nutricih, identidad y transportes se han diseriado

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nuevos ptvgramas estrat6gico.s como telefonia rural, saneamiento rural, electrificacidn rural y medio ambiente, lo que ha pennitido desartvllar la metodologia para la pmgramaci6n presupuestaria estratbgica.

De otro lado con la finalidad de avanzar en la transpawncia de 10s resultados y la gesti6n de 10s recursos pljblicos, la Ley de Presupuesto del Sector Pljblico para el Arlo Fiscal 2007 (Ley 28927) y la Ley de Presupuesto del Sector Pljblico para el Arlo Fiscal 2008 (Ley 29142) norman que se establezcan, de manera experimental, 10s instrumentos para el modelo del monitoreo participativo del gasto en el nivel descentralizado tanto el 2007 como el 2008. Como parte de este proceso se han realizado experiencias piloto de monitoreo participativo el 2007 en cinco municipalidades provinciales del pais; teniendose previstas tambien el financiamiento de expenencias el 2008 y 2009.

2. Garantizar una educacion adecuada para todos

A pesar de la alta cobertura de 10s servicios de educacidn, 10s resultados en aprendizaje aljn son bajos. Para mejorarestos resultados, el Gobierno Peruano se ha comprometido a implementar diversas acciones que permitan un cambio significativo en la calidad de la educaci6n pljblica.

En primer lugar, se han establecido estandares para el segundo grado de primaria sobre comprensidn de lectura, basado en tres niveles de logro de aprendizaje claramente detinidos. Ei objetivo es que se cuente con indicadores clams sobre el avance del nivel de aprendizaje de 10s nifios, y que este pivgreso sea de conocimiento del gobierno regional, de 10s docentes, directores y padres de familia de cada escuela.

En segundo lugar, durante 2007 y 2008, se aplicaron la segunda y tercera evalvacih, respecfivamente, a 10s alumnos de segundo grado de primaria sobre comprensi6n de lectura y logms de aprendizaje en I6gico-matematica. Actualmente, se vienen elaborando 10s reportes de resultados por escuela (dirigidos a 10s directores y docenfes) y reportes individuales por estudiante (dirigidos a 10s padres de familia). Se tiene previsto continuar aplicando estas evaluaciones anualmente como un mecanismo de rendici6n de cuentas para monitorear el desempefio de las escuelas en la mejora de 10s logms en la lectoescritura de segundo grado, con una fuerte participaci6n de 10s padres de familia, En este sentido, el desaffo para 10s siguientes afios es reforzar la difusi6n y us0 de estos resultados para mejorar el aprendizaje y la capacitacidn a 10s docentes.

En adici6n a ello, durante 2008 se complet6 la implementacidn del Sistema Nacionai de Evaluacidn, Acreditaci6n y Certiticaci6n de la Calidad Educativa (SINEACE) que comprende la educacidn primaria, secundaria y terciaria. El organism0 rector del SINEACE es el Consejo Superior que tendr6 entre sus funciones, ptvponer politicas, programas y estrategias para mejorar la calidad educativa, asi como articular el buen funcionamiento de sus organismos operadores. Tales organismos, encargados de garantizar la calidad educativa en el Bmbito de la educaci6n basice y tbcnico-productiva, son el lnstituto Peruano de Evaluacidn y AcreditacMn de la Calidad de la Educacidn Basica, el Consejo Nacional de Evaluaci6n y AcreditacMn de la Educaci6n Superior No Universitaria: y el Consejo Nacional de Evaluaci6n y Acredjtaci6n de la Educaci6n

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Superior Universitaria. De esta manera, se espera que en 10s siguientes dos arios el SINEACE se encuentre acreditando a fodos 10s programas de educacidn superior.

De otm lado, durante 2008, de rnanera excepcional, se destind un total de 270 mlllones de nuevos soles para mantenimiento preventivo de locales educativos pdblicos, con enfasis en zonas rurales y de frontera. Ello permitid identificar e individualizar 10s locales educatlvos receptores de estos recursos y desamllar un instrumento de asignacidn de recursos a locales educatlvos, basados en fdtmulas que recojan indicadores sobre carencia de servicios e infraestructura, pobreza y recursos disponibles, que se espera replicar prbximamen fe.

3. Mejorar significafivamente 10s indicadores de salud y nutrici6n

Los indicadores de salud de la poblacion son 10s que miden con mayorclaridad el nivel de desamllo del pais y /as inequidades a1 inferior de/ mismo, siendo 10s m l s importantes aquellos vinculados a la salud materna e infantil debido a1 impact0 que generan en la sociedad y en el desamllo de capacidades. En el Ped, /os esfuerzos de 10s difimos afios han petmitido que estos indicadores tengan una evolucidn favorable, en particular la mortalidad infantil. Sin embargo, en comparacion a otms palses de la regidn 10s nlveles de mortalidad materna y desnufricion infantil siguen siendo elevados. Por elio, se ha esfablecido como prioridad e indicador clave para el sistema de afencidn primaria de salud la ampliacidn de la cobertura del parto institucional, con mayor Bnfasis en las regiones m8s pobres del Ped. Para el 2011, se espera haber incrementado la cobartura del parto institucional en el hmbito rural a 70% a nivel nacional. Actualmente, ya se ha logrado arnpliar esta cobettura de 73% en 2005 a 77% en 2007; y en zonas rurales de 44% a 51%, de acuerdo a la Encuesta Nacionsl Demogdfica y de Salud Familiar (ENDES).

De otro lado, durante 2008, con el objetivo de consolidar un sistema de aseguramiento pdblico sostenlble que financie servicios de calidad para la mejom del estado de salud de /as personas, se ha implemenfado un nuevo esquerna de capitacidn individual para /as prestaciones aseguradas por el Seguro Integral de Salud, de rnanera pilofo. Sajo este esquema, se establece un contrato de financiamiento con /as direcciones regionales de salud para 10s respectivos establecimientos a fin de que est6n en capacidad, de manera anticipada, de brindar /as prestaciones priorizadas para la reduccibn de la desnutricidn crbnica infantil y salud materna neonatal. Bajo esta estrategia se contlnDa enfafizando la ampliacibn de la cobeltura de este segum a aquellos que no cuentan con 10s recursos necesarios, priorizando a las mujeres en edad f6rtil de /as regiones rn8s pobres del pais y asegurando una mayor disponibilidad de medicinas en 10s establecimientos de salud.

Adicionalmente, recientemente, se ha remitido el proyecto de la Ley de Asegurarniento Universal que tiene por objefivo brindar /as henamientas normafivas para contar con un sistema de seguridad social en salud que cubra /as necesidades blsicas de las personas que no tienen /as condiciones laborales y econdmicas requeridas para el acceso a 10s segoros regulares contributivos.

En cuanto a la desnutricidn infantli que afecta a1 24% de niAos de cero a cinco arias, el Gobiemo se ha fijado como meta a/ 2011, reducir la desnutricidn en 5 puntos y ha

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establecido mefas a nivel regional, logrando el compromiso de /os respectivos gobiernos regionales.

Entre 10s principales factores que influyen en esfa alta tasa de desnutricion estSt la falta de conocimiento de 10s padres sobre el problema y sus determinantes y la alta prevalencia de enfennedades diarreicas y respimtonas en la poblaci6n infantil de nuesfm pais. En este sentido, las refonnas en este campo estStn principalmente vinculadas a contar con un monitoreo y consejerla adecuados del crecimiento y desarrollo de 10s niiios y nifias, continuar fortaleciendo la estrategia de nutricion del progmma de transferencias condicionadas Juntos e incentivar a 10s gobiernos regionales de /as zonas con mayor desnutrici6n con compromisos especificos en el tema de nutricion.

Para incmmentar la cobertum y frecuencia de monitoreo de crecimienfo para 10s nifios menores a dos aiios con el ffn de generar informacidn sobre /as condiciones nutricionales de la poblacidn de alto tiesgo, se viene dando seguimiento a 10s indicadores nacionales y a nivel regional, y son publicados periodicamente. €1 objetivo a mediano plazo es lograr un sistema infegmdo de informaci6n sobre la evolucibn de 10s indicadores de desnutncion a nivel regional y local.

Conclusi6n

Como se desprende de lo descrito, el Gobierno Peruano est& realizando importantes acciones para que /as mejoras que se han logrado en el campo macroecon6mico se vean acompariadas de un claro avance en la educaci6n y la salud de todos 10s peruanos, asi como en la eficiencia del gasto social, para lo cual requiere seguir contando con el apoyo del Banco Mundial en /as Breas serialadas.

El Gobierno se cornpromete a continuar avanzando en estos Stmbitos, para lo cual requiere seguir contando con el apoyo del Banco Mundial en /as areas seiialadas.

En virtud de lo manifestado, por medio de la presente el Gobierno Peruano solicita la aprobacion del “P&stamo ProgramBfico de Reformas Sociales II‘:

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LETTER OF DEVELOPMENT POLICY (Translation into English)

Lima, February 24,2009

O F F I C f i L LETTER NO. 128-2009-EF/IO

SECTORA L POLICY LETTER

Mr. Robert B. Zoellick President World Bank

Reference: 11 Social Reform Program Loan

Dear Mr. Zoellick,

By means of this letter, I would like to express President Alan Garcia Pe‘rez’ administration’s commitment to continue Jighting poverty and improving social indicators, such as the ones related to malnutrition and access to and quality of education, health and sanitation.

Within this fiamework, the second Social Reform Program Loan operation, for which US$330 million has been requested, has been developed with the World Bank (WB). The program shall comprise speciJc actions in diverse areas of social policy. I t should be noted that the reforms included in theJirst operation in 2008 shall be continued with this loan.

Peru’s economic situation, followed by the objectives and reforms attained and proposals for the loan requested, is described below.

A. Economic context

The Peruvian economy is faced with a diflcult international situation. The American economic crisis originated in the housing market has spread to the Jinancial markets, forcing governmental intervention through a bailout package approved by the United States Congress. Additionally, international prices for oil and food have increased, resulting in a worldwide wave of inflation. In our counby, despite this adverse context, economic growth continues to be strong, mainly due to lively domestic demand During the year 2008, real GDP grew 9. I percent, driven by an 11.9 percent increase in internal demand. This growth was due to greater private spending in a context of high business expectations, a significant increase in imports (36.5 percent in the year 2008) and increased bank loans to the private sector (32.5 percent in 2008).

This year, GDP is expected to grow 5,Opercent with a 6.8percent variance in domestic demand, placing the GDP above its potential level in the coming months (estimated at approximately 6percent). The objective of the macroeconomic policy that the government is implementing is to curb this expansion in order to make it consistent with growth potential, thereby avoiding inflationary pressures and guaranteeing sustained, non-volatile growth.

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Additionally, due to the efect of both the reduction in terms of trade and excess internal demand on GDP, the result of the balance in the external current account has become negative this year, following three years of surplus. For 2008, there was a deficit in the current account of 3.2 percent of GDP. This variance in the current account does not constitute a macroeconomic risk because it is financed primarily with direct external investmentflows. However, it is a fact that should be kept in mind when short-term macroeconomic policies are designed and it is important to attain high fiscal surpluses in the coming years. These surpluses are of a preventive nature due to the reduction in private saving as a result of excess consumption. Therefore, in view of the decrease in private saving, public saving must increase in order to reduce the pressure on the current account of the balance ofpayments.

B. Reforms related to the program

A fundamental aspect ofpoverty reduction is having clearly defined standards and goals in the provision of social services, as well as encouraging parents and regional and local governments to take a more active role in monitoring these services.

For this purpose, the ministries of education and health are developing standards and goals that wil l make it possible to assess results related to children’s health, education and nutrition. The objective is to have monitoring systems that make it possible to monitor the performance of health care centers and primary schools.

In each sector, the government is also implementing diverse complementary actions to improve the quality of services, improve beneficiary targeting instruments and increase poor communities’ involvement in monitoring budgets and programs at the regional and local level. The principal elements of this strategy are listed below.

1. Equity and accountability in social sectors

Optimizing social spending

In order to contribute toward the design of better policies against poverty, in 2007 a plan for merging social programs was prepared to articulate them both vertically and horizontally, strengthening the Interministerial Commission on Social Affairs (ICSA) and implementing results-driven program management within the decentralization process. An assessment of the advances and initial effects of this merger, as well as rapid evaluations of the major social programs such as the “Juntos” and nutrition programs, is underway.

Additionally, the public budget for 2009 includes a contingency fund for social programs to finance the potential expansion of programs that show positive results in relation with improving the situation of the population living in poverty, in order to broaden and enhance their scope. Additionally, a one stop service network is being implemented nationwide to reduce thus contributing to avoid duplicate interventions and enhance the quality of social spending. Therefore, in coming months, the necessary measures shall be implemented in order to improve the eflciency of social spending and its impact on the population.

Improving social program beneficiary targeting

The Ministry of Economy and Finance is committed to creating and implementing the System for BenJiciary Household Identijication (SISFOH is the Spanish acronym) as a strategy to improve the quality of social spending. The SISFOH is an information system that provides relevant information on families living in poverty and vulnerability, which shall be used by social programs to identifi and select their beneficiaries. Within this pamework, the scope of the SISFOH General Census of Families has continued io be broadened As a result, from June 2007 to April 2008, 1.86 million families, accounting for 80 percent of the urban families living in poverty, were visited in low-income

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and poor socioeconomic sectors in 30 of the country’s largest cities. Additionally, the Universal Health Care System and, subsequently, the Glass of Mi lk (“Vas0 de Leehe’? and My Own Home (“Techo Propio ’? programs are adopting SISFOH within their institutional set up.

Individual beneficiaries cannot be successfully identified if many potential beneficiaries lack identification documents, mainly found among the poor. Along this line, an important advance is that now al l civil status bureaus must include a Single Identity Code on birth certificates, so that from the time a person ’s birth is registered, he/she has a single identification number that w i l l later be that on hidher National Identity Document. Gradually, it is expected that all citizens w i l l be properly identified and this identification w i l l be used universally.

Articulating and integrating results-driven budgeting in social policy and spending

Since 2007, results-driven budgeting has been implemented progressively at every level of government, as has access through a specific portal to all information related to the management of the government budget cycle. In this regard, in addition to strategic programs in education, health, nutrition, identity and transportation, 200 saw new strategic programs designed, including rural telephone service, rural sanitation, rural electrification and environmental programs. They in turn have permitted developing a methodology for strategic budget programming.

Additionally, to advance transparency in results from and management of public resources, the Laws on the Public Sector Budget for Fiscal Year 2007 (Law 28927) and 2008 (Law 29142) require establishing experimental decentralized participatory monitoring of spending for 2007 and 2008. As part of this process, there were pilot experiences in participatory monitoring in 2007 in f ive of the country’s provincial municipalities. The funding of experiences in 2008 and 2009 was also planned.

2. Guaranteeing an adequate education for all

Despite high coverage of educational services, learning results are still low. In order to improve these results, the Peruvian government has agreed to take diverse actions to introduce significant improvements in the quality ofpublic education.

Firstly, reading comprehension standards have been established for the second grade of primary school, based on three clearly defined levels of learning achievement. The objective is to have clear indicators of progress in children’s level of learning and for the regional government, teachers, school principals and parents to be aware of this progress.

Secondly, in 2007 and 2008, the second and third reading comprehension and mathematics assessments were made among students in second grade of primary school. Currently, reports on the results by school for school principals and teachers) and reports on individual students for parents) are being prepared. These evaluations are planned to be performed annually as an accountability mechanism for monitoring schools success in improving second-grade reading and writing skills, with a high level of parental participation. The challenge in the coming years is to increase the dissemination and use of these results in order to improve learning and teacher training.

In addition, in 2008 the National System for the Evaluation, Accreditation and Certijlcation of Educational Qualify (known by its Spanish acronym, SINEACE) was implemented for primary, secondary and higher education. The governing body of SINEACE is the High Council, whose functions are to propose policy, programs and strategies to improve educational quality, as well as to link efforts of its operational bodies. Such bodies, which are responsible for guaranteeing the quality of basic and technical-vocational

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education, are the Peruvian Institute for the Quality Evaluation and Accreditation of Basic Education, the National Council on Evaluation and Accreditation of Non- University Higher Education, and the National Council on Evaluation and Accreditation of University Education. Therefore, SINEACE should accredit all higher education programs over the next two years.

Also in 2008, as an exceptional measure, 270 million nuevos soles were earmarked for preventive maintenance at public schools, with emphasis on rural and border areas. This made it possible to identify and individualize the schools that were to receive these resources and to develop an instrument for allocating resources to schools based on formulas that incorporate indicators on the lack of services and infiastructure, poverty and available resources. This process is expected to be replicated in the near future.

3. Signijlcantly improving health and nutrition indicators

People’s health indicators clearly measure a country 3 level of development and its inequities. The most important of these indicators are those related to maternal and infant health, due to their impact on society and capacity building. In Peru, efforts in recent years have resulted in a favorable trend for these indicators, particularly infant mortality. However, in comparison with other countries in the region, maternal mortality and infant malnutrition levels continue to be high. Therefore, expanded coverage of institutional childbirth, with greater emphasis on the poorest regions in Peru, has been established as a priority and a key indicator for the primary health care system. For 2011, increased coverage of institutional childbirth to 70 percent in rural areas nationwide is forecasted. Currently, this coverage has been expandedfiom 73 percent in 2005 to 77percent in 2007, andfiom 44 percent to 51 percent in rural areas, according to the National Demographic and Family Health Survey (known by its Spanish acronym, ENDES).

Additionally, in 2008, with the objective of consolidating a sustainable public insurance system that finances quality services to improve people ’s health, services provided by the Integral Health Insurance benefited @om a new pilot capitation system for individual health facilities. Under this scheme, a funding contract is signed with the regional health departments for the respective establishments so that they will be prepared to anticipate priority services needed to reduce chronic infant malnutrition and maternalhew born health. Under this strategy, expanded coverage of this insurance to those who do not have the necessary resources continues receiving emphasis, giving priority to childbearing-age women in the poorest regions of the country and ensuring greater availability of medicines at health establishments.

Additionally, the proposed Universal Insurance Law was passed recently in order to provide regulatory tools for a social security health system to cover the basic needs ofpersons who do not meet employment or economic requirements for access to the regular contribution-based insurance plans.

Child malnutrition affects 24 percent of children fiom zero to f ive years of age. The government has set the goal of reducing malnutrition by 5 points by the year 201 1 and has established goals at the regional level, obtaining commitments fiom the respective regional governments.

Among the main factors that contribute toward this high rate of malnutrition is the parents’ lack of knowledge about the problem and its causes, as well as the prevalence of diarrheic and respiratory diseases among Peruvian children. Reforms in this field are mainly related to adequate monitoring of and counseling on children’s growth and development, continued enhancement of the nutrition strategy of the “Juntos” conditional-transfer program and incentives for regional government in the areas with the highest malnutrition, with specijk commitments related to the issue of nutrition.

To increase coverage andfiequency of growth monitoring of children under two years of age and thus produce data on the nutritional status of the population at high risk, national and regional indicators are

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continuously tracked and reported periodically. integrated information system on the tendencies of regional and local malnutrition indicators.

The objective in the medium term is to attain an

Conclusion

From the foregoing, it is evident that the Peruvian government is carrying out important actions so that macroeconomic improvements are clearly accompanied by progress in the education and health of all Peruvians, as well as in social spending, for which it requires continued supportfiorn the World Bank in the aforementioned areas.

The government is committed to continued progress in these areas, for which it requires continued supportfiom the World Bank in the areas indicated.

In view of the foregoing, by means of this letter, the Peruvian government requests approval of the “11 Social Reform Program Loan”.

Sincerely,

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ANNEX 3: FUND RELATIONS NOTE IMF Executive Board Completes Fourth and Final Review Under Peru's Stand-By Arrangement

Press Release No. 09/20

January 30, 2009

The Executive Board of the International Monetary Fund (IMF) today completed the fourth and final review of Peru's economic performance under a 25-month Stand-By Arrangement in the amount equivalent to SDR 172.4 million (about US$257.2 million). The arrangement, which was approved on January 26, 2007 (see Press Release No. 07/15), is being treated by the Peruvian authorities as precautionary. Following the Executive Board discussion, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, said: "Peru has been enjoying its longest expansion on record, one of the lowest inflation rates in the region, declining vulnerabilities, and poverty reduction. These achievements owe much to the authorities' strong commitment to prudent macroeconomic policies and steady implementation of reforms. "Despite the adverse impact of the global economic downturn and financial crisis, a soft landing for Peru's economy seems likely, owing to its strong fundamentals and the authorities' sound policy framework. Nevertheless, with downside risks increasing, the authorities' "anti-crisis" preparedness plan is timely and appropriate, as is their commitment to make further advances in tackling structural challenges. Were the downside external risks to intensify, carefully paced countercyclical policies could be contemplated, in line with the authorities' anti-crisis plan. "The authorities have targeted a broadly neutral fiscal stance, geared to allowing the automatic stabilizers to operate fully and phasing public investment execution evenly, I t will be important to enhance the fiscal framework and strengthen the tax base, including by establishing a fiscal rule to formalize the prudent fiscal policy of recent years. "Monetary policy will remain focused on achieving a gradual convergence to the inflation target range, while ensuring adequate liquidity in the financial system. Peru's exchange rate policy has appropriately balanced exchange rate flexibility and dollarization risks. Going forward, Peru's improved fundamentals provide scope for allowing greater flexibility, which should await more stable external conditions. "Significant progress has been made in further strengthening the financial system and enhancing the framework for crisis preparedness. The authorities have taken important steps to establish new procyclical provisioning rules and tighten prudential regulations on consumer loans. There is scope to further enhance the framework for liquidity provision to the financial system, including by gradually recapitalizing the Deposit Insurance Fund. To strengthen poverty reduction, the authorities are assessing their existing programs, improving targeting, and linking expenditure to efficiency. A review of reforms to tackle decisively the existing regional disparities would reinforce these efforts. "Directors congratulated the authorities on Peru's highly successful Stand-By Arrangement with the Fund," Mr. Portugal said.

I M F EXTERNAL RELATIONS DEPARTMENT

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ANNEX 4: DEBT SUSTAINABILITY ANALYSIS3’

Peru’s debt-to-GDP ratio i s projected to decline considerably under the baseline debt sustainability scenario. Economic growth would average close to 7 percent a year in 2008-1 3 underpinned by a moderate fiscal surplus position. The public sector revenue-to GDP ratio i s expected to decline by a cumulative 1.6 percentage points, reflecting the decline in growth and mining government revenues. Under these assumptions, Peru’s public sector debt stock (including CRPAOs) would decline from 30.9 percent o f GDP at end-2007, to 13.6 percent o f GDP by 2013.

Given that nearly two thirds of total external debt i s public, in the baseline scenario the projected drop in public debt largely determines the path of Peru’s total external debt. Private external debt rose in 2007 as banks sought long te rm loans abroad to expand their domestic business, but i s projected to decline over the medium term as more financing becomes available domestically. Given the recent declines in public external debt, total external debt i s projected to decline from 32 percent o f GDP at end-2007 to 20 percent by 20 13 (public external debt would decline from 20 percent to 10 percent over the same period).

Peru’s external and public sector debt ratios are robust to alternative assumptions about underlying macroeconomic variables. Sensitivity tests based on 10-year historical standard deviations to form alternative medium-term assumptions for real GDP growth and interest rates show that Peru’s debt dynamics are only moderately vulnerable to such changes.

Despite the increasing share of domestic currency in public sector debt, external and public debt ratios remain sensitive to changes in exchange rate changes, given the high foreign currency share of Peru’s debt. Specifically, under a one-off 30 percent real depreciation o f the exchange rate, the external debt-to-GDP ratio would shift by 6 percentage points above the baseline projections in the medium term. This test assumes that the exchange rate would remain at i t s depreciated level permanently-a scenario that could only occur in case o f the current exchange rate being significantly overvalued. Available data, however, do not point to such an overvaluation. Non-interest current account shocks (such as in the terms o f trade) would have a moderate adverse impact on external indebtedness.

A similar pattern is observed under a 10 percent of GDP shock to the contingent liabilities of the public sector: The public debt-to-GDP ratio would r ise sharply in the short run and, while declining over the medium term, would, by 2013 remain 9.3 percentage points above the debt levels projected under the baseline scenario.

37 As conducted by the IMF Staff for the fourth and final review of the Stand By Agreement held on January 30, 2009.

68

Figure 2. Country: Public Debt Sustainability: Bound Tests 11 (Public debt in percent of GDP)

60

Baseline and historical scenarios Interest rate shock (in percent) 65 8 65 60 60

50 6 50 45

5 40 35

45 40 35 30 30

20 20 15 15 10 5 5 0 0 0 2003 2005 2007 2009 2011 2013 2003 2005 2007 2009 2011 2013

55 under baseline 7 55

25 3 25

1 lo

Baseline, 1.7

Growth shock (in percent per year) 65 60 55 50 45 40 35 30 25 20 15 10

5 0

Scenario 4 9 Historical 4 1

2003 2005 2007 2009 2011 2013

Combined shock 2/

Combined

2003 2005 2007 2009 2011 2013

55 50 45 40 35 30 25 20 15 10

5 No policy change 0 2003 2005 2007 2009 2011 2013

Real depreciation and contingent liabilities shocks 3/

55 50 45 40 35 30 25 20

Baseline 14

5 I 2003 2005 2007 2009 2011 2013

Sources: International Monetary Fund, country desk data, and staff estimates. I/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown. 21 Permanent 114 standard deviation shocks applied to real interest rate, growth rate, and primary balance. 31 One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2009, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

70

Figure 2. Country: Public Debt Sustainability: Bound Tests (Public debt in percent of GDP)

10 5 -

11

. Baseline 14

Baseline and historical scenarios 65 60 Gross financing need 55 under baseline 50 45 40 35 30 25 20 15 10

5 0

Interest rate shock (in percent) 65 60 55 50 45 40 35 30 25 20 15 10

5 0

. .

14

2003 2005 2007 2009 2011 2013 2003 2005 2007 2009 2011 2013

Growth shock (in percent per year) "" 60 - 55 .

25 . 20 15 . 10 .

5 - 0

.

14

2003 2005 2007 2009 2011 2013

Combined shock 21 - - 60 . 55 . 50 .

25 - 20 . 15 . 10 . 5 - 0 ' 2003 2005 2007 2009 2011 2013

' '

Combined

Primary balance shock (in percent of GDP) and no policy change scenario (constant primary balance)

65 60 55 50 45 40 35 30 25 20 15 10

5 0

Scenario: Historical:

T No policy change

2003 2005 2007 2009 2011 2013

Real depreciation and contingent liabilities shocks 31

Sources: International Monetary Fund, country desk data, and staff estimates. 11 Shaded areas represent actual data. Individual shocks are permanent one-haif standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown. 21 Permanent 114 standard deviation shocks applied to real interest rate, growth rate, and primary balance. 31 One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2009, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

70

ANNEX 5: COUNTRY AT A GLANCE

Peru at a glance 9/24/08

POVERTY and SOCIAL

2007 Population, mid-year (millions) GNi per capita (Atlas method, US$) GNI (Atlas method, US$ billions)

Average annual growth, 200107

Population (%) Labor force (%J

Most recent estimate (latest year available, 2001-07) Poverty (% of population below national poverty line) Urban population (% of total population) Life expectancy at birth (years) infant mortality (per 1.000 live births) Child malnutrition (% of children under 5) Access to an improved water source (% of population) Literacy (% ofpopulation age 15t) Gross primary enrollment (% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1907

GDP (US$ billions) Gross capital formation/GDP Exports of goods and services/GDP Gross domestic savingsiGDP Gross national savIngslGDP

Current account bsiancelGDP Interest paymentsiGDP Total debffGDP Total debt serviceiexports Present value of debffGDP Present value of debffexports

23.9 21.5 11.0 19.7

-6.6 0.8

73.1

1907-97 199707 (average annual gmwth) GDP 1.8 4.0 GDP per capita -0.1 2.7 Exports of goods and services 7.3 8.3

Peru

27.9 3,450 96.2

1.2 2.6

53 71 71 21

84 68

116 116 117

1997

59.2 24.1 14.4 19.9 24.1

-5.7 1.7

50.1 35.6

2006

7.6 6.3 1 .I

Lath Arnerlca 8 Carlb.

563 5,540 3,118

1.3 2.1

78 73 22

5 91 90

118 120 116

2006

93.2 19.8 28.5 28.8 22.0

2.8 1.6

30.2 12.9 33.7

107.6

2007

9.0 7.8 6.4

Lower. mlddle- Income

3,437 1,887 6,465

1.1 1.5

42 69 41 25 86 69

111 112 109

2007

109.1 20.2 27.4 28.1 22.4

3.0

2007.1 I

6.2 4.6

10.7

1 Development diamond'

Life expectancy

T

per capita

GNI Gross per t -+ primary capita enrollmenl

i

Access to improved water source

Penl - I - Lower-middle-income group

Trade

Domestic Capital savings formation

Indebtedness

-Pen, __ Lower-middle-income group

STRUCTURE of the ECONOMY

(% of GDP) Agriculture Industry

Services

Household final consumption expenditure General gov't final consumption expenditure Imports of goods and services

Manufacturing

(average annual growth) Agriculture Industry

Services

Household final consumption expenditure General gov't final consumption expenditure Gross capital formation Imports of goods and services

Manufacturing

1907

10.3 33.4 28.8 56.3

70.3 10.0 12.7

190747

2.6 2.7 1.2 1.1

1.2 2.6 6.1 9.8

1997 2006

6.7 6.8 30.7 37.5 16.4 16.4 60.7 55.7

70.3 61.7 9.8 9.6

18.6 19.6

1997-07 2006

4.2 6.6 4.3 7.9 4.2 8.6 3.8 7.8

3.5 6.9 3.8 8.1 2.7 21.1 4.3 11.8

2007

6.3 35.2 15.1 58.5

63.3 8.6

19.5

2007

3.0 4.2 2.5

11.9

9.5 10.9 12.9 13.2

Growth of capital and GDP ( X )

30 T I

I -GCF -GDP I

Growth of exports and Irnporta (Oh) 20

15

10

5

0 n7 m n4 ncI ffi 07 -Exports '-O-imports

Note: 2007 data are preliminary estimates. This table was produced from the Development Economics LDB database. * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will

be incomolete.

71

Peru

PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer pnces Implicit GDP deflator

Government finance (% of GDP, indudes current grants) Current revenue Current budget balance Overall surplusldeficit

TRADE

(US$ millions) Total exports (fob)

Copper Fishmeal Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (2000=100) Import price index (2000=100) Terms of trade (2000=100)

BALANCE of PAYMENTS

(US$ mi/lionsj 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, /ocal/US$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Official grants Official creditors Private creditors Foreign direct investment (net inflows) Portfolio equity (net inflows)

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

Composition of net resource flows

1987

84.7

9.7 -5.0 -7.5

1987

2,713 562 223 762

3,215

175 976

1987

3,506 4,379 -873

-1,312

-2,067

919 1,148

1,130 3.00E-5

1987

17,483 1,214

0

482 50 0

94 292 79 32

0

0 63 31 32 19 13

1997

7.5

16.0 2.8

-0.8

1997

6,825 1,096 1,031 2,120 8,536

0 803

2,791

118 99

119

1997

8,378 10,842 -2,464

-1,822

-3,366

5,099 -1,733

11,119 2.7

1997

29,653 1,920

0

3,464 182

0

225 406 731

2,139 156

507 490

65 425 117 308

2006

5.7 8.3

17.3 3.3 1.4

2006

23,800 6,054 1,137 5,426

14,866 0

2,808 4,145

210 138 152

2006

26,251 18,266 7,985

-7,581 2,228

2,589

-5,342 2,753

17,329 3.3

2006

28,174 2,633

0

3,746 356

0

199 -438

61 3,467

182

325 36

219 -183 137

-319

2007

0.4 2.6

15.6 4.1 0.8

2007

32,775 4,362 4,533 5,529

21,854 927

2,893 4,881

221 140 158

2007

29,511 21,002 5,684

-7,852 2,193

3,299

3,863 -7,161

24,971 3.1

2007

2,649 0

391 0

250 256 241

15 150

-1 35

1 Inflation (Oh) I

1 --*GDP deflator *CPI

Export and import levels (US$ mill.)

40,000

20 000

10 000

0

O7 I 01 02 03 04 05 06

EJ Exports Imports

/Current account balance to GDP (Oh) I

1 Composition of 2006 debt (US$ mill.)

!

1 G 3011 A 2633

I ! I

F 11998

‘ i / A - I B R D E - Bilateral 1 B - IDA I C - I M F G - Short-term

D . Other multilateral F - Pnvate

Note This table was produced from the Development Economics LDB database 9/24/08

72

Andes M

tns.

NevadaNevadaHueascaránHueascarán(6768 m)(6768 m)

NevadaNevadaYerupajaYerupaja(6634 m)(6634 m)

NevadaNevadaSalcantaySalcantay(6271 m)(6271 m)

NevadaNevadaCoropunaCoropuna(6271 m)(6271 m)

NudoNudoAusandateAusandate(6384 m)(6384 m)

TUMBESTUMBES

HUANUCOHUANUCO

P A S CP A S C O

J U N I NJ U N I N M A D R EM A D R ED E D I O SD E D I O S

I C AI C A

A R E Q U IA R E Q U I P A

T A C NT A C N A

L I M AL I M AC

AJ A

MA

RC

A

P I U R AP I U R A

AM

AZ

ON

AS

ANCASHANCASH

L O R E T OL O R E T O

S A NS A NM AM A R T IR T I N

U CU C A Y AA Y A L ÍL Í

HUANCA-HUANCA-VELICAVELICA

P U N OP U N O

C U S C OC U S C O

AYA

CU

CH

O

APUR IMAC

LA LIBELA LIBERTARTADSantaSantaLuciaLucia

TalaraTalaraSullanaSullana

TarapotoTarapoto

YurimaguasYurimaguas TamáncoTamánco

ArcadiaArcadia

Puerto CurarayPuerto Curaray

CaballocochaCaballococha

Tingo MaríaTingo María

SanSanIgnacioIgnacio

SihuasSihuas

Ayar MancoAyar Manco

SayánSayánSatipoSatipo

AynaAyna

QuillabambaQuillabambaSintuyaSintuya

AtalayaAtalaya

LanlacuniLanlacuniBajoBajo

AstilleroAstillero

CaillomaCailloma

DesaguaderoDesaguadero

AlcaAlca

JuliacaJuliaca

NazcaNazca

PuquioPuquio

LaLaOroyaOroya

GoyllarisquizgaGoyllarisquizga

HuarazHuaraz

ChiclayoChiclayo

PiuraPiura

HuancavelicaHuancavelica

HuancayoHuancayo

AyacuchoAyacucho

AbancayAbancayCuscoCusco

PuertoPuertoMaldonadoMaldonado

PunoPuno

MoquegaMoquega

TacnaTacna

ArequipaArequipa

IcaIca

Cerro deCerro de Pasco Pasco

Huánuco Huánuco

MoyobambaMoyobamba

IquitosIquitos

CajamarcaCajamarca

ChachapoyasChachapoyas

PucallpaPucallpa

LIMALIMAA

nd

es

M

tn

s.

ECUADORECUADOR COLOMBIACOLOMBIA

BRAZILBRAZIL

BOLIVIABOLIVIA

CHILECHILE

To To LojaLoja

To To MachalaMachala

To BelénTo Belén

To To VisviriVisviri

To To La PazLa Paz

To To CarabucoCarabuco

To SanTo SanBuenaventuraBuenaventura

To To CruzeiroCruzeirodo Suldo Sul

7575°W 7070°W

1515°S

1010°S

Huacho

Chimbote

SantaLucia

TalaraSullana

Tarapoto

Yurimaguas Tamánco

Arcadia

Puerto Curaray

Caballococha

Tingo María

SanIgnacio

Sihuas

Ayar Manco

Sayán

Pisco

Satipo

Ayna

QuillabambaSintuya

Atalaya

LanlacuniBajo

Astillero

Cailloma

Desaguadero

Alca

Juliaca

Mollendo

NazcaCaballas

San Juan

Antiquipa

Atico

Puquio

LaOroya

Goyllarisquizga

Callao

Huaraz

Trujillo

Chiclayo

Tumbes

Piura

Huancavelica

Huancayo

Ayacucho

AbancayCusco

PuertoMaldonado

Puno

Moquega

Tacna

Arequipa

Ica

Cerro de Pasco

Huánuco

Moyobamba

Iquitos

Cajamarca

Chachapoyas

Pucallpa

LIMA

ECUADOR COLOMBIA

BRAZIL

BOLIVIA

CHILE

TUMBES

LAMBA-YEQUE

HUANUCO

P A S C O

J U N I N M A D R ED E D I O S

I C A

A R E Q U I P A

MOQUEGUA T A C N A

L I M AC A L L A O

P I U R A

ANCASH

L O R E T O

S A NM A R T I N

U C A Y A L Í

HUANCA-VELICA

P U N O

C U S C O

AYA

CU

CH

O

APUR IMAC

LA LIBERTAD

CA

JAM

AR

C

A

AM

AZ

ON

AS

Napo

Pasta

za

Putumayo

Yavari

Amazonas

Ucayali

Ucayali Apurim

ac

Marañon

Santiago

Huallaga

Urubamba

Madre de Dios

Inambari

Purús

Tigre

Corrientes

PACIFICOCEAN

LagoTiticaca

To Loja

To Machala

To Iquique

To Belén

To Visviri

To La Paz

To Carabuco

To SanBuenaventura

To Cruzeirodo Sul

Andes M

tns.

An

de

s

Mt

ns

.

NevadaHueascarán(6768 m)

NevadaYerupaja(6634 m)

NevadaSalcantay(6271 m)

NevadaCoropuna(6271 m)

NudoAusandate(6384 m)

80°W 75°W 70°W

75°W

10°S

5°S

0°

15°S

10°S

5°S

0°

PERU

IBRD 33465R

NOVEMBER 2006

PERUSELECTED CITIES AND TOWNS

REGION CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

REGION BOUNDARIES

INTERNATIONAL BOUNDARIES

0 100 200

0 100 200 Miles

300 Kilometers

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